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): June 12,
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
June
12, 2006, PHH
Corporation (“PHH”, “Company”, “we” or “our”) announced certain key operating
metrics for the three months ended March 31, 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
2.06. Material Impairments
The
information regarding (i) the allocation and valuation of certain Spin-Off
(as
defined below) deferred tax assets relating to certain alternative minimum
tax
credits and net operating loss carryforwards, which we expect would result
in an
impairment and a charge to our 2005 net income of approximately $25 million,
and
(ii) 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 2005 as set forth in Item 8.01 below
is
incorporated by reference into this Item 2.06.
Item
8.01. Other Events.
On
March
1, 2006, March 17, 2006 and May 11, 2006, the Company filed Current Reports
on
Form 8-K (collectively, the “Form 8-Ks”) with the Securities and Exchange
Commission (“SEC”), indicating that we did not expect to meet the extended March
31, 2006 SEC deadline to file our 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 the fiscal year 2005 and the audit of our 2005 financial
statements was and is ongoing. Due to the continuing review of these matters
and
other matters described in the Form 8-Ks and in our Form 12b-25 Notifications
of
Late Filing previously filed with the SEC on March 17, 2006 and May 11, 2006
regarding the delays in filing of our Form 10-K and Form 10-Q for the quarter
ended March 31, 2006 (“Form 10-Q”), we anticipate that the filing of our Form
10-Q for the quarter ended June 30, 2006 (together with the Form 10-Q, the
“Form
10-Qs”) will be delayed beyond the SEC filing deadline. We are working
diligently to complete the Form 10-K and commence work on the Form 10-Q, but
we
are unable at this time to provide an expected date for these filings.
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, 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 identified 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. We continue to evaluate these
accounting matters identified in the Form 8-Ks and certain other accounting
matters in conjunction with the preparation of our 2005 financial statements,
including the following:
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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.
If
we determine that the operations of PHH Home Loans, LLC should not
be
consolidated in our financial statements for 2005, the
mortgage joint venture will be presented on the equity method of
accounting in our consolidated financial statements.
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The
allocation and valuation of certain Spin-Off deferred tax assets
relating
to certain alternative minimum tax credits and net operating loss
carryforwards. We expect to record valuation allowances against these
deferred tax assets, which would result in an impairment of such
deferred
tax assets and a charge to our 2005 net income of approximately $25
million.
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The
proper tax classification of derivatives, hedges and swaps used in
our
business. Based upon our review, we expect that the proper tax
classification of derivatives, hedges and swaps will result in a
charge to
2005 net income of approximately $5
million.
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The
appropriateness of state
tax effective rates included in our income tax provision.
As disclosed in our Current Report on Form 8-K filed as of March
17, 2006,
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 2005 net income of approximately $5 million.
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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.
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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 $14
million.
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The
appropriateness of including a portion of mortgage re-insurance
premiums as a component of the cash flows of our mortgage servicing
rights (“MSR”). Prior to the second quarter 2003, we capitalized the
estimated future cash flows related to mortgage re-insurance premiums
as
part of our MSR asset. The Company ceased capitalizing new mortgage
re-insurance premiums in the second quarter 2003 and the balance
of
previously capitalized mortgage re-insurance premiums was fully amortized
as of the end of the first quarter 2005. Based upon our current
evaluation, we expect that a change in accounting treatment, if required,
would result in a reduction in pre-tax earnings of $108 million in
years
prior to 2001 and $27 million in 2001, and an increase in pre-tax
earnings
of $44 million in 2002, $70 million in 2003, $19 million in 2004
and $2
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 2005, which we expect 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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Because
the preparation of our 2005 and first quarter 2006 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 above
mentioned accounting issues and completing the preparation of our 2005 and
first
quarter 2006 financial statements, these and other 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 that
we have disclosed.
Liquidity
and Waivers
We
continue to believe we have adequate liquidity to fund our operating cash needs.
We have obtained certain waivers and continue to seek additional waivers to
provide 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. On May 26, 2006, we obtained waivers under our $1.3 billion Five
Year Competitive Advance and Revolving Credit Agreement, our $500 million
Revolving Credit Agreement, and our Bishop’s Gate Residential Mortgage Trust
which waive certain potential breaches of covenants under those instruments
and
extend the deadline (the “Extended Deadline”) for the delivery of our 2005 and
first and second quarter 2006 financial statements 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 (such payment
date, the “Payment Date”). In such event, the waiver will terminate one day
prior to the Payment Date. There is no scheduled principal payment required
under such indenture between today and September 30, 2006, and the earliest
possible date that we could be required to make such principal payment if
we
were to receive notice of such election today would be September 10, 2006.
Similarly, on May 26, 2006, our wholly-owned subsidiary, Chesapeake Funding,
LLC, obtained a waiver from its lenders extending the deadline for the delivery
of an annual servicing report required by the base indenture and related
supplements thereto, dated as of March 7, 2006, until the Extended
Deadline.
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 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 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. In addition, we have obtained
certain waivers and continue to seek additional waivers to provide 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 federal and state insurance and mortgage
licensing regulations and certain contractual requirements. We
will
continue to seek similar waivers from such financial institutions and other
third parties 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 as described above, will extend for a sufficient period of time to
avoid 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.
Credit
Ratings
Our
senior debt credit ratings from Moody’s Investors Service, Standard & Poor’s
and Fitch Ratings are Baa3, BBB and A-, respectively. Our 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. Currently, our credit ratings with both
Standard & Poor’s and Fitch Ratings are on credit watch with negative
implications, reflecting the concern that delays in the completion and audit
of
our financial statements could negatively impact liquidity. 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 markets
(both secured and unsecured). A drop in our credit ratings could also increase
our cost of borrowing under our various unsecured Financing Agreements and
could
cause our access to the public debt markets to be severely limited. Further,
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 unsecured financing
could rise significantly.
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 quarter ended March
31,
2006 were not effective. Additional discussion regarding our controls and
procedures will be included in our Form 10-K and our Form 10-Qs 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.
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 contain 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 operating metrics and information regarding the
appropriateness of certain accounting and tax treatment included in this
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
fluctuate”, “may result”, “will result” 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.
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:
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Clair
M. Raubenstine
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Title:
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Executive
Vice President and Chief Financial Officer
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Dated:
June 12, 2006
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