UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
OR
o
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
to
COMMISSION FILE NO. 1-7797
PHH CORPORATION
(Exact name of registrant as specified in its charter)
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MARYLAND
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52-0551284
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(State or other jurisdiction
of incorporation or organization)
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(I.R.S. Employer
Identification Number)
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3000 LEADENHALL ROAD
MT. LAUREL, NEW JERSEY
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08054
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(Address of principal executive offices)
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(Zip Code)
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856-917-1744
(Registrant’s telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE
ACT:
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NAME OF EACH EXCHANGE
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TITLE OF EACH CLASS
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ON WHICH REGISTERED
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Common Stock, par value $0.01 per share
Preference Stock Purchase Rights
7.55% Internotes Due September 15, 2017
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The New York Stock Exchange
The New York Stock Exchange
The New York Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE
ACT:
None
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
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
Registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K.
x
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the
Act) Yes
o
No
x
State the aggregate market value of the voting and non-voting
common stock held by non-affiliates of the registrant as of the
last business day of the registrant’s most recently
completed second fiscal quarter: As of June 30, 2004, all
of our common stock, par value $0.01 per share (our “common
stock”), was owned by Cendant Corporation. As of
February 28, 2005, following our Spin-Off from Cendant
Corporation as discussed in this Annual Report on
Form 10-K, the aggregate market value of our voting and
non-voting common equity (consisting solely of our common stock)
held by non-affiliates was approximately $1,094,880,000.
As of February 28, 2005, 52,684,398 shares of common
stock were outstanding.
The following documents have been incorporated by reference into
the parts of the Form 10-K as indicated:
None.
TABLE OF CONTENTS
Cautionary Note Regarding Forward-Looking Statements
Forward-looking statements in this Annual Report on
Form 10-K and our other public filings and statements are
subject to known and unknown risks, uncertainties and other
factors which may cause our actual results, performance or
achievements to be materially different from any future results,
performance or achievements expressed or implied by such
forward-looking statements. These forward-looking statements are
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. Statements preceded by, followed by
or that otherwise include the words “believes,”
“expects,” “anticipates,”
“intends,” “projects,”
“estimates,” “plans,” “may
increase,” “may fluctuate” and similar
expressions or future or conditional verbs such as
“will,” “should,” “would,”
“may” and “could” are generally
forward-looking in nature and not historical facts. For example,
forward-looking statements in this Annual Report on
Form 10-K include (a) our expectation that we will
drive incremental volume through our origination platform and
improve profitability, (b) our cost estimates under the
transition services agreement, (c) our estimate of the fees
for services to be provided by us to Cendant under the
transition services agreement, (d) our expectation that PHH
Home Loans will commence operations in mid-2005, (e) our
statements about projected levels of mortgage loan originations
and housing market purchase activity in 2005, (f) the
statement of our belief that we maintain adequate allowances to
cover any probable losses related to exposure to retained credit
risk related to loans sold with limited recourse, (g) our
expectation that we will be able to continue to meet our
liquidity and financing needs by relying on the secondary market
for mortgage loans, use of the public and private debt markets,
securitization and asset-backed securities markets and through
committed and uncommitted bank credit facilities, as well as the
public equity markets in the future, (h) our expectations
about the level of capital expenditures for 2005, (i) our
belief that our sources of liquidity and capital resources are
adequate for the next twelve months and (j) our
expectations about the amount of the goodwill write-off in
connection with the recent change of our reporting unit
structure in connection with our spin-off from Cendant.
You should understand that the following important factors and
assumptions could affect our future results and could cause
actual results to differ materially from those expressed in such
forward-looking statements:
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the effect of economic or political conditions or any outbreak
or escalation of hostilities on the economy on a national,
regional or international basis and the impact thereof on our
businesses;
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the effects of a decline in the volume or value of
U.S. existing home sales, due to adverse economic changes
or otherwise, on our mortgage services business;
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the effects of changes in current interest rates, particularly
on our mortgage services segment and on our financing costs;
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our ability to develop and implement operational, technological
and financial systems to manage growing operations and to
achieve enhanced earnings or effect cost savings;
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competition in our existing and potential future lines of
business and the financial resources of, and products available
to, competitors;
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our failure to reduce quickly overhead and infrastructure costs
in response to a reduction in revenue;
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our failure to provide fully integrated disaster recovery
technology solutions in the event of a disaster;
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our ability to obtain financing on acceptable terms to finance
our growth strategy and to operate within the limitations
imposed by financing arrangements and to maintain our credit
ratings;
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in relation to our management and mortgage programs,
(a) the deterioration in the performance of the underlying
assets of such programs and (b) our inability to access the
secondary market for mortgage loans and to act as servicer
thereto, which could occur in the event that our credit ratings
are downgraded below investment grade and, in certain
circumstances, where we fail to meet certain financial ratios;
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changes in laws and regulations, including changes in accounting
standards, mortgage and real estate related regulations and
state, federal and non-United States tax laws; and
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unanticipated liabilities of our fleet management services
segment as a result of damages in connection with motor vehicles
accidents under the theory of vicarious liability.
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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. Most of these factors are
difficult to predict accurately and are generally beyond our
control.
You should consider that the factors and assumptions discussed
above may have an impact on the continued accuracy of any
forward-looking statements that we make, and you should also
consider the risks and uncertainties described in
Exhibit 99 to this Annual Report on Form 10-K entitled
“Risk Factors Affecting Our Business and Future
Results” when evaluating any forward-looking statements
that we make. Except for our ongoing obligations to disclose
material information under the federal securities laws, we
undertake no obligation to release publicly any revisions to any
forward-looking statements, to report events or to report the
occurrence of unanticipated events unless required by law. For
any forward-looking statements contained in any document, we
claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform
Act of 1995.
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PART I
Except as expressly indicated or unless the context otherwise
requires, the “company”, “PHH”,
“we”, “our” or “us” means PHH
Corporation, a Maryland corporation, and its subsidiaries. The
information presented in “Item 1. Business” of
this Annual Report on Form 10-K describes our business as
conducted after the Spin-Off (as defined below), unless
otherwise indicated or required by the context of such
presentation. Because our business has changed substantially due
to the reorganization in connection with the Spin-Off and we are
conducting our business going forward as an independent,
publicly-traded company, our historical financial information
presented in this Annual Report on Form 10-K does not
reflect what our results of operations, financial position or
cash flows would have been had we been an independent,
publicly-traded company during the periods presented. Therefore,
the historical financial information presented herein is not
indicative of what our results of operations, financial position
or cash flows will be in the future. For a pro forma
presentation of our consolidated financial statements as of
September 30, 2004 reflecting the effects of the Spin-Off
as of that date, see the “Unaudited Pro Forma Financial
Information” included in the information statement attached
as Exhibit 99.2 to our Current Report on Form 8-K
dated January 19, 2005.
OVERVIEW
We are a leading outsource provider of mortgage and fleet
management services:
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Our mortgage services segment originates and services mortgage
loans through PHH Mortgage. PHH Mortgage generated 24%, 34% and
23% of our total revenues for the years ended December 31,
2004, 2003 and 2002, respectively;
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Our fleet management services business provides commercial fleet
management services to corporate clients and government agencies
through PHH Arval. Our fleet management services segment
generated 60%, 51% and 60% of our total revenues for the years
ended December 31, 2004, 2003 and 2002, respectively. These
revenue figures include the results of operations from our
former fuel card business, Wright Express LLC, which was
distributed to Cendant Corporation (NYSE: CD), our former
parent corporation (“Cendant”), in connection with the
Spin-Off from Cendant described below under
“— Recent Developments — The
Reorganization and Spin-Off” and will not be part of our
operations going forward; and
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Prior to the Spin-Off, we provided relocation services to
corporate and government clients for the transfer of their
employees through Cendant Mobility Services Corporation,
Cendant’s subsidiary engaged in the relocation services
business (“Cendant Mobility”). We generated 16%, 15%
and 17% of our total revenues from relocation services provided
through Cendant Mobility for the years ended December 31,
2004, 2003 and 2002, respectively. Our former relocation
services segment was distributed to Cendant in connection with
the Spin-Off and will not be part of our operations going
forward.
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Our principal offices are located at 3000 Leadenhall Road, Mt.
Laurel, NJ 08054. Our telephone number is (856) 917-1744.
Our corporate website is located at http://www.phh.com, and our
filings pursuant to the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), are available through
this site. The information contained on our corporate website is
not a part of this Annual Report on Form 10-K.
Recent Developments
The Reorganization and Spin-Off
On October 12, 2004, we and Cendant announced that Cendant,
then our parent corporation, intended to distribute the mortgage
and fleet operations of PHH to Cendant shareholders in a
transaction to be structured as a tax-free distribution of the
common stock of PHH Corporation.
On January 5, 2005, the board of directors of Cendant
approved the distribution of shares of our common stock held by
Cendant to the holders of Cendant common stock at a distribution
rate of one share of our common stock for every twenty
(20) shares of Cendant common stock issued and outstanding
on the record date for the
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distribution. The distribution was paid on January 31,
2005, to holders of record of Cendant common stock at the close
of business on January 19, 2005 (the “Spin-Off”).
In connection with and prior to the Spin-Off, we underwent an
internal reorganization after which we continued to own Cendant
Mortgage Corporation (subsequently renamed PHH Mortgage
Corporation (“PHH Mortgage”)), PHH Vehicle Management
Services, LLC (d/b/a PHH Arval (“PHH Arval”)) and our
other subsidiaries that engage in the mortgage and fleet
management services businesses. Pursuant to this internal
reorganization, Cendant Mobility, Wright Express LLC and other
subsidiaries that engaged in the relocation and fuel card
businesses were separated from us and distributed to Cendant. In
addition, in January 2005, Cendant contributed to us Speedy
Title and Appraisal Review Services, LLC (“STARS”),
its appraisal services business, which provides appraisal review
services through a network of approximately 4,000 third-party
professional licensed appraisers, providing local coverage
throughout the United States, as well as credit research, flood
certification and tax services. The appraisal services business
is closely linked to the processes by which our mortgage
operations originate mortgage loans and derives substantially
all of its business from us. Effective January 5, 2005, the
appraisal services business became part of our mortgage services
segment. For the year ended December 31, 2004, revenue
generated by the appraisal services business was approximately
$90 million.
In connection with the Spin-Off, we have entered into various
agreements with Cendant. For a discussion of these agreements,
please see “—Arrangements with Cendant
Corporation” in this Annual Report on Form 10-K.
Goodwill Write-Off
Our reporting unit structure within the fleet management
services segment changed in connection with the internal
reorganization and Spin-Off. We believe that this change will
likely result in an impairment to our goodwill in the first
quarter of 2005. Although we have not yet completed our final
analysis, we currently expect, based upon information available
to us, this impairment will be in the range of $225 million
to $250 million.
Repurchase of Senior Notes
On February 9, 2005, we announced the prepayment of
$443 million aggregate principal amount of our outstanding
senior notes in cash at an aggregate prepayment price of
$497 million, including $10 million of accrued and
unpaid interest. The prepayment price included an aggregate
make-whole amount of $44 million.
This prepayment was funded with proceeds from the
$100 million cash contribution from Cendant in connection
with the Spin-Off and lower cost, short term borrowings under
our revolving credit and commercial paper facilities.
Our Strategy
We seek to achieve growth in revenues and income derived from
our mortgage and fleet management services businesses. The key
aspects of our business strategy are to:
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Maintain our focus on providing high quality outsourced
services.
We are a leading outsource provider of
mortgage and fleet management services. Across our entire
business, excellent customer service is a critical component of
winning new clients and maintaining existing clients. At every
level of our organization, employees are trained to provide high
levels of customer service in every task. We, along with our
clients, consistently track and monitor customer service levels
and look for ways to improve customer service while maintaining
profitability. PHH Mortgage ranked 5th in customer satisfaction
among national home mortgage companies, according to J.D. Power
and Associates’ 2005 Home Mortgage Study.
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Leverage our existing platforms through new products and
services.
In both our mortgage services and fleet
management services businesses, clients are increasingly
demanding enhanced products and services to meet their and their
customers’ needs. In our mortgage services business, we
regularly work with our clients to offer loan products that meet
the requirements of a specific customer segment. In our fleet
management services segment, we deliver enhanced information
reporting to enable clients to better monitor expenses and
thereby reduce fleet operating costs.
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Increase mortgage loan capture rates at real estate
brokerages owned by, or affiliated with, Cendant.
For
the year ended December 31, 2004, we provided mortgages for
approximately 17% of the transactions in which real estate
brokerages owned by Cendant represented the home buyer and
approximately 4% of the transactions in which real estate
brokerages franchised by Cendant represented the home buyer. By
increasing the number of field sales professionals, and through
other initiatives, we expect to drive incremental volume through
our origination platform and improve profitability. In
connection with the Spin-Off, we formed a mortgage venture with
Cendant, PHH Home Loans, LLC (the “mortgage venture”
or “PHH Home Loans”), for the purpose of originating
and selling mortgage loans primarily sourced through
Cendant’s owned residential real estate brokerage and
corporate relocation businesses. See “— Arrangements
with Cendant Corporation— Mortgage Venture Formed by
Cendant and PHH.”
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Increase market share by entering into new mortgage
origination relationships across all channels.
We
believe the mortgage services industry will become increasingly
competitive in the current rising interest rate environment. We
intend to take advantage of this environment by leveraging our
existing mortgage services platform to enter into new
outsourcing relationships as more companies determine that it is
no longer economically feasible to continue to compete in the
industry.
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Continue to focus on growth in large fleet customers with
increased emphasis on national fleet and truck fleet
sectors.
Large fleet customers (those customers with
more than 500 vehicles in their fleets) are a core competency,
and we will continue to aggressively pursue new customers in
this sector. Additionally, we are increasingly pursuing more
clients in the national fleet (customers with fleets of 75 to
500 vehicles) and truck fleet sectors. We have less penetration
in these sectors, thereby presenting an opportunity for higher
growth and increasing profits.
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OUR BUSINESS
Mortgage Services Segment
PHH Mortgage is a centralized mortgage lender conducting
business throughout the United States. We focus on retail
mortgage originations in which we provide mortgages directly to
consumers. Our mortgage services segment generated approximately
24%, 34% and 23% of our total revenues for the years ended
December 31, 2004, 2003 and 2002, respectively.
We generate revenue through mortgage loan sales, fee-based
origination services and mortgage loan servicing. Mortgage loan
servicing consists of collecting loan payments, remitting
principal and interest payments to investors, managing escrow
funds for payment of mortgage-related expenses such as taxes and
insurance, and administering our mortgage loan servicing
portfolio. For the year ended December 31, 2004, PHH
Mortgage was the sixth largest retail originator of residential
mortgages and the 12th largest overall residential mortgage
originator, according to Inside Mortgage Finance. We are a
leading outsource provider of mortgage origination services to
financial institutions and the only mortgage company authorized
to harness the power of the Coldwell Banker, Century 21 and ERA
brand names, through the mortgage venture and other arrangements
that we established with Cendant in connection with the
Spin-Off. See “—Arrangements with Cendant
Corporation— Mortgage Venture Formed by Cendant and
PHH.” Our mortgage origination volume has grown from
approximately $1.5 billion in 1990 to approximately
$53 billion for the year ended December 31, 2004.
We originate mortgage loans through three principal business
channels: financial institutions (on a private label or
co-branded basis), real estate brokers (including brokers
associated with brokerages owned or franchised by Cendant and
independent brokers) and relocation (mortgage services for
clients of Cendant Mobility).
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Financial Institutions Channel:
We are a leading
provider of “private label” mortgage origination and
servicing for financial institutions and other entities. In this
channel, we offer a complete outsourcing solution, from
processing applications through funding to secondary market
sales of loans and ongoing servicing, for clients that want to
offer mortgage services to customers, but are not equipped to
handle all aspects of the process cost-effectively.
Representative clients include Merrill Lynch Credit Corporation,
American Express Membership Bank, PNC Bank, N.A., The Northern
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Trust Company and Charles Schwab Bank. This channel
generated approximately 54% of our mortgage loan originations
for the year ended December 31, 2004.
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Real Estate Brokers Channel:
We work with real
estate brokers to provide their customers mortgage loans. By
being affiliated with the real estate broker, we have access to
home buyers at the time of purchase. In this channel, we work
with brokers associated with Cendant’s owned real estate
brokerage business (“NRT”), brokers associated with
Cendant’s franchised brokerages (“Cendant
franchisees”) and brokers that are not affiliated with
Cendant (“third party brokers”). For NRT, we are the
exclusive recommended provider of mortgages. For Cendant
franchisees, we are the only endorsed provider of mortgages.
Additionally, for Cendant franchisees and third party brokers,
we endeavor to enter into marketing service agreements
(“MSAs”) or other arrangements whereby we are their
exclusive recommended provider of mortgages. Cendant has
informed us that it has approximately 4,900 Cendant franchisees.
We have entered into exclusive MSAs with 48% of these Cendant
franchisees as of December 31, 2004. In general, our
capture rate of mortgages where we are the exclusive recommended
provider is much higher than in other situations. Cendant is the
largest owner and franchisor of real estate brokerage services
in the United States with approximately 1,000 NRT offices and
8,650 franchise offices in the United States as of
December 31, 2004, based on information provided to us by
Cendant. In this channel, we primarily operate on a private
label basis, incorporating the name of the associated real
estate broker, such as Coldwell Banker Mortgage, Century 21
Mortgage or ERA Mortgage. This channel generated approximately
41% of our mortgage loan originations for the year ended
December 31, 2004.
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Relocation Channel:
We are the exclusive
recommended provider of mortgages offered to the clients of
Cendant Mobility, the largest provider of outsourced corporate
relocation services in the United States. This relocation
channel generated approximately 5% of our mortgage loan
originations for the year ended December 31, 2004.
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In connection with the Spin-Off, we and Cendant, in November
2004, formed a mortgage venture, PHH Home Loans, LLC, for the
purpose of originating and selling mortgage loans primarily
sourced through NRT and Cendant Mobility. Through the mortgage
venture, we are the exclusive recommended provider of mortgages
for NRT and Cendant Mobility. For the year ended
December 31, 2004, approximately 30% of loans originated by
our mortgage services segment were derived from these sources.
We own 50.1% of the mortgage venture, and Cendant owns the
remaining 49.9% of the mortgage venture. The mortgage venture is
consolidated within our financial statements, and Cendant’s
ownership interest in the mortgage venture is reflected in our
financial statements as a minority interest. The material terms
of the mortgage venture are described below under
“—Arrangements with Cendant Corporation— Mortgage
Venture Formed Between Cendant and PHH.”
We will contribute certain of our assets and employees that have
historically supported originations from NRT and Cendant
Mobility to the mortgage venture. All mortgage loans originated
by PHH Home Loans will be sold to us or other third party
investors on a servicing-released basis. PHH Home Loans will not
hold any mortgage loans for investment purposes or perform
servicing functions for any loans it originates.
We expect that the mortgage venture will commence operations in
mid-2005, once it is fully licensed to conduct mortgage banking
activities. As discussed below under “—Arrangements
with Cendant Corporation— Marketing Agreements,” PHH
Mortgage currently has interim marketing agreements with NRT and
Cendant Mobility pursuant to which Cendant, NRT and Cendant
Mobility have agreed that PHH Mortgage will be the exclusive
recommended provider of mortgage products and services promoted
by NRT to its independent contractor sales associates and by
Cendant Mobility to its customers and clients. The interim
marketing services agreements will remain in place until the
mortgage venture is fully licensed. At that point, these interim
agreements will terminate and the provisions of the strategic
relationship agreement and PHH Home Loans operating agreement
described below under “—Arrangements with Cendant
Corporation” will govern the manner in which the mortgage
venture is recommended by Cendant’s real estate division to
such groups.
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We originate mortgages on three distinct mortgage platforms:
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Teleservices:
We operate a teleservices operation
(also known as our Phone In, Move In program), that provides
centralized processing along with consistent customer service.
We utilize Phone In, Move In for all three origination channels
described above. We also maintain multiple Internet sites that
provide on-line mortgage origination capabilities for our
customers;
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Field Sales Professionals:
Members of our field
sales force are generally located in real estate brokerage
offices or are affiliated with financial institution clients
around the United States, and are equipped to provide product
information, quote interest rates and help customers prepare
mortgage applications; and
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Closed Loan Purchases:
We purchase closed loans
from community banks, credit unions and mortgage brokers and
mortgage bankers affiliated with Cendant.
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The following table sets forth the composition of our mortgage
loan originations by channel and platform for each of the years
ended December 31, 2004, 2003 and 2002:
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For the Year Ended
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December 31,
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2004
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2003
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2002
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(dollars in millions)
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Total mortgage loan originations
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$52,553
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$83,701
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$59,279
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Production loans closed to be securitized
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34,405
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60,333
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38,455
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Other production loans closed
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18,148
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23,368
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20,824
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Production loans sold
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32,465
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59,521
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38,055
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Mortgage Loan Originations by Channel:
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Financial institutions
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54
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%
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67
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%
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64
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Real estate brokers
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41
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%
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30
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%
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33
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%
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Relocation
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5
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%
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3
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%
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3
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%
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Mortgage Loan Originations by Platform:
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Teleservices (Phone In, Move In)
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60
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%
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67
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%
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70
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%
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Field sales professionals
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25
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%
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20
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%
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15
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%
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Closed loan purchases
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15
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%
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13
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%
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15
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%
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The following table sets forth the composition of our mortgage
loan originations by product type for each of the years ended
December 31, 2004, 2003 and 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate
|
|
|
60
|
%
|
|
|
63
|
%
|
|
|
56
|
%
|
|
Adjustable rate
|
|
|
40
|
%
|
|
|
37
|
%
|
|
|
44
|
%
|
|
|
|
Conforming
(1)
|
|
|
62
|
%
|
|
|
69
|
%
|
|
|
63
|
%
|
|
Non-conforming
|
|
|
38
|
%
|
|
|
31
|
%
|
|
|
37
|
%
|
|
|
|
Purchase
|
|
|
66
|
%
|
|
|
42
|
%
|
|
|
48
|
%
|
|
Refinance
|
|
|
34
|
%
|
|
|
58
|
%
|
|
|
52
|
%
|
|
|
|
First mortgages
|
|
|
91
|
%
|
|
|
96
|
%
|
|
|
100
|
%
|
|
Home equity lines of credit
|
|
|
9
|
%
|
|
|
4
|
%
|
|
|
—
|
|
|
|
|
|
|
(1)
|
|
Represents mortgages that conform to the standards of the
Federal National Mortgage Association (“Fannie Mae”),
the Federal Home Loan Mortgage Corporation (“Freddie
Mac”) or the Government National Mortgage Association
(“Ginnie Mae”)
|
PHH Mortgage customarily sells all mortgages it originates to
investors (which include a variety of institutional investors)
generally within 60 days of origination. Loans are
typically sold as individual loans, mortgage-backed securities
or participation certificates issued or guaranteed by Fannie
Mae, Freddie Mac or
7
Ginnie Mae. We generally retain the mortgage servicing rights on
loans we sell. PHH Mortgage earns revenue from the sale of the
mortgage loans to investors, as well as from the servicing of
the loans for investors.
The following table sets forth summary data of our mortgage
servicing activities as of December 31, 2004, 2003 and 2002:
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
|
|
|
|
2004
(1)
|
|
2003
(1)
|
|
2002
(1)
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions, except
|
|
|
|
average loan size)
|
|
Average loan servicing portfolio
|
|
$137,881
|
|
$122,887
|
|
$105,780
|
|
Outstanding mortgage loans serviced
|
|
$143,056
|
|
$136,427
|
|
$114,079
|
|
Number of loans serviced
|
|
906,954
|
|
888,860
|
|
786,201
|
|
Average loan size
|
|
$157,731
|
|
$153,485
|
|
$145,102
|
|
Weighted average interest rate
|
|
5.39%
|
|
5.36%
|
|
6.17%
|
|
Delinquent Mortgage Loans:
(2)
|
|
|
|
|
|
|
|
|
30 days
|
|
1.7%
|
|
1.7%
|
|
2.0%
|
|
|
60 days
|
|
0.3%
|
|
0.3%
|
|
0.4%
|
|
|
90 days or more
|
|
0.3%
|
|
0.4%
|
|
0.4%
|
|
|
|
|
|
|
|
|
|
Total delinquencies
|
|
2.3%
|
|
2.4%
|
|
2.8%
|
|
Foreclosures/ Bankruptcies
(2)
|
|
0.6%
|
|
0.7%
|
|
0.7%
|
|
Major Geographical Concentrations:
(2)
|
|
|
|
|
|
|
|
|
California
|
|
11.0%
|
|
10.9%
|
|
11.8%
|
|
|
New Jersey
|
|
9.3%
|
|
9.4%
|
|
7.4%
|
|
|
New York
|
|
7.9%
|
|
7.9%
|
|
6.4%
|
|
|
Florida
|
|
7.3%
|
|
7.1%
|
|
7.2%
|
|
|
Texas
|
|
5.4%
|
|
5.6%
|
|
6.1%
|
|
|
Other
|
|
59.1%
|
|
59.1%
|
|
61.1%
|
|
|
|
|
|
(1)
|
|
Does not include certain home equity mortgages serviced by us.
|
|
|
|
(2)
|
|
As a percentage of unpaid principal balance of outstanding loans.
|
Appraisal Services Business
In January 2005, Cendant contributed STARS, its appraisal
services business, to us which provides appraisals through a
network of approximately 4,000 third-party professional
licensed appraisers offering local coverage throughout the
United States, as well as credit research, flood certification
and tax services. The appraisal services business is closely
linked to the processes by which our mortgage operations
originate mortgage loans and derives substantially all of its
business from us. Effective January 5, 2005, the appraisal
services business became part of our mortgage services segment.
For the year ended December 31, 2004, revenue generated by
the appraisal services business was approximately
$90 million.
Atrium Insurance Corporation
Our mortgage services segment includes Atrium Insurance
Corporation, our wholly-owned subsidiary and a New York
domiciled monoline mortgage guaranty insurance corporation.
Atrium provides reinsurance solely in respect of primary
mortgage insurance issued by certain insurance companies to
borrowers of PHH Mortgage, where the primary mortgage insurer is
indemnified by Atrium, subject to a specified limit, against
losses in excess of a predetermined threshold.
Competition
The principal factors for competition for our mortgage services
segment are service, quality, products, and price. Competitive
conditions also can be impacted by shifts in consumer preference
for variable-rate mortgages from fixed-rate mortgages, depending
on the interest-rate environment. We focus on retail mortgage
originations, in which we provide mortgages directly to
consumers, and mortgage loan servicing, which consists of
collecting loan payments, remitting principal and interest
payments to investors, managing escrow funds for payment of
mortgage-related expenses and administering our mortgage loan
servicing portfolio.
According to Inside Mortgage Finance, PHH Mortgage was the sixth
largest retail mortgage originator in the United States with a
4.1% market share and the tenth largest mortgage loan servicer
with a 1.9% market share as
8
of September 30, 2004. Some of our largest competitors
include Countrywide Financial, Wells Fargo Home Mortgage,
Washington Mutual, Chase Home Finance, CitiMortgage, Bank of
America, and GMAC Mortgage Corporation. Many of our competitors
are larger than we are and may have access to greater financial
resources than we do.
Seasonality
Our mortgage services segment is generally subject to seasonal
trends. These seasonal trends reflect the pattern in the
national housing market. Home sales typically rise during the
spring and summer seasons and decline during the fall and winter
seasons. Seasonality has less of an effect on mortgage
refinancing activity, which is primarily driven by prevailing
mortgage rates. In addition, mortgage delinquency rates
typically rise temporarily in the winter months, driven by
mortgagor payment patterns.
Trademarks and Intellectual Property
Our financial institution clients license the use of their names
to us in connection with our “private label” business,
and Cendant licenses its real estate brands to us in connection
with mortgage loan originations for customers of both
Cendant’s owned real estate brokerages and its franchisees.
In connection with the Spin-Off, TM Acquisition Corp.,
Coldwell Banker Real Estate Corporation, ERA Franchise Systems,
Inc. and PHH Mortgage entered into a trademark license agreement
pursuant to which PHH Mortgage was granted a license to use
certain of the Cendant real estate brand names in connection
with the operation of their businesses in order to permit us to
originate mortgage loans on behalf of customers of
Cendant’s owned and franchised real estate brokerage
business on a co-branded basis. See “—Arrangements
with Cendant Corporation— Trademark License Agreement.”
Employees
As of December 31, 2004, the operations that make up our
mortgage services segment employed approximately 6,000 persons.
Management considers our employee relations to be satisfactory.
None of our mortgage services segment employees is covered under
collective bargaining agreements.
Fleet Management Services Segment
We are a fully integrated provider of fleet management services
with a broad range of product offerings. We are the second
largest provider of outsourced commercial fleet management
services in both the United States and Canada according to a
nationally-recognized industry publication. We focus on clients
with fleets of greater than 500 vehicles (the “large fleet
sector”) and clients with fleets of between 75 and 500
vehicles (the “national fleet sector”). As of
December 31, 2004, we had more than 320,000 vehicles
leased and approximately 300,000 additional vehicles serviced
under fuel, maintenance, accident and/or similar management
arrangements. We purchase more than 80,000 vehicles annually. We
serve nearly one-third of the Fortune 500 and more than 100
corporations have been our clients for 20 years or more.
Including the operations of our former fuel card business, our
fleet management services segment generated approximately 60%,
51% and 60% of our revenue for the years ended December 31,
2004, 2003 and 2002, respectively. As described below, our
former fuel card business was distributed to Cendant in
connection with the Spin-Off and will not be part of our
operations going forward.
We offer fully integrated services that provide solutions to
clients subject to their business objectives. We place an
emphasis on customer service and focus on a consultative
approach with our clients. Our employees support each client in
achieving the full benefits of outsourcing fleet management,
including lower costs and better operations. We offer 24-hour
customer service for the end-users of our products and services.
We believe we have developed one of the industry’s most
advanced technology infrastructures. Our data warehousing,
information management and online systems provides clients
access to download sophisticated, customized reports to better
monitor and manage their corporate fleets.
9
We provide corporate clients and government agencies the
following services and products:
|
|
|
|
|
|
•
|
Fleet Leasing and Fleet Management Services.
These
services include vehicle leasing, fleet policy analysis and
recommendations, benchmarking, vehicle recommendations, ordering
and purchasing vehicles, arranging for vehicle delivery and
administration of the title and registration process, as well as
tax and insurance requirements, pursuing warranty claims and
remarketing used vehicles. We also offer various leasing plans,
financed primarily through the issuance of floating rate notes
and borrowings through an asset-backed structure. At
December 31, 2004, we leased more than 320,000 vehicles,
primarily cars and light trucks and, to a lesser extent, medium
and heavy trucks, trailers and equipment. The majority of the
residual risk on the value of the vehicle at the end of the
lease term remains with the lessee for approximately 98% of the
vehicles financed by us in North America. For the remaining 2%,
we retain the residual risk on the value of the vehicle at the
end of the lease term. We maintain rigorous standards with
respect to the creditworthiness of our clients. Net credit
losses as a percentage of the average balance of vehicle leases
serviced have been less than 0.06% in each of the last three
fiscal years.
|
|
|
|
|
•
|
Maintenance Services.
We offer clients vehicle
maintenance cards that are used to facilitate repairs and
maintenance payments. We maintain an extensive network of
third-party service providers in the United States and Canada to
ensure ease of use by the clients’ drivers. The vehicle
maintenance cards provide clients with the following benefits:
(a) negotiated discounts off of full retail prices through
our convenient supplier network, (b) access to our in-house
team of certified maintenance experts that monitor transactions
for policy compliance, reasonability and cost effectiveness and
(c) inclusion of vehicle maintenance transactions in a
consolidated information and billing database that helps
evaluate overall fleet performance and costs. At
December 31, 2004, we had outstanding more than 337,000
maintenance cards in the United States and Canada.
|
|
|
|
|
•
|
Accident Management Services.
We provide our
clients with comprehensive accident management services such as
immediate assistance upon receiving the initial accident report
from the driver (e.g., facilitating emergency towing services
and car rental assistance), an organized vehicle appraisal and
repair process through a network of third-party preferred repair
and body shops and coordination and negotiation of potential
accident claims. Our accident management services provide our
clients with the following benefits: (a) convenient,
coordinated 24-hour assistance from our call center,
(b) access to our relationships with the repair and body
shops included in our preferred supplier network, which
typically provides customers with favorable terms, and
(c) expertise of our damage specialists, who ensure that
vehicle appraisals and repairs are appropriate, cost-efficient
and in accordance with each client’s specific repair
policy. As of December 31, 2004, more than 330,000 vehicles
were participating in accident management programs with us in
the United States and Canada.
|
|
|
|
|
•
|
Fuel Card Services.
We provide, and will continue
to provide, our customers with fuel card programs which
facilitate the payment, monitoring and control of fuel purchases
through PHH Arval. Fuel is typically the single largest
fleet-related operating expense. By using our fuel cards, our
clients receive the following benefits: access to more fuel
brands and outlets than other private label corporate fuel
cards, point-of-sale processing technology for fuel card
transactions that enhances clients’ ability to monitor
purchases and consolidated billing and access to other
information on fuel card transactions, which assists clients
with evaluation of overall fleet performance and costs. At
December 31, 2004, we had more than 315,000 fuel cards
outstanding in the United States and Canada.
|
Prior to the Spin-Off, we provided payment processing and
information management services to the vehicle fleet industry
through our former subsidiary, Wright Express LLC. We earned
revenue by processing payments to major oil companies, fuel
retailers and vehicle maintenance providers on behalf of our
customers and the customers of our strategic relationships. We
entered into agreements with the major oil companies, fuel
retailers and vehicle maintenance providers for the acceptance
or purchases of products and services by the customers serviced
by us, and the terms and conditions of the fees assessed by us
for processing these payments. The fee charged to the major oil
company, fuel retailer or vehicle maintenance provider was
generally based upon a percentage of the amount purchased by the
customers serviced by us; however, it may be based on a fixed
amount
10
charged per transaction or a combination of both. The processing
fee was deducted from our payment to the major oil company, fuel
retailer or vehicle maintenance provider or for the amount
purchased by our customer or the customer of our strategic
relationships and recorded as payment processing revenue at the
time the transaction was captured. Revenue for other services
was generally recognized as we fulfilled our contractual service
obligations.
In connection with the Spin-Off, our former fuel card business
was distributed to Cendant, and these operations will not be
part of our operations going forward.
Competition
Our competitors in the United States include GE Capital Fleet
Services, Wheels Inc., Automotive Resources International, Lease
Plan International and hundreds of local and regional
competitors, including numerous competitors who focus on one or
two products. We differentiate ourselves from our competitors
primarily on three factors: the completeness of our product
offering, customer service and technology. Unlike certain of our
competitors that focus on selected elements of the fleet
management process, we offer fully ’integrated services. In
this manner, we are able to offer customized solutions to
clients regardless of their needs. We have developed one of the
industry’s most advanced technology infrastructures. Our
state-of-the-art data warehousing, information management and
online systems enable clients to download sophisticated,
customized reports to better monitor and manage their corporate
fleets. Some of our competitors are larger than we are and may
have access to greater financial resources than we do.
Trademarks and Intellectual Property
The service mark “PHH” and related trademarks and
logos are material to our fleet management services segment. All
of the material marks used by us are registered (or have
applications pending for registration) with the United States
Patent and Trademark Office. All of the material marks used by
us are also registered in Canada, and the “PHH” mark
and logo are registered (or have applications pending) in those
major countries where we have strategic partnerships with local
providers of fleet management services. Except for the Arval
mark, which we license from a third party so that we can do
business as PHH Arval, we own the material marks used by us in
our business.
Seasonality
The revenues generated by our fleet management services segment
are generally not seasonal.
Employees
As of December 31, 2004, the operations that make up our
fleet management services business, exclusive of our former fuel
card business, employed approximately 1,300 persons. Management
considers our employee relations to be satisfactory. None of
these employees is covered under collective bargaining
agreements.
Regulation
Mortgage Services Regulation
The federal Real Estate Settlement Procedures Act
(“RESPA”) and state real estate brokerage laws
restrict the payment of fees or other things of value in
consideration for the referral of real estate settlement
services. Our mortgage services segment is subject to numerous
federal, state and local laws and regulations, including those
relating to real estate settlement procedures, fair lending,
fair credit reporting, truth in lending, federal and state
disclosure and licensing. The establishment of PHH Home Loans
and the continuing relationship between and among PHH Home
Loans, Cendant and us will be subject to the anti-kickback
requirements of RESPA.
Commercial Fleet Leasing Regulation
We are subject to federal, state and local laws and regulations
including those relating to taxing and licensing of vehicles,
certain consumer credit and environmental protection. Our fleet
management services segment could
11
be liable for damages in connection with motor vehicle accidents
under the theory of vicarious liability. Under this theory,
companies that lease motor vehicles may be subject to liability
for the tortious acts of their lessees, even in situations where
the leasing company has not been negligent.
Insurance Regulation
Our wholly-owned insurance subsidiary, Atrium Insurance
Corporation, a New York domiciled monoline mortgage guaranty
insurance company, is subject to insurance regulations in the
State of New York relating to, among other things, standards of
solvency that must be met and maintained; the licensing of
insurers and their agents; the nature of and limitations on
investments; premium rates; restrictions on the size of risks
that may be insured under a single policy; reserves and
provisions for unearned premiums, losses and other obligations;
deposits of securities for the benefit of policyholders;
approval of policy forms and the regulation of market conduct,
including the use of credit information in underwriting; as well
as other underwriting and claims practices. The New York
Department of Insurance also conducts periodic examinations and
requires the filing of annual and other reports relating to the
financial condition of companies and other matters. Financial
examinations completed in the past three years have not resulted
in any adjustments to statutory surplus and pending financial
and market conduct examinations have not identified any material
findings to date.
As a result of our ownership of Atrium, we are subject to New
York’s insurance holding company statute, as well as
certain other laws, which, among other things, limit
Atrium’s ability to declare and pay dividends except from
undivided profits remaining on hand above the aggregate of our
paid-in capital, paid-in surplus and contingency reserve.
Additionally, anyone seeking to acquire, directly or indirectly,
10% or more of Atrium’s outstanding common stock, or
otherwise proposing to engage in a transaction involving a
change in control of Atrium, will be required to obtain the
prior approval of the New York Superintendent of Insurance.
ARRANGEMENTS WITH CENDANT CORPORATION
Mortgage Venture Formed by Cendant and PHH
In connection with the Spin-Off, we and Cendant’s
subsidiary, Cendant Real Estate Services Venture Partner, Inc.,
formed a mortgage venture, PHH Home Loans, LLC, for the purpose
of originating and selling mortgage loans primarily sourced
through Cendant’s owned residential real estate brokerage
and corporate relocation businesses, NRT and Cendant Mobility,
respectively. For the year ended December 31, 2004,
approximately 30% of all loans originated by our mortgage
services segment were derived from these sources. We will
contribute certain of our assets and employees that supported
originations from NRT and Cendant Mobility to the mortgage
venture. The mortgage venture has a 50-year term, subject to
earlier termination as described below under
“—Termination” or non-renewal by us after
25 years subject to delivery of notice. In the event that
we do not deliver a non-renewal notice after year 25, the
mortgage venture will be renewed for an additional 25-year term.
The PHH Homes Loans operating agreement is filed as an exhibit
to this Annual Report on Form 10-K.
We expect that the mortgage venture will commence operations in
mid-2005, once it is fully licensed to conduct mortgage banking
activities. As discussed in “Item 1. Business—
Arrangements with Cendant Corporation— Marketing
Agreements,” PHH Mortgage currently has interim marketing
agreements with NRT and Cendant Mobility pursuant to which
Cendant, NRT and Cendant Mobility have agreed that PHH Mortgage
will be the exclusive recommended provider of mortgage products
and services promoted by NRT to its independent contractor sales
associates and by Cendant Mobility to its customers and clients.
The interim marketing services agreements will remain in place
until the mortgage venture is fully licensed. At that point,
these interim agreements will terminate and the provisions of
the strategic relationship agreement and PHH Home Loans
operating agreement described above will govern the manner in
which the mortgage venture is recommended by Cendant’s real
estate division to such groups. All mortgage loans originated by
the mortgage venture will be sold to us or to unaffiliated third
party investors on a servicing-released basis, and the mortgage
venture will not hold any mortgage loans for investment purposes
or perform servicing functions for any loans it originates.
12
We are in the process of causing the mortgage venture to make
application and seek approval for all licenses and regulatory
approvals necessary to conduct its loan origination, loan sales
and related operations in all 50 states and the District of
Columbia.
Ownership and Distributions
We own 50.1% of the mortgage venture, and Cendant owns the
remaining 49.9% of the mortgage venture. Although the mortgage
venture is consolidated within our financial statements, and
Cendant’s ownership interest in the mortgage venture is
reflected on our financial statements as a minority interest,
the mortgage venture did not materially impact our results of
operations for the year ended December 31, 2004. Net income
generated by the mortgage venture will be distributed quarterly
to its members pro rata based upon their respective ownership
interests, less any amounts to be retained (as necessary) to
meet regulatory capital requirements.
Management
The managing member of the mortgage venture is PHH Broker
Partner Corporation, a wholly-owned subsidiary of PHH. The
managing member is responsible for managing all aspects of the
business of the mortgage venture. However, certain specified
actions proposed to be taken by the mortgage venture are subject
to approval by Cendant. The mortgage venture has a board of
advisors consisting of representatives of Cendant and PHH. The
board of advisors has no managerial authority, and its primary
purpose is to provide a means for Cendant to exercise its
approval rights over those specified actions of the mortgage
venture for which Cendant’s approval is required.
Termination
Pursuant to the PHH Home Loans operating agreement, Cendant has
the right to terminate the strategic relationship agreement and
terminate the mortgage venture in the event of:
|
|
|
|
|
|
•
|
a Regulatory Event (defined below) continuing for six months or
more; provided that we may defer termination on account of a
Regulatory Event for up to six additional one month periods by
paying Cendant a $1.0 million fee at the beginning of each
such one month period;
|
|
|
|
|
•
|
a change in control of us involving a competitor of Cendant or
certain other specified parties;
|
|
|
|
|
•
|
a material breach, not cured within the requisite cure period,
by us or our affiliates of our or their representations,
warranties, covenants or other agreements (discussed below)
under any of the PHH Home Loans operating agreement, the
strategic relationship agreement (described below under
“—Strategic Relationship Agreement”), the
marketing agreement (described below under “—Marketing
Agreements”), the interim marketing agreements between PHH
Mortgage and NRT and Cendant Mobility (described below under
“—Marketing Agreements”), the trademark license
agreement (described below under “—Trademark License
Agreement”), the management services agreement (described
below under “—Management Services Agreement”) and
certain other agreements entered into in connection with the
Spin-Off (together, the “mortgage venture agreements”);
|
|
|
|
|
•
|
failure by the mortgage venture to make scheduled distributions
pursuant to the operating agreement;
|
|
|
|
|
•
|
bankruptcy or insolvency of PHH or PHH Mortgage
Corporation, or
|
|
|
|
|
•
|
any act or omission by PHH that causes or would reasonably be
expected to cause material harm to Cendant.
|
A “Regulatory Event” means a situation in which
(a) PHH Mortgage or any of its affiliates (other than PHH
Home Loans) becomes subject to any regulatory order, or any
governmental entity initiates a proceeding with respect to PHH
Mortgage or any of its affiliates (other than PHH Home Loans),
and (b) such regulatory order or proceeding prevents or
materially impairs PHH Home Loans’ ability to originate
loans for any period of time in a manner that adversely affects
the value of one or more quarterly distributions to be paid by
PHH Home Loans pursuant to the PHH Home Loans operating
agreement; provided, however, that a “Regulatory
Event” does not include (1) any order, directive or
interpretation or change in law, rule or regulation, in any such
case that is
13
applicable generally to companies engaged in the mortgage
lending business such that PHH Mortgage or such affiliate or PHH
Home Loans is unable to cure the resulting circumstances
described in (b) above, or (2) any regulatory order or
proceeding that results solely from acts or omissions on the
part of Cendant or its affiliates.
The representations, warranties, covenants and other agreements
in the mortgage venture agreements include, among others:
(a) customary representations and warranties made by us,
the managing member of PHH Home Loans or PHH Mortgage
Corporation, (b) our confidentiality agreements in the
operating agreement and the strategic relationship agreement
with respect to Cendant information, (c) the managing
member’s obligations under the operating agreement,
(d) the indemnification obligations under the operating
agreement, the strategic relationship agreement, and the
trademark license agreement, (e) our non-competition
agreements in the strategic relationship agreement and
(f) our termination assistance agreements in the strategic
relationship agreement in the event that the mortgage venture is
terminated.
In addition, beginning on February 1, 2013, Cendant may
terminate the PHH Home Loans operating arrangement at any time
by giving two years’ notice to us. Upon termination of the
PHH Home Loans operating agreement by Cendant, Cendant will have
the option either to require that we purchase Cendant’s
interest in the mortgage venture at fair value, plus, in certain
cases, liquidated damages, or to cause us to sell our interest
in the mortgage venture to a third party designated by Cendant
at fair value plus, in certain cases, liquidated damages. In the
case of a termination by Cendant following a change in control
of us, we may be required to make a cash payment to Cendant in
an amount equal to its allocable share of the mortgage
venture’s trailing twelve months net income multiplied by
the greater of (a) the number of years remaining in the
first ten years of the term of the operating agreement and
(b) two.
We have the right to terminate the PHH Home Loans operating
agreement upon, among other things, a material breach by Cendant
of a material provision of the operating agreement, in which
case we have the right to purchase Cendant’s interest in
the mortgage venture at a price derived from an agreed-upon
formula based upon fair market value (which is determined with
reference to the trailing twelve months EBITDA (earnings before
income taxes, depreciation and amortization) for the mortgage
venture and the average market EBITDA multiple for mortgage
banking companies).
Upon termination of the mortgage venture, all of the mortgage
venture agreements will terminate automatically (excluding
certain privacy, non-competition, venture related transition
provisions and other general provisions), and Cendant will be
released from any restrictions under the mortgage venture
agreements that may restrict its ability to pursue a
partnership, joint venture or another arrangement with any third
party mortgage operation.
Strategic Relationship Agreement
Concurrently with the consummation of the Spin-Off, PHH, PHH
Mortgage, PHH Home Loans, PHH Broker Partner Corporation,
Cendant Real Estate Services Group, LLC, Cendant Real Estate
Services Venture Partner, Inc. and Cendant entered into a
strategic relationship agreement. The strategic relationship
agreement contains detailed covenants regarding the relationship
of the parties with respect to the operation of the mortgage
venture and its origination channels. The strategic relationship
agreement is filed as an exhibit to this Annual Report on
Form 10-K.
The strategic relationship agreement contains the following
covenants:
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Exclusive Recommended Provider of Mortgage Loans.
Cendant has agreed that PHH Home Loans will be the exclusive
recommended provider of mortgage loans by the Cendant real
estate services division to (a) the independent sales
associates affiliated with Cendant’s real estate and
relocation businesses, (b) the customers of Cendant’s
real estate and relocation businesses, and (c) all
U.S.-based Cendant employees. Cendant has the right to terminate
such exclusivity under certain circumstances, including
(1) if we materially breach any representation, warranty,
covenant or other agreement contained in any of the mortgage
venture agreements (described generally above under
“—Mortgage Venture Formed by Cendant and PHH—
Termination”) and such breach is not cured within the
required cure period, and (2) if a Regulatory Event occurs
and is not cured within the required time period. In addition,
if the mortgage venture is prohibited by law, rule, regulation,
order or other legal restriction
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from performing its mortgage origination function in any
jurisdiction, and such prohibition has not been cured within the
required cure period, Cendant has the right to terminate
exclusivity in the affected jurisdiction.
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Subsequent Mortgage Company Acquisitions.
Cendant
has agreed that if it enters into an agreement to acquire a
residential real estate brokerage business that also conducts a
mortgage origination business, the parties will work together to
plan for the sale of such mortgage origination business to the
mortgage venture pursuant to pricing parameters specified in the
strategic relationship agreement. If the parties do not reach
agreement with respect to the terms of the sale in a timely
manner, Cendant has the option to either (a) sell the
mortgage business to a third party (provided that the mortgage
venture has a right of first refusal if the purchase price for
the proposed sale to the third party is less than 90% of the
purchase price proposed by Cendant for the sale to the mortgage
venture), or (b) retain and operate the mortgage business,
and, in either case, at Cendant’s option, the exclusivity
provisions described above will terminate with respect to each
county in which the mortgage business conducts its operations.
If the parties reach agreement with respect to the terms of the
sale but the mortgage venture defaults on its obligation to
complete the sale transaction in a timely manner, the mortgage
venture is required to make a damages payment to Cendant.
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Non-Competition.
The strategic relationship
agreement provides that, subject to limited exceptions, we and
our affiliates will not engage in (a) the title, closing,
escrow or other search-related services businesses for
residential real estate transactions, (b) the residential
real estate brokerage business, commercial real estate brokerage
business or corporate relocation services business, or become or
operate as a broker, owner or franchisor in any such business,
or otherwise, directly or indirectly, assist or facilitate the
purchase or sale of residential or commercial real estate (other
than through our appraisal services business or through the
origination and servicing of mortgage loans), or (c) any
other business conducted by the Cendant real estate services
division as of January 31, 2005. Our non-competition
covenant will survive for up to two years following termination
of the strategic relationship agreement. The strategic
relationship agreement also provides that we will not directly
or indirectly sell any mortgage loans or mortgage servicing to
any of Cendant’s largest competitors in the residential
real estate brokerage business or any company affiliated with
any of them.
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Other Exclusivity Arrangements.
The strategic
relationship agreement also provides that Cendant’s real
estate division will be the exclusive recommended real estate
brokerage firm for our employees and our customers (other than
customers subject to any other agreement with us), and that we
will use Cendant’s real estate division on all of our
commercial real estate transactions where a Cendant agent is
available. In addition, the strategic relationship agreement
provides that we will (a) recommend Cendant’s
settlement services subsidiary as the provider of title,
closing, escrow and other search-related services, and
(b) utilize Cendant’s settlement services subsidiary
on an exclusive basis whenever PHH has the option to choose the
title or escrow agent.
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Indemnification.
Pursuant to the strategic
relationship agreement, we have agreed to indemnify the mortgage
venture for any losses incurred by it arising out of or
resulting from (a) any violation or breach by us or any of
our affiliates of any representation, warranty, or covenant in
the agreement or (b) the negligence or willful misconduct
of PHH or its affiliates in connection with the agreement.
(described generally above under “—Mortgage Venture
Formed by Cendant and PHH— Termination”).
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Trademark License Agreement
TM Acquisition Corp., Coldwell Banker Real Estate
Corporation, ERA Franchise Systems, Inc. and PHH Mortgage are
parties to a trademark license agreement pursuant to which PHH
Mortgage was granted a license to use certain of the Cendant
real estate brand names in order to permit them to originate
mortgage loans on behalf of customers of Cendant’s owned
and franchised real estate brokerage business on a co-branded
basis. This license agreement is filed as an exhibit to this
Annual Report on Form 10-K.
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Management Services Agreement
PHH Mortgage entered into a management services agreement with
the mortgage venture pursuant to which PHH Mortgage has agreed
to provide certain mortgage origination processing and
administrative services for the mortgage venture. The mortgage
origination processing services will include seasonal call
center staffing beyond the mortgage venture’s permanent
staff, secondary mortgage marketing, pricing and, for certain
channels, underwriting, credit scoring and document review.
Administrative services will include payroll, financial systems
management, treasury, information technology services,
telecommunications services and human resources and employee
benefits services. In exchange for such services, the mortgage
venture will pay PHH Mortgage a fee per service based upon
various metrics, primarily cost per loan.
Marketing Agreements
Coldwell Banker Real Estate Corporation, Century 21 Real Estate
Corporation, ERA Franchise Systems, Inc., Sotheby’s
International Affiliates, Inc. (together, the “Cendant
parties”) and PHH Mortgage are parties to a marketing
agreement that has the same term as the PHH Home Loans operating
agreement. Pursuant to the terms of the marketing agreement, the
Cendant parties have agreed that PHH Mortgage will be the
exclusive recommended provider of mortgage products and services
promoted by Cendant’s real estate division to the
independently owned and operated franchisees of Century 21,
Coldwell Banker, ERA and Sotheby’s International Realty
Systems. Pursuant to this arrangement, the Cendant parties have
agreed to recommend to franchisees that they enter into
marketing or other appropriate relationships with PHH Mortgage,
which may provide for, among other things, promotion of PHH
Mortgage through the posting of PHH Mortgage banners and signs
throughout franchisee offices, mail inserts, brochures and
advertisements as well as placement in company newsletters and
permitting PHH Mortgage presentations during sales meetings. The
Cendant parties will be paid a marketing fee for conducting such
promotions based upon the fair market value of the services to
be provided. Such agreement will be terminable simultaneously
with the strategic relationship agreement. This marketing
agreement is filed as an exhibit to this Annual Report on
Form 10-K.
In addition, certain Cendant parties and PHH Mortgage have
entered into separate interim marketing agreements with NRT and
Cendant Mobility pursuant to which Cendant, NRT and Cendant
Mobility have agreed that PHH Mortgage is the exclusive
recommended provider of mortgage products and services promoted
by NRT to its independent contractor sales associates and by
Cendant Mobility to its customers and clients. The interim
marketing services agreements will remain in place until the
mortgage venture is fully licensed. Such promotions include mail
inserts, brochures and advertisements as well as placement in
company newsletters and permitting PHH mortgage presentations
during sales meetings and, with respect to NRT, also include the
posting of PHH Mortgage banners and signs throughout NRT
offices. The Cendant parties to these agreements are paid
marketing fees for conducting such promotions based upon the
fair market value of the services to be provided. Once the
mortgage venture is operational (which we currently expect will
be in mid-2005), these interim agreements will terminate and the
provisions of the strategic relationship agreement and PHH Home
Loans operating agreement described above will govern the manner
in which the mortgage venture is recommended by Cendant’s
real estate division to such groups.
Separation Agreement
In connection with the Spin-Off, we and Cendant entered into a
separation agreement that requires us to exchange information
with Cendant, follow certain accounting practices and resolve
disputes in a particular manner. We have agreed to maintain the
confidentiality of certain information and preserve available
legal privileges.
The separation agreement includes provisions relating to the
allocation of the costs of the Spin-Off, indemnification,
non-solicitation of employees, the establishment of our pension
plan, our assumption of certain Cendant stock options and
restricted stock awards (as adjusted and converted into awards
relating to our common stock), our assumption of certain pension
obligations and certain other provisions customary for
agreements of its type. This separation agreement is filed as an
exhibit to this Annual Report on Form 10-K.
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The following is a summary of certain other provisions of the
separation agreement:
Allocation of Costs and Expenses Related to the
Transaction
The separation agreement provides that all fees and expenses
incurred by us or Cendant directly related to the Spin-Off
(other than taxes, which are allocated pursuant to the tax
sharing agreement) will be paid by Cendant; provided, however,
Cendant is not obligated to pay any such expenses incurred by us
unless such expenses have had the prior written approval of an
officer of Cendant. Additionally, we are responsible for our own
internal fees, costs and expenses, such as salaries of personnel
incurred in connection with the Spin-Off.
Indemnification
Pursuant to the separation agreement, we have agreed to
indemnify Cendant for any losses (other than losses relating to
taxes, indemnification for which is provided in the tax sharing
agreement) that any party seeks to impose upon Cendant or its
affiliates that relate to, arise or result from:
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any of our liabilities, including, among other things:
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(a)
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all liabilities reflected in our pro forma balance sheet as of
September 30, 2004 or that would be, or should have been,
reflected in such balance sheet,
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(b)
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all liabilities relating to our business whether before or after
the date of the Spin-Off,
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(c)
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all liabilities that relate to, or arise from any performance
guaranty of Avis Group Holdings, Inc. in connection with
indebtedness issued by Chesapeake Funding LLC,
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(d)
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any liabilities relating to our or our affiliates’
employees and
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(e)
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all liabilities that are expressly allocated to us or our
affiliates, or which are not specifically assumed by Cendant or
any of its affiliates, pursuant to the separation agreement, the
tax sharing agreement or the transition services agreement;
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any breach by us or our affiliates of the separation agreement,
the tax sharing agreement or the transition services agreement
(described below under “—Transition Services
Agreement”); and
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any liabilities relating to information in the registration
statement on Form 8-A filed with the Securities and
Exchange Commission (the “Commission”) on
January 18, 2005 (the “Form 8-A”), the
Information Statement (the “information statement”)
filed by us as an exhibit to our Current Report on Form 8-K
filed on January 19, 2005 (the “January 19
Form 8-K”) or the investor presentation (the
“investor presentation”) filed as an exhibit to the
January 19 Form 8-K, other than portions provided by
Cendant.
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Cendant is obligated to indemnify us for any losses (other than
losses relating to taxes, indemnification for which is provided
in the tax sharing agreement described below under
“—Tax Sharing Agreement”) that any party seeks to
impose upon us or our affiliates that relate to:
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any liabilities other than liabilities we have assumed or any
liabilities relating to the Cendant business;
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any breach by Cendant or its affiliates of the separation
agreement, the tax sharing agreement or the transition services
agreement; and
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any liabilities relating to information in the Form 8-A,
the information statement or the investor presentation provided
by Cendant.
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In addition, we and our pension plan have agreed to indemnify
Cendant and its pension plan, and Cendant and its pension plan
have agreed to indemnify us and our pension plan, with respect
to any liabilities involving eligible participants in our and
Cendant’s pension plans, respectively.
Tax Sharing Agreement
In connection with the Spin-Off, we and Cendant entered into a
tax sharing agreement that contains provisions governing the
allocation of liability for taxes between Cendant and us,
indemnification for liability for
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taxes and responsibility for preparing and filing tax returns
and defending tax contests, as well as other tax-related matters
including the sharing of tax information and cooperating with
the preparation and filing of tax returns. This tax sharing
agreement is filed as an exhibit to this Annual Report on
Form 10-K.
Allocation of Liability for Taxes
Pursuant to the tax sharing agreement, Cendant is responsible
for all federal, state and local income taxes of or attributable
to any affiliated or similar group filing a consolidated,
combined or unitary income tax return of which any of Cendant or
its affiliates (other than us or our subsidiaries) is the common
parent for any taxable period beginning on or before
January 31, 2005, except for taxes resulting from the
failure of the Spin-Off or transactions relating to the internal
reorganization to qualify as tax-free. Cendant is responsible
for all other income taxes and all non-income taxes attributable
to Cendant and its subsidiaries (other than us or our
subsidiaries), and we are responsible for all other income taxes
and all non-income taxes attributable to us and our
subsidiaries. As a result of the resolution of any tax
contingencies that relate to audit adjustments due to taxing
authorities’ review of prior income tax returns and any
effects of current year income tax returns, our tax basis in
certain of our assets may be adjusted in the future. We are
responsible for any taxes resulting from the failure of the
Spin-Off or transactions relating to the internal reorganization
to qualify as tax-free, which failure was the result of our or
our subsidiaries’ actions, misrepresentations or omissions.
We also are responsible for 13.7% of any taxes resulting from
the failure of the Spin-Off or transactions relating to the
internal reorganization to qualify as tax-free, which failure is
not due to the actions, misrepresentations or omissions of
Cendant or us or our respective subsidiaries. Such percentage
was based on the relative pro forma net book values of Cendant
and us as of September 30, 2004, without giving effect to
any adjustments to the book values of certain long-lived assets
that may be required as a result of the Spin-Off and the related
transactions. We have agreed to indemnify Cendant and its
subsidiaries and Cendant has agreed to indemnify us and our
subsidiaries for any taxes for which the other is responsible.
Preparing and Filing Tax Returns
Cendant has the right and obligation to prepare and file all
consolidated, combined or unitary income tax returns with
respect to any affiliated or similar group of which any of
Cendant or its affiliates (other than us or our subsidiaries) is
the common parent beginning on or before January 31, 2005.
We are required to provide information and to cooperate with
Cendant in the preparation and filing of these tax returns. We
have the right and obligation to prepare and file all other
income tax returns and all non-income tax returns relating to us
and our subsidiaries.
Tax Contests
Cendant has the right to control all administrative, regulatory
and judicial proceedings relating to federal, state and local
income taxes of or attributable to any affiliated or similar
group filing a consolidated, combined or unitary income tax
return of which any of Cendant or its affiliates (other than us
or our subsidiaries) is the common parent and all proceedings
relating to taxes resulting from the failure of the Spin-Off or
transactions relating to the internal reorganization to qualify
as tax-free. We have the right to control all administrative,
regulatory and judicial proceedings relating to other income
taxes and non-income taxes attributable to us and our
subsidiaries.
Tax Benefits
If we become entitled to certain tax attributes (or benefits)
(related to the Avis merger agreement) subsequent to the
Spin-Off that relate to an audit adjustment for a consolidated,
combined, unitary or similar income tax return for a certain tax
year prior to the Spin-Off for which Cendant is responsible
under the tax sharing agreement, we are required to make
payments to Cendant in respect of these tax attributes (or
benefits) if and to the extent that we actually realize a tax
benefit for a post Spin-Off taxable year (i.e., such tax
attributes or benefits actually reduce the income taxes that we
otherwise would have been required to pay had no such audit
adjustment occurred).
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Transition Services Agreement
In connection with the Spin-Off, we, PHH Arval and PHH Mortgage
entered into a transition services agreement with Cendant and
Cendant Operations, Inc. (the “Cendant parties”) that
governs certain continuing arrangements between us and the
Cendant parties so as to provide for an orderly transition of
our company becoming an independent, publicly-traded company.
This transition services agreement is filed as an exhibit to
this Annual Report on Form 10-K.
Pursuant to the transition services agreement, the Cendant
parties agreed to provide to us, and we agreed to provide
various services including services relating to human resources
and employee benefits, payroll, financial systems management,
treasury and cash management, accounts payable services,
external reporting, telecommunications services and information
technology services. Prior to the Spin-Off, Cendant provided
these and other services to us and allocated certain corporate
costs to us which, in the aggregate, were approximately
$38 million for the year ended December 31, 2004. We
estimate that the monthly cost payable by us to Cendant for
services related to corporate functions under the transition
services agreement will be approximately $550,000. Additionally,
we will continue to purchase certain information technology
services, long distance phone services, and employee benefits
through Cendant under their current contracts on terms
consistent with our historic cost from Cendant. The transition
services agreement also contains agreements relating to
indemnification, access to information and certain other
provisions customary for agreements of this type.
The transition services agreement, the cost of each transition
service generally reflects the same payment terms and is
calculated using the same cost allocation methodologies for the
particular service as those associated with historic costs for
the equivalent services, and at a rate intended to approximate
an arm’s length pricing negotiation as if there were no
pre-existing cost-allocation methodology; however, the agreement
was negotiated in the context of a parent-subsidiary
relationship and in the context of the Spin-Off. After the
expiration of the arrangements contained in the transition
services agreement, we may not be able to replace these services
in a timely manner or on terms and conditions, including cost,
as favorable as those we received from Cendant. We are
developing plans to increase our internal capabilities in the
future to reduce our reliance on the Cendant parties for these
services. We have the right to receive reasonable information
with respect to charges for transition services provided by the
Cendant parties.
Services to be Provided by PHH to the Cendant
Parties
Prior to the Spin-Off, we provided Cendant and certain Cendant
affiliates, subsidiaries and business units with certain
information technology support, equipment and services at or
from our data center, and certain PC desktop support for
approximately 100 Cendant personnel, located at our facility in
Sparks, Maryland. We will continue to provide these services to
the Cendant parties under the transition services agreement
through a date no later than February 1, 2007. The Cendant
parties may terminate the provision of these services upon
90 days’ prior written notice to us, and the Cendant
parties would be responsible for the repayment to us of any
unamortized computer hardware service charges and software
charges specific to their systems environments which are the
subject of the aforementioned services, as well as for any
unpaid actual costs incurred by us with respect to these
services. We do not have early termination rights without cause
with respect to these services. We have allocated the costs for
these services to the Cendant parties (and their applicable
affiliates, subsidiaries and business units) based on their
actual usage and will continue to allocate costs to them in this
manner under the transition services agreement. We estimate the
fees for these services under the transition services agreement
will be approximately $45,000 per month, subject to changes in
Cendant’s (including its applicable affiliates’,
subsidiaries’ and business units’) actual usage of
such services.
Item 2. Properties
Our principal offices are located at 3000 Leadenhall Road, Mt.
Laurel, New Jersey 08054.
Mortgage Services Segment
Our mortgage services segment has centralized operations in one
main area occupying various leased offices in Mt. Laurel, New
Jersey for a total of approximately 800,000 square feet.
Its leases on these premises expires in 2006, 2008, 2013 and
2022. We have a second area of centralized offices for our
mortgage services segment in
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Jacksonville, Florida, where space is occupied pursuant to two
leases expiring in 2005 and 2008. In addition, our mortgage
services segment has approximately 24 smaller regional
offices located throughout the United States.
Fleet Management Services Segment
PHH Arval maintains a headquarters office in a new,
210,000 square-foot office in Sparks, Maryland, which has a
lease expiring in 2014. PHH Arval also leases office space
and marketing centers in five locations in Canada. In addition,
PHH Arval has approximately four smaller regional locations
throughout the United States.
Item 3. Legal Proceedings
We are party to various legal proceedings from time to time,
none of which we currently deem to be material.
Item 4. Submission of Matters to a Vote of Security
Holders
As discussed above in this Annual Report on Form 10-K under
“Item 1. Business—Recent Developments”,
prior to February 1, 2005, we were a wholly-owned
subsidiary of Cendant Corporation. In connection with the
Spin-Off, Cendant Corporation, as our sole stockholder, acted by
written consent to approve various matters in connection with
the Spin-Off.
On January 14, 2005, Cendant, as our sole stockholder,
acting by written consent in lieu of a meeting, took the
following actions:
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the election of James E. Buckman, Stephen P. Holmes and Ronald
L. Nelson as directors until their successors were chosen and
qualified;
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the approval of the filing of our Articles of Amendment to our
Amended and Restated Articles of Incorporation which increased
our authorized capital stock from 1,000 shares of common
stock to 110,000,000 shares of capital stock, consisting of
100,000,000 shares of common stock and
10,000,000 shares of preferred stock;
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the approval of the filing of our Articles of Amendment and
Restatement immediately prior to the Spin-Off;
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the approval and adoption of our employee benefit plans,
including: the PHH Corporation 2005 Equity and Incentive
Plan, the PHH Corporation Non-Employee Directors Deferred
Compensation Plan, the PHH Corporation Employee Stock
Purchase Plan, the PHH Corporation Savings Restoration Plan, the
PHH Corporation Officer Deferred Compensation Plan, the
PHH Corporation Pension Plan, and the PHH Corporation
Retiree Medical Plan (see the section of this Annual Report on
Form 10-K entitled “Item 11. Executive
Compensation”); and
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the election of our current Board of Directors, which was
effective immediately after the Spin-Off, and the election of
Francis J. Van Kirk to our Board of Directors, effective as
of July 1, 2005 (see the section of this Annual Report on
Form 10-K entitled “Item 10. Directors and
Executive Officers of the Registrant”).
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PART II
Item 5. Market for Registrant’s Common
Equity
Shares of our common stock are listed on the New York Stock
Exchange (the “NYSE”) under the symbol “PHH”
and began trading on that exchange immediately after our
Spin-Off from Cendant Corporation on February 1, 2005, as
discussed elsewhere in this Annual Report on Form 10-K. The
high and low sales prices for our common stock for the period
from February 1, 2005 to March 1, 2005 were $22.30 and
$20.04, respectively. As of March 1, 2005, there were
approximately 12,800 holders of record of our common stock.
The declaration and payment of future dividends by us will be
subject to the discretion of our Board of Directors and will
depend upon many factors, including our financial condition,
earnings, capital requirements of our operating subsidiaries,
legal requirements, regulatory constraints and other factors
deemed relevant by our Board of Directors. Currently, we do not
anticipate paying any cash dividends on our common stock in the
foreseeable future. Pursuant to the terms of the indentures
governing our outstanding term notes, we may be restricted from
paying dividends on our common stock in the event that
(a) our ratio of debt to equity exceeds 6.5:1, after giving
effect to the dividend payment or (b) our ratio of debt to
tangible equity exceeds 10:1. In addition, we are party to a
$1.25 billion Three Year Competitive Advance and Revolving
Credit Agreement, dated as of June 28, 2004 and amended as
of December 21, 2004, with a group of lenders and JPMorgan
Chase Bank, N.A., as administrative agent (our “credit
facility”). The credit facility includes various covenants
that may restrict our ability to pay dividends on our common
stock, including covenants which require that we maintain:
(a) net worth of $1.0 billion plus 25% of net income,
if positive, for each fiscal quarter after December 31,
2004 and (b) a ratio of debt to net worth no greater than
8:1.
Item 6. Selected Financial Data
As discussed above under “Item 1. Business—
Recent Developments,” on January 31, 2005, Cendant
distributed all of the shares of our common stock held by it to
the holders of Cendant common stock issued and outstanding on
the record date for the distribution, which was January 19,
2005 (the “Spin-Off”). In connection with and prior to
the Spin-Off, we underwent an internal reorganization after
which we continued to own PHH Mortgage, PHH Arval and
our other subsidiaries that engage in the mortgage services and
fleet management services businesses. Pursuant to this internal
reorganization, in January 2005 Cendant Mobility Services
Corporation, Wright Express LLC and other subsidiaries that
engaged in the relocation and fuel card businesses were
separated from us and distributed to Cendant. In addition, in
January 2005, Cendant contributed to us Speedy Title and
Appraisal Review Services, LLC, through which we now conduct our
appraisal services business.
The selected consolidated financial data set forth below present
our historical financial data for the periods indicated and do
not include financial information after the Spin-Off. Because
our business has changed substantially due to the reorganization
in connection with the Spin-Off and we will conduct our business
going forward as an independent, publicly-traded company, our
historical financial information does not reflect what our
results of operations, financial position or cash flows would
have been had we been an independent, publicly-traded company
during the periods presented. Therefore, the historical
financial information presented herein is not indicative of what
our results of operations, financial position or cash flows will
be in the future. For a pro forma presentation of our
consolidated financial statements as of September 30, 2004
reflecting the effects of the
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Spin-Off as of that date, see the “Unaudited Pro Forma
Financial Information” included in the information
statement attached as Exhibit 99.2 to our Current Report on
Form 8-K dated January 19, 2005.
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Year Ended December 31,
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2004
(1)
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2003
(2)
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2002
(3)
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2001
(4)
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2000
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|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Consolidated Statements of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
2,973
|
|
|
$
|
2,971
|
|
|
$
|
2,449
|
|
|
$
|
2,578
|
|
|
$
|
898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations
(5)
|
|
|
182
|
|
|
|
284
|
|
|
|
98
|
|
|
|
262
|
|
|
|
192
|
|
|
Loss from discontinued operations, net of
tax
(6)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(9
|
)
|
|
Cumulative effect of accounting change, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(35
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
182
|
|
|
$
|
284
|
|
|
$
|
98
|
|
|
$
|
227
|
|
|
$
|
183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheets Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
11,518
|
|
|
$
|
11,553
|
|
|
$
|
10,168
|
|
|
$
|
9,609
|
|
|
$
|
4,417
|
|
|
Assets under management and mortgage programs
|
|
|
9,275
|
|
|
|
9,285
|
|
|
|
8,145
|
|
|
|
7,719
|
|
|
|
2,999
|
|
|
Debt under management and mortgage programs
|
|
|
7,368
|
|
|
|
7,381
|
|
|
|
6,463
|
|
|
|
6,063
|
|
|
|
2,040
|
|
|
Stockholder’s equity
|
|
|
2,161
|
|
|
|
2,108
|
|
|
|
1,951
|
|
|
|
1,777
|
|
|
|
1,550
|
|
|
|
|
|
(1)
|
On February 27, 2004, we acquired First Fleet Corporation,
a national provider of fleet management services to companies
that maintain private truck fleets, for approximately
$26 million, including $4 million of contingent
consideration payable in first quarter 2005 and net of cash
acquired of $10 million. This acquisition resulted in
goodwill (based on the preliminary allocation of the purchase
price) of $26 million, none of which is expected to be
deductible for tax purposes. Such goodwill was assigned to our
fleet management services segment.
|
|
(2)
|
During 2003, we consolidated one entity pursuant to Financial
Accounting Standards Board Interpretation No. 46,
“Consolidation of Variable Interest Entities” and one
entity as a result of an amendment to the underlying structure
of the facility we use to securitize relocation receivables. See
Notes 2, 10 and 11 to our consolidated financial statements.
|
|
(3)
|
During 2002, we adopted the non-amortization provisions of
Statement of Financial Accounting Standards No. 142,
“Goodwill and Other Intangible Assets.” Accordingly,
our results of operations for 2001 and 2000 reflect the
amortization of goodwill and indefinite-lived intangible assets,
while our results of operations for 2004, 2003 and 2002 do not
reflect such amortization. Had we applied the non-amortization
provisions of SFAS No. 142 during 2001 and 2000, net
income would have been $242 million and $184 million,
respectively.
|
|
(4)
|
During 2001, we completed the acquisition of the fleet
management services business of Avis Group Holdings, Inc.
(“Avis’ fleet business”), which materially
impacted our results of operations and financial position. If we
had acquired Avis’ fleet business on January 1, 2001,
net revenues, income from continuing operations and net income
would have been approximately $2.8 billion,
$261 million and $226 million, respectively, during
2001. If we had acquired Avis’ fleet business on
January 1, 2000, net revenues, income from continuing
operations and net income would have been approximately
$2.4 billion, $173 million and $164 million,
respectively, during 2000.
|
|
(5)
|
We do not present income from continuing operations on a per
share basis because, during each of the years presented, Cendant
owned all of our 1,000 issued and outstanding shares of common
stock, par value $0.01 per share, and such information,
therefore, would not be meaningful.
|
|
(6)
|
Loss from discontinued operations, net of tax includes the after
tax results of discontinued operations and the loss on disposal
of discontinued operations.
|
22
|
|
|
|
Item 7.
|
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
|
The following discussion should be read in conjunction with
“Item 1. Business” and our consolidated financial
statements and the notes thereto. You should also read this
discussion together with the “Special Note Regarding
Forward-Looking Statements” set forth above and the risks
and uncertainties described in Exhibit 99 to this Annual
Report on Form 10-K entitled “Risk Factors Affecting
Our Business and Future Results.”
OVERVIEW
We are a leading outsource provider of mortgage and fleet
management services. Our mortgage services segment originates
and services mortgage loans through PHH Mortgage
Corporation (“PHH Mortgage”). PHH Mortgage
is a centralized mortgage lender conducting business throughout
the United States. We focus on retail mortgage originations in
which we provide mortgages directly to consumers. Our fleet
management services segment provides commercial fleet management
services to corporate clients and government agencies through
PHH Vehicle Management Services, LLC (d/b/a PHH Arval)
(“PHH Arval”). PHH Arval is a fully
integrated provider of fleet management services with a broad
range of product offerings.
Recent Developments
In connection with and prior to the Spin-Off, we underwent an
internal reorganization after which we continued to own
PHH Mortgage, PHH Arval and our other subsidiaries
that engage in the mortgage and fleet management services
businesses. Pursuant to this internal reorganization, Cendant
Mobility Services Corporation, previously our relocation
business, and Wright Express LLC, previously our fuel card
business, and other subsidiaries that engaged in the relocation
and fuel card businesses were separated from us and distributed
to Cendant. As a result, approximately $1.6 billion in
assets and $1.4 billion in liabilities related to these
businesses (in each case, as of December 31, 2004) were
distributed to Cendant. In addition, in January 2005, Cendant
contributed Speedy Title and Appraisal Review Services, LLC
(“STARS”) to us, through which we now conduct our
appraisal services business as part of our mortgage services
segment. For the year ended December 31, 2004, revenue
generated by the appraisal services business was approximately
$90 million.
The discussion set forth below presents our historical financial
data for the periods indicated and does not include financial
information after the Spin-Off. Because our business has changed
substantially due to the reorganization in connection with the
Spin-Off and we will conduct our business going forward as an
independent, publicly-traded company, our historical financial
information does not reflect what our results of operations,
financial position or cash flows would have been had we been an
independent, publicly-traded company during the periods
presented. Therefore, the historical financial information
presented herein is not indicative of what our results of
operations, financial position or cash flows will be in the
future. For a pro forma presentation of our consolidated
financial statements as of September 30, 2004 reflecting
the effects of the Spin-Off as of that date, see the
“Unaudited Pro Forma Financial Information” included
in the information statement attached as Exhibit 99.2 to
our Current Report on Form 8-K dated January 19, 2005.
In connection with the Spin-Off, we entered into several
agreements and arrangements with Cendant that we expect to be
material to our business going forward. For a discussion of
these agreements and arrangements, See “Item 1.
Business—Arrangements with Cendant Corporation.” For
example, in connection with the Spin-Off, we and Cendant formed
a mortgage venture, PHH Home Loans, LLC, that originates
and sells mortgage loans primarily sourced through NRT
Incorporated, Cendant’s owned real estate brokerage
business, and Cendant Mobility Services Corporation,
Cendant’s subsidiary that engages in the relocation
business. We will contribute certain of our assets and employees
that have historically supported originations from NRT and
Cendant Mobility to the mortgage venture. The mortgage venture
has a 50-year term, subject to earlier termination as described
below under “Item 1. Business—Arrangements with
Cendant Corporation—Mortgage Venture Formed by Cendant and
PHH Termination” or non-renewal by us after
25 years subject to delivery of notice. In the event that
we do not deliver a non-renewal notice after year 25, the
mortgage venture will be renewed for an additional 25-year term.
We own 50.1% of the mortgage venture, and Cendant owns the
remaining 49.9% of the mortgage venture. All mortgage loans
originated by PHH Home Loans will be sold to us or other
third party investors on a servicing-released basis.
PHH Home Loans will not hold any mortgage loans for
investment purposes or perform
23
servicing functions for any loans it originates. Through the
mortgage venture, we are the exclusive recommended provider of
mortgages for NRT and Cendant Mobility.
The mortgage venture was formed in November 2004, and we expect
that it will commence operations in mid-2005, once it is fully
licensed to conduct mortgage banking activities. As discussed in
“Item 1. Business— Arrangements with Cendant
Corporation— Marketing Agreements,” PHH Mortgage
currently has interim marketing agreements with NRT and Cendant
Mobility pursuant to which Cendant, NRT and Cendant Mobility
have agreed that PHH Mortgage will be the exclusive
recommended provider of mortgage products and services promoted
by NRT to its independent contractor sales associates and by
Cendant Mobility to its customers and clients. The interim
marketing services agreements will remain in place until the
mortgage venture is fully licensed. At that point, these interim
agreements will terminate and the provisions of the strategic
relationship agreement and PHH Home Loans operating
agreement described above will govern the manner in which the
mortgage venture is recommended by Cendant’s real estate
division to such groups.
Although the mortgage venture is consolidated within our
financial statements, and Cendant’s ownership interest in
the mortgage venture is reflected on our financial statements as
a minority interest, the mortgage venture did not materially
impact our results of operations for the year ended
December 31, 2004. Net income generated by the mortgage
venture will be distributed quarterly to its members pro rata
based upon their respective ownership interests, less any
amounts to be retained (as necessary) to meet regulatory capital
requirements.
See “Item 1. Business— Recent Developments”
for a discussion of the Spin-Off and other material recent
developments.
Mortgage Services Segment
The services provided by our mortgage services segment include
the origination (funding either a purchase or refinancing), sale
and servicing of residential mortgage loans. We originate
mortgage loans through three principal business channels:
financial institutions (on a private label or co-branded basis),
real estate brokers (including brokers associated with
brokerages owned or franchised by Cendant and independent
brokers) and relocation (mortgage services for clients of
Cendant Mobility). We also purchase mortgage loans originated by
third parties. Upon the closing of a residential mortgage loan
originated or purchased by us, the mortgage loan is typically
warehoused for a period up to 60 days and then sold into
the secondary market (which is customary in the mortgage
industry). Mortgage loans held for sale represent those mortgage
loans originated or purchased by us and pending sale to
permanent investors. We primarily sell our mortgage loans to
government-sponsored entities, such as the Federal National
Mortgage Association (“Fannie Mae”), the Federal Home
Loan Mortgage Corporation (“Freddie Mac”) or the
Government National Mortgage Association (“Ginnie
Mae”). Upon sale, we generally retain the servicing rights
and obligations of the underlying mortgage loans. A mortgage
servicing right (“MSR”) is the right to receive a
portion of the interest coupon and fees collected from the
mortgagor for performing specified mortgage servicing
activities, which consist of collecting loan payments, remitting
principal and interest payments to investors, arranging for the
escrow of funds for payment of mortgage-related expenses such as
taxes and insurance, and otherwise administering our mortgage
loan servicing portfolio.
Loan origination and commitment fees paid by the borrower in
connection with the origination of mortgage loans and certain
direct loan origination costs are deferred until such loans are
sold to investors. Mortgage loans pending sale are recorded on
our balance sheet at the lower of cost or market value on an
aggregate basis. Sales of mortgage loans are generally recorded
on the date a loan is delivered to an investor. Gains or losses
on sales of mortgage loans are recognized based upon the
difference between the selling price and the allocated carrying
value of the related mortgage loans sold. The capitalization of
the MSRs also occurs upon sale of the underlying mortgages into
the secondary market. Upon initial recording of the
MSR asset, the total cost of loans originated or acquired
is allocated between the MSR asset and the mortgage loan
without the servicing rights based on relative fair values.
Servicing revenues comprise several components, including
recurring servicing fees, ancillary income and the amortization
of the MSR asset. Recurring servicing fees are recognized
upon receipt of the coupon payment from the borrower and
recorded net of guaranty fees. Costs associated with loan
servicing are charged to expense as incurred. The MSR asset
is amortized over the estimated life of the related loan
portfolio in
24
proportion to projected net servicing revenues. Such
amortization is recorded as a reduction of net servicing revenue
in our statements of income.
The MSR asset is routinely evaluated for impairment by
management, but at least on a quarterly basis. For purposes of
performing this impairment evaluation, we stratify our portfolio
on the basis of product type and interest rates of the
underlying mortgage loans. We measure impairment for each
stratum by comparing estimated fair value to the carrying
amount. Fair value is estimated based upon an internal valuation
that reflects management’s estimates of expected future
cash flows considering prepayment estimates (developed using a
third party model described below), our historical prepayment
rates, portfolio characteristics, interest rates based on
interest rate yield curves, implied volatility and other
economic factors. We use a third party model to forecast
prepayment rates used in the development of our expected future
cash flows. The prepayment forecast is based on historical
observations of prepayment behavior in similar periods comparing
current mortgage interest rates to the mortgage interest rates
in our servicing portfolio and incorporates loan characteristics
(e.g., loan type and note rate) and factors such as recent
prepayment experience, previous refinance opportunities and
estimated levels of home equity. Temporary impairment is
recorded through a valuation allowance in the period of
occurrence as a reduction of net revenue in our statements of
income. We periodically evaluate our MSR asset to determine
if the carrying value before the application of the valuation
allowance is recoverable. When we determine that a portion of
the asset is not recoverable, the asset and the previously
designated valuation allowance are reduced to reflect the
write-down.
Market Risks
Our principal market exposure is to interest rate risk,
specifically long-term U.S. Treasury and mortgage interest
rates due to their impact on mortgage-related assets and
commitments and also the London Interbank Offered Rate
(“LIBOR”) and commercial paper interest rates due to
their impact on variable borrowings and other interest rate
sensitive liabilities. We use various financial instruments,
particularly swap contracts, forward delivery commitments,
futures, and options contracts to manage and reduce this risk.
We also retain a certain amount of credit risk related to loans
sold with recourse. The majority of the loans sold with recourse
represent sales under a program where we retain the credit risk
for a limited period of time and only for a specific default
event. The retained credit risk represents the unpaid principal
balance of the mortgage loans. For these loans, we record an
allowance for estimated losses, which is determined based upon
our history of actual loss experience under the program. This
allowance and the related activity are not significant to our
results of operations or financial position.
Our liquidity and financing requirements are significant. Our
ability to finance our operations at the level and cost required
to compete effectively is impacted by our credit ratings. We
have met our financing requirements in a variety of ways
including reliance on the secondary market for mortgage loans,
use of the public and private debt markets, securitization and
asset-backed securities markets and through committed and
uncommitted bank credit facilities. In the future, we expect to
continue to meet these requirements with those sources and will
also have access to the public equity markets as an independent,
publicly traded company. See “—Liquidity and Capital
Resources.” The objective of our liquidity management is to
ensure that adequate, diverse and reliable sources of funding
are available to meet our needs on a cost-effective basis.
Arrangements with Cendant Corporation
In connection with the Spin-Off, we and Cendant formed a
mortgage venture, PHH Home Loans, LLC, that originates and sells
mortgage loans primarily sourced through NRT and Cendant
Mobility. The termination of our mortgage venture with Cendant
or of our exclusivity rights under the mortgage venture could
have a material adverse effect on our financial condition and
our results of operations. See “Item 1. Business—
Arrangements with Cendant Corporation” and Exhibit 99
to this Annual Report on Form 10-K.
Regulatory Trends
The regulatory environments in which we operate have an impact
on the activities in which we may engage, how the activities may
be carried out and the profitability of those activities.
Therefore, changes to laws, regulations or regulatory policies
can affect our operations. As discussed above in
“Item 1. Business—Our
25
Business— Regulation,” the federal Real Estate
Settlement Procedures Act (“RESPA”) and state real
estate brokerage laws restrict the payment of fees or other
things of value in consideration for the referral of real estate
settlement services. Our mortgage services segment is subject to
numerous federal, state and local laws and regulations,
including those relating to real estate settlement procedures,
fair lending, fair credit reporting, truth in lending, federal
and state disclosure and licensing. The establishment of
PHH Home Loans, LLC, our mortgage venture with Cendant
formed for the purpose of originating and selling mortgage loans
primarily sourced through Cendant’s owned residential real
estate brokerage and corporate relocation businesses
(“PHH Home Loans”), and the continuing
relationship between and among PHH Home Loans, Cendant and
us will be subject to the anti-kickback requirements of RESPA.
Our wholly-owned insurance subsidiary, Atrium Insurance
Corporation, a New York domiciled monoline mortgage guaranty
insurance company, is subject to insurance regulations in the
State of New York relating to, among other things, standards of
solvency that must be met and maintained; the licensing of
insurers and their agents; the nature of and limitations on
investments; premium rates; restrictions on the size of risks
that may be insured under a single policy; reserves and
provisions for unearned premiums, losses and other obligations;
deposits of securities for the benefit of policyholders;
approval of policy forms and the regulation of market conduct,
including the use of credit information in underwriting; as well
as other underwriting and claims practices. The New York
Department of Insurance also conducts periodic examinations and
requires the filing of annual and other reports relating to the
financial condition of companies and other matters. Financial
examinations completed in the past three years have not resulted
in any adjustments to statutory surplus and pending financial
and market conduct examinations have not identified any material
findings to date.
As a result of our ownership of Atrium, we are subject to New
York’s insurance holding company statute, as well as
certain other laws, which, among other things, limit
Atrium’s ability to declare and pay dividends except from
undivided profits remaining on hand above the aggregate of our
paid-in capital, paid-in surplus and contingency reserve.
Additionally, anyone seeking to acquire, directly or indirectly,
10% or more of Atrium’s outstanding common stock, or
otherwise proposing to engage in a transaction involving a
change in control of Atrium, will be required to obtain the
prior approval of the New York Superintendent of Insurance.
Mortgage Originations
The aggregate demand for mortgage loans in the U.S. is a
primary driver of our operating results. The demand for mortgage
loans is affected by external factors including prevailing
mortgage rates and the strength of the U.S. housing market.
Calendar years 2003 and 2004 represented historically high
industry originations of $3.8 and $2.8 trillion
respectively. As of February 1, 2005, industry experts are
forecasting a decline in industry originations of close to 20%
from 2004 levels primarily due to lower refinance activity.
Purchase originations are expected to remain relatively
comparable to 2004 levels. Due to our higher mix of purchase
business as compared to the industry and our ability to sign new
outsource clients, we would expect a decline in total mortgage
originations of approximately 10% or half of the forecasted
industry decline. We would also expect increased pricing
pressures due to the declining demand which could negatively
impact profitability.
Relocation Services Segment
Prior to the Spin-Off, we provided relocation services to
corporate and government clients for the transfer of their
employees. Such services included purchasing and/or selling of a
transferee’s home, providing of home equity advances to
transferees (generally guaranteed by the corporate client),
expense processing, arranging household goods moving services
and other related services. We earned revenues from fees charged
to corporate and government clients for the performance of these
services and recognized such revenue as services were provided.
Additionally, we earned interest income on the funds we advanced
to the transferring employee, which was recorded ratably as
earned up until the point of repayment by the client.
Based on client agreements, we negotiated for the ultimate sale
of the transferring employee’s home. The gain or loss on
sale was generally borne by the corporate client. However, in
limited circumstances, we assumed the risk of loss on the sale
of the transferring employee’s home. The fees earned in
these transactions were recorded on a gross basis with
associated costs recorded within expenses. These fees were
recognized as services were provided.
26
We also earned revenue from referral services provided to real
estate brokers and other third-party service providers. We
recognized the referral fees from real estate brokers at the
time our obligations were complete. For services where we paid a
third-party provider on behalf of our clients, we earned a
referral fee or commission, which was recognized at the time of
completion of services.
In connection with the Spin-Off, our former relocation services
segment was distributed to Cendant, and this segment’s
operations will not be part of our operations going forward.
Fleet Management Services Segment
We provide fleet management services to corporate clients and
government agencies. These services include management and
leasing of vehicles and other fee-based services for
clients’ vehicle fleets. We lease vehicles primarily to
corporate fleet users under open-end operating and direct
financing lease arrangements where the customer bears
substantially all of the vehicle’s residual value risk. In
limited circumstances, we lease vehicles under closed-end leases
where we bear all of the vehicle’s residual value risk. The
lease term under the open-end lease agreement provides for a
minimum lease term of twelve months and after the minimum term,
the lease may be continued at the lessee’s election for
successive monthly renewals. For operating leases, lease
revenues, which contain a depreciation component, an interest
component and a management fee component, are recognized based
on the lease term of the vehicle, which encompasses the minimum
lease term and the month-to-month renewals. For direct financing
leases, lease revenue contains an interest component, which is
recognized using an interest method based on the lease term of
the vehicle, which encompasses the minimum lease term and the
month-to-month renewals. Amounts charged to the lessees for
interest are determined in accordance with the pricing
supplement to the respective lease agreement and are generally
calculated on a floating rate basis and can vary month to month
in accordance with changes in the floating rate index. Amounts
charged to lessees for interest may also be based on a fixed
rate that would remain constant for the life of the lease.
Amounts charged to the lessees for depreciation are typically
based on the straight-line depreciation of the vehicle over its
expected lease term. Management fees are recognized on a
straight-line basis over the life of the lease. Revenue for
other services is recognized when such services are provided to
the lessee.
We also sell certain of our leases to a syndicate of third party
banks and individual financial institutions. When we sell such
leases, we are selling the underlying vehicles and assigning any
rights to the leases, including future leasing revenues, to the
syndicating institution. Upon transfer of title and assignment
of rights associated with the lease, we record the proceeds from
the sale as revenue and recognize an expense for the unamortized
cost of the vehicles sold. Under certain syndication agreements,
we retain some residual risk in connection with the fair value
of the asset at lease termination. During 2004, we recorded
$150 million of lease syndication revenue in our statements
of income.
Prior to the Spin-Off, we provided payment processing and
information management services to the vehicle fleet industry
through our former subsidiary, Wright Express LLC. We earned
revenue by processing payments to major oil companies, fuel
retailers and vehicle maintenance providers on behalf of our
customers and the customers of our strategic relationships. We
entered into agreements with the major oil companies, fuel
retailers and vehicle maintenance providers for the acceptance
of purchases of products and services by the customers serviced
by us, and the terms and conditions of the fees assessed by us
for processing these payments. The fee charged to the major oil
company, fuel retailer or vehicle maintenance provider was
generally based upon a percentage of the amount purchased by the
customers serviced by us; however, it may be based on a fixed
amount charged per transaction or a combination of both. The
processing fee was deducted from our payment to the major oil
company, fuel retailer or vehicle maintenance provider or for
the amount purchased by our customer or the customer of our
strategic relationships and recorded as payment processing
revenue at the time the transaction was captured. Revenue for
other services was generally recognized as we fulfilled our
contractual service obligations.
In connection with the Spin-Off, our former fuel card business
was distributed to Cendant, and these operations will not be
part of our operations going forward.
27
Fleet Market
The market size for the U.S. commercial fleet management
services market has displayed little or no growth over the last
several years as reported by a nationally-recognized industry
magazine. Additionally, the portion of this market that does not
typically outsource for fleet management services comprises
mostly smaller fleets, consisting of 500 units or less.
Growth in our fleet management services segment will therefore
be driven principally by increased fee-based services, continued
service of large fleet prospects and increased service to the
smaller fleet market.
Vicarious Liability
Our fleet management services segment is subject to unlimited
liability as the owner of leased vehicles in the State of New
York, the State of Maine, the District of Columbia and in most
provinces in Canada and is subject to limited liability in
approximately six additional jurisdictions under the theory of
vicarious liability. Although our lease contracts require that
each lessee indemnify us against such liabilities, in the event
that a lessee lacks adequate insurance coverage or financial
resources to satisfy these indemnity provisions we could be
liable for property damage or injuries caused by the vehicles
that we lease.
Seasonality
Our mortgage services segment is generally subject to seasonal
trends. These seasonal trends reflect the pattern in the
national housing market. Home sales typically rise during the
spring and summer seasons and decline during the fall and winter
seasons. Seasonality has less of an effect on mortgage
refinancing activity, which is primarily driven by prevailing
mortgage rates. In addition, mortgage delinquency rates
typically rise temporarily in the winter months, driven by
mortgagor payment patterns.
The results of operations of our fleet management services
segment are generally not seasonal.
Inflation
An increase in inflation could have a significant impact on our
mortgage services segment. Interest rates normally increase
during periods of rising inflation. Historically, as interest
rates increase, mortgage loan production decreases, particularly
production from loan refinancing. An environment of gradual
interest rate increases may, however, signify an improving
economy or increasing real estate values, which in turn may
stimulate increased home buying activity. Generally, in such
periods of reduced mortgage loan production the associated
profit margins also decline due to increased competition among
mortgage loan originators and higher unit costs, thus further
reducing our loan production revenues. Conversely, in a rising
interest rate environment, our loan servicing revenues generally
increase because mortgage prepayment rates tend to decrease,
thereby extending the average life of our servicing portfolio
and thus reducing the amortization and impairment of our MSRs.
Inflation does not have a significant impact on our fleet
management services segment.
28
RESULTS OF OPERATIONS
Results of Operations— 2004 vs. 2003
Our consolidated results of operations for the years ended
December 31, 2004 and 2003 comprised the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
2004 v.
|
|
|
|
|
December 31,
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Net revenues
|
|
$
|
2,973
|
|
|
$
|
2,971
|
|
|
$
|
2
|
|
|
Total expenses
|
|
|
2,655
|
|
|
|
2,503
|
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income, before income taxes and minority interest
|
|
|
318
|
|
|
|
468
|
|
|
|
(150
|
)
|
|
Provision for income taxes
|
|
|
134
|
|
|
|
183
|
|
|
|
(49
|
)
|
|
Minority interest, net of tax
|
|
|
2
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
182
|
|
|
$
|
284
|
|
|
$
|
(102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues remained relatively flat year-over-year as an
expected industry-wide decline in mortgage refinancing activity
was offset by additional revenues in our fleet management
services business due principally to our acquisition of First
Fleet Corporation in February 2004, the operating results of
which are included from the acquisition date forward. Total
expenses increased primarily due to this acquisition, partially
offset by lower volumes in our mortgage services business as
discussed below. Our overall effective tax rate was 42.1% and
39.1% for 2004 and 2003, respectively. The difference in the
effective tax rates is primarily due to valuation allowances
established in 2004, relating principally to state net operating
losses, partially offset by lower state income taxes. As a
result of the above-mentioned items, net income decreased
$102 million from 2003 to 2004.
Results of Operations by Segment
Discussed below are the results of operations for each of our
reportable segments for the years ended December 31, 2004
and 2003. Management evaluates the operating results of each of
our reportable segments based upon revenue and
“EBITDA,” which is defined as net income before
non-program related depreciation and amortization, income taxes
and minority interest. Our presentation of EBITDA may not be
comparable to similar measures used by other companies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
2004 v.
|
|
|
Year Ended
|
|
|
2004 v.
|
|
|
|
|
December 31,
|
|
|
2003
|
|
|
December 31,
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
Change
|
|
|
2004
|
|
|
2003
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Mortgage services
|
|
$
|
700
|
|
|
$
|
1,025
|
|
|
|
(32
|
)%
|
|
$
|
100
|
|
|
$
|
302
|
|
|
|
(67
|
)%
|
|
Relocation
services
(1)
|
|
|
468
|
|
|
|
438
|
|
|
|
7
|
%
|
|
|
134
|
|
|
|
124
|
|
|
|
8
|
%
|
|
Fleet management
services
(2)
|
|
|
1,807
|
|
|
|
1,512
|
|
|
|
20
|
%
|
|
|
158
|
|
|
|
114
|
|
|
|
39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reportable segments
|
|
|
2,975
|
|
|
|
2,975
|
|
|
|
*
|
|
|
|
392
|
|
|
|
540
|
|
|
|
|
|
|
Corporate and
other
(3)
|
|
|
(2
|
)
|
|
|
(4
|
)
|
|
|
*
|
|
|
|
(3
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,973
|
|
|
$
|
2,971
|
|
|
|
*
|
|
|
$
|
389
|
|
|
$
|
530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Non-program related depreciation and
amortization
(4)
|
|
|
71
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest
|
|
$
|
318
|
|
|
$
|
468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
In connection with the Spin-Off, our former relocation services
segment was distributed to Cendant, and these operations will
not be part of our operations going forward.
|
|
|
(2)
|
Includes the results of our former fuel card business. In
connection with the Spin-Off, our fuel card business was
distributed to Cendant, and these operations will not be part of
our operations going forward.
|
|
|
(3)
|
Represents unallocated corporate overhead and the elimination of
transactions between segments.
|
29
|
|
|
|
|
|
(4)
|
Non-program related depreciation and amortization includes
depreciation and amortization other than depreciation and
amortization associated with our management and mortgage
programs discussed below in “—Liquidity and Capital
Resources— General— Securitization Programs.”
|
Mortgage Services Segment
As discussed above, production revenue on fee-based loans (where
we perform outsourced mortgage origination functions for a fee)
is generated at the time of closing, whereas originated mortgage
loans held for sale generate revenues at the time of sale
(generally within 60 days after closing). Accordingly, our
production revenue in any given period is driven by the mix of
mortgage loans closed and mortgage loans sold. The following
chart presents our production revenues from originated mortgage
loans held for sale and fee-based mortgage originations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 v. 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
)
|
|
|
|
|
(dollars in billions
|
|
|
Loan closings and loan sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans closed to be securitized
|
|
$
|
34.4
|
|
|
$
|
60.3
|
|
|
$
|
(25.9
|
)
|
|
|
(43
|
)%
|
|
Fee-based loan closings
|
|
|
18.1
|
|
|
|
23.4
|
|
|
|
(5.3
|
)
|
|
|
(23
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
52.5
|
|
|
$
|
83.7
|
|
|
$
|
(31.2
|
)
|
|
|
(37
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan sales
|
|
$
|
32.5
|
|
|
$
|
59.5
|
|
|
$
|
(27.0
|
)
|
|
|
(45
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Production revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production revenue from loan sales
|
|
$
|
323
|
|
|
$
|
958
|
|
|
$
|
(635
|
)
|
|
|
(66
|
)%
|
|
Fee-based production revenue
|
|
|
273
|
|
|
|
354
|
|
|
|
(81
|
)
|
|
|
(23
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
596
|
|
|
$
|
1,312
|
|
|
$
|
(716
|
)
|
|
|
(55
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues and EBITDA for our mortgage services segment decreased
$325 million, or 32%, and $202 million, or 67%,
respectively, in 2004 compared with 2003 primarily due to the
expected industry-wide decline in refinancing activity,
partially offset by increased revenues from mortgage servicing
activities. Mortgage refinancing closings were approximately
$30.8 billion, or 63% lower in 2004 than in 2003.
Refinancing activity is sensitive to interest rate changes
relative to borrowers’ current interest rates and typically
increases when interest rates fall and decreases when interest
rates rise. The year ended December 31, 2003 was marked by
historically high refinancing activity, which decreased the
propensity for borrowers to refinance during 2004. This factor
along with increased competitive pricing pressures due to lower
industry volumes caused revenue from mortgage loan production to
decrease. Typically, as refinancing activity declines, borrower
prepayments also decline which generally results in an increase
in the value of the MSR asset, all other factors being equal.
Partially offsetting the decrease in production revenue was an
increase of $391 million in net revenues generated from
servicing mortgage loans. This increase reflects (a) a
$320 million net reduction in amortization expense and
provision for impairment related to our MSR asset, net of
derivative results (see “—Critical Accounting
Policies— Mortgage Servicing Rights”) which is
primarily attributable to lower prepayment rates experienced in
2004 compared with 2003 driven by the decrease in refinancing
activity in 2004, (b) a $47 million, or 11%, increase
in gross recurring servicing fees (fees received for servicing
existing mortgage loans in the portfolio) driven by a 12%
increase in the average servicing portfolio, which rose to
approximately $137.9 billion in 2004 and (c) a
$24 million increase in other servicing revenue. As
discussed below, we use hedging and other derivative activities
as a strategy to offset potential declines in the value of our
MSR asset, which can be caused by, among other factors,
decreases in interest rates, since decreases in interest rates
tend to increase borrower prepayment activity.
30
Operating expenses for the mortgage services segment declined
approximately $123 million in 2004 primarily due to the
decline in refinancing activity discussed above.
Relocation Services Segment
Revenues and EBITDA from our former relocation services segment
increased $30 million, or 7%, and $10 million, or 8%,
respectively, in 2004 compared with 2003 principally resulting
from higher referral fees. These higher referral fees were
driven by a 7% increase in the volume of relocation
referrals in 2004 and a 17% increase in the average fee per
referral in 2004, as home values increased year-over-year.
Operating expenses for the relocation services segment increased
approximately $20 million in 2004 primarily due to the
increase in volume.
In connection with the Spin-Off, our former relocation services
segment was distributed to Cendant, and these operations will
not be part of our operations going forward.
Fleet Management Services Segment
Revenues and EBITDA for our fleet management services segment
increased $295 million, or 20%, and $44 million, or
39%, respectively, in 2004 compared with 2003 principally as a
result of our acquisition of First Fleet, which contributed
revenues and EBITDA of $212 million and $9 million,
respectively, to 2004 results. Apart from this acquisition,
revenues and EBITDA for the fleet management services segment
increased $83 million and $35 million, respectively,
in 2004 compared with 2003. The revenue increase primarily
reflected (a) an increase of $35 million in vehicle
depreciation expense, (b) $32 million of incremental
revenues from our former fuel card business driven by a
combination of new customers, increased usage of the fuel card
product and higher fuel prices, and (c) $5 million of
additional fees and commissions earned on vehicle maintenance
service contracts. EBITDA increased by a smaller amount than
revenue because (a) vehicle depreciation expense is billed
to our clients and has no impact on EBITDA and (b) the
impact of the increase in revenue from our former fuel card
business was partially offset by $3 million of higher
associated operating expenses.
In connection with the Spin-Off, our former fuel card business
was distributed to Cendant, and this segment’s operations
will only consist of our fleet management service business going
forward.
Results of Operations—2003 vs. 2002
Our consolidated results of operations for the years ended
December 31, 2003 and 2002 comprised the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
2003 v.
|
|
|
|
|
December 31,
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
2002
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Net revenues
|
|
$
|
2,971
|
|
|
$
|
2,449
|
|
|
$
|
522
|
|
|
Total expenses
|
|
|
2,503
|
|
|
|
2,285
|
|
|
|
218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest
|
|
|
468
|
|
|
|
164
|
|
|
|
304
|
|
|
Provision for income taxes
|
|
|
183
|
|
|
|
64
|
|
|
|
119
|
|
|
Minority interest, net of tax
|
|
|
1
|
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
284
|
|
|
$
|
98
|
|
|
$
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues increased during 2003 as compared with 2002
principally due to (a) greater refinancings in our mortgage
business and the absence of a $275 million non-cash
provision for impairment of our MSR asset recorded in 2002,
as well as growth in our former fuel card business. In
connection with the Spin-Off, our former fuel card business was
distributed to Cendant, and these operations will not be part of
our operations going forward. Total expenses also increased to
support the higher level of refinancing, new customers at our
former fuel card business and higher gasoline prices. The
changes in our revenues and expenses are discussed in greater
detail below. Our overall effective tax rate was 39.1% and 39.0%
for 2003 and 2002, respectively. As a result of the
above-mentioned items, net income increased $186 million
from 2002 to 2003.
31
Results of Operations by Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
2003 v.
|
|
|
Year Ended
|
|
|
2003 v.
|
|
|
|
|
December 31,
|
|
|
2002
|
|
|
December 31,
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
2002
|
|
|
Change
|
|
|
2003
|
|
|
2002
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Mortgage services
|
|
$
|
1,025
|
|
|
$
|
553
|
|
|
|
85
|
%
|
|
$
|
302
|
|
|
$
|
(9
|
)
|
|
|
|
*
|
|
Relocation
services
(1)
|
|
|
438
|
|
|
|
419
|
|
|
|
5
|
%
|
|
|
124
|
|
|
|
130
|
|
|
|
(5
|
)%
|
|
Fleet management
services
(2)
|
|
|
1,512
|
|
|
|
1,480
|
|
|
|
2
|
%
|
|
|
114
|
|
|
|
105
|
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reportable segments
|
|
|
2,975
|
|
|
|
2,452
|
|
|
|
|
|
|
|
540
|
|
|
|
226
|
|
|
|
|
|
|
Corporate and
other
(3)
|
|
|
(4
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
(10
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,971
|
|
|
$
|
2,449
|
|
|
|
|
|
|
|
530
|
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Non-program related depreciation and amortization
|
|
|
62
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income
taxes and minority interest
|
|
$
|
468
|
|
|
$
|
164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
In connection with the Spin-Off, our former relocation services
segment was distributed to Cendant, and these operations will
not be part of our operations going forward.
|
|
(2)
|
Includes the results of our former fuel card business. In
connection with the Spin-Off, our fuel card business was
distributed to Cendant, and these operations will not be part of
our operations going forward.
|
|
(3)
|
Represents unallocated corporate overhead and the elimination of
transactions between segments.
|
Mortgage Services Segment
Revenues and EBITDA for our mortgage services segment increased
$472 million, or 85%, and $311 million, respectively,
in 2003 compared with 2002 primarily due to increased production
volume and servicing revenues. Revenues from mortgage loan
production increased $449 million, or 52%, in 2003 compared
with the prior year and were derived from growth in our
fee-based mortgage origination operations and a 56% increase in
the volume of loans that we sold. We sold $59.5 billion of
mortgage loans in 2003 compared with $38.1 billion in 2002,
generating incremental production revenues of $330 million.
In addition, production revenues generated from our fee-based
mortgage-origination activity increased $119 million, or
51%, as compared with 2002. Total mortgage loans closed
increased $25.4 billion, or 44%, to $83.7 billion, in
2003, comprised of a $21.9 billion, or 57%, increase in
closed loans to be securitized and a $3.5 billion, or 18%,
increase in closed loans that were fee-based. In 2003,
refinancing activity increased $18.5 billion, or 61%, to
$48.7 billion, and purchase-money mortgage loan closings
grew $6.9 billion, or 25%, to $35.0 billion.
Net revenues from servicing mortgage loans increased
$112 million, or 28%, primarily due to a $275 million
non-cash provision for impairment of our MSR asset recorded in
2002. Declines in interest rates in 2002 resulted in increases
to our current and estimated future loan prepayment rates and a
corresponding provision for impairment against the value of our
MSR asset. Apart from this impairment charge, net servicing
revenues declined $163 million, primarily due to a
period-over-period increase in amortization of our MSR asset and
provision for impairment (recorded net within revenues) of
$246 million, partially offset by $48 million of
incremental gains from hedging and other derivative activities
The increase in MSR amortization and provision for impairment is
a result of the high levels of refinancings and related mortgage
loan prepayments that occurred in 2003 due to low mortgage
interest rates during 2003. The incremental gains from hedging
and other derivative activities resulted from our strategies to
protect earnings in the event that there was a decline in the
value of our MSR asset, which can be caused by, among other
factors, reductions in interest rates, as such reductions tend
to increase borrower prepayment activity.
In addition, recurring servicing fees increased
$33 million, or 8%, driven by a 16% period-over-period
increase in the average servicing portfolio, which rose to
$122.9 billion in 2003. Interest rates rose from their lows
in the earlier part of 2003 and, as a result, in the fourth
quarter 2003 mortgage refinancing volume and
32
resulting net production revenues comparatively declined. This
decline in mortgage production revenues had been partially
offset by an increase in revenues from mortgage servicing
activities. Historically, mortgage production and mortgage
servicing operations have been counter-cyclical in nature and
represent a naturally offsetting relationship. Additionally, to
supplement this relationship, we have maintained a
comprehensive, non-speculative mortgage risk management program
to further mitigate the impact of fluctuations in interest rates
on our operating results.
The increases in revenues and EBITDA for our mortgage services
segment in 2003 were partially offset by decreases of
$89 million and $30 million, respectively, due to the
distribution of our former title and appraisal businesses on
December 31, 2002 to a wholly-owned subsidiary of Cendant
not within our ownership structure. As a result, we did not
recognize revenues and expenses from these businesses in 2003,
whereas these businesses contributed revenues and EBITDA of
$89 million and $30 million, respectively, in 2002. As
discussed, in January 2005 in connection with the Spin-Off,
Cendant contributed STARS to us, through which we will conduct
our appraisal services business going forward.
Operating and administrative expenses within our mortgage
services segment increased approximately $207 million
compared with 2002 primarily due to the direct costs incurred in
connection with increased mortgage loan production and mortgage
servicing activities.
Relocation Services Segment
Revenues for our former relocation services segment increased
$19 million, or 5%, while EBITDA declined $6 million,
or 5%, in 2003 compared with 2002. The increase in revenues
reflects a benefit of $17 million resulting from a change
in presentation during 2003 to conform to the accounting
presentation used by similar larger-scale businesses in our
industry. There was no impact to EBITDA from this change in
presentation. Excluding the effect of this change, revenues and
EBITDA for our former relocation services segment remained
relatively constant year-over-year.
In connection with the Spin-Off, our former relocation services
segment was distributed to Cendant, and these operations will
not be part of our operations going forward.
Fleet Management Services Segment
Revenues and EBITDA for our fleet management services segment
increased $32 million, or 2%, and $9 million, or 9%,
respectively, in 2003 compared with 2002 primarily due to a
combination of the addition of new customers and an increase in
usage of our proprietary fleet fuel card product. Additionally,
higher gasoline prices also contributed to the revenue growth,
since our former fuel card services business earned a percentage
of total gasoline purchases by its clients. The EBITDA impact
was partially offset by higher operating expenses incurred to
support the additional usage.
LIQUIDITY AND CAPITAL RESOURCES
As discussed above under “Item 1. Business—
Recent Developments,” in connection with and prior to the
Spin-Off, we underwent an internal reorganization after which we
continued to own PHH Mortgage, PHH Arval and our other
subsidiaries that engage in the mortgage and fleet management
services businesses. Pursuant to this internal reorganization,
Cendant Mobility Services Corporation, and Wright Express LLC,
and other subsidiaries that engaged in the relocation and fuel
card businesses were separated from us and distributed to
Cendant. As a result, approximately $1.6 billion in assets
and $1.4 billion in liabilities related to these businesses
(in each case, as of December 31, 2004) were distributed to
Cendant during January 2005.
We present separately the financial data of our management and
mortgage programs. The assets related to these programs are
generally funded through the issuance of debt that is
collateralized by such assets. Such debt is classified as debt
under vehicle management and mortgage programs. The income
generated by these assets is used, in part, to repay the
principal and interest associated with the debt. Cash inflows
and outflows relating to the generation or acquisition of such
assets and the principal debt repayment or financing of such
assets are classified as activities of our vehicle management
and mortgage programs. We believe it is appropriate to segregate
the financial data of our management and mortgage programs
because, ultimately, the source of repayment of such debt is the
realization of such assets.
33
The discussion set forth below includes a description of our
liquidity and capital resources on both a historic basis, for
the years ended December 31, 2004, 2003 and 2002, and on a
going-forward basis as our business will be conducted after the
Spin-Off.
Discussion of Changes in Balance Sheet Items Prior to
the Spin-Off
While total assets remained relatively constant at
December 31, 2004 and 2003, mortgage loans held for sale
decreased by $527 million due to (a) decreased
mortgage loan origination volume in 2004 resulting from
decreased refinancing activity and (b) the differences in
the timing of loan sales. In addition, our MSR asset and related
derivative asset decreased by $270 million, the majority of
which was offset by a decrease in the derivative liability
related to our MSR asset, which is classified within other
liabilities under vehicle management and mortgage programs on
our consolidated balance sheet. These decreases were offset by
(a) net additions of $317 million to our vehicle
leasing fleet primarily associated with our acquisition of First
Fleet in February of 2004, (b) an increase of
$175 million in program cash, (which primarily relates to
amounts specifically designated to purchase assets under vehicle
management and mortgage programs and/or to repay the related
debt) (c) an increase of $164 million in cash and cash
equivalents (see “—Discussion of Liquidity and Capital
Resources— Cash Flows”) and (d) a
$137 million increase in fuel card receivables resulting
from new customers, increased usage of the fuel card product and
higher fuel prices at our former fuel card business.
Total liabilities decreased primarily due to (a) the
repayment of $350 million of medium-term notes related to
our mortgage services business, (b) a $212 million
decrease in the derivative liability related to our MSR asset,
the majority of which was offset by a decrease in the related
derivative asset and (c) a net increase of
$112 million in the aggregate balance of our current income
tax payable to Cendant and our deferred income tax liability,
which principally represents the current year income tax
provision partially offset by tax payments made to tax
authorities in 2004. These decreases were partially offset by
additional borrowings of $332 million within our fleet
management services segment, principally resulting from the
acquisition of First Fleet Corporation in February of 2004.
Stockholder’s equity increased slightly, primarily due to
$182 million of net income generated during 2004 partially
offset by the payment of $140 million in dividends to
Cendant.
Sources of Liquidity and Capital Resources
General
Our short-term financing needs arise primarily from the
warehousing of mortgage loans pending sale and the purchase of
vehicles for the operations of our fleet management services.
Our long-term financing needs arise primarily from our
investments in our MSR asset and other retained interests, along
with the financial instruments acquired to manage the interest
rate risk associated with those investments and our investment
in vehicles leased to the clients of our fleet management
services segment. As discussed under “—Cash
Flows,” “—Indebtedness— Securitization
Programs” and “—Indebtedness— Unsecured
Debt”, our principal sources of liquidity are (a) cash
and cash equivalents; (b) cash flow from operations and
(c) cash flows from financing activities, including the
secondary market for mortgages, our securitization programs, the
public debt markets and committed credit facilities. Given our
current expectation for business volumes, we believe that our
sources of liquidity are adequate to fund our operations for the
next twelve months. We anticipate aggregate capital expenditures
for 2005 will be between $25 million and $35 million.
34
Cash Flows
At December 31, 2004, we had $270 million of cash and
cash equivalents, an increase of $164 million from
$106 million at December 31, 2003. The following table
summarizes the changes in our cash and cash equivalents balances
for the years ended December 31, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
2004 v.
|
|
|
|
|
December 31,
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
2,509
|
|
|
$
|
3,842
|
|
|
$
|
(1,333
|
)
|
|
|
Investing activities
|
|
|
(1,918
|
)
|
|
|
(1,920
|
)
|
|
|
2
|
|
|
|
Financing activities
|
|
|
(430
|
)
|
|
|
(1,829
|
)
|
|
|
1,399
|
|
|
Effects of exchange rate changes
|
|
|
3
|
|
|
|
(17
|
)
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
$
|
164
|
|
|
$
|
76
|
|
|
$
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2004, cash provided by operating activities was approximately
$1.3 billion less than 2003. The decrease in cash provided
by operating activities was principally due to (a) lower
earnings in 2004, (b) an overall decline in mortgage
production volumes and, (c) timing differences between the
receipt of cash from the sale of previously originated mortgage
loans pursuant to our management and mortgage programs discussed
below under “—Securitization Programs— ” and
the origination of new mortgage loans. Cash flows related to our
management and mortgage programs may fluctuate significantly
from period to period due to the timing of the underlying
transactions (i.e., timing of mortgage loan origination versus
sales of mortgage loans).
Cash used in investing activities remained relatively constant
in 2004 compared with 2003. In 2004, we used more cash to
acquire vehicles for our fleet management services business and
less cash in our mortgage services segment due to lower levels
of investment in our MSR asset. Capital expenditures, which
remained relatively consistent year-over-year, were
$51 million in 2004 and $57 million in 2003.
Cash used in financing activities decreased approximately
$1.4 billion during 2004 compared with 2003. This change
principally reflects decreased borrowings by our mortgage
services business following an expected industry-wide reduction
in volume, partially offset by increased borrowings by our fleet
management services business to support the acquisition of
vehicles.
Secondary Mortgage Market
We rely on the secondary mortgage market for a substantial
amount of liquidity to support our operations. Nearly all
mortgage loans that we originate are sold in the secondary
mortgage market, primarily in the form of mortgage-backed
securities (“MBS”), asset-backed securities and whole
loan transactions. The majority of the MBS we sell are
guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae
(collectively, “Agency MBS”). We also issue non-agency
or “non-conforming” MBS and asset-backed securities.
We publicly issue both non-conforming MBS and asset-backed
securities that are registered with the Commission, and we also
issue private non-conforming MBS and asset-backed securities.
Generally, these types of securities have their own credit
ratings. Generally, non-conforming MBS and asset-backed
securities require some form of credit enhancement, such as
over-collateralization, senior-subordinated structures, primary
mortgage insurance, and/or private surety guarantees.
The Agency MBS market, whole loan and non-conforming markets for
prime mortgage loans provide substantial liquidity for our
mortgage loan production. We ensure our ongoing access to the
secondary mortgage market by consistently producing quality
mortgages that meet investor requirements.
35
Indebtedness
The following table summarizes the components of our
indebtedness as of December 31, 2004 and 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
2004 v.
|
|
|
|
|
December 31,
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Asset-Backed Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vehicle management
program
(1)
|
|
$
|
3,450
|
|
|
$
|
3,118
|
|
|
$
|
332
|
|
|
Mortgage
program
(2)
|
|
|
1,306
|
|
|
|
1,651
|
|
|
|
(345
|
)
|
|
Relocation
program
(3)
|
|
|
400
|
|
|
|
400
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,156
|
|
|
|
5,169
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
notes
(4)
|
|
|
1,833
|
|
|
|
1,916
|
|
|
|
(83
|
)
|
|
Commercial
paper
(5)
|
|
|
130
|
|
|
|
164
|
|
|
|
(34
|
)
|
|
Other
(6)
|
|
|
249
|
|
|
|
132
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,212
|
|
|
|
2,212
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Indebtedness
|
|
$
|
7,368
|
|
|
$
|
7,381
|
|
|
$
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The change in the balance at December 31, 2004 principally
reflects debt assumed in connection with our acquisition of
First Fleet (see Note 3 to our Consolidated Financial
Statements).
|
|
(2)
|
The change in the balance at December 31, 2004 primarily
reflects the January 2004 repayment of $350 million of
medium-term notes.
|
|
(3)
|
In connection with the Spin-Off, our relocation services segment
was distributed to Cendant, and this segment’s assets and
liabilities will not be part of our business going forward.
|
|
(4)
|
As discussed below under “—Unsecured Debt— Term
Notes,” on February 9, 2005, we redeemed our
$443 million aggregate principal amount of our senior
notes, together with accrued and unpaid interest, for
$497 million, which included a prepayment premium of
$44 million.
|
|
(5)
|
In connection with redemption of our senior notes in February
2005, we issued an additional $252 million of commercial
paper. See “—Unsecured Debt— Commercial
Paper.”
|
|
(6)
|
Amount as of December 31, 2004 includes $215 million
of indebtedness related to our former fuel card business. In
connection with the Spin-Off, our fuel card business was
distributed to Cendant, and this business’s assets and
liabilities will not be part of our business going forward.
Additionally, we borrowed $150 million under our credit
facility in connection with the redemption of our senior notes
in February 2005 (discussed below under “—Unsecured
Debt— Credit Facility).
|
Securitization Programs
Vehicle Management Program.
Borrowings under our vehicle
management program primarily represent amounts issued under a
domestic financing facility that provides for the issuance of
variable rate term notes and variable funding notes to unrelated
third parties and the issuance of preferred membership interests
to an unconsolidated related party. As of December 31, 2004
and 2003, variable term notes issued under this program were
$3.1 billion and $2.7 billion, respectively. As of
December 31, 2004 and 2003, preferred membership interests
issued under this program were $398 million and
$408 million, respectively. Variable rate term notes and
preferred membership interests were issued to support the
acquisition of vehicles used by our fleet management services
segment’s leasing operations. The debt issued is
collateralized by approximately $4.0 billion of leased
vehicles and related assets, which are not available to pay our
general obligations. The titles to all the vehicles
collateralizing the debt issued under this program are held in a
bankruptcy remote trust, and we act as a servicer of all such
vehicles. The bankruptcy remote trust also acts as lessor under
both operating and financing lease agreements. The debt issued
under this program primarily represents floating rate term notes
for which the weighted average interest rate was 2.5% and 2.0%
for 2004 and 2003, respectively.
As of December 31, 2004, the total capacity under this
securitization program was approximately $3.9 billion, and
we had $422 million of such capacity available to us.
36
The availability of funds from this program could suffer in the
event of: (a) the deterioration of the assets underlying
this program, (b) our inability to access the asset-backed
debt market to refinance maturing debt or (c) termination
of our role as servicer of the underlying lease assets in the
event that we default in the performance of our servicing
obligations or we declare bankruptcy or become insolvent.
Mortgage Program
. Bishop’s Gate Residential Mortgage
Trust (“Bishop’s Gate”) is a bankruptcy remote
special purpose entity that is utilized to warehouse mortgage
loans originated by our mortgage services segment prior to their
sale into the secondary market, which is customary practice in
the mortgage industry. The debt issued by Bishop’s Gate was
collateralized by approximately $1.4 billion of underlying
mortgage loans and related assets at December 31, 2004. The
mortgage loans are serviced by us and recorded within mortgage
loans held for sale on our balance sheet. Prior to the adoption
of Financial Accounting Standards Board Interpretation
No. 46, “Consolidation of Variable Interest
Entities,” sales of mortgage loans to Bishop’s Gate
were treated as off-balance sheet sales. The activities of
Bishop’s Gate are limited to (a) purchasing mortgage
loans from our mortgage subsidiary, (b) issuing commercial
paper or other debt instruments and/or borrowing under a
liquidity agreement to effect such purchases, (c) entering
into interest rate swaps to hedge interest rate risk and certain
non-credit related market risk on the purchased mortgage loans,
(d) selling and securitizing the acquired mortgage loans to
third parties and (e) engaging in certain related
transactions. The assets of Bishop’s Gate are not available
to pay our general obligations. The debt issued under
Bishop’s Gate primarily represents term notes, commercial
paper and certificates for which the weighted average interest
rate was 2.1% and 1.6% for 2004 and 2003, respectively.
As of December 31, 2004, the total capacity under this
securitization program was approximately $2.8 billion, and
we had approximately $1.5 billion of unused capacity
available to us.
The availability of funds from this program could suffer in the
event of: (a) the deterioration in the performance of the
mortgage loans underlying this program, (b) our inability
to access the asset-backed debt market to refinance maturing
debt, (c) our inability to access the secondary market for
mortgage loans or (d) termination of our role as servicer
of the underlying mortgage assets in the event that (1) we
default in the performance of our servicing obligations,
(2) we declare bankruptcy or become insolvent or
(3) our senior unsecured credit ratings fall below
“BB+” or “Ba1” by Standard and Poor’s
and Moody’s Investor Service, respectively.
Repurchase Program
. We maintain a committed mortgage
repurchase facility that we use to finance mortgage loans
originated by PHH Mortgage. The conduit for this facility is
Sheffield Receivables Corporation. As of December 31, 2004,
this repurchase facility had capacity of $150 million, all
of which was available to us on that date. This repurchase
facility has a one year term that is renewable on an annual
basis. Depending on our anticipated mortgage loan origination
volume, we may increase the capacity under this repurchase
facility subject to agreement with the lender.
Unsecured Debt
The public debt markets are a key source of financing for us,
due to their efficiency and low cost. Typically, we access these
markets by issuing unsecured commercial paper and medium-term
notes. At December 31, 2004, we had a total of
approximately $1.5 billion in public debt outstanding. Our
investment grade ratings are a significant factor in maintaining
our current level of broad access to the public debt markets.
Currently, our credit ratings are as follows:
|
|
|
|
|
|
|
|
|
|
|
Moody’s
|
|
|
|
|
|
|
|
Investors
|
|
Standard &
|
|
Fitch
|
|
|
|
Service
|
|
Poor’s
|
|
Ratings
|
|
|
|
|
|
|
|
|
|
Senior debt
|
|
Baa3
|
|
BBB
|
|
A-
|
|
Short-term debt
|
|
P-3
|
|
A-2
|
|
F-2
|
Each of these ratings has been assigned a stable outlook by the
respective agency and reflects our current standing as an
independent, public company. Among other things, maintenance of
our current investment grade ratings requires that we
demonstrate high levels of liquidity, including access to
alternative sources of funding
37
such as committed bank stand-by lines of credit, as well as a
capital structure and leverage appropriate for companies in our
industry. A security rating is not a recommendation to buy, sell
or hold securities and is subject to revision or withdrawal by
the assigning rating organization. Each rating should be
evaluated independently of any other rating.
In the event our credit ratings were to drop below
“investment grade”, our access to the public corporate
debt markets may be severely limited. The cutoff for investment
grade is generally considered to be a long-term rating of
“Baa3,” “BBB-” and “BBB-” for
Moody’s Investors Services, Standard & Poor’s
and Fitch Ratings, respectively, or one level below our lowest
current rating. In the event of a ratings downgrade below
investment grade, we may be required to rely upon alternative
sources of financing, such as bank lines and private debt
placements (secured and unsecured). A drop in our credit ratings
could also increase our cost of borrowing under our credit
facilities. Furthermore, we may be unable to retain all of our
existing bank credit commitments beyond the then existing
maturity dates. As a consequence, our cost of financing could
rise significantly, thereby negatively impacting our ability to
finance some of our capital-intensive activities, such as our
ongoing investment in MSRs and other retained interests.
Term Notes
The outstanding balance of term notes at December 31, 2004
consists of (a) $983 million of publicly issued
medium-term notes bearing interest at a blended rate of 6.7%,
(b) $453 million ($443 million principal amount)
of privately-placed medium-term notes bearing interest at a
blended rate of 7.6% and (c) $397 million of
retail-issued medium-term notes bearing interest at a blended
rate of 6.5%. Such amounts include aggregate hedging losses of
$18 million. The outstanding balance at December 31,
2003 consists of (a) $982 million of publicly issued
medium-term notes bearing interest at a blended rate of 6.7%,
(b) $460 million ($443 million principal amount)
of privately-placed medium-term notes bearing interest at a
blended rate of 7.6% and (c) $474 million of
retail-issued medium-term notes bearing interest at a blended
rate of 6.6%. Such amounts included aggregate hedging losses of
$11 million.
As discussed above in “Item 1. Business— Recent
Developments,” on February 9, 2005, we announced
the prepayment of $443 million aggregate principal amount
of our outstanding senior notes in cash at an aggregate
prepayment price of $497 million, including accrued and
unpaid interest. The prepayment price included an aggregate
make-whole amount of $44 million. This prepayment was
funded with proceeds from the $100 million cash
contribution from Cendant in connection with the Spin-Off,
$150 million in borrowings under our revolving credit
facility and $252 million in commercial paper borrowings.
The indentures pursuant to which these term notes have been
issued require that we maintain a debt to tangible equity ratio
of not more than 10:1. We continually monitor our maintenance of
these required financial ratios and, as of December 31,
2004, we were in compliance with all financial covenants under
these indentures.
We currently have an effective shelf registration statement
which registers an additional $874 million (as of
February 1, 2005) of debt securities that may be issued
under our medium term notes program.
Commercial Paper
Our policy is to maintain available capacity under our committed
revolving credit facility (described below) to fully support our
outstanding commercial paper. The weighted average interest rate
on the outstanding commercial paper, which matures within
270 days from issuance, at December 31, 2004 was 1.4%.
The proceeds from the issuance of commercial paper are used to
finance the purchase of various assets under our vehicle
management and mortgage programs. As discussed above, we issued
$252 million in commercial paper in order to finance a
portion of the prepayment of our senior notes in February 2005.
Credit Facility
We are party to a $1.25 billion Three Year Competitive
Advance and Revolving Credit Agreement, dated as of
June 28, 2004 and amended as of December 21, 2004,
among PHH Corporation, a group of lenders and JPMorgan Chase
Bank, N.A., as administrative agent (our “credit
facility”). Borrowings under the credit facility mature in
June 2007 and, as of December 31, 2004, bear interest at
LIBOR plus a margin of 50 basis points. The credit facility
also required us to pay a per annum facility fee of
12.5 basis points and a per annum utilization fee
38
of approximately 12.5 basis points if our usage exceeded
33% of the aggregate commitments under the facility. As of
February 1, 2005, following ratings action related to our
Spin-Off, we now pay a margin of 60 basis points and are
required to pay a per annum facility fee of 15 basis points
under this facility. In the event that our credit ratings are
downgraded to one level below our current ratings, the interest
rate and facility fees are subject to upward adjustments of
approximately 10.0 and 2.5 basis points, respectively. The
credit facility includes various covenants including financial
covenants which require that we maintain: (a) net worth of
$1.0 billion plus 25% of net income, if positive, for each
fiscal quarter after December 31, 2004 and (b) a ratio
of debt to net worth no greater than 8:1. We continually monitor
our maintenance of the covenants in our credit facility and, as
of December 31, 2004, we were in compliance with all
financial covenants under the credit facility.
As discussed above, we borrowed $150 million under our
credit facility in order to finance a portion of the prepayment
of our senior notes in February 2005. As of February 1,
2005, there were no borrowings outstanding under the credit
facility.
Contractual Obligations
The following table summarizes our future contractual
obligations as of December 31, 2004 after giving effect to
the Spin-Off and related internal reorganization. The table
below does not include future cash payments related to interest
expense.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Asset-backed debt programs
(1)
|
|
$
|
1,040
|
|
|
$
|
1,615
|
|
|
$
|
758
|
|
|
$
|
1,110
|
|
|
$
|
40
|
|
|
$
|
193
|
|
|
$
|
4,756
|
|
|
Unsecured debt
(2)
|
|
|
380
|
|
|
|
1
|
|
|
|
187
|
|
|
|
428
|
|
|
|
183
|
|
|
|
818
|
|
|
|
1,997
|
|
|
Operating leases
(3)
|
|
|
28
|
|
|
|
21
|
|
|
|
18
|
|
|
|
17
|
|
|
|
14
|
|
|
|
127
|
|
|
|
225
|
|
|
Capital leases
|
|
|
3
|
|
|
|
3
|
|
|
|
1
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8
|
|
|
Loan funding commitments
(4)
|
|
|
4,084
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,084
|
|
|
Forward delivery commitments
(5)
|
|
|
2,958
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,958
|
|
|
Other purchase commitments
(6)
|
|
|
15
|
|
|
|
11
|
|
|
|
9
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,508
|
|
|
$
|
1,651
|
|
|
$
|
973
|
|
|
$
|
1,556
|
|
|
$
|
237
|
|
|
$
|
1,138
|
|
|
$
|
14,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents asset-backed debt under management and mortgage
programs, which was issued to support the purchase of assets
under these programs. See “—Sources of Liquidity and
Capital Resources— Indebtedness— Securitization
Programs.” The amounts in this table represent the
contractual maturities for such debt, except for notes issued
under our management program where the underlying indentures
require payments based on cash inflows relating to the
corresponding assets for which estimates of repayments have been
used.
|
|
|
|
(2)
|
|
Includes unsecured debt under management and mortgage programs,
which was issued to support the purchase of assets under these
programs. Also includes our outstanding term notes, commercial
paper and indebtedness under our credit facility. See
“—Sources of Liquidity and Capital Resources—
Indebtedness— Unsecured Debt” and Note 10 to our
consolidated financial statements.
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|
|
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(3)
|
|
Includes operating leases for our mortgage services segment
(a) in Mt. Laurel, New Jersey for a total of approximately
800,000 square feet, with terms expiring in 2006, 2008,
2013 and 2022, (b) in Jacksonville, Florida, with terms
expiring in 2005 and 2008 and (c) in 24 smaller regional
locations throughout the United States. Also includes leases for
PHH Arval (a) of its headquarters office in a new,
210,000 square foot office in Sparks, Maryland, which has a
lease expiring in 2014, (b) for office space and marketing
centers in five locations in Canada and (c) for
approximately four smaller regional locations throughout the
United States. See Note 12 to our consolidated financial
statements.
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|
|
|
(4)
|
|
In the normal course of business, we enter into commitments to
either originate or purchase mortgage loans at specified rates.
These loan commitments represent derivative instruments and are
recorded at fair value on our balance sheet.
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|
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|
(5)
|
|
Commitments to sell loans generally have fixed expiration dates
or other termination clauses and may require payment of a fee
and are generally settled within 90 days of the individual
contract date. We may settle the forward delivery commitments on
a net basis; therefore, the commitments outstanding do not
necessarily represent future cash obligations.
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|
|
|
(6)
|
|
Includes various commitments to purchase goods or services from
specific suppliers made by us in the ordinary course of our
business, including those related to capital expenditures. See
Note 12 to our consolidated financial statements.
|
39
Off-Balance Sheet Arrangements and Guarantees
In the ordinary course of business, we enter into numerous
agreements that contain standard guarantees and indemnities
whereby we indemnify another party for breaches of
representations and warranties. Such guarantees or
indemnifications are granted under various agreements, including
those governing (a) leases of real estate, (b) access
to credit facilities and use of derivatives, (c) sales of
mortgage loans and (d) issuances of debt or equity
securities. The guarantees or indemnifications issued are for
the benefit of the (1) buyers in sale agreements and
sellers in purchase agreements, (2) landlords in lease
contracts, (3) financial institutions in credit facility
arrangements and derivative contracts, (4) purchasers and
insurers of the loans in sales of mortgage loans and
(5) underwriters in debt or equity security issuances.
While some of these guarantees extend only for the duration of
the underlying agreement, many survive the expiration of the
term of the agreement or extend into perpetuity (unless subject
to a legal statute of limitations). There are no specific
limitations on the maximum potential amount of future payments
that we could be required to make under these guarantees, and we
are unable to develop an estimate of the maximum potential
amount of future payments to be made under these guarantees as
the triggering events are not subject to predictability. With
respect to certain of the aforementioned guarantees, such as
indemnifications of landlords against third party claims for the
use of real estate property leased by us, we maintain insurance
coverage that mitigates any potential payments to be made.
We also provide guarantees for the benefit of landlords in lease
contracts where the lease was assigned to a third party due to
the sale of a business which occupied the leased facility. These
guarantees extend only for the duration of the underlying lease
contract. The maximum potential amount of future payments that
we may be required to make under these guarantees is
approximately $8 million in the aggregate. If we were
required to make payments under these guarantees, it would have
similar recourse against the tenant (third party to which the
lease was assigned).
Critical Accounting Policies
In presenting our financial statements in conformity with
generally accepted accounting principles, we are required to
make estimates and assumptions that affect the amounts reported
therein. Several of the estimates and assumptions we are
required to make relate to matters that are inherently uncertain
as they pertain to future events. However, events that are
outside of our control cannot be predicted and, as such, they
cannot be contemplated in evaluating such estimates and
assumptions. If there is a significant unfavorable change to
current conditions, it could result in a material adverse impact
to our consolidated results of operations, financial position
and liquidity. We believe that the estimates and assumptions we
used when preparing our financial statements were the most
appropriate at that time. Presented below are those accounting
policies that we believe require subjective and complex
judgments that could potentially affect reported results.
Mortgage Servicing Rights
A mortgage servicing right is the right to receive a portion of
the interest coupon and fees collected from the mortgagor for
performing specified mortgage servicing activities. The value of
mortgage servicing rights is estimated based upon an internal
valuation that reflects management’s estimates of expected
future cash flows considering prepayment estimates (developed
using a third party model described below), our historical
prepayment rates, portfolio characteristics, interest rates
based on interest rate yield curves, implied volatility and
other economic factors. More specifically, we incorporate a
probability weighted Option Adjusted Spread (“OAS”)
model to generate and discount cash flows for the MSR valuation.
The OAS model generates numerous interest rate paths then
calculates the MSR cash flow at each monthly point for each
interest rate path and discounts those cash flows back to the
current period. The MSR value is determined by averaging the
discounted cash flows from each of the interest rate paths. The
interest rate paths are generated with a random distribution
centered around implied forward interest rates, which are
determined from the interest rate yield curve at any given point
of time. As of December 31, 2004, the implied forward
interest rates project an increase of approximately
26 basis points in the yield of the 10-year Treasury Note
over the next twelve months. Changes in the yield curve will
result in changes to the forward rates implied from that yield
curve.
40
As noted above, a key assumption in our estimate of the MSR
valuation is forecasted prepayments. We use a third party model
to forecast prepayment rates at each monthly point for each
interest rate path in the OAS model. The prepayment forecast is
based on historical observations of prepayment behavior in
similar circumstances. The prepayment forecast incorporates loan
characteristics (e.g., loan type and note rate) and factors such
as recent prepayment experience, previous refinance
opportunities and estimated levels of home equity to determine
the prepayment forecast at each monthly point for each interest
rate path.
To the extent that fair value is less than carrying value at the
individual strata level (which is based upon product type and
interest rates of underlying mortgage loans), we would consider
the portfolio to have been impaired and record a related charge.
Reductions in interest rates different than those used in our
models could cause us to use different assumptions in the MSR
valuation, which could result in a decrease in the estimated
fair value of our MSR asset, requiring a corresponding reduction
in the carrying value of the asset. To mitigate this risk, we
use derivatives that generally increase in value as interest
rates decline and conversely decline in value as interest rates
increase. Additionally, as interest rates decrease, we have
historically experienced increased production revenue resulting
from a greater level of refinancings, which over time has
historically mitigated the impact on earnings of the decline in
our MSR asset.
Changes in the estimated fair value of the mortgage servicing
rights based upon variations in the assumptions (e.g., future
interest rate levels, implied volatility, prepayment speeds)
cannot be extrapolated because the relationship of the change in
assumptions to the change in fair value may not be linear.
Changes in one assumption may result in changes to another,
which may magnify or counteract the fair value sensitivity
analysis and would make such an analysis not meaningful.
Additionally, further declines in interest rates due to a
weakening economy and geopolitical risks, which result in an
increase in refinancing activity or changes in assumptions,
could adversely impact the valuation. The carrying value of our
MSR asset was approximately $1.6 billion as of
December 31, 2004 and the total portfolio that we were
servicing approximated $143.1 billion as of
December 31, 2004 (refer to Note 5 to our Consolidated
Financial Statements for a detailed discussion of the effect of
any changes to the value of this asset during 2004, 2003 and
2002). The effects of certain adverse potential changes in the
estimated fair value of our MSR asset are detailed in
Note 11 to our Consolidated Financial Statements.
Financial Instruments
We estimate fair values for each of our financial instruments,
including derivative instruments. Most of these financial
instruments are not publicly traded on an organized exchange. In
the absence of quoted market prices, we must develop an estimate
of fair value using dealer quotes, present value cash flow
models, option pricing models or other conventional valuation
methods, as appropriate. The use of these fair value techniques
involves significant judgments and assumptions, including
estimates of future interest rate levels based on interest rate
yield curves, prepayment and volatility factors, and an
estimation of the timing of future cash flows. The use of
different assumptions may have a material effect on the
estimated fair value amounts recorded in our financial
statements. See Note 16 to our consolidated financial
statements. In addition, hedge accounting requires that, at the
beginning of each hedge period, we justify an expectation that
the relationship between the changes in fair value of
derivatives designated as hedges compared to changes in the fair
value of the underlying hedged items will be highly effective.
This effectiveness assessment, which is also performed
quarterly, involves an estimation of changes in fair value
resulting from changes in interest rates and corresponding
changes in prepayment levels, as well as the probability of the
occurrence of transactions for cash flow hedges. The use of
different assumptions and changing market conditions may impact
the results of the effectiveness assessment and ultimately the
timing of when changes in derivative fair values and the
underlying hedged items are recorded in earnings. See
“Item 7A. Quantitative and Qualitative Disclosures
About Market Risk” for a sensitivity analysis based on
hypothetical changes to these assumptions.
Goodwill
In accordance with Statement of Financial Accounting Standards
No. 142, “Goodwill and Other Intangible Assets,”
we review the carrying value of goodwill annually, or more
frequently if circumstances indicate impairment may have
occurred. In performing this analysis, we compare the carrying
value of our reporting units
41
to their fair value. When determining fair value, we utilize
various assumptions, including projections of future cash flows.
A change in these underlying assumptions will cause a change in
the results of the tests and, as such, could cause fair value to
be less than the respective carrying amount. In such event, we
would then be required to record a charge, which would impact
earnings. The aggregate carrying value of our goodwill was
$700 million at December 31, 2004.
Our reporting unit structure changed in connection with the
internal reorganization and Spin-Off. We believe that this
change will likely result in an impairment to our goodwill in
the first quarter of 2005. Although we have not yet completed
our final analysis, we currently expect, based upon information
available to us, this impairment will be in the range of
$225 million to $250 million.
See Notes 3 and 4 to our consolidated financial statements.
Changes in Accounting Policies During 2004
During 2004, we adopted the following standards as a result of
the issuance of new accounting pronouncements:
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|
|
|
•
|
Financial Accounting Standards Board Staff Position
No. FAS 109-2, “Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within
the American Jobs Creation Act of 2004”; and
|
|
|
|
|
•
|
Securities and Exchange Commission Staff Accounting
Bulletin No. 105— “Application of Accounting
Principles to Loan Commitments.”
|
Recently Issued Accounting Pronouncements
During 2004, the FASB also issued the following literature,
which we will adopt as required:
|
|
|
|
|
|
•
|
SFAS No. 153, “Exchanges of Nonmonetary Assets,
an Amendment of APB Opinion No. 29, Accounting for
Nonmonetary Transactions”; and
|
|
|
|
|
•
|
SFAS No. 123R, “Share Based Payment.”
|
For detailed information regarding any of these pronouncements
and the impact thereof on our business, see Note 2 to our
consolidated financial statements.
|
|
|
|
Item 7A.
|
Quantitative and Qualitative Disclosures About Market Risk
|
Our principal market exposure is to interest rate risk. Interest
rate movements in one country, as well as relative interest rate
movements between countries can materially impact our
profitability. Our primary interest rate exposure is to interest
rate fluctuations in the United States, specifically long-term
U.S. Treasury and mortgage interest rates due to their
impact on mortgage-related assets and commitments and also LIBOR
and commercial paper interest rates due to their impact on
variable rate borrowings and other interest rate sensitive
liabilities. We anticipate that such interest rates will remain
a primary market risk for the foreseeable future.
Interest Rate Risk
Mortgage Servicing Rights
Our MSR asset is subject to substantial interest rate risk as
the mortgage notes underlying the MSR asset permit the borrower
to prepay the loan. Therefore, the value of the MSR asset tends
to diminish in periods of declining interest rates (as
prepayments increase) and increase in periods of rising interest
rates (as prepayments decrease). We use a combination of
derivative instruments (including option contracts and interest
rate swaps) to offset unexpected changes in fair value on our
MSR asset that could affect reported results.
42
Other Mortgage Related Assets
Our other mortgage-related assets are subject to interest rate
risk created by (a) our commitments to finance mortgages to
borrowers who have applied for loan funding and (b) loans
held in inventory awaiting sale into the secondary market. We
use derivative instruments (including futures, options and
forward delivery contracts) to economically hedge our
commitments to fund mortgages.
Interest rate and price risk stemming from loans held in
inventory awaiting sale into the secondary market (which are
classified on our balance sheets as mortgage loans held for
sale) may be hedged with mortgage forward delivery contracts.
These forward delivery contracts fix the forward sales price
which will be realized in the secondary market and thereby
substantially eliminate the interest rate and price risk to us.
Indebtedness
The debt used to finance much of our operations is also exposed
to interest rate fluctuations. We use various hedging strategies
and derivative financial instruments to create a desired mix of
fixed and floating rate assets and liabilities. Derivative
instruments currently used in these hedging strategies include
swaps and instruments with purchased option features.
Credit Risk and Exposure
We are exposed to counterparty credit risks in the event of
nonperformance by counterparties to various agreements and sales
transactions. We manage such risk by evaluating the financial
position and creditworthiness of such counterparties and/or
requiring collateral in instances in which financing is
provided. We mitigate counterparty credit risk associated with
our derivative contracts by monitoring the amount for which we
are at risk with each counterparty to such contracts,
periodically evaluating counterparty creditworthiness and
financial position, and where possible, dispersing its risk
among multiple counterparties.
As of December 31, 2004, there were no significant
concentrations of credit risk with any individual counterparty
or groups of counterparties. Concentrations of credit risk
associated with receivables are considered minimal due to our
diverse customer base. With the exception of the financing
provided to customers of its mortgage business, we do not
normally require collateral or other security to support credit
sales.
Sensitivity Analysis
We assess our market risk based on changes in interest rates
utilizing a sensitivity analysis. The sensitivity analysis
measures the potential impact in earnings, fair values and cash
flows based on a hypothetical 10% change (increase and
decrease) in interest rates.
We use a duration-based model in determining the impact of
interest rate shifts on our debt portfolio, certain other
interest bearing liabilities and interest rate derivatives
portfolios. The primary assumption used in these models is that
a 10% increase or decrease in the benchmark interest rate
produces a parallel shift in the yield curve across all
maturities.
We use a discounted cash flow model in determining the fair
values of mortgage servicing rights. The primary assumptions
used in determining fair value are prepayment speeds, estimated
loss rates and discount rates. In determining the fair value of
mortgage servicing rights, the model also utilizes credit losses
and mortgage servicing revenues and expenses as primary
assumptions. For mortgage loans, commitments to fund mortgages,
forward delivery contracts and options, we rely on market
sources in determining the impact of interest rate shifts. We
also utilize a probability weighted OAS model to determine the
impact of interest rate shifts on mortgage servicing rights. The
primary assumptions in this model are the implied market
volatility of interest rates and prepayment speeds and the same
primary assumptions are used in determining fair value. In
addition, for commitments to fund mortgages, the borrower’s
propensity to close their mortgage loan under the commitment is
used as a primary assumption.
Our total market risk is influenced by a wide variety of factors
including the volatility present within the markets and the
liquidity of the markets. There are certain limitations inherent
in the sensitivity analyses
43
presented. While probably the most meaningful analysis, these
“shock tests” are constrained by several factors,
including the necessity to conduct the analysis based on a
single point in time and the inability to include the complex
market reactions that normally would arise from the market
shifts modeled.
We used December 31, 2004 market rates on our instruments
to perform the sensitivity analyses. The estimates are based on
the market risk sensitive portfolios described in the preceding
paragraphs and assume instantaneous, parallel shifts in interest
rate yield curves.
We have determined that the impact of a 10% change in foreign
currency exchange rates and prices on our earnings, fair values
and cash flows would not be material for the year ended
December 31, 2004. Additionally, the impact of a 10% change
in interest rates on our fair values and cash flows would not be
material for the year ended December 31, 2004. At
December 31, 2004, the potential impact on earnings
resulting from a 10% increase and decrease in interest rates
would be a loss of approximately $20 million and a gain of
approximately $10 million, respectively. While these
results may be used as benchmarks, they should not be viewed as
forecasts.
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|
|
|
Item 8.
|
Financial Statements and Supplementary Data
|
Information in response to this item is incorporated herein by
reference to the Financial Statements and Financial Statement
Index commencing on Page F-1 hereof.
|
|
|
|
Item 9.
|
Changes in and Disagreement with Accountants on Accounting
and Financial Disclosure
|
None.
|
|
|
|
Item 9A.
|
Controls and Procedures
|
|
|
|
|
|
|
(a)
|
Disclosure Controls and Procedures.
|
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our
reports filed under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”) is recorded, processed,
summarized and reported within the time periods specified in the
Commission’s rules and forms, and that such information is
accumulated and communicated to our management, including its
Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls
and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired
control objectives, and management necessarily was required to
apply its judgment in evaluating the cost-benefit relationship
of possible controls and procedures.
As required by Exchange Act Rule 13a-15(b), we carried out
an evaluation, under the supervision and with the participation
of our management, including our Chief Executive Officer and our
Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures as of the
end of the period covered by this Annual Report on
Form 10-K. Based on the foregoing, our Chief
Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective at the
reasonable assurance level.
|
|
|
|
|
|
(b)
|
Internal Control Over Financial Reporting.
|
There have not been any changes in our internal control over
financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-l5(f) under the Exchange Act)
during our fiscal fourth quarter that have materially affected,
or are reasonably likely to materially affect, our internal
control over financial reporting.
|
|
|
|
Item 9B.
|
Other Information
|
None.
44
PART III
|
|
|
|
Item 10.
|
Directors and Executive Officers of the Registrant
|
Executive Officers
The following sets forth certain information with respect to
those persons who serve as our executive officers:
|
|
|
|
|
|
|
|
|
Name
|
|
Age
|
|
|
Position(s)
|
|
|
|
|
|
|
|
|
Terence W. Edwards
|
|
|
49
|
|
|
President and Chief Executive Officer
|
|
Neil J. Cashen
|
|
|
50
|
|
|
Executive Vice President and Chief Financial Officer; Chief
Financial Officer— PHH Arval
|
|
George J. Kilroy
|
|
|
57
|
|
|
President and Chief Executive Officer— PHH Arval
|
|
Joseph E. Suter
|
|
|
45
|
|
|
President and Chief Executive Officer— PHH Mortgage
|
|
Mark R. Danahy
|
|
|
45
|
|
|
Senior Vice President and Chief Financial Officer— PHH
Mortgage
|
|
William F. Brown
|
|
|
47
|
|
|
Senior Vice President, General Counsel and Corporate Secretary
|
|
Robert E. Groody
|
|
|
46
|
|
|
Senior Vice President and Chief Operating Officer— PHH
Mortgage
|
|
Mark E. Johnson
|
|
|
45
|
|
|
Vice President and Treasurer
|
Terence W. Edwards
serves as our President and
Chief Executive Officer. Prior to the consummation of the
Spin-Off, Mr. Edwards had served as President and Chief
Executive Officer of Cendant Mortgage since February 1996 and as
such was responsible for overseeing Cendant Mortgage’s (now
PHH Mortgage) entire mortgage banking operation. From 1995 to
1996, Mr. Edwards served as Vice President of Investor
Relations and Treasurer of PHH and was responsible for
PHH’s investor, banking and rating agency relations,
financing resources, cash management, pension investment
management and internal financial structure. Mr. Edwards
joined PHH in 1980 as a treasury operations analyst and has held
positions of increasing responsibility, including Director,
Mortgage Finance and Senior Vice President, Secondary Marketing.
Neil J. Cashen
serves as our Executive Vice
President and Chief Financial Officer and as Chief Financial
Officer of PHH Arval. Prior to the consummation of the Spin-Off,
Mr. Cashen had served as Executive Vice President, Chief
Operating Officer and Chief Financial Officer of PHH Arval since
March 2001 and was responsible for PHH Arval’s operations,
including finance, strategic planning, customer and vehicle
services, legal and human resources. From May 1997 to March
2001, Mr. Cashen was Senior Vice President of Finance and
Planning for PHH Arval’s North American fleet operations.
Mr. Cashen joined PHH in 1979 and has held positions of
increasing responsibility, including Vice President and
Controller, Vice President of Business Planning and Analysis,
and Director of Corporate Planning and Business Development.
George J. Kilroy
serves as President and Chief
Executive Officer of PHH Arval, a position that he has held
since March 2001. Mr. Kilroy is responsible for the
management of PHH Arval. From May 1997 to March 2001,
Mr. Kilroy served as Senior Vice President, Business
Development, responsible for new client sales, client relations
and marketing for PHH Arval’s U.S. operations.
Mr. Kilroy joined PHH in 1976 as an Account Executive
in the Truck and Equipment Division and has held positions of
increasing responsibility, including head of Diversified
Services and Financial Services.
Joseph E. Suter
serves as President and Chief
Executive Officer of PHH Mortgage. Prior to the consummation of
the Spin-Off, Mr. Suter was responsible for managing
pricing, interest rate risk and loan securitization efforts of
our mortgage business since 1993 as Vice President and Senior
Vice President of Secondary Marketing. Mr. Suter joined
U.S. Mortgage Corporation in 1983 as a wholesale account
manager and has held positions of increasing responsibility in
Secondary Marketing following our acquisition of
U.S. Mortgage in 1985.
Mark R. Danahy
serves as Senior Vice President and
Chief Financial Officer of PHH Mortgage. Prior to the
consummation of the Spin-Off, Mr. Danahy had served as
Senior Vice President and Chief Financial Officer of Cendant
Mortgage since April 2001. Mr. Danahy is responsible for
directing the corporate accounting and financial planning teams,
which include financial reporting, asset valuation and capital
markets accounting, planning, and forecasting. Mr. Danahy
joined Cendant Mortgage in December 2000 as Controller. From
1999 to 2000, Mr. Danahy served as Vice President, Capital
Market Operations for GE Capital Market Services, Inc.
45
William F. Brown
serves as Senior Vice President,
General Counsel and Corporate Secretary. Prior to the
consummation of the Spin-Off, Mr. Brown had served as
Senior Vice President and General Counsel of Cendant Mortgage
since June 1999 and oversaw its legal, contract, licensing and
regulatory compliance functions. Mr. Brown also served on
Cendant Mortgage’s Executive Quality Control Committee.
From June 1997 to June 1999, Mr. Brown served as Vice
President and General Counsel of Cendant Mortgage. From January
1995 to June 1997, Mr. Brown served as Counsel in the PHH
Corporate Legal Department.
Robert E. Groody
serves as Senior Vice President
and Chief Operating Officer of PHH Mortgage. Prior to the
consummation of the Spin-Off, Mr. Groody had served as
Chief Operating Officer of Cendant Mortgage since 1994. From
1992 through 1994, Mr. Groody was Controller of Cendant
Mortgage.
Mark E. Johnson
serves as Vice President and
Treasurer. Prior to the consummation of the Spin-Off,
Mr. Johnson had served as Vice President, Secondary
Marketing of Cendant Mortgage since May of 2003, responsible for
various funding initiatives and financial management of certain
subsidiary operations. From May 1997 to May 2003,
Mr. Johnson served as Assistant Treasurer of Cendant
Corporation where he had a range of responsibilities, including
bank relations, rating agency relations, unsecured funding and
securitization.
Board of Directors
The following sets forth certain information with respect to the
members of our board of directors. Messrs. Krongard,
Edwards, Kilroy, Brinkley and Mariner and Ms. Logan were
nominated and elected as directors effective upon the
consummation of the Spin-Off. Mr. Van Kirk will become a
director effective July 1, 2005.
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Name
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Age
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Position(s)
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A.B. Krongard
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68
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Non-Executive Chairman of the Board of Directors
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Terence W. Edwards
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Director; President and Chief Executive Officer
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George J. Kilroy
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57
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Director; President and Chief Executive Officer— PHH Arval
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James W. Brinkley
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68
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Director
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Ann D. Logan
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Director
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Jonathan D. Mariner
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Director
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Francis J. Van Kirk
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55
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Director (effective July 1, 2005)
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A.B. Krongard
was elected Non-Executive Chairman
of the board of directors effective upon the consummation of the
Spin-Off. Since December 2004, Mr. Krongard has been
pursuing personal interests. From March 2001 until 2004,
Mr. Krongard served as Executive Director of the Central
Intelligence Agency. From February 1998 until March 2001,
Mr. Krongard served as Counselor to the Director of Central
Intelligence. Mr. Krongard previously worked in various
capacities at Alex. Brown, Incorporated. In 1991,
Mr. Krongard was elected as Chief Executive Officer of
Alex. Brown and assumed the additional duties of Chairman of the
Board in 1994. Upon the merger of Alex. Brown with Bankers
Trust Corporation in September 1997, Mr. Krongard
became Chairman of the Board of Bankers Trust and served in such
capacity until joining the Central Intelligence Agency in 2001.
James W. Brinkley
was elected as a director
effective upon the consummation of the Spin-Off.
Mr. Brinkley has served as director of Legg Mason, Inc., a
holding company that, through its subsidiaries, provides
financial services to individuals, institutions, corporations,
governments and government agencies, since its formation in
1981. Mr. Brinkley has served as a Senior Executive Vice
President of Legg Mason since December 1983. Mr. Brinkley
became Chairman of Legg Mason Wood Walker, Incorporated
(“LMWW”), Legg Mason’s principal brokerage
subsidiary, in February 2004. Mr. Brinkley previously
served as LMWW’s Vice Chairman and Chief Executive Officer
from July 2003 through February 2004, as its President from 1985
until July 2003 and as its Chief Operating Officer from February
1998 until July 2003.
Ann D. Logan
was elected as a director effective
upon the consummation of the Spin-Off. Since July 2000,
Ms. Logan has worked with various non-profit organizations
and is currently Chair of the Annual Fund at Bryn Mawr College
and a member of the College’s campaign steering committee.
Ms. Logan was an Executive Vice President at Fannie Mae
from January 1993 to July 2000. Ms. Logan ran the
single-family mortgage business at
46
Fannie Mae from 1998 to 2000 and was the Chief Credit Officer
from 1993 to 1998. From 1989 to 1993, Ms. Logan was a
Senior Vice President in charge of Fannie Mae’s Northeast
Regional Office in Philadelphia. Prior to joining Fannie Mae,
Ms. Logan was Assistant Vice President at
Standard & Poor’s Corporation in New York. From
1976 to 1980, Ms. Logan worked for the U.S. Senate
Judiciary Committee and served as the Committee Staff Director
in 1980.
Jonathan D. Mariner
was elected as a director
effective upon the consummation of the Spin-Off.
Mr. Mariner has been the Executive Vice President and Chief
Financial Officer of Major League Baseball since January 2004.
From March 2002 to January 2004, Mr. Mariner served as the
Senior Vice President and Chief Financial Officer of Major
League Baseball. From December 2000 to March 2002,
Mr. Mariner served as the Chief Operating Officer of
Charter Schools U.S.A., a charter school development and
management company. Mr. Mariner was the Executive Vice
President and Chief Financial Officer of the Florida Marlins
Baseball Club from February 1992 to December 2000.
Mr. Mariner currently serves on the Boards of Directors of
BankAtlantic Bancorp, Inc. and Steiner Leisure, Limited, both of
which file reports pursuant to the Exchange Act.
Francis J. Van Kirk
will become a director
effective July 1, 2005. Mr. Van Kirk has been the
Managing Partner of PricewaterhouseCoopers LLP’s
Philadelphia office since 1996. In this role, Mr. Van Kirk
oversees the integration and coordination of
PricewaterhouseCoopers’ lines of service and industry
groups to ensure seamless service to its clients. Mr. Van
Kirk will retire as a partner of PricewaterhouseCoopers prior to
joining our board of directors. Mr. Van Kirk began his
career with PricewaterhouseCoopers in 1971 as Staff Auditor and
has been employed by them ever since.
Composition of the Board of Directors
Our charter divides our board into three classes having
staggered terms, with one of such classes being elected each
year for a new three-year term. Class I directors have an
initial term expiring at the annual meeting of our stockholders
to be held in 2006, Class II directors have an initial term
expiring at the annual meeting of our stockholders to be held in
2007 and Class III directors have an initial term expiring
at the annual meeting of our stockholders to be held in 2008.
Class I includes Messrs. Edwards, Krongard and Van
Kirk (effective on July 1, 2005). Class II includes
Mr. Kilroy and Ms. Logan. Class III includes
Messrs. Mariner and Brinkley.
Our board is required under the rules of the NYSE to
affirmatively determine which directors are independent and to
disclose such determination in this Annual Report on
Form 10-K and in the proxy statement for each annual
meeting of stockholders going forward. The board, at its meeting
held on February 24, 2005, determined that all of our
non-employee directors (i.e. all of our directors other than
Messrs. Edwards and Kilroy) are independent as such terms
is defined in the rules of the NYSE and in the judgement of the
board. Mr. Krongard, our Non-Executive Chairman, is a
member of the global board of our principal outside law firm,
DLA Piper Rudnick Gray Cary LLP. Based on the nature of this
position, our board specifically considered
Mr. Krongard’s relationship with DLA Piper Rudnick
Gray Cary LLP and determined that it was not a material
relationship for the purposes of determining his independence.
Non-Executive Chairman
Mr. Krongard serves as our Non-Executive Chairman. The
non-executive chairman is not, and will not be, an officer of
PHH and will lead all meetings of the board of directors at
which he is present. The non-executive chairman will serve on
appropriate committees as requested by the board of directors,
set meeting schedules and agendas, manage information flow to
the board of directors to assure appropriate understanding of,
and discussion regarding, matters of interest or concern to the
board of directors. The non-executive chairman will also have
such additional powers and perform such additional duties
consistent with organizing and leading the actions of the board
of directors as the board of directors may from time to time
prescribe.
47
Committees of Our Board of Directors
Our board of directors has the following committees:
Executive Committee
The Executive Committee is comprised of Messrs. Krongard
(Chairman), Edwards and Kilroy. The Executive Committee may
exercise all of the powers of our board of directors when the
board is not in session, including the power to authorize the
issuance of stock, except that the Executive Committee has no
power to (a) alter, amend or repeal our by-laws or any
resolution or resolutions of the board of directors,
(b) declare any dividend or make any other distribution to
our stockholders, (c) appoint any member of the Executive
Committee or (d) take any other action which legally may be
taken only by the full board of directors.
Audit Committee
The Audit Committee is currently comprised of
Messrs. Mariner and Krongard (Chairman) and Ms. Logan.
It is expected that Mr. Van Kirk will join the Audit
Committee as Chairman, to replace Mr. Krongard, when he
joins our board of directors in July 2005. The Audit Committee
operates under a written charter that is available on our
corporate website at
www.phh.com
under the heading
“Corporate Governance.” A copy of the charter is also
available to stockholders upon request, addressed to the
Corporate Secretary at 3000 Leadenhall Road, Mt. Laurel, NJ
08054 (telephone number: 1-866-PHH-INFO or 1-856-917-1PHH). The
Audit Committee assists our board of directors in overseeing our
corporate accounting and reporting practices by meeting with our
financial management and auditors to review our financial
statements, quarterly earnings releases and financial data;
reviewing and selecting the independent registered public
accountants who will audit our financial statements; reviewing
the selection of the internal auditors who provide internal
audit services; reviewing the scope, procedures and results of
our audits; and evaluating our key financial and accounting
personnel. All members of the Audit Committee are required to
meet the definition of “independence” under the rules
of the NYSE and the Commission, and each of them meets this
definition. In addition, each member of the Audit Committee is
required to have the ability to read and understand fundamental
financial statements. The Audit Committee is also required to
have at least one member that qualifies as an “audit
committee financial expert” as defined by the rules of the
Commission. Our board of directors has determined that
Mr. Mariner qualifies and Mr. Van Kirk will qualify as
an audit committee financial expert.
Compensation Committee
The Compensation Committee is comprised of Messrs. Brinkley
(Chairman) and Krongard and Ms. Logan. The Compensation
Committee operates under a written charter that is available on
our corporate website at
www.phh.com
under the heading
“Corporate Governance.” A copy of the charter is also
available to stockholders upon request, addressed to the
Corporate Secretary at 3000 Leadenhall Road, Mt. Laurel, NJ
08054 (telephone number: 1-866-PHH-INFO or 1-856-917-1PHH). The
Compensation Committee determines, approves and reports to our
board of directors on all elements of compensation for our
senior management. The Compensation Committee also assists us in
developing compensation and benefit strategies to attract,
develop and retain qualified employees. All members of the
Compensation Committee are required to meet the definition of
“independence” under the rules of the NYSE, and each
of them meets this definition.
Corporate Governance Committee
The Corporate Governance Committee is comprised of
Messrs. Krongard (Chairman), Brinkley and Mariner. The
Corporate Governance Committee operates under a written charter
that is available on our corporate website at
www.phh.com
under the heading “Corporate Governance.” A copy
of the charter is also available to stockholders upon request,
addressed to the Corporate Secretary at 3000 Leadenhall
Road, Mt. Laurel, NJ 08054 (telephone number: 1-866-PHH-INFO or
1-856-917-1PHH). The Corporate Governance Committee’s
responsibilities with respect to its governance function include
considering matters of corporate governance and reviewing and
revising our Board of Directors Corporate Governance Guidelines,
Code of Business Conduct and Ethics for Directors and our Code
of Conduct for Employees and Officers. The Corporate Governance
Committee identifies, evaluates and recommends nominees for our
board of directors for each annual meeting; evaluates the
composition, organization and governance of our board of
directors and its committees; and develops and
48
recommends corporate governance principles and policies
applicable to us. All members of the Corporate Governance
Committee are required to meet the definition of
“independence” under the rules of the NYSE and each of
them meets this definition.
The Corporate Governance Committee’s director nominating
functions include the following:
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identify individuals qualified to become members of the board,
which shall be consistent with the board’s criteria for
selecting new directors. Such criteria include consideration of
such diversity, age, skills and experience so as to enhance the
board’s ability to manage and direct our affairs and
business, including, when applicable, to enhance the ability of
committees of the board to fulfill their duties and/or to
satisfy any independence requirements imposed by law, regulation
or NYSE requirement;
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conduct a review in respect of such individuals it wishes to
recommend to the board as a director nominee and recommend that
the board select the director nominees for the next annual
meeting of shareholders; and
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review the suitability for continued service as a director of
each board member when his or her term expires and when he or
she has a significant change in status, including but not
limited to an employment change, and recommend whether or not
the director should be re-nominated to the board or continue as
a director.
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Our by-laws provide the procedure for stockholders to make
director nominations. As set forth in our by-laws, nominations
of persons for election to our board of directors may be made at
any annual meeting of stockholders, or at any special meeting of
stockholders called for the purpose of electing directors, by
any stockholder who is a stockholder of record on the date of
the giving of the notice provided for in the by-laws and on the
record date for the determination of stockholders entitled to
vote at such meeting and who complies with the notice procedures
set forth in the by-laws. A stockholder’s notice must be
delivered to or mailed and received by the Secretary at our
principal executive offices:
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in the case of an annual meeting, not less than 90 days nor
more than 120 days prior to the first anniversary of the
preceding year’s annual meeting; provided, however, that in
the event that the date of the annual meeting is advanced by
more than 30 days or delayed by more than 60 days from
the anniversary date of the preceding year’s annual
meeting, notice by the stockholder must be so delivered not
earlier than the 90th day prior to such annual meeting and not
later than the close of business on the later of the 60th day
prior to such annual meeting or the tenth day following the day
on which public announcement of the date of such annual meeting
is first made; and
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in the case of a special meeting of stockholders called for the
purpose of electing directors, not later than the close of
business on the tenth day following the day on which notice of
the date of the special meeting was mailed or public
announcement of the date of the special meeting was made,
whichever first occurs.
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A stockholder’s notice to the Secretary must be in writing
and set forth (a) as to each person whom the stockholder
proposes to nominate for election as a director, all information
relating to such person that is required to be disclosed in
connection with solicitations of proxies for election of
directors pursuant to Regulation 14A of the Exchange Act,
and the rules and regulations promulgated thereunder; and
(b) as to the stockholder giving the notice:
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the name and address of such stockholder as they appear on our
books and of the beneficial owner, if any, on whose behalf the
nomination is made;
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the class or series and number of shares of our capital stock
which are owned beneficially or of record by such stockholder
and such beneficial owner;
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a description of all arrangements or understandings between such
stockholder and each proposed nominee and any other person or
persons (including their names) pursuant to which the
nomination(s) are to be made by such stockholder;
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a representation that such stockholder intends to appear in
person or by proxy at the meeting to nominate the persons named
in its notice and
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any other information relating to such stockholder that would be
required to be disclosed in a proxy statement or other filings
required to be made in connection with solicitations of proxies
for election of directors pursuant to Regulation 14A of the
Exchange Act and the rules and regulations promulgated
thereunder.
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Such notice must be accompanied by a written consent of each
proposed nominee to be named as a nominee and to serve as a
director if elected.
Compensation Committee Interlocks and Insider
Participation
None of our executive officers serves as a member of the board
of directors or Compensation Committee of any entity that has
one or more executive officers serving as a member of our board
of directors or Compensation Committee.
Director Compensation
The following table sets forth the compensation that will be
paid to our non-employee directors, effective as of the Spin-Off:
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Compensation
(1)
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Annual director
retainer
(2)
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$
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120,000
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New director equity grant
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60,000
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(3)
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Non-Executive Chairman stipend
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50,000
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Audit Committee Chair stipend
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20,000
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Audit Committee member stipend
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12,000
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Compensation Committee Chair stipend
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15,000
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Compensation Committee member stipend
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10,000
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Corporate Governance Committee Chair stipend
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9,000
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Corporate Governance Committee member stipend
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7,000
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(1)
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Members of our board of directors who are also our officers or
employees do not receive compensation for serving as a director
(other than travel-related expenses for meetings held outside of
our headquarters). The Non-Executive Chairman stipend and
committee chair and membership stipends are to be paid half in
cash and half in shares of our common stock, which are required
to be deferred under our Non-Employee Directors Deferred
Compensation Plan (such deferred common stock is referred to as
“deferred stock units”) Directors may elect to receive
all of such stipends in deferred stock units.
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(2)
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The annual director retainer (the “retainer”) is paid
in arrears on a quarterly basis. The retainer is pro-rated for
2005, based on a non-employee director’s service from
February 1 through December 31. Fifty percent (50%) of the
retainer is paid in cash and the other 50% is paid in deferred
stock units. A non-employee director may elect to receive all or
a portion of the cash retainer or any other compensation
received for service as a non-employee director in the form of
additional deferred stock units. The number of shares of common
stock to be received pursuant to the deferred stock unit portion
of the retainer or any other compensation the non-employee
director elects to receive in the form of deferred stock units
equals the value of the compensation being paid in the form of
deferred stock units, divided by the fair market value of our
common stock as of the date on which the compensation would
otherwise have been paid. The deferred stock units are issued
under our 2005 Equity and Incentive Plan and are referred to as
“restricted stock units” under that plan. Non-employee
directors are credited with dividend equivalents with respect to
the number of deferred stock units credited to their accounts,
which dividend equivalents are credited in the form of
additional deferred stock units. Each deferred stock unit
entitles the non-employee director to receive one share of
common stock on the date which is 200 days immediately
following the termination of service as a non-employee director
for any reason. Non-employee directors may not sell or receive
value from any deferred stock unit prior to the receipt of the
common stock following termination of service.
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(3)
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Amount is to be awarded on March 31, 2005 and will be
payable in deferred stock units. The number of units to be
awarded equals $60,000 divided by the fair market value of a
share of our common stock on the date of grant.
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50
Codes of Ethics
Code of Business Conduct and Ethics for Directors
We are committed to conducting business in accordance with the
highest standards of business ethics and complying with
applicable laws, rules and regulations. In furtherance of this
commitment, our board of directors promotes ethical behavior and
has adopted a Code of Business Conduct and Ethics for Directors
(the “Directors Code”) that is applicable to all of
our directors. The Directors Code provides, among other things:
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guidelines for directors with respect to what constitutes a
conflict of interest between a director’s private interests
and interests of PHH;
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a set of standards that must be followed whenever we contemplate
a business relationship between us and a director;
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restrictions on competition between our directors and PHH and
limits the use of our confidential information by directors for
their personal benefit; and
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disciplinary measures for violations of the Directors Code and
any other applicable rules and regulations.
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A copy of the Directors Code is also available to stockholders
upon request, addressed to the Corporate Secretary at
3000 Leadenhall Road, Mt. Laurel, NJ 08054 (telephone
number: 1-866-PHH-INFO or 1-856-917-1PHH).
Code of Conduct for Employees and Officers
Our board of directors has also adopted a Code of Conduct for
Employees and Officers (the “Employees and Officers
Code”) that is applicable to all of our officers and
employees, including our chief executive officer, chief
financial officer and chief accounting officer. The Employees
and Officers Code provides, among other things:
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guidelines for our officers and employees with respect to
ethical handling of conflicts of interest, including examples of
the most common types of conflicts of interest that should be
avoided (e.g., receipt of improper personal benefits from us,
having an ownership interest in other businesses that may
compromise an officer’s loyalty to us; obtaining outside
employment with a competitor of ours, etc.);
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a set of standards to promote full, fair, accurate, timely and
understandable disclosure in periodic reports required to be
filed by us, including, for example, a specific requirement that
all accounting records must be duly preserved and must
accurately reflect our assets and liabilities; and
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disciplinary measures for violations of the Employees and
Officers Code and any other applicable rules and regulations.
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A copy of the Employees and Officers Code is also available to
stockholders upon request, addressed to the Corporate Secretary
at 3000 Leadenhall Road, Mt. Laurel, NJ 08054
(telephone number: 1-866-PHH-INFO or 1-856-917-1PHH).
Item 11. Executive Compensation
The information below sets forth the compensation of the person
who is our chief executive officer and the persons who would
have been our four most highly compensated executive officers
(collectively referred to as our “named executive
officers”) for the fiscal year ending December 31,
2004, had they served in the capacities listed in the table
below for that fiscal year. The services rendered by the named
executive officers prior to the Spin-Off were, in some cases, in
capacities not equivalent to those being provided to us after
the Spin-Off. The form and amount of the compensation to be paid
to each of our executive officers for the fiscal year ending
December 31, 2005, will be as determined by the
Compensation Committee of our board of directors.
51
Summary Compensation Table
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Long Term
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Compensation Awards
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Annual Compensation
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Restricted
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Securities
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Name (Principal
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Other Annual
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Stock
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Underlying
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All Other
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Position(s))
(1)
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Year
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Salary
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Bonus
(2)
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Compensation
(3)
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Awards
(4)
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Options
(5)
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Compensation
(6)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terence W. Edwards
|
|
|
2004
|
|
|
$
|
583,704
|
|
|
$
|
—
|
|
|
$
|
8,943
|
|
|
$
|
1,000,009
|
|
|
|
—
|
|
|
$
|
16,705
|
|
|
|
(President and Chief
|
|
|
2003
|
|
|
|
547,780
|
|
|
|
1,097,590
|
|
|
|
13,564
|
|
|
|
449,997
|
|
|
|
24,835
|
|
|
|
73,017
|
|
|
|
Executive Officer)
|
|
|
2002
|
|
|
|
533,680
|
|
|
|
1,118,525
|
|
|
|
—
|
|
|
|
—
|
|
|
|
144,000
|
|
|
|
34,443
|
|
|
Neil J. Cashen
|
|
|
2004
|
|
|
$
|
271,625
|
|
|
$
|
191,495
|
|
|
$
|
5,916
|
|
|
$
|
519,992
|
|
|
|
—
|
|
|
$
|
22,046
|
|
|
|
(Executive Vice President
|
|
|
2003
|
|
|
|
262,620
|
|
|
|
222,364
|
|
|
|
3,825
|
|
|
|
215,935
|
|
|
|
—
|
|
|
|
12,294
|
|
|
|
and Chief Financial Officer;
|
|
|
2002
|
|
|
|
244,942
|
|
|
|
151,867
|
|
|
|
—
|
|
|
|
—
|
|
|
|
96,000
|
|
|
|
10,615
|
|
|
|
Chief Financial Officer— PHH Arval)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
George J. Kilroy
|
|
|
2004
|
|
|
$
|
317,885
|
|
|
$
|
229,274
|
|
|
$
|
4,761
|
|
|
$
|
1,000,009
|
|
|
|
—
|
|
|
$
|
23,117
|
|
|
|
(President and Chief
|
|
|
2003
|
|
|
|
296,514
|
|
|
|
258,257
|
|
|
|
3,330
|
|
|
|
400,007
|
|
|
|
—
|
|
|
|
29,924
|
|
|
|
Executive Officer—
|
|
|
2002
|
|
|
|
280,817
|
|
|
|
175,511
|
|
|
|
—
|
|
|
|
—
|
|
|
|
105,600
|
|
|
|
30,437
|
|
|
|
PHH Arval)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph E. Suter
|
|
|
2004
|
|
|
$
|
272,110
|
|
|
$
|
—
|
|
|
$
|
14,553
|
|
|
$
|
499,993
|
|
|
|
—
|
|
|
$
|
14,712
|
|
|
|
(President and Chief
|
|
|
2003
|
|
|
|
255,192
|
|
|
|
238,852
|
|
|
|
9,733
|
|
|
|
249,994
|
|
|
|
—
|
|
|
|
13,640
|
|
|
|
Executive Officer—
|
|
|
2002
|
|
|
|
246,677
|
|
|
|
228,125
|
|
|
|
—
|
|
|
|
—
|
|
|
|
67,200
|
|
|
|
11,849
|
|
|
|
PHH Mortgage)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark R. Danahy
|
|
|
2004
|
|
|
$
|
282,698
|
|
|
$
|
—
|
|
|
$
|
14,830
|
|
|
$
|
550,002
|
|
|
|
—
|
|
|
$
|
14,633
|
|
|
|
(Senior Vice President and
|
|
|
2003
|
|
|
|
226,927
|
|
|
|
216,506
|
|
|
|
5,660
|
|
|
|
225,005
|
|
|
|
—
|
|
|
|
13,488
|
|
|
|
Chief Financial Officer—
|
|
|
2002
|
|
|
|
206,923
|
|
|
|
118,125
|
|
|
|
—
|
|
|
|
—
|
|
|
|
52,800
|
|
|
|
11,700
|
|
|
|
PHH Mortgage)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
For a description of the titles of each of our named executive
officers during the periods reflected in the table, see
“Item 10. Directors and Executive Officers of the
Registrant Executive Officers.”
|
|
(2)
|
For 2004 (a) bonus amounts for Messrs. Cashen and
Kilroy represent profit-sharing performance-based bonuses under
the fleet management services segment bonus program and
(b) no profit-sharing performance-based bonuses were paid
to any of Messrs. Edwards, Suter or Danahy under the
mortgage services segment bonus program. For 2003 and 2002, the
amounts shown reflect all bonuses paid for such year, including
performance-based profit-sharing bonuses paid in the first
quarter of the year following the end of the performance year.
|
|
(3)
|
These amounts include the value of perquisites including a
company car, gasoline, financial planning and small gift which
do not exceed $50,000 or 10% of the annual salary and bonus for
any named executive officer. These amounts also include amounts
reimbursed during 2004 for the payment of taxes by each of
Messrs. Edwards, Cashen, Kilroy, Suter and Danahy of
$2,061, $177, $177, $4,340 and $4,241, respectively.
|
|
(4)
|
On June 3, 2004, each named executive officer was granted
performance-vesting restricted stock units relating to shares of
Cendant common stock (each a “2004 unit”). Up to
one-eighth of the units is scheduled to vest on April 27 in each
of 2005, 2006, 2007 and 2008 based upon the extent to which
Cendant attains pre-established performance goals for 2004
through the end of the most recently completed fiscal year prior
to such vesting date (i.e., 25% of the units scheduled to vest
each year will vest if performance reaches “threshold”
levels; and 100% of such units will vest if performance reaches
“target” levels). The performance goals relating to
these units are based upon the “total unit growth” of
Cendant common stock in relation to the average historic
“total stockholder return” of the S&P 500
(“total unit growth” is comprised of earnings before
interest, taxes, depreciation and amortization, plus increases
in free cash flow generation). 2004 units that do not vest
in 2005, 2006 and 2007 may become vested in later year(s)
subject to Cendant’s attainment of cumulative multi-year
performance goals. In addition, up to one-half of the units may
vest on April 27, 2008 based upon the extent to which
Cendant attains cumulative four-year pre-established performance
goals. In all cases, intermediate levels of vesting will occur
for interim levels of performance. Vesting of the
2004 units is subject to the named executive officer
remaining continuously employed with Cendant through the
applicable vesting date. Upon vesting of a 2004 unit, the
named executive officer becomes entitled to receive a share of
Cendant common stock. All 2004 units are eligible to
receive cash dividend equivalents, which remain restricted and
subject to forfeiture until the 2004 unit for which it was
paid becomes vested. Each named executive officer received the
following number of 2004 units relating to Cendant common
stock: Mr. Edwards, 43,253; Mr. Kilroy, 43,253;
Mr. Suter, 21,626; Mr. Cashen, 22,491; and
Mr. Danahy, 23,789. The value of the shares underlying the
2004 units as of the date of grant is shown in the table
above and reflect a per-unit value of $23.12, based upon the
closing price of Cendant common stock on June 3, 2004.
The named executive officers were also granted restricted stock
units relating to shares of Cendant common stock on
April 22, 2003 (each a “2003 unit”).
One-fourth of the 2003 units will vest each year commencing
on April 22, 2004. Vesting of the 2003 units is
subject to the named executive officer remaining continuously
employed with Cendant through
|
(footnotes continued on the following page)
52
|
|
|
|
|
the applicable vesting date. Upon
vesting of a 2003 unit, the named executive officer becomes
entitled to receive a share of Cendant common stock. All
2003 units are eligible to receive cash dividend
equivalents, which remain restricted and subject to forfeiture
until the 2003 unit for which it was paid becomes vested.
Each named executive officer received the following number of
2003 units relating to Cendant common stock:
Mr. Edwards, 32,991; Mr. Kilroy, 29,326;
Mr. Suter, 18,328; Mr. Cashen, 15,831; and
Mr. Danahy, 16,496. The value of the shares underlying the
2003 units as of the date of grant is shown in the table
above and reflects a per-unit value of $13.64, based upon the
closing price of Cendant common stock on April 22, 2003.
The value of the shares of Cendant common stock underlying the
2003 units and the 2004 units held by each named
executive officer as of December 31, 2004, reflecting a
December 31, 2004, value of $23.38 per share of
Cendant common stock, equaled as follows: Mr. Edwards,
$1,589,746; Mr. Kilroy, $1,525,475; Mr. Suter,
$826,997; Mr. Cashen, $803,430; and Mr. Danahy,
$845,449. The number of restricted stock units granted to each
named executive officer was approved by Cendant’s
Compensation Committee and were granted pursuant to
Cendant’s 1997 Stock Option Plan and 2004 Long Term
Incentive Plan.
In connection with the Spin-Off, the restricted stock units
relating to shares of Cendant common stock, described above,
were converted into restricted stock units relating to our
common stock and were assumed under our 2005 Equity and
Incentive Plan. For a description of the manner in which
restricted stock units relating to Cendant common stock were
converted into restricted stock units relating to our common
stock, see “Item 12. Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters— Equity Compensation Plan Information.” The
converted 2003 units will continue to vest on the dates set
forth in the original Cendant award. Under that schedule, the
converted 2003 units will vest pro rata on April 22 in each
of 2005, 2006 and 2007. The Compensation Committee of our board
of directors has determined that one-eighth of the converted
2004 units will become vested on April 27, 2005, and will
establish performance goals on an annual basis for the converted
2004 units scheduled to vest on April 27 in each of 2007
and 2008. The Compensation Committee has established the
performance goals relating to the converted 2004 units scheduled
to vest on April 27, 2006, based on return on equity and
net income growth measured for the 2005 fiscal year. If we
achieve 100% of our target (29% net income growth and 7.25%
return on equity for 2005) for the fiscal year immediately prior
to a vesting date, one-eighth of the converted 2004 units will
vest on that vesting date. If we achieve 150% of our target (77%
net income growth and 10% return on equity for 2005) for the
fiscal year immediately prior to a vesting date,
three-sixteenths of the converted 2004 units will vest on that
vesting date. To the extent that we do not achieve at least the
100% target for a fiscal year, one-eighth of the converted 2004
units will be forfeited on the relevant vesting date.
Additionally, any converted 2004 units which have not vested as
of April 27, 2008, will be forfeited on that date.
Giving effect to the adjustment to the restricted stock units
after the Spin-Off, each named executive officer received the
following number of restricted stock units as of the date of the
Spin-Off: Mr. Edwards, 74,302; Mr. Kilroy, 71,298;
Mr. Suter, 38,651; Mr. Cashen, 37,549; and
Mr. Danahy, 39,513. The value of the shares underlying the
2003 units and the 2004 units held by each named
executive officer as of February 1, 2005, reflecting a
February 1, 2005, value of $21.90 per share of PHH
common stock, equaled as follows: Mr. Edwards, $1,627,214;
Mr. Kilroy, $1,561,426; Mr. Suter, $846,457;
Mr. Cashen, $822,323; and Mr. Danahy, $865,334.
|
|
(5)
|
No Cendant stock options were
granted to the named executive officers during 2004. The number
of Cendant stock options granted by Cendant to the named
executive officers in prior years is shown in the table above.
In connection with the Spin-Off, options to purchase Cendant
common stock with exercise prices of $18.00 and higher held by
the named executive officers were converted into options to
purchase an equivalent number of shares of our common stock on
substantially similar terms and conditions. For a description of
the manner in which options relating to Cendant common stock
were converted into options relating to our common stock, see
“Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters—
Equity Compensation Plan Information.” In addition, the
unvested portion of Mr. Edwards’ options to purchase
Cendant common stock granted on April 22, 2003, with an
exercise price of $13.64 per share, was also converted into
options to purchase an equivalent number of shares of our common
stock. Giving effect to the adjustment of the options after the
Spin-Off, each named executive officer received the following
number of options to purchase our common stock as of the date of
the Spin-Off with respect to the options reported in the table
above: Mr. Edwards, 177,719 shares; Mr. Suter,
73,436 shares; Mr. Cashen, 104,909 shares; and
Mr. Danahy, 35,844 shares. A portion of
Mr. Danahy’s options and all of Mr. Kilroy’s
options to purchase Cendant common stock reported in the table
above were not converted into options to purchase our common
stock, because those options were exercised by
Messrs. Danahy and Kilroy prior to the Spin-Off.
|
|
(6)
|
Payments included in these amounts
for 2004 consist of (i) matching contributions to a
non-qualified deferred compensation plan and/or 401(k) plan
maintained by Cendant (collectively, “Defined Contribution
Match”) (ii) executive medical benefits and
(iii) life and long-term disability insurance coverage.
Defined Contribution Match includes estimated matching
contributions relating to deferred bonuses in respect of 2004
(assumed for this purpose to have been earned and
|
(footnotes continued on the following page)
53
|
|
|
|
|
paid as described in the Summary
Compensation Table above) and paid in the first quarter of 2005.
For 2004, the Defined Contribution Match for the named executive
officers were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life &
|
|
|
|
|
|
|
Defined
|
|
|
Executive
|
|
|
Disability
|
|
|
|
|
|
|
Contribution
|
|
|
Medical
|
|
|
Insurance
|
|
|
|
|
Name
|
|
Match
|
|
|
Benefits
|
|
|
Coverage
|
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terence W. Edwards
|
|
$
|
12,300
|
|
|
$
|
750
|
|
|
$
|
3,655
|
|
|
$
|
16,705
|
|
|
Neil J. Cashen
|
|
|
19,338
|
|
|
|
750
|
|
|
|
1,958
|
|
|
|
22,046
|
|
|
George J. Kilroy
|
|
|
19,073
|
|
|
|
750
|
|
|
|
3,294
|
|
|
|
23,117
|
|
|
Joseph E. Suter
|
|
|
12,300
|
|
|
|
750
|
|
|
|
1,662
|
|
|
|
14,712
|
|
|
Mark R. Danahy
|
|
|
12,300
|
|
|
|
750
|
|
|
|
1,583
|
|
|
|
14,633
|
|
Cendant Stock Options
The following table sets forth information concerning the
exercise of options to purchase shares of Cendant common stock
during 2004 by each of our named executive officers and the
year-end value of unexercised options to purchase shares of
Cendant common stock, reflecting a December 31, 2004 value
of $23.38 per share of Cendant common stock. The
information set forth in the following table does not reflect
any of the equitable adjustments to Cendant stock options made
in connection with the Spin-Off.
Aggregate Option Exercises in Last Fiscal Year and Fiscal
Year-End Option Values
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
Number of Securities
|
|
|
Value of Unexercised
|
|
|
|
|
Acquired
|
|
|
|
|
Underlying Unexercised
|
|
|
In-The-Money Options at
|
|
|
|
|
on
|
|
|
Value
|
|
|
Options at Fiscal Year-End (#)
|
|
|
Fiscal Year End ($)
(1)
|
|
|
Name
|
|
Exercise (#)
|
|
|
Realized ($)
|
|
|
(Exercisable/Unexercisable)
|
|
|
(Exercisable/Unexercisable)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terence W. Edwards
|
|
|
262,500
|
|
|
|
3,628,388
|
|
|
|
567,708/18,627
|
|
|
|
2,195,157/178,819
|
|
|
Neil J. Cashen
|
|
|
24,160
|
|
|
|
280,481
|
|
|
|
319,968/0
|
|
|
|
2,817,661/0
|
|
|
George J. Kilroy
|
|
|
20,000
|
|
|
|
218,028
|
|
|
|
21,667/0
|
|
|
|
201,070/0
|
|
|
Joseph E. Suter
|
|
|
235,000
|
|
|
|
2,586,429
|
|
|
|
198,434/0
|
|
|
|
335,291/0
|
|
|
Mark R. Danahy
|
|
|
30,000
|
|
|
|
196,719
|
|
|
|
87,800/0
|
|
|
|
463,645/0
|
|
|
|
|
|
(1)
|
Amounts are based upon a December 31, 2004 closing price
per share of Cendant Common Stock on the New York Stock Exchange
of $23.38.
|
Report on Executive Compensation
Prior to the Spin-Off, all compensation paid to our executive
officers was paid by Cendant and was set at levels determined by
Cendant. As discussed above under “Item 10. Directors
and Executive Officers of the Registrant— Committees of Our
Board of Directors— Compensation Committee,” we have a
Compensation Committee that is responsible for setting the
compensation levels for our executive officers after the
Spin-Off.
Employment Contracts and Termination, Severance and Change in
Control Arrangements
Employment Agreements
Immediately, after the Spin-Off, we entered into an employment
agreement with Terence W. Edwards, our President and Chief
Executive Officer with a term ending on February 1, 2008.
In addition to providing for a minimum base salary of $625,000
and participation in employee benefit plans generally available
to our executive officers, Mr. Edwards’ agreement
provided for an annual incentive award with a target amount
equal to no less than 100% of his base salary, subject to
attainment of performance goals, and grants of long-term
incentive awards upon such terms and conditions as determined by
our board of directors or our Compensation Committee. In
addition, Mr. Edwards was entitled to receive an equity
incentive award under the employment agreement relating to our
common stock that will vest based on the achievement of
specified performance goals and will have a value on the grant
date of $2.5 million, which value will be based on such
criteria as our board of directors or our Compensation Committee
may determine. After the Spin-Off, we adopted a policy generally
not to enter
54
into employment agreements with any of our executive officers or
other employees. In accordance with this policy, we and
Mr. Edwards have terminated his employment agreement and
Mr. Edwards’ employment with us is on an at-will basis.
Change in Control Arrangements
Generally, all stock options granted to each of the Named
Executive Officers under our 2005 Equity and Incentive Plan will
become fully and immediately vested and exercisable, and all
restricted stock units will vest, upon the occurrence of any
change in control transaction affecting the Company.
Pension Benefits
Prior to the Spin-Off, each of the named executive officers
other than Mr. Danahy participated in the Cendant
Corporation Pension Plan (the “Cendant Plan”), a
defined benefit employee pension plan. In connection with the
Spin-Off, Cendant and PHH agreed to separate the Cendant Plan
into two separate plans. Effective as of the Spin-Off, we have
adopted the PHH Corporation Pension Plan (the “PHH
Plan”), which is identical in all material respects to the
Cendant Plan, and have assumed all of the liabilities and
obligations owed under the Cendant Plan to those Cendant Plan
participants who were actively employed by PHH at the time of
the Spin-Off, including each of the named executive officers
other than Mr. Danahy, who was not a participant in the
Cendant Plan. Additionally, a portion of the assets of the
Cendant Plan, representing the share of the Cendant Plan’s
assets allocable to the sum of the present values of the accrued
benefits of the PHH Employees eligible to participate in the PHH
Plan, will be transferred to the PHH Plan. Such amounts will be
determined by the actuaries of the Cendant Plan and the PHH Plan
in accordance with the requirements under the Internal Revenue
Code of 1986, as amended. Employees who did not participate in
the Cendant Plan, including Mr. Danahy, will not
participate in the PHH Plan. PHH has also assumed any
supplemental pension obligations accrued by the named executive
officers under plans maintained by Cendant.
Each of the named executive officers, other than
Mr. Danahy, is eligible to receive a benefit under the PHH
Plan based on 2% of their final average compensation times the
number of their years of benefit service (up to a maximum of
30 years) minus 50% of their annualized primary social
security benefit. For purposes of determining the named
executive officers’ benefits under the PHH Plan, their
final average compensation and years of benefit service shall be
based on compensation and service earned prior to
October 31, 1999 (October 31, 2004, for
Mr. Kilroy). The named executive officers will not accrue
any additional benefits under the PHH Plan or under any other
defined benefit plan of PHH or Cendant after October 31,
1999 (October 31, 2004, for Mr. Kilroy).
The estimated annual benefits payable to each of the named
executive officers upon retirement at their normal retirement
age (which is set forth immediately following their name) is:
Mr. Edwards (2020), $41,300; Mr. Cashen (2019),
$33,200; Mr. Kilroy (2012), $83,500; and Mr. Suter
(2024), $32,700. The estimated annual benefits described in the
preceding sentence reflect straight-life annuity amounts and
reflect an offset for estimated social security benefits.
Additionally, Mr. Suter’s estimated annual benefit
includes benefits that are payable under a supplemental pension
plan formerly sponsored by PHH which provides additional
benefits which would have been payable under the PHH Plan, but
for Internal Revenue Service limitations.
|
|
|
|
Item 12.
|
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
|
The following table sets forth the beneficial ownership of our
outstanding common stock, as of February 28, 2005, by our
directors and executive officers, individually and as a group,
and by those persons who currently are known to us to be
beneficial owners of 5% or more of our common stock.
We have determined beneficial ownership in the table in
accordance with the rules of the Commission. In computing the
number of shares beneficially owned by a person and the
percentage ownership of that person, we have deemed shares of
common stock subject to options held by that person that are
currently exercisable or will become exercisable within
60 days of February 28, 2005 to be outstanding, but we
have not deemed these shares to be outstanding for computing the
percentage ownership of any other person. To our knowledge,
except as set
55
forth in the footnotes below, each stockholder identified in the
table possesses sole voting and investment power with respect to
all shares of common stock shown as beneficially owned by that
stockholder. Unless otherwise indicated, the address of all
listed stockholders is c/o PHH Corporation, 3000 Leadenhall
Road, Mt. Laurel, NJ 08054.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
Shares
|
|
Common
|
|
|
|
|
Beneficially
|
|
Stock
|
|
|
Name
|
|
Owned
|
|
Outstanding
(1)
|
|
|
|
|
|
|
|
|
|
Principal Stockholders:
|
|
|
|
|
|
|
|
SAB Capital Partners and its affiliates
(2)
|
|
4,650,800
|
|
|
8.83
|
%
|
|
|
712 Fifth Avenue, 42nd Floor
|
|
|
|
|
|
|
|
|
New York, N.Y. 10019
|
|
|
|
|
|
|
|
Barclays Global Investors, N.A.
(3)
|
|
3,717,095
|
|
|
7.06
|
%
|
|
|
45 Fremont Street
|
|
|
|
|
|
|
|
|
San Francisco, CA 94015
|
|
|
|
|
|
|
|
Directors and Named Executive Officers:
|
|
|
|
|
|
|
|
Terence W. Edwards
(4)
|
|
362,671
|
|
|
*
|
|
|
Neil J. Cashen
(5)
|
|
112,546
|
|
|
*
|
|
|
George J. Kilroy
(6)
|
|
14,545
|
|
|
*
|
|
|
Joseph E. Suter
(7)
|
|
225,348
|
|
|
*
|
|
|
Mark R. Danahy
(8)
|
|
87,312
|
|
|
*
|
|
|
William F. Brown
(9)
|
|
73,480
|
|
|
*
|
|
|
Robert E. Groody
(10)
|
|
251,820
|
|
|
*
|
|
|
Mark E. Johnson
(11)
|
|
45,569
|
|
|
*
|
|
|
James W. Brinkley
(12)
|
|
250
|
|
|
*
|
|
|
A.B. Krongard
|
|
—
|
|
|
—
|
|
|
Ann D. Logan
|
|
—
|
|
|
—
|
|
|
Jonathan D. Mariner
|
|
—
|
|
|
—
|
|
|
All directors and executive officers as a group (11 persons)
|
|
1,173,541
|
|
|
2.23
|
%
|
|
|
|
|
|
*
|
|
Represents less than one percent.
|
|
(1)
|
|
Figures are based upon 52,684,398 shares of our common
stock outstanding as of February 28, 2005.
|
|
(2)
|
|
Reflects beneficial ownership of shares of our common stock as
derived solely from information reported in a Schedule 13G
filed under the Securities Exchange Act of 1934, as amended, by
SAB Capital Partners, L.P. (“SABCP”),
SAB Capital Partners II, L.P.
(“SABCP II”), SAB Capital Advisors, L.L.C.
(“SABC Advisors”), SAB Overseas Capital
Management, L.P. (SABC Overseas Management”),
SAB Capital Management, L.L.C. (“SABC
Management”) and Mr. Scott A. Bommer with the
Securities and Exchange Commission on February 2, 2005.
Includes (a) shares of our common stock beneficially owned
directly by SABCP and SABCP II, (b) shares of our
common stock beneficially owned indirectly by SABC Advisors as
general partner of each of SABCP and SABCP II,
(c) shares of our common stock beneficially owned
indirectly by each of SABC Overseas Management and SABC
Management as the investment manager and general partner,
respectively, of SAB Overseas Fund, Ltd. and
(d) shares of our common stock beneficially owned
indirectly by Mr. Bommer as the managing member of SABC
Advisors and SABC Management.
|
|
(3)
|
|
Reflects beneficial ownership of 74,341,918 shares of
Cendant common stock by Barclays Global Investors, N.A. and its
affiliated entities (“Barclays”), as derived solely
from information reported in a Schedule 13F for the year
ended December 31, 2004 filed under the Securities Exchange
Act of 1934, as amended, by Barclays with the Securities and
Exchange Commission on February 14, 2005. Such
Schedule 13F indicates that Barclays has sole voting power
over 65,768,318 of the shares and no voting power over 8,573,600
of the shares. The principal business address for Barclays
Global Investors, N.A. is 45 Fremont Street, San Francisco,
CA 94015. Information is based upon the assumption that Barclays
held 74,341,918 shares of Cendant common stock as of
January 31, 2005, that each received a dividend of 1/20th
of a share of our common stock pursuant to the Spin-Off.
|
|
(4)
|
|
Represents (a) 556 shares of our common stock held by
Mr. Edwards directly, (b) options to
purchase 347,194 shares of our common stock and
(c) 14,921 restricted stock units.
|
|
(5)
|
|
Represents (a) 96 shares of our common stock held by
Mr. Cashen directly, (b) 144 shares of our common
stock held in Mr. Cashen’s 401(k) account,
(c) options to purchase 104,909 shares of our
common stock and (d) 7,397 restricted stock units.
|
|
(6)
|
|
Represents (a) 625 shares of our common stock held in
Mr. Kilroy’s 401(k) account (b) 13,920 restricted
stock units.
|
|
(7)
|
|
Represents (a) 539 shares of our common stock held in
Mr. Suter’s 401(k) account, (b) options to
purchase 216,848 shares of our common stock and
(c) 7,961 restricted stock units.
|
|
(8)
|
|
Represents (a) options to purchase 79,556 shares
of our common stock and (b) 7,756 restricted stock units.
|
|
(9)
|
|
Represents (a) 111 shares of our common stock,
(b) options to purchase 67,696 shares of our
common stock and (c) 5,673 restricted stock units.
|
|
(10)
|
|
Represents (a) options to purchase 242,857 shares
of our common stock and (b) 8,963 restricted stock units.
|
|
(11)
|
|
Represents options to purchase 45,569 shares of our
common stock.
|
|
(12)
|
|
Represents shares held by Brinkley Investments, LLC, a
partnership among Mr. Brinkley, his wife and his children.
|
56
Equity Compensation Plan Information
The table below reflects the number of securities to be issued
and the number of securities remaining available for issuance
under each of our equity compensation plans, as of
February 1, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
Remaining Available for
|
|
|
|
|
Number of Securities to
|
|
|
|
|
Future Issuance Under
|
|
|
|
|
Be Issued upon
|
|
|
Weighted Average
|
|
|
Equity Compensation
|
|
|
|
|
Exercise of Outstanding
|
|
|
Exercise Price of
|
|
|
Plans (Excluding
|
|
|
|
|
Options, Warrants and
|
|
|
Outstanding Options,
|
|
|
Securities Reflected in
|
|
|
|
|
Rights
|
|
|
Warrants and Rights
|
|
|
Column (a))
|
|
|
Plan Category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans approved by security holders
(1)
|
|
|
5,074,503
|
(2)
|
|
$
|
18.79
|
(3)
|
|
|
2,425,497
|
|
|
Equity compensation plans not approved by security holders
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,074,503
|
|
|
$
|
18.79
|
|
|
|
2,425,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Our 2005 Equity and Incentive Plan was approved prior to the
consummation of the Spin-Off by Cendant as our sole stockholder.
|
|
(2)
|
|
Includes 1,595,988 restricted stock units of which 1,174,416
units are subject to performance-based vesting at target levels.
Depending on the level of achievement of performance goals, the
performance-based units may not be fully paid out as shares.
|
|
(3)
|
|
Includes 1,595,988 restricted stock units. Because there is no
exercise price associated with these units, such units are not
included in the weighted average price calculation.
|
Conversion of Cendant Stock Options and Restricted Stock
Units into PHH Stock Options and Restricted Stock Units
In connection with the Spin-Off, outstanding stock options to
purchase Cendant common stock (“Cendant options”) held
by our employees with an exercise price of at least
$18.00 per share were converted into stock options to
purchase our common stock (“PHH options”).
Additionally, the unvested portion of Mr. Edwards’
Cendant options granted on April 22, 2003, with an exercise
price of $13.64 per share were also converted into PHH
options. Each Cendant option was converted into 1.0928 PHH
options based on a conversion ratio, with the total rounded down
to the nearest whole number. The conversion ratio was determined
by dividing the last trade of Cendant common stock on
January 31, 2005, or $23.55, by the first trade of our
common stock on February 1, 2005, or $21.55. The exercise
price for the PHH options was determined by dividing the
exercise price for the Cendant options by the conversion ratio,
rounded up to the nearest cent.
In addition, the outstanding restricted stock units related to
Cendant common stock (“Cendant RSUs”) held by our
employees were converted into restricted stock units related to
our common stock (“PHH RSUs”). The number of PHH RSUs
received by each of our employees equaled the number of Cendant
RSUs multiplied by the conversion ratio.
|
|
|
|
Item 13.
|
Certain Relationships and Related Transactions
|
Arrangements with Cendant Corporation
Prior to the Spin-Off, in the ordinary course of business, we
were allocated certain expenses from Cendant, formerly our sole
stockholder, for corporate-related functions including executive
management, finance, human resources, information technology,
legal and facility related expenses. Such expenses amounted to
$32 million, $34 million and $31 million during
2004, 2003 and 2002, respectively, and are included in general
and administrative expenses in our statements of income. During
2004 and 2003, we maintained average outstanding borrowings from
Cendant of approximately $25 million and $30 million,
respectively, all of which had been
57
repaid as of December 31, 2004 and 2003, respectively.
During 2004 and 2003, interest expense related to such
inter-company funding was de minimis. During 2002, we incurred
interest expense of $9 million related to such
inter-company funding. In addition, at December 31, 2004
and 2003, we had outstanding balances of $31 million and
$19 million, respectively, payable to Cendant, representing
the accumulation of corporate allocations and amounts paid by
Cendant on behalf of us. Amounts payable to Cendant are included
in accounts payable and other accrued liabilities in our balance
sheets.
During both 2004 and 2003, we paid Cendant $140 million of
cash dividends. On December 31, 2002, we distributed, in
the form of a non-cash dividend of $35 million, our title
and appraisal service businesses to a wholly-owned subsidiary of
Cendant not within our ownership structure. During 2003, Cendant
transferred the mortgage operations (with net assets of
$11 million) of a recently acquired real estate brokerage
business to us in a non-cash capital transaction. During 2002,
Cendant made a capital contribution of $125 million to us.
Spin-Off and Reorganization
As discussed above, on October 12, 2004, we and Cendant
announced that Cendant, then our parent corporation, intended to
distribute the mortgage and fleet operations of PHH to Cendant
shareholders in a transaction to be structured as a tax-free
distribution of the common stock of PHH Corporation.
In connection with and prior to the Spin-Off, we underwent an
internal reorganization after which we continued to own PHH
Mortgage, PHH Arval and our other subsidiaries that engage in
the mortgage and fleet management services businesses. Pursuant
to this internal reorganization, Cendant Mobility Services
Corporation, previously our relocation business, and Wright
Express LLC, previously our fuel card business, and other
subsidiaries that engaged in the relocation and fuel card
businesses were separated from us and distributed to Cendant. In
addition, in January 2005, Cendant contributed to us Speedy
Title and Appraisal Review Services, LLC, its appraisal services
business, which provides appraisal review services through a
network of approximately 4,000 professional licensed appraisers,
providing local coverage throughout the United States, as well
as credit research, flood certification and tax services.
On January 5, 2005, the board of directors of Cendant
approved the distribution of shares of our common stock held by
Cendant to the holders of Cendant common stock at a distribution
rate of one share of our common stock for every twenty
(20) shares of Cendant common stock issued and outstanding
on the record date for the distribution. The distribution was
paid on January 31, 2005, to holders of record of Cendant
common stock at the close of business on January 19, 2005.
Immediately prior to the Spin-Off, Cendant made a capital
contribution of $100 million to us.
In connection with the Spin-Off, we have entered into various
agreements with Cendant. For a discussion of these agreements,
please see “Item 1. Business— Arrangements with
Cendant Corporation” in this Annual Report on
Form 10-K.
NRT Incorporated
Prior to the Spin-Off, we participated in acquisitions made by
NRT Incorporated (“NRT”), a real estate broker, by
acquiring mortgage operations of certain real estate brokerage
firms acquired by NRT both before and after NRT was acquired by
Cendant on April 17, 2002. The net assets resulting from
the acquisition of mortgage operations through NRT were not
material during 2004 and 2003. Such mortgage operations were
immediately integrated into our existing mortgage operations. We
also received real estate referral fees from NRT in connection
with clients referred to NRT by our former relocation services
segment. During 2004, 2003 and 2002, such fees were
approximately $49 million, $42 million and
$37 million, respectively, and were recorded by us in our
statements of income. These amounts were paid to us by all other
real estate brokerages (both affiliates and non-affiliates) who
received referrals from our former relocation services segment.
Transactions with Management and Others
Certain affiliates of Barclays Global Investors, N.A.
(collectively, “Barclays”), a greater than 5%
stockholder of Cendant as of December 31, 2004 and a
greater than 5% holder of our common stock immediately
58
after the Spin-Off, have performed, and may in the future
perform, various commercial banking, investment banking and
other financial advisory services for us and our subsidiaries
for which they have received, and will receive, customary fees
and expenses. Fees paid to Barclays by us and our subsidiaries
in 2004 were approximately $4.5 million.
Indebtedness of Management
One or more of our mortgage lending subsidiaries has made, in
the ordinary course of business, mortgage loans and/or home
equity lines of credit to directors and executive officers and
their immediate families. Such mortgage loans and/or home equity
lines of credit were made on substantially the same terms,
including interest rates and collateral requirements, as those
prevailing at the time for comparable transactions with our
other customers generally, and they did not involve more than
the normal risk of collectibility or present other unfavorable
features. Generally, we sell these mortgage loans and/or home
equity lines of credit, soon after origination, into the
secondary market in the ordinary course of business.
|
|
|
|
Item 14.
|
Principal Accountant Fees and Services
|
After the Spin-Off, our audit committee is responsible for
pre-approving all audit services and permitted non-audit
services (including the fees and terms thereof) to be performed
for us and its subsidiaries by our independent auditor, subject
to the
de minimis
exception for non-audit services
described in Section 10A(i)(1)(B) of the Exchange Act which
are then approved by our audit committee prior to the completion
of the audit. Management and our board of directors subscribe to
these policies and procedures.
For the years ended December 31, 2004 and 2003,
professional services were performed for us by
Deloitte & Touche LLP, subject to the processes used by
Cendant’s Audit Committee to approve and monitor services
by its auditors.
Audit and audit-related fees aggregated $2.1 million and
$2.3 million for the years ended December 31, 2004 and
2003, respectively. Cendant was billed certain fees directly by
our accounting firm. Set forth below is the portion of fees
billed by Deloitte & Touche LLP, the member firms of
Deloitte Touche Tohmatsu and their respective affiliates to the
company.
|
|
|
|
|
|
|
|
|
|
|
|
Fees by Type
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Audit fees
|
|
$
|
1.4
|
|
|
$
|
2.0
|
|
|
Audit-related fees
|
|
|
0.7
|
|
|
|
0.3
|
|
|
Tax fees
|
|
|
0.3
|
|
|
|
0.3
|
|
|
All other fees
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2.4
|
|
|
$
|
2.6
|
|
|
|
|
|
|
|
|
|
Audit Fees.
The aggregate fees billed for the audit of
our financial statements for the fiscal years ended
December 31, 2004 and 2003 and for other audit services
primarily related to financial accounting consultations, comfort
letters and consents related to Commission and other
registration statements and agreed-upon procedures were
$1.4 million and $2.0 million, respectively.
Audit-Related Fees.
The aggregate fees billed for
audit-related services for the fiscal years ended
December 31, 2004 and 2003 were $0.7 million and
$0.3 million, respectively. These fees relate primarily to
due diligence pertaining to acquisitions and accounting
consultation for contemplated transactions for the fiscal years
ended December 31, 2004 and 2003.
Tax Fees.
The aggregate fees billed for tax services for
the fiscal years ended December 31, 2004 and 2003 were
$0.3 million and $0.3 million, respectively. These
fees relate to tax compliance, tax advice and tax planning for
the fiscal years ended December 31, 2004 and 2003.
59
PART IV
Item 15. Exhibits and Financial Statement
Schedules
Item 15(a)(1). Financial Statements
Information in response to this item is incorporated herein by
reference to the Financial Statements and Financial Statements
Index commencing on page F-1 hereof.
Item 15(a)(2). Financial Statement Schedules
Information in response to this item is incorporated herein by
reference to Exhibit 12 attached to this Annual Report on
Form 10-K.
Item 15(a)(3) and (b). Exhibits
Information in response to this item is incorporated herein by
reference to the Exhibit Index to this Annual Report on
Form 10-K.
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this Annual Report on Form 10-K to be signed on
its behalf by the undersigned, thereunto duly authorized on this
14th day of March, 2005.
|
|
|
|
|
|
By:
|
/s/
Terence W. Edwards
|
|
|
|
|
|
|
|
|
Name: Terence W. Edwards
|
|
|
Title: President and Chief Executive Officer
|
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, this Annual Report
on Form 10-K has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated. The undersigned hereby constitute and appoint
Terence W. Edwards, Neil J. Cashen and William F. Brown, and
each of them, their true and lawful agents and attorneys-in-fact
with full power and authority in said agents and
attorneys-in-fact, and in any one or more of them, to sign for
the undersigned and in their respective names as directors and
officers of PHH Corporation, any amendment or supplement hereto.
The undersigned hereby confirm all acts taken by such agents and
attorneys-in-fact, or any one or more of them, as herein
authorized.
|
|
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
/s/
Terence W. Edwards
Terence
W. Edwards
|
|
President, Chief Executive Officer and Director (Principal
Executive Officer)
|
|
March 14, 2005
|
|
|
/s/
Neil J. Cashen
Neil
J. Cashen
|
|
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
|
|
March 14, 2005
|
|
|
/s/
A.B. Krongard
A.B.
Krongard
|
|
Non-Executive Chairman
of the Board of Directors
|
|
March 14, 2005
|
|
|
/s/
James W. Brinkley
James
W. Brinkley
|
|
Director
|
|
March 14, 2005
|
|
|
/s/
George J. Kilroy
George
J. Kilroy
|
|
Director
|
|
March 14, 2005
|
|
|
/s/
Ann D. Logan
Ann
D. Logan
|
|
Director
|
|
March 14, 2005
|
|
|
/s/
Jonathan D. Mariner
Jonathan
D. Mariner
|
|
Director
|
|
March 14, 2005
|
S-1
INDEX TO FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
F-2
|
|
Consolidated Statements of Income for the years ended
December 31, 2004, 2003 and 2002
|
|
F-3
|
|
Consolidated Balance Sheets as of December 31, 2004 and 2003
|
|
F-4
|
|
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002
|
|
F-5
|
|
Consolidated Statements of Stockholder’s Equity for the
years ended December 31, 2004, 2003 and 2002
|
|
F-6
|
|
Notes to Consolidated Financial Statements
|
|
F-7
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of PHH Corporation:
We have audited the accompanying consolidated balance sheets of
PHH Corporation and subsidiaries (the “Company”),
formerly a wholly-owned subsidiary of Cendant Corporation, as of
December 31, 2004 and 2003, and the related consolidated
statements of income, cash flows and stockholder’s equity
for each of the three years in the period ended
December 31, 2004. These consolidated financial statements
are the responsibility of the Company’s management. Our
responsibility is to express an opinion on the consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of the Company at
December 31, 2004 and 2003, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2004 in conformity with
accounting principles generally accepted in the United States of
America.
As discussed in Note 2 to the consolidated financial
statements, on January 1, 2003, the Company adopted the
fair value method of accounting for stock-based compensation,
and during 2003, the Company adopted the consolidation
provisions for variable interest entities.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
March 11, 2005
F-2
PHH Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fees, net
|
|
$
|
1,452
|
|
|
$
|
1,664
|
|
|
$
|
1,165
|
|
|
|
Fleet leasing
|
|
|
1,521
|
|
|
|
1,307
|
|
|
|
1,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
2,973
|
|
|
|
2,971
|
|
|
|
2,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
1,003
|
|
|
|
920
|
|
|
|
751
|
|
|
|
Vehicle depreciation and interest, net
|
|
|
1,270
|
|
|
|
1,176
|
|
|
|
1,175
|
|
|
|
General and administrative
|
|
|
311
|
|
|
|
345
|
|
|
|
298
|
|
|
|
Non-program related depreciation and amortization
|
|
|
71
|
|
|
|
62
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
2,655
|
|
|
|
2,503
|
|
|
|
2,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest
|
|
|
318
|
|
|
|
468
|
|
|
|
164
|
|
|
Provision for income taxes
|
|
|
134
|
|
|
|
183
|
|
|
|
64
|
|
|
Minority interest, net of tax
|
|
|
2
|
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
182
|
|
|
$
|
284
|
|
|
$
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-3
PHH Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
Cash and cash equivalents
|
|
$
|
270
|
|
|
$
|
106
|
|
|
|
Restricted cash
|
|
|
250
|
|
|
|
253
|
|
|
|
Receivables (net of allowance for doubtful accounts of $10 and
$26)
|
|
|
443
|
|
|
|
589
|
|
|
|
Income taxes receivable from Cendant
|
|
|
-
|
|
|
|
31
|
|
|
|
Property and equipment, net
|
|
|
185
|
|
|
|
189
|
|
|
|
Goodwill
|
|
|
700
|
|
|
|
657
|
|
|
|
Other intangibles, net
|
|
|
59
|
|
|
|
55
|
|
|
|
Deferred income taxes
|
|
|
64
|
|
|
|
46
|
|
|
|
Other assets
|
|
|
272
|
|
|
|
342
|
|
|
|
|
|
|
|
|
|
|
Total assets exclusive of assets under programs
|
|
|
2,243
|
|
|
|
2,268
|
|
|
|
|
|
|
|
|
|
|
Assets under management and mortgage programs:
|
|
|
|
|
|
|
|
|
|
|
Program cash
|
|
|
626
|
|
|
|
451
|
|
|
|
Mortgage loans held for sale
|
|
|
1,981
|
|
|
|
2,508
|
|
|
|
Relocation receivables
|
|
|
720
|
|
|
|
534
|
|
|
|
Vehicle-related, net
|
|
|
4,184
|
|
|
|
3,686
|
|
|
|
Mortgage servicing rights, net
|
|
|
1,608
|
|
|
|
1,641
|
|
|
|
Other
|
|
|
156
|
|
|
|
465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,275
|
|
|
|
9,285
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
11,518
|
|
|
$
|
11,553
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDER’S EQUITY
|
|
|
Accounts payable and other accrued liabilities
|
|
$
|
865
|
|
|
$
|
818
|
|
|
|
Income taxes payable to Cendant
|
|
|
278
|
|
|
|
-
|
|
|
|
Deferred income
|
|
|
32
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
Total liabilities exclusive of liabilities under programs
|
|
|
1,175
|
|
|
|
833
|
|
|
|
|
|
|
|
|
|
|
Liabilities under management and mortgage programs:
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
7,368
|
|
|
|
7,381
|
|
|
|
Deferred income taxes
|
|
|
788
|
|
|
|
954
|
|
|
|
Other
|
|
|
26
|
|
|
|
277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,182
|
|
|
|
8,612
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 12)
|
|
|
|
|
|
|
|
|
|
Stockholder’s equity
|
|
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value—authorized, issued and
outstanding 1,000 shares
|
|
|
-
|
|
|
|
-
|
|
|
|
Additional paid-in capital
|
|
|
935
|
|
|
|
935
|
|
|
|
Retained earnings
|
|
|
1,232
|
|
|
|
1,190
|
|
|
|
Accumulated other comprehensive loss
|
|
|
(6
|
)
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholder’s equity
|
|
|
2,161
|
|
|
|
2,108
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholder’s equity
|
|
$
|
11,518
|
|
|
$
|
11,553
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-4
PHH Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
182
|
|
|
$
|
284
|
|
|
$
|
98
|
|
|
Adjustments to reconcile net income to net cash provided by
operating activities exclusive of management and mortgage
programs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-program related depreciation and amortization
|
|
|
71
|
|
|
|
62
|
|
|
|
61
|
|
|
|
Deferred income taxes
|
|
|
(187
|
)
|
|
|
228
|
|
|
|
(32
|
)
|
|
|
Net change in assets and liabilities, excluding the impact of
acquisitions and dispositions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
12
|
|
|
|
46
|
|
|
|
3
|
|
|
|
|
Income taxes
|
|
|
307
|
|
|
|
(132
|
)
|
|
|
2
|
|
|
|
|
Accounts payable and other current liabilities
|
|
|
31
|
|
|
|
17
|
|
|
|
(56
|
)
|
|
|
|
Other, net
|
|
|
13
|
|
|
|
(10
|
)
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities exclusive of
management and mortgage programs
|
|
|
429
|
|
|
|
495
|
|
|
|
137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management and mortgage programs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vehicle depreciation
|
|
|
1,158
|
|
|
|
1,089
|
|
|
|
1,069
|
|
|
|
Amortization and impairment of mortgage servicing rights
|
|
|
527
|
|
|
|
893
|
|
|
|
922
|
|
|
|
Net gain on mortgage servicing rights and related derivatives
|
|
|
(117
|
)
|
|
|
(163
|
)
|
|
|
(115
|
)
|
|
|
Origination of mortgage loans
|
|
|
(36,518
|
)
|
|
|
(62,880
|
)
|
|
|
(44,003
|
)
|
|
|
Proceeds on sale of and payments from mortgage loans held for
sale
|
|
|
37,045
|
|
|
|
64,371
|
|
|
|
43,459
|
|
|
|
Other
|
|
|
(15
|
)
|
|
|
37
|
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,080
|
|
|
|
3,347
|
|
|
|
1,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
2,509
|
|
|
|
3,842
|
|
|
|
1,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment additions
|
|
|
(51
|
)
|
|
|
(57
|
)
|
|
|
(57
|
)
|
|
Net assets acquired (net of cash acquired of $10, $2 and $8) and
acquisition-related payments
|
|
|
(38
|
)
|
|
|
(2
|
)
|
|
|
(36
|
)
|
|
Other, net
|
|
|
58
|
|
|
|
38
|
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities exclusive of management
and mortgage programs
|
|
|
(31
|
)
|
|
|
(21
|
)
|
|
|
(128
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Management and mortgage programs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in program cash
|
|
|
(175
|
)
|
|
|
(162
|
)
|
|
|
9
|
|
|
|
Investment in vehicles
|
|
|
(2,195
|
)
|
|
|
(5,197
|
)
|
|
|
(4,560
|
)
|
|
|
Payments received on investment vehicles
|
|
|
801
|
|
|
|
4,207
|
|
|
|
3,420
|
|
|
|
Equity advances on homes under management
|
|
|
(4,718
|
)
|
|
|
(5,699
|
)
|
|
|
(5,968
|
)
|
|
|
Repayment on advances on homes under management
|
|
|
4,702
|
|
|
|
5,635
|
|
|
|
6,028
|
|
|
|
Additions to mortgage servicing rights
|
|
|
(498
|
)
|
|
|
(1,008
|
)
|
|
|
(928
|
)
|
|
|
Proceeds from sales of mortgage servicing rights
|
|
|
-
|
|
|
|
10
|
|
|
|
16
|
|
|
|
Cash received on derivatives related to mortgage servicing
rights, net
|
|
|
142
|
|
|
|
295
|
|
|
|
370
|
|
|
|
Other, net
|
|
|
54
|
|
|
|
20
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,887
|
)
|
|
|
(1,899
|
)
|
|
|
(1,587
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(1,918
|
)
|
|
|
(1,920
|
)
|
|
|
(1,715
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contribution from Cendant
|
|
|
-
|
|
|
|
-
|
|
|
|
125
|
|
|
Payment of dividends to Cendant
|
|
|
(140
|
)
|
|
|
(140
|
)
|
|
|
-
|
|
|
Net intercompany funding from (to) parent
|
|
|
2
|
|
|
|
(68
|
)
|
|
|
(101
|
)
|
|
Other, net
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities exclusive
of management and mortgage programs
|
|
|
(143
|
)
|
|
|
(213
|
)
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management and mortgage programs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings
|
|
|
4,707
|
|
|
|
22,503
|
|
|
|
12,402
|
|
|
|
|
Principal payments on borrowings
|
|
|
(4,949
|
)
|
|
|
(23,400
|
)
|
|
|
(12,093
|
)
|
|
|
|
Net change in short-term borrowings
|
|
|
(37
|
)
|
|
|
(702
|
)
|
|
|
(114
|
)
|
|
|
|
Other, net
|
|
|
(8
|
)
|
|
|
(17
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(287
|
)
|
|
|
(1,616
|
)
|
|
|
187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(430
|
)
|
|
|
(1,829
|
)
|
|
|
204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of changes in exchange rates on cash and cash equivalents
|
|
|
3
|
|
|
|
(17
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
164
|
|
|
|
76
|
|
|
|
(102
|
)
|
|
Cash and cash equivalents, beginning of period
|
|
|
106
|
|
|
|
30
|
|
|
|
132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
270
|
|
|
$
|
106
|
|
|
$
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest payments
|
|
$
|
318
|
|
|
$
|
239
|
|
|
$
|
249
|
|
|
Income tax payments, net
|
|
$
|
13
|
|
|
$
|
87
|
|
|
$
|
93
|
|
See Notes to Consolidated Financial Statements.
F-5
PHH Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY
(In millions, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Stockholder’s
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Loss
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2002
|
|
|
1,000
|
|
|
$
|
-
|
|
|
$
|
800
|
|
|
$
|
983
|
|
|
$
|
(6
|
)
|
|
$
|
1,777
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
98
|
|
|
|
-
|
|
|
|
|
|
|
Currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
|
|
|
Unrealized losses on available-for-sale securities, net of tax
of ($7)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10
|
)
|
|
|
|
|
|
Unrealized gain on cash flow hedges, net of tax of $4
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
|
|
|
|
|
Minimum pension liability adjustment, net of tax of ($9)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(15
|
)
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
|
|
|
Non-cash dividend
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(35
|
)
|
|
|
-
|
|
|
|
(35
|
)
|
|
Capital contribution from Cendant
|
|
|
-
|
|
|
|
-
|
|
|
|
125
|
|
|
|
-
|
|
|
|
-
|
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
|
|
|
1,000
|
|
|
|
-
|
|
|
|
925
|
|
|
|
1,046
|
|
|
|
(20
|
)
|
|
|
1,951
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
284
|
|
|
|
-
|
|
|
|
|
|
|
Currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13
|
|
|
|
|
|
|
Unrealized gains on available-for-sale securities, net of tax of
($4)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8
|
)
|
|
|
|
|
|
Unrealized loss on cash flow hedges, net of tax of ($1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
287
|
|
|
Cash dividend
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(140
|
)
|
|
|
-
|
|
|
|
(140
|
)
|
|
Capital contribution from Cendant
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
1,000
|
|
|
|
-
|
|
|
|
935
|
|
|
|
1,190
|
|
|
|
(17
|
)
|
|
|
2,108
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9
|
|
|
|
|
|
|
Unrealized gains on available-for-sale securities, net of tax of
$4
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
|
|
|
Reclassification for realized holding gains on
available-for-sale securities, net of tax of $(2)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
|
|
|
Minimum pension liability adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
193
|
|
|
Cash dividend
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(140
|
)
|
|
|
-
|
|
|
|
(140
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
1,000
|
|
|
$
|
-
|
|
|
$
|
935
|
|
|
$
|
1,232
|
|
|
$
|
(6
|
)
|
|
$
|
2,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-6
PHH Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise noted, all amounts are in millions)
1. Basis of Presentation
|
|
|
|
|
As of December 31, 2004, PHH Corporation
(“PHH”) was a wholly-owned subsidiary of Cendant
Corporation (“Cendant”) that provided home buyers with
mortgages, facilitated employee relocations and provided vehicle
fleet management and fuel card services to commercial clients.
On January 31, 2005, PHH began operating as a separately
traded public company pursuant to a spin-off from Cendant. Prior
to the spin-off and subsequent to December 31, 2004, PHH
underwent an internal reorganization whereby it distributed its
former relocation and fuel card businesses to Cendant and
Cendant contributed its former appraisal business to PHH. The
accompanying Consolidated Financial Statements include the
accounts and transactions of PHH and its subsidiaries as of
December 31, 2004 (including its former relocation and fuel
card businesses, the operations of which were owned by PHH as of
December 31, 2004), as well as entities in which PHH
directly or indirectly had a controlling financial interest
(collectively, the “Company”) at December 31,
2004.
|
|
|
|
|
As the internal reorganization did not occur until after
December 31, 2004, the Consolidated Financial Statements do
not reflect the distributions of the Company’s former
relocation and fuel card business or Cendant’s contribution
of its appraisal business to the Company.
|
|
|
|
|
In presenting the Consolidated Financial Statements, management
makes 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. Certain
reclassifications have been made to prior year amounts to
conform to the current year presentation.
|
|
|
|
|
For more information regarding the Company’s consolidation
policy, refer to Note 2— Summary of Significant
Accounting Policies.
|
|
|
|
|
Management and Mortgage Programs.
The Company’s
Consolidated Financial Statements present separately the
financial data of the Company’s management and mortgage
programs. The assets under these programs are generally funded
through the issuance of debt that is collateralized by such
assets. Specifically assets under management and mortgage
programs are funded through either borrowings under asset-backed
funding arrangements or unsecured borrowings. Such borrowings
are classified as debt under management and mortgage programs.
The income generated by these assets is used, in part, to repay
the principal and interest associated with the debt. Cash
inflows and outflows relating to the generation or acquisition
of such assets and the principal debt repayment or financing of
such assets are classified as activities of the Company’s
management and mortgage programs. The Company believes it is
appropriate to segregate the financial data of its management
and mortgage programs because, ultimately, the source of
repayment of such debt is the realization of such assets.
|
2. Summary of Significant
Accounting Policies
Changes
in Accounting Policies During 2004
|
|
|
|
|
Repatriation of Foreign Earnings.
In December
2004, the Financial Accounting Standards Board
(“FASB”) issued FASB Staff Position
No. FAS 109-2, “Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within
the American Jobs Creation Act of 2004”
(“FSP No. 109-2”). The American Jobs
Creation Act of 2004 (the “Act”), which became
effective October 22, 2004, provides a one-time dividends
received deduction on the repatriation of certain foreign
earnings to a U.S. taxpayer, provided certain criteria are
met. The Company may apply the provision of the Act to
qualifying earnings repatriations through December 31,
2005. FSP No. 109-2 provides accounting and disclosure
guidance for the repatriation provision. As permitted by
FSP No. 109-2, the Company will not complete its
evaluation of the repatriation provisions until a reasonable
duration following the publication of clarifying language on key
elements of the Act by Congress or the Treasury Department.
Accordingly, the Company has not recorded any income tax expense
or benefit for amounts that may be repatriated under the
|
F-7
|
|
|
|
|
Act. The range of unremitted earnings the Company is considering
for possible repatriation under the Act is $0 to
$55 million, which would result in additional estimated
income tax expense of $0 to $12 million. Currently, the
Company does not record deferred tax liabilities on unremitted
earnings of its foreign subsidiaries, as such subsidiaries
invest such undistributed earnings indefinitely.
|
|
|
|
|
Loan Commitments.
On March 9, 2004, the
United States Securities and Exchange Commission
(“SEC”) issued Staff Accounting
Bulletin No. 105— Application of Accounting
Principles to Loan Commitments (“SAB 105”).
SAB 105 summarizes the views of the SEC staff
regarding the application of generally accepted accounting
principles to loan commitments accounted for as derivative
instruments. The SEC staff believes that in recognizing a
loan commitment, entities should not consider expected future
cash flows related to the associated servicing of the loan until
the servicing asset has been contractually separated from the
underlying loan by sale or securitization of the loan with the
servicing retained. The provisions of SAB 105 are
applicable to all loan commitments accounted for as derivatives
and entered into subsequent to March 31, 2004. The adoption
of SAB 105 did not have a material impact on the
Company’s consolidated results of operations, financial
position or cash flows, as the Company’s preexisting
accounting treatment for such loan commitments was consistent
with the provisions of SAB 105.
|
Changes
in Accounting Policies During 2003
|
|
|
|
|
Consolidation Policy.
On January 17, 2003,
the Financial Accounting Standards Board (“FASB”)
issued FASB Interpretation No. 46, “Consolidation of
Variable Interest Entities” (“FIN 46”). Such
Interpretation addresses the consolidation of variable interest
entities (“VIEs”), including special purpose entities
(“SPEs”) that are not controlled through voting
interests or in which the equity investors do not bear the
residual economic risks and rewards. The provisions of
FIN 46 were effective immediately for transactions entered
into by the Company subsequent to January 31, 2003 and
became effective for all other transactions as of July 1,
2003. However, in October 2003, the FASB permitted companies to
defer the July 1, 2003 effective date to December 31,
2003, in whole or in part. On December 24, 2003, the FASB
issued a complete replacement of FIN 46
(“FIN 46R”), which clarified certain complexities
of FIN 46. The Company adopted FIN 46R in its entirety
as of December 31, 2003 even though adoption for non-SPEs
was not required until March 31, 2004.
|
|
|
|
|
|
In connection with the implementation of FIN 46, the
Company consolidated Bishop’s Gate Residential Mortgage
Trust (“Bishop’s Gate”) effective July 1,
2003 through the application of the prospective transition
method. The consolidation of Bishop’s Gate did not result
in the recognition of a cumulative effect of accounting change.
See Note 10— Debt Under Management and Mortgage
Programs and Borrowing Arrangements for more complete
information regarding Bishop’s Gate.
|
|
|
|
|
New Policy.
In connection with FIN 46R, when
evaluating an entity for consolidation, the Company first
determines whether an entity is within the scope of FIN 46R
and if it is deemed to be a VIE. If the entity is considered to
be a VIE, the Company determines whether it would be considered
the entity’s primary beneficiary. The Company consolidates
those VIEs for which it has determined that it is the primary
beneficiary. Generally, the Company will consolidate an entity
not deemed either a VIE or qualifying special purpose entity
(“QSPE”) upon a determination that its ownership,
direct or indirect, exceeds fifty percent of the outstanding
voting shares of an entity and/or that it has the ability to
control the financial or operating policies through its voting
rights, board representation or other similar rights. For
entities where the Company does not have a controlling interest
(financial or operating), the investments in such entities are
classified as available-for-sale debt securities or accounted
for using the equity or cost method, as appropriate. The Company
applies the equity method of accounting when it has the ability
to exercise significant influence over operating and financial
policies of an investee in accordance with APB Opinion
No. 18, “The Equity Method of Accounting for
Investments in Common Stock.”
|
|
|
|
|
Previous Policy.
Prior to the adoption of FIN 46 and
FIN 46R, the Company did not consolidate SPE and SPE-type
entities unless the Company retained both control of the assets
transferred and the risks and rewards of those assets.
Additionally, non-SPE-type entities were only consolidated if
the Company’s ownership exceeded fifty percent of the
outstanding voting shares of an entity and/or if the Company had
the
|
F-8
|
|
|
|
|
ability to control the financial or operating policies of an
entity through its voting rights, board representation or other
similar rights.
|
|
|
|
|
Derivative Instruments and Hedging Activities.
On
July 1, 2003, the Company adopted SFAS No. 149,
“Amendment of Statement 133 on Derivative Instruments
and Hedging Activities.” Such standard amends and clarifies
the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133,
“Accounting for Derivative Instruments and Hedging
Activities.” The impact of adopting this standard was not
material to the Company’s results of operations or
financial position.
|
|
|
|
|
Stock-Based Compensation.
As of December 31,
2004, all employee stock awards were granted by Cendant. Prior
to January 1, 2003, Cendant measured its stock-based
compensation using the intrinsic value approach under Accounting
Principles Board (“APB”) Opinion No. 25, as
permitted by SFAS No. 123, “Accounting for
Stock-Based Compensation.” Accordingly, Cendant did not
recognize compensation expense upon the issuance of its stock
options to employees because the option terms were fixed and the
exercise price equaled the market price of the underlying common
stock on the date of grant. Therefore, the Company was not
allocated compensation expense upon Cendant’s issuance of
common stock options to the Company’s employees. The
Company complied with the provisions of SFAS No. 123
by providing pro forma disclosures of net income giving
consideration to the fair value method provisions of
SFAS No. 123.
|
|
|
|
|
On January 1, 2003, Cendant adopted the fair value method
of accounting for stock-based compensation provisions of
SFAS No. 123, which is considered by the FASB to be
the preferable accounting method for stock-based employee
compensation. Cendant also adopted SFAS No. 148,
“Accounting for Stock-Based Compensation— Transition
and Disclosure,” in its entirety on January 1, 2003,
which amended SFAS No. 123 to provide alternative
methods of transition for a voluntary change to the fair value
based method of accounting provisions. As a result, Cendant now
expenses all employee stock awards over their vesting periods
based upon the fair value of the award on the date of grant. As
Cendant elected to use the prospective transition method,
Cendant allocated expense to the Company for only employee stock
awards that were granted subsequent to December 31, 2002.
|
|
|
|
|
The following table illustrates the effect on net income as if
the fair value based method had been applied to all employee
stock awards granted by Cendant to the Company’s employees
for all periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported net income
|
|
$
|
182
|
|
|
$
|
284
|
|
|
$
|
98
|
|
|
Add back: Stock-based employee compensation expense
included in reported net income, net of tax
(a)
|
|
|
4
|
|
|
|
2
|
|
|
|
-
|
|
|
Less: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of tax
(b)
|
|
|
(4
|
)
|
|
|
(6
|
)
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
182
|
|
|
$
|
280
|
|
|
$
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
For a detailed account of compensation expense recorded within
the Consolidated Statements of Income for stock awards granted
subsequent to December 31, 2002, see Note 14—
Stock-Based Compensation.
|
|
|
|
|
|
|
(b)
|
The 2002 amounts reflect the August 27, 2002 acceleration
of the vesting schedules for certain options previously granted
(see Note 14— Stock-Based Compensation for a more
detailed account). Pro forma compensation expense reflected for
grants awarded prior to January 1, 2003 is not indicative
of future compensation expense that would be recorded by the
Company, as future expense will vary based upon factors such as
the type of award granted and the then-current fair market value
of such award.
|
|
|
|
|
|
Costs Associated with Exit or Disposal Activities.
On January 1, 2003, the Company adopted
SFAS No. 146, “Accounting for Costs Associated
with Exit or Disposal Activities.” Such standard nullifies
EITF Issue No. 94-3, “Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a
Restructuring).” Under SFAS No. 146, a liability
related to an exit or disposal activity (including
restructurings) initiated after December 31, 2002 is not
|
F-9
|
|
|
|
|
recognized until such liability has actually been incurred
whereas under EITF Issue No. 94-3 a liability was
recognized at the date of commitment to an exit or disposal
plan. The impact of adopting this standard was not material to
the Company’s results of operations or financial position.
|
|
|
|
|
Guarantees.
On January 1, 2003, the Company
adopted FASB Interpretation No. 45, “Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others,” in its
entirety. Such Interpretation elaborates on the disclosures to
be made by a guarantor about its obligations under certain
guarantees issued. It also clarifies that a guarantor is
required to recognize, at the inception of certain guarantees
issued or modified after December 31, 2002, a liability for
the fair value of the obligation undertaken in issuing the
guarantee. The impact of adopting this Interpretation was not
material to the Company’s results of operations or
financial position.
|
Revenue
Recognition
Mortgage
Services
|
|
|
|
|
Mortgage services include the origination (funding either a
purchase or refinancing), sale and servicing of residential
mortgage loans. Mortgage loans are originated through a variety
of marketing techniques, including relationships with
corporations, affinity groups, financial institutions and real
estate brokerage firms. The Company may also purchase mortgage
loans originated by third parties. Upon the closing of a
residential mortgage loan originated or purchased by the
Company, the mortgage loan is typically warehoused for a period
up to 60 days and then sold into the secondary market
(which is customary in the mortgage industry). Mortgage loans
held for sale represent those mortgage loans originated or
purchased by the Company and pending sale to permanent
investors. The Company primarily sells its mortgage loans to
government-sponsored entities. Upon sale, the servicing rights
and obligations of the underlying mortgage loans are generally
retained by the Company. A mortgage servicing right
(“MSR”) is the right to receive a portion of the
interest coupon and fees collected from the mortgagor for
performing specified mortgage servicing activities, which
consist of collecting loan payments, remitting principal and
interest payments to investors, holding escrow funds for payment
of mortgage-related expenses such as taxes and insurance, and
otherwise administering the Company’s mortgage loan
servicing portfolio.
|
|
|
|
|
Loan origination and commitment fees paid by the borrower in
connection with the origination of mortgage loans and certain
direct loan origination costs are deferred until such loans are
sold to investors. Mortgage loans pending sale are recorded on
the Company’s Consolidated Balance Sheets at the lower of
cost or market value on an aggregate basis. Sales of mortgage
loans are generally recorded on the date a loan is delivered to
an investor. Gains or losses on sales of mortgage loans are
recognized based upon the difference between the selling price
and the allocated carrying value of the related mortgage loans
sold. The capitalization of the MSRs also occurs upon sale of
the underlying mortgages into the secondary market. Upon initial
recording of the MSR asset, the total cost of loans
originated or acquired is allocated between the MSR asset and
the mortgage loan without the servicing rights based on relative
fair values. Servicing revenues comprise several components,
including recurring servicing fees, ancillary income and the
amortization of the MSR asset. Recurring servicing fees are
recognized upon receipt of the coupon payment from the borrower
and recorded net of guaranty fees. Costs associated with loan
servicing are charged to expense as incurred. The MSR asset is
amortized over the estimated life of the related loan portfolio
in proportion to projected net servicing revenues. Such
amortization is recorded as a reduction of net servicing revenue
in the Consolidated Statements of Income.
|
|
|
|
|
The MSR asset is routinely evaluated for impairment, but at
least on a quarterly basis. For purposes of performing its
impairment evaluation, the Company stratifies its portfolio on
the basis of product type and interest rates of the underlying
mortgage loans. The Company measures impairment for each stratum
by comparing estimated fair value to the carrying amount. Fair
value is estimated based upon an internal valuation that
reflects management’s estimates of expected future cash
flows considering prepayment estimates (developed using a third
party model described below), the Company’s historical
prepayment rates, portfolio characteristics, interest rates
based on interest rate yield curves, implied volatility and
other economic factors. The Company uses a third party model to
forecast prepayment rates used in the development of its
expected future cash flows. The prepayment forecast is based on
historical observations
|
F-10
|
|
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|
|
of prepayment behavior in similar periods comparing current
mortgage interest rates to the mortgage interest rates in the
Company’s servicing portfolio and incorporates loan
characteristics (e.g., loan type and note rate) and factors
such as recent prepayment experience, previous refinance
opportunities and estimated levels of home equity. Temporary
impairment is recorded through a valuation allowance in the
period of occurrence as a reduction of net revenue in the
Consolidated Statements of Income. The Company periodically
evaluates its MSR asset to determine if the carrying value
before the application of the valuation allowance is
recoverable. When the Company determines that a portion of the
asset is not recoverable, the asset and the previously
designated valuation allowance are reduced to reflect the
write-down.
|
Relocation
Services
|
|
|
|
|
The Company provides relocation services to corporate and
government clients for the transfer of their employees. Such
services include the purchasing and/or selling of a
transferee’s home, providing home equity advances to
transferees (generally guaranteed by the corporate client),
expense processing, arranging household goods moving services
and other related services. The Company earns revenues from fees
charged to corporate and government clients for the performance
of these services and recognizes such revenue as services are
provided. Additionally, the Company earns interest income on the
funds it advances to the transferring employee, which is
recorded ratably as earned up until the point of repayment by
the client.
|
|
|
|
|
Based on client agreements, the Company negotiates for the
ultimate sale of the transferring employee’s home. The gain
or loss on sale is generally borne by the corporate client.
However, in limited circumstances, the Company will assume the
risk of loss on the sale of the transferring employee’s
home. The fees earned in these transactions are recorded on a
gross basis with associated costs recorded within expenses.
These fees are recognized as services are provided.
|
|
|
|
|
The Company also earns revenue from referral services provided
to real estate brokers and other third-party service providers.
The Company recognizes the referral fees from real estate
brokers at the time its obligations are complete. For services
where the Company pays a third-party provider on behalf of its
clients, the Company earns a referral fee or commission, which
is recognized at the time of completion of services.
|
Fleet
Leasing Services
|
|
|
|
|
The Company provides fleet management services to corporate
clients and government agencies. These services include
management and leasing of vehicles and other fee-based services
for clients’ vehicle fleets. The Company leases vehicles
primarily to corporate fleet users under open-end operating and
direct financing lease arrangements where the customer bears
substantially all of the vehicle’s residual value risk. In
limited circumstances, the Company leases vehicles under
closed-end leases where the Company bears all of the
vehicle’s residual value risk. The lease term under the
open-end lease agreement provides for a minimum lease term of
twelve months and after the minimum term, the lease may be
continued at the lessee’s election for successive monthly
renewals. For operating leases, lease revenues, which contain a
depreciation component, an interest component and a management
fee component, are recognized based on the lease term of the
vehicle, which encompasses the minimum lease term and the
month-to-month renewals. For direct financing leases, lease
revenue contains an interest component, which is recognized
using an interest method based on the lease term of the vehicle,
which encompasses the minimum lease term and the month-to-month
renewals. Amounts charged to the lessees for interest are
determined in accordance with the pricing supplement to the
respective lease agreement and are generally calculated on a
floating rate basis and can vary month to month in accordance
with changes in the floating rate index. Amounts charged to
lessees for interest may also be based on a fixed rate that
would remain constant for the life of the lease. Amounts charged
to the lessees for depreciation are typically based on the
straight-line depreciation of the vehicle over its expected
lease term. Management fees are recognized on a straight-line
basis over the life of the lease. Revenue for other services is
recognized when such services are provided to the lessee.
|
|
|
|
|
The Company also sells certain of its leases to a syndicate of
third party banks and individual financial institutions. When
the Company sells such portfolios, it is selling the underlying
vehicles and assigning any
|
F-11
|
|
|
|
|
rights to the leases, including future leasing revenues, to the
syndicating institution. Upon transfer of title and assignment
of rights associated with the lease, the Company records the
proceeds from the sale as revenue and recognizes an expense for
the unamortized cost of the vehicles sold. Under certain
syndication agreements, the Company retains some residual risk
in connection with the fair value of the vehicle at lease
termination. During 2004, the Company recorded $150 million
of lease syndication revenue within its Consolidated Statement
of Income.
|
Fuel
Card Services
|
|
|
|
|
The Company provides payment processing and information
management services to the vehicle fleet industry. The Company
earns revenue by processing payments to major oil companies,
fuel retailers and vehicle maintenance providers on behalf of
the Company’s customers and the customers of the
Company’s strategic relationships. The Company enters into
agreements with the major oil companies, fuel retailers and
vehicle maintenance providers for the acceptance of purchases of
products and services by the customers serviced by the Company,
and the terms and conditions of the fees assessed by the Company
for processing these payments. The fee charged to the major oil
company, fuel retailer or vehicle maintenance provider is
generally based upon a percentage of the amount purchased by the
customers serviced by the Company; however, it may be based on a
fixed amount charged per transaction or a combination of both.
The processing fee is deducted from the Company’s payment
to the major oil company, fuel retailer or vehicle maintenance
provider or for the amount purchased by the Company’s
customer or the customer of the Company’s strategic
relationships and recorded as payment processing revenue at the
time the transaction is captured. Revenue for other services is
generally recognized as the Company fulfills its contractual
service obligations.
|
Vehicle
Depreciation and Interest, Net
|
|
|
|
|
Vehicles are stated at cost, net of accumulated depreciation.
The initial cost of the vehicles is net of incentives and
allowances from vehicle manufacturers. Leased vehicles are
principally depreciated on a straight-line basis over a term
that generally ranges from 3 to 6 years. Gains or losses on
the sale of vehicles under closed-end leases are reflected as an
adjustment to depreciation expense.
|
Advertising
Expenses
|
|
|
|
|
Advertising costs are generally expensed in the period incurred.
Advertising expenses, primarily recorded within operating
expenses on the Company’s Consolidated Statements of
Income, were $16 million, $14 million and
$16 million in 2004, 2003 and 2002, respectively.
|
Income
Taxes
|
|
|
|
|
The Company’s operations have been included in the
consolidated federal tax return of Cendant and will continue to
be included up to the date of the spin-off. In addition, the
Company has filed consolidated and combined state income tax
returns with Cendant in jurisdictions where required and will
continue to file with Cendant up to the date of the spin-off.
The provision for income taxes is computed as if the Company
filed its federal and state income tax returns on a stand-alone
basis and, therefore, determined using the asset and liability
method, under which deferred tax assets and liabilities are
calculated based upon the temporary differences between the
financial statement and income tax bases of assets and
liabilities using currently enacted tax rates. The
Company’s deferred tax assets are recorded net of a
valuation allowance when, based on the weight of available
evidence, it is more likely than not that some portion or all of
the recorded deferred tax assets will not be realized in future
periods. Decreases to the valuation allowance are recorded
concurrently as reductions to the Company’s provision for
income taxes while increases to the valuation allowance result
in additional provision. However, if the valuation allowance is
adjusted in connection with an acquisition, such adjustment is
recorded concurrently through goodwill rather than the provision
for income taxes. The realization of the Company’s deferred
tax assets, net of the valuation allowance, is primarily
dependent on estimated future taxable income. A change in the
Company’s estimate of future taxable income may require an
addition or reduction to the valuation allowance.
|
F-12
Cash
and Cash Equivalents
|
|
|
|
|
The Company considers highly liquid investments purchased with
an original maturity of three months or less to be cash
equivalents.
|
Restricted
Cash
|
|
|
|
|
The Company is required to set aside cash primarily in relation
to agreements entered into by its mortgage services business.
Restricted cash amounts primarily relate to (i) fees
collected and held for pending mortgage closings and
(ii) accounts held for the capital fund requirements of and
potential claims related to mortgage reinsurance agreements.
|
Derivative
Instruments
|
|
|
|
|
The Company uses derivative instruments as part of its overall
strategy to manage its exposure to market risks primarily
associated with fluctuations in interest rates. As a matter of
policy, the Company does not use derivatives for trading or
speculative purposes.
|
|
|
|
|
All derivatives are recorded at fair value either as assets or
liabilities. Changes in fair value of derivatives not designated
as hedging instruments and of derivatives designated as fair
value hedging instruments are recognized currently in earnings
and included either as a component of net revenues or net
non-program related interest expense, based upon the nature of
the hedged item, in the Consolidated Statements of Income.
Changes in fair value of the hedged item in a fair value hedge
are recorded as an adjustment to the carrying amount of the
hedged item and recognized currently in earnings as a component
of net revenues or net non-program interest expense, based upon
the nature of the hedged item, in the Consolidated Statements of
Income. The effective portion of changes in fair value of
derivatives designated as cash flow hedging instruments is
recorded as a component of other comprehensive income. The
ineffective portion is reported currently in earnings as a
component of net revenues or net non-program related interest
expense, based upon the nature of the hedged item. Amounts
included in other comprehensive income are reclassified into
earnings in the same period during which the hedged item affects
earnings.
|
|
|
|
|
The Company is also party to certain contracts containing
embedded derivatives. As required by SFAS No. 133,
“Accounting for Derivative Instruments and Hedging
Activities,” certain embedded derivatives have been
bifurcated from their host contracts and are recorded at fair
value in the Consolidated Balance Sheets. The total fair value
of the Company’s embedded derivatives and changes in fair
value during 2004, 2003 and 2002 were not material to the
Company’s results of operations or financial position.
|
Investments
|
|
|
|
|
Management determines the appropriate classification of its
investments in debt and equity securities at the time of
purchase and reevaluates such determination at each balance
sheet date. Common stock investments in affiliates over which
the Company has the ability to exercise significant influence
but not a controlling interest are carried on the equity method
of accounting. Available-for-sale securities are carried at
current fair value with unrealized gains or losses reported net
of taxes as a separate component of stockholder’s equity.
Trading securities are recorded at fair value with realized and
unrealized gains and losses reported currently in earnings.
|
|
|
|
|
All of the Company’s investments are included in other
assets on the Company’s Consolidated Balance Sheets (with
the exception of retained interests in securitizations, which
are included in other assets under management and mortgage
programs within the Company’s Consolidated Balance Sheets).
All realized gains and losses are recorded within net revenues
in the Consolidated Statements of Income. Declines in market
value that are judged to be “other than temporary” are
recorded as a component of impairment of investments in the
Consolidated Statements of Income.
|
F-13
|
|
|
|
|
The following table summarizes the Company’s investment
portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
Retained Interests from Securitizations
|
|
$
|
47
|
|
|
$
|
102
|
|
|
Other
|
|
|
20
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
67
|
|
|
$
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The retained interests from the Company’s securitizations
of residential mortgage loans, with the exception of mortgage
servicing rights (the accounting for which is described above
under “Revenue Recognition— Mortgage”), are
classified as available-for-sale mortgage-backed securities.
Gains or losses relating to the assets securitized are allocated
between such assets and the retained interests based on their
relative fair values on the date of sale. The Company estimates
fair value of retained interests based upon the present value of
expected future cash flows, which is subject to prepayment
risks, expected credit losses and interest rate risks of the
sold financial assets. See Note 11— Securitizations
for more information regarding these retained interests.
|
Property
and Equipment
|
|
|
|
|
Property and equipment (including leasehold improvements) are
recorded at cost, net of accumulated depreciation and
amortization. Depreciation, recorded as a component of
non-program related depreciation and amortization on the
Consolidated Statements of Income, is computed utilizing the
straight-line method over the estimated useful lives of the
related assets. Amortization of leasehold improvements, also
recorded as a component of non-program related depreciation and
amortization, is computed utilizing the straight-line method
over the estimated benefit period of the related assets or the
lease term, if shorter. Useful lives are generally 30 years
for buildings and range from 3 to 15 years for leasehold
improvements, from 3 to 8 years for capitalized software
and from 3 to 7 years for furniture, fixtures and equipment.
|
Goodwill
and Identifiable Intangible Assets
|
|
|
|
|
In connection with SFAS No. 142, “Goodwill and
Other Intangible Assets,” the Company is required to assess
goodwill and indefinite-lived intangible assets for impairment
annually, or more frequently if circumstances indicate
impairment may have occurred. The Company assesses goodwill for
such impairment by comparing the carrying value of its reporting
units to their fair values. The Company’s reporting units
are one level below the Company’s reportable operating
segments. The Company determines the fair value of its reporting
units utilizing discounted cash flows and incorporates
assumptions that it believes marketplace participants would
utilize. When available and as appropriate, the Company uses
comparative market multiples and other factors to corroborate
the discounted cash flow results. Indefinite-lived intangible
assets are tested for impairment and written down to fair value,
as required by SFAS No. 142.
|
|
|
|
|
The Company performed its initial goodwill impairment assessment
on January 1, 2002 in connection with the adoption of
SFAS No. 142 and determined that the carrying amounts
of its reporting units did not exceed their respective fair
values. Accordingly, the initial implementation of this standard
on January 1, 2002 did not impact the Company’s
results of operations during 2002. Subsequent to the initial
assessment, the Company performed its review annually, or more
frequently if circumstances indicated impairment may have
occurred, and during 2004, 2003 and 2002, determined that no
such impairment had occurred. The Company will be required to
perform a goodwill impairment assessment in first quarter 2005
in connection with the spin-off. The Company currently estimates
that, based upon current available information, this assessment
will yield a non-cash impairment charge in the range of
$225 million to $250 million to be recorded in first
quarter 2005.
|
Impairment
or Disposal of Long-Lived Assets
|
|
|
|
|
As required by SFAS No. 144, if circumstances indicate
an impairment may have occurred, the Company evaluates the
recoverability of its long-lived assets including amortizing
intangible assets, by comparing the
|
F-14
|
|
|
|
|
respective carrying values of the assets to the current and
expected future cash flows, on an undiscounted basis, to be
generated from such assets. Property and equipment is evaluated
separately within each business.
|
Program
Cash
|
|
|
|
|
Program cash primarily relates to amounts specifically
designated to purchase assets under management and mortgage
programs and/or to repay the related debt. Program cash also
includes amounts set aside for the collateralization
requirements of outstanding debt for the Company’s fleet
management business.
|
Recently
Issued Accounting Pronouncements
|
|
|
|
|
Exchanges of Nonmonetary Assets.
In December 2004,
the FASB issued SFAS No. 153, “Exchanges of
Nonmonetary Assets, an Amendment of APB Opinion No. 29,
Accounting for Nonmonetary Transactions”.
SFAS No. 153 addresses the measurement of exchanges of
nonmonetary assets and requires that such exchanges be measured
at fair value, with limited exceptions. SFAS No. 153
amends APB Opinion No. 30 by eliminating the exception that
required nonmonetary exchanges of similar productive assets be
recorded on a carryover basis. The provisions of
SFAS No. 153 are effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after
June 15, 2005. The Company will adopt the provisions of
SFAS No. 153, as required.
|
|
|
|
|
Stock-Based Compensation.
In December 2004, the
FASB issued SFAS No. 123R, “Share Based
Payment,” which eliminates the alternative to measure
stock-based compensation awards using the intrinsic value
approach permitted by APB No. 25 and by
SFAS No. 123. The Company is required to adopt the
provisions of SFAS No. 123R on July 1, 2005. As
previously discussed, on January 1, 2003, Cendant adopted
the fair value method of accounting for stock-based compensation
provisions of SFAS No. 123 and the transitional
provisions of SFAS No. 148. As a result, Cendant has
been allocating stock-based compensation expense to the Company
since January 1, 2003 for employee stock awards that were
granted or modified subsequent to December 31, 2002.
Cendant’s current practice with respect to forfeitures is
to allocate the related benefit upon forfeiture of the award.
Upon adoption of SFAS No. 123R, the Company will be
required to recognize compensation expense net of estimated
forfeitures upon the issuance of the award. Although the Company
has not yet completed its assessment of adopting SFAS 123R,
it does not believe that such adoption will significantly affect
its earnings, financial position or cash flows.
|
|
|
|
|
|
Assets acquired and liabilities assumed in business combinations
were recorded on the Company’s Consolidated Balance Sheets
as of the respective acquisition dates based upon their
estimated fair values at such dates. The results of operations
of businesses acquired by the Company have been included in the
Company’s Consolidated Statements of Income since their
respective dates of acquisition. The excess of the purchase
price over the estimated fair values of the underlying assets
acquired and liabilities assumed was allocated to goodwill. In
certain circumstances, the allocations of the excess purchase
price are based upon preliminary estimates and assumptions.
Accordingly, the allocations are subject to revision when the
Company receives final information, including appraisals and
other analyses. Revisions to the fair values, which may be
significant, will be recorded by the Company as further
adjustments to the purchase price allocations. The Company is
also in the process of integrating the operations of all its
acquired businesses and expects to incur costs relating to such
integrations. These costs may result from integrating operating
systems, relocating employees, closing facilities, reducing
duplicative efforts and exiting and consolidating other
activities. These costs will be recorded on the Company’s
Consolidated Balance Sheets as adjustments to the purchase price
or on the Company’s Consolidated Statements of Income as
expenses, as appropriate.
|
|
|
|
|
First Fleet Corporation.
On February 27, 2004, the
Company acquired First Fleet Corporation (“First
Fleet”), a national provider of fleet management services
to companies that maintain private truck fleets, for
approximately $26 million, including $4 million of
contingent consideration payable in first quarter 2005 and net
of cash acquired of $10 million. This acquisition resulted
in goodwill (based on the preliminary allocation of the purchase
price) of $26 million, none of which is expected to be
deductible for tax purposes. Such goodwill was assigned to the
Company’s Fleet Management Services segment. Management
believes
|
F-15
|
|
|
|
|
this acquisition enhances the Company’s position as a
leading provider of leasing and services to truck fleets.
|
|
|
|
|
Other.
During 2004, the Company completed two
acquisitions for $16 million in cash, which resulted in
goodwill (based on the preliminary allocation of the purchase
price) of $14 million, of which $5 million and
$9 million was assigned to the Company’s Mortgage
Services segment and Relocation Services segment, respectively.
During 2003 and 2002, the Company completed certain acquisitions
for aggregate consideration of $2 million and
$43 million, respectively, in cash. The goodwill resulting
from the acquisitions completed in 2003 aggregated
$2 million, all of which was assigned to the Company’s
Mortgage Services segment. The goodwill resulting from
acquisitions completed in 2002 aggregated $29 million, of
which $23 million was assigned to the Company’s
Mortgage Services segment and $6 million was assigned to
the Company’s Fleet Management Services segment.
|
Intangible assets consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2004
|
|
|
As of December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
Net
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer lists
(*)
|
|
$
|
46
|
|
|
$
|
9
|
|
|
$
|
37
|
|
|
$
|
43
|
|
|
$
|
6
|
|
|
$
|
37
|
|
|
Other
|
|
|
6
|
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
52
|
|
|
$
|
12
|
|
|
$
|
40
|
|
|
$
|
46
|
|
|
$
|
9
|
|
|
$
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
700
|
|
|
|
|
|
|
|
|
|
|
$
|
657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
19
|
|
|
|
|
|
|
|
|
|
|
$
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
|
Generally amortized over a period of 20 years.
|
The changes in the carrying amount of goodwill are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
Foreign
|
|
|
|
|
|
|
Balance at
|
|
|
Acquired
|
|
|
Exchange
|
|
|
Balance at
|
|
|
|
|
January 1,
|
|
|
during
|
|
|
and
|
|
|
December 31,
|
|
|
|
|
2004
|
|
|
2004
|
|
|
Other
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relocation Services
|
|
$
|
41
|
|
|
$
|
9
|
(a)
|
|
$
|
3
|
|
|
$
|
53
|
|
|
Mortgage Services
|
|
|
59
|
|
|
|
5
|
(b)
|
|
|
-
|
|
|
|
64
|
|
|
Fleet Management Services
|
|
|
557
|
|
|
|
26
|
(c)
|
|
|
-
|
|
|
|
583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company
|
|
$
|
657
|
|
|
$
|
40
|
|
|
$
|
3
|
|
|
$
|
700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Relates
to the acquisition of the remaining minority interest in an
investment (December 2004).
|
|
(b)
|
|
Relates to the acquisition of the mortgage operations of a real
estate brokerage firm by NRT Incorporated (“NRT”) (May
2004). See Note 18— Related Party Transactions.
|
|
(c)
|
|
Relates to the acquisition of First Fleet.
|
F-16
|
|
|
|
|
Amortization expense included within non-program related
depreciation and amortization relating to all intangible assets
excluding mortgage servicing rights (see Note 5—
Mortgage Activities) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer lists
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
Other
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3
|
|
|
$
|
2
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on the Company’s amortizable intangible assets as of
December 31, 2004 (excluding mortgage servicing rights),
the Company expects related amortization expense for the five
succeeding fiscal years to approximate $3 million each year.
|
|
|
|
|
|
The activity in the Company’s residential mortgage loan
servicing portfolio consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1
|
|
$
|
136,427
|
|
|
$
|
114,079
|
|
|
$
|
97,205
|
|
|
Additions
|
|
|
34,539
|
|
|
|
63,870
|
|
|
|
47,045
|
|
|
Payoffs/curtailments
|
|
|
(32,200
|
)
|
|
|
(54,079
|
)
|
|
|
(35,514
|
)
|
|
Purchases, net
|
|
|
4,290
|
|
|
|
12,557
|
|
|
|
5,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
(*)
|
|
$
|
143,056
|
|
|
$
|
136,427
|
|
|
$
|
114,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
|
Does not include approximately $2.7 billion,
$2.2 billion and $1.8 billion of home equity mortgages
serviced by the Company as of December 31, 2004, 2003 and
2002, respectively. The weighted average note rate on all the
underlying mortgages within this servicing portfolio was 5.4%,
5.4% and 6.2% as of December 31, 2004, 2003 and 2002,
respectively.
|
|
|
|
|
|
Approximately $6.5 billion (approximately 5%) of loans
within this servicing portfolio as of December 31, 2004
were sold with recourse. The majority of the loans sold with
recourse (approximately $5.9 billion of the
$6.5 billion) represent sales under a program where the
Company retains the credit risk for a limited period of time and
only for a specific default event. The retained credit risk
represents the unpaid principal balance of the mortgage loans.
For these loans, the Company records an allowance for estimated
losses, which is determined based upon the Company’s
history of actual loss experience under the program. Such
allowance and the related activity is not significant to the
Company’s results of operations or financial position.
|
F-17
|
|
|
|
|
The activity in the Company’s capitalized MSR asset
consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1
|
|
$
|
2,015
|
|
|
$
|
1,883
|
|
|
$
|
2,081
|
|
|
Additions, net
|
|
|
498
|
|
|
|
1,008
|
|
|
|
928
|
|
|
Changes in fair value
|
|
|
-
|
|
|
|
168
|
|
|
|
(540
|
)
|
|
Amortization
|
|
|
(320
|
)
|
|
|
(700
|
)
|
|
|
(468
|
)
|
|
Sales
|
|
|
(5
|
)
|
|
|
(29
|
)
|
|
|
(26
|
)
|
|
Permanent impairment
|
|
|
(11
|
)
|
|
|
(315
|
)
|
|
|
(92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
|
|
|
2,177
|
|
|
|
2,015
|
|
|
|
1,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1,
|
|
|
(374
|
)
|
|
|
(503
|
)
|
|
|
(144
|
)
|
|
Additions
|
|
|
(207
|
)
(a)
|
|
|
(193
|
)
(b)
|
|
|
(454
|
)
(c)
|
|
Reductions
|
|
|
1
|
|
|
|
7
|
|
|
|
3
|
|
|
Permanent impairment
|
|
|
11
|
|
|
|
315
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
|
|
|
(569
|
)
|
|
|
(374
|
)
|
|
|
(503
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Servicing Rights, net
|
|
$
|
1,608
|
|
|
$
|
1,641
|
|
|
$
|
1,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Represents changes in estimates of interest rates and borrower
prepayment behavior, the after tax amount of which is
$123 million.
|
|
|
|
|
|
|
(b)
|
Represents changes in estimates of interest rates and borrower
prepayment behavior, the after tax amount of which was
$115 million.
|
|
|
|
|
|
|
(c)
|
Represents changes in estimates of interest rates and borrower
prepayment behavior, the after tax amount of which was
$290 million. Approximately $275 million
($175 million, after tax) of this amount resulted from
reductions in interest rates and an acceleration in loan
prepayments, as well as an update to the Company’s loan
prepayment model, all of which occurred during third quarter
2002.
|
|
|
|
|
|
The MSR asset is subject to substantial interest rate risk as
the mortgage notes underlying the asset permit the borrowers to
prepay the loans. Therefore, the value of the MSR asset tends to
diminish in periods of declining interest rates (as prepayments
increase) and increase in periods of rising interest rates (as
prepayments decrease). The Company primarily uses a combination
of derivative instruments to offset expected changes in fair
value of its MSR asset that could affect reported earnings.
Beginning in 2004, the Company designated the full change in
fair value of its MSR asset as the hedged risk and, as a result,
discontinued hedge accounting treatment until such time that the
documentation required to support the assessment of hedge
effectiveness on a full fair value basis could be completed.
During 2004, all of the derivatives associated with the MSR
asset were designated as freestanding derivatives. The net
activity in the Company’s derivatives related to mortgage
servicing rights consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance, January 1,
|
|
$
|
85
|
(a)
|
|
$
|
385
|
|
|
$
|
100
|
|
|
Additions, net
|
|
|
560
|
|
|
|
402
|
|
|
|
389
|
|
|
Changes in fair value
|
|
|
117
|
|
|
|
(5
|
)
|
|
|
655
|
|
|
Sales/proceeds received
|
|
|
(702
|
)
|
|
|
(697
|
)
|
|
|
(759
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance, December 31,
|
|
$
|
60
|
(b)
|
|
$
|
85
|
(a)
|
|
$
|
385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
The net balance represents the gross asset of $316 million
(recorded within other assets under management and mortgage
programs on the accompanying Consolidated Balance Sheet) net of
the gross liability of $231 million (recorded within other
liabilities under management and mortgage programs on the
accompanying Consolidated Balance Sheet).
|
|
|
|
|
|
|
(b)
|
The net balance represents the gross asset of $79 million
(recorded within other assets under management and mortgage
programs on the accompanying Consolidated Balance Sheet) net of
the gross liability of $19 million (recorded within other
liabilities under management and mortgage programs on the
accompanying Consolidated Balance Sheet).
|
F-18
|
|
|
|
|
The net impact to the Company’s Consolidated Statements of
Income resulting from changes in the fair value of the
Company’s MSR asset and the related derivatives, was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment of MSR asset under hedge accounting
|
|
$
|
-
|
|
|
$
|
168
|
|
|
$
|
(540
|
)
|
|
Net gain (loss) on derivatives related to MSR asset
|
|
|
117
|
|
|
|
(5
|
)
|
|
|
655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain
|
|
|
117
|
|
|
|
163
|
|
|
|
115
|
|
|
Provision for MSR asset valuation allowance
|
|
|
(207
|
)
|
|
|
(193
|
)
|
|
|
(454
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impact
|
|
$
|
(90
|
)
|
|
$
|
(30
|
)
|
|
$
|
(339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based upon the composition of the portfolio as of
December 31, 2004 (and other assumptions regarding interest
rates and prepayment speeds), the Company expects MSR
amortization expense for the five succeeding fiscal years to
approximate $380 million, $300 million,
$240 million, $200 million and $160 million,
respectively. As of December 31, 2004, the MSR portfolio
had a weighted average life of approximately 4.5 years.
|
|
|
|
|
6.
|
Vehicle Leasing Activities
|
|
|
|
|
|
The components of the Company’s vehicle-related assets
under management and mortgage programs are comprised of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
Vehicles under open-end operating leases
|
|
$
|
6,322
|
|
|
$
|
5,429
|
|
|
Vehicles under closed-end operating leases
|
|
|
187
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
Vehicles held for leasing
|
|
|
6,509
|
|
|
|
5,585
|
|
|
Vehicles held for sale
|
|
|
12
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,521
|
|
|
|
5,598
|
|
|
Less: Accumulated depreciation
|
|
|
(2,929
|
)
|
|
|
(2,323
|
)
|
|
|
|
|
|
|
|
|
|
Total investment in leased vehicles
|
|
|
3,592
|
|
|
|
3,275
|
|
|
Plus: Receivables under direct financing leases
|
|
|
173
|
|
|
|
129
|
|
|
Plus: Fuel card related receivables
|
|
|
419
|
|
|
|
282
|
|
|
|
|
|
|
|
|
|
|
Total vehicle-related, net
|
|
$
|
4,184
|
|
|
$
|
3,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of vehicle depreciation and interest, net are
summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
$
|
1,158
|
|
|
$
|
1,089
|
|
|
$
|
1,069
|
|
|
Interest expense, net
(*)
|
|
|
114
|
|
|
|
87
|
|
|
|
106
|
|
|
Gain on sale of vehicles, net
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,270
|
|
|
$
|
1,176
|
|
|
$
|
1,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
|
Net of vehicle interest income of $3 million,
$4 million and $4 million during 2004, 2003 and 2002,
respectively.
|
F-19
|
|
|
|
|
At December 31, 2004, future minimum lease payments to be
received on the Company’s open-end and closed-end operating
leases (which do not reflect interest to be received as such
interest is based upon variable rates) are as follows:
|
|
|
|
|
|
|
|
Year
|
|
Amount
|
|
|
|
|
|
|
|
2005
|
|
$
|
1,068
|
|
|
2006
|
|
|
893
|
|
|
2007
|
|
|
691
|
|
|
2008
|
|
|
363
|
|
|
2009
|
|
|
234
|
|
|
Thereafter
|
|
|
343
|
|
|
|
|
|
|
|
|
|
$
|
3,592
|
|
|
|
|
|
|
|
|
|
|
|
The Company sells interests in operating leases and the
underlying vehicles to two independent Canadian third parties.
The Company repurchases the leased vehicles and then leases such
vehicles under direct financing leases to the Canadian third
parties. The Canadian third parties retain the lease rights and
prepay all the lease payments except for an agreed upon amount,
which is typically 7.0% of the total lease payments. The total
subordinated interest under these leasing arrangements, as
recorded on the Consolidated Balance Sheets at December 31,
2004 and 2003, was $29 million and $27 million,
respectively. The Company recognized $7 million,
$6 million and $6 million of net revenues related to
these securitizations during 2004, 2003 and 2002, respectively.
|
|
|
|
|
|
The income tax provision consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
264
|
|
|
$
|
(47
|
)
|
|
$
|
76
|
|
|
|
State
|
|
|
53
|
|
|
|
2
|
|
|
|
13
|
|
|
|
Foreign
|
|
|
4
|
|
|
|
-
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
321
|
|
|
|
(45
|
)
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(169
|
)
|
|
|
199
|
|
|
|
(23
|
)
|
|
|
State
|
|
|
(19
|
)
|
|
|
25
|
|
|
|
(5
|
)
|
|
|
Foreign
|
|
|
1
|
|
|
|
4
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(187
|
)
|
|
|
228
|
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
134
|
|
|
$
|
183
|
|
|
$
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income for domestic and foreign operations consists of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
304
|
|
|
$
|
457
|
|
|
$
|
156
|
|
|
Foreign
|
|
|
14
|
|
|
|
11
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income
|
|
$
|
318
|
|
|
$
|
468
|
|
|
$
|
164
|
|
|
|
|
|
|
|
|
|
|
|
|
F-20
|
|
|
|
|
Deferred income tax assets and liabilities are comprised of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities and deferred income
|
|
$
|
43
|
|
|
$
|
19
|
|
|
|
Provision for doubtful accounts
|
|
|
6
|
|
|
|
6
|
|
|
|
State net operating loss carryforward
|
|
|
80
|
|
|
|
88
|
|
|
|
Alternative minimum tax credit carryforward
|
|
|
23
|
|
|
|
23
|
|
|
|
Other
|
|
|
43
|
|
|
|
33
|
|
|
|
Valuation
allowance
(*)
|
|
|
(86
|
)
|
|
|
(88
|
)
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets
|
|
|
109
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
45
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities
|
|
|
45
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax asset
|
|
$
|
64
|
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
|
The valuation allowance of $86 million at December 31,
2004 relates to state net operating loss carryforwards and
certain state deferred tax assets of $80 million and
$6 million, respectively. The valuation allowance will be
reduced when and if the Company determines that the deferred
income tax assets are more likely than not to be realized.
|
|
|
|
|
|
Net deferred income tax liabilities related to management and
mortgage programs are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
Unamortized mortgage servicing rights
|
|
$
|
433
|
|
|
$
|
426
|
|
|
Depreciation and amortization
|
|
|
372
|
|
|
|
502
|
|
|
Other
|
|
|
(17
|
)
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax liability under management and
mortgage programs
|
|
$
|
788
|
|
|
$
|
954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No provision has been made for U.S. federal deferred income
taxes on approximately $35 million of accumulated and
undistributed earnings of foreign subsidiaries at
December 31, 2004 since it is the present intention of
management to reinvest the undistributed earnings indefinitely
in those foreign operations. The determination of the amount of
unrecognized U.S. federal deferred income tax liability for
unremitted earnings is not practicable.
|
|
|
|
|
The Company’s effective income tax rate for continuing
operations differs from the U.S. federal statutory rate as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
State and local income taxes, net of federal tax benefits
|
|
|
1.2
|
|
|
|
3.8
|
|
|
|
3.2
|
|
|
Changes in valuation allowance
|
|
|
5.8
|
|
|
|
-
|
|
|
|
-
|
|
|
Taxes on foreign operations at rates different than
U.S. federal statutory rates
|
|
|
-
|
|
|
|
-
|
|
|
|
0.3
|
|
|
Other
|
|
|
0.1
|
|
|
|
0.3
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42.1
|
%
|
|
|
39.1
|
%
|
|
|
39.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
F-21
8. Property and Equipment, net
|
|
|
|
|
Property and equipment, net consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
Building and leasehold improvements
|
|
$
|
26
|
|
|
$
|
24
|
|
|
Capitalized software
|
|
|
228
|
|
|
|
196
|
|
|
Furniture, fixtures and equipment
|
|
|
232
|
|
|
|
217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
486
|
|
|
|
437
|
|
|
Less: Accumulated depreciation and amortization
|
|
|
(301
|
)
|
|
|
(248
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
185
|
|
|
$
|
189
|
|
|
|
|
|
|
|
|
|
9. Accounts Payable and Other Accrued
Liabilities
|
|
|
|
|
Accounts payable and other accrued liabilities consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
455
|
|
|
$
|
396
|
|
|
Accrued payroll and related
|
|
|
55
|
|
|
|
79
|
|
|
Pension and other post-retirement
|
|
|
70
|
|
|
|
70
|
|
|
Due to Cendant
|
|
|
31
|
|
|
|
19
|
|
|
Accrued interest
|
|
|
46
|
|
|
|
45
|
|
|
Other
|
|
|
208
|
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
865
|
|
|
$
|
818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.
|
Debt Under Management and Mortgage Programs and Borrowing
Arrangements
|
|
|
|
|
|
Debt under management and mortgage programs consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
Asset-Backed Debt:
|
|
|
|
|
|
|
|
|
|
|
Vehicle management program
|
|
$
|
3,450
|
|
|
$
|
3,118
|
|
|
|
Mortgage program
|
|
|
1,306
|
|
|
|
1,651
|
|
|
|
Relocation program
|
|
|
400
|
|
|
|
400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,156
|
|
|
|
5,169
|
|
|
|
|
|
|
|
|
|
|
Unsecured Debt:
|
|
|
|
|
|
|
|
|
|
|
Term notes
|
|
|
1,833
|
|
|
|
1,916
|
|
|
|
Commercial paper
|
|
|
130
|
|
|
|
164
|
|
|
|
Other
|
|
|
249
|
|
|
|
132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,212
|
|
|
|
2,212
|
|
|
|
|
|
|
|
|
|
|
Total debt under management and mortgage programs
|
|
$
|
7,368
|
|
|
$
|
7,381
|
|
|
|
|
|
|
|
|
|
Asset-Backed
Debt
Vehicle
Management Program
|
|
|
|
|
Borrowings under the Company’s vehicle management program
primarily represent amounts issued under a domestic financing
facility that provides for the issuance of variable rate term
notes and variable funding notes to unrelated third parties
($3.1 billion and $2.7 billion at December 31,
2004 and 2003, respectively) and the issuance of preferred
membership interests to an unconsolidated related party
($398 million and $408 million at December 31,
2004 and 2003, respectively). The variable rate notes and
preferred membership interests were issued to support the
acquisition of vehicles used in the Company’s fleet leasing
|
F-22
|
|
|
|
|
operations. The debt issued is collateralized by approximately
$4.0 billion of leased vehicles and related assets, which
are not available to pay the obligations of the Company. The
titles to all the vehicles collateralizing the debt issued under
this program are held in a bankruptcy remote trust and the
Company acts as a servicer of all such vehicles. The bankruptcy
remote trust also acts as lessor under both operating and
financing lease agreements. The debt issued by this program
primarily represents floating rate term notes for which the
weighted average interest rate was 3% and 2% for 2004 and 2003,
respectively.
|
Mortgage
Program
|
|
|
|
|
Borrowings under the Company’s mortgage program represent
issuances by Bishop’s Gate. Bishop’s Gate is a
bankruptcy remote SPE that is utilized to warehouse mortgage
loans originated by the Company’s mortgage business prior
to their sale into the secondary market, which is customary
practice in the mortgage industry. The debt issued by
Bishop’s Gate is collateralized by approximately
$1.4 billion of underlying mortgage loans and related
assets. The mortgage loans are serviced by the Company and
recorded within mortgage loans held for sale on the
Company’s Consolidated Balance Sheet as of
December 31, 2004 and 2003. Prior to the adoption of
FIN 46, sales of mortgage loans to Bishop’s Gate were
treated as off-balance sheet sales. The activities of
Bishop’s Gate are limited to (i) purchasing mortgage
loans from the Company’s mortgage subsidiary,
(ii) issuing commercial paper or other debt instruments
and/or borrowing under a liquidity agreement to effect such
purchases, (iii) entering into interest rate swaps to hedge
interest rate risk and certain non-credit related market risk on
the purchased mortgage loans, (iv) selling and securitizing
the acquired mortgage loans to third parties and
(v) engaging in certain related transactions. The assets of
Bishop’s Gate are not available to pay the obligations of
the Company. The debt issued by Bishop’s Gate primarily
represents term notes for which the weighted average interest
rate was 2% for both 2004 and 2003.
|
|
|
|
|
|
Borrowings under the Company’s relocation program represent
issuances by Apple Ridge Funding LLC (“Apple Ridge”).
Apple Ridge is a bankruptcy remote SPE that is utilized to
securitize relocation receivables generated from advancing funds
to clients of the Company’s relocation business. The debt
issued by Apple Ridge is collateralized by underlying relocation
receivables, which are serviced by the Company, and related
assets aggregating $491 million at December 31, 2004.
These relocation receivables and related assets are recorded
within assets under management and mortgage programs on the
Company’s Consolidated Balance Sheet as of
December 31, 2004 and 2003. Prior to November 26,
2003, sales of relocation receivables to Apple Ridge were
treated as off-balance sheet sales, as this entity was
structured as a bankruptcy remote QSPE and, therefore, excluded
from the scope of FIN 46. However, on November 26,
2003, the underlying structure of Apple Ridge was amended in a
manner that resulted in it no longer meeting the criteria to
qualify as a QSPE pursuant to SFAS No. 140.
Consequently, the Company began consolidating the account
balances and activities of Apple Ridge on November 26, 2003
pursuant to FIN 46. Prior to consolidation, the Company
recognized gains upon the sale of relocation receivables to
Apple Ridge. However, such gains were not material for the
period January 1, 2003 through November 25, 2003 and
for the year ended December 31, 2002. The activities of
Apple Ridge are limited to (i) purchasing relocation
receivables from the Company’s relocation subsidiary,
(ii) issuing debt securities and/or borrowing under a
conduit facility to effect such purchases and
(iii) entering into, terminating or modifying certain
derivative transactions. The assets of Apple Ridge are not
available to pay the general obligations of the Company. The
debt issued under Apple Ridge represents a floating rate term
note for which the weighted average interest rate was 2% and 1%
for 2004 and 2003, respectively.
|
|
|
|
|
|
The balance at December 31, 2004 consists of
(i) $983 million of publicly issued medium-term notes
bearing interest at a blended rate of 7%,
(ii) $453 million ($443 million principal amount)
of privately-placed medium-term notes bearing interest at a
blended rate of 8% and (iii) $397 million of
short-term notes bearing interest at a blended rate of 7%. Such
amounts include aggregate hedging losses of $18 million.
The balance at December 31, 2003 consists of
(i) $982 million of publicly issued medium-term notes
bearing interest at a blended rate of 7%,
(ii) $460 million ($443 million principal amount)
of privately-placed
|
F-23
|
|
|
|
|
medium-term notes bearing interest at a blended rate of 8% and
(iii) $474 million of short-term notes bearing
interest at a blended rate of 7%. Such amounts included
aggregate hedging losses of $11 million.
|
|
|
|
|
|
The Company’s policy is to maintain available capacity
under its committed revolving credit facility (described below)
to fully support its outstanding commercial paper. The weighted
average interest rate on the outstanding commercial paper, which
matures within 270 days from issuance, at December 31,
2004 was 1%. The proceeds from the issuance of commercial paper
are used to finance the purchase of various assets under
management and mortgage programs.
|
|
|
|
|
|
The following table provides the contractual maturities for debt
under management and mortgage programs at December 31, 2004
(except for notes issued under the Company’s vehicle
management program, where the underlying indentures require
payments based on cash inflows relating to the corresponding
assets under management and mortgage programs and for which
estimates of repayments have been used):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-Backed
|
|
|
Unsecured
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
$
|
1,440
|
|
|
$
|
595
|
|
|
$
|
2,035
|
|
|
2006
|
|
|
1,615
|
|
|
|
1
|
|
|
|
1,616
|
|
|
2007
|
|
|
758
|
|
|
|
187
|
|
|
|
945
|
|
|
2008
|
|
|
1,110
|
|
|
|
428
|
|
|
|
1,538
|
|
|
2009
|
|
|
40
|
|
|
|
183
|
|
|
|
223
|
|
|
Thereafter
|
|
|
193
|
|
|
|
818
|
|
|
|
1,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,156
|
|
|
$
|
2,212
|
|
|
$
|
7,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available Funding
Arrangements and Committed Credit Facilities
|
|
|
|
|
|
As of December 31, 2004, available funding under the
Company’s on-balance sheet asset-backed debt programs and
committed credit facilities related to the Company’s
management and mortgage programs consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Outstanding
|
|
|
Available
|
|
|
|
|
Capacity
|
|
|
Borrowings
|
|
|
Capacity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-Backed Funding Arrangements
(*)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vehicle management program
|
|
$
|
3,872
|
|
|
$
|
3,450
|
|
|
$
|
422
|
|
|
Mortgage program
|
|
|
2,966
|
|
|
|
1,306
|
|
|
|
1,660
|
|
|
Relocation program
|
|
|
600
|
|
|
|
400
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,438
|
|
|
|
5,156
|
|
|
|
2,282
|
|
|
|
|
|
|
|
|
|
|
|
|
Committed Credit Facility
Maturing in June 2007
|
|
|
1,250
|
|
|
|
-
|
|
|
|
1,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,688
|
|
|
$
|
5,156
|
|
|
$
|
3,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
|
Capacity is subject to maintaining sufficient assets to
collateralize debt.
|
|
|
|
|
|
Borrowings under the Company’s $1.25 billion credit
facility maturing in June 2007 bear interest at LIBOR plus a
margin of 50 basis points. In addition, the Company is
required to pay a per annum facility fee of 12.5 basis
points under this facility and a per annum utilization fee of
approximately 12.5 basis points if usage under the facility
exceeds 33% of aggregate commitments. In the event that the
credit ratings assigned to the Company by nationally recognized
debt rating agencies are downgraded to a level below its ratings
as of December 31, 2004, the interest rate and facility
fees are subject to a maximum upward adjustment of approximately
75.0 and 12.5 basis points, respectively.
|
F-24
|
|
|
|
|
As of December 31, 2004, the Company also had
$874 million of availability for public debt issuances
under a shelf registration statement.
|
|
|
|
|
|
Certain of the Company’s debt instruments and credit
facilities related to its management and mortgage programs
contain restrictive covenants, including restrictions on
indebtedness of material subsidiaries, mergers, limitations on
liens, liquidations, and sale and leaseback transactions, and
also require the maintenance of certain financial ratios. At
December 31, 2004, the Company was in compliance with all
financial covenants of its debt instruments and credit facility
related to management and mortgage programs.
|
|
|
|
|
|
The Company sells residential mortgage loans in securitization
transactions typically retaining one or more of the following:
servicing rights, interest-only strips, principal-only strips
and/or subordinated interests. Although the Company principally
sells its originated mortgage loans directly to government
sponsored entities, in limited circumstances, the Company sells
loans through a wholly-owned subsidiary’s public
registration statement. With the exception of specific mortgage
loans that are sold with recourse, the investors have no
recourse to the Company’s other assets for failure of
debtors to pay when due (see Note 5—Mortgage
Activities). Key economic assumptions used during 2004, 2003 and
2002 to measure the fair value of the Company’s retained
interests in mortgage loans at the time of the securitization
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-
|
|
|
|
|
Mortgage-
|
|
|
|
|
Mortgage-
|
|
|
|
|
|
|
Backed
|
|
|
|
|
Backed
|
|
|
|
|
Backed
|
|
|
|
|
|
|
Securities
(*)
|
|
|
MSRs
|
|
|
Securities
(*)
|
|
|
MSRs
|
|
|
Securities
(*)
|
|
|
MSRs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepayment speed
|
|
|
10-24%
|
|
|
|
13-36%
|
|
|
|
7-25%
|
|
|
|
11-50%
|
|
|
|
7-22%
|
|
|
|
12-54%
|
|
|
Weighted average life (in years)
|
|
|
4.2-9.7
|
|
|
|
2.2-7.0
|
|
|
|
1.9-6.9
|
|
|
|
1.3-6.8
|
|
|
|
2.1-10.6
|
|
|
|
1.3-6.3
|
|
|
Discount rate
|
|
|
7%
|
|
|
|
9-10%
|
|
|
|
5-15%
|
|
|
|
6-21%
|
|
|
|
5-18%
|
|
|
|
6-14%
|
|
|
|
|
|
|
|
(*)
|
Includes interest-only strips, principal-only strips and
subordinated interests.
|
|
|
|
|
|
Key economic assumptions used in subsequently measuring the fair
value of the Company’s retained interests in securitized
mortgage loans at December 31, 2004 and the effect on the
fair value of those interests from adverse changes in those
assumptions are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-
|
|
|
|
|
|
|
Backed
|
|
|
|
|
|
|
Securities
|
|
|
MSR
|
|
|
|
|
|
|
|
|
|
|
Fair value of retained interests
|
|
$
|
47
|
|
|
$
|
1,608
|
|
|
Weighted average life (in years)
|
|
|
5.3
|
|
|
|
4.5
|
|
|
Annual servicing fee
|
|
|
-
|
|
|
|
0.32
|
%
|
|
Prepayment speed (annual rate)
|
|
|
2-36
|
%
|
|
|
12-40
|
%
|
|
Impact of 10% adverse change
|
|
$
|
(1
|
)
|
|
$
|
(110
|
)
|
|
Impact of 20% adverse change
|
|
$
|
(2
|
)
|
|
$
|
(210
|
)
|
|
Discount rate (annual rate)
|
|
|
4-15
|
%
|
|
|
8.7
|
%
|
|
Impact of 10% adverse change
|
|
$
|
(2
|
)
|
|
$
|
(48
|
)
|
|
Impact of 20% adverse change
|
|
$
|
(4
|
)
|
|
$
|
(93
|
)
|
|
|
|
|
|
These sensitivities are hypothetical and presented for
illustrative purposes only. Changes in fair value based on a 10%
variation in assumptions generally cannot be extrapolated
because the relationship of the change in assumption to the
change in fair value may not be linear. Also, the effect of a
variation in a particular assumption is calculated without
changing any other assumption; in reality, changes in one
assumption may
|
F-25
|
|
|
|
|
result in changes in another, which may magnify or counteract
the sensitivities. Further, this analysis does not assume any
impact resulting from management’s intervention to mitigate
these variations.
|
|
|
|
|
The following table presents information about delinquencies and
components of securitized residential mortgage loans as of and
for the year ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
|
|
Total
|
|
|
Amount 60
|
|
|
|
|
Average
|
|
|
|
|
Principal
|
|
|
Days or More
|
|
|
Net Credit
|
|
|
Principal
|
|
|
|
|
Amount
|
|
|
Past Due
(a)
|
|
|
Losses
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
loans
(b)
|
|
$
|
193
|
|
|
$
|
24
|
|
|
$
|
3
|
|
|
$
|
233
|
|
|
|
|
|
|
|
(a)
|
Amounts are based on total securitized assets at
December 31, 2004.
|
|
|
|
|
|
|
(b)
|
Excludes securitized mortgage loans that the Company continues
to service but to which it has no other continuing involvement.
|
|
|
|
|
|
As discussed in Note 10—Debt Under Management and
Mortgage Programs and Borrowing Arrangements, the Company sold
financial assets to Bishop’s Gate and Apple Ridge prior to
its consolidation of these securitization structures on
July 1, 2003 and November 26, 2003, respectively. The
cash flow activity presented below covers the period up to and
including the date of consolidation of these structures in
addition to cash flow activity resulting from the Company’s
securitization of mortgage loans directly into the secondary
market.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loans
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from new securitizations
|
|
$
|
32,699
|
|
|
$
|
59,511
|
|
|
$
|
38,722
|
|
|
Servicing fees received
|
|
|
491
|
|
|
|
444
|
|
|
|
411
|
|
|
Other cash flows received on retained
interest
(a)
|
|
|
9
|
|
|
|
24
|
|
|
|
25
|
|
|
Purchases of delinquent or foreclosed
loans
(b)
|
|
|
(262
|
)
|
|
|
(677
|
)
|
|
|
(681
|
)
|
|
Servicing advances
|
|
|
(575
|
)
|
|
|
(512
|
)
|
|
|
(161
|
)
|
|
Repayment of servicing advances
|
|
|
615
|
|
|
|
473
|
|
|
|
139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relocation Receivables
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
Proceeds from new securitizations
|
|
$
|
35
|
|
|
$
|
770
|
|
|
Proceeds from collections reinvested in securitizations
|
|
|
2,717
|
|
|
|
2,433
|
|
|
Servicing fees received
|
|
|
3
|
|
|
|
4
|
|
|
Other cash flows received on retained
interests
(a)
|
|
|
38
|
|
|
|
48
|
|
|
Cash (paid)/received upon funding/release of reserve account
|
|
|
(17
|
)
|
|
|
1
|
|
|
|
|
|
|
|
(a)
|
Represents cash flows received on retained interests other than
servicing fees.
|
|
|
|
|
|
|
(b)
|
The purchase of delinquent or foreclosed loans is primarily at
the Company’s option and not based on a contractual
relationship with the securitization trust.
|
|
|
|
|
|
During 2004, 2003 and 2002, the Company recognized pre-tax gains
of $228 million, $850 million and $493 million,
respectively, related to the securitization of residential
mortgage loans. Gains recognized on the securitization of
relocation receivables were not material during 2003 and 2002.
All gains on the securitization of financial assets are recorded
within net revenues on the Company’s Consolidated
Statements of Income.
|
|
|
|
|
The Company has made representations and warranties customary
for securitization transactions, including eligibility
characteristics of the mortgage loans and relocation receivables
and servicing responsibilities, in connection with the
securitization of these assets. See
Note 12—Commitments and Contingencies.
|
F-26
|
|
|
|
12.
|
Commitments and Contingencies
|
|
|
|
|
|
The Company is committed to making rental payments under
noncancelable operating leases covering various facilities and
equipment. Future minimum lease payments required under
noncancelable operating leases as of December 31, 2004 are
as follows:
|
|
|
|
|
|
|
|
Year
|
|
Amount
|
|
|
|
|
|
|
|
2005
|
|
$
|
39
|
|
|
2006
|
|
|
32
|
|
|
2007
|
|
|
27
|
|
|
2008
|
|
|
24
|
|
|
2009
|
|
|
21
|
|
|
Thereafter
|
|
|
163
|
|
|
|
|
|
|
|
|
|
$
|
306
|
|
|
|
|
|
|
|
|
|
|
|
Commitments under capital leases are not significant. During
2004, 2003 and 2002, the Company incurred total rental expense
of $43 million, $40 million and $34 million,
respectively.
|
|
|
|
|
|
In the normal course of business, the Company makes various
commitments to purchase goods or services from specific
suppliers, including those related to capital expenditures. None
of the purchase commitments made by the Company as of
December 31, 2004 (aggregating approximately
$42 million) was individually significant.
|
|
|
|
|
|
In the normal course of business, the Company enters into
commitments to either originate or purchase mortgage loans at
specified rates. These loan commitments represent derivative
instruments and are recorded at fair value on the Company’s
Consolidated Balance Sheets. At December 31, 2004, the
notional amount of these loan commitments approximated to
$4.1 billion.
|
Forward
Delivery Commitments
|
|
|
|
|
Commitments to sell loans generally have fixed expiration dates
or other termination clauses and may require payment of a fee.
The Company may settle the forward delivery commitments on a net
basis; therefore, the commitments outstanding do not necessarily
represent future cash obligations. At December 31, 2004,
the Company had $3.0 billion of outstanding forward
delivery commitments, which will be settled generally within
90 days of the individual contract date.
|
|
|
|
|
|
The Company is also involved in claims and legal proceedings
related to contract disputes and other commercial, employment
and tax matters. Based on currently available information, the
Company does not believe such matters will have a material
adverse effect on its results of operations, financial position
or cash flows. However, litigation is inherently unpredictable
and, although the Company believes that it has valid defenses in
these matters, unfavorable resolutions could occur, which could
have a material adverse effect on the Company’s results of
operations or cash flows in a particular reporting period.
|
|
|
|
|
|
Standard Guarantees/ Indemnifications
|
|
|
|
|
|
In the ordinary course of business, the Company enters into
numerous agreements that contain standard guarantees and
indemnities whereby the Company indemnifies another party for
breaches of representations and warranties. Such guarantees or
indemnifications are granted under various agreements, including
those governing (i) leases of real estate, (ii) access
to credit facilities and use of derivatives, (iii) sales of
mortgage loans and (iv) issuances of debt or equity
securities. The guarantees or indemnifications issued are for
the benefit of the (i) buyers in sale agreements and
sellers in purchase agreements, (ii) landlords in lease
contracts, (iii) financial institutions in credit facility
arrangements and derivative contracts, (iv) purchasers and
insurers of the loans in sales of mortgage loans and
(v) underwriters in debt or equity security issuances.
|
F-27
|
|
|
|
|
While some of these guarantees extend only for the duration of
the underlying agreement, many survive the expiration of the
term of the agreement or extend into perpetuity (unless subject
to a legal statute of limitations). There are no specific
limitations on the maximum potential amount of future payments
that the Company could be required to make under these
guarantees, nor is the Company able to develop an estimate of
the maximum potential amount of future payments to be made under
these guarantees as the triggering events are not subject to
predictability. With respect to certain of the aforementioned
guarantees, such as indemnifications of landlords against third
party claims for the use of real estate property leased by the
Company, the Company maintains insurance coverage that mitigates
any potential payments to be made.
|
|
|
|
|
The Company also provides guarantees for the benefit of
landlords in lease contracts where the lease was assigned to a
third party due to the sale of a business which occupied the
leased facility. These guarantees extend only for the duration
of the underlying lease contract. The maximum potential amount
of future payments that the Company may be required to make
under these guarantees is approximately $8 million in the
aggregate. If the Company were required to make payments under
these guarantees, it would have similar recourse against the
tenant (third party to which the lease was assigned).
|
|
|
|
|
13.
|
Accumulated Other Comprehensive Loss
|
|
|
|
|
|
The components of accumulated other comprehensive loss are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains/(Losses)
|
|
|
|
|
Minimum
|
|
|
Accumulated
|
|
|
|
|
Currency
|
|
|
on Available-
|
|
|
Unrealized Gains
|
|
|
Pension
|
|
|
Other
|
|
|
|
|
Translation
|
|
|
for-Sale
|
|
|
(Losses) on Cash
|
|
|
Liability
|
|
|
Comprehensive
|
|
|
|
|
Adjustments
(*)
|
|
|
Securities
|
|
|
Flow Hedges
|
|
|
Adjustment
|
|
|
Income/(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2002
|
|
$
|
(5
|
)
|
|
$
|
16
|
|
|
$
|
-
|
|
|
$
|
(17
|
)
|
|
$
|
(6
|
)
|
|
Current period change
|
|
|
4
|
|
|
|
(10
|
)
|
|
|
7
|
|
|
|
(15
|
)
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2002
|
|
|
(1
|
)
|
|
|
6
|
|
|
|
7
|
|
|
|
(32
|
)
|
|
|
(20
|
)
|
|
Current period change
|
|
|
13
|
|
|
|
(8
|
)
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
12
|
|
|
|
(2
|
)
|
|
|
5
|
|
|
|
(32
|
)
|
|
|
(17
|
)
|
|
Current period change
|
|
|
9
|
|
|
|
3
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
$
|
21
|
|
|
$
|
1
|
|
|
$
|
5
|
|
|
$
|
(33
|
)
|
|
$
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
|
Assets and liabilities of foreign subsidiaries having
non-U.S.-dollar functional currencies are translated at exchange
rates at the Consolidated Balance Sheet dates. Revenues and
expenses are translated at average exchange rates during the
periods presented. The gains or losses resulting from
translating foreign currency financial statements into
U.S. dollars, net of hedging gains or losses and taxes, are
included in accumulated other comprehensive income. Gains or
losses resulting from foreign currency transactions are included
in the Consolidated Statements of Income.
|
|
|
|
|
|
All components of accumulated other comprehensive income are net
of tax except currency translation adjustments, which exclude
income taxes related to indefinite investments in foreign
subsidiaries.
|
|
|
|
|
14.
|
Stock-Based Compensation
|
|
|
|
|
|
As of December 31, 2004, all employee stock awards (stock
options and restricted stock units (“RSUs”)) were
granted by Cendant, certain of which will be converted into PHH
equity awards upon spin-off (see Note 20—Subsequent
Events).
|
Stock
Options
|
|
|
|
|
Stock options generally have a ten-year term, and those granted
prior to 2004 vest ratably over periods ranging from two to five
years. Cendant’s policy is to grant options with exercise
prices at then- current fair
|
F-28
|
|
|
|
|
market value. The annual activity of Cendant’s stock option
plans under which the Company’s employees were granted
options consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Weighted
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
Average
|
|
|
|
|
Average
|
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
16
|
|
|
$
|
16.76
|
|
|
|
21
|
|
|
$
|
16.08
|
|
|
|
17
|
|
|
$
|
14.92
|
|
|
|
Granted at fair market value
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
18.89
|
|
|
|
Exercised
|
|
|
(4
|
)
|
|
|
13.38
|
|
|
|
(4
|
)
|
|
|
11.46
|
|
|
|
(1
|
)
|
|
|
10.44
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
21.93
|
|
|
|
(1
|
)
|
|
|
16.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
12
|
|
|
$
|
17.90
|
|
|
|
16
|
|
|
$
|
16.76
|
|
|
|
21
|
|
|
$
|
16.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below summarizes information regarding outstanding and
exercisable stock options issued to the Company’s employees
as of December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
|
Exercisable Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
Average
|
|
|
Range of
|
|
Number of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
|
Exercise Prices
|
|
Options
|
|
|
Life
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.01 to $10.00
|
|
|
1
|
|
|
|
3.5
|
|
|
$
|
9.46
|
|
|
|
1
|
|
|
$
|
9.46
|
|
|
$10.01 to $20.00
|
|
|
8
|
|
|
|
5.1
|
|
|
|
17.60
|
|
|
|
8
|
|
|
|
17.64
|
|
|
$20.01 to $30.00
|
|
|
3
|
|
|
|
4.1
|
|
|
|
22.30
|
|
|
|
3
|
|
|
|
22.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
4.7
|
|
|
$
|
17.90
|
|
|
|
12
|
|
|
$
|
17.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2002, Cendant’s Board of Directors accelerated the
vesting of certain options previously granted with exercise
prices greater than or equal to $15.1875. In connection with
such action, approximately 8 million options (with a
weighted average exercise price of $19.21), substantially all of
which were scheduled to become exercisable by January 2004,
became exercisable as of August 27, 2002. In addition, the
post-employment exercise period for the modified options was
reduced from one year to thirty days. However, if the employee
remained employed by Cendant through the date on which the
option was originally scheduled to become vested, the
post-employment exercise period became one year. Cendant’s
senior executive officers were not eligible for this
modification. In accordance with the provisions of the FASB
Interpretation No. 44, “Accounting for Certain
Transactions Involving Stock Compensation (an Interpretation of
APB Opinion No. 25),” there was no charge associated
with this modification since none of the modified options had
intrinsic value because the market price of the underlying CD
common stock on August 27, 2002 was less than the exercise
price of the modified options.
|
|
|
|
|
The weighted-average grant-date fair value of CD common stock
options granted during 2002 was $8.69. The fair values of these
stock options are estimated on the dates of grant using the
Black-Scholes option-pricing model with the following weighted
average assumptions for stock options granted in 2002:
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
-
|
|
|
Expected volatility
|
|
|
50.0
|
%
|
|
Risk-free interest rate
|
|
|
4.2
|
%
|
|
Expected holding period (years)
|
|
|
4.5
|
|
|
|
|
|
|
RSUs granted by Cendant to the Company’s employees entitle
the employee to receive one share of Cendant common stock upon
vesting. RSUs granted in 2003 vest ratably over a four-year
term. In 2004, Cendant
|
F-29
|
|
|
|
|
adopted performance and time vesting criteria for RSU grants.
The predetermined performance criteria determine the number of
RSUs that will ultimately vest and are based on the growth of
Cendant’s earnings and cash flows over the vesting period
of the respective award. The number of RSUs that will ultimately
vest may range from 0% to 200% of the base award. Vesting occurs
over a four year period, but cannot exceed 25% of the base award
in each of the three years following the grant date. As of
December 31, 2004, the number of outstanding RSUs granted
by Cendant to the Company’s employees was approximately
2.7 million with a weighted-average grant-date fair value
of $19.94. The Company was allocated compensation expense for
such RSUs on a basis consistent with the related vesting period.
During 2004 and 2003, the Company recorded pre-tax compensation
expense of approximately $7 million and $2 million,
respectively, in connection with these RSUs, which is included
within general and administrative expenses on the Company’s
Consolidated Statements of Income.
|
|
|
|
|
15.
|
Employee Benefit Plans
|
|
|
|
|
|
Defined Contribution Savings Plan
|
|
|
|
|
|
As of December 31, 2004, Cendant sponsored a defined
contribution savings plan that provides certain eligible
employees of the Company an opportunity to accumulate funds for
retirement. The Company matches the contributions of
participating employees on the basis specified by the plan. The
Company’s cost for contributions to this plan was
$22 million, $20 million and $18 million during
2004, 2003 and 2002, respectively.
|
|
|
|
|
|
Defined Benefit Pension Plan
|
|
|
|
|
|
As of December 31, 2004, Cendant sponsored a domestic
non-contributory defined benefit pension plan, which covers
certain eligible employees. The majority of the employees
participating in this plan are no longer accruing benefits.
Additionally, the Company sponsors contributory defined benefit
pension plans in certain foreign subsidiaries with participation
in the plans at the employees’ option. Under both the
domestic and foreign plans, benefits are based on an
employee’s years of credited service and a percentage of
final average compensation or as otherwise described by the
plan. As of December 31, 2004 and 2003, the aggregate
projected benefit obligation of this plan was $154 million
and $146 million, respectively, and the aggregate fair
value of the plan’s assets was $89 million and
$80 million, respectively. Accordingly, the plan was
underfunded by $65 million and $66 million,
respectively, as of December 31, 2004 and 2003 primarily
due to the downturn in the financial markets and a decline in
interest rates. However, the net pension liability recorded by
the Company as of December 31, 2004 and 2003 approximated
$65 million, of which approximately $55 million and
$52 million at December 31, 2004 and 2003,
respectively, represents additional minimum pension liability
recorded as a charge to other comprehensive income. The
Company’s policy is to contribute amounts sufficient to
meet minimum funding requirements as set forth in employee
benefit and tax laws plus such additional amounts the Company
determines to be appropriate. During 2004, 2003 and 2002, the
Company recorded pension expense of $5 million,
$6 million and $2 million, respectively.
|
|
|
|
|
|
Other Employee Benefit Plan
|
|
|
|
|
|
The Company also maintains a health and welfare plan. As of
December 31, 2004 and 2003, the related projected benefit
obligation, which was fully accrued for on the Company’s
Consolidated Balance Sheets, was $5 million. The expense
recorded in 2004 was insignificant. During 2003, the Company
recorded post-retirement expense of $1 million related to
this plan. The expense recorded in 2002 was insignificant.
|
|
|
|
|
16.
|
Financial Instruments
|
Risk
Management
|
|
|
|
|
Following is a description of the Company’s risk management
policies.
|
Interest
Rate Risk
|
|
|
|
|
Mortgage Servicing Rights.
The Company’s mortgage
servicing rights asset is subject to substantial interest rate
risk as the mortgage notes underlying the MSR asset permit the
borrower to prepay the loan. Therefore, the value of the MSR
asset tends to diminish in periods of declining interest rates
(as
|
F-30
|
|
|
|
|
prepayments increase) and increase in periods of rising interest
rates (as prepayments decrease). The Company uses a combination
of derivative instruments (including option contracts and
interest rate swaps) and other investment securities to offset
potential changes in fair value on its MSR asset that could
affect reported earnings. These derivatives are designated as
freestanding derivatives in 2004 and as either freestanding
derivatives or fair value hedging instruments in 2003 and 2002,
and recorded at fair value with changes in fair value recorded
to current earnings. The change in fair value for the hedged
portion of the MSR asset in 2003 and 2002 is also recorded to
current earnings.
|
|
|
|
|
During 2004, 2003 and 2002, the net impact of the Company’s
derivative activity related to its MSR asset after giving effect
to the offsetting changes in fair value of the MSR asset was a
gain of $117 million, $163 million and
$115 million, respectively. The 2003 amount consists of
gains of $155 million to reflect the ineffective portion of
the fair value hedges and gains of $8 million resulting
from the component of the derivatives’ fair value excluded
from the assessment of effectiveness (as such amount relates to
freestanding derivatives). The 2002 amount consists of gains of
$48 million to reflect the ineffective portion of the fair
value hedges and gains of $67 million resulting from the
component of the derivatives’ fair value excluded from the
assessment of effectiveness (as such amount relates to
freestanding derivatives).
|
|
|
|
|
Other Mortgage Related Assets.
The Company’s other
mortgage-related assets are subject to interest rate risk
created by (i) its commitments to finance mortgages to
borrowers who have applied for loan funding and (ii) loans
held in inventory awaiting sale into the secondary market. The
Company uses derivative instruments (including futures, options
and forward delivery contracts) to economically hedge its
commitments to fund mortgages. Commitments to fund mortgages and
related hedges are classified and accounted for as freestanding
derivatives. Accordingly, these positions are recorded at fair
value with changes in fair value recorded to current earnings
and generally offset the fair value changes recorded relating to
the underlying assets. During 2004, 2003 and 2002, the net
impact of these freestanding derivatives was a net gain (loss)
of $5 million, ($10) million and $14 million,
respectively. Such amounts are recorded within net revenues in
the Consolidated Statements of Income.
|
|
|
|
|
Interest rate and price risk stemming from loans held in
inventory awaiting sale into the secondary market (which are
classified on the Company’s Consolidated Balance Sheets as
mortgage loans held for sale) may be hedged with mortgage
forward delivery contracts. These forward delivery contracts fix
the forward sales price which will be realized in the secondary
market and thereby substantially eliminate the interest rate and
price risk to the Company. Such forward delivery contracts are
either classified and accounted for as fair value hedges or
freestanding derivatives. During 2004 and 2003, the net impact
of these derivatives, after giving effect to changes in fair
value of the underlying loans, was a gain (loss) of
$17 million and ($20) million, respectively (the
impact was not material during 2002). Such amounts are recorded
within net revenues on the Consolidated Statements of Income.
|
|
|
|
|
Debt.
The debt used to finance much of the Company’s
operations is also exposed to interest rate fluctuations. The
Company uses various hedging strategies and derivative financial
instruments to create a desired mix of fixed and floating rate
assets and liabilities. Derivative instruments currently used in
these hedging strategies include swaps and instruments with
purchased option features. The derivatives used to manage the
risk associated with the Company’s fixed rate debt were
designated as fair value hedges and were perfectly effective
resulting in no net impact on the Company’s results of
operations during 2004, 2003 and 2002, except to create the
accrual of interest expense at variable rates. During 2003, the
Company terminated certain of its fair value hedges, which
resulted in cash gains of $24 million. Such gains are
deferred and being recognized over future periods as a component
of interest expense. During 2004 and 2003, the Company recorded
$5 million and $4 million, respectively, of such
amortization.
|
|
|
|
|
The derivatives used to manage the risk associated with the
Company’s floating rate debt included freestanding
derivatives and derivatives designated as cash flow hedges.
During 2004, the Company recorded a nominal loss to other
comprehensive income. During 2003 and 2002, the Company recorded
a net gain (loss) of ($2) million and $7 million,
respectively, to other comprehensive income. The amount of gains
or losses reclassified from other comprehensive income to
earnings resulting from ineffectiveness or from excluding a
component of the derivatives’ gain or loss from the
effectiveness calculation for cash flow
|
F-31
|
|
|
|
|
hedges during 2004, 2003 and 2002 was not material. The amount
of losses the Company expects to reclassify from other
comprehensive income to earnings during the next 12 months
is not material. These freestanding derivatives had a nominal
impact on the Company’s results of operations in 2004, 2003
and 2002.
|
Credit
Risk and Exposure
|
|
|
|
|
The Company is exposed to counterparty credit risks in the event
of nonperformance by counterparties to various agreements and
sales transactions. The Company manages such risk by evaluating
the financial position and creditworthiness of such
counterparties and/or requiring collateral in instances in which
financing is provided. The Company mitigates counterparty credit
risk associated with its derivative contracts by monitoring the
amount for which it is at risk with each counterparty to such
contracts, periodically evaluating counterparty creditworthiness
and financial position, and where possible, dispersing its risk
among multiple counterparties.
|
|
|
|
|
As of December 31, 2004, there were no significant
concentrations of credit risk with any individual counterparty
or groups of counterparties. Concentrations of credit risk
associated with receivables are considered minimal due to the
Company’s diverse customer base. With the exception of the
financing provided to customers of its mortgage business, the
Company does not normally require collateral or other security
to support credit sales.
|
Fair
Value
|
|
|
|
|
The fair value of financial instruments is generally determined
by reference to market values resulting from trading on a
national securities exchange or in an over-the-counter market.
In cases where quoted market prices are not available, fair
value is based on estimates using present value or other
valuation techniques, as appropriate. The carrying amounts of
cash and cash equivalents, restricted cash, available-for-sale
securities, accounts receivable, program cash, relocation
receivables and accounts payable and other accrued liabilities
approximate fair value due to the short-term maturities of these
assets and liabilities.
|
F-32
The carrying amounts and estimated fair values of all financial
instruments at December 31, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
270
|
|
|
$
|
270
|
|
|
$
|
106
|
|
|
$
|
106
|
|
|
|
Restricted cash
|
|
|
250
|
|
|
|
250
|
|
|
|
253
|
|
|
|
253
|
|
|
|
Marketable securities
|
|
|
20
|
|
|
|
20
|
|
|
|
19
|
|
|
|
19
|
|
|
Derivatives
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forwards
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
Assets under management and mortgage programs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Program cash
|
|
|
626
|
|
|
|
626
|
|
|
|
451
|
|
|
|
451
|
|
|
|
Mortgage loans held for sale
|
|
|
1,981
|
|
|
|
1,988
|
|
|
|
2,508
|
|
|
|
2,542
|
|
|
|
Relocation receivables
|
|
|
720
|
|
|
|
720
|
|
|
|
534
|
|
|
|
534
|
|
|
|
Mortgage servicing rights, net
|
|
|
1,608
|
|
|
|
1,608
|
|
|
|
1,641
|
|
|
|
1,641
|
|
|
|
Derivatives related to mortgage servicing rights
|
|
|
79
|
|
|
|
79
|
|
|
|
316
|
|
|
|
316
|
|
|
|
Mortgage-backed securities
|
|
|
47
|
|
|
|
47
|
|
|
|
102
|
|
|
|
102
|
|
|
|
Derivatives
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to fund mortgages
|
|
|
9
|
|
|
|
9
|
|
|
|
18
|
|
|
|
18
|
|
|
|
|
Forward delivery commitments
|
|
|
2
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
Interest rate and other swaps
|
|
|
18
|
|
|
|
18
|
|
|
|
25
|
|
|
|
25
|
|
|
|
|
Option contracts
|
|
|
3
|
|
|
|
3
|
|
|
|
5
|
|
|
|
5
|
|
|
Liabilities under management and mortgage programs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
7,335
|
|
|
|
7,493
|
|
|
|
7,354
|
|
|
|
7,528
|
|
|
|
Derivatives related to mortgage servicing rights(a)
|
|
|
(19
|
)
|
|
|
(19
|
)
|
|
|
(231
|
)
|
|
|
(231
|
)
|
|
|
Derivatives
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
(33
|
)
|
|
|
(33
|
)
|
|
|
(27
|
)
|
|
|
(27
|
)
|
|
|
|
Interest rate and other swaps
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
(10
|
)
|
|
|
(10
|
)
|
|
|
|
Forward delivery commitments
|
|
|
(6
|
)
|
|
|
(6
|
)
|
|
|
(36
|
)
|
|
|
(36
|
)
|
|
|
|
|
|
(a)
Derivative
instruments in gain (loss) positions.
|
|
|
|
|
|
Management evaluates the operating results of each of its
reportable segments based upon revenue and “EBITDA,”
which is defined as net income before non-program related
depreciation and amortization, income taxes and minority
interest. The Company’s presentation of EBITDA may not be
comparable to similar measures used by other companies.
|
Year Ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fleet
|
|
|
|
|
|
|
|
|
Mortgage
|
|
|
Relocation
|
|
|
Management
|
|
|
Corporate
|
|
|
|
|
|
|
Services
|
|
|
Services
|
|
|
Services
|
|
|
and Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
(a)
|
|
$
|
700
|
|
|
$
|
468
|
|
|
$
|
1,807
|
|
|
$
|
(2
|
)
|
|
$
|
2,973
|
|
|
EBITDA
|
|
|
100
|
|
|
|
134
|
|
|
|
158
|
|
|
|
(3
|
)
|
|
|
389
|
|
|
Non-program depreciation and amortization
|
|
|
31
|
|
|
|
19
|
|
|
|
21
|
|
|
|
-
|
|
|
|
71
|
|
|
Total assets
|
|
|
4,844
|
|
|
|
964
|
|
|
|
5,532
|
|
|
|
178
|
|
|
|
11,518
|
|
|
Capital expenditures
|
|
|
13
|
|
|
|
15
|
|
|
|
23
|
|
|
|
-
|
|
|
|
51
|
|
F-33
Year Ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fleet
|
|
|
|
|
|
|
|
|
Mortgage
|
|
|
Relocation
|
|
|
Management
|
|
|
Corporate
|
|
|
|
|
|
|
Services
|
|
|
Services
|
|
|
Services
|
|
|
and Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
(a)
|
|
$
|
1,025
|
|
|
$
|
438
|
|
|
$
|
1,512
|
|
|
$
|
(4
|
)
|
|
$
|
2,971
|
|
|
EBITDA
|
|
|
302
|
|
|
|
124
|
|
|
|
114
|
|
|
|
(10
|
)
|
|
|
530
|
|
|
Non-program depreciation and amortization
|
|
|
27
|
|
|
|
17
|
|
|
|
18
|
|
|
|
-
|
|
|
|
62
|
|
|
Total assets
|
|
|
5,551
|
|
|
|
910
|
|
|
|
4,968
|
|
|
|
124
|
|
|
|
11,553
|
|
|
Capital expenditures
|
|
|
22
|
|
|
|
7
|
|
|
|
28
|
|
|
|
-
|
|
|
|
57
|
|
Year Ended December 31, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fleet
|
|
|
|
|
|
|
|
|
Mortgage
|
|
|
Relocation
|
|
|
Management
|
|
|
Corporate
|
|
|
|
|
|
|
Services
|
|
|
Services
|
|
|
Services
|
|
|
and Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
(a)
|
|
$
|
553
|
|
|
$
|
419
|
|
|
$
|
1,480
|
|
|
$
|
(3
|
)
|
|
$
|
2,449
|
|
|
EBITDA
|
|
|
(9
|
)
|
|
|
130
|
|
|
|
105
|
|
|
|
(1
|
)
|
|
|
225
|
|
|
Non-program depreciation and amortization
|
|
|
23
|
|
|
|
21
|
|
|
|
17
|
|
|
|
-
|
|
|
|
61
|
|
|
Capital expenditures
|
|
|
23
|
|
|
|
12
|
|
|
|
22
|
|
|
|
-
|
|
|
|
57
|
|
|
|
|
|
|
|
(a)
|
Inter-segment net revenues were not significant to the net
revenue of any one segment.
|
|
|
|
|
|
|
(b)
|
Includes unallocated corporate overhead and the elimination of
transactions between segments.
|
|
|
|
|
|
Provided below is a reconciliation of EBITDA to income before
income taxes and minority interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
389
|
|
|
$
|
530
|
|
|
$
|
225
|
|
|
Non-program related depreciation and amortization
|
|
|
71
|
|
|
|
62
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest
|
|
$
|
318
|
|
|
$
|
468
|
|
|
$
|
164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The geographic segment information provided below is classified
based on the geographic location of the Company’s
subsidiaries.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
|
|
|
United
|
|
|
All Other
|
|
|
|
|
|
|
States
|
|
|
Kingdom
|
|
|
Countries
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
2,863
|
|
|
$
|
24
|
|
|
$
|
86
|
|
|
$
|
2,973
|
|
|
Total assets
|
|
|
11,166
|
|
|
|
162
|
|
|
|
190
|
|
|
|
11,518
|
|
|
Net property and equipment
|
|
|
181
|
|
|
|
3
|
|
|
|
1
|
|
|
|
185
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
2,872
|
|
|
$
|
22
|
|
|
$
|
77
|
|
|
$
|
2,971
|
|
|
Total assets
|
|
|
11,244
|
|
|
|
165
|
|
|
|
144
|
|
|
|
11,553
|
|
|
Net property and equipment
|
|
|
185
|
|
|
|
3
|
|
|
|
1
|
|
|
|
189
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
2,369
|
|
|
$
|
20
|
|
|
$
|
60
|
|
|
$
|
2,449
|
|
F-34
|
|
|
|
18.
|
Related Party Transactions
|
Cendant
|
|
|
|
|
In the ordinary course of business, the Company is allocated
certain expenses from Cendant for corporate-related functions
including executive management, finance, human resources,
information technology, legal and facility related expenses.
Cendant allocates corporate expenses to subsidiaries conducting
ongoing operations based on a percentage of the
subsidiaries’ forecasted revenues. Such expenses amounted
to $32 million, $34 million and $31 million
during 2004, 2003 and 2002, respectively, and are included in
general and administrative expenses in the Consolidated
Statements of Income. During 2004 and 2003, the Company
maintained average outstanding borrowings from Cendant of
approximately $25 million and $30 million,
respectively, all of which had been repaid as of
December 31, 2004 and 2003, respectively. The Company could
have accessed the public debt market or available credit
facilities for such funding; however, Cendant preferred to lower
the total cost of funding for the consolidated entity through
the use of its available cash and, accordingly, provided such
funding to the Company. During 2004 and 2003, interest expense
related to such intercompany funding was de minimis. During
2002, the Company incurred interest expense of $9 million
related to such intercompany funding. In addition, at
December 31, 2004 and 2003, the Company had outstanding
balances of $31 million and $19 million, respectively,
payable to Cendant, representing the accumulation of corporate
allocations and amounts paid by Cendant on behalf of the
Company. Amounts payable to Cendant are included in accounts
payable and other accrued liabilities in the Consolidated
Balance Sheets.
|
|
|
|
|
During both 2004 and 2003, the Company paid Cendant
$140 million of cash dividends. During 2003, Cendant
transferred the mortgage operations (with net assets of
$11 million) of a recently acquired real estate brokerage
business to the Company in a non-cash financing transaction.
During 2002, Cendant made a capital contribution of
$125 million to the Company. On December 31, 2002, the
Company distributed, in the form of a non-cash dividend of
$35 million, its title and appraisal service businesses to
a wholly-owned subsidiary of Cendant not within the
Company’s ownership structure.
|
NRT Incorporated
|
|
|
|
|
The Company participates in acquisitions made by NRT, a real
estate broker, by acquiring mortgage operations of the real
estate brokerage firms acquired by NRT. When NRT was acquired by
Cendant on April 17, 2002, the Company continued to
participate in such acquisitions. The net assets resulting from
the acquisition of mortgage operations through NRT were not
material during 2004 and 2003. Such mortgage operations were
immediately integrated into the Company’s existing mortgage
operations. The Company also received real estate referral fees
from NRT in connection with clients referred to NRT by the
Company’s relocation services business. During 2004, 2003
and 2002, such fees were approximately $49 million,
$42 million and $37 million, respectively, and were
recorded by the Company in its Consolidated Statements of
Income. These amounts were paid to the Company by all other real
estate brokerages (both affiliates and non-affiliates) who
received referrals from the Company’s relocation services
business.
|
F-35
|
|
|
|
19.
|
Selected Quarterly Financial Data—(unaudited)
|
|
|
|
|
|
Provided below is selected unaudited quarterly financial data
for 2004 and 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Services
|
|
$
|
152
|
|
|
$
|
217
|
|
|
$
|
175
|
|
|
$
|
156
|
|
|
|
Relocation Services
|
|
|
106
|
|
|
|
114
|
|
|
|
128
|
|
|
|
120
|
|
|
|
Fleet Management Services
|
|
|
393
|
|
|
|
431
|
|
|
|
451
|
|
|
|
532
|
|
|
|
Corporate and Other
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
650
|
|
|
$
|
762
|
|
|
$
|
753
|
|
|
$
|
808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Services
|
|
$
|
1
|
|
|
$
|
58
|
|
|
$
|
29
|
|
|
$
|
12
|
|
|
|
Relocation Services
|
|
|
21
|
|
|
|
38
|
|
|
|
47
|
|
|
|
28
|
|
|
|
Fleet Management Services
|
|
|
32
|
|
|
|
37
|
|
|
|
42
|
|
|
|
47
|
|
|
|
Corporate and Other
|
|
|
(3
|
)
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
|
|
|
|
132
|
|
|
|
115
|
|
|
|
91
|
|
|
Less: Non-program related depreciation and amortization
|
|
|
16
|
|
|
|
19
|
|
|
|
19
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest
|
|
$
|
35
|
|
|
$
|
113
|
|
|
$
|
96
|
|
|
$
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
21
|
|
|
$
|
68
|
|
|
$
|
59
|
|
|
$
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Services
|
|
$
|
268
|
|
|
$
|
266
|
|
|
$
|
275
|
|
|
$
|
216
|
|
|
|
Relocation Services
|
|
|
108
|
|
|
|
111
|
|
|
|
119
|
|
|
|
100
|
|
|
|
Fleet Management Services
|
|
|
376
|
|
|
|
380
|
|
|
|
376
|
|
|
|
380
|
|
|
|
Corporate and Other
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
751
|
|
|
$
|
757
|
|
|
$
|
770
|
|
|
$
|
693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Services
|
|
$
|
97
|
|
|
$
|
70
|
|
|
$
|
83
|
|
|
$
|
52
|
|
|
|
Relocation Services
|
|
|
21
|
|
|
|
37
|
|
|
|
43
|
|
|
|
23
|
|
|
|
Fleet Management Services
|
|
|
29
|
|
|
|
30
|
|
|
|
27
|
|
|
|
28
|
|
|
|
Corporate and Other
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
(4
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145
|
|
|
|
135
|
|
|
|
149
|
|
|
|
101
|
|
|
Less: Non-program related depreciation and amortization
|
|
|
15
|
|
|
|
15
|
|
|
|
15
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest
|
|
$
|
130
|
|
|
$
|
120
|
|
|
$
|
134
|
|
|
$
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
78
|
|
|
$
|
71
|
|
|
$
|
81
|
|
|
$
|
54
|
|
F-36
Spin-Off
from Cendant
|
|
|
|
|
On January 31, 2005, Cendant approved the distribution of
52.7 million shares of the Company’s common stock held
by Cendant to the holders of Cendant common stock on
January 19, 2005, the record date for the distribution
(the “Spin-Off”).
|
|
|
|
|
In connection with and prior to the Spin-Off, the Company
underwent an internal reorganization after which it continued to
own Cendant Mortgage Corporation (subsequently renamed
PHH Mortgage Corporation (“PHH Mortgage”)),
PHH Vehicle Management Services, LLC and its other
subsidiaries that engage in the mortgage and fleet management
services businesses. Pursuant to this internal reorganization,
Cendant Mobility Services Corporation (“Cendant
Mobility”), Wright Express LLC and other subsidiaries
that engaged in the relocation and fuel card businesses were
separated from the Company and distributed to Cendant. In
addition, in January 2005, Cendant contributed its
appraisal services business to the Company.
|
|
|
|
|
The Company believes that the internal reorganization will
likely result in an impairment to its goodwill in the first
quarter of 2005. Although the Company has not yet completed its
final analysis, the Company currently expects, based upon
currently available information, this impairment will be in the
range of $225 million to $250 million.
|
|
|
|
|
In connection with the Spin-Off, the Company has entered into
various agreements with Cendant, including (i) a mortgage
venture (and related agreements) for the purpose of originating
and selling mortgage loans primarily sourced through
Cendant’s owned residential real estate brokerage,
NRT Incorporated, and Cendant Mobility, which is expected
to commence operations in mid-2005 and which will be
consolidated within the Company’s results of operations;
(ii) a strategic relationship agreement whereby Cendant and
the Company have agreed on non-competition, indemnification and
exclusivity arrangements; (iii) a separation agreement that
requires the exchange of information with Cendant and other
provisions regarding the Company’s separation from Cendant;
(iv) a tax sharing agreement governing the allocation of
liability for taxes between Cendant and the Company,
indemnification for liability for taxes and responsibility for
preparing and filing tax returns and defending tax contests, as
well as other tax-related matters and (v) a transition
services agreement governing certain continuing arrangements
between the Company and Cendant so as to provide for an orderly
transition of the Company becoming an independent
publicly-traded company.
|
|
|
|
|
The tax sharing agreement contains certain provisions relating
to the treatment of the ultimate settlement of Cendant tax
contingencies that relate to audit adjustments due to taxing
authorities review of prior income tax returns and any effects
of the current year filing of income tax returns. As a result of
the resolution of these matters, the Company’s tax basis in
certain assets may be adjusted in the future, in addition to, in
certain circumstances, being required to remit any tax benefits
ultimately realized by the Company to Cendant.
|
Redemption
of Private Placement Notes
|
|
|
|
|
On February 9, 2005, the Company redeemed its
$443 million aggregate principal amount outstanding of
private placement notes for $497 million in cash, including
accrued and unpaid interest and a premium.
|
Debt
Issuances
|
|
|
|
|
In February 2005, the Company issued $252 million of
commercial paper and borrowed $150 million against its
revolving credit facility to fund a portion of its
February 9, 2005 redemption of its $443 million
aggregate principal amount outstanding of private placement
notes.
|
* * *
F-37
EXHIBIT INDEX
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|
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|
|
Exhibit No.
|
|
|
Description
|
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|
|
|
|
|
2.1
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|
|
Agreement and Plan of Merger by and among Cendant Corporation,
PHH Corporation, Avis Acquisition Corp, and Avis Group Holdings,
Inc., dated as of November 11, 2000 (Incorporated by
reference to Exhibit 10.4 to our Quarterly Report on
Form 10-Q for the quarterly period ended September 30,
2000 filed on November 14, 2000).
|
|
|
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|
3.1
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|
|
Amended and Restated Articles of Incorporation. (Incorporated by
reference to our Current Report on Form 8-K dated as of
February 1, 2005).
|
|
|
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|
3.2
|
|
|
Amended and Restated By-Laws. (Incorporated by reference to our
Current Report on Form 8-K dated as of February 1,
2005).
|
|
|
|
|
3.3
|
|
|
Amended and Restated Limited Liability Company Operating
Agreement, dated as of January 31, 2005, of PHH Home Loans,
LLC, by and between PHH Broker Partner Corporation and Cendant
Real Estate Services Venture Partner, Inc. (Incorporated by
reference to our Current Report on Form 8-K dated as of
February 1, 2005).
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|
|
|
|
4.1
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|
|
Specimen common stock certificate.
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|
|
|
|
4.2
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|
|
Rights Agreement, dated as of January 28, 2005, by and
between PHH Corporation and the Bank of New York. (Incorporated
by reference to our Current Report on Form 8-K dated as of
February 1, 2005).
|
|
|
|
|
4.3
|
|
|
Indenture dated November 6, 2000 between PHH Corporation
and Bank One Trust Company, N.A., as Trustee (Incorporated
by reference to Exhibit 4.0 to our Current Report on
Form 8-K dated December 12, 2000).
|
|
|
|
|
4.4
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|
|
Supplemental Indenture No. 1 dated November 6, 2000
between PHH Corporation and Bank One Trust Company, N.A.,
as Trustee (Incorporated by reference to Exhibit 4.1 to our
Current Report on Form 8-K dated December 12, 2000).
|
|
|
|
|
4.5
|
|
|
Supplemental Indenture No. 3 dated as of May 30, 2002
to the Indenture dated as of November 6, 2000 between PHH
corporation and Bank One Trust Company, N.A., as Trustee
(pursuant to which the Internotes, 6.000% Notes due 2008
and 7.125% Notes due 2013 were issued) (Incorporated by
reference to Exhibit 4.1 to our Current Report on
Form 8-K dated June 4, 2002).
|
|
|
|
|
4.6
|
|
|
Form of PHH Corporation Internotes (Incorporated by reference to
our Annual Report on Form 10-K for the year ended
December 31, 2002).
|
|
|
|
|
10.1
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|
|
Base Indenture dated as of June 30, 1999 between Greyhound
Funding LLC (now known as Chesapeake Funding LLC) and The Chase
Manhattan Bank, as Indenture Trustee. (Incorporated by reference
to Greyhound Funding LLC’s Amendment to its Registration
Statement on Form S-1 filed with the Securities and
Exchange Commission on March 19, 2001) (No. 333-40708)).
|
|
|
|
|
10.2
|
|
|
Supplemental Indenture No. 1 dated as of October 28,
1999 between Greyhound Funding LLC and The Chase Manhattan Bank
to the Base Indenture dated as of June 30, 1999.
(Incorporated by reference to Greyhound Funding LLC’s
Amendment to its Registration Statement on Form S-1 filed
with the Securities and Exchange Commission on March 19,
2001) (No. 333-40708)).
|
|
|
|
|
10.3
|
|
|
Series 2001-1 Indenture Supplement between Greyhound
Funding LLC (now known as Chesapeake Funding LLC) and The Chase
Manhattan Bank, as Indenture Trustee, dated as of
October 25, 2001 (Incorporated by reference to Greyhound
Funding LLC’s Annual Report on Form 10-K for the year
ended December 31, 2001).
|
|
|
|
|
10.4
|
|
|
Second Amended and Restated Mortgage Loan Purchase and Servicing
Agreement, dated as of October 31, 2000 among the
Bishop’s Gate Residential Mortgage Trust, Cendant Mortgage
Corporation, Cendant Mortgage Corporation, as Servicer and PHH
Corporation (Incorporated by reference to our Annual Report on
Form 10-K for the year ended December 31, 2001).
|
E-1
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|
|
|
|
|
|
Exhibit No.
|
|
|
Description
|
|
|
|
|
|
|
|
|
|
10.5
|
|
|
Purchase Agreement dated as of April 25, 2000 by and
between Cendant Mobility Services Corporation and Cendant
Mobility Financial Corporation (Incorporated by reference to our
Annual Report on Form 10-K for the year ended
December 31, 2001).
|
|
|
|
|
10.6
|
|
|
Receivables Purchase Agreement dated as of April 25, 2000
by and between Cendant Mobility Financial Corporation and Apple
Ridge Services Corporation (Incorporated by reference to our
Annual Report on Form 10-K for the year ended
December 31, 2001).
|
|
|
|
|
10.7
|
|
|
Transfer and Servicing Agreement dated as of April 25, 2000
by and between Apple Ridge Services Corporation, Cendant
Mobility Financial Corporation, Apple Ridge Funding LLC and Bank
One, National Association (Incorporated by reference to our
Annual Report on Form 10-K for the year ended
December 31, 2001).
|
|
|
|
|
10.8
|
|
|
Master Indenture among Apple Ridge Funding LLC, Bank One,
National Association and The Bank Of New York dated as of
April 25, 2000 (Incorporation by reference to our Annual
Report on Form 10-K for the year ended December 31,
2001).
|
|
|
|
|
10.9
|
|
|
Second Amended and Restated Mortgage Loan Repurchases and
Servicing Agreement dated as of December 16, 2002 among
Sheffield Receivables Corporation, as Purchaser, Barclays Bank
Plc. New York Branch, as Administrative Agent, Cendant Mortgage
Corporation, as Seller and Servicer and PHH Corporation, as
Guarantor (Incorporated by reference to our Annual Report on
Form 10-K for the year ended December 31, 2001).
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|
|
|
|
10.10
|
|
|
Series 2002-1 Indenture Supplement, between Chesapeake
Funding LLC, as issuer and JPMorgan Chase Bank, as indenture
trustee, dated as of June 10, 2002. (Incorporated by
reference to Chesapeake Funding LLC’s Annual Report on
Form 10-K for the year ended December 31, 2002).
|
|
|
|
|
10.11
|
|
|
Supplemental Indenture No. 2, dated as of May 27,
2003, to Base Indenture, dated as of June 30, 1999, as
supplemented by Supplemental Indenture No. 1, dated as of
October 28, 1999, between Chesapeake Funding LLC and
JPMorgan Chase Bank, as trustee (Incorporated by reference to
Exhibit 10.1 to Chesapeake Funding LLC’s Quarterly
Report on Form 10-Q for the period ended June 30,
2003).
|
|
|
|
|
10.12
|
|
|
Supplemental Indenture No. 3, dated as of June 18,
2003, to Base Indenture, dated as of June 30, 1999, as
supplemented by Supplemental Indenture No. 1, dated as of
October 28, 1999, and Supplemental Indenture No. 2,
dated as of May 27, 2003, between Chesapeake Funding LLC
and JPMorgan Chase Bank, as trustee (Incorporated by reference
to Exhibit 10.2 to Chesapeake Funding LLC’s Quarterly
Report on Form 10-Q for the period ended June 30,
2003).
|
|
|
|
|
10.13
|
|
|
Supplement Indenture No. 4, dated as of July 31, 2003,
to the Base Indenture, dated as of June 30, 1999, between
Chesapeake Funding LLC and JPMorgan Chase Bank (formerly known
as The Chase Manhattan Bank), as Indenture Trustee (Incorporated
by reference to the Amendment to the Registration Statement on
Forms S-3/ A and S-1/ A (Nos. 333-103678 and 333-103678-01,
respectively) filed with the Securities and Exchange Commission
on August 1, 2003).
|
|
|
|
|
10.14
|
|
|
Series 2003-1 Indenture Supplement, dated as of
August 14, 2003, to the Base Indenture, dated as of
June 30, 1999, between Chesapeake Funding LLC and JPMorgan
Chase Bank (formerly known as The Chase Manhattan Bank), as
Indenture Trustee (Incorporated by reference to Chesapeake
Funding LLC’s Quarterly Report of Form 10-Q for the
quarterly period ended September 30, 2003).
|
|
|
|
|
10.15
|
|
|
Series 2003-2 Indenture Supplement, dated as of
November 19, 2003, between Chesapeake Funding LLC, as
issuer and JPMorgan Chase Bank, as indenture trustee
(Incorporated by reference to Cendant Corporation’s
Form 10-K for the year ended December 31, 2003).
|
|
|
|
|
10.16
|
|
|
Three Year Competitive Advance and Revolving Credit Agreement,
dated as of June 28, 2004, among PHH Corporation, the
lenders party thereto, and JPMorgan Chase Bank, N.A., as
Administrative Agent (Incorporated by reference to our Current
Report on Form 8-K dated June 30, 2004).
|
E-2
|
|
|
|
|
|
|
Exhibit No.
|
|
|
Description
|
|
|
|
|
|
|
|
|
|
10.17
|
|
|
Amendment, dated as of December 21, 2004, to the Three Year
Competitive Advance and Revolving Credit Agreement, dated
June 28, 2004, between PHH, the financial institutions
parties thereto and JPMorgan Chase Bank, N.A., as administrative
agent. (Incorporated by reference to our Current Report on
Form 8-K dated as of February 1, 2005).
|
|
|
|
|
10.18‡
|
|
|
Strategic Relationship Agreement, dated as of January 31,
2005, by and among Cendant Real Estate Services Group, LLC,
Cendant Real Estate Services Venture Partner, Inc., PHH
Corporation, Cendant Mortgage Corporation, PHH Broker Partner
Corporation and PHH Home Loans, LLC. (Incorporated by reference
to our Current Report on Form 8-K dated as of
February 1, 2005).
|
|
|
|
|
10.19
|
|
|
Trademark License Agreement, dated as of January 31, 2005,
by and among TM Acquisition Corp., Coldwell Banker Real Estate
Corporation, ERA Franchise Systems, Inc., Century 21 LLC and
Cendant Mortgage Corporation. (Incorporated by reference to our
Current Report on Form 8-K dated as of February 1,
2005).
|
|
|
|
|
10.20
|
|
|
Marketing Agreement, dated as of January 31, 2005, by and
between Coldwell Banker Real Estate Corporation, Century 21 Real
Estate LLC, ERA Franchise Systems, Inc., Sotheby’s
International Affiliates, Inc. and Cendant Mortgage Corporation.
(Incorporated by reference to our Current Report on
Form 8-K dated as of February 1, 2005).
|
|
|
|
|
10.21
|
|
|
Separation Agreement, dated as of January 31, 2005, by and
between Cendant Corporation and PHH Corporation. (Incorporated
by reference to our Current Report on Form 8-K dated as of
February 1, 2005).
|
|
|
|
|
10.22‡
|
|
|
Tax Sharing Agreement, dated as of January 31, 2005, by and
among Cendant Corporation, PHH Corporation and certain
affiliates of PHH Corporation named therein. (Incorporated by
reference to our Current Report on Form 8-K dated as of
February 1, 2005).
|
|
|
|
|
10.23
|
|
|
Transition Services Agreement, dated as of January 31,
2005, by and among Cendant Corporation, Cendant Operations, Inc.
PHH Corporation, PHH Vehicle Management Services LLC (d/b/a PHH
Arval) and Cendant Mortgage Corporation. (Incorporated by
reference to our Current Report on Form 8-K dated
February 1, 2005).
|
|
|
|
|
10.24†
|
|
|
Employment Agreement, dated as of January 31, 2005, by and
between PHH Corporation and Terence W. Edwards. (Incorporated by
reference to our Current Report on Form 8-K dated
February 1, 2005).
|
|
|
|
|
10.25†
|
|
|
Non-Employee Directors Deferred Compensation Plan. (Incorporated
by reference to our Current Report on Form 8-K dated
February 1, 2005).
|
|
|
|
|
10.26†
|
|
|
Officer Deferred Compensation Plan. (Incorporated by reference
to our Current Report on Form 8-K dated February 1,
2005).
|
|
|
|
|
10.27†
|
|
|
Savings Restoration Plan. (Incorporated by reference to our
Current Report on Form 8-K dated February 1, 2005).
|
|
|
|
|
10.28†
|
|
|
PHH Corporation 2005 Equity and Incentive Plan. (Incorporated by
reference to our Current Report on Form 8-K dated
February 1, 2005).
|
|
|
|
|
10.29†
|
|
|
Form of PHH Corporation 2005 Equity Incentive Plan Non-Qualified
Stock Option Agreement.
|
|
|
|
|
12
|
|
|
Computation of Ratio of Earnings to Fixed Charges
|
|
|
|
|
14
|
|
|
Code of Conduct for Employees and Officers.
|
|
|
|
|
21
|
|
|
Subsidiaries of the Registrant.
|
|
|
|
|
23
|
|
|
Consent of Independent Registered Public Accounting Firm.
|
|
|
|
|
31.1
|
|
|
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
|
E-3
|
|
|
|
|
|
|
Exhibit No.
|
|
|
Description
|
|
|
|
|
|
|
|
31.2
|
|
|
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
|
|
|
|
|
32.1
|
|
|
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
|
|
|
|
32.2
|
|
|
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
|
|
|
|
99
|
|
|
Risk Factors Affecting Our Business and Future Results.
|
|
|
|
|
†
|
Management or compensatory plan or arrangement required to be
filed pursuant to Item 15(a)(3) and (b) of this Annual
Report on Form 10-K.
|
|
|
|
‡
|
Confidential treatment has been requested for certain portions
of this Exhibit pursuant to Rule 24b-2 of the Exchange Act
which portions have been omitted and frilled separately with the
Commission.
|
E-4
Exhibit 14
CODE OF CONDUCT
FOR EMPLOYEES AND OFFICERS
TABLE OF CONTENTS
|
|
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|
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|
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|
|
Page
|
|
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|
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|
|
|
|
MESSAGE FROM TERENCE EDWARDS
|
|
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1
|
|
|
|
|
|
|
|
|
INTRODUCTION
|
|
|
2
|
|
|
|
|
|
|
|
|
COMPLIANCE WITH THE CODE
|
|
|
2
|
|
|
|
|
|
|
|
|
FOR ADDITIONAL INFORMATION
|
|
|
3
|
|
|
|
|
|
|
|
|
WORKPLACE
|
|
|
4
|
|
|
Nondiscriminatory Environment
|
|
|
4
|
|
|
Equal Employment Opportunity.
|
|
|
4
|
|
|
Harassment-Free Workplace.
|
|
|
4
|
|
|
Employee Professionalism
|
|
|
4
|
|
|
Substance Abuse.
|
|
|
4
|
|
|
Workplace Violence.
|
|
|
5
|
|
|
Favoritism.
|
|
|
5
|
|
|
|
|
|
|
|
|
ENVIRONMENT, HEALTH & SAFETY
|
|
|
5
|
|
|
Environment.
|
|
|
5
|
|
|
Health and Safety.
|
|
|
5
|
|
|
|
|
|
|
|
|
THIRD-PARTY RELATIONSHIPS
|
|
|
5
|
|
|
Conflicts of Interest.
|
|
|
6
|
|
|
Corporate Opportunities.
|
|
|
7
|
|
|
Gifts and Entertainment.
|
|
|
7
|
|
|
Public Relations.
|
|
|
7
|
|
|
Regulatory or Legal Inquiries.
|
|
|
7
|
|
|
Government Relations.
|
|
|
8
|
|
|
Marketing, Advertising and Promotions.
|
|
|
8
|
|
|
|
|
|
|
|
|
COMPETITOR RELATIONSHIPS
|
|
|
8
|
|
|
Antitrust and Competition.
|
|
|
8
|
|
|
Trade Shows and Trade Association Meetings.
|
|
|
9
|
|
|
Fair Dealing.
|
|
|
9
|
|
|
|
|
|
|
|
|
INSIDER INFORMATION
|
|
|
9
|
|
|
|
|
|
|
|
|
BUSINESS RECORDS & INFORMATION
|
|
|
10
|
|
|
Confidential and Proprietary Information.
|
|
|
10
|
|
|
Financial Reporting and Records.
|
|
|
11
|
|
|
Business Records and Information Management.
|
|
|
11
|
|
|
|
|
|
|
|
|
PHH ASSETS
|
|
|
12
|
|
|
Use of PHH Property.
|
|
|
12
|
|
|
Destruction of Property and Theft.
|
|
|
12
|
|
|
Bribes and Kickbacks.
|
|
|
12
|
|
|
Money Laundering or Illicit Financing.
|
|
|
12
|
|
|
Intellectual Property of PHH.
|
|
|
13
|
|
|
Intellectual Property of Others.
|
|
|
13
|
|
|
Information Technology and Communications Equipment.
|
|
|
13
|
|
MESSAGE FROM TERENCE EDWARDS
The cornerstone of PHH’s success has been the entrepreneurial spirit, energy and commitment of our
employees. We meet business goals without compromising our core values and encourage free and open
communication. PHH has established a new Code of Conduct to reflect and perpetuate these values.
How we carry ourselves and treat others affects how consumers, business partners and investors
ultimately view PHH. Accordingly, the Company is committed to promoting an ethical environment
based on these fundamental principles of conduct:
Treat everyone – employees, customers and business partners – with dignity, integrity and respect;
|
|
•
|
Behave honestly and fairly;
|
|
|
•
|
Strive for mutual respect and trust in relationships;
|
|
|
•
|
Use good judgment and high ethical standards in all business dealings;
|
|
|
•
|
Abide by applicable laws, rules and regulations;
|
|
|
•
|
Ensure a safe and healthy work environment; and
|
|
|
•
|
Address any actual or potential violation of the Code of Conduct.
|
We are all personally responsible for adhering to these core values in our daily routines.
Therefore, I ask that you observe the Code of Conduct. While it is impossible to anticipate every
situation that could arise, the Code of Conduct should provide a clear understanding of what is
expected of each of us as members of the PHH family. In complying with these standards, the
following questions should guide us in making the right decisions:
|
|
•
|
Would we be comfortable telling our family, friends or co-workers about our
behavior?
|
|
|
•
|
Would we want to see the behavior reported on the front page of the
Wall Street
Journal
, the
Financial Times
or any other publication?
|
|
|
•
|
Could a person’s life, health or safety be endangered by any of our actions?
|
|
|
•
|
Do we believe that what we are doing is illegal or unethical?
|
I appreciate your continuing commitment and dedication in protecting the Company’s outstanding
reputation and in ensuring that PHH remains an integrity-first organization.
Sincerely,
Terence W. Edwards
President and Chief Executive Officer
INTRODUCTION
The Code of Conduct (“Code”) is the foundation of PHH’s Corporate Compliance Program (“Program”),
which will assist employees of PHH in conducting their daily activities ethically and legally. The
Code, together with your local business unit policies and procedures, and other business policies
that may be distributed from time to time, describes the behavior expected of all employees and
agents doing business on behalf of PHH. In many instances, the Code goes beyond legal requirements.
The Code applies to all employees of PHH and its subsidiaries, regardless of when such person was
hired or became associated with PHH. The Code supersedes any and all previous codes of conduct and
similar documents of PHH or its subsidiaries governing employee conduct. While certain subsidiaries
of PHH may issue other information or guidance about the standards of conduct expressed in the
Code, to the extent that any such information or guidance is inconsistent with the Code of Conduct,
the Code shall take precedence. The Code is not intended to cover every situation that might arise,
but is intended to help employees make the right decision or ask the right questions. Each new and
current PHH employee is required to certify that she or he has read, understood and will comply
with the Code of Conduct.
COMPLIANCE WITH THE CODE
It is the responsibility of all employees to know, understand, and comply with the Code. Subject to
applicable laws and regulations, failure to do so may result in disciplinary action including, but
not limited to, retraining, reprimands, suspension, termination, and, in certain instances,
referral to appropriate authorities.
If you observe or become aware of an actual or potential violation of any law, regulation or the
Code, whether committed by PHH employees or by a contractor or others associated with PHH, you
should report the circumstances in an appropriate manner and cooperate with any investigation that
might ensue. The Program is designed to foster a positive work environment and give employees the
means to report in good faith any potential violation of law or business ethics.
For assistance with compliance and business ethics matters and to report actual or potential
infractions, or if you are in doubt as to the proper course of action, you should contact your
supervisor. If a manager is unable to resolve the issue or if you are uncomfortable discussing the
issue with your supervisor, each Business Unit and PHH will have compliance officers available to
assist you. You also may seek assistance from your Human Resources Department, Legal Department or
the “Integrity Hotline,” a service established to enable employees to make confidential, anonymous
reports of possible violations of the Code of Conduct. While the Integrity Hotline does not replace
the existing reporting channels, it may be used to report matters you believe are not being
resolved through existing channels as outlined above. The Integrity Hotline toll-free number is:
1-888-732-1413, callers inside the U.S. or Canada can dial direct, all others must first dial the
appropriate International access code. The Integrity Hotline is available to receive calls and
process reports 24 hours a day, seven days a week.
You may place calls to the Integrity Hotline to report actual or potential violations of the Code
(including complaints regarding accounting, auditing and financial reporting matters), or to ask
questions or obtain advice to clarify compliance- or ethical-related issues. Every effort will be
made to keep the identity of anyone reporting an actual or potential violation confidential to the
- 2 -
extent permitted by law, unless doing so will prevent PHH from fully and effectively investigating
suspected misconduct. In order to assist the investigation of any report made, PHH encourages those
reporting to identify themselves; however, PHH will accept and investigate anonymous reports.
Anonymous callers will be assigned a personal identification number for follow-up. This affords the
caller an opportunity to report additional information and/or receive appropriate information on
the status of the disposition of his or her report. The Integrity Hotline will not record calls or
use call identifiers. There will be no reprisals or adverse employment action against employees for
good faith reporting of compliance or ethical concerns in accordance with the Code of Conduct. The
Code is a statement of policies for individual and business conduct and does not, in any way,
constitute an employment contract or an assurance of continued employment. The Code is, however,
binding on all employees of PHH to the extent permitted by law. Subject to applicable law, a
violation of the Code may be grounds for the Company to start disciplinary action, which could lead
to termination and result in civil and criminal liability.
FOR ADDITIONAL INFORMATION
More specific information and guidance can be found in various sources including policies,
procedures and guidelines that you may obtain from your manager, your Business Unit Human Resources
Department or your Business Unit Legal Department.
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WORKPLACE
Nondiscriminatory Environment
Equal Employment Opportunity
Harassment-Free Workplace
Equal Employment Opportunity.
PHH fosters a work environment in which all individuals are treated with respect and dignity. We
are an equal opportunity employer and do not discriminate either directly or indirectly against
employees or potential employees on the basis of race, color, religion, sex, sexual
preference/orientation, citizenship, marital status, veteran status, national origin, age or
disability, or against any other group protected by applicable law or regulation. PHH will make
reasonable accommodations for its eligible disabled employees in compliance with applicable laws
and regulations. PHH is committed to actions and policies to assure fair employment, including
equal treatment in hiring, promotion, training, compensation, termination and disciplinary action,
and will not tolerate such discrimination either directly or indirectly by its employees or agents.
Harassment-Free Workplace.
PHH will not tolerate unlawful harassment of its employees, customers or vendors in any form.
Sexual harassment is illegal in the United States and other countries and all employees are
prohibited from engaging in any form of sexually harassing behavior. Sexual harassment includes,
but is not limited to, unwelcome sexual conduct, either visual, verbal or physical, and may
include, but is not limited to: unwanted sexual advances, unwanted touching and suggestive touching
of self or others, language of a sexual nature, telling sexual jokes, innuendoes, suggestions,
suggestive looks and displaying sexually suggestive visual materials. For a more detailed
explanation of the Sexual Harassment Policy, please consult your Business Unit Human Resources
Department or Legal Department.
Employee Professionalism
Substance Abuse
Workplace Violence
Favoritism
Substance Abuse.
PHH is committed to maintaining a safe and healthy work environment free of substance abuse.
Employees are expected to perform their responsibilities in a professional manner and to be free
from the adverse effects of illegal drugs, alcohol or other substances that may hinder job
performance or judgment. Employees are prohibited from the illegal use, sale, dispensing,
distribution, purchase, possession or manufacture of illegal drugs or other controlled substances,
while on Company property or Company-sponsored business. In the United States, PHH makes services
available through an Employee Assistance Program (EAP) at 1-800-881-9524 to help employees deal
with drug or alcohol abuse problems. Outside the United States, employees should consult with their
Business Unit’s Human Resources Department. Consistent with applicable law, the Company may require
an employee suspected of unlawful drug use or being under the influence of alcohol while at work to
submit to a screening test or undergo mandatory
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rehabilitation. Similarly, to the extent permitted by local law, any conviction for a drug-related
offense could result in termination of employment.
Workplace Violence.
The workplace must be free of violent and abusive behavior. Threatening, aggressive or abusive
behavior toward fellow employees or others in the workplace will not be tolerated. Employees may
not carry weapons or explosives into PHH facilities or on business unit property.
Favoritism.
PHH is committed to fostering a professional work environment in which managers treat employees in
a fair and impartial manner. PHH is also committed to avoiding perceptions of favoritism, claims of
lack of objectivity toward subordinate job performance, and complaints of sexual harassment or even
the appearance of impropriety. Accordingly, managers (i.e., all employees who directly or
indirectly supervise or direct another employee on a full- or part-time basis) may not favor any
employee in promotions, compensation, assignments and the like on the basis of any personal
friendship or financial or social relationship with the employee.
Examples of relationships that may lead to favoritism or a perception of favoritism are:
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Relatives who work as supervisors or subordinates to one another, either directly
or indirectly, or work in the same department or function.
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Employees in the same department or function who are dating one another, or who are
otherwise engaged in a close personal relationship.
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ENVIRONMENT, HEALTH & SAFETY
Environment.
PHH is committed to sound environmental management. It is the intent of PHH to conduct itself in
partnership with the environment and community at large as a responsible and caring corporate
citizen. PHH strives to comply with all applicable environmental laws and regulations. PHH is
committed to preventing or mitigating adverse environmental impact in all its business activities.
Health and Safety.
PHH is committed to providing its employees with a healthy and safe workplace in compliance with
applicable laws. Employees must be aware of safety issues and policies that affect their job.
Employees must immediately advise the Company, their managers, or the persons responsible for
health and safety, of any workplace injury or any circumstance presenting a dangerous situation, so
that a timely investigation may be conducted and corrective action taken to resolve the issue. Upon
learning of any circumstance that might affect the health and safety in the workplace, managers
must act immediately to address the situation.
THIRD-PARTY RELATIONSHIPS
Conflicts of Interest
Corporate Opportunities
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Gifts and Entertainment
Public Relations
Regulatory or Legal Inquiries
Government Relations
Marketing, Advertising and Promotions
Conflicts of Interest.
All employees occupy a position of trust with the Company and, as a result, have a duty of loyalty
to the Company both during and after the employment relationship. Employees are required to avoid
any relationship or activity that might create or give the appearance of a conflict between their
personal interests and the interests of PHH or its subsidiaries. PHH selects its suppliers, vendors
and contractors in a non-discriminatory manner and based on appropriate quality, cost, service and
ability to supply a range of goods and services. A decision to hire a supplier, vendor or
contractor must never be based on personal interests or interests of family members, but must be in
the best interests of PHH and its shareholders.
Employees must disclose any relationship that appears to create a conflict of interest to their
manager, Business Unit Compliance Officer or PHH’s Corporate Compliance Officer. They must also
obtain written pre-approval before proceeding with any transaction, conduct or investment that
creates or appears to create a conflict of interest, such as: (1) engaging in personal business
transactions that arise from or are based upon an employee’s position of authority, (2) owning a
financial interest (other than less than one percent of the capital stock of a public company) in a
business that does business or competes with PHH, and (3) participating in an opportunity
discovered from information provided by a competitor, customer or supplier.
Executive officers of PHH must disclose actual or potential conflicts of interest to the Audit
Committee of the Board of Directors and obtain from such person or committee written pre-approval
before engaging in any such transaction or conduct or making any such investment.
In addition, an employee of the Company must seek prior approval from PHH’s Corporate Compliance
Officer or the employee’s Business Unit Compliance Officer before accepting an invitation to serve
as a director or trustee of any other business. If such service existed at the time of hire or upon
acquisition of a new company, the employee must promptly disclose the existence of such service and
obtain approval to continue providing such service before doing so. Service as a director of a
for-profit entity (other than PHH and its subsidiaries) is strongly discouraged.
Here are additional examples of potential conflicts of interest that may require disclosure:
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Employee or immediate family member of employee acting as a director, partner,
consultant or employee of a firm that provides goods or services to PHH or is a
competitor of PHH or one of its subsidiaries.
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Holding a second job that interferes with employment duties at PHH.
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Ownership by employees or members of their immediate family of a material financial
interest, known to the employee, in a firm which is either a competitor of or vendor
to PHH or one of its subsidiaries.
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Using PHH’s confidential information in any manner that violates the Company’s
confidentiality policy (please see page 10).
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Corporate Opportunities.
Employees of PHH owe a duty to the Company to advance its legitimate interests when the opportunity
to do so arises. If you learn of a business or investment opportunity through the use of corporate
property or information or your position at PHH, such as from a competitor or actual or potential
customer, supplier or business associate of the Company, you may not participate in the business or
make the investment without the prior written approval of your Business Unit Compliance Officer or
PHH’s Corporate Compliance Officer. Executive officers must obtain the prior written approval of
PHH’s Corporate Compliance Officer or Audit Committee of the Board of Directors. Such an
opportunity should be considered an investment opportunity for PHH in the first instance, subject
to other conflict-of-interest safeguards as outlined in this document.
Gifts and Entertainment.
Employees or the immediate family of employees shall not use their position with PHH to solicit any
cash, gifts or free services from any PHH customer, vendor or contractor for personal benefit.
Gifts or entertainment from others should not be accepted if they could be reasonably considered to
improperly or materially influence PHH’s business relationship with or create an obligation to a
customer, vendor or contractor.
The following examples are guidelines regarding gifts and entertainment:
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Nominal gifts and entertainment, such as logo items, pens, calendars, caps, shirts
and mugs are acceptable.
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Reasonable invitation to business-related meetings, conventions, conferences or
product-training seminars may be accepted.
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Invitations to social or cultural events may be accepted if the cost is reasonable
and your attendance serves a customary business purpose such as networking.
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Invitations to sporting activities or ticketed events that are usual and customary
in the conduct of business and promote good working relationships with customers and
suppliers may be accepted.
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Special rules may apply to employees involved in seeking business with, or providing services to,
government entities. Contact your Business Unit Compliance Officer or PHH’s Corporate Compliance
Officer for specific information and guidance on these rules.
Public Relations.
PHH’s Communications Department is responsible for all public relations, including all contact with
the media. Unless specifically authorized to represent PHH to the media, employees may not respond
to inquiries or requests for information. This includes newspapers, magazines, trade publications,
radio, television and websites, as well as any other external source seeking information about PHH.
If the media contacts you about any topic, refer the call to PHH’s Communications Department or
your Business Unit Communications Department. Employees must be careful not to disclose
confidential, personnel or business information through public or casual discussions, to the media
or others.
Regulatory or Legal Inquiries.
Inquiries from federal, state and local governmental officials and entities related to PHH and its
business affairs (or from comparable governmental officials or entities outside the United States)
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should be referred to PHH’s Corporate Legal Department or your Business Unit Legal Department
unless you have been specifically authorized to respond to such inquiries. In the latter case, you
should inform PHH’s Corporate Legal Department or your Business Unit Legal Department of any
response given by you. Examples of government inquiries include requests for information, notice of
an investigation, or service of a subpoena.
Government Relations.
Employees may, of course, participate in the political process as private citizens. It is important
to separate personal political activity from PHH’s political activities in order to comply with the
appropriate rules and regulations regarding lobbying or attempting to influence government
officials. PHH will not reimburse employees for money or personal time contributed to political
campaigns. In addition, employees may not work on behalf of a candidate’s campaign during working
hours or at any time use PHH’s facilities or resources for that purpose.
PHH is prohibited from making contributions to candidates, officeholders and political parties at
the U.S. federal level and under certain state and local laws in the United States of America. Laws
governing contributions to state and local candidates (and comparable political figures outside the
United States) vary from state to state and country to country, and are to be observed by all
employees as applicable.
Consult with PHH’s General Counsel, PHH’s Corporate Compliance Officer or your Business Unit
Compliance Officer if you have any questions on the conduct of political activity.
Marketing, Advertising and Promotions.
PHH markets its products and services in a fair, truthful and ethical manner. Marketing,
telemarketing, point-of-purchase and advertising materials are designed to reflect available
products and services. PHH uses marketing, telemarketing, point-of-purchase and advertising
materials to educate the public, report to its constituents, increase awareness of its services,
recruit employees, promote brand recognition and support marketing initiatives. Complex laws and
regulations apply to these activities. When providing these marketing, telemarketing,
point-of-purchase and advertising opportunities, PHH practices appropriate protection of customer
data in order to safeguard consumer privacy. If you have any questions on marketing, advertising or
promotions contact PHH’s Marketing Department, PHH’s Corporate Legal Department or your Business
Unit Legal Department.
COMPETITOR RELATIONSHIPS
Competitor Relationships
Antitrust and Competition
Trade Shows and Trade Association Meetings
Fair Dealing
Antitrust and Competition.
PHH’s business activities are subject to antitrust and competition laws in most countries around
the world. These laws are intended to promote fair competition and free enterprise by prohibiting
activities that unreasonably restrain or inhibit competition, “bring about a monopoly” (in the
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United States), artificially maintain pricing or otherwise illegally hamper or distort normal
commerce.
These laws apply to such diverse activities as marketing, procurement, contracting, and mergers and
acquisitions. These laws specifically prohibit or restrict agreements (including tacit and unspoken
agreements):
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To fix, coordinate or control prices.
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To allocate or divide up customers, territories or markets.
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To refrain from competing against other market participants wholly or in some
limited fashion.
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This list is not exhaustive.
The antitrust and competition laws also prohibit or restrict certain group boycotts and “tying”
arrangements. Unlawful tying may occur when the purchase of one product or service requires the
purchase of another, “tied” product or service.
These laws are complex, and their requirements are not always clear. In many jurisdictions,
including the United States, violations can lead to severe penalties, damage awards equal to three
times the actual damage sustained, and fines and jail sentences in criminal law proceedings.
If you have any questions about how the antitrust and competition laws apply to a particular
situation, seek advice from PHH’s Corporate Legal Department or your Business Unit Legal Department
before taking action.
Trade Shows and Trade Association Meetings.
The antitrust and competition laws are particularly relevant if you attend trade shows or trade
association meetings while acting on behalf of PHH, because of the opportunity to interact with
competitors or potential competitors. In order to avoid possible violations of such laws, you
should not discuss pricing, including pricing strategies and costs; the allocation of customers,
territories or markets; agreements not to compete or to compete only in a limited fashion;
agreements to regulate or limit production; or agreements to participate in group boycotts.
Any effort with another company or companies to seek relief from courts, regulatory agencies or
legislative bodies should be reviewed with PHH’s Corporate Legal Department or your Business Unit
Legal Department, before taking action.
Fair Dealing.
Each employee should endeavor to deal fairly with PHH’s customers, suppliers, competitors and
employees. None should take unfair advantage of anyone through manipulation, concealment, abuse of
privileged information, misrepresentation of material facts or any other unfair-dealing practice.
INSIDER INFORMATION
Employees of PHH may, in the course of performing their duties, come into possession of “material
non-public information” about PHH or its subsidiaries, or other companies with whom
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PHH does business. “Material non-public information” is defined as any information that a
reasonable investor would consider important in making a decision to buy or sell securities. In
short, it includes any information that could be expected to affect the price of securities, either
positively or negatively. Buying or selling securities based on such information is referred to as
“insider trading” and can result in substantial fines and imprisonment.
It is illegal for a PHH employee to, directly or indirectly, buy or sell stocks (shares) or bonds
based on insider information or to discuss such information with others who might buy or sell such
securities, including shares or bonds.
For example, if in the course of your work and prior to a public announcement, you become aware of
a change in dividends and earnings, an acquisition, or a major change in management that would
materially affect PHH or one of its subsidiaries, you may be guilty of insider trading if you
bought or sold securities of PHH based on this knowledge or passed this information to anyone who
then bought or sold such securities. For a more detailed explanation of the Insider Trading Policy,
please consult PHH’s Procedures and Guidelines Governing Securities Trades by Company Personnel or
PHH’s Corporate Compliance Officer or PHH’s Corporate Legal Department.
BUSINESS RECORDS & INFORMATION
Business Records & Information
Confidential and Proprietary Information
Financial Reporting and Records
Business Records and Information Management
Confidential and Proprietary Information.
In the course of employment at PHH, employees may be exposed to information considered confidential
by PHH, or may be involved in the design or development of new products, procedures or inventions
related to the business of the Company. All such information, products and inventions, whether or
not they are the subject of a copyright or patent, are the sole property of PHH. Employees shall
not disclose confidential information to persons outside the Company, including family members,
except for reasons strictly related to the performance of their authorized duties, and should share
such information only with other employees who have a “need to know.”
Confidential information includes, but is not limited to:
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Proposed or advance product plans;
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Projected earnings, proposed dividends, important management or organizational
changes, or information about mergers or acquisitions and any other information
related to the foregoing;
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Product or service design and development or training;
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Computer software and systems developed by, or for, unique to, the Company’s
business;
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Client lists (including phone numbers, addresses and e-mail addresses) or client
contact information;
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Personal or financial information pertaining to any employee of PHH; and
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Advertising or marketing plans, cost structures, pricing plans and strategies.
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Employees are responsible and accountable for safeguarding Company documents and information to
which they have direct or indirect access as a result of their employment with PHH. This duty
includes the responsibility to protect sensitive or confidential Company documents from unwanted
disclosure.
Financial Reporting and Records.
Each manager is responsible and accountable for maintaining an adequate system of internal controls
over all areas of his or her responsibility. These controls should provide reasonable assurance
that (1) (A) all transactions have been properly recorded, (B) each such transaction has been made
with management authorization and in accordance with applicable laws and regulations, and (C)
Company assets are adequately safeguarded; and (2) as a consequence, the financial records and
other reports are accurately and fairly stated. Each employee within their area of responsibility
is expected to adhere to these established controls and the following prohibitions:
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No employee may willfully make false or misleading entries in the Company’s books
and records for any reason.
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No employee may willfully conceal Company information from authorized auditors or
governmental regulatory agencies. Employees are required to disclose, on a timely
basis, information required to evaluate the fairness of the Company’s financial
presentation, the soundness of its financial condition and the propriety of its
operation.
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No employee may make a payment or transfer of Company funds or assets that is not
authorized, properly recorded and clearly accounted for on the Company’s books. No
employee may make or approve a payment or transfer Company funds or assets with the
intention or understanding that any part of such payment or transfer is to be used
except as specified in the supporting transactional documents.
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No employee shall deliberately attempt to circumvent any Company processes or
controls.
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Business Records and Information Management.
PHH maintains its records in accordance with laws and regulations regarding the retention of
business records. The business of PHH and its subsidiaries generates a broad range of information
and communications. The information is created in many forms (such as email, Web page content, word
processing files, systems files and databases) and communicated on various media (such as paper,
digital, microfiche, audio, computer hard drives, CD-ROMs and diskettes), whether maintained or
stored at work or off site. PHH requires all employees to comply with its Business Records and
Information Management Policy, which prohibits the unauthorized destruction of or tampering with
any records, whether paper or in electronic form, when the Company is required by law or government
regulation to maintain the records or when it has reason to know of a pending or contemplated
investigation or litigation relating to the records. If you have any questions concerning records
retention or about how PHH’s Business Records and Information Management Policy applies to a
particular situation, you should seek guidance from your Business Unit Compliance Officer, PHH’s
Corporate Compliance Officer or PHH’s Corporate Legal Department.
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PHH ASSETS
PHH Assets
Use of PHH Property
Destruction of Property and Theft
Bribes and Kickbacks
Money Laundering or Illicit Financing
Intellectual Property of PHH
Intellectual Property of Others
Information Technology and Communications Equipment
Use of PHH Property.
The use of PHH property for individual profit or any unlawful or unauthorized personal purpose is
prohibited. PHH’s information, technology, intellectual property, buildings, land, equipment,
machines, software and cash must be used for business purposes only, except as provided by Company
policy or approved by your manager. Further, travel and entertainment expenses must be reasonable
and substantiated by receipts as required by PHH’s Travel and Expense Reimbursement Guidelines, the
text for which can be obtained from PHH’s or your Business Unit’s Finance Department.
Destruction of Property and Theft.
Employees shall not intentionally damage or destroy the property of PHH or others, or engage in
theft.
Bribes and Kickbacks.
Employees must ensure that payments made by or on behalf of PHH are made only for legitimate
business purposes. Under no circumstances is it acceptable to offer, give, solicit or receive any
form of bribe or kickback. PHH employees must not give or offer anything of value that would be
beyond usual or customary practices or would violate laws on giving to foreign and U.S. government
officials. This policy applies to all PHH transactions within and outside of the United States. Due
to the complex laws in this area, you should consult PHH’s Corporate Legal Department or your
Business Unit’s Legal Department should you have any questions.
Money Laundering or Illicit Financing.
Employees must actively guard against the use of PHH products and services by third parties for the
purposes of money laundering or illicit financing activity, including terrorist activity. Money
laundering is the process by which the proceeds of criminal activity are moved through the
financial system in order to hide all traces of their criminal origin. Money laundering is an
essential part of much criminal activity and has become the focus of considerable attention by
governments, international organizations and law enforcement agencies throughout the world. By
contrast, illicit financing activity, including activity by or for terrorist groups, focuses on the
destination and use of funds that may come from legitimate or criminal sources, or a combination of
the two.
PHH is committed to cooperate fully with law enforcement and regulatory investigations concerning
possible money laundering or illicit financing activity. You must immediately contact PHH’s
Corporate Legal Department or your Business Unit’s Legal Department if you are
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approached in any manner by government agencies for records and information on customers, agents,
or business partners that may be under investigation. Strict rules specify time frames for
complying with such government inquiries or requests and for reporting certain activities that may
bear upon money laundering or terrorist activity. Therefore, your immediate action is vital in both
reporting requests and being responsive when given instructions by PHH’s Legal Department or your
Business Unit’s Legal Department.
Intellectual Property of PHH.
PHH is committed to protecting its brands. This means that all employees must safeguard the
intellectual property of PHH, such as trademarks, service marks, patents, copyrights, and trade
secrets. Such property is the very foundation of PHH.
Intellectual Property of Others.
Employees may not reproduce, distribute or alter copyrighted materials without permission of the
copyright owner or its authorized agents. Software used in connection with PHH’s business must be
properly licensed and used only in accordance with that license. Using unlicensed software could
constitute copyright infringement. The unauthorized reproduction, distribution or use of
copyrighted materials, including software, can result in severe civil and criminal penalties and is
strictly prohibited.
Information Technology and Communications Equipment.
PHH’s information technology systems, including computers, email, Internet access lines, telephones
and voice mail are the property of PHH and are to be used primarily for business purposes. These
business systems and the data that reside on them are the property of PHH. Users, therefore, should
not have any expectations of personal privacy with respect to their use of PHH business systems or
the data resident on them. PHH information technology systems may be used for minor or incidental
personal situations provided that such use is kept at a minimum.
Employees may not use, whether inadvertently or intentionally, PHH’s information technology systems
to:
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Allow others to gain access to the Company’s information technology systems through
the use of your password or other security codes;
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Access files, data, or systems to which express authorization from the owner,
whether PHH or another company, has not been obtained;
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Remove, install or modify any PHH-installed software or programs without
authorization;
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Send copyrighted documents not authorized for reproduction;
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Attempt to circumvent or subvert system or network security measures;
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View network traffic for any reason (unless required by your position);
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Send or promote the distribution of unsolicited and unnecessary “junk mail” (e.g.,
chain letters, advertisements or other communications that represent a waste of time
or computer resources for PHH or others);
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Access the Internet for inappropriate use such as pornography or personal
entertainment;
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Send harassing, threatening or obscene messages; and
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Engage in any non-PHH-related commercial venture.
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It is extremely important that you take all necessary measures to secure your computer and any of
your computer or voicemail passwords. If you have any reason to believe that your password or the
security of a Company computer or communication resource has in any manner been compromised, you
must change your password immediately and report the incident to PHH’s Corporate Information
Technology Department, your Business Unit’s Compliance Officer or PHH’s Corporate Compliance
Officer.
PHH may monitor the use of its information technology and communication systems to the extent
permitted by law.
Integrity Hotline
1-888-732-1413
Callers inside the U.S. or Canada can dial direct. All others must first dial the appropriate
International access code.
© 2005 PHH Corporation. All Rights Reserved.
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Exhibit 99
RISK FACTORS AFFECTING OUR BUSINESS AND FUTURE RESULTS
Risks Related to PHH’s Business
The
termination of our status as the exclusive recommended provider
of mortgage products and services promoted by Cendant’s
owned residential real estate brokerage business
(“NRT”) to its independent contractor sales associates
and by Cendant Mobility Services Corporation, Cendant’s
subsidiary engaged in the relocation services business
(“Cendant Mobility”) to its customers and clients
could have a material adverse effect on our financial condition
and our results of operations.
Pursuant to our interim marketing agreements with Cendant, we
are, and under the terms of the mortgage venture once
operational, we will be, the exclusive recommended provider of
mortgage products and services promoted by NRT to its
independent contractor sales associates and by Cendant Mobility
to its customers and clients. See “Item 1.
Business— Arrangements with Cendant Corporation—
Mortgage Venture Formed by Cendant and PHH” and
“—Marketing Agreements.” For the year ended
December 31, 2004, approximately 30% of loans originated by
our mortgage services segment were derived from these sources.
We anticipate that a similar portion of mortgage loan
originations from our mortgage services segment will be
comprised of business from our mortgage venture with Cendant for
the foreseeable future. Pursuant to the terms of the operating
agreement for the mortgage venture, Cendant has the right to
terminate the mortgage venture upon the occurrence of certain
events, including a material breach by us of our obligations or
by our affiliates of their obligations under any of the mortgage
venture agreements (and such breach is not cured within the
requisite cure period), the occurrence and continuance for a
period of six consecutive months or more of any regulatory order
or governmental proceeding that restricts the mortgage
venture’s ability to originate mortgage loans in a manner
that adversely affects the value of quarterly distributions from
the mortgage venture to its members or a change in control of
PHH under certain circumstances. In addition, beginning on
February 1, 2013, Cendant will have the right at any time
upon two years’ notice to us to terminate its interest in
the mortgage venture. A termination of the mortgage venture
could have a material adverse effect on our financial condition
and our results of operations. In addition, the PHH Home Loans
operating agreement provides that Cendant’s real estate
services division will exclusively recommend the mortgage
venture as the provider of mortgage loans to the independent
sales associates and customers of NRT and Cendant Mobility and
to U.S.-based employees of Cendant. However, Cendant has the
right to terminate this exclusivity covenant, following notice
and a cure period, if:
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we materially breach any representation, warranty, covenant or
other agreement contained in any mortgage venture agreement;
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we or the mortgage venture become subject to any regulatory
order or governmental proceeding and such order or proceeding
prevents or materially impairs the mortgage venture’s
ability to originate mortgages for any period of time (which
order or proceeding is not generally applicable to companies in
the mortgage lending business) in a manner that adversely
affects the value of one or more of the quarterly distributions
to be paid by the mortgage venture to its members; or
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the mortgage venture otherwise is not permitted by law,
regulation, rule, order or other legal restriction to perform
its origination function in any jurisdiction, but in such case
exclusivity may be terminated only with respect to such
jurisdiction.
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If Cendant were to terminate its exclusivity obligations with
respect to the mortgage venture, Cendant would be permitted to
recommend other competing mortgage lenders as providers of
mortgage loans to independent sales associates and customers of
NRT and Cendant Mobility, which would adversely affect our
results of operations.
Adverse
developments in general business, economic and political
conditions could have a material adverse effect on our financial
condition and our results of operations.
Our businesses and operations are sensitive to general business
and economic conditions in the United States. These conditions
include short-term and long-term interest rates, inflation,
fluctuations in debt and equity capital markets and the general
condition of the U.S. economy, both nationally and in the
regions in which we conduct our businesses. A significant
portion of our mortgage loan originations are made in a small
group of geographical areas which include: California, New
Jersey, New York, Florida and Texas.
A host of factors beyond our control could cause fluctuations in
these conditions, including the political environment and acts
or threats of war or terrorism. Adverse developments in these
general business and economic conditions, including through
recession, downturn or otherwise, either in the economy
generally or in the regions in which a large portion of our
business is conducted, could have a material adverse effect on
our financial condition and our results of operations.
Our business is significantly affected by the monetary policies
of the federal government and its agencies. We are particularly
affected by the policies of the Federal Reserve Board, which
regulates the supply of money and credit in the United States.
The Federal Reserve Board’s policies affect the size of the
mortgage origination market as well as the pricing of our
interest-earning assets and the cost of our interest-bearing
liabilities. Changes in those policies are beyond our control
and difficult to predict and could have a material adverse
effect on our business, results of operations and financial
condition.
Our
business is affected by fluctuations in interest rates, and if
we fail to effectively manage our exposure to changes in
interest rates, our results of operations and our financial
condition could be adversely affected.
The level and volatility of interest rates significantly affect
the mortgage lending industry. For example, a decline in
mortgage interest rates generally increases the demand for home
loans as more potential homeowners seek mortgage loans and more
borrowers seek to refinance existing loans, but also generally
leads to accelerated payoffs in our mortgage servicing
portfolio, which negatively impacts the value of our mortgage
servicing rights (“MSR”) asset. We attempt to manage
this risk in part through the use of derivatives. Our main
objective in managing interest rate risk is to moderate the
impact of changes in interest rates on our earnings over time.
Our interest rate risk management strategies may result in
significant earnings volatility in the short term. The success
of our interest rate risk management strategy is largely
dependent on our ability to predict the earnings sensitivity of
our loan servicing and loan production operations in various
interest rate environments, which is inherently uncertain.
Significant changes in current market conditions and/or the
assumptions used (including the relationship of the change in
the MSR asset to the change in the derivatives) in developing
our estimates of borrower behavior and future interest rates
could result in a material adverse effect on our results of
operations and our financial condition.
The
mortgage services industry is highly competitive and, if we fail
to meet the competitive challenges in our industry, our
financial condition and results of operations could be
materially adversely affected.
We operate in a highly competitive industry that could become
even more competitive as a result of economic, legislative,
regulatory and technological changes. Competition for mortgage
loans comes primarily from large commercial banks and savings
institutions, which typically have lower funding costs and are
less reliant than we are on the sale of mortgages into the
secondary markets to maintain their liquidity. In addition,
technological advances and heightened e-commerce activity have
increased consumers’ access to products and services
generally. This has intensified competition among banking, as
well as non-banking companies in offering financial products and
services, with or without the need for a physical presence. If
competition in the mortgage services industry continues to
increase, it could have a material adverse effect on our
financial condition and results of operations.
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The
businesses in which we engage are heavily regulated, and changes
in the regulatory environment affecting our businesses could
have a material adverse effect on our financial condition and
our results of operations.
We are subject to many federal, state and local laws, rules and
regulations that affect our business, including mortgage and
real estate related regulations such as the Federal Real Estate
Settlement Procedures Act (“RESPA”), which restricts
the payment of fees or other things of value in consideration
for the referral of real estate settlement services, including
mortgage loans, as well as rules and regulations related to
taxation, vicarious liability and accounting. Our mortgage
services business, in general, is heavily regulated by mortgage
lending laws at the federal, state and local levels, and
proposals for further regulation of the financial services
industry are continually being introduced. The establishment of
the mortgage venture and the continuing relationship between and
among the mortgage venture, Cendant and us will be subject to
the anti-kickback requirements of RESPA. With respect to our
fleet management business, we are subject to unlimited liability
as the owner of leased vehicles in three jurisdictions (the
States of New York and Maine and the District of Columbia) and
Canada and limited liability in approximately six additional
jurisdictions under the legal theory of vicarious liability.
Congress and state legislatures, as well as federal and state
regulatory agencies, review such laws, rules, regulations and
policies and periodically propose changes that could
significantly affect or restrict the manner in which we conduct
our business. It is possible that one or more legislative
proposals may be adopted or one or more regulatory changes,
changes in interpretations of laws and regulations, judicial
decisions or governmental enforcement actions involving the
mortgage industry may be implemented that would have a material
adverse effect on our financial condition and our results of
operations. For example, certain trends in the regulatory
environment could result in increased pressure from our clients
for us to assume more residual risk on the value of the vehicles
at the end of the lease term. If this were to occur, it could
have a material adverse effect on our results of operations.
Our failure to comply with such laws, rules or regulations,
whether actual or alleged, could expose us to fines, penalties
or potential litigation liabilities, including costs,
settlements and judgments, any of which could have a material
adverse effect on our financial condition and our results of
operations.
If
a change in control transaction occurs, some of our mortgage
loan origination arrangements with financial institutions could
be subject to voluntary termination at the election of such
institutions.
For the year ended December 31, 2004, approximately 54% of
our mortgage loan originations was derived from our financial
institutions channel, pursuant to which we provide outsourced
mortgage loan services for customers of our financial
institution clients such as Merrill Lynch Credit Corporation and
American Express Membership Bank. Our agreements with some of
these financial institutions provide the applicable financial
institution with the right to terminate its relationship with us
prior to the expiration of the contract term if we complete a
change in control transaction with a third party acquiror that
is a competitor of such financial institution. Accordingly,
completion of such a change in control transaction could have a
material adverse effect on our business, results of operations
and financial condition. Furthermore, the existence of these
termination rights could discourage offers from third parties
seeking to acquire us or could reduce the amount of
consideration an acquiror would be willing to pay in an
acquisition transaction. Although in some cases these contracts
would require the payment of liquidated damages in such event,
such amounts may not fully compensate us for all of our actual
or expected loss of business opportunity for the remaining
duration of the contract term.
Unanticipated
liabilities of our fleet management services segment as a result
of damages in connection with motor vehicles accidents under the
theory of vicarious liability could have a material adverse
effect on our business, financial condition and results of
operations.
Our fleet management services segment is subject to unlimited
liability as the owner of leased vehicles in the State of New
York, the State of Maine, the District of Columbia and in most
provinces in Canada and is subject to limited liability in
approximately six additional jurisdictions under the theory of
vicarious liability. Although our lease contracts require that
each lessee indemnify us against such liabilities, in the event
that a lessee lacks adequate insurance coverage or financial
resources to satisfy these indemnity provisions we could be
liable for property damage or injuries caused by the vehicles
that we lease.
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Risks Related to the Spin-Off
For
the past seven years, we have not been an independent company
and we may be unable to make, on a timely or cost-effective
basis, the changes necessary to operate as an independent
company.
Prior to the Spin-Off, our business was operated by Cendant as
part of its broader corporate organization, rather than as an
independent company. Cendant or one of its affiliates performed
various corporate functions for us, including, but not limited
to:
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selected human resources related functions;
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tax administration;
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selected legal functions (including compliance with the
Sarbanes-Oxley Act of 2002), as well as external reporting,
treasury administration, investor relations, internal audit,
insurance and facilities functions; and
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selected information technology and telecommunications services.
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Neither Cendant nor any of its affiliates has any obligation to
provide these functions to us other than the transition services
that will be provided by Cendant and its affiliates that are
described in the section of this Annual Report on Form 10-K
entitled “Item 1. Business— Arrangements with
Cendant Corporation— Transition Services Agreement.”
If, once our transition services agreement expires, we do not
have in place our own systems and business functions, we do not
have agreements with other providers of these services or we are
not able to make these changes cost-effectively, we may not be
able to operate our business effectively and our profitability
may decline. If Cendant or its affiliates do not continue to
perform effectively the transition services that are called for
under the transition services agreement, we may not be able to
operate our business effectively.
Historically, we have benefited from Cendant’s size and
purchasing power in procuring goods, technology and services. We
may be unable to obtain such goods, technology and services as a
separate, stand-alone company at prices and on terms as
favorable as those available to us prior to the Spin-Off, and we
may not have access to financial and other resources comparable
to those available to us prior to the Spin-Off.
Our
agreements with Cendant and its affiliates may not reflect terms
that would have resulted from arm’s-length negotiations
between unaffiliated parties.
The agreements related to our separation from Cendant, including
the separation, transition services and other agreements, were
not the result of arm’s-length negotiations and thus may
not reflect terms that would have resulted from
arm’s-length negotiations between two unaffiliated parties.
This could include, among other things, allocation of assets,
liabilities, rights, indemnifications and other obligations
between Cendant and us. See “Item 1. Business—
Arrangements with Cendant Corporation.”
We
may be required to satisfy certain indemnification obligations
to Cendant and its affiliates, or we may not be able to collect
on indemnification rights from Cendant and its
affiliates.
In connection with the Spin-Off, we and Cendant and our
respective affiliates have agreed to indemnify the other for
certain liabilities and obligations. Our indemnification
obligations could be significant. We are required to indemnify
Cendant for any taxes incurred by it and its affiliates as a
result of any action, misrepresentation or omission by us or one
of our subsidiaries that causes the distribution of our common
stock by Cendant or transactions relating to the internal
reorganization to fail to qualify as tax-free. We are also
responsible for 13.7% of any taxes resulting from the failure of
the Spin-Off or transactions relating to the internal
reorganization to qualify as tax-free, which failure is not due
to the actions, misrepresentations or omissions of Cendant or us
or our respective subsidiaries. Such percentage was based on the
relative pro forma book net values of Cendant and us as of
September 30, 2004, without giving effect to any
adjustments to the book values of certain long-lived assets that
may be required as a result of the Spin-Off and the related
transactions. We cannot determine whether we will have to
indemnify Cendant or its affiliates for any substantial
obligations in the future. We also cannot
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assure you that if Cendant or any of its affiliates is required
to indemnify us for any substantial obligations, they will be
able to satisfy those obligations.
Our
historical financial information may not be representative of
results we would have achieved as an independent company or will
achieve in the future.
Because our business has changed substantially due to the
reorganization in connection with the Spin-Off, our historical
financial information does not reflect what our results of
operations, financial position or cash flows would have been had
we been an independent company during the periods presented. For
this reason, as well as the inherent uncertainties of our
business, the historical financial information is not indicative
of what our results of operations, financial position, cash
flows or costs and expenses will be in the future.
A
failure to maintain our investment grade ratings could impact
our ability to obtain financing on favorable terms and could
negatively impact our business.
Our current senior debt credit ratings from Moody’s
Investors Service, Standard & Poor’s and Fitch
Ratings are Baa3, BBB and A-, respectively. Our current
short-term debt credit ratings from Moody’s Investors
Service, Standard & Poor’s and Fitch Ratings are
P-3, A-2 and F-2, respectively. Each of these ratings has been
assigned a stable outlook by the respective agency and reflects
our current standing as an independent, public company. Among
other things, maintenance of our current investment grade
ratings requires that we demonstrate high levels of liquidity,
including access to alternative sources of funding such as
committed bank stand-by lines of credit, as well as a capital
structure and leverage appropriate for companies in our industry.
In the event our credit ratings were to drop below
“investment grade”, our access to the public corporate
debt markets may be severely limited. The cutoff for investment
grade is generally considered to be a long-term rating of
“Baa3,” “BBB-” and “BBB-” for
Moody’s Investors Services, Standard & Poor’s
and Fitch Ratings, respectively, or one level below our lowest
current rating. In the event of a ratings downgrade below
investment grade, we may be required to rely upon alternative
sources of financing, such as bank lines and private debt
placements (secured and unsecured). A drop in our credit ratings
could also increase our cost of borrowing under our credit
facilities. Furthermore, we may be unable to retain all of our
existing bank credit commitments beyond the then existing
maturity dates. As a consequence, our cost of financing could
rise significantly, thereby negatively impact our ability to
finance some of our capital-intensive activities, such as our
ongoing investment in MSRs and other retained interests.
Risks Related to Our Common Stock
There
may be a limited public market for our common stock and our
stock price may experience volatility.
Prior to the Spin-Off, there was no public market for our common
stock. In connection with the Spin-Off, our common stock was
listed on the New York Stock Exchange under the symbol
“PHH”. From February 1, 2005 through
March 1, 2005, the trading price for our common stock has
ranged from $22.30 to $20.04. However, there can be no assurance
that an active trading market for our common stock will be
sustained in the future. In addition, the stock market has from
time to time experienced extreme price and volume fluctuations
that often have been unrelated to the operating performance of
particular companies. Changes in earnings estimates by analysts
and economic and other external factors may have a significant
impact on the market price of our common stock. Fluctuations or
decreases in the trading price of our common stock may adversely
affect the liquidity of the trading market for our common stock
and our ability to raise capital through future equity financing.
Provisions
in our charter documents, the Maryland General Corporation Law
(the “MGCL”) and our stockholder rights plan may delay
or prevent our acquisition by a third party.
Our charter and by-laws contain several provisions that may make
it more difficult for a third party to acquire control of us
without the approval of our board of directors. These provisions
will include, among other things, a classified board of
directors, advance notice for raising business or making
nominations at meetings and “blank check” preferred
stock. Blank check preferred stock enables our board of
directors, without stockholder approval, to designate and issue
additional series of preferred stock with such dividend,
liquidation, conversion,
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voting or other rights, including the right to issue convertible
securities with no limitations on conversion, as our board of
directors may determine, including rights to dividends and
proceeds in a liquidation that are senior to the common stock.
We are also subject to certain provisions of the MGCL which
could delay, prevent or deter a merger, acquisition, tender
offer, proxy contest or other transaction that might otherwise
result in our stockholders receiving a premium over the market
price for their common stock or may otherwise be in the best
interest of our stockholders. These include, among other
provisions:
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The “business combinations” statute which prohibits
transactions between a Maryland corporation and an interested
stockholder or an affiliate of an interested stockholder for
five years after the most recent date on which the interested
stockholder becomes an interested stockholder and
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The “control share” acquisition statute which provides
that control shares of a Maryland corporation acquired in a
control share acquisition have no voting rights except to the
extent approved by a vote of two-thirds of the votes entitled to
be cast on the matter.
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Our by-laws contain a provision exempting any share of our
capital stock from the control share acquisition statute to the
fullest extent permitted by the Maryland General Corporation
Law. However, our board of directors has the exclusive right to
amend our by-laws and, subject to their fiduciary duties, could
at any time in the future amend the by-laws to remove this
exemption provision.
In addition, we entered into a Rights Agreement, dated as of
January 28, 2005, with The Bank of New York, as rights
agent. This agreement entitles our stockholders to acquire
shares of our common stock at a price equal to 50% of the then
current market value in limited circumstances when a third party
acquires beneficial ownership of 15% or more of our outstanding
common stock or commences a tender offer for at least 15% of our
common stock, in each case, in a transaction that our board of
directors does not approve. Because, under these limited
circumstances, all of our stockholders would become entitled to
effect discounted purchases of our common stock, other than the
person or group that caused the rights to become exercisable,
the existence of these rights would significantly increase the
cost of acquiring control of our company without the support of
our board of directors. The existence of the rights agreement
could therefore deter potential acquirers and reduce the
likelihood that you receive a premium for our common stock in an
acquisition.
Certain
provisions of the PHH Home Loans operating agreement could
discourage third parties from seeking to acquire us or could
reduce the amount of consideration they would be willing to pay
our stockholders in an acquisition transaction.
Pursuant to the terms of the PHH Home Loans operating agreement
with Cendant, Cendant has the right to terminate the mortgage
venture at its election at any time on or after February 1,
2013 by providing two years’ notice to us. In addition,
under the PHH Home Loans operating agreement, Cendant may
terminate the mortgage venture if we effect a change in control
transaction with a competitor of Cendant or with certain other
third parties. In connection with such termination, we would be
required to make a cash payment to Cendant of an amount equal to
its allocable share of the mortgage venture’s trailing
twelve months net income multiplied by the greater of the number
of years remaining in the first ten years of the mortgage
venture’s term and two. The existence of these termination
provisions could discourage third parties from seeking to
acquire us or could reduce the amount of consideration they
would be willing to pay to our stockholders in an acquisition
transaction. See “Item 1. Business— Arrangements
with Cendant Corporation— Mortgage Venture Formed by
Cendant and PHH.”
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