Item
2.06. Material Impairments.
On
March
1, 2006, PHH Corporation (“PHH”,
“Company”,
“we”
or
“our”)
issued
a press release and filed a Current Report on Form 8−K (“Form
8-K”)
with
the Securities and Exchange Commission (“SEC”),
indicating that we did not expect to meet the March 16, 2006 deadline to
file
our Annual Report on Form 10-K for the year ended December 31, 2005
(“Form
10-K”)
because we had not yet finalized our financial statements for the fourth
quarter
and fiscal year 2005 and the audit of our 2005 financial statements is ongoing.
Due to the continuing review of these matters and other matters described
in the
Form 8-K, in this Current Report on Form 8-K and in our Form 12b-25 Notification
of Late Filing filed with the SEC on March 17, 2006, we have determined that
we
will need to delay the filing of the Form 10-K beyond March 31, 2006. We
are
working diligently to complete the Form 10-K but are unable at this time
to
provide an expected date for the filing of the Form 10-K.
As
previously reported in our prior SEC filings, on February 1, 2005, we began
operating as an independent, publicly-traded company pursuant to a spin-off
(“Spin-Off”)
from
Cendant Corporation (“Cendant”).
Prior
to our Spin-Off from Cendant, we underwent an internal reorganization which
required significant accounting adjustments and certain allocations were
made
that are now the subject of additional review by us as part of the on-going
preparation of our 2005 financial statements. As part of our review of these
transactions and certain other accounting items not related to the Spin-Off
identified in the course of the on-going preparation of our 2005 financial
statements, a number of accounting matters have been identified and are being
reviewed by us, as described more fully in Item 8.01 below. On February 28,
2006, we determined that we expect that a material charge for impairment
associated with the assets described below may be required under generally
accepted accounting principles.
The
Spin-Off required the allocation and valuation of tax attributes to our post
Spin-Off businesses which had previously been reported for tax filing purposes
as part of the Cendant consolidated income tax returns (including certain
alternative minimum tax credits and net operating loss carryforwards), which
are
accounted for as deferred tax assets for financial reporting purposes. We
are
performing an extensive analysis regarding the carrying value of these deferred
tax assets. This analysis requires an in-depth examination of the tax accounting
methodologies previously utilized. Our current evaluation is focused on the
amount of deferred tax assets relating to certain alternative minimum tax
credits and net operating loss carryforwards that were available to PHH at
the
Spin-Off. Additionally, we are evaluating the probability of ongoing
realizability of these tax assets by PHH. We expect that the foregoing analysis
may result in recording valuation allowances against these deferred tax assets
and a charge to our net income during 2005 of between $25 million and $50
million.
We
are
continuing the process of reviewing documentation and reevaluating the analysis
regarding amounts equal to $21 million relating to certain intangibles for
trademarks and customer lists in connection with the goodwill reallocation
taken
at the time of the Spin-Off and the resulting impairment previously recorded.
We
expect that this analysis may result in a reclassification to goodwill and
an
impairment of such goodwill, which could potentially be reflected as a charge
to
our net income during 2005 of as much as $21 million.
Because
our assessment and the preparation of our 2005 financial statements continues,
the accounting matters identified at this stage as well as the potential
impact
of these matters on our financial statements remain preliminary and are subject
to change. As we continue the process of evaluating the abovementioned
accounting issues and completing the preparation of our 2005 financial
statements, these and other material accounting issues may be identified
which,
individually or in the aggregate, may result in material impairments to assets
and/or material adjustments to or restatements of our financial statements.
Item
8.01. Other Events.
Delay
in Filing Form 10-K and Open Accounting Matters
In
connection with the on-going preparation of our 2005 financial statements,
we
are reviewing our accounting treatment for transactions surrounding the Spin-Off
and certain other matters not related to the Spin-Off and have identified
a
number of accounting matters requiring additional review, including but not
limited to the following: (i) the allocation and valuation of certain Spin-Off
deferred tax assets relating to certain alternative minimum tax credits and
net
operating loss carryforwards, which we expect may result in recording valuation
allowances against these deferred tax assets and a charge to our net income
during 2005 of between $25 million and $50 million; (ii) the reevaluation
of $21
million of certain intangibles related to trademarks and customer lists in
connection with the goodwill reallocation at the time of the Spin-Off and
the
resulting impairment previously recorded, which we expect may result in a
reclassification to goodwill and an impairment of such goodwill, which could
potentially be reflected as a charge to our net income during 2005 of as
much as
$21 million; (iii) the $239 million goodwill impairment taken as a result
of the
Spin-Off in the first quarter of 2005; (iv) the appropriateness of consolidating
PHH Home Loans LLC, the mortgage joint venture between Cendant and PHH Mortgage,
which commenced operations in October 2005, in our consolidated financial
statements; (v) the proper tax classification of derivatives, hedges and
swaps
used in our business, which may result in a charge to net income during 2005
of
an amount we do not expect to exceed $5 million; and (vi) the appropriateness
of
not recording federal income tax reserves and valuation allowances associated
with the amended and restated tax sharing agreement dated as of December
21,
2005 with Cendant post Spin-Off, which we expect may result in the creation
of a
reserve and/or valuation allowance and a charge to our net income during
2005.
Since the filing of our Form 8-K, we have resolved the appropriateness of
state
tax effective rates included in our income tax provision which will result
in a
charge of approximately $5 million to our net income during 2005.
Because
our assessment and the preparation of our 2005 financial statements continues,
at this time, we are unable to present our results of operations for fiscal
2005
or provide an estimate of our expected net loss for 2005, primarily related
to
charges associated with the Spin-Off, or an estimate comparing our expected
net
loss for 2005 to the net income we reported for the year ended December 31,
2004. The accounting matters identified at this stage as well as the potential
impact of these matters on our financial statements remain preliminary and
are
subject to change and we are unable at this time to estimate the potential
impact of a number of items.
As
we
continue the process of evaluating the abovementioned accounting issues and
completing the preparation of our 2005 financial statements, these and other
material accounting issues may be identified which, individually or in the
aggregate, may result in material impairments to assets and/or material
adjustments to or restatements of our financial statements. As disclosed
in the
Form 8-K filed on March 1, 2006 and in Item 2.06 above, we expect that a
material charge for impairment associated with certain of the assets described
above may be required under generally accepted accounting
principles.
Liquidity
We
continue to believe we have adequate liquidity to fund our operating cash
needs.
Our revolving credit facilities and various other financing agreements require,
among other things, that the Company file, and/or deliver to the various
lenders
and trustees (within various specified periods of time) a copy of, the Company’s
financial statements or the financial statements of our Mortgage Services
segment. We have discussed the aforementioned accounting matters with our
principal lenders and trustees under our revolving credit facilities and
various
other financing agreements. On March 17, 2006, we obtained waivers under
both
our $1.3 billion Three Year Competitive Advance and Revolving Credit Agreement
and our Bishop’s Gate mortgage warehouse asset-backed debt program which permit
us to delay the delivery of our 2005 audited financial statements to the
various
lenders under those instruments until June 15, 2006 and waive certain other
potential breaches of covenants under those instruments.
We
will
continue to seek similar waivers from such other financial institution parties
as a result of the aforementioned accounting matters as may be necessary.
There
can be no assurance that any additional required waivers will be received
on a
timely basis, if at all, or that any waivers obtained, including the waivers
we
have already obtained as described above, will extend for a sufficient period
of
time to avoid an event of default. Moreover, failure to obtain waivers could
be
material and adverse to our business, liquidity and financial condition.
Under
certain of our financing agreements, the lenders or trustees have the right
to
notify us if they believe we have breached a covenant under the operative
documents and may declare an event of default. We currently have no reason
to
expect that any such notices will be given. However, if one or more notices
of
default were to be given, we believe we would have various periods in which
to
cure such events of default. If we did not cure the events of default or
obtain
necessary waivers within the required time periods, the maturity of some
of our
debt could be accelerated and our ability to incur additional indebtedness
could
be restricted.
Blackout
Period for Securities Act Registration Statements
Since
we
were unable to file our Form 10-K by the March 16, 2006 deadline and we will
be
unable to file our Form 10-K by the extended deadline of March 31, 2006,
starting today, our active Form S-3 short-form registration statement may
no
longer be used to issue our securities. Upon the filing of our Form 10-K
and
assuming no other eligibility issues affect our status to issue securities,
we
will be deemed current under SEC rules and regulations, but not timely.
Therefore due to our lack of timeliness, we will be ineligible to continue
utilizing our short-form registration statement on Form S-3 to issue our
securities. Should we desire to engage in a public offering of our securities,
or a private placement of our securities followed by the registration of
the
resale of such securities, any new registration statements for such offerings
of
our securities will be required to be filed on Form S-1 until we have been
timely in our filings for at least twelve months prior to the date we file
the
new registration statement. This may make it more difficult for us to raise
equity or debt financing. Further, although our Form S-8 registration statement
does not hold the same timeliness requirement, it does require our reporting
to
be deemed current. Until we file our Form 10-K, we will be unable to utilize
our
Form S-8 registration statement to make equity-based awards to our eligible
employees 2005 Equity and Incentive Plan (the “Plan”)
and
the holders of our outstanding stock options under the Plan will be unable
to
exercise those stock options.
Notice
to New York Stock Exchange
On
March
17, 2006, we notified the New York Stock Exchange (“NYSE”)
that
we will not meet the March 31, 2006 deadline to file our Form 10-K for fiscal
year ended December 31, 2005. We further notified the NYSE that we filed
a Form
12b-25 Notification of Late Filing with the SEC and that we are unable to
provide an expected date for the filing of the Form 10-K. Since we expect
to
file our Form 10-K after March 31, 2006, under SEC rules, our Form 10-K will
be
deemed untimely filed. Currently, we are unable to determine whether we will
be
able to satisfy the requirements of Section 203.01 of the NYSE
Listed Company Manual, to distribute our annual report containing financial
statements of the Company to our stockholders within 120 days of our 2005
fiscal
year end.
Forward-Looking
Statements
This
Current Report on Form 8-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities and Exchange Act of 1934, as amended. These 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. 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.
You
should consider the areas of risk described under the heading “Forward Looking
Statements” in our periodic reports under the Securities Exchange Act of 1934,
as amended, and those risk factors included as Exhibit 99 thereto, titled
“Risk
Factors Affecting our Business and Future Results,” in connection with any
forward-looking statements that may be made by us and our businesses generally.
Except for our ongoing obligations to disclose material information under
the
federal securities laws, we undertake no obligation to release publicly any
updates or revisions to any forward-looking statements, to report events
or to
report the occurrence of unanticipated events unless required by law.