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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Form 10-Q

Commission File No. 1-7797

PHH Corporation
(Exact name of registrant as specified in its charter)

(973) 428-9700
(Registrant's telephone number, including area code)

 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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 ý    No o

 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act):  Yes o    No ý

 The Company meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is, therefore, filing this Form with the reduced disclosure format.

PHH Corporation and Subsidiaries

Table of Contents

FORWARD-LOOKING STATEMENTS

Forward-looking statements in our public filings or other public 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 were based on various factors and were derived utilizing numerous important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements. Forward-looking statements include the information concerning our future financial performance, business strategy, projected plans and objectives. 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 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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terrorist attacks, such as the September 11, 2001 terrorist attacks on New York City and Washington, D.C., other attacks, acts of war or measures taken by governments in response thereto may negatively affect our financial results and could also result in a disruption in our business;



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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 and relocation businesses;



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the effects of changes in current interest rates, particularly on our mortgage business 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 ability to reduce quickly our substantial technology costs and other overhead costs in response to a reduction in revenue;



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our ability 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 our financing arrangements and to maintain our credit ratings;



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in relation to our management and mortgage programs, (i) the deterioration in the performance of the underlying assets of such programs and (ii) 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; and



•

changes in laws and regulations or the applications thereof, including changes in accounting standards; state, international and federal tax laws; privacy policy regulation or other laws that impact our mortgage, fleet or relocation businesses.

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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 the areas of risk described above 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 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—FINANCIAL INFORMATION

Item 1. Financial Statements

INDEPENDENT ACCOUNTANTS' REPORT

To the Board of Directors and Stockholder of
PHH Corporation
Parsippany, New Jersey

We have reviewed the accompanying consolidated condensed balance sheet of PHH Corporation and subsidiaries (the "Company"), a wholly-owned subsidiary of Cendant Corporation, as of September 30, 2003, the related consolidated condensed statements of operations for the three and nine month periods ended September 30, 2003 and 2002, and the related consolidated condensed statements of cash flows for the nine month periods ended September 30, 2003 and 2002. These financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such consolidated condensed financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of the Company as of December 31, 2002, and the related consolidated statements of operations, stockholder's equity, and cash flows for the year then ended (not presented herein); and in our report dated February 5, 2003 (February 13, 2003 as to the subsequent event described in Note 20), we expressed an unqualified opinion (and included an explanatory paragraph with respect to the adoption of the non-amortization provisions for goodwill and other indefinite lived intangible assets and the modification of the accounting treatment relating to securitization transactions and the accounting for derivative instruments and hedging activities, as discussed in Note 1 to the consolidated financial statements) on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated condensed balance sheet as of December 31, 2002 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Deloitte & Touche LLP
Parsippany, New Jersey
November 5, 2003

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PHH Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In millions)

See Notes to Consolidated Condensed Financial Statements.

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PHH Corporation and Subsidiaries
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions, except share data)

See Notes to Consolidated Condensed Financial Statements.

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PHH Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In millions)

See Notes to Consolidated Condensed Financial Statements.

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PHH Corporation and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unless otherwise noted, all amounts are in millions)

1.     Summary of Significant Accounting Policies

Basis of Presentation
The accompanying unaudited Consolidated Condensed Financial Statements include the accounts and transactions of PHH Corporation and its subsidiaries ("PHH"), as well as entities in which PHH directly or indirectly has a controlling financial interest (collectively, the "Company"). For more detailed information regarding the Company's consolidated policy, refer to "Changes in Accounting Polices—Consolidation Policy" below. PHH is a wholly-owned subsidiary of Cendant Corporation ("Cendant"). Pursuant to certain covenant requirements in the indentures under which PHH issues debt, PHH continues to operate and maintain its status as a separate public reporting entity.

The Company's Consolidated Condensed Financial Statements present separately the financial data of the Company's management and mortgage programs. Specifically, in the Company's vehicle management, relocation and mortgage services businesses, assets under management and mortgage programs are generally 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.

In presenting the Consolidated Condensed Financial Statements, management is required to make estimates and assumptions that affect the amounts reported and related disclosures. Estimates, by their nature, are based on judgments and available information. Accordingly, actual results could differ from those estimates. In management's opinion, the Consolidated Condensed Financial Statements contain all normal recurring adjustments necessary for a fair presentation of interim results reported. The results of operations reported for interim periods are not necessarily indicative of the results of operations for the entire year or any subsequent interim period. Certain reclassifications have been made to prior period amounts to conform to the current period presentation. These financial statements should be read in conjunction with the Company's 2002 Annual Report on Form 10-K filed on March 5, 2003.

Changes in Accounting Policies
Stock-Based Compensation.    Under Cendant's existing stock plans, Cendant common stock awards (including stock options, stock appreciation rights, restricted shares and restricted stock units) are granted to the Company's employees, including directors and officers of the Company. 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 Statement of Financial Accounting Standards ("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

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by providing pro forma disclosures of net income (loss) 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 Financial Accounting Standards Board ("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 (loss) 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:

---

^(a)

The 2003 amounts reflect the second quarter 2003 issuance by Cendant of approximately 1.0 million restricted stock units to certain of the Company's employees (including officers) as a form of compensation. These restricted stock units entitle the employee to receive one share of Cendant's common stock upon vesting, which occurs ratably over a four year period. Accordingly, Cendant allocated compensation expense to the Company during the three and nine months ended September 30, 2003, which on an after-tax basis is $1 million.

^(b)

The 2002 amounts reflect the August 27, 2002 acceleration of the vesting schedules for certain options previously granted by Cendant. 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 by the Company 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 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

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guarantor is required to recognize, at the inception of any guarantee 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.

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.

Financial Instruments with Characteristics of Both Liabilities and Equity.    On July 1, 2003, the Company adopted SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This standard addresses how certain financial instruments with characteristics of both liabilities and equity should be classified and measured. The impact of adopting this standard was not material to the Company's results of operations or financial position.

Consolidation Policy.    On January 17, 2003, the 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. Transfers to a qualifying SPE ("QSPE") and certain other interests in QSPEs are generally not subject to this Interpretation. The provisions of FIN 46 are 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, and indicated that it would provide further clarification of this Interpretation before December 31, 2003.

In accordance with its current understanding 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 caused the total assets and liabilities of the Company's Real Estate Services segment to increase by $3.1 billion each (on a consolidated basis after eliminations). See Note 3—Debt Under Management and Mortgage Programs and Borrowing Arrangements for more complete information regarding Bishop's Gate. The Company is currently assessing the application of FIN 46 to other entities and is awaiting the additional clarification of FIN 46 that the FASB is expected to provide.

In connection with FIN 46, when evaluating an entity for consolidation, the Company first determines whether an entity is deemed to be a VIE and, if so, whether the Company would be considered its 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 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."

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Prior to the adoption of FIN 46 (before the change in policy), 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 ability to control the financial or operating policies of an entity through its voting rights, board representation or other similar rights.

2.     Mortgage Servicing Activities

        The activity in the Company's residential first mortgage loan servicing portfolio consisted of:

---

^(*)

Does not include approximately $2.1 billion and $1.7 billion of home equity mortgages serviced by the Company as of September 30, 2003 and 2002, respectively. The weighted average note rate on all the underlying mortgages within this servicing portfolio was 5.44% and 6.43% as of September 30, 2003 and 2002, respectively.

Substantially all of the mortgage loans within this servicing portfolio were sold by the Company without recourse. However, approximately $4.3 billion (approximately 3%) of loans within this servicing portfolio as of September 30, 2003 were sold with recourse. The majority of such loans were sold under a program where the Company retains the credit risk for a limited period of time and only for a specific default event. For these loans, the Company accrues a provision (equal to the fair value of the recourse obligation) for estimated losses. As of September 30, 2003, the provision approximated $7 million. There was no significant activity during 2003 that would cause the Company to utilize this provision.

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The activity in the Company's capitalized mortgage servicing rights ("MSR") asset consisted of:

The Company uses derivatives to mitigate the impact that accelerated prepayments would have on the fair value of its MSR asset. Such derivatives, which are primarily designated as fair value hedging instruments, tend to increase in value as interest rates decline and conversely decline in value as interest rates increase. The net activity in the Company's derivatives related to mortgage servicing rights consisted of:

---

^(*)

At September 30, 2003, the net balance represents the gross asset of $423 million net of the gross liability of $227 million.

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The net impact to the Company's Consolidated Condensed Statements of Operations resulting from changes in the fair value of the Company's MSR asset, after giving effect to hedging and other derivative activity, was as follows:

Based upon the composition of the portfolio as of September 30, 2003, the Company expects MSR amortization expense for the remainder of 2003 and the five succeeding fiscal years to approximate $75 million, $255 million, $210 million, $185 million, $165 million and $145 million, respectively. As of September 30, 2003, the MSR portfolio had a weighted average life of approximately 5.3 years.

3.     Debt Under Management and Mortgage Programs and Borrowing Arrangements

As previously discussed in Note 1—Summary of Significant Accounting Policies, the Company consolidated Bishop's Gate on July 1, 2003. Accordingly, Bishop's Gate has been included in the Company's consolidated results of operations and cash flows since July 1, 2003. The assets of Bishop's Gate are not available to pay the general obligations of the Company. Additionally, the creditors of Bishop's Gate have no recourse to the general credit of the Company. However, the Company has made representations and warranties customary for securitization transactions, including eligibility characteristics of the mortgage loans and servicing responsibilities, in connection with the securitization of these assets.

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Debt under management and mortgage programs (including outstanding debt of Bishop's Gate at September 30, 2003) consisted of:

---

^(a)

At September 30, 2003, approximately $2.6 billion of asset-backed term notes were included in outstanding borrowings.

^(b)

As of December 31, 2002, Bishop's Gate had $2.5 billion of indebtedness, which was not recorded on the Company's Consolidated Condensed Balance Sheet as Bishop's Gate was not consolidated on such date.

^(c)

The change in the balance at September 30, 2003 principally reflects (i) the issuance of $400 million of 6% term notes due March 2008, (ii) the issuance of $600 million of 7¹/8% term notes due March 2013, (iii) the issuance of $187 million of term notes with various interest rates and maturity dates and (iv) the February 2003 repayment of $650 million of 8¹/8% term notes.

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 $3.1 billion of underlying mortgage loans, which are serviced by the Company and recorded within mortgage loans held for sale on the Company's Consolidated Condensed Balance Sheet as of September 30, 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 noncredit-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.

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The following table provides the contractual maturities for debt under management and mortgage programs at September 30, 2003 (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 appropriate estimates have been used):

---

(*)

Unsecured commercial paper borrowings of $590 million are assumed to be repaid with borrowings under committed credit facilities, which expire in February 2005, as such amount is fully supported by these committed credit facilities, which are detailed below.

As of September 30, 2003, available funding under the Company's asset-backed debt programs and committed credit facilities related to the Company's management and mortgage programs consisted of:

---

^(a)

Capacity is subject to maintaining sufficient assets to collateralize debt.

^(b)

On July 3, 2003, the Company amended the terms of this facility, which reduced the capacity to $500 million and extended the maturity date to February 2005.

As of September 30, 2003, the Company also had $874 million of availability for public debt issuances under a shelf registration statement.

At September 30, 2003, the Company was in compliance with all restrictive and financial covenants of its debt instruments and credit facilities related to management and mortgage programs.

4.    Off-Balance Sheet Financing Arrangement

The Company sells relocation receivables to Apple Ridge Funding Corporation ("Apple Ridge"), a bankruptcy remote QSPE. As this entity is a QSPE and precluded from consolidation pursuant to

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generally accepted accounting principles, the debt issued by this entity and the collateralizing assets, which are serviced by the Company, are not reflected on the Company's Consolidated Condensed Balance Sheets. The assets of this QSPE are not available to pay the Company's obligations. Additionally, the creditors of this QSPE have no recourse to the Company's credit. However, the Company has made representations and warranties customary for securitization transactions, including eligibility characteristics of the receivables and servicing responsibilities, in connection with the securitization of these assets.

The following table provides detailed information for this off-balance sheet QSPE.

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^(a)

Does not include cash of $14 million.

^(b)

Represents a term note.

^(c)

Subject to maintaining sufficient assets to collateralize debt.

5.    Commitments and Contingencies

The June 1999 disposition of the Company's fleet businesses was structured as a tax-free reorganization and, accordingly, no tax provision was recorded on a majority of the gain. However, pursuant to an interpretive ruling, the Internal Revenue Service ("IRS") has subsequently taken the position that similarly structured transactions do not qualify as tax-free reorganizations under the Internal Revenue Code Section 368(a)(1)(A). If the transaction is not considered a tax-free reorganization, the resultant incremental liability could range between $10 million and $170 million depending upon certain factors, including utilization of tax attributes. Notwithstanding the IRS interpretive ruling, the Company believes that, based upon analysis of current tax law, its position would prevail, if challenged.

The Company is involved in other pending litigation, which, in the opinion of management, will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows.

6.    Comprehensive Income

The components of comprehensive income (loss) are summarized as follows:

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The after-tax components of accumulated other comprehensive loss are as follows:

The currency translation adjustments exclude income taxes related to indefinite investments in foreign subsidiaries.

7.    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 $8 million for both the three months ended September 30, 2003 and 2002 and $25 million and $23 million for the nine months ended September 30, 2003 and 2002, respectively.

On January 1, 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. Additionally, during the nine months ended September 30, 2003, the Company paid Cendant $53 million in connection with the settlement of intercompany activities. Furthermore, during the nine months ended September 30, 2003, the Company paid cash dividends of $105 million to Cendant.

NRT Incorporated
NRT Incorporated ("NRT"), a real estate brokerage firm, is a wholly-owned subsidiary of Cendant not within the Company's ownership structure. The Company receives real estate referral fees from NRT in connection with referring its relocation clients to NRT for brokerage services. Reflected within the Company's Consolidated Condensed Statements of Operations for the three months ended September 30, 2003 and 2002 are $14 million and $12 million, respectively, of real estate referral fees charged to NRT by the Company. For the nine months ended September 30, 2003 and 2002, the Company recorded real estate referral fees of $32 million and $28 million, respectively. These fees are customary as they are paid to the Company by all real estate brokerages (both affiliates and non-affiliates) who receive referrals from the Company's relocation business.

8.    Segment Information

Management evaluates the operating results of each of its reportable segments based upon revenue and "EBITDA," which is defined as net income (loss) before non-program related depreciation and amortization, income taxes and minority interest. On January 1, 2003, the Company changed its performance measure used to evaluate the operating results of its reportable segments and, as such, the information presented below for the three and nine months ended September 30, 2002 has been revised to reflect this change. The Company's presentation of EBITDA may not be

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comparable to similar measures used by other companies. Presented below are the revenues and EBITDA for each of the Company's reportable segments and a reconciliation of EBITDA to income (loss) before income taxes and minority interest for the three and nine months ended September 30, 2003 and 2002. The effects of transactions within and between each of these reportable segments are eliminated in consolidation.

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^(a)

Includes unallocated corporate overhead and the elimination of transactions between segments.

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Item 2. Management's Narrative Analysis of the Results of Operations and Liquidity and Capital Resources

The following discussion should be read in conjunction with our Consolidated Condensed Financial Statements and accompanying Notes thereto included elsewhere herein and with our 2002 Annual Report on Form 10-K filed with the Commission on March 5, 2003. Unless otherwise noted, all dollar amounts are in millions.

We are a provider of relocation, mortgage and fleet management services. Our Real Estate Services segment provides homebuyers with mortgages and facilitates employee relocations and our Fleet Management Services segment provides fleet management and fuel card services to corporate clients and government agencies.

Effective July 1, 2003, we consolidated Bishop's Gate Residential Mortgage Trust pursuant to FASB Interpretation No. 46, "Consolidation of Variable Interest Entities." The consolidation of Bishop's Gate caused our total assets and liabilities under management and mortgage programs to increase by $3.1 billion each. There was no impact to our results of operations.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2003 vs. Three Months Ended September 30, 2002

Discussed below are the results of operations for each of our reportable segments. Management evaluates the operating results of each of our reportable segments based upon revenue and "EBITDA," which is defined as net income (loss) before non-program related depreciation and amortization, income taxes and minority interest. On January 1, 2003, we changed the performance measure we use to evaluate the operating results of our reportable segments and, as such, the information presented below for third quarter 2002 has been revised to reflect this change. Our presentation of EBITDA may not be comparable to similar measures used by other companies.

^(a)

Revenues and EBITDA for 2002 reflect a $275 million provision for impairment of our mortgage servicing rights asset, which is discussed in greater detail below.

^(b)

Includes unallocated corporate overhead and the elimination of transactions between segments.

Real Estate Services
Revenues and EBITDA increased $326 million (479%) and $286 million (179%), respectively, in third quarter 2003 compared with 2002, primarily reflecting growth in our mortgage business. Revenues from mortgage-related activities totaled $275 million in third quarter 2003, an increase of $362 million compared with third quarter 2002. Revenues and EBITDA in last year's third quarter were adversely impacted by a $275 million non-cash provision for impairment of our mortgage servicing rights asset ("MSRs"). Declines in interest rates at such time resulted in increases to our current and estimated future loan prepayment rates and a corresponding provision for impairment against the value of our MSRs. Excluding the $275 million non-cash MSR impairment provision in third quarter 2002, revenues

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from mortgage-related activities increased $87 million in third quarter 2003 due to a significant increase in mortgage loan production, partially offset by an increase in amortization of the mortgage servicing rights asset as low interest rates continued to result in record levels of mortgage refinancing activity.

Revenues from mortgage loan production increased $226 million (112%) in third quarter 2003 compared with third quarter 2002 and were derived from growth in our fee-based mortgage origination operations (discussed below) and an increase in the volume of loans that we sold, which more than doubled quarter-over-quarter. We sold $19.2 billion of mortgage loans in third quarter 2003 compared with $9.2 billion in third quarter 2002, generating incremental production revenues of $181 million. In addition, production revenues generated from our fee-based mortgage-origination activity increased $45 million (82%) as compared with third quarter 2002. Production fee income on fee-based loans is generated at the time of closing, whereas originated mortgage loans held for sale generate revenues at the time of sale (typically 30-60 days after closing). Accordingly, our production revenue in any given period is driven by a mix of mortgage loans closed and mortgage loans sold. Total mortgage loans closed increased $12.9 billion (88%) to $27.6 billion in third quarter 2003, comprised of an $11.3 billion (114%) increase in closed loans to be securitized (sold by us) and a $1.6 billion (34%) increase in closed loans which were fee-based. Refinancings increased $10.1 billion (151%) to $16.7 billion and purchase mortgage closings grew $2.8 billion (35%) to $10.9 billion.

Net revenues from servicing mortgage loans increased $136 million primarily due to the $275 million non-cash provision for impairment of MSRs recorded in third quarter 2002. Apart from this impairment charge, net servicing revenues declined $139 million substantially due to a quarter-over-quarter increase in MSR amortization of $136 million (recorded as a contra revenue) resulting from the high levels of mortgage loan prepayments during third quarter 2003, which was partially offset by a $9 million (9%) increase in recurring servicing fees (fees received for servicing existing loans in the portfolios) driven by a 16% quarter-over-quarter increase in the average servicing portfolio to $125.2 billion. In addition, net servicing revenues declined $7 million from hedging and other derivative activities to protect against changes in the fair value of MSRs due to fluctuations in interest rates.

Interest rates have risen from their lows in the earlier part of 2003 and, as such, we expect mortgage refinancing volume and resulting net production revenues to decline comparatively in future quarters. However, in a rising interest rate environment, although no assurances can be given, the impact of lower revenues from a decline in production should be partially offset by increased servicing revenues, net of hedge results. Historically, mortgage production and mortgage servicing operations have been counter-cyclical in nature and represented a naturally offsetting relationship. Additionally, to supplement this relationship, we also maintain a comprehensive, non-speculative mortgage risk management program to further mitigate the impact of fluctuations in interest rates on our operating results.

Partially offsetting the growth in our mortgage business is a decline in revenues and EBITDA of $38 million and $9 million, respectively, related to our former title and appraisal businesses. On December 31, 2002, we distributed these businesses 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 third quarter 2003 while these businesses contributed revenues and EBITDA of $38 million and $9 million, respectively, in third quarter 2002.

Operating and administrative expenses within this segment increased approximately $75 million primarily due to the direct costs incurred in connection with the high level of mortgage loan production in third quarter 2003.

Fleet Management
Revenues and EBITDA increased $6 million (2%) and $2 million (8%), respectively, in third quarter 2003 compared with the comparable prior year quarter primarily due to an increase in fuel card usage

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and higher gasoline prices, since our fuel card business earns a percentage of the total gas purchases by its clients. The EBITDA impact was partially offset by higher operating expenses incurred to support the additional usage.

Nine Months Ended September 30, 2003 vs. Nine Months Ended September 30, 2002

Discussed below are the results of operations for each of our reportable segments. The information presented for the nine months ended September 30, 2002 has been revised to reflect the previously described change in the performance measure that we use to evaluate the operating results of our reportable segments.

^(a)

Revenues and EBITDA for 2002 reflect a $275 million provision for impairment of our mortgage servicing rights asset, which is discussed in greater detail below.

^(b)

Includes unallocated corporate overhead and the elimination of transactions between segments.

Real Estate Services
Revenues and EBITDA increased $543 million (90%) and $356 million, respectively, in nine months 2003 compared with nine months 2002, reflecting growth across all of our mortgage business. Revenues from mortgage-related activities grew $584 million (259%) in nine months 2003 compared with nine months 2002 due to a significant increase in mortgage loan production, partially offset by an increase in amortization of our MSRs as low interest rates resulted in record levels of mortgage refinancing activity. Revenues and EBITDA in last year's third quarter were adversely impacted by a $275 million non-cash provision for impairment of our MSRs. Declines in interest rates at such time resulted in increases to our current and estimated future loan prepayment rates and a corresponding provision for impairment against the value of our MSRs. Excluding the $275 million non-cash MSR impairment provision in third quarter 2002, revenues from mortgage-related activities increased $309 million (62%) in nine months 2003.

Revenues from mortgage loan production increased $505 million (89%) in nine months 2003 compared with the prior year period and were derived from growth in our fee-based mortgage origination operations (discussed below) and a 91% increase in the volume of loans that we sold. We sold $48.2 billion of mortgage loans in nine months 2003 compared with $25.8 billion in nine months 2002, generating incremental production revenues of $378 million. In addition, production revenues generated from our fee-based mortgage-origination activity increased $127 million (83%), as compared with nine months 2002. Production fee income on fee-based loans is generated at the time of closing, whereas originated mortgage loans held for sale generate revenues at the time of sale (typically 30-60 days after closing). Accordingly, our production revenue in any given period is driven by a mix of mortgage loans closed and mortgage loans sold. Total mortgage loans closed increased $29.2 billion (74%) to $68.8 billion in nine months 2003, comprised of a $25.0 billion (99%) increase in closed loans to be securitized (sold by us) and a $4.2 billion (29%) increase in closed loans that were fee-based.

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Refinancings increased $24.3 billion (134%) to $42.5 billion and purchase mortgage closings grew $4.8 billion (23%) to $26.3 billion.

Net revenues from servicing mortgage loans increased $79 million primarily due to the $275 million non-cash provision for impairment of MSRs recorded in third quarter 2002. Apart from this impairment charge, net servicing revenues declined $196 million primarily due to a period-over-period increase in MSR amortization and provision for impairment of $351 million (recorded as a contra revenue), partially offset by $133 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 in nine months 2003 due to low mortgage interest rates during 2003, while the incremental gains from hedging and other derivative activities resulted from our strategies to protect against changes in the fair value of MSRs due to fluctuations in interest rates. In addition, recurring servicing fees (fees received for servicing existing loans in the portfolio), increased $28 million (9%) driven by a 16% period-over-period increase in the average servicing portfolio, which rose to $120.3 billion for the nine-month period in 2003.

Interest rates have risen from their lows in the earlier part of 2003 and, as such, we expect mortgage refinancing volume and resulting net production revenues to decline comparatively in future quarters. However, in a rising interest rate environment, although no assurances can be given, the impact of lower revenues from a decline in production should be partially offset by increased servicing revenues, net of hedge results. Historically, mortgage production and mortgage servicing operations have been counter-cyclical in nature and represented a naturally offsetting relationship. Additionally, to supplement this relationship, we also maintain a comprehensive, non-speculative mortgage risk management program to further mitigate the impact of fluctuations in interest rates on our operating results.

Partially offsetting the growth in our mortgage business is a decline in revenues and EBITDA of $60 million and $22 million, respectively, related to our former title and appraisal businesses. On December 31, 2002, we distributed these businesses 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 the nine months ended September 30, 2003 while these businesses contributed revenues and EBITDA of $60 million and $22 million, respectively, in the comparable period in 2002.

Operating and administrative expenses within this segment increased approximately $205 million primarily due to the direct costs incurred in connection with continued high level of mortgage loan production and related servicing activities.

Fleet Management
Revenues and EBITDA increased $26 million (2%) and $9 million (12%), respectively, in the nine months ended 2003 compared with the 2002 comparable period primarily due to an increase in fuel card usage and higher gasoline prices, since our fuel card business earns a percentage of the total gas purchased by its clients. The EBITDA impact was partially offset by higher operating expenses incurred to support the additional usage.

LIQUIDITY AND CAPITAL RESOURCES

We present separately the financial data of our management and mortgage programs. Specifically, in our vehicle management, relocation and mortgage services businesses, assets under management and mortgage programs are generally 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 our management and mortgage programs. We believe it is appropriate to segregate the financial data of

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our management and mortgage programs because, ultimately, the source of repayment of such debt is the realization of such assets.

Our principal sources of liquidity are cash on hand and our ability to generate cash through operations and financing activities, as well as available credit and securitization facilities, each of which is discussed below.

Cash Flows
At September 30, 2003, we had $185 million of cash on hand, an increase of $155 million from $30 million at December 31, 2002. The following table summarizes such increase:

During the nine months ended September 30, 2003, we generated $704 million less cash from operating activities as compared to the nine months ended September 30, 2002. This change principally reflects a reduction in net cash inflows provided by our management and mortgage programs, which resulted from timing differences between the origination of mortgage loans and the receipt of proceeds from the sale of such loans. Such decrease was partially offset by stronger operating results and better management of our working capital.

During the nine months ended September 30, 2003, we used $126 million less cash for investing activities as compared to the nine months ended September 30, 2002. This change principally reflects (i) a timing difference between the cash receipts and cash payments within our vehicle management business, (ii) higher cash receipts on derivative contracts used to manage the interest rate risk inherent in our MSR asset and (iii) an increase in the proceeds received on the sale of real estate in the normal course of our mortgage services business. However, we used $4 million more cash for capital expenditures to support operational growth and to enhance operating efficiencies through technological improvements. We anticipate aggregate capital expenditure investments for 2003 to be approximately $60 million.

We generated $703 million of net cash from financing activities during the nine months ended September 30, 2003 as compared to using $113 million of net cash during the comparable period in 2002 primarily resulting from greater borrowings in 2003 to support the purchase of assets under management and mortgage programs.

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Debt Under Management and Mortgage Programs
At September 30, 2003, we had approximately $9.4 billion of indebtedness. The following table summarizes the components of such debt: