PHH 8k
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the Securities Exchange Act of
1934
Date
of Report (Date of earliest event reported): July 17,
2006
PHH
CORPORATION
(Exact
name of registrant as specified in its charter)
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MARYLAND
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1-7797
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52-0551284
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(State
or other jurisdiction
of
incorporation)
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(Commission
File Number)
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(IRS
Employer
Identification
No.)
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3000
Leadenhall Road
Mt.
Laurel, New Jersey 08054
(Address
of principal executive offices, including zip code)
(856)
917-1744
(Registrant’s
telephone number, including area code)
Check
the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions:
[
] Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
[
] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17
CFR 240.14a-12)
[
] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[
] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
Item
2.02. Results of Operations and Financial Condition.
On
July
21, 2006, PHH Corporation ("PHH", "Company", "we" or
"our"), announced
certain key operating metrics for the three months and six months ended June
30,
2006 and liquidity information as of June 30, 2006. A copy of the press release
is attached to this Current Report on Form 8-K as Exhibit 99.1 and is
incorporated herein by reference.
The
information disclosed in this Item 2.02, including Exhibit 99.1 hereto, is
being
furnished and shall not be deemed “filed” for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, or otherwise subject to the
liabilities of Section 18, nor shall it be deemed incorporated by reference
into
any registration statement or other document pursuant to the Securities Act
of
1933, as amended, except to the extent, if any, expressly set forth in such
filing.
Item
4.02(a). Non-Reliance on Previously Issued Financial Statements or a Related
Audit Report or Completed Interim Review.
On
March
1, 2006, March 17, 2006, May 11, 2006 and June 12, 2006, we filed Current
Reports on Form 8−K (collectively, the “Form 8-Ks”) with the Securities and
Exchange Commission (“SEC”), indicating that we would not meet the SEC 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
quarter and the year ended December 31, 2005 and the audit of our 2005 financial
statements was and is ongoing. We also disclosed that the filing of our
Quarterly Reports on Form 10-Q for the quarters ended March 31, 2006 and June
30, 2006 would be delayed beyond their respective SEC filing deadlines. We
are
working diligently to complete the Form 10-K and commence work on our Quarterly
Reports on Form 10-Q, but we are unable at this time to provide an expected
date
for these filings.
As
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 the Spin-Off, 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 ongoing preparation of our 2005 financial statements. We previously
disclosed in the Form 8-Ks that we are evaluating accounting matters regarding
transactions surrounding the Spin-Off and certain other matters not related
to
the Spin-Off.
On
July
17, 2006, after consultation with and review of the conclusions of management,
the Audit Committee of our Board of Directors concluded that our audited
financial statements for the years ended December 31, 2001, 2002, 2003 and
2004
and our unaudited
quarterly financial statements for the quarters ended March 31, 2004, June
30,
2004, September 30, 2004, March 31, 2005, June 30, 2005 and September 30, 2005
(collectively, the “Prior Financial Statements”) should not be relied
upon because
of errors in the Prior Financial Statements. We
have
determined that the correction of these errors is material and will require
the
restatement of certain of our Prior Financial Statements. Until
we
are able to correct these errors, the Prior Financial Statements should no
longer be relied upon, and financial statements for other periods may also
be
affected. Further, the audit reports of Deloitte & Touche LLP, our
independent registered public accounting firm, relating
to our Prior Financial Statements similarly
may not be relied upon. The
errors also affect financial information for the periods mentioned that we
included in certain of our other disclosures, such as in press releases and
Current Reports on Form 8-K.
We
have
identified certain accounting errors in our Prior Financial Statements,
including the appropriateness of a portion of mortgage re-insurance
premiums being included as a component of the cash flows of our mortgage
servicing rights (“MSRs”). Prior to the second quarter of 2003, we capitalized
the estimated future cash flows related to mortgage re-insurance premiums as
part of our MSRs. We ceased capitalizing new mortgage re-insurance premiums
in
the second quarter of 2003 and the balance of previously capitalized mortgage
re-insurance premiums was fully amortized as of the end of the first quarter
of
2005. We intend to change this accounting treatment, which we expect will impact
only the timing of revenue recognition. While further analysis is required,
we
expect this change will result in a reduction in pre-tax income of approximately
$108 million in years prior to 2001 and $27 million in 2001, and an offsetting
increase in pre-tax income of approximately $44 million in 2002, $70 million
in
2003, $19 million in 2004 and $2 million in 2005.
Because
the preparation of our financial statements continues, certain of the accounting
matters identified at this stage as well as the potential impact of certain
of
these matters on our financial statements have not yet been finalized and are
subject to change. As we continue the process of evaluating the accounting
issues identified in the Form 8-Ks and completing the preparation of our
financial statements, additional 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 for prior periods or prior fiscal years beyond those we have
disclosed.
Our
Audit
Committee has discussed the matters disclosed in this Item 4.02(a) with Deloitte
& Touche LLP.
For
more
information, see the disclosure in Item 8.01, “Accounting Matters,” below, which
is incorporated by reference into this Item 4.02(a).
Item
8.01. Other Events.
Accounting
Matters
As
previously disclosed in the Form 8-Ks, we are evaluating accounting matters
regarding transactions surrounding the Spin-Off and certain other matters not
related to the Spin-Off. We have concluded our evaluation of the following
accounting matters identified in the Form 8-Ks:
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After
evaluating the documentation and other information concerning the
operations of PHH Home Loans LLC, the mortgage joint venture between
Cendant and PHH Mortgage Corporation, a wholly-owned subsidiary of
PHH,
which commenced operations in October 2005, we have determined that
the
operations of PHH Home Loans, LLC should be consolidated in our financial
statements. This is consistent with our historical accounting
treatment.
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After
evaluating certain Spin-Off deferred tax assets relating to alternative
minimum tax credits and net operating loss carryforwards, we have
determined that we will record valuation allowances against these
deferred
tax assets relating to the net operating loss carryforwards, which
will
result in the impairment of such deferred tax assets and require
a charge
to net income of approximately $25 million in 2005.
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The
appropriateness of state tax effective rates included in our income
tax
provision. As previously disclosed, we have evaluated and resolved
the
appropriateness of state tax effective rates included in our income
tax
provision, which we expect will result in a charge to our 2005 net
income
of approximately $6 million.
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We
have reevaluated the appropriateness of including a portion of mortgage
re-insurance premiums as a component of the cash flows of our MSRs.
Prior to the second quarter of 2003, we capitalized the estimated
future
cash flows related to mortgage re-insurance premiums as part of our
MSRs.
The Company ceased capitalizing new mortgage re-insurance premiums
in the
second quarter of 2003 and the balance of previously capitalized
mortgage
re-insurance premiums was fully amortized as of the end of the first
quarter of 2005. We intend to change this accounting treatment, which
we
expect will impact only the timing of revenue recognition. While
further
analysis is required, we expect this change will result in a reduction
in
pre-tax income of approximately $108 million in years prior to 2001
and
$27 million in 2001, and an offsetting increase in pre-tax income
of
approximately $44 million in 2002, $70 million in 2003, $19 million
in
2004 and $2 million in 2005.
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We
continue to evaluate the following accounting matters identified in the Form
8-Ks and certain other accounting matters in conjunction with the preparation
of
our 2005 financial statements:
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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 may
result
in the creation of a reserve and/or valuation allowance and a charge
to
our 2005 net income. This analysis requires an in-depth examination
of the
tax accounting methodologies previously utilized with respect to
a wide
range of financial instruments used by the Company in the ordinary
course
of business, including the tax classification of derivatives, hedges
and
swaps.
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The
appropriateness of not recording certain amounts relating to an ongoing
audit by the Canadian tax authorities of the goods and service tax,
which
if unfavorably resolved could result in additional taxes, interest
and
penalties of approximately $16 million in
2005.
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The
$239 million goodwill impairment recorded in the first quarter of
2005 as
a result of the Spin-Off. Our analysis of this matter is ongoing
and has
been complicated by the need to obtain and evaluate certain historical
information and documentation going back to 2001.
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The
reevaluation of $21 million of certain intangibles related to trademarks
and customer lists in connection with the goodwill reallocation recorded
at the time of the Spin-Off and the resulting goodwill impairment
previously recorded in the first quarter of 2005, which may result
in a
reclassification to goodwill and an impairment of such goodwill and
could
potentially be reflected as a charge to our 2005 net income of as
much as
$21 million. Our analysis of this $21 million of intangibles is ongoing
and we expect that this matter will be resolved in conjunction with
the
resolution of the $239 million goodwill impairment taken at the time
of
the Spin-Off.
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The
appropriateness of the timing of revenue recognition related to loan
sales
from PHH Mortgage Corporation, to Bishops Gate Residential Mortgage
Trust
(“Bishop’s Gate”), a
consolidated special purpose entity,
prior to the adoption of Financial
Accounting Standards Board Interpretation No. 46, “Consolidation of
Variable Interest Entities” (“FIN 46”), and
the accounting for derivatives and hedging activities related to
loans
held for sale under Statement of Financial Accounting Standards No.
133,
“Accounting for Derivative Instruments and Hedging Activities” (“SFAS
133”). Prior to the date of adoption of FIN 46 in the second quarter
of
2003 and the related consolidation of Bishop’s Gate, we recorded loan
sales to Bishop’s Gate at the time of sale; however, the gain on sale was
deferred until we completed our obligation to assist Bishop’s Gate in
selling those loans to third-party investors. In addition, we employed
derivatives to hedge our interest rate risk from interest rate lock
commitments, loans held for sale, and loans held by Bishop’s Gate and used
hedge accounting from the date of adoption of SFAS 133 in the first
quarter of 2001 through the third quarter of 2003. We discontinued
hedge
accounting in the fourth quarter of 2003 and developed enhanced systems
to
meet the documentation requirements of SFAS 133 and resumed hedge
accounting late in the first quarter of 2004. This assessment may
result
in the identification of errors in the timing of revenue recognition
for
the periods in 2004 and prior. While further analysis is required,
we
estimate the potential impact related to these items could result
in
increases in pre-tax income of approximately $17 million in years
prior to
2001 and $39 million in 2001 and offsetting decreases in pre-tax
income of
approximately $24 million in 2002, $30 million in 2003 and $2 million
in
2004. We do not expect that this change in accounting treatment will
impact pre-tax income in 2005.
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The
reevaluation of contemporaneous documentation required to employ
SFAS 133
hedge accounting to certain financial instruments used to hedge interest
rate risk for the years 2002 through 2005. While further analysis
is
required, this reevaluation may result in the disallowance of hedge
accounting previously used for these hedging arrangements. We estimate
the
aggregate potential impact could result in a net increase to pre-tax
income of $20 million in 2002, partially offset by net decreases
to
pre-tax income of $7 million in 2003, $5 million in 2004, and $6
million
in 2005.
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The
reevaluation of the timing of recognition of motor company monies
that
impact the basis in our leased vehicles and depreciation methodologies
applied to certain of our leased vehicles, which could result in
changes
to our depreciation expense. While further analysis is required,
we
estimate the aggregate potential impact could result in net decreases
to
pre-tax income of $10 million in years prior to 2001, $3 million
in 2001
and $2 million in 2002, partially offset by net increases to pre-tax
income of $1 million in 2003, $5 million in 2004, and $3 million
in
2005.
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Because
the preparation of our financial statements continues, certain of the accounting
matters identified at this stage as well as the potential impact of certain
of
these matters on our financial statements have not yet been finalized and are
subject to change. As we continue the process of evaluating the accounting
issues identified in the Form 8-Ks and completing the preparation of our
financial statements, additional 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 for prior periods or prior fiscal years beyond those we have
disclosed.
Liquidity
and Waivers
We
continue to believe we have adequate liquidity to fund our operating cash needs.
We have previously obtained certain waivers and continue to seek additional
waivers extending the date for delivery of our audited financial statements,
or
the audited financial statements of our subsidiaries, and other documents
related to such financial statements to certain lenders, trustees and other
third parties in connection with certain of our financing, servicing, hedging
and related agreements and instruments (collectively, our “Financing
Agreements”).
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), our 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. As previously disclosed, we have obtained waivers under our $1.3
billion Five-Year Amended and Restated Competitive Advance and Revolving Credit
Agreement, our $500 million Revolving Credit Agreement, and certain other
facilities waiving certain potential breaches of covenants under those
instruments and extending the deadline (the “Extended Deadline”) for the
delivery of our financial statements and/or our 2005 annual servicing report
to
the various lenders under those instruments until September 30, 2006, unless
the
principal amount of any indebtedness issued under our public notes indenture
shall become due and payable (other than by optional redemption) prior to such
date. We have not received any notices of default accelerating our payment
of
our currently outstanding indebtedness.
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. If we receive notice and are
unable to cure the events of default or obtain necessary waivers within the
required time periods or certain extended time periods, the maturity of some
of
our debt could be accelerated and our ability to incur additional indebtedness
could be restricted.
Bishop’s
Gate, a consolidated special purpose entity, received a notice (the “Notice”),
dated July 10, 2006, from The Bank of New York, as Indenture Trustee (the
“Trustee”), that certain events of default have occurred under the Base
Indenture dated December 11, 1998 (the “Indenture”) between the Trustee and
Bishop’s Gate, pursuant to which Bishop’s Gate Residential Mortgage Loan Medium
Term Notes, Variable Rate Notes, Series 1999-1, Due 2006 and Variable Rate
Notes, Series 2001-2, Due 2008 (collectively, the “Notes”) were issued. The
total principal outstanding under the Notes is $800 million. We are in
discussions with the Trustee seeking to obtain a waiver of any events of default
under the Indenture from the required parties.
The
Notice indicates that events of default occurred as a result of Bishop’s Gate
failure to provide the Trustee with our and certain other audited annual and
unaudited quarterly financial statements. While the Notice further informed
the
holders of the Notes of these events of default, the notice received did not
constitute a notice of acceleration of repayment of the Notes. The Notice
creates an event of default under the Amended and Restated Liquidity Agreement
(the “Liquidity Agreement”), dated as of December 11, 1998, as further amended
and restated as of December 2, 2003, among Bishop’s Gate, certain banks listed
therein and JPMorgan Chase Bank, as Agent. The Liquidity Agreement supports
commercial paper issued by Bishop’s Gate. We have received approvals from the
required banks and are in the process of obtaining other approvals required
under the Liquidity Agreement in order to finalize a waiver of this event of
default.
There
can
be no assurance that any required waivers under any of our Financing Agreements
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 acceleration event, an event of
default or other restrictions on our business operations. Moreover, failure
to
obtain waivers could be material and adverse to our business, liquidity and
financial condition.
Regulatory
and Contractual Waivers
We
have
obtained certain waivers and continue to seek additional waivers extending
the
date for delivery of the audited financial statements of our subsidiaries and
other documents related to such financial statements to certain regulators,
investors in mortgage loans and other third parties in order to satisfy state
mortgage licensing regulations and certain contractual requirements. We will
continue to seek similar waivers as a result of the aforementioned accounting
matters as may be necessary. There can be no assurance that any required waivers
will be received on a timely basis, if at all, or that any waivers obtained,
including the waivers we have already obtained, will extend for a sufficient
period of time to avoid restrictions on our business operations. The failure
to
obtain waivers from investors in mortgage loans and other parties or the loss
of
licenses to do mortgage business in one or more states could be material and
adverse to our business, liquidity and financial condition.
Internal
Control Over Financial Reporting
We
have
not completed our assessment of internal controls over financial reporting
as of
December 31, 2005, as required by Section 404 of the Sarbanes-Oxley Act of
2002
(“Section 404”). We have, however, identified a number of internal control
deficiencies, some of which have been classified as material weaknesses and
others may be classified as significant deficiencies that alone or in the
aggregate may constitute material weaknesses. A material weakness is a control
deficiency (within the meaning of Public Company Accounting Oversight Board
Auditing Standard No. 2), or combination of control deficiencies, that results
in there being more than a remote likelihood that a material misstatement of
the
annual or interim financial statements will not be prevented or detected on
a
timely basis by employees in the normal course of their assigned functions.
Furthermore, we expect to conclude that our disclosure controls and procedures
(as defined in Rule 13a-15 and 15d-15 under the Exchange Act of 1934, as
amended) as of the year ended December 31, 2005 and the quarters ended March
31,
2006 and June 30, 2006 were not effective. Additional discussion regarding
our
controls and procedures will be included in our Form 10-K and our Quarterly
Reports on Form 10-Q when filed.
The
aforementioned control deficiencies have contributed to the delay in the
finalization of our financial statements. Management intends to remediate such
control deficiencies as promptly as possible. We have and will continue to
devote substantial time and incur significant expense in connection with meeting
the requirements of Section 404.
Item
9.01. Financial Statements and Exhibits.
(c) Exhibits
The
information disclosed in Exhibit 99.1 hereto is being furnished and shall not
be
deemed “filed” for purposes of Section 18 of the Securities Exchange Act of
1934, as amended, or otherwise subject to the liabilities of Section 18, nor
shall it be deemed incorporated by reference into any registration statement
or
other document pursuant to the Securities Act of 1933, as amended, except to
the
extent, if any, expressly set forth in such filing.
Forward-Looking
Statements
This
Current Report on Form 8-K and Exhibit 99.1 hereto 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. As you read and
consider the estimates of historic operating metrics, such as loan origination
volume and average fleet units, and information regarding the appropriateness
of
certain accounting and tax treatments included in this Current Report on Form
8-K and Exhibit 99.1 hereto, you should understand that these statements are
not
guarantees of performance or results and are preliminary in nature. Statements
preceded by, followed by or that otherwise include the words “believes”,
“expects”, “anticipates”, “intends”, “projects”, “estimates”, “plans”, “may
increase”, “may result”, “will result”, “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 “Cautionary Note
Regarding 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.
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
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PHH
CORPORATION
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By:
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/s/
Clair M. Raubenstine
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Name:
Clair
M. Raubenstine
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Title:
Executive
Vice President and Chief Financial Officer
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Dated:
July 21, 2006
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