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Filed pursuant to Rule 424(B)(3)
Registration No. 333-06737
PROSPECTUS
$200,000,000
HOMESIDE, INC.
OFFER TO EXCHANGE $1,000 IN PRINCIPAL AMOUNT OF
11 1/4% SERIES B SENIOR SECURED SECOND PRIORITY NOTES DUE 2003
FOR EACH $1,000 IN PRINCIPAL AMOUNT OF OUTSTANDING
11 1/4% SENIOR SECURED SECOND PRIORITY NOTES DUE 2003
HomeSide, Inc. (the "Issuer") hereby offers to exchange (the "Exchange
Offer") up to $200,000,000 in aggregate principal amount of its 11 1/4% Series B
Senior Secured Second Priority Notes due 2003 (the "Exchange Notes") for
$200,000,000 in aggregate principal amount of its outstanding 11 1/4% Senior
Secured Second Priority Notes due 2003 (the "Initial Notes"; and together with
the Exchange Notes, the "Notes").
The terms of the Exchange Notes are identical in all respects (including
principal amount, interest rate and maturity) to the terms of the Initial Notes
for which they may be exchanged pursuant to this offer, except that the Exchange
Notes are freely transferable by holders thereof (except as provided in the next
paragraph below) and are issued without any covenant upon the Issuer regarding
registration. The Exchange Notes will be issued under the same indenture
governing the Initial Notes. For a complete description of the terms of the
Exchange Notes, see "Description of the Exchange Notes." There will be no cash
proceeds to the Issuer from this offer. The Initial Notes and the Exchange Notes
are secured by a second priority lien on the stock of the Issuer's wholly owned
direct and indirect subsidiaries, HomeSide Holdings, Inc. ("HHI") and HomeSide
Lending, Inc. ("HLI").
The Initial Notes were originally issued and sold on May 14, 1996 (the
"Issue Date"), in a transaction (the "Offering") not registered under the
Securities Act of 1933, as amended (the "Securities Act"), in reliance upon the
exemption provided in Section 4(2) of the Securities Act. Accordingly, the
Initial Notes may not be reoffered, resold or otherwise pledged, hypothecated or
transferred in the United States unless so registered or unless an applicable
exemption from the registration requirements of the Securities Act is available.
Based upon the interpretations by the Staff of the Securities and Exchange
Commission (the "Commission") issued to third parties, the Issuer believes that
Exchange Notes issued pursuant to the Exchange Offer in exchange for Initial
Notes may be offered for resale, resold or otherwise transferred by holders
thereof (other than any holder which is an "affiliate" of the Issuer within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act provided
that such Exchange Notes are acquired in the ordinary course of such holders'
business and such holders have no arrangement with any person to participate in
the distribution of such Exchange Notes. Each broker-dealer that receives
Exchange Notes for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. The Letter of Transmittal (as defined herein) states that
by so acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act. This Prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of Exchange Notes
received in exchange for Initial Notes where such Exchange Notes were acquired
by such broker-dealer as a result of market-making activities or other trading
activities. The Issuer has agreed that, for a period of 180 days after the
Expiration Date (as defined herein), it will make this Prospectus available to
any broker-dealer for use in connection with any such resale. See "Plan of
Distribution".
The Initial Notes and the Exchange Notes constitute issues of securities
with no established trading market. Any Initial Notes not tendered and accepted
in the Exchange Offer will remain outstanding. To the extent that Initial Notes
are tendered and accepted in the Exchange Offer, a holder's ability to sell
untendered and tendered but unaccepted Initial Notes could be adversely
affected. Following consummation of the Exchange Offer, the holders of the
Initial Notes will continue to be subject to the existing restrictions on
transfer thereof and the Issuer will have no further obligation to such holders
to provide for the registration under the Securities Act of the Initial Notes
held by them. No assurance can be given as to the liquidity of the trading
market for either the Initial Notes or the Exchange Notes.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Initial Notes being tendered for exchange. The Exchange Offer will
expire at 5:00 p.m., New York City time, on November 26, 1996, unless extended
(the "Expiration Date"). The date of acceptance for exchange for the Initial
Notes (the "Exchange Date") will be the first business day following the
Expiration Date. Initial Notes tendered pursuant to the Exchange Offer may be
withdrawn at any time prior to the Expiration Date; otherwise such tenders are
irrevocable.
Interest on the Exchange Notes shall accrue from May 14, 1996 or from the
last May 15 or November 15 (an "Interest Payment Date") on which interest was
paid on the Initial Notes so surrendered.
SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DESCRIPTION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS OCTOBER 22, 1996
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AVAILABLE INFORMATION
The Issuer has filed with the Commission a Registration Statement on Form
S-4 (the "Registration Statement," which term shall include all amendments,
exhibits, annexes and schedules thereto) pursuant to the Securities Act, and the
rules and regulations promulgated thereunder, covering the Exchange Notes being
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission and to which reference is
hereby made. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete.
With respect to each such contract, agreement or other document filed as an
exhibit to the Registration Statement, reference is made to the exhibit for a
more complete description of the matter involved, and each such statement shall
be deemed qualified in its entirety by such reference.
For further information with respect to the Issuer and the Notes, reference
is made to such Registration Statement. A copy of the Registration Statement can
be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth St., N.W., Washington, D.C.
20549, and at the Regional Offices of the Commission at 7 World Trade Center,
13th Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West
Madison Street Suite 1400, Chicago, Illinois 60661-2511. Copies of such
materials can be obtained from the public reference facilities of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of such site is http://www.sec.gov.
The Issuer intends, and is required by the terms of the Indenture dated as
of May 14, 1996 (the "Indenture") between the Issuer and The Bank of New York,
as trustee, under which the Notes are issued, to furnish the holders of the
Notes with annual reports containing financial statements audited by its
independent certified public accountants and with quarterly reports containing
unaudited financial statements for each of the first three quarters of each
fiscal year.
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE EXCHANGE OFFER COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE ISSUER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL,
OR A SOLICITATION OF AN OFFER TO BUY, THE EXCHANGE NOTES IN ANY JURISDICTION
WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATIONS THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE ISSUER SINCE THE DATE HEREOF.
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UNTIL JANUARY 20, 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information, risk factors and financial
statements, including the related notes, appearing elsewhere in this Prospectus.
Unless otherwise referred to herein or the context otherwise requires,
references to "HomeSide" shall mean HomeSide, Inc., a Delaware corporation, and
its consolidated subsidiaries, including HomeSide Lending, Inc. ("HLI") formerly
known as BancBoston Mortgage Corporation, and HomeSide Holdings, Inc. ("HHI"),
formerly known as Barnett Mortgage Company. Both BancBoston Mortgage Corporation
and Barnett Mortgage Company operated on a fiscal year end of December 31.
HomeSide was formed in December 1995, but had no operations prior to its
acquisition of BancBoston Mortgage Corporation on March 15, 1996, which was
accounted for as a purchase transaction. HomeSide has adopted a February 28 year
end. Accordingly, unless otherwise stated, all 1996 interim financial
information for HLI is for the period ended March 15, 1996 and all interim
financial information for HHI is for the period January 1, 1996 to May 30, 1996
and April 1, 1996 to May 30, 1996. All combined or pro forma financial
information for HomeSide as of or for the period ended August 31, 1996 has been
prepared using HomeSide information as of or for the period ended August 31,
1996 and HHI information as of or for the period April 1, 1996 to May 30, 1996.
However, all information for HomeSide presented as of or for the period ended
March 31, 1996 has been prepared by combining information for HLI for the period
ended March 15, 1996 with information for HomeSide for the period from March 16,
1996 to March 31, 1996. HomeSide's executive offices are located at 7301
Baymeadows Way, Jacksonville, Florida 32256, telephone number (904) 281-3000.
THE COMPANY
HomeSide is one of the largest full-service mortgage banking companies in
the United States, emphasizing wholesale mortgage originations and low cost
mortgage servicing. For the year ended December 31, 1995 and the three months
ended March 31, 1996, HLI originated approximately $8.9 billion and $4.2
billion of mortgage loans, respectively, including co-issue production, and
serviced a loan portfolio of $41.6 billion and $44.2 billion, respectively, at
the end of such periods. For 1995, HLI was ranked as the 9th largest originator
of residential mortgage loans (including co-issue volume) and as the 16th
largest servicer of residential mortgage loans, according to National Mortgage
News, and as the 5th largest wholesale originator of mortgage loans (including
co-issue volume) according to Wholesale Access. The Issuer acquired HHI, a
full-service mortgage banking company engaged in the origination, sale and
servicing of mortgage loans secured by residential properties, on May 31, 1996.
For 1995, HHI was ranked as the 15th largest originator of residential mortgage
loans and as the 19th largest servicer of residential mortgage loans, according
to National Mortgage News. In 1995, and the three months ended March 31, 1996,
HHI reported total mortgage production of approximately $5.8 billion and $1.5
billion, respectively, and had a servicing portfolio of $33.4 billion at
December 31, 1995 and $33.0 billion at March 31, 1996. HHI grew substantially
over the past two years primarily through the acquisition of two mortgage
banking companies. See "Business -- Acquisition of HHI".
HomeSide, Inc. was formed on December 11, 1995 to acquire HLI (the "HLI
Acquisition"), the mortgage banking subsidiary of The First National Bank of
Boston ("Bank of Boston" or "BKB"). On March 15, 1996, HomeSide completed the
HLI Acquisition. On May 31, 1996, HomeSide acquired HHI, the mortgage banking
subsidiary of Barnett Banks, Inc. ("Barnett") (the "HHI Acquisition"). Upon the
HHI Acquisition, the Issuer contributed all of the stock of HLI to HHI,
whereupon HLI became a wholly-owned subsidiary of HHI. All of HHI's servicing
portfolio was transferred to HLI, with the exception of HHI's GNMA loans, which
it retained. All of HHI's former subsidiaries, except Honolulu Mortgage Company,
Inc. ("Honolulu Mortgage"), were merged with and into HLI.
The combined originations and servicing of HLI and HHI would have been
$14.7 billion and $75.0 billion, respectively, for the year ended and at
December 31, 1995 and $5.7 billion and $77.2 billion, respectively, for the
three months ended and at March 31, 1996. HomeSide, pro forma for the HHI
Acquisition, would have ranked as the 5th largest mortgage loan originator and
the 7th largest mortgage loan servicer in the United States for 1995 based on
data published by National Mortgage News.
HomeSide expects that the acquisition and integration of HHI will allow it
to realize improved economies of scale in servicing costs, increase its
productivity by converting to HHI's proprietary servicing software system and
expand and diversify its variable cost origination channels. HomeSide is in the
process of
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consolidating servicing operations and converting to HHI's proprietary servicing
software system. Once this conversion is completed, this system is expected to
increase HomeSide's servicing capacity to accommodate approximately twice the
number of loans in the combined portfolio of HLI and HHI. HomeSide has exclusive
access through a correspondent relationship to Bank of Boston retail and Barnett
retail and broker origination channels for an initial term of five years,
subject to certain limitations. The combined origination and servicing
operations of HLI and HHI are expected to enhance HomeSide's national presence
and increase its visibility to consumers and mortgage market participants.
Homeside's business consists primarily of:
- Mortgage production: the origination and purchase of residential single
family mortgage loans through all major channels including correspondents
(including BKB and Barnett), mortgage brokers, co-issue partners,
telemarketing, affinity programs and retail branches;
- Secondary marketing: the sale of residential single family mortgage loans
as pools underlying mortgage-backed securities guaranteed or issued by
governmental or quasi-governmental agencies or as whole loans to
investors; and
- Servicing: the administration, collection and remittance of monthly
mortgage principal and interest payments, the collection and payment of
property taxes and insurance premiums and the management of certain loan
default activities.
HomeSide's business strategy is focused on building its origination and
servicing business to benefit from the economies of scale inherent in the
business through growth in its wholesale and retail origination channels, as
well as by selected acquisitions of servicing portfolios and mortgage banking
companies. Consistent with this growth strategy, HomeSide typically retains the
right to service the loans it originates and purchases servicing rights in bulk
from other mortgage lenders or on an individual (loan-by-loan) basis from
correspondents or mortgage brokers. Management believes that HLI has been one of
the nation's most efficient mortgage servicers based on industry surveys of
direct cost per loan and loans serviced per employee. HomeSide plans to continue
to pursue economies of scale and productivity improvements in both origination
and servicing, relying on, among other things, a high degree of automation,
outsourcing of selected labor intensive functions, which enables it to maintain
a low fixed cost base, and an emphasis on quality control.
As with HomeSide, HHI's servicing strategy has been to build its mortgage
servicing portfolio to benefit from economies of scale. Through an acquisition
strategy, HHI succeeded in building a production network and servicing portfolio
national in scope. Primarily an originator of FNMA/FHLMC loans, HHI's servicing
portfolio consisted predominantly of conventional servicing. In addition, HHI
maintained a proprietary servicing software system which HomeSide believes is
more efficient and cost effective than HomeSide's system. HHI's portfolio was
fully converted to the proprietary system by the end of 1995. See "Business --
Acquisition of HHI -- Servicing Integration".
Ownership. Thomas H. Lee Equity Fund III, L.P. (the "Fund") and certain
affiliates of Thomas H. Lee Company (collectively, "THL") and Madison Dearborn
Capital Partners, L.P. ("MDP") collectively own approximately 33% of HomeSide;
Bank of Boston and Siesta Holdings, Inc., an affiliate of Barnett ("Siesta"),
each own approximately 33% and management of HomeSide and other unaffiliated
investors own the remainder.
Recent Results of Risk Management Activities. The value of HomeSide's
servicing portfolio is subject to volatility in the event of unanticipated
changes in the speed of prepayments by mortgagors. As interest rates decrease,
prepayments by mortgagors increase as homeowners seek to refinance their
mortgages, reducing expected future cash flows from servicing revenues on those
prepaid mortgages. Conversely, as interest rates increase, prepayments by
mortgagors decrease as fewer homeowners refinance, increasing expected future
cash flows from servicing revenues. Since the value of servicing rights is based
on the net present value of future cash flows, the value of the portfolio
increases in a rising interest rate environment and decreases in a declining
interest rate environment. HomeSide employs a hedging program which uses risk
management contracts designed to offset changes in the value of the servicing
portfolio resulting from changes in interest rates and prepayments.
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To date, option contracts on U.S. Treasury bond futures have been used to
manage interest rate risk on HomeSide's mortgage servicing rights. The option
contracts used by HomeSide have characteristics such that they tend to increase
in value as interest rates decline. Conversely, these option contracts tend to
decline in value as interest rates rise. Accordingly, changes in value of these
contracts will tend to move inversely with changes in value of HomeSide's
mortgage servicing rights.
HLI recognized a gain on risk management contracts of $108.7 million in
1995, of which $86.5 million was unrealized. During the first quarter of 1996,
long-term interest rates increased, reversing the declining trend which
prevailed during 1995. As a result, through the date of the HLI Acquisition in
March 1996, HLI recognized a loss on risk management contracts of $128.8
million, which included a reversal of such $86.5 million unrealized gain
recognized during 1995. In both 1995 and 1996, changes in the value of
HomeSide's mortgage servicing rights substantially offset the gain and loss on
the risk management contracts. However, such changes in value were not fully
recorded in the financial statements of HomeSide because servicing rights are
recorded at the lower of amortized cost or market value.
From March 15, 1996 to August 31, 1996, long-term interest rates continued
to increase. Accordingly, the risk management contracts declined in total value
by $84.0 million from March 15, 1996 to August 31, 1996. These changes in value
were substantially offset by increases in the value of mortgage servicing
rights. For additional information regarding HomeSide's risk management
activities, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- HomeSide" and Notes 3, 10 and 11 of "Notes to
Consolidated Financial Statements" for HomeSide.
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THE EXCHANGE OFFER
THE EXCHANGE OFFER......... The Issuer is offering to exchange (the "Exchange
Offer") up to $200,000,000 aggregate principal
amount of 11 1/4% Series B Senior Secured Second
Priority Notes due 2003 (the "Exchange Notes") for
$200,000,000 aggregate principal amount of its
outstanding 11 1/4% Senior Secured Second Priority
Notes due 2003 (the "Initial Notes"; and together
with the Exchange Notes, the "Notes"). The terms of
the Exchange Notes are substantially identical in
all respects (including principal amount, interest
rate and maturity) to the terms of the Initial
Notes for which they may be exchanged pursuant to
the Exchange Offer, except that the Exchange Notes
are freely transferable by holders thereof (except
as provided herein -- see "The Exchange
Offer -- Terms of the Exchange" and " -- Terms and
Conditions of the Letter of Transmittal"), and are
not subject to any covenant regarding registration
under the Securities Act. The Initial Notes and the
Exchange Notes are secured by a second priority
lien on the stock of the Issuer's wholly owned
direct and indirect subsidiaries, HHI and HLI.
INTEREST PAYMENTS.......... Interest on the Exchange Notes shall accrue from
May 14, 1996 or from the last Interest Payment Date
on which interest was paid on the Initial Notes so
surrendered.
MINIMUM CONDITION.......... The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Initial Notes
being tendered for exchange.
EXPIRATION DATE............ The Exchange Offer will expire at 5:00 p.m., New
York City time, on November 26, 1996, unless
extended.
EXCHANGE DATE.............. The date of acceptance for exchange of the Initial
Notes will be the first business day following the
Expiration Date.
CONDITIONS OF THE EXCHANGE
OFFER.................... The obligation of the Issuer to consummate the
Exchange Offer is subject to certain conditions.
See "The Exchange Offer -- Conditions to the
Exchange Offer". The Issuer reserves the right to
terminate or amend the Exchange Offer at any time
prior to the Expiration Date upon the occurrence of
any such condition.
WITHDRAWAL RIGHTS.......... Tenders may be withdrawn at any time prior to the
Expiration Date. Otherwise, all tenders are
irrevocable. Any Initial Notes not accepted for any
reason will be returned without expense to the
tendering holders thereof as promptly as
practicable after the expiration or termination of
the Exchange Offer.
PROCEDURES FOR TENDERING
INITIAL NOTES.............. See "The Exchange Offer -- How to Tender".
FEDERAL INCOME TAX
CONSEQUENCES............. The exchange of Initial Notes for Exchange Notes
should be treated as a "non-event" for Federal
income tax purposes. See "Income Tax
Considerations".
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EFFECTS ON HOLDERS OF
INITIAL NOTES.............. As a result of the making of, and upon acceptance
for exchange of all validly tendered Initial Notes
pursuant to the terms of, this Exchange Offer, the
Issuer will have fulfilled a covenant contained in
the terms of the Initial Notes and the Registration
Rights Agreement as amended (the "Registration
Rights Agreement") dated May 14, 1996 between the
Issuer, HHI and Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Smith Barney Inc. and Friedman,
Billings, Ramsey & Co., Inc. (collectively, the
"Initial Purchasers") and, accordingly, there will
be no increase in the interest rate on the Initial
Notes pursuant to the terms of the Registration
Rights Agreement, the Initial Notes or the
Indenture. The holders of the Initial Notes will
have no further registration rights under the
Registration Rights Agreement with respect to the
Initial Notes. Holders of the Initial Notes who do
not tender their Notes in the Exchange Offer will
continue to hold such Initial Notes and their
rights under such Initial Notes will not be
altered, except for any such rights under the
Registration Rights Agreement, which by their terms
terminate or cease to have further effectiveness as
a result of the making of, and the acceptance for
exchange of all validly tendered Initial Notes
pursuant to, the Exchange Offer. All untendered and
tendered but unaccepted Initial Notes will continue
to be subject to the restrictions on transfer
provided for in the Initial Notes and in the
Indenture. To the extent that Initial Notes are
tendered and accepted in the Exchange Offer, the
trading market for untendered Initial Notes could
be adversely affected.
TERMS OF THE EXCHANGE NOTES
The Exchange Offer applies to $200,000,000 aggregate principal amount of
the Initial Notes. The form and terms of the Exchange Notes are the same as the
form and terms of the Initial Notes except as noted above and except that the
Exchange Notes have been registered under the Securities Act and, therefore,
will not bear legends restricting the transfer thereof. The Exchange Notes will
evidence the same debt as the Initial Notes and will be entitled to the benefits
of the Indenture. See "Description of the Exchange Notes".
Terms capitalized below have the meanings ascribed to them in "Description
of the Exchange Notes".
NOTES OFFERED.............. $200,000,000 principal amount of 11 1/4% Series B
Senior Secured Second Priority Notes due 2003.
MATURITY DATE.............. May 15, 2003.
INTEREST PAYMENT DATES..... May 15 and November 15 of each year, commencing
November 15, 1996.
OPTIONAL REDEMPTION........ The Exchange Notes are redeemable at the option of
the Issuer, in whole or in part, at any time, on or
after May 15, 2001, at the redemption prices set
forth herein, together with accrued and unpaid
interest, if any, to the date of redemption. In
addition, at any time on or prior to May 15, 1999,
the Issuer may redeem up to 35% of the principal
amount of the Notes originally issued with the net
proceeds of one or more Equity Offerings at 111.25%
of the principal amount thereof, together with
accrued and unpaid interest, if any, to the date of
redemption; provided that at least
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$75 million in aggregate principal amount of the
Notes remain outstanding after such redemption.
CHANGE OF CONTROL.......... Upon the occurrence of a Change of Control, each
holder of the Exchange Notes may require the Issuer
to purchase all or any portion of such holder's
Notes at a purchase price equal to 101% of the
principal amount thereof, together with accrued and
unpaid interest, if any, to the date of purchase.
See "Description of the Exchange Notes -- Certain
Covenants -- Purchase of Notes Upon a Change of
Control".
SECURITY................... The Exchange Notes will be secured by a second
priority lien on (i) the capital stock of HHI owned
by the Issuer and (ii) the capital stock of HLI
owned by HHI. HHI is a direct wholly-owned
subsidiary of the Issuer and HLI is a direct
wholly-owned subsidiary of HHI. See "Description of
the Exchange Notes -- Security" and "The
Acquisitions".
RANKING.................... The Exchange Notes will be senior secured
obligations of the Issuer, ranking pari passu in
right of payment with the Issuer's existing and
future unsubordinated indebtedness. As of August
31, 1996, the aggregate outstanding principal
amount of senior indebtedness of the Issuer was
approximately $2,288.2 million. Of this amount,
$2,088.2 million represented the guarantee by the
Issuer of the indebtedness of its subsidiaries
under the Bank Credit Agreement (as defined).
Currently the Issuer has no indebtedness other than
the Initial Notes and the foregoing guaranty.
In addition, the business operations of the Issuer
are conducted through its subsidiaries and,
accordingly, the Exchange Notes will be effectively
subordinated to the obligations of such
subsidiaries. As of August 31, 1996, the Issuer's
subsidiaries had approximately $2,109.6 million of
indebtedness outstanding. Subject to certain
limitations, the Issuer and its subsidiaries may
incur additional indebtedness in the future. See
"Risk Factors -- Substantial Leverage and Ability
to Service Debt; Need to Refinance Notes" and "Debt
Restrictions; Compliance with Certain Covenants;
Asset Encumbrances" and "Description of the
Exchange Notes -- Certain Covenants -- Limitation
on Indebtedness".
CERTAIN COVENANTS.......... The Indenture contains certain covenants,
including, but not limited to, the following: (i)
limitation on indebtedness; (ii) limitation on
restricted payments; (iii) limitation on issuances
and sales of capital stock of subsidiaries; (iv)
limitation on transactions with affiliates; (v)
limitation on liens; (vi) limitation on guarantees
of indebtedness by subsidiaries; (vii) limitation
on dividend and other payment restrictions
affecting subsidiaries; and (viii) restrictions on
consolidations, mergers and transfers of all or
substantially all of the assets of the Issuer to
another person. See "Description of the Exchange
Notes -- Certain Covenants" and "Consolidation,
Merger and Sale of Assets".
USE OF PROCEEDS............ There will not be any proceeds from the Exchange
Offer. The net proceeds from the sale of the
Initial Notes were used as follows: (i) $90 million
to repay all principal on the Bridge Loan (as
defined), (ii) $87.5 million to finance a portion
of the cash consideration paid to Barnett in the
HHI Acquisition and to pay certain fees and
expenses
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related thereto and (iii) the remainder to repay
borrowings under HomeSide's former credit facility.
ABSENCE OF MARKET
FOR THE EXCHANGE NOTES... The Exchange Notes will be new securities for which
there is currently no trading market. Although the
Issuer has been advised by the Initial Purchasers
that, following the completion of the Exchange
Offer, the Initial Purchasers presently intend to
make a market in the Exchange Notes, the Initial
Purchasers are under no obligation to do so and may
discontinue any market making activities at any
time without notice. Accordingly, there can be no
assurance as to the development or liquidity of any
market for the Exchange Notes. The Issuer does not
intend to apply for listing of the Exchange Notes
on any securities exchange or through the National
Association of Securities Dealers Automated
Quotation System.
RISK FACTORS
See "Risk Factors" for a discussion of certain factors which should be
considered by prospective investors in evaluating an investment in the Exchange
Notes.
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HOMESIDE
SUMMARY FINANCIAL INFORMATION
SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The summary unaudited pro forma consolidated financial information for
HomeSide set forth below has been derived from the unaudited pro forma
consolidated financial information included elsewhere in this Prospectus and
gives effect to the HHI Acquisition and the HLI Acquisition by the Issuer as
though such transactions occurred on January 1, 1995 for income statement data.
The summary pro forma consolidated income statement information for the period
ended August 31, 1996 is presented for the period March 16, 1996 to August 31,
1996 for HomeSide and for the period April 1, 1996 to May 30, 1996 for HHI. The
unaudited pro forma consolidated financial information does not purport to
represent what HomeSide's results of operations would have been if the HLI
Acquisition and the HHI Acquisition had actually been completed as of the dates
indicated and is not intended to project HomeSide's financial position or
results of operations for any future period. The following summary financial
information should be read in conjunction with the historical financial
statements of HomeSide, HLI and HHI and the unaudited pro forma consolidated
financial information for HomeSide and the related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA HOMESIDE FOR THE HLI
ACQUISITION AND THE HHI ACQUISITION
--------------------------------------
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1995 AUGUST 31, 1996
----------------- ----------------
<S> <C> <C>
(DOLLARS IN MILLIONS)
UNAUDITED STATEMENTS OF OPERATIONS DATA:
Revenues:
Mortgage servicing revenues........................................ $ 301.5 $145.4
Gain on risk management contracts.................................. 108.7(a) --(b)
Amortization of mortgage servicing rights.......................... (172.8) (66.7)
------ ------
Net servicing revenue............................................ 237.4 78.7
Interest income.................................................... 66.9 41.6
Interest expense................................................... (72.4) (43.8)
------ ------
Net interest revenue............................................. (5.5) (2.2)
Net mortgage origination revenue................................... 0.7 28.1
Other income....................................................... 0.7 0.5
------ ------
Total revenues............................................ 233.3 105.1
Total operating expenses.................................. 144.1 76.5
------ ------
Income before income taxes......................................... 89.2 28.6
Income tax expense................................................. 36.5 11.7
------ ------
Net income......................................................... $ 52.7 $ 16.9
====== ======
SELECTED OPERATING DATA:
EBITDA(c).......................................................... $ 358.1 $ 140.4
Ratio of EBITDA to total other interest expense.................... 5.1x 3.5x
Ratio of earnings to fixed charges................................. 1.68x 1.64x
Pro forma cash flows (used in) provided by operating activities.... ($219.9) $311.9
Pro forma cash flows used in investing activities.................. 327.0 591.7
Pro forma cash flows provided by financing activities.............. 545.7 730.7
Volume of loans originated and acquired............................ 4,652 14,327
Loan servicing portfolio (at period end)........................... 74,966 85,835
Loan servicing portfolio (average)................................. 69,953 79,938
Weighted average interest rate (at period end)..................... 8.01% 7.92%
Weighted average servicing fee (average for period)................ 0.351% 0.367%
</TABLE>
- ---------------
(a) The non-cash portion of gain on risk management contracts was $86.5 million
pro forma HomeSide for the HLI Acquisition and HHI Acquisition for the year
ended December 31, 1995.
(b) See Note 3 of HomeSide's August 31, 1996 financial statements for a
description of HomeSide's hedge accounting policy.
10
<PAGE> 11
- -------------------------------------------------------------------------------
(c) EBITDA represents earnings before total other interest expense, taxes,
depreciation and amortization, including amortization of mortgage servicing
rights. Total other interest expense excludes interest expense to fund
mortgage loans held for sale of $70.0 million and $34.1 million for the year
ended December 31, 1995 and period ended August 31, 1996, respectively.
Depreciation and amortization, excluding amortization of mortgage servicing
rights, was $12.7 million and $5.3 million, respectively, for these periods.
In addition to EBITDA, other major elements of cash flows from investing and
financing activities are important in determining available cash flow. Pro
forma cash flows used in operating activities totalled $219.9 million for
the period ended December 31, 1995 and pro forma cash flows provided by
operating activities totalled $311.9 million for the period ended August 31,
1996. EBITDA includes substantially all expenditures for operating expenses.
Pro forma cash flows used in investing activities were $327.0 million and
$591.7 million for the periods ended December 31, 1995 and August 31, 1996,
respectively. Significant adjustments to EBITDA from investing activities
include the value of originated mortgage servicing rights (OMSR), cash
purchases and proceeds from risk management contracts, and the purchase of
mortgage servicing rights. Revenue from OMSR represents a future cash flow
stream and therefore should be excluded from the determination of the
current period's cash flow. OMSR totalled $13.5 million and $22.2 million
for the year ended December 31, 1995 and period ended August 31, 1996,
respectively. During the year ended December 31, 1995, risk management
contracts were marked to market at the end of each period and the change in
value was included in net income as gain on risk management contracts. The
non-cash portion of gain on risk management contracts was $86.5 million
proforma HomeSide for the HLI Acquisition and HHI Acquisition for the year
ended December 31, 1995. Net cash proceeds from risk management contracts
totalled $27.1 million for the year ended December 31, 1995, and $77.9
million in cash expenditures was excluded from net income for the period
ended August 31, 1996. The Company also purchases mortgage servicing rights
which totalled $214.6 million and $255.8 million for the year ended December
31, 1995 and period ended August 31, 1996, respectively. A portion of the
available financing under the Bank Credit Agreement is based upon the market
value of mortgage servicing rights. Both OMSR and purchases of mortgage
servicing rights increase the available cash flow under the Bank Credit
Agreement.
The Bank Credit Agreement represents the major source of financing for cash
flows. Pro forma cash flow provided by financing activities totalled $545.7
million and $730.7 million for the periods ended December 31, 1995 and
August 31, 1996, respectively. Unused line of credit, calculated with
reference to available collateral and over-all borrowing limits, totalled
approximately $225.0 million and $411.8 million proforma HomeSide for the
HLI Acquisition and HHI Acquisition for the year ended December 31, 1995 and
period ended August 31, 1996, respectively.
Management believes that the presentation of EBITDA facilitates the reader's
evaluation of the Company's debt service capacity, and that EBITDA is a
generally recognized statistic for performing such evaluations. EBITDA
should not be considered as an alternative to net income as an indicator of
the Issuer's operating performance or to cash flow as a measure of
liquidity, but rather to provide additional information related to the
Issuer's ability to service debt.
- --------------------------------------------------------------------------------
11
<PAGE> 12
- -------------------------------------------------------------------------------
HOMESIDE
SUMMARY HISTORICAL FINANCIAL INFORMATION
MARCH 16, 1996 TO AUGUST 31, 1996 AND
THE THREE MONTHS ENDED AUGUST 31, 1996
<TABLE>
The following table sets forth summary historical financial information for
HomeSide for the period March 16, 1996 to August 31, 1996 and the three months
ended August 31, 1996. Such financial information should be read in conjunction
with HomeSide's consolidated financial statements, pro forma financial
information and related notes included elsewhere in this Prospectus.
<CAPTION>
FOR THE THREE FOR THE PERIOD
MONTHS ENDED MARCH 16, 1996 TO
AUGUST 31, 1996 AUGUST 31, 1996
(IN THOUSANDS) (IN THOUSANDS)
--------------- -----------------
<S> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Mortgage servicing fees.............................. $ 83,349 $ 124,834
Amortization of mortgage servicing rights............ (40,464) (56,906)
----------- -----------
Net servicing revenue................................ 42,885 67,928
Interest income...................................... 22,270 34,989
Interest expense..................................... (23,920) (38,882)
----------- -----------
Net interest revenue................................. (1,650) (3,893)
Net mortgage origination revenue..................... 16,273 27,083
Other income......................................... 355 462
----------- -----------
Total revenues....................................... 57,863 91,580
Expenses:
Salaries and employee benefits....................... 21,177 32,657
Occupancy and equipment.............................. 3,084 4,930
Servicing losses on investor-owned loans............. 4,058 7,996
Other expenses....................................... 12,523 17,868
----------- -----------
Total expenses....................................... 40,842 63,451
Income before income taxes........................... 17,021 28,129
Income tax expense................................... 6,954 11,508
----------- -----------
Net income........................................... $ 10,067 $ 16,621
=========== ===========
SELECTED OPERATING DATA:
Volume of loans originated and acquired (a).......... $ 9,565,199(a) $13,345,435(a)
Loan servicing portfolio (at period end) (a)......... 85,835,155(a) $85,835,155(a)
Loan servicing portfolio (average) (a)............... 82,247,794(a) $63,482,914(a)
Weighted average interest rate (at period end) (a)... 7.92%(a) 7.92%(a)
Weighted average servicing fee (average for period)
(a)................................................ 0.367%(a) 0.384%(a)
SELECTED BALANCE SHEET DATA (AT PERIOD END):
Mortgage loans held for sale......................... $ 1,290,841 $ 1,290,841
Mortgage servicing rights............................ $ 1,428,117 $ 1,428,117
Total assets......................................... $ 2,934,938 $ 2,934,938
Warehouse credit facility............................ $ 1,245,591 $ 1,245,591
Long term debt....................................... $ 1,064,067 $ 1,064,067
Total liabilities.................................... $ 2,559,817 $ 2,559,817
Total stockholders' equity........................... $ 375,121 $ 375,121
<FN>
- ---------------
(a) Period information is for the period March 1, 1996 to August 31, 1996 and
the three months ended August 31, 1996, and period end information is at
August 31, 1996.
</TABLE>
- --------------------------------------------------------------------------------
12
<PAGE> 13
- -------------------------------------------------------------------------------
HLI
SUMMARY HISTORICAL FINANCIAL INFORMATION
<TABLE>
The following table sets forth summary historical financial information for
HLI (formerly BancBoston Mortgage Corporation). Such financial information
should be read in conjunction with the consolidated financial statements, pro
forma financial information and related notes included elsewhere in this
Prospectus.
<CAPTION>
FOR THE THREE FOR THE PERIOD
MONTHS JANUARY 1,
YEARS ENDED DECEMBER 31, ENDED 1996 TO
------------------------------------------------------------------- MARCH 31, MARCH 15,
1991 1992 1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- ----------- ------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues:
Mortgage servicing fees.... $ 92,362 $ 105,890 $ 111,822 $ 140,491 $ 173,038 $ 43,657 $ 38,977
Gain (loss) on risk
management contracts..... -- -- 6,688 (6,702) 108,702 3,612 (128,795)
Amortization of mortgage
servicing rights......... (37,213) (73,908) (112,492) (66,801) (108,013) (23,103) (7,245)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net servicing revenue.... 55,149 31,982 6,018 66,988 173,727 24,166 (97,063)
Interest income............ 41,252 46,865 50,156 31,585 24,324 4,122 8,423
Interest expense........... (27,686) (38,855) (44,199) (33,952) (27,128) (6,079) (10,089)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net interest revenue..... 13,566 8,010 5,957 (2,367) (2,804) (1,957) (1,666)
Net mortgage origination
revenue (expense)........ 6,508 1,123 6,173 4,983 3,417 (1,083) 7,638
Gain on sales of servicing
rights................... 12,034 14,769 651 10,862 10,230 4,285 --
Other income............... 52 17 50 147 511 13 253
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues..... 87,309 55,901 18,849 80,613 185,081 25,424 (90,838)
Expenses:
Salaries and employee
benefits............... 27,328 30,053 33,096 40,370 45,381 11,696 10,287
Occupancy and equipment.. 7,809 7,788 7,966 9,012 10,009 2,358 2,041
Servicing losses on
investor-owned loans... 2,880 8,138 2,770 7,177 9,981 733 5,560
Real estate acquired..... 1,195 1,124 1,600 253 1,054 218 291
Other expenses........... 17,552 20,461 22,058 19,326 21,896 4,713 7,377
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total expenses..... 56,764 67,564 67,490 76,138 88,321 19,718 25,556
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes and cumulative
effects of changes in
accounting principles.... $ 30,545 $ (11,663) $ (48,641) $ 4,475 $ 96,760 $ 5,706 $ (116,394)
=========== =========== =========== =========== =========== =========== ===========
Net income (loss).......... $ 18,377 $ (7,834) $ (85,185) $ 5,405 $ 58,826 $ 3,429 $ (73,861)
=========== =========== =========== =========== =========== =========== ===========
SELECTED OPERATING DATA:
Volume of loans originated
and acquired............. $ 5,196,996 $ 9,705,875 $13,682,761 $14,473,000 $ 9,567,521 $ 1,181,642 $ 4,187,603(a)
Loan servicing portfolio
(at period end).......... 20,600,569 23,705,642 27,999,100 37,971,200 41,555,354 37,800,120 44,158,163(a)
Loan servicing portfolio
(average)................ 19,663,100 22,153,100 25,852,400 33,178,600 39,283,700 38,099,730 43,158,072(a)
Weighted average interest
rate (at period end)..... 9.65% 9.05% 8.07% 7.91% 7.97% 7.90% 7.92%(a)
Weighted average servicing
fee (average for
period).................. 0.400% 0.390% 0.372% 0.389% 0.383% 0.384% 0.380%(a)
SELECTED BALANCE SHEET
DATA (AT PERIOD END):
Mortgage loans held for
sale..................... $ 507,776 $ 495,455 $ 607,506 $ 271,215 $ 388,436 $ 70,978 $ 641,465
Mortgage servicing
rights................... 296,393 337,307 281,727 431,148 551,338 414,974 542,862
Total assets............... 1,034,269 1,073,686 1,193,583 1,006,887 1,254,303 858,001 1,512,902
Note payable to parent..... 748,827 799,992 1,019,011 779,021 966,000 648,499 1,256,000
Total liabilities.......... 818,890 866,141 1,071,223 879,122 1,067,712 726,807 1,400,172
Total stockholders'
equity................... 215,379 207,545 122,360 127,765 186,591 131,194 112,730
<FN>
- ---------------
(a) Period information is for the period January 1, 1996 to March 31, 1996 and
period end information is at March 31, 1996.
</TABLE>
- --------------------------------------------------------------------------------
13
<PAGE> 14
HHI
SUMMARY HISTORICAL FINANCIAL INFORMATION
The following table sets forth summary historical financial information for
HHI (formerly known as Barnett Mortgage Company). Such financial information
should be read in conjunction with the consolidated financial statements, pro
forma financial information and related notes included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
FOR THE
THREE FOR THE
YEARS ENDED DECEMBER 31, MONTHS ENDED PERIOD APRIL
------------------------------------------------------- JUNE 30, 1, 1996 TO
1991 1992 1993 1994(A) 1995(B) 1995 MAY 30, 1996
------- -------- -------- -------- -------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Mortgage origination revenue:
Mortgage origination fees..... $ -- $ -- $ 358 $ 3,276 $ 17,104 $ 3,469 $ 1,646
Gain (loss) on sales of loans,
net......................... 3,184 8,187 5,688 692 (13,920) 995 (3,383)
---------- ---------- ---------- ----------
-- -- -- --
-------- ---------- --
---
Total mortgage
origination revenue.... 3,184 8,187 6,046 3,968 3,184 4,464 (1,737)
Interest income (expense):
Interest income............... 765 657 855 3,460 27,264 4,420 5,638
Interest expense,
substantially all to
affiliates.................. (568) (531) (1,415) (4,911) (20,427) (6,766) (3,480)
---------- ---------- ---------- ----------
-- -- -- --
-------- ---------- --
---
Net interest income
(expense).............. 197 126 (560) (1,451) 6,837 (2,346) 2,158
Mortgage servicing revenue:
Mortgage servicing income..... 10,143 13,427 20,560 27,130 83,502 22,439 15,709
Mortgage servicing income from
affiliates.................. 6,986 16,143 18,326 20,017 25,057 6,407 5,464
Amortization of capitalized
mortgage servicing rights... (2,453) (6,013) (11,547) (17,783) (48,282) (12,124) (8,456)
Gain on sales of servicing.... -- -- -- -- 9,096 -- --
---------- ---------- ---------- ----------
-- -- -- --
-------- ---------- --
---
Net mortgage servicing
revenue................ 14,676 23,557 27,339 29,364 69,373 16,722 12,717
Other income................... 2,860 7,750 6,296 4,492 2,592 6,203 1,678
---------- ---------- ---------- ----------
-- -- -- --
-------- ---------- --
---
Total revenues........... 20,917 39,620 39,121 36,373 81,986 25,043 14,816
Expenses:
Salaries and benefits......... 7,778 13,698 13,914 17,474 53,070 14,301 10,402
General and administrative.... 10,349 11,401 12,432 14,924 41,849 12,119 6,816
Affiliate profit sharing...... 1,699 12,471 10,774 3,534 6,242 -- --
Occupancy and equipment....... 1,091 1,167 1,810 2,702 5,960 2,424 1,569
Amortization of goodwill...... -- -- -- 259 4,840 1,673 928
---------- ---------- ---------- ----------
-- -- -- --
-------- ---------- --
---
Total expenses........... 20,917 38,737 38,930 38,893 111,961 30,517 19,715
---------- ---------- ---------- ----------
-- -- -- --
-------- ---------- --
---
Income (loss) before income
taxes......................... $ 0 $ 883 $ 191 $ (2,520) $(29,975) (5,474) (4,899)
=========== ============ ============ ============ ============ ============
Net income (loss).............. $ (34) $ 17 $ 104 $ (2,058) $(20,386) $ (3,356) $ (3,985)
=========== ============ ============ ============ ============ ============
SELECTED OPERATING DATA
(DOLLARS IN MILLIONS):
Volume of loans originated and
acquired...................... $ 1,945 $ 3,507 $ 3,360 $ 3,410 $ 5,767 $ 1,330 $ 982
Loan servicing portfolio (at
period end)................... 10,034 11,524 13,085 18,411 33,411 33,070 (d)
Loan servicing portfolio
(average)..................... 9,639 10,779 12,305 15,748 30,669 32,839 33,057
Weighted average interest rate
(at period end)(c)............ -- -- 7.34% 7.44% 8.05% 7.98% (d)
Weighted average servicing fee
(average for period)(c)....... -- -- 0.259% 0.261% 0.299% 0.301% 0.346%
SELECTED BALANCE SHEET DATA (AT
PERIOD END):
Mortgage loans held for sale... $ -- $ -- $ -- $183,914 $465,880 $331,184 (e)
Mortgage servicing rights...... 12,959 25,458 48,941 92,461 250,788 259,796 (e)
Total assets................... 42,082 61,166 96,186 359,472 994,630 857,046 (e)
Notes payable.................. 16,107 20,325 63,329 248,214 653,056 503,000 (e)
Total liabilities.............. 22,676 38,541 69,930 274,570 762,802 612,311 (e)
Total stockholders' equity..... 19,406 22,625 26,257 84,902 231,828 244,735 (e)
<CAPTION>
FOR THE SIX
MONTHS ENDED FOR THE PERIOD
JUNE 30, JANUARY 1, 1996
1995 TO MAY 30, 1996
------------ ---------------
<S> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Mortgage origination revenue:
Mortgage origination fees..... $ 6,005 $ 7,288
Gain (loss) on sales of loans,
net......................... 1,514 482
Total mortgage
origination revenue.... 7,519 7,770
Interest income (expense):
Interest income............... 7,003 14,216
Interest expense,
substantially all to
affiliates.................. (9,685) (9,574)
Net interest income
(expense).............. (2,682) 4,642
Mortgage servicing revenue:
Mortgage servicing income..... 35,723 38,833
Mortgage servicing income from
affiliates.................. 12,503 13,626
Amortization of capitalized
mortgage servicing rights... (20,475) (25,467)
Gain on sales of servicing.... -- --
Net mortgage servicing
revenue................ 27,751 26,992
Other income................... 7,054 1,740
Total revenues........... 39,642 41,144
Expenses:
Salaries and benefits......... 23,433 25,173
General and administrative.... 20,403 20,748
Affiliate profit sharing...... -- --
Occupancy and equipment....... 3,941 3,720
Amortization of goodwill...... 2,226 2,324
Total expenses........... 50,003 51,965
Income (loss) before income
taxes......................... (10,361) (10,821)
Net income (loss).............. $ (7,484) $ (8,343)
SELECTED OPERATING DATA
(DOLLARS IN MILLIONS):
Volume of loans originated and
acquired...................... $ 2,886 $ 2,538
Loan servicing portfolio (at
period end)................... 33,070 (d)
Loan servicing portfolio
(average)..................... 28,153 33,182
Weighted average interest rate
(at period end)(c)............ 7.98% (d)
Weighted average servicing fee
(average for period)(c)....... 0.299% 0.337%
SELECTED BALANCE SHEET DATA (AT
PERIOD END):
Mortgage loans held for sale... $331,184 (e)
Mortgage servicing rights...... 259,796 (e)
Total assets................... 857,046 (e)
Notes payable.................. 503,000 (e)
Total liabilities.............. 612,311 (e)
Total stockholders' equity..... 244,735 (e)
</TABLE>
- ---------------
(a) Includes operations of Loan America since its acquisition in October 1994.
(b) Includes operations of BancPLUS since its acquisition in February 1995.
(c) Information not available for 1991 and 1992.
(d) Barnett Mortgage Company was acquired by HomeSide on May 31, 1996 and,
accordingly, its servicing portfolio is included in HomeSide's servicing
portfolio as of May 31, 1996.
(e) Barnett Mortgage Company was acquired by HomeSide on May 31, 1996 and,
accordingly, all of its assets and liabilities are included in the
consolidated balance sheet of HomeSide, Inc. as of May 31, 1996.
14
<PAGE> 15
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be carefully considered before investing in the Exchange Notes
offered hereby.
SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE DEBT
HomeSide has significant debt service obligations. As of August 31, 1996,
the Issuer had aggregate outstanding indebtedness of approximately $2,288.2
million, of which $2,088.2 million represented the guarantee by the Issuer of
the indebtedness of its subsidiaries under the Bank Credit Agreement, and its
subsidiaries had aggregate outstanding indebtedness of approximately $2,109.6
million and $411.8 million of additional availability under the Bank Credit
Agreement. See "Capitalization." HomeSide may incur additional indebtedness in
the future, subject to certain limitations contained in the instruments
governing its indebtedness.
The degree to which HomeSide is leveraged could have important consequences
to holders of the Exchange Notes, including the following: (i) HomeSide's
ability to grow will depend on its ability to obtain additional financing in the
future for originating loans, investment in servicing rights, working capital,
capital expenditures and general corporate purposes or other purposes, and that
ability may be impaired; (ii) a substantial portion of HomeSide's cash flow from
operations must be dedicated to the payment of the principal of and interest on
its indebtedness thereby reducing the funds available to finance operations;
(iii) HomeSide may be more highly leveraged than certain of its competitors,
which may place HomeSide at a competitive disadvantage and make it more
vulnerable to economic downturns; and (iv) the Issuer's ability to refinance the
Exchange Notes in order to pay the principal of the Exchange Notes at maturity
or upon a Change of Control may be adversely affected.
HomeSide's ability to satisfy its interest payment obligations under its
indebtedness will depend largely on its future performance, which, in turn, is
subject to prevailing economic conditions and to financial, business and other
factors beyond its control, including levels of interest rates. There can be no
assurance that HomeSide will be able to generate sufficient cash flow to service
its interest payment obligations under its indebtedness.
NEED TO REFINANCE DEBT
All amounts owing under the Bank Credit Agreement will become due prior to
the time the principal payments on the Exchange Notes will become due and such
amounts will need to be refinanced. Furthermore, the Issuer does not expect to
be able to repay the principal amount of the Exchange Notes at maturity and
accordingly will need to refinance the Exchange Notes, or repay the Exchange
Notes with the proceeds of an equity offering, at or prior to their maturity. To
the extent that HomeSide is not successful in negotiating renewals of its
borrowings or in arranging new financing, it may have to curtail its origination
activities and/or sell significant portions of its servicing portfolio, which
would have a material adverse effect on HomeSide's business and results of
operations. Among the factors that will affect the Issuer's ability to effect an
offering of its capital stock or refinance the Exchange Notes are financial
market conditions and the value and performance of the Issuer at the time of
such offering or refinancing. There can be no assurance that any such offering
or refinancing can be successfully completed. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- HLI -- Liquidity
and Capital Resources" and "Description of Bank Credit Agreement".
HOLDING COMPANY STRUCTURE; EFFECTIVE SUBORDINATION
The Issuer is a holding company and does not have any material assets other
than ownership of capital stock of its subsidiaries. Accordingly, the Notes will
be effectively subordinated to all existing and future liabilities of the
Issuer's subsidiaries, including indebtedness under the Bank Credit Agreement.
As of August 31, 1996, the Issuer's subsidiaries had aggregate outstanding
indebtedness of approximately $2,109.6 million and $411.8 million of additional
availability under the Bank Credit Agreement for future borrowings. The Issuer
and its subsidiaries may incur additional indebtedness in the future, subject to
certain limitations contained in the instruments governing their indebtedness.
15
<PAGE> 16
Any right of the Issuer to participate in any distribution of the assets of
its subsidiaries upon the liquidation, reorganization or insolvency of any such
subsidiary (and the consequent right of the holders of the Exchange Notes to
participate in the distribution of those assets) will be subject to the prior
claims of the respective subsidiary's creditors. The obligations of the Issuer's
subsidiaries under the Bank Credit Agreement are secured by substantially all of
their respective assets, including mortgage loans held for sale and loan
servicing rights, and are guaranteed by the Issuer. Additionally, the Bank
Credit Agreement is secured by a first priority pledge of all the capital stock
of HHI owned by the Issuer and all of the capital stock of HLI owned by HHI. See
"Description of Bank Credit Agreement".
LIMITATION ON THE PAYMENT OF FUNDS TO ISSUER BY SUBSIDIARIES
The Issuer's cash flow, and consequently its ability to service debt,
including the Exchange Notes, is dependent upon the earnings of its subsidiaries
and the payment of funds by its subsidiaries to the Issuer in the form of loans,
dividends or otherwise. The Issuer's operating subsidiaries have no obligation,
contingent or otherwise, to pay any amounts due pursuant to the Exchange Notes
or to make any funds available therefor. In addition, the payment of funds by
the subsidiaries to the Issuer is subject to restrictions under such
subsidiaries' debt instruments. Under the Bank Credit Agreement, the Issuer's
subsidiaries will be permitted to pay dividends to the Issuer equal to the
semi-annual interest payments due on the Exchange Notes; provided that upon a
notice of a default or event of default under the Bank Credit Agreement, the
Issuer's subsidiaries will be prohibited from paying such dividends until the
earlier of the 180th day following such notice and the date such default or
event of default is cured or waived. Accordingly, repayment of the Exchange
Notes may depend upon the ability of the Issuer to effect an offering of capital
stock or to refinance the Exchange Notes prior to maturity.
DEBT RESTRICTIONS; COMPLIANCE WITH CERTAIN COVENANTS; ASSET ENCUMBRANCES
The Indenture and the Bank Credit Agreement will impose restrictions that
affect, among other things, the ability of the Issuer and its subsidiaries, as
the case may be, to incur debt, pay dividends, sell assets, create liens, make
capital expenditures and investments and otherwise enter into certain
transactions outside the ordinary course of business. The Bank Credit Agreement
also requires the Issuer's subsidiaries to maintain specified financial ratios
and meet certain financial tests. Although such subsidiaries are currently in
compliance with covenants and restrictions contained in the Bank Credit
Agreement, their ability to continue to comply may be affected by events beyond
their control. See "Impact of Changes in Interest Rates; Results of Risk
Management Activities" and "Loan Delinquencies and Defaults on Loans" below. The
breach of any of these covenants or restrictions could result in a default under
the Bank Credit Agreement. In the event of any such default, the lenders under
the Bank Credit Agreement could elect to declare all amounts borrowed
thereunder, together with accrued interest, to be due and payable, or cease
making additional revolving loans. In connection with the Bank Credit Agreement,
the Issuer's subsidiaries have granted the lenders thereunder a first priority
lien on substantially all of their respective assets. If such subsidiaries were
unable to repay such amounts in the event of a default under the Bank Credit
Agreement, the lenders thereunder could foreclose upon the assets pledged to
secure the Bank Credit Agreement and the holders of the Exchange Notes might not
be able to receive any payments until any payment default was cured or waived,
any acceleration was rescinded, or the indebtedness under the Bank Credit
Agreement was discharged or paid in full. Moreover, since the security interest
of the Exchange Notes in the stock of certain subsidiaries of the Issuer is a
second priority security interest, there may not be sufficient funds available
after payment to the lenders under the Bank Credit Agreement holding the first
priority security interest to pay all, or any, of the principal amount of the
Exchange Notes.
IMPACT OF CHANGES IN INTEREST RATES; RESULTS OF RISK MANAGEMENT ACTIVITIES
Changes in interest rates can have a variety of effects on HomeSide's
business. In particular, changes in interest rates affect the volume of loan
originations and acquisitions, the interest rate spread on loans held for sale,
the amount of gain or loss on the sale of loans and the value of HomeSide's
servicing portfolio.
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During periods of declining interest rates, HomeSide typically experiences
an increase in loan originations because of increased home purchases and,
particularly, increased refinancing activity. During 1990 to 1993, a period of
generally declining interest rates, refinancing activity as a percentage of
total originations increased from 13% in 1990 to 55% in 1993. In contrast,
refinancing activity decreased to 32% of total originations in 1994 and 25% in
1995 as the result of generally increasing interest rates. Increases in interest
rates may adversely affect refinancing activity, which could have an adverse
effect on HomeSide's origination revenues.
HomeSide's loans held for sale are generally funded by borrowings under its
revolving warehouse credit line. HomeSide's net warehouse interest income is the
difference between the interest income it earns on loans held for sale
(generally based on long-term interest rates) and the interest it pays on its
borrowings (generally based on short-term interest rates). To the extent this
spread narrows or if the yield curve inverts, HomeSide's results of operations
could be adversely affected.
Gain or loss on sales of mortgage loans may result from changes in interest
rates from the time the interest rate on the customer's loan application is
established to the time HomeSide sells the loan. To manage interest rate risk
HomeSide uses a hedging strategy that is designed to minimize the negative
effect of changes in interest rates on loans that have closed and loans for
which interest rate commitments have been given that are expected to close.
HomeSide then enters into forward sale commitments and option contracts with
FNMA, FHLMC and the private investors to whom HomeSide sells loans based on this
analysis. The actual number of loans that close may differ from the estimate, in
particular due to changes in interest rates. The resultant mismatching of
commitments to originate loans and commitments to deliver loans may have an
adverse effect on results of operations.
In addition, the value of HomeSide's servicing portfolio may be adversely
affected if mortgage interest rates decline and loan prepayments increase. In
periods of declining interest rates, the economic advantages to borrowers of
refinancing mortgage loans increase, and increases in the rate of mortgage loan
prepayments reduce the period during which HomeSide receives servicing income
from such loans. HomeSide capitalizes the cost of the acquisition of servicing
rights from third parties and began in 1996 to capitalize servicing rights on
loans that it originates. Since the value of servicing rights is based upon the
net present value of future cash flows, if the rate of prepayment of the related
loans exceeds the rate assumed by HomeSide, due to a significant reduction in
interest rates or otherwise, the value of the servicing portfolio will decrease
and accelerated amortization of servicing rights may become necessary. Interest
rate changes can also adversely affect the ability to sell or the proceeds of a
sale of servicing rights to a third party. While HomeSide has established a
hedging program designed to protect the value of its servicing portfolio from
declines in economic value, the results of such hedging depend on a variety of
factors, including the relationship between mortgage rates and Treasury
securities, the hedge instruments used and other factors.
HLI recognized a gain on risk management contracts of $108.7 million in
1995, of which $86.5 million was unrealized. During the first quarter of 1996,
long-term interest rates increased, reversing the declining trend which
prevailed during 1995. As a result, through the date of the acquisition of HLI
in March 1996, HLI recognized a loss on risk management contracts of $128.8
million, which included a reversal of such $86.5 million unrealized gain
recognized during 1995. From March 15, 1996 to August 31, 1996, long-term
interest rates continued to increase. Accordingly, the risk management contracts
declined in total value by $84.0 million from March 15, 1996 to August 31, 1996.
In both 1995 and 1996, changes in the value of HomeSide's mortgage servicing
rights substantially offset the gain and loss on the risk management contracts.
However, such changes in value were not fully recorded in the financial
statements of HomeSide because servicing rights are recorded at the lower of
amortized cost or market value.
LOAN DELINQUENCIES AND DEFAULTS ON LOANS
HomeSide's profitability may be negatively impacted by economic downturns
as the frequency of loan defaults tends to increase. From the time that HomeSide
funds the loans it originates to the time it sells the loans (generally 10 to 40
days), HomeSide is generally at risk for any loan defaults. Once HomeSide sells
the loans it originates, the risk of loss from loan defaults and foreclosure
generally passes to the purchaser or insurer of the loans. In connection
therewith, HomeSide typically makes certain representations and warranties to
the purchasers and insurers of loans and to the purchasers of servicing rights.
Such representa-
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tions and warranties generally relate to the origination and servicing of loans
in substantial conformance with state and federal laws and applicable investor
guidelines. If a loan defaults and there has been a breach of these
representations and warranties, HomeSide becomes liable for the unpaid principal
and interest on the defaulted mortgage loan. In such a case, HomeSide may be
required to repurchase the loan and bear the subsequent loss, if any.
Historically, the impact of loans repurchased by HomeSide as the result of such
breaches of representations and warranties has not been material. However, the
number and amount of loans repurchased in the future could increase due to the
high volume of loans which HomeSide originates and sells. Accordingly, HomeSide
believes that future provisions relating to loan repurchases may be necessary as
loan origination volume increases. See "Business -- HLI -- Secondary Marketing".
HomeSide is also affected by loan delinquencies and defaults on loans that
it services. Under certain types of servicing contracts, particularly contracts
to service loans that have been pooled or securitized, the servicer must forward
all or part of the scheduled payments to the owner of the loan, even when loan
payments are delinquent. Also, to protect their liens on mortgaged properties,
owners of loans usually require the servicer to advance mortgage and hazard
insurance and tax payments on schedule even if sufficient escrow funds are not
available. The servicer will be reimbursed, subject to certain limitations with
respect to FHA/VA loans, by the mortgage owner or from liquidation proceeds for
payments advanced that the servicer is unable to recover from the mortgagor,
although the timing of such reimbursement is typically uncertain. In the
interim, the servicer must absorb the cost of funds advanced during the time the
advance is outstanding. Further, the servicer must bear the increased costs of
attempting to collect on delinquent and defaulted loans. HomeSide also foregoes
servicing income from the time such loan becomes delinquent until foreclosure
when, if any proceeds are available, such amounts may be recovered.
HomeSide periodically incurs losses attributable to servicing Federal
Housing Administration ("FHA") and Veterans Administration ("VA") loans for
investors, including actual losses for final disposition of loans that have been
foreclosed or assigned to the FHA or VA and accrued interest on such FHA or VA
loans for which payment has not been received. HLI's servicing losses on
investor-owned loans totaled $2.8 million, $7.2 million and $10.0 million for
the years ended 1993, 1994 and 1995, respectively, and $5.6 million for the
period January 1, 1996 to March 15, 1996, primarily representing losses on VA
loans. Because the total principal amount of FHA loans is guaranteed, losses on
such loans are generally limited to expenses of collection. HomeSide has
experienced minimal losses from FHA loans. In respect of VA loans, the VA
guarantees the initial losses on a loan. The guaranteed amount generally ranges
from 20% to 35% of the original principal balance. Before each foreclosure sale,
the VA determines whether to bid by comparing the estimated net sale proceeds to
the outstanding principal balance and the servicer's accumulated reimbursable
costs and fees. If this amount is a loss and exceeds the guaranteed amount, the
VA typically issues a no-bid and pays the servicer the guaranteed amount.
Whenever a no-bid is issued, the servicer absorbs the loss, if any, in excess of
the sum of the guaranteed principal and amounts recovered at the foreclosure
sale. HomeSide's historical delinquency and foreclosure rate experience on VA
loans has generally been consistent with that of the industry. There can be no
assurance that HomeSide's servicing losses on investor-owned loans will not be
greater in the future.
OPERATIONS AS AN INDEPENDENT COMPANY
Prior to the consummation of the HLI Acquisition, HLI had been a
wholly-owned subsidiary of BKB, and prior to the HHI Acquisition, HHI was a
wholly-owned subsidiary of Barnett. Each has engaged in various intercompany
transactions and arrangements with, and was provided certain administrative
services by, its parent. As a former subsidiary of a national bank and a bank
holding company, HLI and HHI, respectively, have benefitted from their ability
to finance certain acquisitions, their loan production funding and to a lesser
extent, their capital expenditure and working capital requirements, through
borrowings from their respective parents. Following the consummation of the HLI
Acquisition, certain arrangements, including all borrowing arrangements, with
BKB were terminated or modified and, following the consummation of the HHI
Acquisition, such arrangements with Barnett were similarly terminated or
modified. See "Certain Relationships and Related Transactions". Accordingly,
HomeSide can no longer rely on such entities and there can be no assurances that
it will be able to successfully operate as an independent company.
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CONCENTRATION OF OWNERSHIP
THL and MDP, collectively, currently own approximately 33% of HomeSide;
each of BKB and Siesta owns approximately 33%. In addition, THL, MDP, BKB and
Siesta (the "Investors") have entered into an Amended and Restated Shareholder
Agreement that provides for the designation of directors, requires super-
majority consent for certain actions by the Board of Directors of HomeSide and
other matters. As a result of their percentage ownership of HomeSide and such
agreement, the Investors as a group will be able to effectively control the
affairs and policies of HomeSide. Certain decisions concerning the operations or
financial structure of HomeSide may present conflicts of interest between the
owners of HomeSide's capital stock and the holders of the Exchange Notes. See
"Certain Relationships and Related Transactions".
GENERAL INTEGRATION/SYSTEMS CONVERSION RISK
The ability of HomeSide to realize significant benefits from the HHI
Acquisition, including improved economies of scale in servicing costs and
increased productivity, will depend on its ability to integrate HHI's operations
effectively and to convert to the HHI servicing software system. Difficulties or
delays in such integration and conversion could adversely affect HomeSide's
operating and financial results.
COMPETITION
The mortgage banking business is highly competitive. HomeSide competes with
other mortgage banking companies, commercial banks, savings associations, credit
unions and other financial institutions in every aspect of its business,
including funding and purchasing loans from mortgage brokers, purchasing loans
from correspondents and acquiring loan servicing rights and origination
capabilities. HomeSide competes with mortgage banking companies and other
financial institutions that have substantially greater financial resources,
greater operating efficiencies and longer operating histories than HomeSide. To
the extent that market pricing becomes more competitive, HomeSide may be unable
to achieve its planned level of originations or consummate acquisitions of
servicing rights at a satisfactory cost. Retail mortgage banking companies have
direct access to borrowers and generally are able to sell their loans to the
same entities that purchase HomeSide's loans. HomeSide depends primarily on
mortgage brokers and correspondents for originating new loans. Competitors also
seek to establish relationships with mortgage brokers and correspondents, who
are not obligated by contract or otherwise to continue to do business with
HomeSide.
REGULATION, POSSIBLE CHANGES AND RELATED MATTERS
HomeSide's mortgage banking business is subject to the rules and
regulations of the Department of Housing and Urban Development ("HUD"), FHA, VA,
FNMA, FHLMC, GNMA and other regulatory agencies with respect to originating,
processing, underwriting, selling, securitizing and servicing mortgage loans. In
addition, there are other federal and state statutes and regulations affecting
such activities. These rules and regulations, among other things, impose
licensing obligations on HomeSide, prohibit discrimination and establish
underwriting guidelines which include provisions for inspections and appraisals,
require credit reports on prospective borrowers and fix maximum loan amounts.
Moreover, lenders such as HomeSide are required annually to submit audited
financial statements to FNMA, FHLMC and GNMA and to comply with each regulatory
entity's own financial requirements. HomeSide's business is also subject to
examination by FNMA, FHLMC and GNMA and state regulatory agencies at all times
to assure compliance with applicable regulations, policies and procedures.
Mortgage origination activities are subject to the provisions of various
Federal and state statutes including, among others, the Equal Credit Opportunity
Act, the Federal Truth-in-Lending Act and the Real Estate Settlement Procedures
Act, and the regulations promulgated thereunder, which prohibit discrimination
and require the disclosure of certain basic information to mortgagors concerning
credit terms and settlement costs. Many of the aforementioned regulatory
requirements are designed to protect the interests of consumers, while others
protect the owners or insurers of mortgage loans. Failure to comply with these
requirements can lead to loss of approved status, termination of servicing
contracts without compensation to the servicers,
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demands for indemnification or loan repurchases, class action lawsuits and
administrative enforcement actions.
HomeSide's net income reflects a reduction in interest expense on its
borrowings with depository institutions for custodial balances placed with such
institutions. Net income could be adversely affected to the extent that proposed
revisions of applicable bank regulations cause these escrow accounts to be
recharacterized as demand deposit accounts, thereby requiring reserves to be
established with Federal Reserve Banks, which would reduce the amount of the
credit. Other regulatory changes or interpretations if applied retroactively to
change the ability of HomeSide to receive credit for escrow balances would
adversely affect HomeSide.
In addition, certain states require that interest be paid to mortgagors on
funds deposited by them in escrow to cover mortgage-related payments such as
property taxes and insurance premiums. Federal legislation has in the past been
introduced that would, if ever enacted, revise current escrow regulations and
establish a uniform interest payment requirement in all states. If such federal
legislation were enacted or if other states enact legislation relating to
payment of, or increases in the rate of, interest on escrow balances, or if such
legislation were retroactively applied to loans in HomeSide's servicing
portfolio, HomeSide's earnings would be adversely affected.
Prior to the HLI Acquisition, HLI was a wholly-owned operating subsidiary
of a national bank, and subject to substantially all of the regulations and
restrictions applicable to a national bank. Prior to the HHI Acquisition, HHI
was a wholly-owned subsidiary of a bank holding company. During the period that
BKB or Barnett, or any of their subsidiaries, retains a material ownership
interest in HomeSide, HomeSide and its subsidiaries (i) will continue to be
under the jurisdiction, supervision, and examining authority of the Office of
the Comptroller of the Currency ("OCC"), and (ii) may only engage in activities
that are part of, or incidental to, the business of banking. The OCC has
specifically ruled that mortgage banking is a proper incident to the business of
banking.
In recent years, the mortgage banking industry has been subject to class
action lawsuits which allege violations of federal and state laws and
regulations, including the propriety of collecting various fees and charges and
the calculation of escrow amounts. Class action lawsuits may continue to be
filed in the future against the mortgage banking industry generally. See
"Business -- Litigation".
There are various other state and local laws and regulations affecting
HomeSide's operations. HomeSide is licensed in those states that require
licensing to originate, purchase and/or service mortgage loans. Conventional
mortgage operations may also be subject to state usury statutes. FHA and VA
loans are exempt from the effect of such statutes.
CONTINUATION OF FEDERAL PROGRAMS; AVAILABILITY OF ACTIVE SECONDARY MARKET
HomeSide's ability to sell mortgage loans and mortgage-backed securities is
largely dependent upon the continuation of programs of FNMA, FHLMC and private
investors. These entities facilitate the sale of mortgage loans and
mortgage-backed securities. HomeSide's continued eligibility to participate in
such programs is also a necessary element to the ability to sell mortgage loans.
Although HomeSide is not aware of any proposed discontinuation of, or
significant reduction in, the various programs of FNMA, FHLMC, or private
investors, any such discontinuation or reduction in the operation of such
programs could have a material adverse effect on HomeSide's operations. HomeSide
expects that it will continue to remain eligible to participate in such programs
but any significant impairment of such eligibility could also materially and
adversely affect its operations.
The requirements of loans accepted under such programs may be changed from
time to time by the sponsoring entity. The profitability of participating in
specific programs may vary depending on a number of factors, including the
administrative costs to HomeSide of originating and purchasing qualifying loans.
There can be no assurance that HomeSide will be successful in effecting the
sale of mortgage loans at the historic price or volume levels in any particular
future periods. Any significant change in the secondary market level of activity
or underwriting criteria of FNMA, FHLMC or private investors could have a
material adverse effect on the gain or loss on sales of mortgage loans recorded
by HomeSide and therefore on HomeSide's results of operations.
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FRAUDULENT CONVEYANCE
The net proceeds from the sale of the Initial Notes were used to repay
indebtedness under the short term promissory notes of the Issuer dated March 15,
1996, issued in favor of Merrill Lynch Capital Corporation (the "Bridge Loan"),
to finance a portion of the cash consideration paid to Barnett in the HHI
Acquisition and to repay borrowings under HomeSide's former credit facility.
Borrowings under the Bridge Loan were used to finance a portion of the cash
consideration paid to BKB in connection with the HLI Acquisition. The
obligations of the Issuer incurred under the Indenture and the Notes, including
the second priority security interest in the collateral created thereunder, may
be subject to review under relevant federal and state fraudulent conveyance
statutes (the "fraudulent conveyance statutes") in a bankruptcy, reorganization
or rehabilitation case or similar proceeding or a lawsuit by or on behalf of
unpaid creditors of the Issuer. The requirements for establishing a fraudulent
conveyance or revocatory transfer vary depending on the law of the jurisdiction
which is being applied. If under relevant fraudulent conveyance statutes a court
were to find that, at the time the Notes were issued, (i) the Issuer issued the
Notes or granted the security interest in the collateral with the intent of
hindering, delaying or defrauding current or future creditors of the Issuer, or
(ii) (a) the Issuer received less than reasonably equivalent value or fair
consideration for issuing the Notes or granting such security interest and (b)
the Issuer (A) was insolvent or was rendered insolvent by reason of the issuance
of the Notes, (B) was engaged or about to engage in a business or transaction
for which its assets constituted unreasonably small capital, (C) intended to
incur, or believed that it would incur, indebtedness beyond its ability to pay
as such indebtedness matured (as all of the foregoing terms are defined in or
interpreted under the applicable fraudulent conveyance statutes) or (D) was a
defendant in an action for money damages, or had a judgment for money damages
docketed against it (if, in either case, the judgment is unsatisfied after the
final judgment), such court could avoid or subordinate the Notes to presently
existing and future indebtedness of the Issuer, avoid the granting of the
security interest in the collateral and take other action detrimental to the
holders of the Notes, including, under certain circumstances, invalidating the
Notes.
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the federal or local law that is being applied in any such
proceeding. Generally, however the Issuer would be considered insolvent if, at
the time it incurs the indebtedness constituting the Notes, either (i) the fair
market value (or fair saleable value) of its assets is less than the amount
required to pay the probable liability on its total existing debts and
liabilities (including contingent liabilities) as they become absolute and
matured or (ii) it is incurring indebtedness beyond its ability to pay as such
indebtedness matures.
The Issuer believes that at the time of issuance of the Notes it will have
received reasonably equivalent value or fair consideration for issuing the Notes
and granting the security interest in the Collateral and that it (i) will be (a)
neither insolvent nor rendered insolvent thereby for purposes of the foregoing
standards, (b) in possession of sufficient capital to meet its obligations as
such obligations mature or become due and to operate its businesses effectively
and (c) incurring obligations within its ability to pay such obligations as they
mature or become due and (ii) will have sufficient assets to satisfy any
probable money judgment against it in any pending action. No assurance can be
given, however, that a court passing on such issues would reach the same
conclusions.
ABSENCE OF PUBLIC MARKET; RESTRICTIONS ON RESALE
There is no existing market for the Exchange Notes and there can be no
assurances as to the liquidity of any markets that may develop for the Exchange
Notes, the ability of holders of the Exchange Notes to sell their Exchange
Notes, or the price at which holders would be able to sell their Exchange Notes.
Future trading prices of the Exchange Notes will depend on many factors,
including, among other things, prevailing interest rates, HomeSide's operating
results and the market for similar securities. The Initial Purchasers have
advised the Issuer that they currently intend to make a market in the Exchange
Notes offered hereby. However, the Initial Purchasers are not obligated to do so
and any market making may be discontinued at any time without notice. The Issuer
does not intend to apply for listing of the Exchange Notes offered hereby on any
securities exchange or through the National Association of Securities Dealers
Automated Quotation System.
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CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Initial Notes who do not exchange their Initial Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of Initial Notes set forth in the legend thereon as a
consequence of the issuance of the Initial Notes pursuant to an exemption from
or in a transaction not subject to, the registration requirements of the
Securities Act. In general, the Initial Notes may not be offered or sold, unless
registered under the Securities Act, except pursuant to an exemption from, or in
a transaction not subject to, the Securities Act and applicable state securities
laws. The Issuer does not anticipate registering the Initial Notes under the
Securities Act. Holders of the Initial Notes who do not tender their Notes in
the Exchange Offer will continue to hold such Initial Notes and their rights
under such Initial Notes will not be altered, except for any such rights under
the Registration Rights Agreement, which by their terms terminate or cease to
have further effectiveness as a result of the making of, and the acceptance for
exchange of all validly tendered Initial Notes pursuant to the Exchange Offer.
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Initial Notes were originally issued and sold on May 14, 1996. Such
sales were not registered under the Securities Act in reliance upon the
exemption provided by Section 4(2) of the Securities Act. In connection with the
sale of the Initial Notes, the Issuer agreed to file with the Commission a
registration statement relating to an exchange offer (the "Exchange Offer
Registration Statement") pursuant to which the Exchange Notes would be offered
in exchange for Initial Notes tendered at the option of the holders thereof or,
if applicable interpretations of the staff of the Commission did not permit the
Issuer to effect such an exchange offer, the Issuer agreed, at its cost, to file
a shelf registration statement covering resales of the Initial Notes (the
"Resale Registration Statement") and to have such Resale Registration Statement
declared effective and kept effective for a period of three years from the
effective date thereof. In the event that (i) the Issuer fails to file the
Exchange Offer Registration Statement, (ii) the Exchange Offer Registration
Statement is not declared effective by the Commission, or (iii) the Exchange
Offer is not consummated or the Resale Registration Statement is not declared
effective by the Commission, in each case within specified time periods, the
interest rate borne by the Notes shall increase, which interest will accrue and
be payable in cash until completion of such filing, declaration of effectiveness
or completion of such exchange. See "Registration Rights Agreement".
The sole purpose of the Exchange Offer is to fulfill obligations of the
Issuer with respect to the foregoing agreement. Following the consummation of
the Exchange Offer, the Issuer does not currently anticipate registering any
untendered Initial Notes under the Securities Act and will not be obligated to
do so.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the carrying value of the Initial
Notes that are exchanged. Therefore, no gain or loss will be recorded in
HomeSide's financial statements as a result of the transaction.
TERMS OF THE EXCHANGE
The Issuer hereby offers to exchange, subject to the conditions set forth
herein and in the Letter of Transmittal accompanying this Prospectus, $1,000 in
principal amount of Exchange Notes for each $1,000 in principal amount of the
Initial Notes. The terms of the Exchange Notes are identical in all respects to
the terms of the Initial Notes, for which they may be exchanged pursuant to this
Exchange Offer, except that the Exchange Notes will generally be freely
transferable by holders thereof and the holders of the Exchange Notes (as well
as remaining holders of any Initial Notes) will not be entitled to registration
rights under the Registration Rights Agreement. See "Registration Rights
Agreement". The Exchange Notes will evidence the same debt as the Initial Notes
and will be entitled to the benefits of the Indenture. See "Description of the
Exchange Notes".
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Initial Notes being tendered for exchange.
Based on interpretations by the staff of the Commission set forth in
no-action letters issued to third parties, the Issuer believes the Exchange
Notes issued pursuant to the Exchange Offer in exchange for Initial Notes may be
offered for sale, resold and otherwise transferred by any holder of such
Exchange Notes (other than any such holder which is an "affiliate" of the Issuer
within the meaning of Rule 405 under the Securities Act) without compliance with
the registration and prospectus delivery provisions of the Securities Act,
provided that such Exchange Notes are acquired in the ordinary course of such
holder's business and such holder has no arrangement or understanding with any
person to participate in the distribution of such Exchange Notes. Any holder who
tenders in the Exchange Offer for the purpose of participating in a distribution
of the Exchange Notes cannot rely on such interpretations by the staff of the
Commission and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any secondary resale
transaction. Each broker-dealer that receives Exchange Notes for its own account
in exchange for Initial Notes, where such Initial Notes were acquired by such
broker-dealer as a result of
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<PAGE> 24
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange Notes.
See "Plan of Distribution".
Interest on the Exchange Notes shall accrue from May 14, 1996 or from the
last Interest Payment Date on which interest was paid on the Initial Notes so
surrendered.
Tendering holders of the Initial Notes will not be required to pay
brokerage commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of the Initial Notes
pursuant to the Exchange Offer.
EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS
The Exchange Offer shall expire on the Expiration Date. The term
"Expiration Date" means 5:00 p.m. New York City time, on November 26, 1996,
unless the Issuer, in its sole discretion, extends the period during which the
Exchange Offer is open, in which event the term "Expiration Date" shall mean the
latest time and date on which the Exchange Offer, as so extended by the Issuer,
shall expire. The Issuer reserves the right to extend the Exchange Offer at any
time and from time to time by giving oral or written notice to The Bank of New
York (the "Exchange Agent") and by timely public announcement communicated,
unless otherwise required by applicable law or regulation, by making a release
to the Dow Jones News Service. During any extension of the Exchange Offer, all
Initial Notes previously tendered pursuant to the Exchange Offer will remain
subject to the Exchange Offer.
The Exchange Date will be the first business day following the Expiration
Date. The Issuer expressly reserves the right to (i) terminate the Exchange
Offer and not accept for exchange any Initial Notes if either of the events set
forth below under "Conditions to the Exchange Offer" shall have occurred and
shall not have been waived by the Issuer and (ii) amend the terms of the
Exchange Offer in any manner which, in its good faith judgment, is advantageous
to the holders of the Initial Notes, whether before or after any tender of the
Initial Notes. If any such termination or amendment occurs, the Issuer will
notify the Exchange Agent and will either issue a press release or give oral or
written notice to the holders of the Initial Notes as promptly as practicable.
Unless the Issuer terminates the Exchange Offer prior to 5:00 p.m., New York
City time, on the Expiration Date, the Issuer will exchange the Exchange Notes
for the Initial Notes on the Exchange Date.
HOW TO TENDER
The tender to the Issuer of Initial Notes by a holder thereof pursuant to
one of the procedures set forth below will constitute an agreement between such
holder and the Issuer in accordance with the terms and subject to the conditions
set forth herein and in the Letter of Transmittal.
A holder of an Initial Note may tender the same by (i) properly completing
and signing the Letter of Transmittal or a facsimile thereof (all references in
this Prospectus to the Letter of Transmittal shall be deemed to include a
facsimile thereof) and delivering the same, together with the certificate or
certificates representing the Initial Notes being tendered and any required
signature guarantees, to the Exchange Agent at its address set forth on the back
cover of this Prospectus on or prior to the Expiration Date, (ii) complying with
the procedure for book entry transfer described below or (iii) complying with
the guaranteed delivery procedures described below.
If tendered Initial Notes are registered in the name of the signer of the
Letter of Transmittal and the Exchange Notes to be issued in exchange therefor
are to be issued (and any untendered Initial Notes are to be reissued) in the
name of the registered holder (which term, for the purposes described herein,
shall include any participant in The Depository Trust Company ("DTC") (also
referred to as a book-entry transfer facility) whose name appears on a security
listing as the owner of Initial Notes), the signature of such signer need not be
guaranteed. In any other case. the tendered Initial Notes must be endorsed or
accompanied by written instruments of transfer in form satisfactory to the
Issuer and duly executed by the registered holder and the signature on the
endorsement or instrument of transfer must be guaranteed by a commercial bank or
trust company located or having an office or correspondent in the United States,
or by a member firm of a national securities exchange or of the National
Association of Securities Dealers, Inc. (any of the foregoing hereinafter
24
<PAGE> 25
referred to as an "Eligible Institution"). If the Exchange Notes and/or Initial
Notes not exchanged are to be delivered to an address other than that of the
registered holder appearing on the note register for the Initial Notes, the
signature in the Letter of Transmittal must be guaranteed by an Eligible
Institution.
The method of delivery of Initial Notes and all other documents is at the
election and risk of the holder. If sent by mail, it is recommended that
registered mail, return receipt requested, be used, proper insurance obtained,
and the mailing be made sufficiently in advance of the Expiration Date to permit
delivery to the Exchange Agent on or before the Expiration Date.
The Exchange Agent and DTC have confirmed that any financial institution
that is a participant in DTC's system (a "Participant") may utilize DTC's
Automated Tender Offer Program ("ATOP") to tender Initial Notes.
The Exchange Agent will request that DTC establish an account with respect
to the Initial Notes for purposes of the Exchange Offer within two business days
after the date of this Prospectus. Any Participant may make book-entry delivery
of Initial Notes by causing DTC to transfer such Initial Notes into the Exchange
Agent's account in accordance with DTC's ATOP procedures for transfer. However,
the exchange for the Initial Notes so tendered will only be made after timely
confirmation (a "Book-Entry Confirmation") of such book-entry transfer of
Initial Notes into the Exchange Agent's account, and timely receipt by the
Exchange Agent of an Agent's Message (as such term is defined in the next
sentence) and any other documents required by the Letter of Transmittal. The
term "Agent's Message" means a message, transmitted by DTC and received by the
Exchange Agent and forming part of a Book-Entry Confirmation, which states that
DTC has received an express acknowledgment from a Participant tendering Initial
Notes which are the subject of such Book-Entry Confirmation that such
Participant has received and agrees to be bound by the terms of the Letter of
Transmittal and that the Issuer may enforce such agreement against such
Participant.
If a holder desires to accept the Exchange Offer and time will not permit a
Letter of Transmittal or Initial Notes to reach the Exchange Agent before the
Expiration Date or the procedure for book-entry transfer cannot be completed on
a timely basis, a tender may be effected if the Exchange Agent has received at
its office listed on the back cover hereof on or prior to the Expiration Date a
letter, telegram or facsimile transmission from an Eligible Institution setting
forth the name and address of the tendering holder, the names in which the
Initial Notes are registered and, if possible, the certificate numbers of the
Initial Notes to be tendered, and stating that the tender is being made thereby
and guaranteeing that within five New York Stock Exchange trading days after the
date of execution of such letter, telegram or facsimile transmission by the
Eligible Institution, the Initial Notes, in proper form for transfer (or a
confirmation of book-entry transfer of such Initial Notes into the Exchange
Agent's account at the book-entry transfer facility), will be delivered by such
Eligible Institution together with a properly completed and duly executed Letter
of Transmittal (and any other required documents). Unless Initial Notes being
tendered by the above-described method are deposited with the Exchange Agent
within the time period set forth above (accompanied or preceded by a properly
completed Letter of Transmittal and any other required documents), the Issuer
may, at its option, reject the tender. Copies of a Notice of Guaranteed Delivery
which may be used by Eligible Institutions for the purposes described in this
paragraph are available from the Exchange Agent.
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Initial Notes is received by the Exchange Agent, (ii) a
confirmation of book-entry transfer of such Initial Notes into the Exchange
Agent's account at the book-entry transfer facility is received by the Exchange
Agent, or (iii) a Notice of Guaranteed Delivery or letter, telegram or facsimile
transmission to similar effect (as provided above) from an Eligible Institution
is received by the Exchange Agent. Issuances of Exchange Notes in exchange for
Initial Notes tendered pursuant to a Notice of Guaranteed Delivery or letter,
telegram or facsimile transmission to similar effect (as provided above) by an
Eligible Institution will be made only against deposit of the Letter of
Transmittal (and any other required documents) and the tendered Initial Notes.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Initial Notes will be
determined by the Issuer, whose determination will be final and binding. The
Issuer reserves the absolute right to reject any or all tenders not in proper
form or the acceptances for
25
<PAGE> 26
exchange of which may, in the opinion of the counsel of the Issuer, be unlawful.
The Issuer also reserves the absolute right to waive any of the conditions of
the Exchange Offer or any defect or irregularity in the tender of any Initial
Notes. None of the Issuer, the Exchange Agent or any other person will be under
any duty to give notification of any defects or irregularities in tenders or
incur any liability for failure to give any such notification.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer.
The party tendering Initial Notes for exchange (the "Transferor")
exchanges, assigns and transfers the Initial Notes to the Issuer and irrevocably
constitutes and appoints the Exchange Agent as the Transferor's agent and
attorney-in-fact to cause the Initial Notes to be assigned, transferred and
exchanged. The Transferor represents and warrants that it has full power and
authority to tender, exchange, assign and transfer the Initial Notes and to
acquire Exchange Notes issuable upon the exchange of such tendered Initial
Notes, and that, when the same are accepted for exchange, the Issuer will
acquire good and unencumbered title to the tendered Initial Notes, free and
clear of all liens, restrictions, charges and encumbrances and not subject to
any adverse claim. The Transferor also warrants that it will, upon request,
execute and deliver any additional documents deemed by the Issuer to be
necessary or desirable to complete the exchange, assignment and transfer of
tendered Initial Notes or transfer ownership of such Initial Notes on the
account books maintained by a book-entry transfer facility. The Transferor
further agrees that acceptance of any tendered Initial Notes by the Issuer and
the issuance of Exchange Notes in exchange therefor shall constitute performance
in full by the Issuer of its obligations under the Registration Rights Agreement
and that the Issuer shall have no further obligations or liabilities thereunder.
All authority conferred by the Transferor will survive the death or incapacity
of the Transferor and every obligation of the Transferor shall be binding upon
the heirs, legal representatives, successors, assigns, executors and
administrators of such Transferor.
By tendering Initial Notes, the Transferor certifies that it is not an
"affiliate" of the Issuer within the meaning of Rule 405 under the Securities
Act and that it is acquiring the Exchange Notes offered hereby in the ordinary
course of such Transferor's business and that such Transferor has no arrangement
with any person to participate in the distribution of such Exchange Notes.
WITHDRAWAL RIGHTS
Initial Notes tendered pursuant to the Exchange Offer may be withdrawn at
any time prior to the Expiration Date.
For a withdrawal to be effective, a written, telegraphic, telex or
facsimile transmission notice of withdrawal must be timely received by the
Exchange Agent at its address set forth on the back cover of this Prospectus.
Any such notice of withdrawal must specify the person named in the Letter of
Transmittal as having tendered Initial Notes to be withdrawn, the certificate
numbers of Initial Notes to be withdrawn, the principal amount of Initial Notes
to be withdrawn, a statement that such holder is withdrawing his election to
have such Initial Notes exchanged, and the name of the registered holder of such
Initial Notes, and must be signed by the holder in the same manner as the
original signature on the Letter of Transmittal (including any required
signature guarantees) or be accompanied by evidence satisfactory to the Issuer
that the person withdrawing the tender has succeeded to the beneficial ownership
of the Initial Notes being withdrawn. The Exchange Agent will return the
properly withdrawn Initial Notes promptly following receipt of notice of
withdrawal. If Initial Notes have been tendered pursuant to the procedures for
book-entry transfer, any notice of withdrawal must specify the name and number
of the account at the book-entry transfer facility to be credited with the
withdrawn Initial Notes or otherwise comply with the book-entry transfer
facility procedure. All questions as to the validity of notices of withdrawals,
including time of receipt, will be determined by the Issuer, and such
determination will be final and binding on all parties.
26
<PAGE> 27
ACCEPTANCE OF NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon the terms and subject to the conditions of the Exchange Offer, the
acceptance of Initial Notes validly tendered and not withdrawn and issuance of
the Exchange Notes will be made on the Exchange Date. For the purpose of the
Exchange Offer, the Issuer shall be deemed to have accepted for exchange validly
tendered Initial Notes when, as and if the Issuer has given oral or written
notice thereof to the Exchange Agent.
The Exchange Agent will act as agent for the tendering holders of Initial
Notes for the purpose of receiving Exchange Notes from the Issuer and causing
the Initial Notes to be assigned, transferred and exchanged. Upon the terms and
subject to the conditions of the Exchange Offer, delivery of Exchange Notes to
be issued in exchange for accepted Initial Notes will be made by the Exchange
Agent promptly after acceptance of the tendered Initial Notes. Initial Notes not
accepted for exchange by the Issuer will be returned without expense to the
tendering holders promptly following the Expiration Date or, if the Issuer
terminates the Exchange Offer prior to the Expiration Date, promptly after the
Exchange Offer is so terminated.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, or any extension
of the Exchange Offer, the Issuer will not be required to issue Exchange Notes
in respect of any properly tendered Initial Notes not previously accepted and
may terminate the Exchange Offer (by oral or written notice to the Exchange
Agent and by timely public announcement communicated, unless otherwise required
by applicable law or regulation, by making a release to the Dow Jones News
Service) or, at its option, modify or otherwise amend the Exchange Offer, if
there shall be threatened, instituted or pending any action or proceeding
before, or any injunction, order or decree shall have been issued by, any court
or governmental agency or other governmental regulatory or administrative agency
or commission, (i) seeking to restrain or prohibit the making or consummation of
the Exchange Offer or any other transaction contemplated by the Exchange Offer,
or assessing or seeking any damages as a result thereof, or (ii) resulting in a
material delay in the ability of the Issuer to accept for exchange or exchange
some or all of the Initial Notes pursuant to the Exchange Offer; or any statute,
rule, regulation, order or injunction shall be sought, proposed, introduced,
enacted, promulgated or deemed applicable to the Exchange Offer or any of the
transactions contemplated by the Exchange Offer by any government or
governmental authority, domestic or foreign, or any action shall have been
taken, proposed or threatened, by any government, governmental authority, agency
or court, domestic or foreign, that in the reasonable judgment of the Issuer,
might directly or indirectly result in any of the consequences referred to in
clauses (i) or (ii) above or, in the reasonable judgment of the Issuer, might
result in the holders of Exchange Notes having obligations with respect to
resales and transfers of Exchange Notes which are greater than those described
in the interpretations of the Commission referred to on the cover page of this
Prospectus, or would otherwise make it inadvisable to proceed with the Exchange
Offer.
In addition, the Issuer will not accept for exchange any Initial Notes
tendered and no Exchange Notes will be issued in exchange for any such Initial
Notes, if at such time any stop order shall be threatened or in effect with
respect to the Registration Statement of which this Prospectus constitutes a
part or qualification of the Indenture under the Trust Indenture Act of 1939
(the "Trust Indenture Act").
The Issuer expressly reserves the right to terminate the Exchange Offer and
not accept for exchange any Initial Notes upon the occurrence of either of the
foregoing conditions (which represent all of the material conditions to the
acceptance by the Issuer of properly tendered Initial Notes). In addition, the
Issuer may amend the Exchange Offer at any time prior to the Expiration Date if
either of the conditions set forth above occur. Moreover, regardless of whether
either of such conditions has occurred, the Issuer may amend the Exchange Offer
in any manner which, in its good faith judgment, is advantageous to holders of
the Initial Notes.
The foregoing conditions are for the sole benefit of the Issuer and may be
waived by the Issuer, in whole or in part, if, in its reasonable judgment, such
waiver is not disadvantageous to holders of the Initial Notes.
27
<PAGE> 28
Any determination made by the Issuer concerning an event, development or
circumstance described or referred to above will be final and binding on all
parties.
EXCHANGE AGENT
The Bank of New York has been appointed as the Exchange Agent for the
Exchange Offer. Letters of Transmittal must be addressed to the Exchange Agent
at its address set forth on the back cover of this Prospectus.
Delivery to an address other than as set forth herein, or transmissions of
instructions via a facsimile or telex number other than the ones set forth
herein, will not constitute a valid delivery.
SOLICITATION OF TENDERS; EXPENSES
The Issuer has not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others for soliciting acceptances of the Exchange Offer. The Issuer
will, however, pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for reasonable out-of-pocket expenses in
connection therewith. The Issuer will also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this Prospectus and related documents
to the beneficial owners of the Initial Notes and in handling or forwarding
tenders for their customers.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Issuer. Neither the delivery
of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Issuer since the respective dates as of which information is
given herein. The Exchange Offer is not being made to (nor will tenders be
accepted from or on behalf of) holders of Initial Notes in any jurisdiction in
which the making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction. However, the Issuer may, at its
discretion, take such action as it may deem necessary to make the Exchange Offer
in any such jurisdiction and extend the Exchange Offer to holders of Initial
Notes in such jurisdiction. In any jurisdiction the securities laws or blue sky
laws of which require the Exchange Offer to be made by a licensed broker or
dealer, the Exchange Offer is being made on behalf of the Issuer by one or more
registered brokers or dealers which are licensed under the laws of such
jurisdiction.
OTHER
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Initial Notes are urged to
consult their financial and tax advisors in making their own decisions on what
action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Initial Notes pursuant to the terms of, this Exchange Offer,
the Issuer will have fulfilled a covenant contained in the terms of the Initial
Notes, the Indenture and the Registration Rights Agreement. Holders of the
Initial Notes who do not tender their certificates in the Exchange Offer will
continue to hold such certificates and their rights under such Initial Notes
will not be altered, except for any such rights under the Registration Rights
Agreement, which by their terms terminate or cease to have further effect as a
result of the making of this Exchange Offer. See "Description of the Initial
Notes". All untendered Initial Notes will continue to be subject to the
restrictions on transfer set forth in the Indenture. To the extent that Initial
Notes are tendered and accepted in the Exchange Offer, the trading market for
untendered Initial Notes could be adversely affected.
The Issuer may in the future seek to acquire untendered Initial Notes in
open market or privately negotiated transactions, through subsequent exchange
offers or otherwise. The Issuer has no present plan to acquire any Initial Notes
which are not tendered in the Exchange Offer or to file a registration statement
to permit resales of any Initial Notes which are not tendered pursuant to the
Exchange Offer.
28
<PAGE> 29
CAPITALIZATION
<TABLE>
The following table sets forth the capitalization of HomeSide as of August
31, 1996. The information in this table should be read in conjunction with the
consolidated financial statements and related notes appearing elsewhere in this
Prospectus.
<CAPTION>
AT AUGUST 31, 1996
---------------------
(DOLLARS IN MILLIONS)
<S> <C>
Short-term debt:
Warehouse credit facility............................................. $1,245.6
========
Long-term debt:
Servicing secured credit facility..................................... $ 842.6
Notes................................................................. 200.0
Other................................................................. 21.4
--------
Total long-term debt.......................................... 1,064.0
Stockholders' equity
Class A voting common stock, par value $.01 per share, authorized
2,500,000 shares, issued and outstanding 2,046,861 shares.......... --
Class B non-voting common stock, par value $.01 per share, authorized
5,714 shares, issued and outstanding 5,714 shares.................. --
Class C non-voting common stock, par value $1.00 per share, authorized
5,714 shares, issued and outstanding 5,714 shares.................. --
Additional paid-in capital............................................ 360.2
Retained earnings..................................................... 16.6
--------
376.8
Less: Notes received in payment for capital stock............. (1.7)
--------
Total stockholders' equity............................... 375.1
--------
Total capitalization..................................... $1,439.1
========
</TABLE>
29
<PAGE> 30
UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL INFORMATION
The unaudited pro forma consolidated financial information set forth below
which is based upon management's assumptions and includes adjustments as
described in the notes which follow, should be read in conjunction with the
historical financial statements and notes thereto included elsewhere in this
Prospectus. The Unaudited Pro Forma Consolidated Income Statement set forth
below gives effect to the HLI Acquisition and the HHI Acquisition and the
issuance of $200.0 million principal amount of the Initial Notes as though such
transactions occurred on January 1, 1995. Results of operations for the period
March 16, 1996 to August 31, 1996 include the period March 16, 1996 to August
31, 1996 for HomeSide and the period April 1, 1996 to May 30, 1996 for HHI.
Results of operations for the year ended December 31, 1995 include the results
of HLI and HHI for the twelve months ended December 31, 1995. The unaudited pro
forma consolidated financial information does not purport to represent the
results that actually would have occurred if the acquisition of HLI or the
acquisition of HHI or the issuance of the Initial Notes had in fact occurred on
such date or to project the results that may be achieved in the future.
30
<PAGE> 31
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
<TABLE>
FOR THE PERIOD MARCH 16, 1996 TO AUGUST 31, 1996(A)
(IN MILLIONS)
<CAPTION>
HHI ACQUISITION PRO FORMA
HOMESIDE HHI AND OFFERING HOMESIDE, HHI
HISTORICAL(A) HISTORICAL(A) ADJUSTMENTS(B) AND THE OFFERING
------------- ------------- --------------- ----------------
<S> <C> <C> <C> <C>
Revenues:
Mortgage servicing fees............ $124.8 $20.6 $ -- $145.4
Amortization of mortgage servicing
rights.......................... (56.9) (8.3) (1.5)(c) (66.7)
------ ----- ------ ------
Net servicing revenue...... 67.9 12.3 (1.5) 78.7
Interest income.................... 35.0 4.9 1.7(d) 41.6
Interest expense................... (38.9) (3.5) (1.4)(d) (43.8)
------ ----- ------ ------
Net interest revenue....... (3.9) 1.4 0.3 (2.2)
Net mortgage origination revenue... 27.1 5.0 (4.0)(e) 28.1
Other income....................... 0.5 0.7 (0.7)(f) 0.5
------ ----- ------ ------
Total revenue.............. 91.6 19.4 (5.9) 105.1
Expenses:
Salaries and employee benefits..... 32.7 10.4 (5.5)(g) 37.6
Occupancy and equipment............ 4.9 1.6 (1.2)(h) 5.3
Servicing losses on investor-owned
loans........................... 8.0 -- -- 8.0
Other expenses..................... 17.9 12.2 (4.5)(i) 25.6
------ ----- ------ ------
Total expenses............. 63.5 24.2 (11.2) 76.5
Income before income taxes........... 28.1 (4.8) 5.3 28.6
Income tax expense................... 11.5 (0.9) 1.1(j) 11.7
------ ----- ------ ------
Net income........................... $ 16.6 $(3.9) $ 4.2 $ 16.9
====== ===== ====== ======
<FN>
- ---------------
(a) Reflects HomeSide's and HHI's historical consolidated financial statements
for the period March 16, 1996 to August 31, 1996 for HomeSide and for the
period April 1, 1996 to May 30, 1996 for HHI. Pro forma adjustments to the
historical financial statements have been completed in a manner consistent
with the calendar periods of the related financial statements of HomeSide
and HHI, respectively.
(b) Reflects pro forma adjustments related to the HHI Acquisition and proceeds
from the offering of $200.0 million of notes as if such offering occurred
on March 16, 1996. The adjustments reflect the application of purchase
accounting to the HHI Acquisition and, as a result, the assets and
liabilities have been adjusted to reflect the allocation of the purchase
price.
(c) Amortization was increased by $1.5 million to reflect the allocation of the
HHI purchase price to mortgage servicing rights.
(d) In 1996, HHI sold loans held for sale as participations to an affiliate of
Barnett. The funding source will be replaced with the Bank Credit
Agreement. Consequently, interest income was increased by $1.7 million to
adjust for interest income passed to the participations.
Interest expense was reduced to reflect the Bank Credit Agreement. Also
reflects the reversal of interest expense of $1.4 million on $90.0 million
of bridge financing outstanding March 16, 1996 to May 15, 1996 and records
incremental interest expense of $3.6 million on the $200 million of notes
as if the issuance
</TABLE>
31
<PAGE> 32
<TABLE>
occurred on March 16, 1996 instead of May 15, 1996. A portion of the
proceeds from the offering were used to pay-off the bridge financing.
<S> <C>
Bank Credit Agreement................................................ $ .8
Reversal on interest on $90 million bridge financing................. 1.4
Interest expense on $200 million of notes............................ (3.6)
-----
Net increase in interest expense........................... $(1.4)
=====
</TABLE>
<TABLE>
Pro Forma interest expense is comprised of the following components:
<S> <C>
Warehouse interest expense.......................................... $(34.1)
Interest credit on escrow deposits.................................. 30.1
Other interest expense
Servicing secured interest expense................................ (20.5)
Other interest expense............................................ (19.3)
------
Total other interest expense........................................ (39.8)
------
Total interest expense.................................... $ 43.8
======
</TABLE>
(e) Origination revenue of $4.0 million generated by the loan production units
retained by Barnett was eliminated.
(f) Barnett is retaining mortgage loans held for investment. The interest
earned on these loans of $0.7 million has been eliminated.
(g) Salaries and employee benefits of $5.5 million for mortgage loan production
units retained by Barnett were eliminated. The personnel associated with
these positions were retained by Barnett.
(h) Occupancy and equipment expenses of $1.2 million for loan production units
retained by Barnett have been eliminated. The assets and operations
associated with these functions were retained by Barnett.
<TABLE>
(i) Expenses have been reduced for mortgage loan production units retained by
Barnett. Other expenses have been adjusted to reflect amortization of debt
issuance costs.
<S> <C>
Decrease in other expenses for loan production units retained by
Barnett............................................................ $(3.8)
Elimination of goodwill amortization................................. (1.0)
Amortization of debt issuance costs.................................. 0.3
-----
Net decrease in other expenses............................. $(4.5)
=====
(j) Adjusts income tax expense for HomeSide's expected effective income tax
rate.
<FN>
- ---------------
Note: Numbers may not total or agree to financial statements due to rounding.
</TABLE>
32
<PAGE> 33
<TABLE>
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1995
(IN MILLIONS)
<CAPTION>
PRO FORMA PRO FORMA
HLI HOMESIDE HLI HOMESIDE FOR
ACQUISITION FOR THE HLI ACQUISITION THE HLI AND HHI
HLI AND OFFERING ACQUISITION AND HHI AND OFFERING ACQUISITIONS AND
HISTORICAL(A) ADJUSTMENTS(B) THE OFFERING HISTORICAL(A) ADJUSTMENTS(C) THE OFFERING
------------- -------------- --------------- ------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Mortgage servicing fees....... $ 173.0 $ 173.0 $108.6 $ 19.9(m) $ 301.5
Gain on risk management
contracts................... 108.7 -- 108.7 -- --(n) 108.7
Amortization of mortgage
servicing rights............ (108.0) $ (7.7)(d) (115.7) (48.3) (8.8)(o) (172.8)
------- ------ ------- ------ ------ -------
Net servicing revenue......... 173.7 (7.7) 166.0 60.3 11.1 237.4
Interest income............... 24.3 5.4(e) 29.7 27.3 9.9(p) 66.9
Interest expense.............. (27.1) (11.0)(f) (38.1) (20.4) (13.9)(q) (72.4)
------- ------ ------- ------ ------ -------
Net interest revenue.......... (2.8) (5.6) (8.4) 6.9 (4.0) (5.5)
Net mortgage origination
revenue..................... 3.4 (2.9)(g) 0.5 3.2 (3.0)(r) 0.7
Gain on sales of servicing
rights...................... 10.2 (10.2)(h) -- 9.1 (9.1)(s) --
Other income.................. 0.5 -- 0.5 2.5 (2.3)(t) 0.7
------- ------ ------- ------ ------ -------
Total revenue................. 185.0 (26.4) 158.6 82.0 (7.3) 233.3
Expenses:
Salaries and employee
benefits.................... 45.4 (5.8)(i) 39.6 53.1 (21.5)(u) 71.2
Occupancy and equipment....... 10.0 (6.4)(j) 3.6 6.0 (4.2)(v) 5.4
Servicing losses on
investor-owned loans........ 10.0 -- 10.0 -- -- 10.0
Real estate acquired.......... 1.1 -- 1.1 -- -- 1.1
Other expenses................ 21.8 3.3(k) 25.1 52.9 (21.6)(w) 56.4
------- ------ ------- ------ ------ -------
Total expenses................ 88.3 (8.9) 79.4 112.0 (47.3) 144.1
Income before income tax
expense..................... 96.7 (17.5) 79.2 (30.0) 40.0 89.2
Income tax expense............ 37.9 (7.8)(l) 30.1 (9.6) 16.0(x) 36.5
------- ------ ------- ------ ------ -------
Net income.................... $ 58.8 $ (9.7) $ 49.1 $(20.4) $ 24.0 $ 52.7(y)
======= ====== ======= ====== ====== =======
<FN>
- ---------------
(a) Reflects HLI's and HHI's historical consolidated income statements for the
year ended December 31, 1995 subject to certain reclassifications to
conform with the pro forma income statement presentation. For HHI,
amortization of goodwill and affiliate profit sharing amounts have been
reclassified to conform with this pro forma presentation.
(b) Reflects pro forma adjustments related to HomeSide's initial capitalization
and the HLI Acquisition, including related financing and proceeds from
$112.5 million of the Notes. The remaining proceeds of the Offering were
held in escrow pending completion of the HHI Acquisition. The adjustments
reflect the application of purchase accounting to the HLI Acquisition and,
as a result, the assets and liabilities have been adjusted to reflect the
allocation of the purchase price.
(c) Reflects pro forma adjustments related to the HHI Acquisition, including
related financing and proceeds from the incremental $87.5 million of the
Notes. The adjustments reflect the application of purchase accounting to
the HHI Acquisition and, as a result, the assets and liabilities have been
adjusted to reflect the allocation of the purchase price.
(d) Amortization of mortgage servicing rights was increased by $7.7 million to
reflect the allocation of the HLI purchase price to servicing rights.
(e) In 1995, HLI sold loans held for sale as participations to an affiliate of
Bank of Boston. This funding source was replaced with the Bank Credit
Agreement. Consequently, interest income has been increased by $13.3
million to adjust for interest income passed to the participations. Bank of
Boston retained
</TABLE>
33
<PAGE> 34
mortgage loans held for investment. The interest earned on these loans of
$7.9 million has been eliminated.
(f) Reflects the Bank Credit Agreement, issuance of $112.5 million of the
Notes, and new capital structure. The Bank Credit Agreement also replaced
the funding of loans held for sale as participations to an affiliate of
Bank of Boston. Consequently, interest expense has been increased by $10.3
million.
The income earned on the escrow deposit accounts associated with the loan
servicing portfolio reduces interest expense. Before the HLI Acquisition,
these deposits were held at Bank of Boston and earned a higher benefit than
would have been earned had they been held by an independent party.
Reduction of $2.6 million is based on the benefit that would have been
received from an independent party.
<TABLE>
<S> <C>
New Bank Credit Agreement and capital structure.............. $ 14.6
Issuance of $112.5 million of the Notes...................... (12.7)
Participations to affiliate of Bank of Boston................ (10.3)
Reduced benefit from escrow deposits......................... (2.6)
-----
$(11.0)
=====
</TABLE>
Pro Forma interest expense is comprised of the following components:
<TABLE>
<S> <C>
Warehouse interest expense................................... $(24.8)
Interest credit on escrow deposits........................... 32.1
Other interest expense
Servicing secured interest expense......................... (31.3)
Other interest expense..................................... (14.1)
-----
Total other interest expense................................. (45.4)
-----
Total interest expense............................. $(38.1)
=====
</TABLE>
(g) Mortgage origination revenue of $2.9 million generated by the branches
retained by Bank of Boston was eliminated.
(h) Mortgage servicing rights were adjusted to fair value as part of the
purchase accounting adjustments. Therefore no gain on sales would have been
recognized since the proceeds received on the sales would have been equal
to the cost basis of the mortgage servicing rights.
(i) The salaries and employee benefits incurred at the retail branches and the
loan processing center retained by Bank of Boston of $5.8 million have been
eliminated. The personnel associated with these positions were retained by
Bank of Boston.
(j) Occupancy expenses for the retail branches and the loan processing center
retained by Bank of Boston of $6.4 million have been eliminated. The assets
and operations associated with these functions were retained by Bank of
Boston.
(k) Reflects amortization of debt issuance and Offering costs of $3.6 million
and elimination of goodwill amortization of $0.3 million.
(l) Adjusts income tax expense for the HLI Acquisition and Offering Adjustments
and HomeSide's expected effective rate.
(m) BancPLUS was acquired by HHI on February 28, 1995. Income for the period
January 1, 1995 through February 28, 1995 was added to reflect the period
BancPLUS was not owned by HHI. Also, servicing fee income was increased to
reflect the new agreement on servicing fee rates paid on Barnett's mortgage
loan portfolio.
<TABLE>
<S> <C>
Period BancPLUS not owned by HHI................................ $ 9.9
Servicing fee income............................................ 10.0
-----
Net increase in mortgage servicing revenues................ $19.9
=====
</TABLE>
(n) At HHI, risk management contracts were not in place throughout 1995 and no
gains were recognized in income to offset the decline in the value of the
mortgage servicing rights and accelerated amortization
34
<PAGE> 35
due to changes in interest rates. No adjustments have been included to
reflect the results of a risk management program had once been in place at
HHI. After the HHI Acquisition, HomeSide extended its risk management
practices to the combined servicing portfolio.
(o) Amortization of mortgage servicing rights was increased to reflect the
period from January 1, 1995 through February 28, 1995 during which BancPLUS
was not owned by HHI. Amortization was also increased to reflect the
allocation of the HHI purchase price to mortgage servicing rights.
<TABLE>
<S> <C>
Amortization for BancPLUS during period not owned by HHI........ $(2.9)
Increased amortization.......................................... (5.9)
-----
Net increase in amortization of mortgage servicing
rights................................................... $(8.8)
=====
</TABLE>
(p) In 1995, HHI sold loans held for sale as participations to an affiliate of
Barnett. This funding source will be replaced with the Bank Credit
Agreement. Consequently, interest income was increased to adjust for
interest income passed to the participations. Income for the period January
1, 1995 through February 28, 1995 was added to reflect the period BancPLUS
was not owned by BMC. Barnett is retaining mortgage loans held for
investment. The interest earned on these loans has been eliminated.
<TABLE>
<S> <C>
Interest income on participations................................... $ 9.6
Period BancPLUS not owned by HHI.................................... 1.4
Elimination of interest income on mortgage loans held for
investment........................................................ (1.1)
Net increase in warehouse interest income...................... $ 9.9
======
</TABLE>
(q) Reflects the Bank Credit Agreement, issuance of $87.5 million of the Notes
and the new capital structure.
Interest expense for the period January 1, 1995 through February 28, 1995
was added to reflect the period BancPLUS was not owned by BMC.
The income earned on the escrow deposit accounts associated with the loan
servicing portfolio reduces interest expense. Before the HHI Acquisition,
these deposits were held at Barnett and earned a higher benefit than would
have been earned had they been held by an independent party. Reduction of
$0.6 million is based on the benefit that would have been received from an
independent party.
<TABLE>
<S> <C>
New Bank Credit Agreement and capital structure................ $ (1.6)
Issuance of $87.5 million of the Notes......................... (9.8)
Period BancPLUS not owned by HHI............................... (1.9)
Reduced benefit from escrow deposits........................... (0.6)
------
$(13.9)
======
</TABLE>
Pro Forma interest expense is comprised of the following components:
<TABLE>
<S> <C>
Warehouse interest expense........................................ $(40.9)
Interest credit on escrow deposits................................ 31.2
Other interest expense
Servicing secured interest expense........................... (14.8)
Other interest expense....................................... (9.8)
-----
Total other interest expense 24.6
-----
Total interest expense.................................. $ 34.3
=====
</TABLE>
(r) Origination revenue of $3.0 million generated by the loan production units
retained by Barnett was eliminated.
(s) Mortgage servicing rights were adjusted to fair value as part of the
purchase accounting adjustments. Because the proceeds received on the sales
would have been equal to the adjusted carrying value of the mortgage
servicing rights, no gain on sales would have been recognized.
35
<PAGE> 36
(t) Other income of $2.3 million generated by the branches retained by Barnett
was eliminated.
<TABLE>
(u) Salaries and employee benefits for the period January 1, 1995 through
February 28, 1995 were added to reflect the period BancPLUS was not owned
by HHI. Salaries and employee benefits for mortgage loan production units
retained by Barnett were eliminated.
<S> <C>
Period BancPLUS not owned by HHI............................... $ 5.6
Decrease in salaries and employee benefits for loan production
units retained by Barnett..................................... (27.1)
------
Net decrease in salaries and employee benefits................. $(21.5)
======
</TABLE>
(v) Occupancy and equipment expenses of $4.2 million for loan production units
retained by Barnett have been eliminated.
<TABLE>
(w) Expenses have been reduced for mortgage loan production units retained by
Barnett. Other expenses for the period January 1, 1995 through February 28,
1995 were added to reflect the period BancPLUS was not owned by HHI. Other
expenses have been adjusted to reflect amortization of debt issuance costs
and amortization of goodwill.
<S> <C>
Decrease in other expenses for loan production units retained
by Barnett.................................................... $(25.8)
Period BancPLUS not owned by HHI -- other expenses............. 3.9
Amortization of debt issuance costs............................ 2.0
Adjustment to amortization of goodwill......................... (1.7)
------
Net decrease in other expenses............................ $(21.6)
======
</TABLE>
(x) Adjusts income tax expense for the HHI Acquisition and Offering Adjustments
and HomeSide's expected effective rate.
(y) The pro forma financial statements for the year ended December 31, 1995
have been prepared under the accounting policies used by HLI and HHI during
that period. Effective January 1, 1996, HLI and HHI prospectively adopted
SFAS 122, "Accounting for Mortgage Servicing Rights." This statement, among
other provisions, requires that the value of mortgage servicing rights
associated with mortgage loans originated by an entity be capitalized as
assets. The value of originated mortgage servicing rights (OMSR) is
determined by allocating the total costs of the mortgage loans between the
loans and the mortgage servicing rights based on their relative fair
values. Also, the new statement requires that capitalized mortgage
servicing rights be evaluated for impairment based on the fair value of
these rights. For purposes of determining impairment, mortgage servicing
rights that are capitalized after the adoption of this statement are
stratified based on one or more of the predominant risk characteristics of
the underlying loans. Impairment is recognized through a valuation
allowance for each impaired stratum.
Had this statement been adopted January 1, 1995, net mortgage origination
revenue would have increased by $10.6 million and $2.8 million for pro
forma HLI and pro forma HHI, respectively, for the effect on income of
recording OMSR. If these provisions of SFAS 122 were applied to the pro
forma financial statements for the year ended December 31, 1995, additional
amortization of mortgage servicing rights of $45.0 million and $10.0
million would have been recorded for pro forma HLI and pro forma HHI,
respectively, due to the interest rate environment during 1995. As a result
of the above adjustments, pro forma HomeSide for the HLI Acquisition and
the Offering net income would have been $27.8 million and pro forma
HomeSide for the HLI and HHI Acquisitions and the Offering net income would
have been $28.1 million for the year ended December 31, 1995.
- ---------------
Note: Numbers may not total or agree to financial statements due to rounding.
36
<PAGE> 37
SELECTED CONSOLIDATED FINANCIAL INFORMATION
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF HOMESIDE
<TABLE>
The selected consolidated financial information of HomeSide set forth below
is for its second quarter of operations (three months ended August 31, 1996) and
for the year to date period ended August 31, 1996 (March 16, 1996 to August 31,
1996) and should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto and with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" of HomeSide included elsewhere
in this Prospectus. See also "Unaudited Pro Forma Consolidated Financial
Information." The consolidated operating results for the three months ended
August 31, 1996 and the period March 16, 1996 to August 31, 1996 and the
consolidated balance sheet data at August 31, 1996 are unaudited but, in the
opinion of management, contain all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation. The results of
operations for the periods ended August 31, 1996 are not necessarily indicative
of results to be expected for the full year.
<CAPTION>
FOR THE THREE FOR THE PERIOD
MONTHS ENDED MARCH 16, 1996 TO
AUGUST 31, 1996 AUGUST 31, 1996
(IN THOUSANDS) (IN THOUSANDS)
--------------- -----------------
<S> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Mortgage servicing fees.............................. $ 83,349 $ 124,834
Amortization of mortgage servicing rights............ (40,464) (56,906)
----------- -----------
Net servicing revenue................................ 42,885 67,928
Interest income...................................... 22,270 34,989
Interest expense..................................... (23,920) (38,882)
----------- -----------
Net interest revenue................................. (1,650) (3,893)
Net mortgage origination revenue..................... 16,273 27,083
Other income......................................... 355 462
----------- -----------
Total revenues....................................... 57,863 91,580
Expenses:
Salaries and employee benefits....................... 21,177 32,657
Occupancy and equipment.............................. 3,084 4,930
Servicing losses on investor-owned loans............. 4,058 7,996
Other expenses....................................... 12,523 17,868
----------- -----------
Total expenses....................................... 40,842 63,451
Income before income taxes........................... 17,021 28,129
Income tax expense................................... 6,954 11,508
----------- -----------
Net income........................................... $ 10,067 $ 16,621
=========== ===========
SELECTED OPERATING DATA:
Volume of loans originated and acquired (a).......... $ 9,565,199(a) $13,345,435(a)
Loan servicing portfolio (at period end) (a)......... $85,835,155(a) $85,835,155(a)
Loan servicing portfolio (average) (a)............... $82,247,794(a) $63,482,914(a)
Weighted average interest rate (at period end) (a)... 7.92%(a) 792%(a)
Weighted average servicing fee (average for period)
(a)................................................ 0.367%(a) 0.384%(a)
Ratio of earnings to fixed charges................... 1.70x 1.71x
SELECTED BALANCE SHEET DATA (AT PERIOD END):
Mortgage loans held for sale......................... $ 1,290,841 $ 1,290,841
Mortgage servicing rights............................ $ 1,428,117 $ 1,428,117
Total assets......................................... $ 2,934,938 $ 2,934,938
Warehouse credit facility............................ $ 1,245,591 $ 1,245,591
Long term debt....................................... $ 1,064,067 $ 1,064,067
Total liabilities.................................... $ 2,559,817 $ 2,559,817
Total stockholders' equity........................... $ 375,121 $ 375,121
<FN>
- ---------------
(a) Period information is for the period March 1, 1996 to August 31, 1996 and
the three months ended August 31, 1996 and period end information is at
August 31, 1996.
</TABLE>
37
<PAGE> 38
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF HLI
The selected consolidated financial information of HLI (formerly BancBoston
Mortgage Corporation) set forth below has been derived from the audited
financial statements of HLI and the related notes thereto. The selected
consolidated financial information should be read in conjunction with HLI's
Consolidated Financial Statements and the Notes thereto and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- HLI"
included elsewhere in this Prospectus. See also "Unaudited Pro Forma
Consolidated Financial Information."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, FOR THE THREE FOR THE PERIOD
---------------------------------------------------------------- MONTHS ENDED JANUARY 1, 1996
1991 1992 1993 1994 1995 MARCH 31, 1995 TO MARCH 15, 1996
----------- ----------- ----------- ----------- ----------- -------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues:
Mortgage servicing fees.... $ 92,362 $ 105,890 $ 111,822 $ 140,491 $ 173,038 $ 43,657 $ 38,977
Gain (loss) on risk
management contracts..... -- -- 6,688 (6,702) 108,702 3,612 (128,795)
Amortization of mortgage
servicing rights......... (37,213) (73,908) (112,492) (66,801) (108,013) (23,103) (7,245)
----------- ----------- ----------- ----------- ----------- -------------- -----------------
Net servicing revenue.... 55,149 31,982 6,018 66,988 173,727 24,166 (97,063)
Interest income............ 41,252 46,865 50,156 31,585 24,324 4,122 8,423
Interest expense........... (27,686) (38,855) (44,199) (33,952) (27,128) (6,079) (10,089)
----------- ----------- ----------- ----------- ----------- -------------- -----------------
Net interest revenue..... 13,566 8,010 5,957 (2,367) (2,804) (1,957) (1,666)
Net mortgage origination
revenue (expense)........ 6,508 1,123 6,173 4,983 3,417 (1,083) 7,638
Gain on sales of servicing
rights................... 12,034 14,769 651 10,862 10,230 4,285 --
Other income............... 52 17 50 147 511 13 253
----------- ----------- ----------- ----------- ----------- -------------- -----------------
Total revenues..... 87,309 55,901 18,849 80,613 185,081 25,424 (90,838)
Expenses:
Salaries and employee
benefits............... 27,328 30,053 33,096 40,370 45,381 11,696 10,287
Occupancy and
equipment.............. 7,809 7,788 7,966 9,012 10,009 2,358 2,041
Servicing losses on
investor-owned loans... 2,880 8,138 2,770 7,177 9,981 733 5,560
Real estate acquired..... 1,195 1,124 1,600 253 1,054 218 291
Other expenses........... 17,552 20,461 22,058 19,326 21,896 4,713 7,377
----------- ----------- ----------- ----------- ----------- -------------- -----------------
Total expenses..... 56,764 67,564 67,490 76,138 88,321 19,718 25,556
----------- ----------- ----------- ----------- ----------- -------------- -----------------
Income (loss) before income
taxes and cumulative
effects of changes in
accounting principles.... 30,545 (11,663) (48,641) 4,475 96,760 5,706 (116,394)
Income tax expense
(benefit) before
cumulative effects of
changes in accounting
principles............... 12,168 (3,829) (17,284) 2,525 37,934 2,277 (42,533)
----------- ----------- ----------- ----------- ----------- -------------- -----------------
Income (loss) before
cumulative effects of
changes in accounting
principles............... 18,377 (7,834) (31,357) 1,950 58,826 3,429 (73,861)
Change in purchased
mortgage servicing
rights (PMSR) valuation
method, net of tax..... -- -- (59,921 (a) -- -- -- --
Change in accounting for
income taxes........... -- -- 6,093(b) -- -- -- --
Change in accounting for
mortgage servicing fee
income, net of tax..... -- -- -- 3,455(c) -- -- --
----------- ----------- ----------- ----------- ----------- -------------- -----------------
Net income (loss).......... $ 18,377 $ (7,834) $ (85,185) $ 5,405 $ 58,826 $ 3,429 $ (73,861)
========== ========== ========== ========== ========== ============== =================
SELECTED OPERATING DATA:
Volume of loans originated
and acquired............. $ 5,196,996 $ 9,705,875 $13,682,761 $14,473,000 $ 9,567,521 1,181,642 $ 4,187,603(e)
Loan servicing portfolio
(at period end).......... 20,600,569 23,705,642 27,999,100 37,971,200 41,555,354 37,800,120 44,158,163(e)
Loan servicing portfolio
(average)................ 19,663,100 22,153,100 25,852,400 33,178,600 39,283,700 38,099,730 43,158,072(e)
Weighted average interest
rate (at period end)..... 9.65% 9.05% 8.07% 7.91% 7.97% 7.90% 7.92%(e)
Weighted average servicing
fee (average for
period).................. 0.400% 0.390% 0.372% 0.389% 0.383% 0.384% 0.380%(e)
Ratio of earnings to fixed
charges.................. 2.06x --(d) --(d) 1.13x 4.40x 1.88x --(d)
SELECTED BALANCE SHEET DATA
(AT PERIOD END):
Mortgage loans held for
sale..................... $ 507,776 $ 495,455 $ 607,506 $ 271,215 $ 388,436 $ 70,978 $ 641,465
Mortgage servicing
rights................... 296,393 337,307 281,727 431,148 551,338 414,974 542,862
Total assets............... 1,034,269 1,073,686 1,193,583 1,006,887 1,254,303 858,001 1,512,902
Note payable to parent..... 748,827 799,992 1,019,011 779,021 966,000 648,499 1,256,000
Long term debt............. 14,483 14,339 14,180 14,007 13,816 13,961 13,790
Total liabilities.......... 818,890 866,141 1,071,223 879,122 1,067,712 726,807 1,400,172
Total stockholders'
equity................... 215,379 207,545 122,360 127,765 186,591 131,194 112,730
</TABLE>
38
<PAGE> 39
- ---------------
(a) On January 1, 1993, HLI changed its method of accounting for PMSR to conform
to the accounting rules adopted in 1993 by the banking regulators. Under
these new rules, the carrying value of PMSR is recorded at the lesser of
amortized cost or the discounted cash flows from servicing the underlying
mortgages. Previously, this valuation was performed on an undiscounted
basis. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 2 of Notes to Consolidated Financial
Statements.
(b) On January 1, 1993, HLI adopted SFAS No. 109, "Accounting for Income Taxes,"
which principally affects accounting for deferred taxes. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and Note 2 of Notes to Consolidated Financial Statements.
(c) On January 1, 1994, HLI changed its method of recognizing servicing fee
income to the accrual method. Previously, these fees were recorded as income
when the payments were received. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note 2 of Notes to
Consolidated Financial Statements.
(d) Fixed charges exceeded income before income taxes, cumulative effects of
changes in accounting principles and fixed charges by $11.7 million and
$48.6 million in 1992 and 1993, respectively, and $116.4 million for the
period January 1, 1996 to March 15, 1996.
(e) Period information is for the period January 1, 1996 to March 31, 1996 and
period end information is at March 31, 1996.
39
<PAGE> 40
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF HHI
The selected consolidated financial information of HHI (formerly Barnett
Mortgage Company) set forth below has been derived from the audited financial
statements of HHI and the related notes thereto. The selected consolidated
financial information should be read in conjunction with HHI's Consolidated
Financial Statements and the Notes thereto and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- HHI" included
elsewhere in this Prospectus. See also "Unaudited Pro Forma Consolidated
Financial Information."
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE SIX FOR THE PERIOD
YEARS ENDED DECEMBER 31, FOR THE THREE APRIL 1, 1996 MONTHS ENDED JANUARY 1,
-------------------------------------------------- MONTHS ENDED TO MAY 30, JUNE 30, 1996 TO MAY
1991 1992 1993 1994(A) 1995(B) JUNE 30, 1995 1996 1995 30, 1996
------- ------- -------- -------- -------- ------------- -------------- ------------ --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED
STATEMENTS OF
OPERATIONS
DATA:
Mortgage
Origination
Revenue:
Mortgage
origination
fees......... $ -- $ -- $ 358 $ 3,276 $ 17,104 $ 3,469 $ 1,646 $ 6,005 $ 7,288
Gain (loss) on
sales of
loans, net... 3,184 8,187 5,688 692 (13,920) 995 (3,383) 1,514 482
------- ------- -------- -------- -------- -------- -------- -------- --------
Total
mortgage
origination
revenue... 3,184 8,187 6,046 3,968 3,184 4,464 (1,737) 7,519 7,770
Interest Income
(expense):
Interest
income....... 765 657 855 3,460 27,264 4,420 5,638 7,003 14,216
Interest
expense,
substantially
all to
affiliates... (568) (531) (1,415) (4,911) (20,427) (6,766) (3,480) (9,685) (9,574)
------- ------- -------- -------- -------- -------- -------- -------- --------
Net
interest
income
(expense)... 197 126 (560) (1,451) 6,837 (2,346) 2,158 (2,682) 4,642
Mortgage
Servicing
Revenue:
Mortgage
servicing
income....... 10,143 13,427 20,560 27,130 83,502 22,439 15,709 35,723 38,833
Mortgage
servicing
income from
affiliates... 6,986 16,143 18,326 20,017 25,057 6,407 5,464 12,503 13,626
Amortization of
capitalized
mortgage
servicing
rights....... (2,453) (6,013) (11,547) (17,783) (48,282) (12,124) (8,456) (20,475) (25,467)
Gain on sales
of
servicing.... -- -- -- -- 9,096 -- -- -- --
------- ------- -------- -------- -------- -------- -------- -------- --------
Net mortgage
servicing
revenue.... 14,676 23,557 27,339 29,364 69,373 16,722 12,717 27,751 26,992
Other Income..... 2,860 7,750 6,296 4,492 2,592 6,203 1,678 7,054 1,740
------- ------- -------- -------- -------- -------- -------- -------- --------
Total
revenues... 20,917 39,620 39,121 36,373 81,986 25,043 14,816 39,642 41,144
Expenses:
Salaries and
benefits..... 7,778 13,698 13,914 17,474 53,070 14,301 10,402 23,433 25,173
General and
administrative... 10,349 11,401 12,432 14,924 41,849 12,119 6,817 20,403 20,748
Affiliate
profit
sharing...... 1,699 12,471 10,774 3,534 6,242
Occupancy and
equipment.... 1,091 1,167 1,810 2,702 5,960 2,424 1,569 3,941 3,720
Amortization of
goodwill..... -- -- -- 259 4,840 1,673 928 2,226 2,324
------- ------- -------- -------- -------- -------- -------- -------- --------
Total
expenses... 20,917 38,737 38,930 38,893 111,961 30,517 19,715 50,003 51,965
------- ------- -------- -------- -------- -------- -------- -------- --------
Income (loss)
before income
taxes.......... 0 883 191 (2,520) (29,975) (5,474) (4,899) (10,361) (10,821)
Income tax
provision
(benefit)...... 34 359 87 (462) (9,589) (2,118) (914) (2,877) (2,478)
------- ------- -------- -------- -------- -------- -------- -------- --------
Income (loss)
before changes
in accounting
principles..... (34) 524 104 (2,058) (20,386) -- -- -- --
Cumulative effect
of changes in
accounting
principles..... -- (507)(c) -- -- -- -- -- -- --
------- ------- -------- -------- -------- -------- -------- -------- --------
Net income
(loss)......... $ (34) $ 17 $ 104 $ (2,058) $(20,386) $ (3,356) $ (3,985) $ (7,484) $ (8,343)
======= ======= ======== ======== ======== ======== ======== ======== ========
SELECTED
OPERATING DATA
(DOLLARS IN
MILLIONS):
Volume of loans
originated and
acquired....... $ 1,945 $ 3,507 $ 3,360 $ 3,410 $ 5,767 $ 1,330 $ 982 $ 2,886 $ 2,538
Loan servicing
portfolio (at
period end).... 10,034 11,524 13,085 18,411 33,411 33,070 (e) 33,070 (e)
Loan servicing
portfolio
(average)...... 9,639 10,779 12,305 15,748 30,669 32,839 33,057 28,153 33,182
Weighted average
interest rate
(at period
end)(d)........ -- -- 7.34% 7.44% 8.05% 7.98% (e) 7.98% (e)
Weighted average
servicing fee
(average for
period)(d)..... -- -- 0.259% 0.261% 0.299% 0.301% 0.346% 0.299% 0.337%
Ratio of earnings to fixed charges... 1.00x 2.10x 1.10x --(e) --(e) (f) (f) (f)
SELECTED BALANCE
SHEET DATA (AT
PERIOD END):
Mortgage loans
held for
sale........... $ -- $ -- $ -- $183,914 $465,880 $ 331,184 (g) 331,184 (g)
Mortgage
servicing
rights......... 12,959 25,458 48,941 92,461 250,788 259,796 (g) 259,796 (g)
Total assets..... 42,082 61,166 96,186 359,472 994,630 857,046 (g) 857,046 (g)
Notes payable.... 16,107 20,325 63,329 248,214 653,056 503,000 (g) 503,000 (g)
Total
liabilities.... 22,676 38,541 69,930 274,570 762,802 612,311 (g) 612,311 (g)
Total
stockholder's
equity......... 19,406 22,625 26,257 84,902 231,828 244,735 (g) 244,735 (g)
</TABLE>
40
<PAGE> 41
- ---------------
(a) Includes Loan America since its acquisition in October 1994.
(b) Includes BancPLUS since its acquisition in February 1995.
(c) In 1992, HHI adopted two new accounting standards. Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes,"
changed HHI's accounting for income taxes to the asset/liability method from
the deferred method previously required by Accounting Principles Board
Opinion No. 11. HHI also adopted SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," which requires that the
projected future cost of providing postretirement health care and other
benefits be recognized during the periods employees provide services to earn
those benefits. Prior to adopting SFAS No. 106, these costs were expensed as
incurred. HHI adopted both of these changes on a prospective basis effective
January 1, 1992. As permitted under SFAS No. 106, HHI chose to immediately
recognize the transition obligation for postretirement benefits other than
pensions in net income for 1992 rather than on a delayed basis over the
remaining average service period of active plan members.
(d) Information not available for 1991 and 1992.
(e) HHI was acquired by HomeSide on May 31, 1996 and, accordingly, its servicing
portfolio is included in HomeSide's servicing portfolio as of May 31, 1996.
(f) Fixed charges exceeded income before income taxes, cumulative effects of
changes in accounting principles and fixed charges by $2.5 million and $30.0
million in 1994 and 1995, respectively, $4.9 million for the period April 1,
1996 to May 30, 1996, $5.5 million for the three months ended June 30, 1995,
$10.8 million for the period January 1, 1996 to May 30, 1996 and $10.4
million for the six months ended June 30, 1995.
(g) HHI was acquired by HomeSide on May 31, 1996 and, accordingly, all of its
assets and liabilities are included in the consolidated balance sheet of
HomeSide, Inc. as of May 31, 1996.
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<PAGE> 42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- HOMESIDE
MARCH 16, 1996 TO AUGUST 31, 1996
AND THE THREE MONTHS ENDED AUGUST 31, 1996
GENERAL
HomeSide, Inc. ("HomeSide" or "the Company") is a holding company, owning
100% of the outstanding common stock of HomeSide Holdings, Inc., which in turn
owns 100% of the outstanding common stock of HomeSide Lending, Inc. HomeSide was
formed on December 11, 1995 by an investor group, consisting of Thomas H. Lee
Company and Madison Dearborn Partners ("Investors"), and signed a definitive
stock purchase agreement with The First National Bank of Boston ("Bank of
Boston") for the purpose of acquiring certain assets and liabilities of the
mortgage banking business ("HLI") owned by Bank of Boston. The transaction
closed on March 15, 1996 and HomeSide began operations on March 16, 1996 through
its operating subsidiary, HomeSide Lending, Inc.
On May 31, 1996, Barnett Banks, Inc. ("Barnett") sold certain of its
mortgage banking operations, primarily its servicing portfolio and proprietary
mortgage banking software systems, to HomeSide. Barnett received cash and an
ownership interest in HomeSide. For more information on these acquisitions see
Note 4 of Notes to Consolidated Financial Statements. Since May 31, 1996, Bank
of Boston, Barnett and the Investors each have owned approximately one-third of
HomeSide. Barnett Mortgage Company was subsequently renamed HomeSide Holdings,
Inc.
HomeSide has adopted a February 28 fiscal year end. The consolidated
financial statements of HomeSide have been prepared for the period March 16,
1996 to August 31, 1996 to coincide with the end of the Company's second fiscal
quarter. HomeSide did not have any operations prior to March 16, 1996. The
purchase method of accounting was used for the HLI and HHI acquisitions and,
accordingly, assets acquired and liabilities assumed were recorded at their
estimated fair values at the date of acquisition.
Comparative financial statements for the same period in the prior year have
not been presented due to a lack of comparability between HomeSide and BBMC/HHI.
As noted above, the assets acquired and liabilities assumed by HomeSide in each
of the acquisitions were recorded at their estimated fair values as of the date
of acquisition. As a result, HomeSide's operating results are not directly
comparable to HLI and BMC historical operating results due, in part, to
different balance sheet valuations (estimated fair value as compared to
historical cost). In addition, certain production channels were retained by HLI
and all of BMC's production channels were retained by Barnett. The results of
operations for the three months ended August 31, 1996 are, therefore, most
directly comparable to the results of operations for the period March 16, 1996
to May 31, 1996. Results of operations for the period ended May 31, 1996 do not
include the results of operations of Barnett Mortgage Company ("HHI"), which was
acquired by the Company on May 31, 1996.
The following operating statistics for HomeSide are presented to aid in
understanding the results of operations and financial condition of HomeSide for
the period March 16 to May 31, 1996, the three months ended August 31, 1996 and
the period March 16, 1996 to August 31, 1996 (year to date). References to the
first quarter of 1997 relate to the period March 16, 1996 to May 31, 1996.
References to the second quarter of 1997 relate to the three months ended August
31, 1996.
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<PAGE> 43
<TABLE>
Loan Production Activities
<CAPTION>
FOR THE PERIOD FOR THE THREE
MARCH 16, 1996 MONTHS ENDED YEAR TO
TO MAY 31, 1996 AUGUST 31, 1996 DATE
--------------- --------------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Correspondent....................................... $1,893 $2,950 $ 4,843
Co-issue (a)........................................ 1,419 2,208 3,627
Broker.............................................. 220 155 375
------ ------ -------
Total wholesale..................................... 3,532 5,313 8,845
Retail.............................................. 248 179 427
------ ------ -------
Total purchases..................................... 3,780 5,492 9,272
Bulk acquisitions................................... -- 4,073 4,073
------ ------ -------
Total purchases and acquisitions.................... $3,780 $9,565 $13,345
====== ====== =======
<FN>
- ---------------
(a) Co-issue production represents the purchase of servicing rights from a
correspondent under contracts to deliver specified volumes on a monthly or
quarterly basis. The substance of this transaction is the purchase of a
loan and mortgage servicing right with the instantaneous sale of the loan
with the servicing right retained. Amounts represent the unpaid principal
balance of mortgage debt to which the acquired servicing rights relate.
</TABLE>
<TABLE>
Servicing Portfolio
<CAPTION>
FOR THE PERIOD FOR THE THREE
MARCH 16, 1996 MONTHS ENDED YEAR TO
TO MAY 31, 1996 AUGUST 31, 1996 DATE
--------------- --------------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Balance at beginning of period.................. $42,907 $78,391 $42,907
Acquisition of BMC.............................. 33,082 -- 33,082
Other additions................................. 4,102 9,842 13,944
------- ------- -------
Total additions............................ 37,184 9,842 47,026
------- ------- -------
Scheduled amortization.......................... 235 494 729
Prepayments..................................... 1,321 1,702 3,023
Foreclosures.................................... 130 137 267
Sale of servicing............................... 14 65 79
------- ------- -------
Total reductions........................... 1,700 2,398 4,098
------- ------- -------
Balance at end of period........................ $78,391 $85,835 $85,835
======= ======= =======
</TABLE>
RESULTS OF OPERATIONS
Summary
During the second quarter of 1997, HomeSide's loan production increased to
$9.6 billion from $3.8 billion in the first quarter. This increase was due to
the bulk acquisition of servicing on $3.8 billion of loans at the end of August
1996 and additional production from the addition of HHI on May 31, 1996. The
second quarter production levels were held in check, however, due to a general
increase in long-term interest rates, continuing a trend that began in February
1996. Increasing long-term interest rates tend to decrease the number of loan
refinancings and, therefore result in lower overall production.
At August 31, 1996, HomeSide's servicing portfolio stood at $85.8 billion
compared to $78.4 billion at May 31, 1996, $33.1 billion of which was acquired
from HHI on May 31, 1996, and approximately $41.6 billion at March 16, 1996. The
number of loans being serviced at August 31, 1996 was 1,059,000, compared to
984,000 as of May 31, 1996 and approximately 510,000 as of March 16, 1996.
HomeSide's strategy is to build its mortgage servicing portfolio and benefit
from the economies of scale inherent in the business.
HomeSide reported net income of $10.1 million during the second quarter of
1997 compared to net income of $6.6 million during the first quarter of 1997.
Net income for the period March 16, 1996 to August
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<PAGE> 44
31, 1996 was $16.6 million. Total revenue for the second quarter was primarily
comprised of net servicing revenue of $42.9 million and net mortgage origination
revenue of $16.3 million. These revenues were partially offset by operating
expenses of $40.8 million, net interest expense of $1.7 million and income taxes
of $7.0 million. The primary reason for the increase in revenues and expenses
during the second quarter as compared to the first quarter is due to the
acquisition of HHI on May 31, 1996. Results of operations for HHI are included
from the date of acquisition and, therefore, are not included in HomeSide's
first quarter 1997 results.
Net Servicing Revenue
During the second quarter of 1997, HomeSide had net servicing revenue of
$42.9 million, compared to net servicing revenue of $25.0 million during the
first quarter. Net servicing revenue during the second quarter was comprised of
mortgage servicing fees of $83.3 million, offset by mortgage servicing rights
amortization of $40.5 million. Mortgage servicing fees generally range from
0.25% to 0.50% of the declining principal balances of the loans per annum.
HomeSide's weighted average servicing fee during the second quarter was 0.365%
compared to 0.380% during the first quarter. The decrease in the weighted
average service fee was due to the servicing rights acquired from HHI, which
generally had lower service fees due to the lower proportion of government loans
in HHI's servicing portfolio. Amortization of mortgage servicing rights is
recorded over the estimated servicing period in proportion to estimated
servicing revenue and increased from $16.4 million in the first quarter as a
result of a higher average servicing portfolio.
Risk Management Activities
HomeSide has a risk management program designed to protect the economic
value of its mortgage servicing portfolio from declines in value due to
increases in estimated prepayment speeds, which are primarily influenced by
declines in interest rates. When loans prepay faster than anticipated, the cash
flow HomeSide expects to receive from servicing such loans is reduced. Since the
value of mortgage servicing rights is based on the present value of the cash
flows to be received over the life of the loan, the value of the servicing
portfolio declines as prepayments increase.
During the period March 16, 1996 to August 31, 1996, HomeSide purchased
options on U.S. Treasury bond futures to protect a significant portion of the
market value of its mortgage servicing portfolio from a decline in value. The
option contracts used by HomeSide have characteristics such that they tend to
increase in value as interest rates decline. Conversely, these option contracts
tend to decline in value as interest rates rise. Accordingly, changes in value
of these securities will tend to move inversely with changes in value of
HomeSide's mortgage servicing rights.
The option contracts are designated as hedges on the purchase date and such
designation must be at a level at least as specific as the level at which
mortgage servicing rights are evaluated for impairment. The option contracts are
marked-to-market with changes in market value deferred and recognized as an
adjustment to the cost of the related mortgage servicing right asset being
hedged. As a result, any changes in market value that are deferred are amortized
and evaluated for impairment in the same manner as the related mortgage
servicing rights. Effectiveness of HomeSide's hedging activity can be measured
by the correlation between changes in the value of the option and changes in the
value of HomeSide's mortgage servicing rights. This correlation is assessed on a
quarterly basis to ensure that high correlation is maintained over the term of
the hedging program. During the period presented, HomeSide has experienced a
high measure of correlation between changes in the value of mortgage servicing
rights and the option contracts. However, in periods of rising interest rates,
the increase in value of mortgage servicing rights may outpace the decline in
value of the option contracts since the loss on the options is limited to the
premium paid.
At August 31, 1996, losses on option contracts included in the cost basis
of mortgage servicing rights were $74.7 million. The fair value of these
contracts was $19.5 million, which was equal to its carrying amount since the
options are marked-to-market at each reporting date. Of the $74.7 million of
losses included in the basis of HomeSide's mortgage servicing rights portfolio,
$33.5 million was realized from the settlement of option contracts during the
period March 16, 1996 to August 31, 1996. Of the realized losses, $8.9 million
occurred during the second quarter of 1997. HomeSide's future cash needs as they
relate to its hedging program will be influenced by such factors as long-term
interest rates, loan production levels and growth in the mortgage
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<PAGE> 45
servicing portfolio. See "Liquidity and Capital Resources" for further
discussion of HomeSide's sources and uses of cash. See Note 3 of Notes to
Consolidated Financial Statements for a description of HomeSide's hedge
accounting policy. See Notes 10 and 11 of Notes to Consolidated Financial
Statements for additional fair value disclosures with respect to HomeSide's risk
management contracts.
Net Interest Expense
Net interest expense decreased from $2.2 million during the first quarter
of 1997 to $1.7 million during the second quarter of 1997, or 23%. Net interest
expense during the second quarter was comprised of interest income of $22.3
million, which was more than offset by interest expense on the Company's
borrowings of $23.9 million. Interest income and expense during the first
quarter of 1997 were $12.7 million and $15.0 million, respectively. The
increases in interest income and interest expense during the second quarter are
the result of an increase in the average balance of loans held for sale from
$770 million in the first quarter of 1997 to $1.3 billion during the second
quarter of 1997 and an increase in the average balance of notes payable to banks
from $1.3 billion to $2.0 billion, from the first quarter to the second quarter
of 1997, respectively. Interest income during the second quarter was also
positively impacted by a general increase in long-term interest rates during the
second quarter. Interest expense during the quarter also included $5.7 million
of interest incurred on $200.0 million of 11.25% notes issued on May 15, 1996.
Interest expense on these notes during the first quarter of 1997 was $2.3
million. First quarter interest expense also included interest on $90.0 million
of bridge financing, which was outstanding from March 16, 1996 to May 15, 1996
and incurred interest at 9.25%. The bridge financing was paid off with a portion
of the proceeds from the 11.25% notes.
Net Mortgage Origination Revenue
Net mortgage origination revenue was $16.3 million during the second
quarter of 1997 compared to $10.8 million during the first quarter of 1997, a
51% increase. Net mortgage origination revenue is comprised of fees earned on
the origination of mortgage loans, gains and losses on the sale of loans, gains
and losses resulting from hedges of secondary marketing activity and fees
charged to correspondents for the review of loan documents. Net mortgage
origination revenue also includes gains from excess mortgage servicing
receivables. As noted above, loan production, exclusive of bulk servicing
acquisitions, was $5.5 billion for the second quarter of 1997, $1.7 billion
(45%) higher than the first quarter loan production of $3.8 billion. The
increase in loan production is reflective of the additional production channels
acquired from HHI. HomeSide's primary origination activities during the first
and second quarters of 1997 were through correspondent and co-issue channels.
HomeSide expects these channels to continue to be the primary loan origination
sources in the future.
Salaries and Employee Benefits
Salaries and employee benefits expense increased $9.7 million, or 84%, from
$11.5 million in the first quarter of 1997 to $21.2 million during the second
quarter of 1997. The increase is due to growth in headcount as a result of the
acquisition of HHI on May 31, 1996. The average number of full time equivalent
employees grew from 1,096 during the first quarter of 1997 to 1,618 during the
second quarter of 1997.
Occupancy and Equipment Expense
Occupancy and equipment expense increased $1.3 million, or 67%, from $1.8
million during the first quarter to $3.1 million during the second quarter of
1997. Occupancy and equipment expense primarily includes rental expense, repairs
and maintenance costs, certain computer software expenses and depreciation of
HomeSide's premises and equipment. The increase in occupancy and equipment
expense is due to certain premises and equipment acquired from HHI and increases
in information systems required to handle the growing mortgage servicing
portfolio.
Servicing Losses on Investor-Owned Loans
Servicing losses on investor-owned loans increased slightly from $3.9
million for the first quarter of 1997 to $4.1 million for the second quarter of
1997, a 3% increase. Servicing losses on investor-owned loans
45
<PAGE> 46
primarily represents anticipated losses attributable to servicing FHA and VA
loans for investors. These amounts include actual losses for final disposition
of loans, accrued interest for which payment has been denied, and estimates for
potential losses based on HomeSide's experience as a servicer of government
loans.
Included in the balance of accounts payable and accrued liabilities at
August 31, 1996 is a reserve for estimated servicing losses on investor-owned
loans of $22.3 million. The reserve has been established for potential losses
related to the mortgage servicing portfolio. Increases to the reserve are
charged to earnings as servicing losses on investor owned loans. The reserve is
decreased for actual losses incurred related to the mortgage servicing
portfolio. HomeSide's historical loss experience on VA loans generally has been
consistent with industry experience.
Other Expense
Other expense increased $7.2 million from $5.3 million for the first
quarter of 1997 to $12.5 million during the second quarter of 1997. Other
expense consists mainly of professional fees, communications expense,
advertising and public relations and certain loan origination expenses. The
level of other expense will fluctuate in part based upon the level of HomeSide's
mortgage servicing portfolio and loan production volumes, both of which
increased during the second quarter as compared to the first quarter. Future
production levels are dependent on the level of long-term interest rates and
other economic factors, which are difficult to accurately predict.
Provision for Income Taxes
HomeSide's provision for income taxes was $7.0 million during the second
quarter of 1997, an increase of $2.4 million over the $4.6 million provision
recorded during the first quarter of 1997. The effective income tax rate for the
first and second quarters, as well as the year to date period ended August 31,
1996, was 41%.
LIQUIDITY AND CAPITAL RESOURCES
Operations
Net cash used in operations was $339.2 million for the period March 16,
1996 to August 31, 1996. The primary uses of cash in operations are to fund loan
originations and pay corporate expenses. These uses of cash were partially
offset by cash provided from servicing fee income, loan sales and principal
repayments. Cash flows from loan originations are dependent upon current
economic conditions and the level of long-term interest rates. Decreases in
long-term interest rates generally result in higher loan refinancing activity
which results in higher cash demands to meet increased loan production levels.
Cash needs in times of increased production are primarily met through borrowings
and loan sales.
Investing
Net cash used in investing activities was $568.9 million during the period
March 16, 1996 to August 31, 1996. Cash used in investing activities is
primarily used for the purchase and origination of mortgage servicing rights and
the purchase of options on U.S. Treasury bond futures as part of the Company's
hedging program. During the period March 16, 1996 to August 31, 1996, HomeSide
also used cash of $133.4 million and $106.2 million to purchase certain mortgage
banking operations of HLI and HHI, respectively (see Note 4 of Notes to
Consolidated Financial Statements). Future uses of cash for investing activities
will be dependent on the mortgage origination market and the Company's hedging
needs. HomeSide is not able to estimate the timing and amount of cash uses for
future acquisitions of other mortgage banking entities, if such acquisitions
were to occur.
Financing
During the period March 16, 1996 to August 31, 1996, HomeSide had $936.1
million of net cash provided by financing activities. The primary sources of
cash from financing activities during the period were $152.8 million from the
issuance of common stock of HomeSide, the issuance of $200.0 million of 11.25%
notes due 2003 (Notes) and increases in the Company's line of credit borrowings.
Cash used in financing activities was used to repay a $90.0 million bridge loan
and the payment of debt issue costs related to the Notes and a new bank credit
facility.
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<PAGE> 47
The issuance of bridge financing, Notes and common stock are isolated
events that are not expected to recur on a regular basis in future periods. The
bridge financing was used to finance a portion of the HLI acquisition and was
repaid with a portion of the proceeds from the Notes. The Notes were issued on
May 15, 1996, pay interest semiannually at 11.25% and are due May 15, 2003.
Proceeds of $87.5 million were held in escrow until the close of the HHI
acquisition and an additional $6.5 million were used to pay underwriting fees.
The proceeds from common stock issuances were received upon the close of the HLI
acquisition on March 15, 1996. Additional proceeds were received upon the
issuance of stock as part of the HHI acquisition on May 31, 1996. For additional
information regarding the Notes and the issuance of common stock, see Notes 6
and 7 of Notes to Consolidated Financial Statements.
Cash from financing activities was also provided by a three year senior
secured revolving credit facility that was entered into on March 15, 1996 and
re-issued on May 31, 1996. The line of credit is subject to a $2.5 billion limit
and is secured by primarily all of the assets of HomeSide. The $2.5 billion
commitment is comprised of a servicing secured credit facility, which is capped
at $950 million, and a warehouse loan commitment. Drawings under the line of
credit bear interest at rates per annum, based on, at HomeSide's option (A) the
highest of (i) the lead bank's prime rate, (ii) the secondary market rate of
certificates of deposit plus 100 basis points, and (iii) the federal funds rate
in effect from time to time plus 0.5%, or (B) a eurodollar rate. Cash provided
by the Company's line of credit facility is the result of borrowings needed to
finance loan origination activity. In periods of higher loan origination
activity, cash needs are greater and, accordingly, HomeSide must borrow under
the credit facility in order to meet production demand. In periods of reduced
loan demand, proceeds from loan sales can be used to pay down the credit
facility. In future periods, it is expected that cash financing needs will
primarily be met from drawings on the credit facility as opposed to further
issuances of notes or common stock.
HomeSide does not expect to pay dividends for the foreseeable future.
During the period March 16, 1996 to August 31, 1996, net cash used in
operations and investing activities was $339.2 million and $568.9 million
respectively, while cash provided by financing activities was $936.1 million,
resulting in a net increase in cash of $28.0 million. HomeSide expects that to
the extent cash generated from operations is inadequate to meet its liquidity
needs, those needs can be met through financing from its credit facility.
Accordingly, HomeSide does not currently anticipate that it will make sales of
servicing rights to any significant degree for the purpose of generating cash.
Nevertheless, in addition to its cash and loans held for sale balances,
HomeSide's servicing rights portfolio provides a potential source of funds to
meet liquidity requirements, especially in periods of rising interest rates when
loan origination volume slows. Future cash needs are highly dependent on future
loan production and servicing results, which are influenced by changes in
long-term interest rates.
New Accounting Standard
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" (SFAS 125). This
Statement, among other things, provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities.
SFAS 125 requires that after a transfer of financial assets, an entity recognize
the financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. SFAS 125 also requires that
liabilities and derivatives incurred or obtained by transferors as part of a
transfer of financial assets be initially measured at fair value. In addition,
servicing assets and other retained interests in the transferred assets must be
measured by allocating the previous carrying amount between the assets sold, if
any, and retained interests, if any, based on their relative fair values. The
Statement requires that servicing assets and liabilities be subsequently
measured by (a) amortization in proportion to and over the period of estimated
net servicing income or loss and (b) assessment for asset impairment or
increased obligation based on their fair values. This Statement is effective for
transfers and servicing of financial assets and extinguishment of liabilities
occurring after December 31, 1996 and is to be applied prospectively. Management
has not yet evaluated the impact of this Standard on the results of operations
or financial condition of HomeSide, however, the effect of this Statement is
expected to be immaterial.
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<PAGE> 48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- HLI
JANUARY 1, 1996 TO MARCH 15, 1996
AND
JANUARY 1, 1995 TO MARCH 31, 1995
GENERAL
On March 15, 1996, the HLI Acquisition was consummated. On May 31, 1996,
the HHI Acquisition was consummated. See "The Acquisitions".
The interim financial statements of HLI have been prepared for the period
January 1, 1996 to March 15, 1996 to coincide with the closing of the HLI
Acquisition. Results of operations for periods subsequent to March 15, 1996 will
be included in future financial statements of HomeSide. Results of operations
for the three months ended March 31, 1995 have been presented for comparative
purposes. Unless otherwise noted, for purposes of the Management's Discussion
and Analysis of Financial Condition and Results of Operations -- HLI, references
to the first quarter 1996 pertain to the period January 1, 1996 to March 15,
1996. The Management's Discussion and Analysis of Financial Condition and
Results of Operations for the first quarter of 1996 and 1995 should be read in
conjunction with the Management's Discussion and Analysis of Financial Condition
and Results of Operations for the three years ended December 31, 1995 appearing
elsewhere in this Prospectus.
RESULTS OF OPERATIONS
For purposes of this "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- HLI" the term "HLI" means HLI prior to
the closing of the HLI Acquisition.
Summary
Long-term interest rates declined through mid-February 1996, the
continuation of a trend which began in 1995. This decline led to an increase in
loan production to $4.2 billion during the first quarter of 1996 from $1.2
billion during the first quarter of 1995, and resulted in growth in HLI's
servicing portfolio, which increased from $41.6 billion at December 31, 1995 to
$44.2 billion at March 31, 1996. Beginning in late February and continuing
through March 1996, long-term interest rates increased and negatively impacted
HLI's results of operations for the first quarter. HLI reported a net loss of
$73.9 million during the first quarter of 1996, compared to net income of $3.4
million in the first quarter of 1995. The decrease in net income was primarily
due to losses on HLI's risk management contracts of $128.8 million during the
first quarter of 1996 as a result of increasing interest rates in late February
and March 1996.
Net Servicing Revenue
Servicing activities include collection of mortgage principal, interest and
escrow payments; remitting these payments to investors; and maintaining records
of loans and escrows. Servicing fees are typically expressed as a percentage of
unpaid principal balance ("UPB") and are collected from the monthly remittances
of the borrower before being paid to the investor. HLI is one of the largest
servicers of government insured and guaranteed loans. These loans receive a
higher servicing fee as compared to conventional loans to compensate for the
additional risks associated with FHA/VA loans (see "-- Servicing Losses on
Investor-Owned Loans").
During the first quarter of 1996, HLI had servicing expenses in excess of
servicing revenues ("net servicing expense") of $97.1 million, as compared to
servicing revenues in excess of servicing expenses ("net servicing revenue") of
$24.2 million in the first quarter of 1995. The net servicing expense in 1996
was primarily due to losses on HLI's risk management contracts. Excluding the
effect of risk management contracts, net servicing revenue increased from $20.6
million in the first quarter 1995 to $31.7 million in the first quarter 1996. In
the first quarter of 1995, HLI recorded gains on risk management contracts of
$3.6
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<PAGE> 49
million. Due to an increase in long-term interest rates in late February and
early March 1996, HLI experienced losses on risk management contracts of $128.8
million during the quarter. Changes in the value of HLI's mortgage servicing
rights substantially offset the loss on risk management contracts. However, such
changes in value were not fully recorded in the financial statements of HLI
because servicing rights are recorded at the lower of amortized cost or market
value.
The decrease in net servicing revenue was partially offset by a reduction
in amortization of mortgage servicing rights from $23.1 million in the first
quarter of 1995 to $7.2 million in the first quarter of 1996. The reduction in
amortization was due to the increase in long-term interest rates noted above,
which had a favorable effect on prepayment estimates used in calculating HLI's
periodic amortization expense. Since mortgage servicing rights are amortized
over the expected period of service fee revenues, a reduction in prepayment
activity typically results in a longer amortization period and, accordingly,
lower amortization expense for each reporting period. Amortization charges are
highly dependent upon the level of prepayments during the period and the change
in prepayment expectations, which are significantly influenced by the direction
and level of long-term interest rate movements.
Risk Management Activities
HLI has a risk management program designed to protect the economic value of
its mortgage servicing portfolio from declines in value due to increases in
estimated prepayments speeds, which are primarily influenced by declines in
interest rates. When loans prepay faster than anticipated, the cash flow HLI
expects to receive from servicing such loans is reduced. The value of mortgage
servicing rights is based on the present value of the cash flows to be received
over the life of the loans. Therefore, the value of the servicing portfolio
declines as prepayments increase.
To implement its risk management objectives, HLI purchases risk management
contracts that are designed to increase in value when long-term interest rates
decline, or when prepayment speeds increase above a specified level. During the
period ended March 15, 1996, HLI purchased options on U.S. Treasury bond futures
to protect a significant portion of the market value of its mortgage servicing
portfolio from a decline in value. The option contracts used by HLI have
characteristics such that they tend to increase in value as interest rates
decline. Conversely, these option contracts tend to decline in value as interest
rates rise. Accordingly, changes in value of these contracts will tend to move
inversely with changes in value of HLI's mortgage servicing rights. For a
discussion of the results of HLI's risk management activities for the period
ended March 15, 1996, see the previous subsection titled "Net Servicing
Revenue."
Net Interest Expense
Net interest expense represents interest earned on warehouse loans and on
mortgage loans held for investment purposes, less interest expense incurred to
fund such loans and certain other assets including mortgage servicing rights.
Net interest expense decreased from $2.0 million in the first quarter of 1995 to
$1.7 million in the first quarter of 1996, primarily due to an increase in
long-term interest rates during February and March 1996 without a corresponding
increase in short term interest rates on its credit facility. This increase in
long-term interest rates had a positive impact on HLI's interest spread, which
is the difference between interest revenue and interest expense, by increasing
HLI's yield on its loans held for sale. The increase in interest income was
impacted by an increase in the average balance of HLI's loans held for sale from
$124.6 million during the first quarter of 1995 to $535.6 million during the
first quarter of 1996. An increase in the average balance of loans held for
sale, therefore, increased HLI's interest revenue during the first quarter of
1996 as compared to 1995. Interest expense was incurred on HLI's credit facility
with Bank of Boston, which is primarily influenced by short-term interest rates.
For the periods presented, interest earned on loans held for sale was less than
interest expense on borrowings, thereby creating net interest expense for HLI.
49
<PAGE> 50
Net Mortgage Origination Revenue (Expense)
Net mortgage origination revenue (expense) increased from ($1.1) million in
the first quarter of 1995 to $7.6 million in the first quarter of 1996. The
following table sets forth HLI's origination activity for the three months ended
March 31, 1995 and 1996:
<TABLE>
<CAPTION>
FIRST FIRST
QUARTER QUARTER
1995 1996
------ ------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Correspondent.......................................... $ 314 $2,031
Co-issue(a)............................................ 755 1,597
Broker................................................. 28 191
------ ------
Total wholesale........................................ 1,097 3,819
Retail................................................. 85 368
------ ------
Total production....................................... $1,182 $4,187
====== ======
</TABLE>
- ---------------
(a) Represents the acquisition of servicing rights, not the underlying loans.
Amounts represent UPB of mortgage debt to which the acquired servicing
rights relate.
The increase in net origination revenue during the first quarter of 1996
was partially due to the adoption of Statement of Financial Accounting Standards
No. 122, "Accounting for Mortgage Servicing Rights" (SFAS 122) as of January 1,
1996, which had the effect of increasing net mortgage origination revenue by
$2.1 million. In previous periods, the cost of mortgage servicing rights on a
loan originated by HLI was included in the basis of the related loan. SFAS 122
requires that the cost of an originated loan that is sold with servicing
retained be allocated between the loan sold and the servicing rights retained.
Consequently, the cost basis of loans originated in 1996 by HLI was lower than
the basis that would have been recorded prior to the adoption of SFAS 122 and
resulted in additional gain on the sale of loans. The remaining increase was due
to increases in origination income resulting from higher loan production
volumes.
Gain on Sales of Servicing Rights
Gain on sales of servicing rights during the first quarter of 1995 were
$4.3 million. The gain was due to the sale of servicing rights on loans with a
principal balance of $1.1 billion. There were no sales of servicing rights
during the first quarter of 1996, since the factors that would have made such a
sale advantageous were not present. HLI's decision to sell mortgage servicing
rights depends on a variety of factors, including the available markets and
current prices for such servicing rights and the working capital requirements of
HLI. The likelihood of future sales of mortgage servicing rights, or the
profitability on such sales, cannot be predicted.
Salaries and Employee Benefits
Salaries and employee benefits decreased $1.4 million, or 12.1%, from $11.7
million in the first quarter of 1995 to $10.3 million in the first quarter of
1996. Direct loan origination costs, principally salary and employee benefit
costs, are included in the cost basis of the mortgage loans and, therefore, they
are not recognized until the sale of the loans. Including these capitalized loan
costs, salaries and employee benefits increased $0.7 million, or 5.8%, from
$12.8 million in the first quarter of 1995 to $13.5 million in the first quarter
of 1996. The increase reflects general salary and benefit increases as compared
to the first quarter of 1995 and a slight increase in the number of full-time
equivalent employees from 1,117 as of March 31, 1995 to approximately 1,120 as
of March 15, 1996.
Occupancy and Equipment Expense
Occupancy and equipment expense decreased $0.4 million, from $2.4 million
for the first quarter of 1995 to $2.0 million for the first quarter of 1996. The
decrease is primarily due to a decline in equipment repair and maintenance
expenses in the first quarter of 1996 as compared to the first quarter of 1995.
50
<PAGE> 51
Servicing Losses on Investor-Owned Loans
Servicing losses on investor-owned loans increased from $0.7 million in the
first quarter of 1995 to $5.6 million in the first quarter of 1996. The increase
is primarily due to a change in the VA's method of calculating the amount it
will guarantee on any loan, coupled with planned military base closings in
California that may have an impact on the performance of certain VA loans
serviced by HLI. The increase in the VA marketing rate effectively represents a
potential increase in HLI's exposure on properties conveyed to the VA. HLI
analyzed the effect of these factors on the level of its reserve for estimated
servicing losses and recorded a higher provision in the first quarter of 1996 in
order to bring the reserve to an acceptable level.
Real Estate Owned Expense
Real estate owned expense is incurred from foreclosed properties on which
HLI has taken title and includes declines in the value of the property, as well
as the incurrence of property holding and maintenance costs. Real estate owned
expense increased from $0.2 million in the first quarter of 1995 to $0.3 million
in the first quarter of 1996. The change was due to an increase in the average
balance of real estate owned from $1.2 million during the first quarter of 1995
to $2.6 million during the first quarter of 1996.
Other Expense
Other expense increased $2.7 million, from $4.7 million during the first
quarter of 1995 to $7.4 million in the first quarter of 1996. The increase was
the result of a $0.5 million increase in communications expense and a $0.4
million increase in loan expense, coupled with a decrease in expense credits
resulting from a decline in early pool buyout activity in 1996. These increases
are reflective of the increase in HLI's servicing portfolio, $44.2 billion at
March 31, 1996 as compared to $37.8 billion at March 31, 1995, and higher loan
production levels in the first quarter of 1996 as compared to the first quarter
of 1995.
Provision for (benefit from) Income Taxes
HLI's benefit from income taxes was $42.5 million during the first quarter
of 1996 as compared to a provision for income taxes of $2.3 million in the first
quarter of 1995. The change in HLI's income tax provision is the result of a
decline in pre-tax income during the first quarter of 1996 as compared to the
first quarter of 1995, and a decrease in the effective tax rate from 39.9%
during the first quarter of 1995 to 36.5% during the first quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES
Overview
HLI's primary sources of cash are revenues earned from the servicing of
mortgage loans and cash generated from the origination and sale of mortgage
loans, as well as borrowings under HLI's line of credit. HLI has entered into a
new credit facility (see "-- Post-Acquisition Financing" below). HLI anticipates
that these sources of cash will be sufficient to meet its liquidity needs and
accordingly, does not currently anticipate that it will make sales of servicing
rights to any significant degree for the purpose of generating cash. HLI's
primary uses of cash are to fund loan originations and purchases, purchase bulk
servicing rights, repay its line of credit and pay general corporate expenses.
Operations
Net cash used in operations was $112.5 million for the first quarter of
1996 as compared to net cash provided by operations of $197.6 million for the
first quarter of 1995. The decrease in net cash provided by operating activities
was principally the result of a $453.3 million increase in net cash used in the
origination and purchase of loans held for sale. This is evidenced by the
increase in loan production from $1.2 billion during the first quarter of 1995
to $4.2 billion during the first quarter of 1996. The increase in cash used in
loan production activities was partially offset by a $62.6 million increase in
collection of accounts and mortgage claims receivable.
51
<PAGE> 52
Investing
Net cash used in investing activities increased $83.7 million to $155.1
million in the first quarter of 1996 from $71.4 million during the first quarter
of 1995. The increase in cash used in investing activities was due to a $53.2
million increase in cash used for the purchase and origination of mortgage
servicing rights and a $66.7 million increase in the purchase of risk management
contracts. These increases were the result of higher loan production levels and
an increasing loan servicing portfolio. The increases noted above were partially
offset by a $40.0 million decrease in net originations of loans held for
investment.
Financing
During the first quarter of 1996, HLI had $290.0 million of net cash
provided by financing activities as compared to net cash used in financing
activities of $130.6 million during the first quarter of 1995. During the first
quarter of 1995, HLI had net repayments on its line of credit with Bank of
Boston of $130.5 million, as opposed to net borrowings of $290.0 million during
the first quarter of 1996. The level of borrowings is highly dependent on loan
production and servicing activity. As loan production and servicing increases,
HLI draws more from its credit line, and conversely, as production and servicing
levels decrease, HLI is able to use excess cash to pay down the credit line. The
net borrowings for the first quarter of 1996, therefore, are the result of
increased loan production and held for sale balances as compared to the first
quarter of 1995.
Post Acquisition Financing
In connection with the HLI Acquisition, HomeSide entered into a $1.5
billion three year senior secured revolving credit facility maturing on March
15, 1999 that replaced the former line of credit with BKB. In connection with
the HHI Acquisition, HLI, together with its wholly-owned subsidiary, Honolulu
Mortgage, entered into a $2.5 billion three year senior secured revolving credit
facility maturing on May 31, 1999 that replaced the line of credit entered into
by HLI on March 15, 1996 in connection with the HLI Acquisition and HHI's former
line of credit with Barnett. The new facility is comprised of a $2.5 billion
warehouse commitment and a $950 million servicing commitment sublimit and is
funded by independent third party financial institutions. HLI's and Honolulu
Mortgage's total borrowing capacity under the new facility is $2.5 billion, with
the servicing commitment portion capped at $950 million. The new credit facility
provides financing for HLI's and Honolulu Mortgage's ongoing operations,
including the origination and servicing of residential mortgage loans, other
working capital and general corporate purposes. The facility is secured
primarily by all of HLI's and Honolulu Mortgage's assets. See "Description of
Bank Credit Agreement".
On May 14, 1996, the Issuer issued $200 million of the Initial Notes. The
Notes mature May 15, 2003 and pay interest semiannually in arrears on May 15 and
November 15 of each year, commencing November 15, 1996. The Notes are redeemable
at the option of the Issuer, in whole or in part, at any time on or after May
15, 2001, at certain pre-set redemption prices. Upon issuance, $90.0 million of
the proceeds were used to pay-off bridge financing incurred in the HLI
Acquisition, $87.5 million was placed into escrow pending completion of the HHI
Acquisition, $6.5 million was used to pay underwriting expenses and the
remaining $16.0 million was used to repay borrowings under HLI's former credit
facility. The $87.5 million was released from escrow on May 31, 1996
concurrently with the completion of the HHI Acquisition.
HLI also has a mortgage note payable with interest at 9.50% maturing in
2017. HomeSide's main office building is pledged as collateral for such note,
and certain restrictions and/or penalties apply with respect to HLI's ability to
refinance this note.
For the period January 1, 1996 through March 15, 1996 net cash used in
operating activities and in investing activities was $112.4 million and $155.1
million, respectively, while cash provided by financial activities amounted to
$289.9 million, resulting in a net increase in cash of $22.3 million. HLI
expects that to the extent cash generated from operations is inadequate to meet
its liquidity needs, those needs can be met through financing from its credit
facility. Accordingly, HLI does not currently anticipate that it will make sales
of servicing rights to any significant degree for the purpose of generating
cash. Nevertheless, in addition to its cash and loans held for sale balances,
HLI's servicing rights portfolio provides a potential source of funds to meet
liquidity requirements, especially in periods of rising interest rates when loan
origination volume slows.
52
<PAGE> 53
Future cash needs are highly dependent on future loan production and servicing
results, which are influenced by changes in long-term interest rates.
THREE YEARS ENDED DECEMBER 31, 1995
GENERAL
Prior to March 15, 1996, HLI was a wholly-owned subsidiary of Bank of
Boston, a subsidiary of Bank of Boston Corporation ("BKBC"). In December 1995,
Bank of Boston signed an agreement to sell HLI to HomeSide, Inc. At the closing
of the HLI Acquisition, Bank of Boston received cash and approximately a 45%
equity interest in HomeSide, Inc. Also at the closing of the HLI Acquisition,
THL and MDP collectively acquired approximately a 55% interest in HomeSide, Inc.
On March 4, 1996, HomeSide, Inc. signed an agreement to acquire from
Barnett all of the outstanding stock of HHI. At the closing of the HHI
Acquisition, certain assets and liabilities of HHI were retained by Barnett,
including those assets of HHI and its subsidiaries (other than Honolulu
Mortgage) associated with the loan origination or production activities of such
entities. Upon closing of the HHI Acquisition, Barnett received cash and Siesta,
an affiliate of Barnett, acquired an ownership interest in HomeSide, Inc. such
that each of (i) Siesta, (ii) BKB, and (iii) THL and MDP collectively, own
approximately a 33% interest in HomeSide, Inc.
On June 1, 1995, HLI purchased certain assets and assumed certain
liabilities of Bell Mortgage Company ("Bell Mortgage"), a privately-held
mortgage origination company located in Minneapolis, Minnesota. The acquisition
of Bell Mortgage was accounted for under the purchase method of accounting.
Results of operations of Bell Mortgage are included in the 1995 consolidated
financial statements from the date of acquisition. See Note 16 of Notes to
Consolidated Financial Statements for further discussion.
HLI operates as a full-service mortgage banking firm emphasizing wholesale
mortgage originations and low cost mortgage servicing. Servicing activities
represent HLI's primary revenue source. HLI also generates revenue, to a lesser
extent, from mortgage loan origination fees. HLI incurs expenses for
amortization of mortgage servicing rights, interest on its line of credit and
general corporate activities.
RESULTS OF OPERATIONS
For purposes of this "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- HLI" the term "HLI" means HLI prior to
the closing of the HLI Acquisition.
Summary
HLI reported net income of $58.8 million in 1995, $5.4 million in 1994 and
a net loss of $85.2 million in 1993. Net income in 1994 included an after tax
positive effect of $3.5 million from a change in the accounting for mortgage
servicing fee income. The net loss in 1993 includes an after tax charge of $59.9
million for a change in HLI's method of valuing purchased mortgage servicing
rights, which was partially offset by an after tax benefit of $6.1 million
resulting from the cumulative effect on prior years of adopting Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" as of
January 1, 1993. Prior to the effect of the adjustments noted above, HLI had
income of $58.8 million in 1995, $2.0 million in 1994 and a loss of $31.4
million in 1993. See Notes 2 and 10 of Notes to Consolidated Financial
Statements for further discussion of HLI's accounting changes.
The increase in net income in 1995 as compared to 1994 was primarily due to
factors that resulted from a decrease in interest rates coupled with growth in
HLI's servicing portfolio. The lower interest rate environment resulted in a
gain related to HLI's risk management activities in 1995 as compared to a loss
in 1994. See "-- Risk Management Activities." HLI also benefited from a 9%
increase in its residential servicing portfolio from $38.0 billion at December
31, 1994 to $41.6 billion at December 31, 1995. The increases were partially
offset, however, by higher mortgage servicing rights amortization charges as a
result of increased servicing
53
<PAGE> 54
volumes and higher prepayment activity in 1995. The loss before the cumulative
effect of changes in accounting principles in 1993 was primarily due to
unscheduled mortgage servicing rights amortization that resulted from a
declining interest rate environment.
Net Servicing Revenue
Servicing activities include collection of mortgage principal, interest and
escrow payments; remitting these payments to investors; and maintaining records
of loans and escrows. Servicing fees are typically expressed as a percentage of
unpaid principal balance ("UPB") and are collected from the monthly remittances
of the borrower before being paid to the investor. HLI is one of the largest
servicers of government insured and guaranteed loans. These loans receive a
higher servicing fee as compared to conventional loans to compensate for the
additional risks associated with FHA/VA loans (see "-- Servicing Losses on
Investor-Owned Loans").
The following table sets forth the composition of HLI's servicing portfolio
by UPB:
<TABLE>
<CAPTION>
AT DECEMBER 31,(A)
------------------------------------
1993 1994 1995
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
FHA/VA.................................... $ 12,524 $ 15,695 $ 19,880
Conventional.............................. 14,130 20,113 21,041
------- ------- -------
Total........................... $ 26,654 $ 35,808 $ 40,921
======= ======= =======
</TABLE>
- ---------------
(a) Excludes loans purchased not yet on servicing system.
Net servicing revenue increased from $67.0 million to $173.7 million, an
increase of $106.7 million or 159.3%, from 1994 to 1995. This increase was
comprised of a $115.4 million rise in gain on risk management contracts and a
$32.5 million increase in mortgage servicing fees, offset by a $41.2 million
increase in amortization of mortgage servicing rights. The gain on risk
management contracts resulted primarily from a decline in interest rates in the
fourth quarter of 1995 and was substantially offset by a related decrease in the
economic value of the servicing portfolio, which was not reflected in earnings
for the period. The cost of acquiring the right to service mortgage loans
originated by others is capitalized and amortized as a reduction of servicing
fee revenue over the estimated servicing period. The increases in mortgage
servicing fees and amortization of mortgage servicing rights were primarily due
to growth in the HLI's average servicing portfolio during 1995. Average
servicing fees decreased slightly from 0.389% in 1994 to 0.383% in 1995.
At December 31, 1995, HLI serviced approximately 510,000 loans, including
loans purchased not yet on HLI's servicing system, with UPB of $41.6 billion,
compared to approximately 484,000 loans with UPB of $38.0 billion at December
31, 1994, an increase of $3.6 billion, or 9.5%. The average servicing volume
increased from $33.2 billion in 1994 to $39.3 billion in 1995, an increase of
$6.1 billion or 18.4%. Growth in HLI's servicing portfolio has been primarily
generated by wholesale loan production, which includes correspondent, co-issue
and broker channels. HLI also purchases servicing rights in bulk from other
mortgage servicing entities. Bulk purchases totalled $2.3 billion, $5.5 billion
and $0.7 billion in 1993, 1994 and 1995, respectively.
In addition to growth in the servicing portfolio, an increase in late fee
income contributed to the rise in mortgage servicing revenue during 1995. Late
fees are included in the consolidated statement of operations as a component of
mortgage servicing revenue. HLI instituted efforts to improve the collection of
ancillary fee income during the year which contributed to an increase in late
fee charges collected from $10.5 million in 1994 to $14.4 million in 1995. Late
fee income also increased as a result of increases in HLI's servicing portfolio
and average loan balance. The higher average loan balance translates into higher
loan payments on which late fees are based. There was little or no change in the
rate on which late fees were computed during 1995 as compared to 1994.
Net servicing revenue increased from $6.0 million to $67.0 million from
1993 to 1994, an increase of $61 million. This increase was comprised of a $28.7
million growth in mortgage servicing revenue and a $45.7
54
<PAGE> 55
million decrease in amortization of mortgage servicing rights, offset by a $13.4
million reduction in gain on risk management contracts. The growth in servicing
revenue was due to an increase in HLI's average servicing portfolio from 1993 to
1994, as a result of loan production and an increase in the average servicing
fee rate from 0.372% to 0.389%. At December 31, 1993, HLI serviced approximately
368,000 loans with UPB of $28.0 billion, including loans purchased not yet on
HLI's servicing system, compared to approximately 484,000 loans with UPB of
$38.0 billion at December 31, 1994, an increase of $10.0 billion, or 35.7%. The
average servicing volume was $33.2 billion in 1994, as compared to $25.9 billion
in 1993. The decrease in amortization of $45.7 million was due to an increase in
interest rates during 1994 which reduced refinancing activities below the levels
of 1993 and helped to reduce prepayments on HLI's servicing portfolio. High loan
prepayment activity shortens the estimated life of the associated mortgage
servicing right and, accordingly, accelerates the rate of mortgage servicing
amortization. The slower prepayment activity during 1994 increased the value of
HLI's servicing rights and reduced the amount of amortization required in 1994
as compared to 1993.
Risk Management Activities
HLI has a risk management program designed to protect the economic value of
its mortgage servicing portfolio from declines in value due to increases in
estimated prepayment speeds, which are primarily influenced by declines in
interest rates. When loans prepay faster than anticipated, the cash flow HLI
expects to receive from servicing such loans is reduced. Since the value of the
mortgage servicing rights is based on the present value of the cash flows to be
received over the life of the loan, the value of the servicing portfolio
declines as prepayments increase. Prior to 1994, risk management of the mortgage
servicing rights value was principally conducted by BKB as part of a
consolidated risk management program. Through the third quarter of 1995, BKB
continued to manage a portion of the risk associated with the servicing
portfolio.
To implement its risk management objectives, HLI purchases risk management
contracts that increase in value when long-term interest rates decline, or when
prepayment speeds increase above a specified level. During 1994 and 1995, HLI
purchased options on long-term United States Treasury bond futures to protect a
significant portion of the market value of its mortgage servicing portfolio from
a decline in value. The value of HLI's risk management position is designed to
perform inversely with changes in value of mortgage servicing rights due to the
effects of the changes in interest rates. The options were marked to market at
each reporting date with changes in value reported in revenues. HLI recognized a
gain on risk management contracts of $108.7 million in 1995. While the value of
the servicing portfolio declined, the full effect of such decline was not
reflected in HLI's financial results because its value exceeded its book value.
Due to a rising interest rate environment, HLI experienced a $6.7 million loss
related to its risk management contracts in 1994. In 1993, the decline in the
value of mortgage servicing rights substantially exceeded gains on risk
management contracts realized by HLI. The value of the servicing rights was
included in BKB's consolidated risk management program.
HLI recognized a gain on risk management contracts of $108.7 million in
1995, of which $86.5 million was unrealized. During the first quarter of 1996,
long-term interest rates increased, reversing the declining trend which
prevailed during 1995. As a result, through the date of the sale of HLI in March
1996, HLI recognized a loss on risk management contracts of $128.8 million,
which included a reversal of such $86.5 million unrealized gain recognized
during 1995. In 1995 and 1996, changes in the value of HLI's mortgage servicing
rights substantially offset the gain and loss on the risk management contracts.
However, such changes in value were not fully recorded in the financial
statements of HLI because servicing rights are recorded at the lower of
amortized cost or market value.
Net Interest Revenue/Expense
Net interest revenue represents interest earned on warehouse loans and on
mortgage loans held for investment purposes, less interest expense incurred to
fund such loans and certain other assets, including mortgage servicing rights.
HLI's net interest position was negatively impacted by a compression of its net
interest spread from 3.60% in 1993 to 2.57% in 1994 and 1.49% in 1995. In
addition, HLI's net interest revenue and expense position is affected by the
volume of loan originations, which have a direct effect on interest earned on
warehouse loans and interest paid on borrowings. During periods of reduced
production
55
<PAGE> 56
volume, HLI will have lower average balances of interest earning loans and
interest bearing warehouse debt. The entire mortgage loan origination industry
experienced a decline in production from 1993 to 1995. As reported by FNMA,
United States total residential mortgage originations declined from $1,020
billion in 1993 to $769 billion in 1994 and $654 billion in 1995.
During 1995 and 1994, HLI incurred net interest expense of $2.8 million and
$2.4 million, respectively. Interest revenue decreased $7.3 million during 1995
primarily as a result of a decrease in the average rate earned on warehouse
loans from 9.52% in 1994 to 7.78% in 1995. The reduction in interest revenue on
warehouse loans was partially offset by a $2.1 million increase in interest
earned on mortgage loans held for investment and a decrease in interest expense
of $6.8 million resulting from a decline in the average rate paid on HLI's
borrowings from 7.14% in 1994 to 6.89% in 1995.
HLI earned $6.0 million of net interest revenue during 1993 as compared to
$2.4 million of net interest expense in 1994. The change from 1993 to 1994 was
comprised of a decrease in interest revenue of $18.6 million partially offset by
a reduction in interest expense of $10.2 million. The decrease in interest
income was due to a decrease in the average balance of warehouse loans from
$529.7 million in 1993 to $272.0 million in 1994. The impact of decreased
average balances was partially mitigated by an increase in the average rate
earned on warehouse loans from 8.84% in 1993 to 9.52% in 1994 and a $2.2 million
increase in interest revenue on mortgage loans held for investment. The decrease
in interest expense from 1993 to 1994 was due to a reduction in borrowings on
the warehouse line of credit as a result of weaker loan production during 1994.
Net Mortgage Origination Revenue
HLI maintains various loan origination channels, including correspondent
flow and co-issue, brokered, telemarketing, affinity programs and retail
branches. Additionally, HLI purchases servicing rights in bulk from time to
time. HLI has continued to deemphasize its retail branch network in favor of
wholesale production. By primarily relying on wholesale originations, HLI avoids
high fixed costs in periods of lower market volumes as well as the high start-up
costs associated with entering new markets through retail expansion. This shift
to a more variable cost structure is expected to continue as HLI actively
reduces its retail production network. In connection with the sale of HLI, Bank
of Boston agreed to retain its retail production facilities in New England, and
HLI has sold or closed most of its remaining retail branches.
The following table sets forth HLI's origination activity:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
-------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Wholesale:
Correspondent.................................. $ 4,955 $ 3,364 $ 3,778
Co-Issue(a).................................... 2,860 4,285 3,901
Broker......................................... 1,431 498 291
------ ------- -------
Total wholesale........................... 9,246 8,147 7,970
Retail.............................................. 2,125 788 915
------ ------- -------
Total production.......................... $ 11,371 $ 8,935 $ 8,885
====== ======= =======
</TABLE>
- ---------------
(a) Represents the acquisition of servicing rights, not the underlying loans.
Amounts represent the UPB of mortgage debt to which the acquired servicing
rights relate.
Through its correspondent production channel, HLI buys loans from
approximately 500 financial intermediaries. Co-issue loan production is the
purchase of servicing rights from a correspondent subject to contracts to
deliver specified volumes on a monthly or quarterly basis. Under its broker
program, HLI funds loans at closing from a network of approximately 450 mortgage
brokers nationwide.
Net mortgage origination revenue includes gains and losses from sales of
mortgage loans, deferred origination fees and expenses (see "- Salaries and
Employee Benefits") and the gains from excess servicing rights. Net mortgage
origination revenue decreased from $5.0 million in 1994 to $3.4 million in 1995,
or 31.4%, and from $6.2 million in 1993 to $5.0 million in 1994, or 19.0%.
56
<PAGE> 57
During 1995 and 1994, HLI's loan production, excluding co-issue volume, was
$5.0 billion and $4.7 billion, respectively. The majority of these loans were
purchased through HLI's correspondent channel.
The decrease in net mortgage origination revenue from 1993 to 1994 was due
to a decrease in mortgage production during 1994. Loan production volume
decreased from $8.5 billion in 1993 to $4.7 billion in 1994, or 44.7%. The
declining interest rate environment in 1993 prompted a record number of
homeowners to refinance existing mortgages.
Gain on Sales of Servicing Rights
Gain on sales of servicing rights decreased $0.7 million from $10.9 million
in 1994 to $10.2 million in 1995 and increased $10.2 million from $0.7 million
in 1993. HLI sold servicing rights on loans of $1.9 billion, $0.8 billion and
$0.5 billion during 1995, 1994 and 1993, respectively. The sales of servicing
rights during 1994 consisted of primarily retail originated loans, for which a
servicing right asset was not recognized, and therefore there was little or no
basis in the servicing rights sold. The servicing rights sales in 1995 consisted
of a higher percentage of servicing on purchased loans, which had a higher basis
because servicing rights on purchased loans are capitalized. Since gain on sales
of servicing rights is determined as the excess of proceeds from the sale over
HLI's cost basis in the asset, gains will tend to be higher on sales of
servicing rights with little or no cost basis, as was the case for the sales in
1994. HLI's decision to sell mortgage servicing rights depends on a variety of
factors, including the available markets and current prices for such servicing
rights and the working capital requirements of HLI. The likelihood of future
sales of mortgage servicing rights, or the profitability on such sales, cannot
be predicted. HomeSide anticipates that the sale of servicing rights by HLI will
not be a significant component of its business strategy in the future.
Salaries and Employee Benefits
Salaries and employee benefits increased from $40.4 million in 1994 to
$45.4 million in 1995, or 12.4%, and from $33.1 million in 1993 to $40.4 million
in 1994, or 22.1%. Direct loan origination costs, principally salary and
employee benefit costs, are included in the cost basis of the mortgage loans
and, therefore, they are not recognized until the sale of the loans. Including
these capitalized costs, salaries and employee benefits increased from $51.5
million to $56.5 million from 1994 to 1995, or 9.7% and decreased from $56.2
million to $51.5 million from 1993 to 1994, or 8.3%.
The $5.0 million increase, including capitalized costs, in 1995 over 1994
included a $3.9 million increase in salaries and a $1.1 million increase in
benefits. The salary and benefit increases were the result of a larger
production staff needed to support HLI's growing servicing portfolio. Loan
production headcount grew from 498 full time equivalent ("FTE") employees at
December 31, 1994 to 523 FTE employees at December 31, 1995. The increases to
salaries and benefits were partially offset by the outsourcing of certain
default administration and tax payment administration activities during 1995.
HLI determined that the performance of these services on a contracted basis was
more cost effective than maintaining the personnel and infrastructure necessary
to carry out these functions in-house.
The decrease in salaries and benefits from 1993 to 1994 was due to a
reduction of loan production during 1994 and lower incentive compensation
expenses. Loan production headcount fell from 806 at December 31, 1993 to 498 at
December 31, 1994. The decrease in salaries and employee benefits due to reduced
loan demand was partially offset by the assumption of certain risk management
functions formerly provided by BKB and an increased staff required to service a
larger portfolio.
Occupancy and Equipment Expense
Occupancy and equipment expense increased from $9.0 million in 1994 to
$10.0 million in 1995, or 11.1%, due primarily to the acquisition of Bell
Mortgage and the larger servicing operations.
Occupancy and equipment expense increased from $8.0 million in 1993 to $9.0
million in 1994, or 13.1%. This increase included a leasehold reserve of $0.3
million recorded in December 1994 for the planned closing of certain broker
branches that were subsequently closed during 1995.
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<PAGE> 58
Servicing Losses on Investor-Owned Loans
HLI periodically incurs losses attributable to servicing FHA and VA loans
for investors, including actual losses for final disposition of loans that have
been foreclosed or assigned to the FHA or VA and accrued interest on such FHA or
VA loans for which payment has not been received. Servicing losses on investor-
owned loans totaled $2.8 million, $7.2 million and $10.0 million for the years
ended 1993, 1994 and 1995, respectively, primarily representing losses on VA
loans. Because the total principal amount of FHA loans is guaranteed, losses on
such loans are generally limited to expenses of collection. HLI has experienced
minimal losses from FHA loans. In respect of VA loans, the VA guarantees the
initial losses on a loan. The guaranteed amount generally ranges from 20% to 35%
of the original principal balance. Before each foreclosure sale, the VA
determines whether to bid by comparing the estimated net sale proceeds to the
outstanding principal balance and the servicer's accumulated reimbursable costs
and fees. If this amount is a loss and exceeds the guaranteed amount, the VA
typically issues a no-bid and pays the servicer the guaranteed amount. Whenever
a no-bid is issued, the servicer absorbs the loss, if any, in excess of the sum
of the guaranteed principal and the amounts recovered at the foreclosure sale.
HLI's historical loss experience on VA loans has generally been consistent with
industry experience.
In 1995 and 1994, HLI recorded provisions in excess of actual foreclosure
losses. Management believes that HLI has an adequate level of reserve based on
its servicing volume, portfolio composition, credit quality and historical loss
rates, as well as estimated future losses. For an analysis of changes in the
reserve for estimated servicing losses on investor-owned loans for each of the
three years ended December 31, 1995, see Note 4 of Notes to Consolidated
Financial Statements of HLI.
Real Estate Owned Expense
Real estate owned expense increased from $0.3 million in 1994 to $1.1
million in 1995, and decreased from $1.6 million in 1993 to $0.3 million in
1994. Real estate owned expense is incurred from foreclosed properties on which
HLI has taken title and includes declines in the value of the property, as well
as the incurrence of property holding and maintenance costs. The change in real
estate owned expense in 1995 was due primarily to an increase in the average
balance of real estate owned from $1.4 million in 1994 to $1.6 million in 1995.
The decrease from 1993 to 1994 is due to a decline in the average balance of
real estate owned from $3.4 million in 1993 to $1.4 million in 1994. As part of
the HLI Acquisition, BKB retained all real estate owned.
Other Expense
Other expense increased from $19.3 million to $21.9 million, or 13.3%, from
1994 to 1995 and decreased from $22.1 million to $19.3 million, or 12.4%, from
1993 to 1994. The increase in other expense from 1994 to 1995 included increases
of $1.1 million in advertising and public relations, $1.0 million in contracted
services, $0.9 million in software costs and $0.6 million in communication
expenses. These increases were partially offset by a $0.7 million reduction in
loan related expenses. The increase in advertising and public relations expense
was due to a $1.0 million major advertising campaign carried out during 1995 in
addition to normal advertising activity. Contracted services increased due to an
increase in bank service charges for loan payment processing, which increased
with the rise in HLI's servicing volume. Software costs increased as HLI
continued to expand and redesign its computer platform in order to deliver more
efficient and reliable service. The increase in communications expense was due
to higher telephone postage and delivery expenses resulting from higher loan
production levels.
The decline in other expense from 1993 to 1994 was principally due to a
$2.0 million increase in gains from the disposition of foreclosed property.
Gains and losses on the sale of foreclosed property are netted and included as a
component of other expense. Gains and losses on the disposition of foreclosed
property result from the difference between the amount received in satisfaction
of the borrower's obligation upon sale of the property and the amount at which
the property was recorded on HLI's books at the time of the sale. Gains and
losses on the disposition of real estate fluctuate based on regional and
national market conditions at the time each property is being marketed.
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<PAGE> 59
Provision for Income Taxes
HLI recorded a provision for income taxes of $37.9 million and $2.5 million
for 1995 and 1994, respectively, and an income tax benefit of $17.3 million in
1993. The effective income tax rate was 39.2%, 56.4% and 35.5% for 1995, 1994
and 1993, respectively. The difference between these rates and the statutory
federal tax rate is primarily due to state income taxes, net of federal tax
benefit, and the effect on deferred taxes of a change in the federal statutory
rate in 1993. The changes in the provisions for, and benefit from, income taxes
is the result of variances in HLI's pre-tax income and loss for each of the
years presented. For additional information regarding income taxes, refer to
Note 10 of Notes to Consolidated Financial Statements of HLI.
Accounting Changes
Effective January 1, 1993, HLI elected to change its method of valuing
mortgage servicing rights from an undiscounted basis to a discounted basis to
conform its financial reporting to the regulatory accounting rules adopted by
bank regulators in 1993. HLI also adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" on January 1, 1993. On January
1, 1994, HLI changed its method of accounting for mortgage servicing fees from
the cash basis to the accrual basis. See Notes 2 and 10 of Notes to Consolidated
Financial Statements for further discussion of HLI's accounting changes. See
"-- Liquidity and Capital Resources -- New Accounting Standard" for a discussion
of Statement of Financial Accounting Standards No. 122, -- "Accounting for
Mortgage Servicing Rights," which was adopted by HLI in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Overview
HLI's primary sources of cash are revenues earned from the servicing of
mortgage loans, sales of mortgage loans and servicing rights and borrowings
under HLI's warehouse line of credit. HLI has entered into a new credit facility
(see "-- Post Acquisition Financing"). HomeSide anticipates that cash provided
by servicing and sales of mortgage loans and borrowings will be sufficient to
meet its liquidity needs and, accordingly, does not anticipate that sales of
servicing rights will be a significant component of its business strategy in the
future. HLI's primary uses of cash are to fund loan originations and purchases,
purchase bulk servicing rights, repay its warehouse line of credit and pay
general corporate expenses. HLI had a net increase (decrease) in cash of ($4.8
million), $0.3 million and ($0.8 million) in 1995, 1994 and 1993, respectively.
Operations
Net cash provided by (used in) operating activities was ($65.9 million) in
1995, $394.6 million in 1994, and ($110.2 million) in 1993. The decrease in cash
provided by operating activities from 1994 to 1995 was attributable to cash
needed to meet growth in loan origination volume coupled with a reduction in
proceeds on sales of mortgage loans. The increase in cash provided by operating
activities from 1993 to 1994 was due to a reduction in loan demand during 1994,
which diminished HLI cash needs for funding loan production.
Investing
Cash used in investing activities was $125.7 million in 1995, $154.2
million in 1994 and $109.5 million in 1993. The decrease in cash used in
investing activities from 1994 to 1995 was comprised primarily of a $36.8
million increase in proceeds from risk management contracts and a $17.8 million
increase in proceeds from sales of mortgage servicing rights. These cash inflows
were partially offset by a $29.0 million increase in purchases of mortgage
servicing rights. The increase in proceeds from risk management contracts was a
result of a decline in interest rates during 1995 that increased the value of
HLI's risk management contracts and, accordingly, the proceeds received by HLI
upon settlement. The increase in proceeds from sales of mortgage servicing
rights was principally due to an increase in sales activity in 1995 as compared
to 1994. HLI sold servicing rights of $1.9 billion in 1995 as compared to $0.8
billion in 1994. The increase in cash used to purchase mortgage servicing rights
during 1995 is related to an increase in mortgage loans purchased through
59
<PAGE> 60
HLI's warehouse channels as a result of declining interest rates that increased
loan production across the industry.
The increase in cash used in investing activities in 1994 as compared to
1993 was comprised of a $39.4 million increase in purchases of mortgage
servicing rights and a $16.3 million decrease in proceeds from risk management
contracts. The decreases in cash flow were partially mitigated by a $10.2
million increase in proceeds from the sale of mortgage servicing rights. The
increase in cash used to purchase mortgage servicing rights was part of HLI's
overall strategy to increase its servicing portfolio and benefit from economies
of scale. The decrease in proceeds from risk management contracts was a result
of an increase in interest rates during 1994 which negatively impacted the value
of the contracts. The increase in proceeds from the sale of mortgage servicing
rights from 1993 to 1994 was due to an improvement in the market for mortgage
servicing rights during 1994. The low interest rate environment in 1993
depressed the value of the mortgage servicing right market since loans were
being prepaid with a higher frequency.
Financing
Cash provided by (used in) financing activities was $186.8 million in 1995,
($240.2 million) in 1994 and $218.9 million in 1993. Prior to the HLI
Acquisition, the primary source and use of cash related to financing activities
was attributable to the line of credit with Bank of Boston. This line of credit
was used to fund the origination and purchase of mortgage loans until the loans
were sold to investors. The proceeds of such sales were typically used to pay
down the related warehouse debt with any excess retained by HLI. Maximum
borrowings under the line of credit were $1.25 billion. The higher level of
borrowings in 1995 and 1993 were indicative of higher loan production and
purchase volumes during these years as compared to 1994.
Impact of Inflation
Inflation affects HLI primarily through its effect on interest rates since
interest rates normally increase during periods of high inflation and decrease
during periods of low inflation. See "Risk Factors -- Impact of Changes in
Interest Rates".
New Accounting Standard
In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights." This Statement, among other provisions, requires that the value of
mortgage servicing rights associated with mortgage loans originated by an entity
be capitalized as assets, which results in an increase in mortgage origination
revenues. The value of originated mortgage servicing rights is determined by
allocating the total costs of the mortgage loans between the loans and the
mortgage servicing rights based on their relative fair values. Also, the
Statement requires that capitalized servicing rights be evaluated for impairment
based on the fair value of these rights. For the purposes of determining
impairment, mortgage servicing rights that are capitalized after the adoption of
this Statement are stratified based on one or more of the predominant risk
characteristics of the underlying loans. Impairment is recognized through a
valuation allowance for each impaired stratum. HLI adopted this statement
effective January 1, 1996.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- HHI
FOR THE PERIOD APRIL 1, 1996 TO MAY 30, 1996
AND THREE MONTHS ENDED JUNE 30, 1995
GENERAL
HHI, based in Jacksonville, Florida, is the wholly-owned mortgage banking
subsidiary of Barnett and operates as a full service mortgage banking company,
engaged in the origination, sale and servicing of first mortgage loans secured
by residential properties. On March 4, 1996, Barnett entered into an agreement
to sell HHI to HomeSide, Inc. ("HomeSide"). Under the terms of the sale,
HomeSide acquired HHI's and its subsidiaries' servicing portfolio and servicing
platform, its proprietary mortgage servicing software, and Honolulu Mortgage
Company ("Honolulu Mortgage"), a full service mortgage banking company in
Honolulu, Hawaii.
HHI acquired Loan America Financial Corporation ("Loan America" or "LAFC");
a wholesale mortgage banking company with a $4.0 billion servicing portfolio in
October 1994. Headquartered in Miami, Florida, Loan America originates loans
through brokers in twelve states. The acquisition of Loan America represented
HHI's first entry into the wholesale origination business.
In February 1995, HHI acquired BancPLUS Financial Corporation ("BPFC"); a
full service mortgage company with a $13.9 billion servicing portfolio.
Headquartered in San Antonio, Texas, BancPLUS Mortgage Company ("BancPLUS"), a
wholly-owned subsidiary of BPFC, was primarily a retail originator with thirty-
six branch offices in seventeen states. HHI's acquisition of BPFC also included
Honolulu Mortgage, with its $1.7 billion servicing portfolio.
The BancPLUS and Loan America acquisitions were accounted for as purchases
and, accordingly, their results are only included in HHI's results since the
dates of their acquisitions.
On May 31, 1996, Barnett Banks, Inc. (the "parent") sold certain of its
mortgage banking operations, primarily its servicing portfolio and proprietary
mortgage banking software systems to HomeSide, as discussed above. Barnett
received cash and an ownership interest in HomeSide. As a result of the
acquisition of HHI by HomeSide, HHI ceased to operate as a separate Company and
operations for periods subsequent to that date will be included in the results
of operations of HomeSide, Inc. Accordingly, statement of operations data does
not include periods subsequent to May 30, 1996. Comparative information in the
prior year is presented through June 30, 1995 because this was the end of HHI's
1995 second quarter. Reasons for variances which are not attributed solely to
differences in the number of months in the periods presented have been discussed
where appropriate. Reasons for variances due to differences in the number of
months in the periods presented have been noted where applicable.
RESULTS OF OPERATIONS
HHI reported a net loss of $4.0 million for the period April 1, 1996 to May
30, 1996 and a net loss of $3.4 million for the quarter ended June 30, 1995. The
period April 1, 1996 to May 30, 1996 loss was mainly attributable to servicing
hedging costs, while the second quarter 1995 loss was attributable to costs
associated with the BancPLUS acquisition.
NET SERVICING REVENUE
HHI's revenues are primarily earned from servicing mortgage loans for
investors. Servicing activities include collection of mortgage principal,
interest and escrow payments; remitting these payments to investors; and
maintaining records of loans and escrows. Servicing fees are typically expressed
as a percentage of UPB and are collected from the monthly remittances of the
borrower before being paid to the investor. Mortgage servicing income also
includes late charges for delinquent customer payments.
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<TABLE>
The following table sets forth the composition of HHI's servicing
portfolio.
<CAPTION>
AT MAY 30,
1996
----------
(DOLLARS IN
MILLIONS)
<S> <C>
FHA/VA......................................................... $ 5,588
Conventional................................................... 27,494
--------
Total................................................ $ 33,082
========
</TABLE>
Net servicing revenue was $12.7 million for the period April 1, 1996 to May
30, 1996 and $16.7 million for the three months ended June 30, 1995. Mortgage
servicing fees are earned for servicing mortgage loans owned by investors. The
cost of acquiring the right to service mortgage loans originated by others is
capitalized and amortized as a reduction of servicing fee revenue over the
estimated servicing period. The increases in mortgage servicing fees and
amortization of mortgage servicing rights were primarily due to growth in the
servicing portfolio related to the BancPLUS acquisition. The average servicing
fee increased from 0.307% at June 30, 1995 to 0.337% at May 30, 1996.
At May 30, 1996, before the acquisition by HomeSide, HHI serviced
approximately 440,000 loans with UPB of $33.1 billion, compared to approximately
446,000 loans with UPB of $33.1 billion at June 30, 1995 and approximately
243,000 loans with UPB of $18.4 billion at December 31, 1994. Growth in HHI's
servicing portfolio has been primarily generated from the acquisition of
BancPLUS.
SERVICING VALUES
HHI's operating results can be affected by changes in the economic value of
its mortgage servicing portfolio due to increases in prepayment speeds, which
are primarily influenced by interest rates. When loans prepay faster than
anticipated, the estimated future cash flow HHI expected to receive from
servicing such loans is reduced. Since the value of the mortgage servicing
rights is based on the present value of the cash flows to be received over the
life of the loan, the value of the servicing portfolio declines as prepayments
increase.
During second quarter 1995, hedging of the mortgage servicing rights value
was handled by Barnett as part of its overall risk management program. During
this period, no hedges were specifically implemented for risk management of
mortgage servicing rights. During fourth quarter 1995, Barnett and HHI evaluated
the risks, benefits and costs related to servicing hedges and in December 1995
commenced a partial hedging program which continued into the second quarter of
1996. The results of HHI's hedging activities did not have a material effect on
its financial statements for the periods presented.
SECONDARY MARKETING GAIN/LOSS
Gains or losses on the sales of loans result primarily from two factors.
First, HHI may make a loan to a borrower at a price (i.e., interest rate and
discount) which is higher or lower than its would receive if it immediately sold
the loan in the secondary market. HHI adjusts the pricing on its loans depending
on competitive pressure.
Second, gains or losses may result from changes in interest rates which
result in changes in the market value of the loans, or commitments to purchase
loans, from the time the price commitment is given to the borrower until the
time that the loan is sold to investors. HHI uses sophisticated modeling tools
to provide information to hedge this latter interest rate risk. HHI uses forward
delivery contracts for mortgage-backed securities and whole loan sales as
hedging instruments. There is close correlation of risk as the borrower's loan
is used to satisfy the forward delivery contract. HHI's secondary marketing
activities are generally negatively impacted during periods of high interest
rate volatility and periods when there is a significant overall change in the
direction of interest rates.
HHI had losses on the sale of loans of $3.4 million for the period April 1,
1996 to May 30, 1996, compared to gain on sales of loans of $1.0 million for the
three months ended June 30, 1995. The losses incurred during the period April 1,
1996 to May 30, 1996 were due to an increase in long-term interest rates, which
negatively impacted the market value of loans in HHI's pipeline, and competitive
pricing pressures.
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<PAGE> 63
NET INTEREST REVENUE/EXPENSE
HHI recorded net interest expense of $2.3 million and net interest revenue
of $2.2 million for the second quarter ended June 30, 1995 and the period April
1, 1996 to May 30, 1996, respectively. HHI's net interest results are derived
from interest earned on warehouse loans originated by the BancPLUS and Loan
America branches, less interest expense incurred to fund such loans. The
interest expense, following the acquisition of BancPLUS on February 28, 1995,
was incurred at a rate reduced by the benefit for the escrow balances maintained
in the Barnett banks for the servicing portfolio.
NET MORTGAGE ORIGINATION REVENUE
HHI has built a multi-channel production network as part of its strategy to
become a national participant in the mortgage banking business. HHI maintains
several channels, including Barnett's retail bank franchise, a national retail
network obtained from BancPLUS, a national wholesale broker group obtained from
the Loan America traditional correspondent business and production from Honolulu
Mortgage. This varied production base is designed to provide flexibility,
allowing HHI to shift production focus to the most attractive source given
specific market conditions.
<TABLE>
The following table sets forth HHI origination activity:
<CAPTION>
THREE MONTHS ENDED FOR THE PERIOD APRIL 1, 1996
JUNE 30, 1995 TO MAY 30, 1996
------------------ ----------------------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Barnett bank branch retail................ $ 516 $418
BancPLUS retail(a)........................ 143 131
Loan America broker(a).................... 251 302
Honolulu Mortgage(a)...................... 76 59
Correspondent............................. 344 72
------ ----
Total Production..................... $1,330 $982
====== ====
<FN>
- ---------------
(a) Since date of acquisition by HHI.
</TABLE>
Net mortgage origination revenue includes origination fees received from
borrowers, gains and losses from mortgage sales, and capitalized originated
mortgage servicing rights ("OMSR"). OMSR income results from the January 1, 1996
implementation of SFAS 122. The requirements of SFAS 122 are discussed in Note 3
to the interim financial statements. Net mortgage origination revenue was $4.5
million for the second quarter 1995 compared to net mortgage origination expense
of $1.7 million for the period April 1, 1996 to May 30, 1996. The decrease was
attributable to a $10.2 million decline in gain on sale of loans, offset by a
$5.9 million increase in OMSR income. The decline in gains on sales of loans,
excess servicing gains and pricing subsidies was due to an increase in loan
origination and sales from the second quarter 1995 compared to the period April
1, 1996 to May 30, 1996. This volume increase was due to additional loan
origination channels resulting from the acquisition of BancPLUS.
SALARIES AND EMPLOYEE BENEFITS
Salaries and employee benefits decreased from $14.3 million during second
quarter 1995 to $10.4 million during the period April 1, 1996 to May 30, 1996.
The decline is due to the comparison of the two months data versus three months
data, which is a result of the sale of HHI to HomeSide on May 31, 1996.
OCCUPANCY AND EQUIPMENT EXPENSE
Occupancy and equipment expense decreased from $2.4 million to $1.6 million
from second quarter 1995 to the period April 1, 1996 to May 30, 1996. The
decline is due to the comparison of the two months data versus three months
data, which is a result of the sale of HHI to HomeSide on May 31, 1996.
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GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expenses decreased from $12.1 million to $6.8
million from second quarter 1995 to the period April 1, 1996 to May 30, 1996.
The decline is due to the comparison of the two months data versus three months
data, which is a result of the sale of HHI to HomeSide on May 31, 1996.
PROVISION FOR INCOME TAXES
HHI's results of operations are included in Barnett's consolidated income
tax return. HHI's income tax provision and related asset or liability are
computed based on income tax rates as if HHI filed a separate income tax return.
Pursuant to a tax-sharing agreement with Barnett, HHI is reimbursed for the tax
effect of current operating losses utilized in the consolidated return.
During second quarter 1995, HHI recorded a benefit for income taxes of $2.1
million compared to a tax benefit of $0.9 million for the period April 1, 1996
to May 30, 1996. For further information regarding the reconciliation between
statutory federal tax rate and the effective tax rate, refer to Note 4 of Notes
to Consolidated Financial Statements of HHI for the year ended December 31,
1995.
THE PERIOD JANUARY 1, 1996 TO MAY 30, 1996 AND SIX MONTHS ENDED JUNE 30, 1995
RESULTS OF OPERATIONS
During the six-month period ended June 30, 1995, HHI experienced
significant growth in loan servicing and production through its acquisition of
BancPLUS. From December 31, 1994 to May 30, 1996, the servicing portfolio
increased by 80% and production volume increased by 13% from the six months
ended June 30, 1995 to the period January 1, 1996 to May 30, 1996.
HHI reported a net loss of $8.3 million for the period January 1, 1996 to
May 30, 1996 and a net loss of $7.5 million for the six months ended June 30,
1995. The loss for the first five months of 1996 was mainly attributable to
servicing hedging costs, while the loss for the first six months of 1995 was
attributable to costs associated with the BancPLUS acquisition.
Net servicing revenue was $27.8 million for the first six months of 1995
compared to $27.0 million for the period January 1, 1996 to May 30, 1996.
Mortgage servicing fees are earned for servicing mortgage loans owned by
investors. The cost of acquiring the right to service mortgage loans originated
by others is capitalized and amortized as a reduction of servicing fee revenue
over the estimated servicing period. The increases in mortgage servicing fees
and amortization of mortgage servicing rights were primarily due to growth in
the servicing portfolio related to the BancPLUS acquisition. The average
servicing fee increased from 0.307% at June 30, 1995 to 0.337% at May 30, 1996.
Net Interest Revenue/Expense
HHI recorded net interest expense of $2.7 million and net interest revenue
of $4.6 million for the six months ended June 30, 1995 and the period January 1,
1996 to May 30, 1996, respectively. HHI's net interest results are derived from
interest earned on warehouse loans originated by the BancPLUS and Loan American
branches, less interest expense incurred to fund such loans. The interest
expense, following the acquisition of BancPLUS on February 28, 1995, was
incurred at a rate reduced by the benefit for the escrow balances maintained in
the Barnett banks for the servicing portfolio.
Net Mortgage Origination Revenue
The following table sets forth HHI's origination activity:
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<PAGE> 65
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
------------ FOR THE PERIOD JANUARY 1,
JUNE 30, 1995 1996 TO MAY 30, 1996
------------- -------------------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Barnett bank branch retail........................ $1,053 $ 955
BancPLUS retail(a)................................ 335 323
Loan America broker(a)............................ 629 680
Honolulu Mortgage(a).............................. 159 142
Correspondent..................................... 710 438
------ ------
Total production........................ $2,886 $2,538
====== ======
<FN>
- ---------------
(a) Since date of acquisition by HHI.
</TABLE>
Net mortgage origination revenue includes origination fees received from
borrowers, gains and losses from mortgage sales, and capitalized originated
mortgage servicing rights ("OMSR"). OMSR income results from the January 1, 1996
implementation of SFAS 122. The requirements of SFAS 122 are discussed in Note 3
to the interim financial statements. Net mortgage origination revenue increased
from $7.5 million to $7.8 million from the first six months of 1995 to the
period January 1, 1996 to May 30, 1996. This volume increase was due to
additional loan origination volume resulting from the acquisition of BancPLUS.
Salaries and Employee Benefits
Salaries and employee benefits increased from $23.4 million during the
first six months of 1995 to $25.2 million during the period January 1, 1996 to
May 30, 1996. The salary and benefit increased was the result of an increase in
loan origination activity from the first six months of 1995 versus the period
January 1, 1996 to May 30, 1996. For the first six months of 1995, origination
volume was $2,250 million versus $2,538 million for the period January 1, 1996
to May 30, 1996.
Occupancy and Equipment Expense
Occupancy and equipment expense decreased from $3.9 million to $3.7 million
for the first six months of 1995 compared to the period January 1, 1996 to May
30, 1996.
General and Administrative Expense
General and administrative expenses increased from $20.4 million to $20.7
from the first six months of 1995 to the period January 1, 1996 to May 30, 1996.
Provision for Income Taxes
During the first six months of 1995, HHI recorded a benefit for income
taxes of $2.9 million compared to a tax benefit of $2.5 million for the period
January 1, 1996 to May 30, 1996. For further information regarding the
reconciliation between the statutory federal tax rate and the effective tax
rate, refer to Note 4 of Notes to Consolidated Financial Statements of HHI for
the year ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
Overview
HHI's primary sources of cash are revenues earned from the servicing of
mortgage loans, sales of mortgage loans and servicing rights, which historically
have offered a high measure of liquidity, and borrowings under HHI's line of
credit. HHI's primary uses of cash are to fund loan originations and purchases,
repay its lines of credit and pay general corporate expenses. HHI had a net
increase in cash of $9.6 million for the six months ended June 30, 1995 and a
net decrease in cash of $3.8 million for the period January 1, 1996 to May 30,
1996.
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<PAGE> 66
Operations
Net cash used in operating activities was $57.0 million for the six months
ended June 30, 1995 and net cash provided by operating activities was $211.0
million for the period January 1, 1996 to May 30, 1996. The cash used in
operating activities during the first six months of 1995 was attributable to
cash needed to meet growth in loan origination volume which related to the
acquisition of BancPLUS in February 1995. The cash provided from operating
activities for the period January 1, 1996 to May 30, 1996 was attributable to an
increase in loan sales.
Investing
Cash used in investing activities was $171.5 million the first six months
of 1995, primarily due to the acquisition of BancPLUS, and $9.3 million for the
period January 1, 1996 to May 30, 1996, primarily due to an increased servicing
portfolio.
Financing
Cash provided by financing activities was $238.2 million during the first
six months of 1995 compared to cash used in financing activities of $205.4
million for the period January 1, 1996 to May 30, 1996. The primary sources and
uses of cash related to financing activities are the lines of credit with
Barnett and its affiliates, to which some of HHI's assets are pledged as
collateral. These lines of credit are used to fund the origination and purchase
of mortgage loans until the loans are sold to investors. The proceeds of such
sales are typically used to pay down the related warehouse debt with any excess
retained by HHI. There was a net increase of $70.8 million in the lines of
credit for the six months ended June 30, 1995. Additionally, cash provided as
capital contributions from Barnett were $167.3 million for the six months ended
June 30, 1995 and $28.2 million for the period January 1, 1996 to May 30, 1996,
respectively. The 1995 contribution was to fund the acquisition of BancPLUS and
the 1996 contribution was primarily to fund servicing hedging activities.
THREE YEARS ENDED DECEMBER 31, 1995
GENERAL
Prior to May 31, 1996, HHI was a wholly-owned mortgage banking subsidiary
of Barnett and a full service mortgage banking company, engaged in the
origination, sale and servicing of first mortgage loans secured by residential
properties. On March 4, 1996, Barnett entered into an agreement to sell HHI to
the Issuer. At the closing of the HHI Acquisition, the Issuer acquired HHI's and
its subsidiaries' $33.4 billion servicing portfolio and servicing platform, its
proprietary mortgage servicing software and Honolulu Mortgage Company ("Honolulu
Mortgage"), a full service mortgage banking company in Honolulu, Hawaii.
HHI acquired Loan America Financial Corporation ("Loan America" or "LAFC"),
a wholesale mortgage banking company with a $4.0 billion servicing portfolio in
October 1994. Headquartered in Miami, Florida, Loan America originated loans
through brokers in twelve states. The acquisition of Loan America represented
HHI's first entry into the wholesale origination business.
In February 1995, HHI acquired BancPLUS Financial Corporation ("BPFC"), a
full service mortgage company with a $13.9 billion servicing portfolio.
Headquartered in San Antonio, Texas, BancPLUS Mortgage Company ("BancPLUS"), a
wholly-owned subsidiary of BPFC, was primarily a retail originator with thirty-
six branch offices in seventeen states. HHI's acquisition of BPFC also included
Honolulu Mortgage, with its $1.7 billion servicing portfolio.
The BancPLUS and Loan America acquisitions were accounted for as purchases
and, accordingly, their results are only included in HHI's results since the
dates of their acquisitions. On May 31, 1996, BPFC was merged into BancPLUS,
which in turn was merged, together with Loan America, into HLI.
In connection with the HHI Acquisition, HHI transferred all of its
servicing rights to HLI, except for the servicing of GNMA loans, which it
retained. HomeSide currently believes that HHI will not in the future acquire
any additional servicing rights.
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RESULTS OF OPERATIONS
For purposes of this "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- HHI" the term "HHI" means HHI and its
subsidiaries prior to the closing of the HHI Acquisition.
During 1993, 1994 and 1995, HHI experienced significant growth through its
acquisitions of BancPLUS and Loan America. From 1993 to 1995, the servicing
portfolio increased by 155% and production volumes increased by 72%.
HHI reported a net loss of $20.4 million in 1995, a net loss of $2.1
million in 1994 and net income of $0.1 million in 1993. The net loss in 1995 was
mainly attributable to costs associated with the BancPLUS acquisition and
secondary market losses, partially offset by a $9.1 million gain on the sales of
servicing rights.
Net Servicing Revenue
HHI's revenues were primarily earned from servicing mortgage loans for
investors. Servicing activities include collection of mortgage principal,
interest and escrow payments; remitting these payments to investors; and
maintaining records of loans and escrows. Servicing fees are typically expressed
as a percentage of UPB and are collected from the monthly remittances of the
borrower before being paid to the investor. Mortgage servicing income also
includes late charges assessed for delinquent customer payments.
<TABLE>
The following table sets forth the composition of HHI's servicing
portfolio:
<CAPTION>
AT DECEMBER 31,
-----------------------------
1993 1994 1995
---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
FHA/VA....................................... $ 1,032 $ 1,082 $ 6,023
Conventional................................. 12,053 17,329 27,388
------- ------- -------
Total.............................. $13,085 $18,411 $33,411
======= ======= =======
</TABLE>
Net servicing revenue increased from $29.4 million to $69.4 million, or
136% from 1994 to 1995. This increase was comprised of a $9.1 million increase
in gain on the sales of servicing and a $61.4 million growth in mortgage
servicing fees, offset by a $30.5 million increase in amortization of mortgage
servicing rights. Mortgage servicing fees are earned for servicing mortgage
loans owned by investors. The cost of acquiring the right to service mortgage
loans originated by others is capitalized and amortized as a reduction of
servicing fee revenue over the estimated servicing period. The increases in
mortgage servicing fees and amortization of mortgage servicing rights were
primarily due to growth in HHI's servicing portfolio during 1995. The average
servicing fee increased from 0.259% in 1993 to 0.261% in 1994 and to 0.277% in
1995.
At December 31, 1995, HHI serviced approximately 446,000 loans with UPB of
$33.4 billion, compared to approximately 243,000 loans with UPB of $18.4 billion
at December 31, 1994. Growth in HHI's servicing portfolio was primarily
generated from the acquisition of BancPLUS.
The 1995 gain on the sales of servicing is a result of two servicing sales
totalling $1.2 billion of UPB. There were no servicing sale gains during 1994 or
1993. HHI's decision to sell mortgage servicing rights depended on a variety of
factors, including the available markets and current prices for such servicing
rights and the working capital requirements of HHI.
Net servicing revenue increased from $27.3 million in 1993 to $29.4 million
in 1994, or 8%. This increase was partially due to the acquisition of Loan
America and its $4.0 billion servicing portfolio in October 1994. At December
31, 1993, HHI serviced approximately 193,000 loans with UPB of $13.1 billion.
Risk Management Activities
HHI has actively monitored and managed risk of loss related to the value of
its mortgage servicing portfolio and its origination and subsequent sale of
loans into the secondary market.
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<PAGE> 68
Servicing Values
HHI's operating results have been affected by changes in the economic value
of its mortgage servicing portfolio due to increases in prepayment speeds, which
are primarily influenced by interest rates. When loans prepay faster than
anticipated, the estimated cash flow HHI expected to receive from servicing such
loans is reduced. Since the value of the mortgage servicing rights is based on
the present value of the cash flows to be received over the life of the loan,
the value of the servicing portfolio declines as prepayments increase.
During 1993, 1994 and most of 1995, hedging of the mortgage servicing
rights value was handled by Barnett as part of its overall risk management
program. During this period, no hedges were specifically implemented for risk
management of mortgage servicing rights. During 1995, Barnett and HHI evaluated
the risks, benefits and costs related to servicing hedges and in December 1995
commenced a partial hedging program. While the market value of HHI's servicing
portfolio declined, such decline was not reflected in HHI's financial results
because its market value exceeded its book value.
Secondary Marketing Gain/Loss
Gains or losses on the sales of loans result primarily from two factors.
First, HHI may have made a loan to a borrower at a price (i.e., interest rate
and discount) which is higher or lower than it would have received if it
immediately sold the loan in the secondary market. HHI adjusted the pricing on
its loans depending on competitive pressure. Generally, prior to the acquisition
of Loan America at the end of 1994 and BancPLUS in the beginning of 1995, HHI
priced its loans based on interest rate levels prevalent in the secondary
market. After the acquisition of those companies, HHI began aggressively
competing in national markets where pricing below the secondary market often
occurred, especially for loans sourced through wholesale brokers. Price
competition intensified in 1994 due to the sharp decline in origination volumes
and industry overcapacity and aggressive price pressure continued through 1995.
Second, gains or losses may result from changes in interest rates which
result in changes in the market value of the loans, or commitments to purchase
loans, from the time the price commitment is given to the borrower until the
time that the loan is sold to investors. HHI has employed sophisticated
modelling tools to provide information to hedge this latter interest rate risk.
HHI has employed forward delivery contracts for mortgage-backed securities and
whole loan sales as hedging instruments. There is close correlation of risk as
the borrower's loan was used to satisfy the forward delivery contract. HHI's
secondary marketing activities have been generally negatively impacted during
periods of high interest rate volatility and periods when there is a significant
overall change in the direction of interest rates, both of which occurred in
1994 and 1995. Additionally, during the period following the integration of
BancPLUS' secondary marketing operations during 1995, the magnitude of the
conversion task caused a temporary operational delay in selling borrowers' loans
into the secondary market, reducing the normally close correlation of loans to
forward delivery contracts. This condition had an additional temporary negative
impact on results from sales of mortgages.
Net Interest Revenue/Expense
In 1995, HHI recorded net interest revenue of $6.8 million, an increase
from net interest expense of $1.5 million in 1994. The net interest revenue was
mainly derived from interest earned on warehouse loans originated by the
BancPLUS and Loan America branches, less interest expense incurred to fund such
loans. The interest expense for 1995 was incurred at a rate reduced by the
benefit for the escrow balances maintained in the Barnett banks for the
servicing portfolio. Prior to 1995, when the primary origination source was the
Barnett bank branches, HHI's net interest revenue was comprised of interest
income on a small portfolio of mortgage loans that HHI held for investment
purposes, offset by interest expense on a line of credit from Barnett to fund
servicing acquisitions and servicing advances since Barnett banks held loans
until they were sold by HHI.
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<PAGE> 69
Net Mortgage Origination Revenue
HHI has built a multi-channel production network as part of its strategy to
become a national participant in the mortgage banking business. Until the HHI
Acquisition, HHI maintained several channels, including Barnett's retail bank
franchise, a national retail network obtained from BancPLUS, a national
wholesale broker group obtained from the Loan America, traditional correspondent
business and production from Honolulu Mortgage. This varied production base was
designed to provide flexibility, allowing HHI to shift production focus to the
most attractive source given specific market conditions. The following table
sets forth HHI's origination activity:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1993 1994 1995
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Barnett bank branch retail...................... $3,360 $2,559 $1,932
BancPLUS retail(a).............................. -- -- 606
Loan America broker(a).......................... -- 401 1,386
Honolulu Mortgage(a)............................ -- -- 244
Correspondent................................... -- 450 1,599
------ ------ ------
Total production........................... $3,360 $3,410 $5,767
====== ====== ======
</TABLE>
- ---------------
(a) Since date of acquisition by HHI.
Net mortgage origination revenue includes origination fees received from
borrowers and gains and losses from sales of mortgage loans. Net mortgage
origination revenue decreased from $4.0 million to $3.2 million, or 20% from
1994 to 1995. The decrease was comprised of a $14.6 million decrease in gains on
sales of loans, offset by a $13.8 million increase in loan origination fees. The
decline in gains on sales of loans, excess servicing gains and pricing subsidies
was due to an increase in loan originations and sales over 1994. This volume
increase was driven by the acquisitions of BancPLUS and Loan America. Prior to
October 1994, the primary source of loan originations was the Barnett bank
retail network, and related origination fees were recognized by such banks. The
BancPLUS acquisition in February 1995 resulted in HHI collecting and recording
the origination fee income for loans originated through these channels. Net
mortgage origination revenue decreased from $6.0 million to $4.0 million, or
33%, from 1993 to 1994. The acquisition of Loan America in late 1994 resulted in
a $3.0 million increase in origination fees from 1993; however, this was offset
by a $5.0 million decrease in gain on the sale of loans.
Salaries and Employee Benefits
Salaries and employee benefits increased from $17.5 million in 1994 to
$53.1 million in 1995 and increased from $13.9 million in 1993 to $17.5 million
in 1994. The salary and benefit increases were the result of additional
employees assumed in the 1994 Loan America and 1995 BancPLUS acquisitions. Total
employee headcount grew from 464 FTE employees at December 31, 1993 to 555 FTE
employees at December 31, 1994 to 1,341 FTE employees at December 31, 1995. The
increase in the 1995 headcount was net of approximately 200 job eliminations
resulting from the consolidation of the administrative and operational functions
of the three mortgage companies that occurred throughout the year.
Occupancy and Equipment Expense
Occupancy and equipment expense increased from $2.7 million in 1994 to $6.0
million in 1995 due to the increases in rental and depreciation expense related
to assets and production offices acquired in the acquisition of BancPLUS in
February 1995.
Occupancy and equipment expense increased from $1.8 million in 1993 to $2.7
million in 1994 due to the increases in rental and depreciation expense related
to assets and production offices acquired in the acquisition of Loan America in
October 1994.
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General and Administrative Expense
General and administrative expenses increased from $14.9 million in 1994 to
$41.8 million in 1995, and increased from $12.4 million in 1993 to $14.9 million
in 1994. The increases in both 1995 and 1994 were largely a result of the
acquisition of Loan America and BancPLUS.
Provision for Income Taxes
HHI's results of operations are included in Barnett's consolidated income
tax return. HHI's income tax provision and related asset or liability are
computed based on income tax rates as if HHI filed a separate income tax return.
Pursuant to a tax-sharing agreement with Barnett, HHI is reimbursed for the tax
effect of current operating losses utilized in the consolidated return.
In 1995, HHI recorded a benefit for income taxes of $9.6 million compared
to a tax benefit of $0.5 million for 1994. The increased benefit was
attributable to the significantly higher operating loss reported in 1995.
Comparatively, a tax provision of $0.1 million was recorded in 1993 due to the
reported $0.2 million net income before income taxes. For additional information
regarding the reconciliation between the statutory federal tax rate and the
effective tax rate, refer to Note 4 of Notes to Consolidated Financial
Statements of HHI.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Prior to the HHI Acquisition, HHI's primary sources of cash were revenues
earned from the servicing of mortgage loans, sales of mortgage loans and
servicing rights, which historically have offered a high measure of liquidity,
and borrowings under HHI's lines of credit. Prior to the HHI Acquisition, HHI's
primary uses of cash are to fund loan originations and purchases, repay its
lines of credit and pay general corporate expenses. HHI had a net increase of
cash of $11.1 million and $2.4 million in 1995 and 1994, respectively.
Operations
Net cash used in operating activities was $185.5 million in 1995, $39.0
million in 1994 and $6.3 million in 1993. The increase in cash used in operating
activities from 1994 to 1995 was attributable to cash needed to meet growth in
loan origination volume which was related to the acquisition of BancPLUS, a full
year impact of the October 1994 acquisition of Loan America, and increased
correspondent business. The $32.7 million increase from 1993 to 1994 was
similarly attributable to increased loan origination volume from Loan America in
the fourth quarter of 1994 and the first time entry into the correspondent
business.
Investing
Cash used in investing activities was $182.3 million in 1995, $83.3 million
in 1994 and $36.3 million in 1993. The increase in cash used is primarily due to
the cost of the acquisitions of BancPLUS in 1995 and Loan America in 1994. The
increase in cash used to purchase BancPLUS and Loan America was part of HHI's
overall strategy to increase its servicing portfolio and nationwide loan
originations.
Financing
Cash provided by financing activities was $378.9 million in 1995, $124.8
million in 1994 and $43.0 million in 1993. Prior to the HHI Acquisition, the
primary source and use of cash related to financing activities was attributable
to the lines of credit with Barnett and its affiliates. The net increase in the
lines of credit with Barnett was $211.7 million in 1995, $65.0 million in 1994,
and $43.0 million in 1993. The higher level of borrowings in 1995 and 1994 are
indicative of increasingly higher loan production and purchase volumes during
these years.
Additionally, cash provided as capital contributions from Barnett increased
from $0 in 1993 to $59.8 million in 1994 and $167.2 in 1995. These contributions
were provided primarily for the acquisitions of BancPLUS in 1995 and Loan
America in 1994.
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<PAGE> 71
Impact of Inflation
Inflation has affected HHI primarily through its effect on interest rates
since interest rates normally increase during periods of high inflation and
decrease during periods of low inflation. See "Risk Factors -- Impact of Changes
in Interest Rates".
New Accounting Standard
In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights." This Statement, among other provisions, requires that the value of
mortgage servicing rights associated with mortgage loans originated by an entity
be capitalized as assets, which results in an increase in mortgage origination
revenues. The value of originated mortgage servicing rights is determined by
allocating the total costs of the mortgage loans between the loans and the
mortgage servicing rights based on their relative fair values. Also, the
Statement requires that capitalized servicing rights be evaluated for impairment
based on the fair value of these rights. For purposes of determining impairment,
mortgage servicing rights that are capitalized after the adoption of this
Statement are stratified based on one or more of the predominant risk
characteristics of the underlying loans. Impairment is recognized through a
valuation allowance for each impaired stratum. HHI adopted this Statement
effective January 1, 1996. The actual effect of implementing this Statement on
HHI's financial position and results of operations will depend on factors
determined at the end of a reporting period, including the amount and mix of
originated and purchased production, the level of interest rates and market
estimates of future prepayment rates.
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<PAGE> 72
INDUSTRY OVERVIEW
INTRODUCTION
Mortgage banking is a specialized branch of the financial services industry
which primarily involves (1) originating and purchasing mortgage loans
("origination" and/or "production"); (2) selling the originated mortgages to
third parties either as mortgage-backed securities or as whole loans ("secondary
marketing"); (3) servicing of mortgage loans on behalf of the ultimate
purchasers, which includes the collection and disbursement of payments of
mortgage principal and interest and the collection of payments of taxes and
insurance premiums to pay property taxes and insurance premiums and the
performance of other attendant administrative functions (collectively,
"servicing"); and (4) the purchase and sale of the rights to service mortgage
loans.
Mortgage bankers originate loans generally through two channels: wholesale
and retail. Wholesale origination involves the origination of mortgage loans
from sources other than homeowners, including mortgage brokers and other
mortgage lenders. Retail origination typically includes (i) networks of retail
loan offices with sales staff that solicit business from homeowners, realtors,
builders, and other real estate professionals, (ii) centers that use
telemarketing, direct mail, and advertising to market loans directly to home
buyers or homeowners, (iii) affinity and co-branding partnerships, and (iv)
corporate relocations. Once originated, mortgage bankers hold the loans
temporarily ("warehousing") until they are sold, typically earning an interest
spread equal to the difference between the loan rate and the cost of financing.
Each loan is sold either excluding or including the associated right to service
the loan ("servicing retained" or "servicing released," respectively).
Mortgage bankers rely mainly on short-term borrowings, such as warehouse
lines, to finance the origination of mortgages that are then typically sold.
Mortgage bankers also borrow on a longer term basis to finance their servicing
assets and working capital requirements. Revenues consist primarily of those
related to servicing and, to a lesser extent, fees and interest spreads from
originations. The major expenses of a mortgage banker include costs of
financing, operating costs related to origination and servicing and the
amortization of mortgage servicing rights.
Mortgage bankers typically seek to retain the rights to service the loans
they originate and to acquire rights to service additional loans in order to
generate recurring fee income. The purchase and sale of servicing rights can
occur on a loan by loan basis ("flow") or on a portfolio (group of loans) basis
("bulk" or "mini-bulk"). Prices for servicing rights are typically stated as a
multiple of the servicing fee or as a percentage of the outstanding UPB for a
group of mortgage loans. Values of servicing portfolios are determined on the
basis of the present value of the servicing fee income stream (net of servicing
costs) expected to be received over the estimated life of the loans. The assets
of a mortgage banking company consist primarily of loans in warehouse and the
value of the servicing rights purchased ("purchased mortgage servicing rights"
or "PMSR") or originated ("originated mortgage servicing rights" or "OMSR").
MORTGAGE MARKET
Mortgage bankers operate in the second largest debt market in the world,
exceeded only by the United States national debt. One to four family residential
mortgage debt in the United States grew to over $3.6 trillion in 1995 from $1.7
trillion in 1985, approximately a 8% compounded annual growth rate. Management
believes that the industry category of one to four family residential mortgage
debt is relevant to HomeSide as that is the industry category on which
substantially all of HomeSide's business is based.
Over the past five years mortgage bankers have emerged as the dominant
players in the United States' mortgage origination and servicing business.
Mortgage bankers held market shares of 55% and 41%, respectively, of the United
States' residential mortgage origination and servicing markets in 1995, up from
35% and 37% in 1990. The bulk of the remaining origination and servicing market
share is held by commercial banks and thrifts. The mortgage bankers' market
share improvement began in the late 1980s and early 1990s when the thrift
industry, historically the largest provider of residential mortgage loans,
experienced serious financial difficulties. Mortgage bankers expanded market
share not only by supplanting thrifts as the primary
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mortgage originators and servicers in the marketplace but also by purchasing the
mortgage banking operations and assets of certain of these entities. Mortgage
bankers gained additional momentum and increased their market share during the
decline in interest rates in the early 1990s.
Although mortgage loan demand is affected by a number of factors, including
economic conditions, demographics and consumer confidence, it is most heavily
influenced by interest rates and correlates inversely with interest rate
movements. When mortgage rates dropped below 10% in 1990, mortgagors began to
seek mortgages at lower interest rates, resulting in a growing refinancing boom
that lasted through 1993.
TOTAL RESIDENTIAL MORTGAGE ORIGINATIONS
<TABLE>
<CAPTION>
PURPOSE OF MORTGAGE(B)
-----------------------------
PURCHASE REFINANCING FIXED ADJUSTABLE
(% OF TOTAL) (% OF TOTAL) RATE(B)(C)(E) RATE(B)(D)(E)
TOTAL ------------ -------------- ------------- --------------
ORIGINATIONS(A)
---------------------
(DOLLARS IN BILLIONS)
<S> <C> <C> <C> <C> <C>
1985...................... $290 82% 18% 12.42% 10.04%
1986...................... 499 68 32 10.18 8.42
1987...................... 507 71 29 10.20 7.82
1988...................... 446 82 18 10.33 7.90
1989...................... 453 81 19 10.32 8.80
1990...................... 458 87 13 10.13 8.36
1991...................... 562 70 30 9.25 7.10
1992...................... 894 52 48 8.40 5.63
1993...................... 1,020 45 55 7.33 4.59
1994...................... 769 68 32 8.36 5.33
1995...................... 636 75 25 N/A N/A
</TABLE>
- ---------------
(a) Source: FNMA
(b) Sources: Board of Governors of the Federal Reserve System; FHLMC; Federal
Home Loan Bank of San Francisco.
(c) 30-year conventional contract loan rate with 20% down payment.
(d) 1-year Treasury-indexed conventional contract loan rate with 20% down
payment.
(e) Figures are annual averages of monthly data.
SECONDARY MORTGAGE MARKETS
The secondary mortgage market and its evolution have been significantly
influenced by two government-sponsored enterprises, the Federal National
Mortgage Association ("FNMA" or "Fannie Mae") and the Federal Home Loan Mortgage
Corporation ("FHLMC" or "Freddie Mac"), and one government agency, the
Government National Mortgage Association ("GNMA" or "Ginnie Mae") (collectively,
the "Agencies"). Through these entities, the United States government provides
support and liquidity to the market for residential mortgage debt.
Mortgage originators sell their loans directly to FNMA and FHLMC either as
whole loans or, more typically, as pools of loans used to collateralize
mortgage-backed securities ("MBS") issued or guaranteed by these entities.
Similarly, the originators can issue MBS collateralized by pools of loans that
are guaranteed by GNMA. In order to effect these sales or obtain these
guarantees, the originator must underwrite its loans to conform ("conforming
loans") with standards established by FNMA or FHLMC or by the Federal Housing
Administration ("FHA") or Veterans Administration ("VA") in the case of GNMA.
All loans other than FHA and VA loans ("government loans") are considered
conventional loans. Loans with principal balances exceeding Agency guidelines
("jumbo loans"), currently in excess of $207,000, are sold to private investors
or aggregated into pools and sold as MBS.
The role of the Agencies has grown substantially over the past ten years.
In 1994, FNMA, FHLMC, and GNMA mortgage-backed securities accounted for, in the
aggregate, $1.4 trillion, or 42.0% of total residential
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mortgage debt outstanding, approximately a fivefold increase from $287 billion
ten years earlier. The mortgage banking industry relies heavily on these
Agencies to provide liquidity.
There are a number of other participants in the market that primarily
purchase MBS. These participants include institutional investors such as life
insurance companies, pension funds and mutual funds. More recently, investors
that purchase pools of loans to collateralize MBS issued in their own name
("private investor securities") have entered the market. The development of the
private investor securities market has provided mortgage bankers the liquidity
essential to effect the sale of the loans the mortgage banker originates that do
not conform ("non-conforming") to Agency guidelines.
MORTGAGE BANKING MARKET CHARACTERISTICS
The mortgage banking market is highly fragmented. Despite the market share
growth of the industry as a whole, no single company controls or dominates the
market. In 1995 the largest originator represented 5.2% of the market and the
largest servicer represented 3.7%, while the top 25 originators and servicers
represented 38.1% and 39.1% of their markets, respectively.
TOP 10 ORIGINATORS AND SERVICERS
(DOLLARS IN BILLIONS)
<TABLE>
<C> <S> <C> <C> <C> <C>
1995 ORIGINATIONS SERVICING PORTFOLIO AT DECEMBER 31, 1995
1 Norwest Mortgage................. $ 34.2 1 Countrywide Funding.............. $ 134.0
2 Countrywide Funding.............. 31.5 2 General Electric Mortgage........ 109.5
3 Prudential Home Mortgage......... 15.7 3 Norwest Mortgage................. 107.4
4 Fleet Mortgage................... 14.9 4 Fleet Mortgage................... 105.5
5 Chase Manhattan Mortgage......... 13.9 5 Prudential Home Mortgage......... 81.8
6 Chemical Mortgage................ 13.3 6 NationsBank...................... 81.4
7 NationsBank...................... 11.0 7 Bank of America.................. 63.1
8 Bank of America.................. 10.3 8 Home Savings of America.......... 60.7
9 BancBoston Mortgage.............. 8.9 9 Chase Manhattan Mortgage......... 59.4
10 North American Mortgage.......... 7.6 10 Chemical Mortgage................ 57.2
</TABLE>
- ---------------
Source: National Mortgage News.
Mortgage bankers operate in a highly competitive market. The underwriting
guidelines and servicing requirements set by the participants in the secondary
markets are standardized. As a result, mortgage banking products (i.e., mortgage
loans and the servicing of those loans) have become difficult to differentiate.
Therefore, mortgage bankers compete primarily on the basis of price or service,
making effective cost management essential.
Mortgage bankers generally seek to develop cost efficiencies in one of two
ways: economies of scale or specialization. Large full service national or
regional mortgage bankers have sought economies of scale through an emphasis on
wholesale originations, the introduction of automated processing systems and
expansion through acquisition. Smaller companies frequently identify and pursue
a particular expertise or customer base in an attempt to create a market niche.
RECENT TRENDS
The introduction of significant technological improvements to the mortgage
banking industry began in the mid 1980s. From the use of laptop computers for
originations to the electronic scanning of loan documents, technological
advances have allowed mortgage bankers to accommodate higher volumes of
business. This trend has continued, contributing to the consolidation in
mortgage banking. The automation of many functions in mortgage banking,
especially those related to servicing, has reduced costs significantly for
industry participants.
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Just as declining interest rates contributed to the growth of the mortgage
bankers' role in the early 1990s, rising interest rates in 1994 caused a
reduction in overall demand for mortgage loans, particularly refinancings. Many
mortgage bankers had expanded their operations in response to the increased
refinancing activities of 1992 and 1993. The contraction of the refinancing
demand in 1994 created substantial excess capacity in the industry, resulting in
further industry consolidation.
Many mortgage bankers that were not low cost, high volume producers or did
not operate in a low cost specialized field experienced earnings declines during
this period, causing many to exit the business or to be acquired. Surviving cost
effective firms purchased servicing portfolios or other companies to expand
their servicing economies of scale, while others acquired market niche
operations. As evidence of this consolidation, the top 25 mortgage loan
servicers increased their market share from 21% in 1990 to 39% in 1995.
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BUSINESS
OVERVIEW
The Issuer was formed on December 11, 1995 to acquire HLI, the mortgage
banking subsidiary of Bank of Boston. On March 15, 1996, the Issuer completed
the HLI Acquisition. On March 4, 1996, the Issuer entered into an agreement to
acquire HHI, the mortgage banking subsidiary of Barnett. On May 31, 1996, the
Issuer completed the HHI Acquisition. The Issuer's executive offices are located
at 7301 Baymeadows Way, Jacksonville, Florida 32256, telephone number (904)
281-3000.
The combined originations and servicing of HLI and HHI for the year ended
and at December 31, 1995 would have been $14.7 billion and $75.0 billion,
respectively. At its current size, HomeSide would have ranked as the 5th largest
mortgage loan originator and as the 7th largest mortgage loan servicer in the
United States for 1995 based on data published by National Mortgage News.
HomeSide expects that the acquisition and integration of HLI and HHI will
allow it to realize improved economies of scale in servicing costs, increase its
productivity by converting to HHI's proprietary servicing software system and
expand and diversify its variable cost origination channels. HomeSide is in the
process of consolidating servicing operations and converting to HHI's
proprietary servicing software system. Once this conversion is completed, this
system is expected to increase HomeSide's servicing capacity to accommodate
approximately twice the number of loans in the combined portfolio of HLI and
HHI. HomeSide will have exclusive access through a correspondent relationship to
BKB retail and Barnett retail and broker origination channels for an initial
term of five years, subject to certain limitations. The combined origination and
servicing operations of HLI and HHI are expected to enhance HomeSide's national
presence and increase its visibility to consumers and mortgage market
participants.
HomeSide's business consists primarily of:
- Mortgage production: the origination and purchase of residential single
family mortgage loans through all major channels including correspondents
(including BKB and Barnett), mortgage brokers, co-issue partners,
telemarketing, affinity programs and retail branches;
- Secondary marketing: the sale of residential single family mortgage loans
as pools underlying mortgage-backed securities guaranteed or issued by
governmental or quasi-governmental agencies or as whole loans to
investors; and
- Servicing: the administration, collection and remittance of monthly
mortgage principal and interest payments and the collection and payment
of property taxes and insurance premiums and the management of certain
loan default activities.
HomeSide's business strategy is focused on building its origination and
servicing business to benefit from the economies of scale inherent in the
business through growth in its wholesale and retail origination channels, as
well as by selected acquisitions of servicing portfolios and mortgage banking
companies. Consistent with this growth strategy, HomeSide typically retains the
right to service the loans it originates and purchases servicing rights in bulk
from other mortgage lenders or on an individual (loan-by-loan) basis from
correspondents or mortgage brokers. Management believes that HomeSide has been
one of the nation's most efficient mortgage servicers based on industry surveys
of cost per loan and loans serviced per employee. HomeSide plans to continue to
pursue economies of scale and productivity improvements in both origination and
servicing, relying on, among other things, a high degree of automation,
outsourcing of selected labor intensive functions, which enables it to maintain
a low fixed cost base, and an emphasis on quality control.
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<PAGE> 77
The table below sets forth the historical production and servicing
portfolio volumes of HLI and HHI.
COMBINED PRODUCTION AND SERVICING SUMMARY
<TABLE>
<CAPTION>
YEARS ENDED AND AT DECEMBER 31, THREE MONTHS
----------------------------------------------- ENDED AND AT
1991 1992 1993 1994 1995 MARCH 31, 1996
------- ------- ------- ------- ------- --------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
PRODUCTION
HLI....................... $ 4,437 $ 8,660 $11,371 $ 8,935 $ 8,885 $ 4,187
HHI....................... 1,945 3,507 3,360 3,410 5,767 1,556
------- ------- ------- ------- ------- -------
Combined production..... $ 6,382 $12,167 $14,731 $12,345 $14,652 $ 5,743
======= ======= ======= ======= ======= =======
SERVICING PORTFOLIO
HLI....................... $20,601 $23,706 $27,999 $37,971 $41,555 $ 44,158
HHI....................... 10,034 11,524 13,085 18,411 33,411 33,019
------- ------- ------- ------- ------- -------
Combined servicing
portfolio............ $30,635 $35,230 $41,084 $56,382 $74,966 $ 77,177
======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(a) If Loan America and BancPLUS loan production had been included for years
prior to their acquisitions, then production would have been $4,742 million,
$8,480 million, $9,589 million, $6,401 million and $5,767 million for 1991,
1992, 1993, 1994 and 1995, respectively.
The table below sets forth the servicing statistics for HomeSide pro forma
for the HLI Acquisition and HHI Acquisition:
HOMESIDE PRO FORMA SERVICING STATISTICS
<TABLE>
<CAPTION>
AT DECEMBER 31, AT MARCH 31,
1995 1996
----------------- --------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
FHA/VA............................................... $25,903 $ 26,266
Conventional......................................... 48,429 49,069
------- -------
Total serviced (UPB)(a)............................ $74,332 75,335
ARM.................................................. 23% 22%
Fixed................................................ 77% 78%
Weighted average coupon.............................. 8.01% 7.97%
Weighted average servicing fee (% of UPB)............ 0.351%(b) 0.365%
Weighted average maturity (months)................... 278 280
</TABLE>
- ---------------
(a) Excludes loans purchased not yet on servicing system.
(b) HHI's weighted average servicing fees are adjusted to reflect market rates
under contractual arrangements between HomeSide and Barnett.
77
<PAGE> 78
HLI
For purposes of this Section "Business -- HLI" the term "HomeSide" means
"HLI".
HomeSide, headquartered in Jacksonville, Florida, is one of the largest
full-service mortgage banking companies in the United States, emphasizing
wholesale mortgage originations and low cost mortgage servicing. For the year
ended December 31, 1995 and the three months ended March 31, 1996, HomeSide
originated approximately $8.9 billion and $4.2 billion of mortgage loans,
respectively, including co-issue production, and serviced a loan portfolio of
$41.6 billion and $44.2 billion, respectively, at the end of such periods. For
1995, HomeSide was ranked as the 9th largest originator of residential mortgage
loans (including co-issue volume) and as the 16th largest servicer of
residential mortgage loans, according to National Mortgage News, and as the 5th
largest wholesale originator of mortgage loans (including co-issue volume)
according to Wholesale Access.
PRODUCTION
HomeSide participates in several origination channels, with a focus on
wholesale originations. In 1995, wholesale channels (correspondent, co-issue and
broker) represented approximately 90% of HomeSide's total production. No single
source within the correspondent or broker channels accounted for more than 2% of
total production in 1995. HomeSide's other origination channels include
telemarketing, affinity programs and retail branches. HomeSide also purchases
servicing rights in bulk from time to time. This multi-channel production base
provides access to and flexibility among production channels in a wide variety
of market and economic conditions. The table below details production by HLI's
origination channels:
RESIDENTIAL LOAN PRODUCTION BY CHANNEL
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------- THREE MONTHS ENDED
1991 1992 1993 1994 1995 MARCH 31, 1996
------- ------ ------- ------- ------ ------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Wholesale:
Correspondent............... $ 2,096 $2,947 $ 4,955 $ 3,364 $3,778 $2,031
Co-issue(a)................. 1,200 2,955 2,860 4,285 3,901 1,597
Broker...................... 231 934 1,431 498 291 191
------- ------- ------- ------- ------- -------
Total wholesale.......... 3,527 6,836 9,246 8,147 7,970 3,819
Retail........................ 910 1,824 2,125 788 915 368
------- ------- ------- ------- ------- -------
Total production......... 4,437 8,660 11,371 8,935 8,885 4,187
Bulk acquisitions(a).......... 760 1,046 2,311 5,538 683 --
------- ------- ------- ------- ------- -------
Total production and
acquisitions........... $ 5,197 $9,706 $13,682 $14,473 $9,568 $4,187
======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(a) Represents the acquisition of servicing rights, not the underlying loans.
Amounts represent the UPB of mortgage debt to which the acquired servicing
rights relate.
HomeSide competes nationwide by offering a wide variety of mortgage
products designed to respond to consumer needs and tailored to address market
competition. HomeSide is primarily an originator of fixed rate 15- and 30-year
mortgage loans, which collectively represented 77% of total production in 1995
and 81% of the total production in the first three months of 1996. HomeSide also
offers other products, such as adjustable rate mortgages ("ARMs") and balloon
and jumbo mortgages.
HomeSide's national loan production operation has resulted in
geographically diverse originations, enabling HomeSide to diversify its risk
across many markets in the United States. HomeSide originates loans in 48 states
and the District of Columbia and its largest markets by state in 1995 were
California (18.4% of UPB of production), Texas (9.4%), Florida (7.1%), Georgia
(5.1%) and Massachusetts (4.5%). HomeSide's
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<PAGE> 79
largest markets by state in the three months ended March 31, 1996 were
California (19.5% of UPB of production), Maryland (7.5%), Texas (6.9%), Florida
(6.4%), and Georgia (5.1%).
HomeSide's production strategy is to maintain and improve its reputation as
one of the largest, most cost effective originators of mortgage loans
nationwide. HomeSide pursues this strategy through an emphasis on wholesale
production, the use of contract and delegated underwriters, a high degree of
automation in its processing and retail originations and quality control.
HomeSide plans to expand production through its low cost correspondent and
telemarketing channels and to continue to streamline its production operation.
HomeSide plans to continue to pursue bulk acquisitions in the secondary market
for mortgage servicing rights on an opportunistic basis.
WHOLESALE PRODUCTION
Correspondent Production
Through its correspondent program, HomeSide purchases loans from
approximately 500 commercial banks, savings and loan associations, licensed
mortgage lenders and other financial intermediaries. The correspondent takes the
mortgage application and processes the loan, which is either underwritten
through contract underwriters or, in some cases, the correspondent to whom
underwriting authority has been delegated. Closing documents are submitted to
HomeSide for legal review and funding. The participants in this program are
prequalified and monitored on an ongoing basis by HomeSide. If a correspondent
subsequently fails to meet HomeSide's requirements, HomeSide typically
terminates the relationship. Correspondents are also required to repurchase
loans in the event of fraud or misrepresentation in the origination process and
for certain other reasons. In 1995, HomeSide's top ten correspondents accounted
for approximately 20% of the total loans originated through this channel.
Co-Issue Production
Co-issue production, which represents the purchase of servicing rights from
a correspondent under contracts to deliver specified volumes on a monthly or
quarterly basis, is another main source of HomeSide's production. The co-issue
correspondent controls the entire loan process from application to closing. This
arrangement particularly suits large originators who have the ability to deliver
on an automated basis. Reflecting this delegated underwriting authority,
co-issue correspondents are subject to more extensive credit and quality control
reviews. Contractually, the co-issue correspondent is obligated to make certain
representations and warranties and is required to repurchase loans in the event
of fraud or misrepresentation in the origination process or for certain other
reasons.
Broker Production
Under its broker program, HomeSide funds loans at closing from a network of
approximately 450 mortgage brokers nationwide. The broker controls the process
of application and loan processing. A preclosing quality control review is
performed by HomeSide to verify the borrower's credit. All loans originated
through brokers are underwritten by HomeSide's approved contract underwriters.
Loans are funded by HomeSide and may be closed in either the broker's name or
HomeSide's name. Participants in this program prequalify on the basis of
creditworthiness, mortgage lending experience and reputation. Each broker is
subject to annual and ongoing reviews by HomeSide. In 1995, HomeSide's top ten
brokers accounted for approximately 24% of the total loans originated through
this channel.
RETAIL PRODUCTION
HomeSide's retail production includes the use of telemarketing to solicit
loans from several sources, including refinancings of mortgage loans in
HomeSide's existing servicing portfolio, leads generated from direct mail
campaigns and other advertising, and mortgages related to affinity group and
co-branding partnerships. HomeSide established a telemarketing system in May
1995. HomeSide believes that these efforts have been a significant factor in
increasing the percentage of loans captured by the retail division from loan
prepayments in HomeSide's servicing portfolio. Refinancing retention, which
represents the percentage of
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<PAGE> 80
loans refinanced through HLI's retail channel that were serviced by HLI prior to
refinancing, was approximately 1% in June 1995, approximately 6% in January 1996
and approximately 7% in May 1996.
In April 1996, pursuant to a two-year agreement, HomeSide began offering
mortgage loans through the American Airlines AAdvantage Program, which
encompasses approximately 14 million households. Under this program, a borrower
will receive one frequent flyer mile for every dollar of interest paid on time.
HomeSide will offer loans in four out of five geographic regions in the United
States, along with two other lenders in each region. Each lender will receive
one third of the referrals from the AAdvantage program, or prospective borrowers
may contact the lender directly. HomeSide pays American Airlines a fee for each
mile earned by a borrower. Under such program, such fees are paid to American
Airlines on a monthly basis as the borrower earns miles by making monthly
interest payments. The program is in its infancy and fees paid to American
Airlines by HomeSide for miles earned have thus far been insignificant. HomeSide
plans to establish additional affinity relationships.
Under the terms of the HLI Acquisition, BKB has retained all of its retail
production facilities in the New England area and entered into an exclusive
five-year agreement to sell, subject to certain limitations, all loans
originated from these branches to HomeSide on a broker or correspondent basis at
market rates. In 1996, HomeSide sold or closed most of HomeSide's remaining
retail branches.
BULK ACQUISITION
Bulk acquisition is the large scale purchase of mortgage servicing rights.
In connection with such acquisitions, HomeSide does not purchase the underlying
mortgage loans which were originated by other originators. HomeSide may purchase
servicing rights on an exclusive basis or through a competitive bidding process
and plans to continue this practice on an opportunistic basis in order to grow
its servicing portfolio and benefit from economies of scale.
UNDERWRITING AND QUALITY CONTROL
Underwriting
HomeSide's loans are underwritten in accordance with applicable FNMA,
FHLMC, VA, and FHA guidelines, as well as certain private investor requirements.
The underwriting process is organized by origination channel and by loan type.
HomeSide currently employs underwriters with an average of ten years of
underwriting experience.
HomeSide requires approximately 80% of its correspondent lenders to have
their loans underwritten by third party contract underwriters prior to purchase.
These contract underwriters are designated by HomeSide and include General
Electric Capital Corp., Mortgage Guaranty Insurance Corp., and Private Mortgage
Insurance Corp. HomeSide grants delegated underwriting status to the remaining
approximately 20% of correspondents which enables the correspondent to submit
conventional loans to HomeSide without prior underwriting approval. Generally,
HomeSide grants delegated underwriting status to its larger correspondents who
meet financial strength, delinquency, underwriting and quality control
standards, and which correspondents are monitored regularly. The FHA and VA
require that loans be underwritten by the originating lender on an
Agency-approved or delegated basis. If issuance of FHA guarantees or VA
insurance certificates is denied, the correspondent must repurchase the loan.
HomeSide implemented an automated underwriting process for its retail
production operation in 1994. The automated underwriting technology incorporates
credit scoring and appraisal evaluation systems. These systems employ
rules-based and statistical technologies to evaluate the borrower, the property
and salability of the loan to the secondary market. HomeSide believes that these
technologies have contributed to improved productivity and reduced underwriting
and processing turnaround time.
Quality Control
HomeSide maintains a compliance and quality assurance department that
operates independently of the production, underwriting, secondary marketing and
loan administration departments. For its production compliance process, HomeSide
randomly selects 10% of all closed loans monthly for review. This review
includes a credit scoring and reunderwriting of such loans; ordering second
appraisals on 10% of the sample; reverifying funds, employment and final
applications; and reordering credit reports on all loans selected. In
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<PAGE> 81
addition, a full underwriting review is conducted on (i) all jumbo loans that go
into default during the first thirty-six months from the date of origination and
(ii) all other loans that go into default during the first six months from the
date of origination. Document and file reviews are also undertaken to ensure
regulatory compliance. In addition, random reviews of the servicing portfolio,
covering selected aspects of the loan administration process, are conducted.
HomeSide monitors the performance of the underwriting department through
quality assurance reports, HUD/VA reports and audits, reviews and audits of
regulatory agencies, investor reports and mortgage insurance company audits.
According to HomeSide's quality control findings, less than 1% of its loans have
underwriting issues that affect salability to the secondary market. Flaws in
these loans are generally corrected; otherwise, the holder of the MBS is
indemnified against future losses resulting from such flaws by HLI or,
ultimately, the originating correspondent. Correspondents or co-issue partners
are required to repurchase any flawed loans originated by them, and as a result,
HomeSide has repurchased and had to retain fewer than three loans annually for
the last three years. See "Risk Factors -- Loan Delinquencies, Defaults on Loans
and Other Risks."
SECONDARY MARKETING
HomeSide customarily sells all loans that it originates while retaining the
servicing rights to such loans. HomeSide aggregates mortgage loans into pools
and sells these pools, as well as individual mortgage loans, to investors
principally at prices established under forward sales commitments. HomeSide's
FHA and VA loans are generally pooled and sold in the form of GNMA MBS.
Conforming conventional mortgage loans are generally pooled and exchanged under
the purchase and guarantee programs sponsored by FNMA and FHLMC for FNMA MBS or
FHLMC participation certificates, respectively. HomeSide pays certain guarantee
fees to the Agencies in connection with these programs and then sells the GNMA,
FNMA and FHLMC securities to securities dealers. A limited number of mortgage
loans (i.e. non-conforming loans) are sold to private investors. In 1995,
approximately 83% of the mortgage loans originated by HomeSide were sold to GNMA
(43%), FNMA (31%) or FHLMC (9%). The remaining approximately 17% were sold to
private investors. In the three months ended March 31, 1996, approximately 92%
of the mortgage loans originated by HomeSide were sold to GNMA (48%), FNMA (35%)
or FHLMC (9%). The remaining approximately 8% were sold to private investors.
The sale of mortgage loans may generate a gain or loss to HomeSide. Gains
or losses result primarily from two factors. First, HomeSide may purchase a loan
at a price (i.e., interest rate and discount) that may be higher or lower than
HomeSide would receive if it immediately sold the loan in the secondary market.
These pricing differences occur principally as a result of competitive pricing
conditions in the primary loan origination market. Second, gains or losses may
result from fluctuations in interest rates that create changes in the market
value of the loans or commitments to purchase loans, from the time the interest
rate commitment is given to the mortgagor until the loan is sold to an investor.
HomeSide assesses the interest rate risk associated with outstanding
commitments that it has extended to fund loans and hedges the interest rate risk
of these commitments based upon a number of factors, including the remaining
term of the commitment, the interest rate at which the commitment was provided,
current interest rates and interest rate volatility. HomeSide constantly
monitors these factors and adjusts its hedging on a daily basis as needed. In
1995, HomeSide converted to the Quantitative Risk Management ("QRM") system, a
sophisticated hedging, reporting and evaluation system, which has the ability to
perform analyses under various interest rate scenarios. HomeSide's interest rate
risk is currently hedged using a combination of forward sales of MBS and over
the counter ("OTC") options, including both puts and calls, on fixed income
securities. HomeSide generally commits to sell to investors for delivery at a
future time for a stated price all its closed loans and a percentage of the
mortgage loan commitments for which the interest rate has been established.
HomeSide aims to price loans competitively, hedge the interest rate risk of loan
origination and sell loans on a break-even basis. For each year since 1990,
HomeSide has not experienced secondary marketing losses.
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<PAGE> 82
HomeSide's policy is to sell mortgage loans on a non-recourse basis.
However, in the case of VA loans used to form GNMA pools, the VA's loan
guarantees do not cover the entire principal balance of the loan and HomeSide is
responsible for losses which exceed the VA's guaranteed limitations. See "--
Loan Servicing Credit Issues". In connection with HomeSide's loan exchanges and
sales, HomeSide makes representations and warranties customary in the industry
relating to, among other things, compliance with laws, regulations and program
standards, and to accuracy of information. In the event of a breach of these
representations and warranties, HomeSide typically corrects such flaws, but, if
the flaws cannot be corrected, may be required to repurchase such loans. In
cases where loans are originated by a correspondent, HomeSide may sell the
flawed loan back to the correspondent under a repurchase obligation.
LOAN SERVICING
HomeSide derives its revenues predominantly from its servicing operations.
Since 1991, HomeSide's servicing portfolio has grown as originations and bulk
servicing acquisitions have exceeded scheduled principal reductions,
prepayments, foreclosures and sales of servicing rights. HomeSide anticipates
that the sale of servicing rights will not be a significant component of its
business strategy in the future. Since 1994, HomeSide has also maintained a risk
management program designed to protect, within certain parameters, the economic
value of its servicing portfolio, which is subject to prepayment risk when
interest rate declines provide mortgagors with refinancing opportunities.
CHANGES IN SERVICING PORTFOLIO
<TABLE>
<CAPTION>
THREE MONTHS
1991 1992 1993 1994 1995 ENDED MARCH 31, 1996
------- ------- ------- ------- ------- --------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
January 1st
balance............ $18,726 $20,601 $23,706 $27,999 $37,971 $ 41,555
Total additions.... 5,375 9,733 13,669 14,970 9,389 4,243
Scheduled
amortization....... 337 434 501 523 869 241
Prepayments.......... 1,303 4,345 8,123 3,372 2,740 1,274
Foreclosures......... 174 157 223 258 334 113
Servicing sales...... 1,686 1,692 529 845 1,862 12
------- ------- ------- ------- ------- -------
Total reductions... 3,500 6,628 9,376 4,998 5,805 1,640
------- ------- ------- ------- ------- -------
December 31st balance
or at end of
period............. $20,601 $23,706 $27,999 $37,971 $41,555 $ 44,158
======= ======= ======= ======= ======= =======
</TABLE>
Loan servicing includes collecting payments of principal and interest from
borrowers, remitting aggregate loan payments to investors, accounting for
principal and interest payments, holding escrow funds for payment of mortgage
related expenses such as taxes and insurance, making advances to cover
delinquent payments, inspecting the mortgaged premises as required, contacting
delinquent mortgagors, supervising foreclosures and property dispositions in the
event of unremedied defaults, and other miscellaneous duties related to loan
administration. HomeSide collects servicing fees from monthly mortgage payments.
These fees generally range from 0.25% to 0.50% of the declining principal
balances of the loans per annum. HomeSide's weighted average servicing fee was
0.386% at December 31, 1995. HomeSide also maintains certain subservicing
relationships whereby servicing is performed by another servicer under an
agreement with HomeSide, which remains contractually responsible for servicing
the loans. Subservicing relationships are often entered into as part of a bulk
servicing acquisition where the selling institution continues to perform
servicing until the loans are transferred to the purchasing institution.
HomeSide's servicing strategy is to continue to build its mortgage
servicing portfolio and benefit from the economies of scale inherent in the
business. HomeSide services substantially all of the mortgage loans that it
originates. In addition, HomeSide purchases the rights to service mortgage loans
originated by other lenders. Over the past five years, HomeSide's servicing
portfolio has grown steadily, from $20.6 billion at December 31, 1991 to $41.6
billion at December 31, 1995, a 19% compounded annual growth rate.
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<PAGE> 83
HomeSide's servicing strategy is also to enhance the profitability of its
servicing revenue through low cost and efficient processes. This strategy is
pursued through highly automated, cost effective processing systems, strategic
outsourcing of selected servicing functions and effective control of
delinquencies and foreclosures. HomeSide outsources to third party vendors
functions related to insurance, taxes and default management, contributing to
HomeSide's ability to maintain a highly variable cost structure. HomeSide is
recognized in the industry as one of the most efficient servicers of mortgage
loans. Industry surveys have ranked HomeSide among the top three mortgage
bankers on a variety of factors, including loans serviced per employee and cost
per loan. Management believes that its low cost servicing provides it with a
competitive advantage in the industry.
SERVICING PORTFOLIO COMPOSITION
HomeSide originates and purchases servicing rights for mortgage loans
nationwide. The broad geographic distribution of HomeSide's servicing portfolio
reflects the national scope of HomeSide's originations and bulk servicing
acquisitions. The nine largest states accounted for 63.6% and 63.4% of
outstanding UPB of the total servicing portfolio of HomeSide at December 31,
1995, and March 31, 1996, respectively, while the largest volume by state is
California with a 16.8% and 16.9% share of the total portfolio at December 31,
1995 and March 31, 1996, respectively. HomeSide actively monitors the geographic
distribution of its servicing portfolio to maintain a mix that it deems
appropriate and makes adjustments as it deems necessary.
The following tables set forth certain information regarding HLI's
servicing portfolio:
SERVICING PORTFOLIO COMPOSITION(A)
<TABLE>
<CAPTION>
AT DECEMBER 31, AT
----------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
FHA/VA....................... $ 9,898 $10,751 $12,524 $15,695 $19,880 $ 20,680
Conventional................. 10,703 12,955 14,130 20,113 21,041 21,636
------- ------- ------- ------- -------
Total serviced (UPB)....... $20,601 $23,706 $26,654 $35,808 $40,921 $ 42,316
======= ======= ======= ======= =======
</TABLE>
- ---------------
(a) Servicing statistics are based on loans serviced by HomeSide, and excludes
loans purchased not yet on servicing system.
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<PAGE> 84
SERVICING PORTFOLIO BY STATE(A)
<TABLE>
<CAPTION>
AT MARCH 31, 1996
AT DECEMBER 31, 1995 ------------------------
------------------------ UPB
STATE % OF UPB ----------- % OF UPB
--------------------------------------- -------- (DOLLARS IN --------
UPB MILLIONS)
-----------
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C> <C>
California............................. $ 6,863 16.8% $ 7,168 16.9%
Massachusetts.......................... 3,784 9.2 3,759 8.9
Florida................................ 3,094 7.6 3,198 7.6
Maryland............................... 2,748 6.7 2,859 6.8
Texas.................................. 2,605 6.4 2,727 6.4
Virginia............................... 2,297 5.6 2,350 5.6
Georgia................................ 1,879 4.6 1,961 4.6
Connecticut............................ 1,430 3.5 1,449 3.4
Washington............................. 1,293 3.2 1,340 3.2
Other(b)............................... 14,928 36.4 15,505 36.6
------- -----
Total.................................. $40,921 100.0% $42,316 100.0%
======= =====
</TABLE>
- ---------------
(a) Excludes loans purchased not yet on servicing system.
(b) No other state represents more than 3.0% of HomeSide's servicing portfolio.
SERVICING PORTFOLIO BY COUPON(A)
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995 AT MARCH 31, 1996
--------------------------------------- ---------------------------------------
CUMULATIVE UPB CUMULATIVE
INTEREST RATE % OF UPB % OF UPB ----------- % OF UPB % OF UPB
- ------------------------- -------- ---------- (DOLLARS IN -------- ----------
UPB MILLIONS)
-----------
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Less than 6.0%........... $ 515 1.3% 1.3% $ 636 1.5% 1.5%
6.0% to 6.9%............. 4,636 11.3 12.6 4,633 11.0 12.5
7.0% to 7.9%............. 16,621 40.6 53.2 18,550 43.8 56.3
8.0% to 8.9%............. 11,752 28.7 81.9 11,648 27.5 83.8
9.0% to 9.9%............. 4,923 12.0 93.9 4,532 10.7 94.5
10.0% to 10.9%........... 2,024 5.0 98.9 1,893 4.5 99.0
Over 11.0%............... 450 1.1 100.0 424 1.0 100.0
------- ----- ------- -----
Total.......... $40,921 100.0% $42,316 100.0%
======= ===== ======= =====
</TABLE>
- ---------------
(a) Statistics based on loans serviced by HomeSide. Excludes loans purchased not
yet on servicing system.
LOAN SERVICING CREDIT ISSUES
HomeSide is affected by loan delinquencies and defaults on loans that it
services. Under certain types of servicing contracts, particularly contracts to
service loans that have been pooled or securitized, HomeSide must forward all or
part of the scheduled payments to the owner of the loan, even when loan payments
are delinquent. Also, to protect their liens on mortgaged properties, owners of
loans usually require a servicer to advance scheduled mortgage and hazard
insurance and tax payments even if sufficient escrow funds are not available.
HomeSide is generally reimbursed, subject to certain limitations with respect to
FHA/VA loans as described below, by the mortgage owner or from liquidation
proceeds for payments advanced that the servicer is unable to recover from the
mortgagor, although the timing of such reimbursement is typically uncertain. In
the interim, HomeSide absorbs the cost of funds advanced during the time the
advance is outstanding. Further, HomeSide bears the increased costs of
collection activities on delinquent and defaulted loans.
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<PAGE> 85
HomeSide also foregoes servicing income from the time such loan becomes
delinquent until foreclosure, when, if any proceeds are available, it may
recover such amounts.
HomeSide periodically incurs losses attributable to servicing FHA and VA
loans for investors, including actual losses for final disposition of loans that
have been foreclosed or assigned to the FHA or VA and accrued interest on such
FHA or VA loans for which payment has not been received. For HomeSide, servicing
losses on investor-owned loans totaled $2.8 million, $7.2 million, $10.0 million
and $5.6 million for the years ended 1993, 1994 and 1995 and the period January
1 to March 15, 1996, respectively, primarily representing losses on VA loans.
Because the total principal amount of FHA loans is guaranteed, losses on such
loans are generally limited to expenses of collection. HomeSide experiences
minimal losses from FHA loans. In respect of VA loans, the VA guarantees the
initial losses on a loan. The guaranteed amount generally ranges from 20% to 35%
of the original principal balance. Before each foreclosure sale, the VA
determines whether to bid by comparing the estimated net sale proceeds to the
outstanding principal balance and the servicer's accumulated reimbursable costs
and fees. If this amount is a loss and exceeds the guaranteed amount, the VA
typically issues a no-bid and pays the servicer the guaranteed amount. Whenever
a no-bid is issued, the servicer absorbs the loss, if any, in excess of the sum
of the guaranteed principal and amounts recovered at the foreclosure sale.
HomeSide's historical delinquency and foreclosure rate experience on VA loans
has generally been consistent with that of the industry.
In the period January 1 to March 15, 1996 and in 1995 and 1994, HomeSide
recorded provisions in excess of actual foreclosure losses. HomeSide's
management believes that it has an adequate level of reserve based on HomeSide's
servicing volume, portfolio composition, credit quality and historical loss
rates, as well as estimated future losses.
Set forth below is a comparison of HomeSide's historical delinquency and
foreclosure experience to national industry statistics compiled by the Mortgage
Bankers Association:
SERVICING PORTFOLIO DELINQUENCIES
(PERCENT BY LOAN COUNT)
<TABLE>
<CAPTION>
AT TOTAL FORECLOSURE
DECEMBER 31, 30 DAYS 60 DAYS 90+ DAYS PAST DUE INVENTORY
- ------------ ------- ------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
1993 HomeSide ...................... 2.91% 0.70% 1.00% 4.61% 1.41%
Industry Average (adjusted for
servicing portfolio mix)....... 3.77 0.88 1.10 5.75 1.27
1994 HomeSide....................... 3.13 0.70 0.97 4.80 1.19
Industry Average (adjusted for
servicing portfolio mix)....... 3.62 0.87 1.01 5.50 1.08
1995 HomeSide....................... 3.51 0.73 1.04 5.28 1.16
Industry Average (adjusted for
servicing portfolio mix)....... 3.89 0.84 0.95 5.68 1.11
</TABLE>
<TABLE>
<CAPTION>
AT
MARCH 31,
- ------------
<S> <C> <C> <C> <C> <C> <C>
1996 HomeSide....................... 2.65 0.56 0.59 3.80 1.00
</TABLE>
SERVICING PORTFOLIO HEDGING PROGRAM
The value of HomeSide's servicing portfolio is subject to volatility in the
event of unanticipated changes in prepayments. As interest rates increase,
prepayments by mortgagors decrease as fewer owners refinance, increasing
expected future cash flows from servicing revenue. Conversely, as interest rates
decrease, prepayments by mortgagors increase as homeowners seek to refinance
their mortgages, reducing expected future cash flows from servicing revenues on
those prepaid mortgages. Since the value of servicing rights is based on the net
present value of future cash flows, the value of the portfolio decreases in a
declining interest rate environment and increases in a rising rate environment.
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<PAGE> 86
HomeSide's risk management policy is designed to minimize exposure to loss
in the value of the servicing portfolio caused by prepayments due to declines in
interest rates. The servicing portfolio is valued using market discount rates
and market consensus prepayment speeds, among other variables. The value is then
analyzed under various interest rate scenarios that help HomeSide estimate the
exposure to loss. This potential loss exposure determines the hedge profile,
which profile is monitored daily and may be adjusted to reflect significant
moves in key variables such as interest rate and yield curve changes and revised
prepayment speed assumptions. Results of the risk management program depend on a
variety of factors, including the hedge instruments typically used by HomeSide,
the relationship between mortgage rates and Treasury securities and certain
other factors. See "Risk Factors -- Impact of Changes in Interest Rates; Results
of Risk Management Activities" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- HomeSide -- Results of
Operations -- Risk Management Activities".
The Financial Accounting Standards Board ("FASB") has been evaluating the
accounting for derivative financial instruments and hedging activities. The FASB
has not yet reached a consensus on the outcome of its deliberations, although an
exposure draft may be issued in 1996. Under current practice, derivative
financial instruments may be accounted for as hedges with changes in the value
deferred as a component of the asset or liability being hedged, provided the
instruments are designated as a hedge and reduce exposure to loss with a high
correlation. HomeSide is currently reviewing the potential use of hedge
accounting. Management is unable to predict what effect, if any, changes in
accounting principles would have on HomeSide's financial statements or
HomeSide's potential use of hedge accounting.
86
<PAGE> 87
ACQUISITION OF HHI
On March 4, 1996, the Issuer entered into an agreement to acquire HHI. On
May 31, 1996, the Issuer consummated the HHI Acquisition.
Prior to the HHI Acquisition, HHI operated as a full service mortgage
banking company, engaged in the origination, sale and servicing of mortgage
loans secured by residential properties. A significant portion of the loans
originated by HHI were underwritten to the standards and requirements of
secondary market investors and were sold as pools underlying mortgage backed
securities guaranteed by FNMA, FHLMC, GNMA and other institutional investors.
The balance was underwritten and retained by Barnett. In 1995 and the three
months ended March 31, 1996, HHI reported total production of $5.8 billion and
$1.6 billion, respectively and had a servicing portfolio of $33.4 billion at
December 31, 1995 and $33.0 billion at March 31, 1996. HHI was ranked as the
19th largest originator and as the 18th largest servicer of residential mortgage
loans for 1995, according to National Mortgage News.
Prior to 1994, HHI originated loans primarily on a retail basis through
bank branches in Florida and Georgia. In 1994, HHI grew its origination business
and servicing portfolio substantially, primarily through two acquisitions. HHI
acquired Loan America, a wholesale mortgage banking company with a $4.0 billion
servicing portfolio, in October 1994. Headquartered in Miami, Florida, Loan
America originated loans through brokers in twelve states. The acquisition of
Loan America represented HHI's first entry into the wholesale origination
business.
In February 1995, HHI acquired BancPLUS, a full service mortgage company
with a $13.9 billion servicing portfolio. Headquartered in San Antonio, Texas,
BancPLUS was primarily a retail originator with thirty-six branch offices in
seventeen states. HHI's acquisition of BancPLUS included the company's
proprietary mortgage banking software for retail origination, secondary
marketing and servicing. It also included BancPLUS' wholly-owned subsidiary
Honolulu Mortgage, a full-service mortgage banking company based in Honolulu,
Hawaii with a $1.7 billion servicing portfolio.
In connection with the HHI Acquisition, the Issuer acquired HHI's and its
subsidiaries' $33.0 billion servicing portfolio and servicing platform, its
proprietary mortgage servicing software, and Honolulu Mortgage (production and
servicing operations). Barnett retained its retail bank branch network, the
retail branch network acquired from BancPLUS, the broker network acquired from
Loan America, and all of the related facilities. Barnett also retained the
facility which housed HHI's Jacksonville servicing unit. In connection with the
HHI Acquisition, BPFC was merged into BancPLUS, which in turn was merged,
together with LoanAmerica, into HLI. Also concurrently with the HHI Acquisition,
all of HHI's servicing portfolio was transferred to HLI, except for HHI's GNMA
loans, which HHI retained. In the future, it is expected that HHI will neither
originate nor service any loans, except for the GNMA loans retained by it on May
31, 1996. As part of the HHI Acquisition, Barnett agreed to sell, subject to
certain limitations, to HomeSide all of its production on market terms pursuant
to an exclusive, five-year correspondent contract. See "Certain Relationships
and Related Transactions".
PRODUCTION
Prior to the HHI Acquisition, HHI expanded its production capabilities
primarily through recent acquisitions. Originations grew from $1.9 billion in
1991 to $5.8 billion in 1995. In 1995 and the three months ended March 31, 1996,
wholesale originations represented approximately 52% and 49%, respectively, of
HHI's total production and retail represented the balance.
Subsequent to the HHI Acquisition, Barnett has agreed to deliver to HLI all
of its mortgage loan production under an exclusive, five-year correspondent
relationship on market terms, with the exception of the loans held by Barnett.
However, Barnett will sell to HLI, on a co-issue basis, the servicing rights
related to those loans which it retains. Under the terms of its correspondent
agreement, loans originated through the Barnett network will be underwritten on
a delegated basis. HLI will perform the secondary marketing functions of pricing
and hedging related to the correspondent production.
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<PAGE> 88
Like HLI, HHI has built a multi-channel production network as part of its
strategy to become a national mortgage banking business through several
channels, including Barnett's retail bank branch franchise; a national wholesale
broker group obtained through the Loan America acquisition; a national retail
network obtained through the BancPLUS acquisition; traditional correspondent
business; and production from the Honolulu Mortgage subsidiary. This
multi-channel production base provided HHI with the flexibility to shift its
production focus to the most appropriate channel given specific market
conditions.
RESIDENTIAL LOAN PRODUCTION BY CHANNEL
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------ THREE MONTHS ENDED
1991 1992 1993 1994 1995 MARCH 31, 1996
------ ------ ------ ------ ------ ------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Barnett banks branch retail.... $1,945 $3,507 $3,360 $2,559 $1,932 $ 537
BancPLUS retail (a)............ -- -- -- -- 606 192
Loan America broker (a)........ -- -- -- 401 1,386 378
Honolulu Mortgage (a).......... -- -- -- -- 244 83
Correspondent.................. -- -- -- 450 1,599 366
-------
-
------- ------- ------- ------- -------
Total production.......... $1,945 $3,507 $3,360 $3,410 $5,767 $1,556
======= ======= ======= ======= ======== =======
</TABLE>
- ---------------
(a) Since date of acquisitions by HHI.
HHI's loan production operation, historically limited to the Florida and
Georgia markets, became national in scope over the last two years. This
expansion was achieved primarily through HHI's acquisitions of Loan America and
BancPLUS. Historically, the mortgage origination leader in Florida with a market
share in excess of 11%, HHI originated loans in 45 states and the District of
Columbia. Its largest markets by state in 1995 were Florida (34% of UPB of
production), California (8%), Ohio (7%), New York (6%) and Hawaii (6%) and its
largest markets by state in the three months ended March 31, 1996 were Florida
(33% of UPB of production), California (8%), New York (7%), Hawaii (7%) and Ohio
(6%).
Secondary Marketing
Prior to the acquisitions of LoanAmerica and BancPLUS, HHI sold
approximately 20% of the loans originated by the Barnett banks into the
secondary market, predominately to FNMA. The remaining 80% were retained in
Barnett's portfolio. Subsequent to its recent acquisitions, HHI began to deliver
some loans to FHLMC and issue GNMA securities. In 1995 and the first three
months of 1996, approximately 81% and 95%, respectively, of the mortgage loans
originated by HHI were eligible for inclusion in the programs of GNMA, FNMA, or
FHLMC. Those loans not sold under these programs were sold to approximately
seven private investors, including several state housing finance agency
programs. The integration of HHI's production profile into HLI is expected to
provide greater balance in originations overall and is expected to increase the
weighting toward conventional product.
Loan Servicing
As with HLI, HHI's strategy has been to build its mortgage servicing
portfolio to benefit from economies of scale and productivity improvements. The
HHI portfolio increased from $10.0 billion at the end of 1991 to $33.4 billion
at the end of 1995, primarily as a result of the Loan America and BancPLUS
acquisitions. As a result of the HHI Acquisition, HomeSide expects to benefit
from HHI's substantial growth over the past several years and will service over
950,000 loans with UPB of over $75 billion.
88
<PAGE> 89
CHANGES IN SERVICING PORTFOLIO
<TABLE>
<CAPTION>
PRO FORMA
HHI HOMESIDE
THREE MONTHS THREE MONTHS
HHI PRO FORMA ENDED ENDED
----------------------------------------------- HOMESIDE MARCH 31, MARCH 31,
1991 1992 1993 1994 1995 1995 1996 1996
------- ------- ------- ------- ------- ------------ ------------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January 1st
balance............ $ 9,243 $10,034 $11,524 $13,085 $18,411 $ 56,382 $33,411 $ 74,966
Total
additions(a)..... 2,039 3,744 5,237 7,469 20,312 29,701 1,526 5,769
Reductions........... 1,248 2,254 3,016 2,143 4,241 8,184 1,911 3,539
Servicing sales...... 0 0 660 0 1,071 2,933 7 19
------- ------- ------- ------- ------- ------- -------
Total reductions... 1,248 2,254 3,676 2,143 5,312 11,117 1,918 3,558
------- ------- ------- ------- ------- ------- -------
December 31st balance
or end of period
balance............ $10,034 $11,524 $13,085 $18,411 $33,411 $ 74,966 $33,019 $ 77,177
======= ======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(a) Includes $13.9 billion of servicing from BancPLUS which includes $1.7
billion of servicing from Honolulu Mortgage in 1995 and $4.0 billion of
servicing from LoanAmerica acquisition in 1994.
SERVICING PORTFOLIO COMPOSITION
Historically, HHI had been primarily a servicer of conventional loans,
consisting of FNMA and FLHMC product. The acquisition of HHI's servicing
portfolio has reduced the percentage of HomeSide's government loans. Based on
the combined servicing portfolios of HLI and HHI, the percentage of conventional
loans and FHA/VA loans serviced was 65% and 35%, respectively, at December 31,
1995 and 65% and 35%, respectively, at March 31, 1996.
SERVICING PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
HHI(A)
------------------------------- PRO FORMA PRO FORMA
HOMESIDE HHI AT HOMESIDE
AT DECEMBER 31, AT MARCH AT
------------------------------- DECEMBER 31, 31, MARCH 31,
1993 1994 1995 1995(A) 1996 1996(A)
------- ------- ------- -------------- -------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
FHA/VA.......................... $ 1,032 $ 1,082 $ 6,023 $ 25,903 $ 5,586 $ 26,266
Conventional.................... 12,053 17,329 27,388 48,429 27,433 49,069
------- ------- ------- ------- ------- -------
Total serviced (UPB)........ $13,085 $18,411 $33,411 $ 74,332 $33,019 $ 75,335
======= ======= ======= ======= ======= =======
ARM............................. 48% 41% 28% 23% 27 % 22%
Fixed........................... 52% 59% 72% 77% 73 % 78%
Weighted average coupon......... 7.34% 7.44% 8.05% 8.01% 8.04 % 7.97%
Weighted average servicing fee
(% of UPB).................... 0.259% 0.261% 0.277% 0.351% 0.346 % 0.365%(b)
Weighted average maturity
(months)...................... 257 259 261 278 260 280
</TABLE>
- ---------------
(a) Servicing statistics are based on loans serviced. Excludes loans purchased
not yet on servicing system.
(b) HHI's weighted average servicing fees are adjusted to reflect market rates
under contractual arrangements between HomeSide and Barnett.
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<PAGE> 90
The following table sets forth information regarding the geographic
distribution of HLI's, HHI's and HomeSide's pro forma combined servicing
portfolio. Because of Barnett's market presence in Florida, that state comprised
approximately 21.2% share of HomeSide's total portfolio on a pro forma basis as
of March 31, 1996:
SERVICING PORTFOLIO BY STATE
<TABLE>
<CAPTION>
PRO FORMA(A)
HLI(A) HHI HOMESIDE
---------------- ---------------- ----------------
% OF % OF % OF
STATE UPB UPB UPB UPB UPB UPB
-------------------------------- ------- ----- ------- ----- ------- -----
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Florida......................... $ 3,198 7.6% $12,803 38.8% $16,001 21.2%
California...................... 7,168 16.9 4,689 14.2 11,857 15.7
Texas........................... 2,727 6.4 1,739 5.3 4,466 5.9
Massachusetts................... 3,759 8.9 236 0.7 3,995 5.3
Maryland........................ 2,859 6.8 536 1.6 3,395 4.5
Virginia........................ 2,350 5.6 491 1.5 2,841 3.8
Georgia......................... 1,961 4.6 870 2.6 2,831 3.8
Hawaii.......................... 388 0.9 2,015 6.1 2,403 3.2
Illinois........................ 1,194 2.8 1,060 3.2 2,254 3.0
Washington...................... 1,340 3.2 864 2.6 2,204 2.9
Other........................... 15,372 36.3 7,716 23.4 23,088 30.7
------- ----- ------- ----- ------- -----
Total................. $42,316 100.0% $33,019 100.0% $75,335 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
- ---------------
(a) Excludes loans purchased not yet on servicing system.
The following table sets forth the coupon stratification of HLI's, HHI's
and HomeSide's pro forma combined servicing portfolio at March 31, 1996:
SERVICING PORTFOLIO BY COUPON
<TABLE>
<CAPTION>
HLI(A) HHI PRO FORMA HOMESIDE(A)
---------------------------- ---------------------------- ----------------------------
% OF CUMULATIVE % OF CUMULATIVE % OF CUMULATIVE
INTEREST RATE UPB UPB % OF UPB UPB UPB % OF UPB UPB UPB % OF UPB
- -------------------- ------- ----- ---------- ------- ----- ---------- ------- ----- ----------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Less than 6.0%...... $ 636 1.5% 1.5% $ 195 0.6% 0.6% $ 831 1.1% 1.1%
6.0% to 6.9%........ 4,633 11.0 12.5 4,075 12.3 12.9 8,708 11.6 12.7
7.0% to 7.9%........ 18,550 43.8 56.3 12,236 37.1 50.0 30,786 40.9 53.6
8.0% to 8.9%........ 11,648 27.5 83.8 10,904 33.0 83.0 22,552 29.9 83.5
9.0% to 9.9%........ 4,532 10.7 94.5 3,390 10.3 93.3 7,922 10.5 94.0
10.0% to 10.9%...... 1,893 4.5 99.0 1,615 4.9 98.2 3,508 4.7 98.7
Over 11.0%.......... 424 1.0 100.0 604 1.8 100.0 1,028 1.3 100.0
------- ----- ------- ----- ------- -----
Total..... $42,316 100.0% $33,019 100.0% $75,335 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
- ---------------
(a) Excludes loans purchased not yet on servicing system.
90
<PAGE> 91
LOAN SERVICING CREDIT ISSUES
The table below sets forth a comparison of HHI's historical delinquency and
foreclosure experience to national statistics compiled by the Mortgage Bankers
Association at December 31, 1995 and March 31, 1996:
SERVICING PORTFOLIO DELINQUENCIES
(PERCENT BY LOAN COUNT)
<TABLE>
<CAPTION>
TOTAL FORECLOSURE
30 DAYS 60 DAYS 90+ DAYS PAST DUE INVENTORY
------- ------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
AT DECEMBER 31, 1995
HHI..................................... 3.47% 0.66% 0.49% 4.62% 0.55%
Industry Average (adjusted for servicing
portfolio mix)........................ 3.17 0.65 0.63 4.45 0.80
AT MARCH 31, 1996
HHI..................................... 2.95 0.59 0.39 3.93 0.66
</TABLE>
Under the terms of the HHI Acquisition, if HHI originated loans are
required to be repurchased out of the pool existing as May 31, 1996 by an
investor for the five year period following closing, Barnett is obligated to
purchase these loans from HomeSide. See "Certain Relationships and Related
Transactions".
SERVICING INTEGRATION
To facilitate administration and to effect the economies of scale targeted
by management, HomeSide's servicing operations are expected to be integrated
over the next year. HomeSide has one servicing site located in Jacksonville,
Florida, which at December 31, 1995 serviced approximately 510,000 loans with a
servicing staff of 408. HHI had three servicing operations, located in
Jacksonville, Florida; San Antonio, Texas; and Honolulu, Hawaii. Approximately
11,000 loans are serviced at the Honolulu Mortgage subsidiary. HomeSide expects
that the servicing center in Honolulu will remain. HomeSide plans to integrate
the existing HomeSide portfolio of approximately 510,000 loans with the former
HHI portfolio of approximately 446,000 loans in stages based on the capacity and
capabilities of each of the respective servicing sites. Initially, HomeSide
intends to transfer its approximately 145,000 existing loans at HHI's
Jacksonville facility to San Antonio for servicing while HomeSide's Jacksonville
servicing center is converted from the current outsourced system to the new
proprietary system. Barnett retained the HHI Jacksonville facility. Both
Jacksonville and San Antonio are expected to function as full service operations
for the next twelve to fifteen months while the conversion takes place. Once
conversion of all its servicing has been completed, HomeSide intends to use the
Jacksonville site to service conventional loans and the San Antonio site to
service all government loans.
In addition to the physical consolidation of servicing operations, HomeSide
is in the process of converting the entire servicing platform to HHI's
proprietary software. This proprietary servicing technology accommodates all
areas of loan servicing, including loan setup and maintenance, cashiering,
escrow administration, investor accounting, customer service and default
management. The platform is mainframe based, with on-line, real-time
architecture and is supported by an experienced staff of over 30 technology
providers.
HomeSide expects to achieve significant competitive advantages over time by
converting to the proprietary servicing software, which is expected to cost less
to operate than HomeSide's current outsourced system and is configured to
accommodate growth more efficiently than the current HomeSide system. Once the
conversion has been completed, this architecture is expected to support
HomeSide's portfolio growth to a size of up to approximately twice its size
following the HHI Acquisition. The system is also expected to permit continued
development of workflow and other client-server applications, contributing to
increased productivity.
Several other measures are expected to be undertaken in conjunction with
the conversion of HomeSide's servicing to the proprietary system in order to
operate more efficiently. It is expected that HHI's hazard insurance, tax
payments and default functions will be subcontracted to specialized vendors, as
they currently are at HomeSide. This outsourcing process has begun and is
expected be completed by the fall of 1996, prior to moving additional servicing
to the San Antonio site. The consolidation of the two servicing operations in
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<PAGE> 92
Jacksonville is expected to result in a reduction in headcount of approximately
100 positions. In addition, the plan to have dedicated centers for conventional
and FHA/VA servicing in Jacksonville and San Antonio, respectively, is expected
to yield additional economies through specialization.
EMPLOYEES
As of May 31, 1996, HLI had approximately 1,106 total employees,
substantially all of whom were full-time employees. Of these, approximately 805
were employed at HomeSide's Jacksonville, Florida headquarters, and
approximately 150 employees were employed in retail and wholesale offices.
HomeSide has no unionized employees and considers its relationship with its
employees generally to be satisfactory. Upon consummation of the HHI
Acquisition, HomeSide had approximately 2,300 total employees, substantially all
of whom were full-time employees.
PROPERTIES
HomeSide's corporate, administrative, and servicing headquarters are
located in Jacksonville, Florida, in facilities, which comprise approximately
145,000 square feet of owned space and approximately 135,000 square feet of
leased space. The servicing center lease expires on August 31, 1999 unless
HomeSide exercises its options to renew, which could extend the lease for an
additional six years. HomeSide also leases approximately 53,000 square feet of
warehouse space in Jacksonville, Florida for storing certain loan files, loan
servicing documents and other corporate records. In addition, HomeSide leases
20,000 square feet of space in Hawaii and owns an additional 190,000 square feet
of space in San Antonio, Texas. HomeSide believes that its present facilities
are adequate for its operations.
REGULATIONS
HomeSide's mortgage banking business is subject to the rules and
regulations of HUD, FHA, VA, FNMA, FHLMC, GNMA and other regulatory agencies
with respect to originating, processing, underwriting, selling, securitizing and
servicing mortgage loans. In addition, there are other federal and state
statutes and regulations affecting such activities. These rules and regulations,
among other things, impose licensing obligations on HomeSide, prohibit
discrimination and establish underwriting guidelines which include provisions
for inspections and appraisals, require credit reports on prospective borrowers
and set maximum loan amounts. Moreover, lenders such as HomeSide are required
annually to submit audited financial statements to FNMA, FHLMC and GNMA and to
comply with each regulatory entity's own financial requirements. HomeSide's
business is also subject to examination by FNMA, FHLMC and GNMA and state
regulatory agencies at all times to assure compliance with applicable
regulations, policies and procedures.
Mortgage origination activities are subject to the provisions of various
Federal and state statutes including, among others, the Equal Credit Opportunity
Act, the Federal Truth-in-Lending Act and the Real Estate Settlement Procedures
Act, and the regulations promulgated thereunder, which prohibit discrimination
and require the disclosure of certain basic information to mortgagors concerning
credit terms and settlement costs. Many of the aforementioned regulatory
requirements are designed to protect the interests of consumers, while others
protect the owners or insurers of mortgage loans. Failure to comply with these
requirements can lead to loss of approved status, termination of servicing
contracts without compensation to the servicers, demands for indemnification or
loan repurchases, class action lawsuits and administrative enforcement actions.
Prior to the HLI Acquisition, HLI was a wholly-owned operating subsidiary
of a national bank, and subject to substantially all of the regulations and
restrictions applicable to a national bank. Prior to the HHI Acquisition, HHI
was a wholly-owned subsidiary of a bank holding company. During the period that
BKB or Barnett, or any of their subsidiaries, retains a material ownership
interest in HomeSide, HomeSide and its subsidiaries (i) will be under the
jurisdiction, supervision, and examining authority of the OCC, and (ii) may only
engage in activities that are part of, or incidental to, the business of
banking. The OCC has specifically ruled that mortgage banking is a proper
incident to the business of banking.
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<PAGE> 93
There are various other state and local laws and regulations affecting
HomeSide's operations. HomeSide is licensed in those states that require
licensing to originate, purchase and/or service mortgage loans. Conventional
mortgage operations may also be subject to state usury statutes. FHA and VA
loans are exempt from the effect of such statutes. See "Risk Factors --
Regulations, Possible Changes and Related Matters".
LITIGATION
HomeSide is a defendant in a number of legal proceedings arising in the
normal course of business. HomeSide, in management's estimation, has recorded
adequate reserves in the financial statements for pending litigation.
Management, after reviewing all actions and proceedings pending against or
involving HomeSide, considers that the aggregate liability or loss, if any,
resulting from the final outcome of these proceedings will not have a material
effect on the financial position of HomeSide.
In recent years, the mortgage banking industry has been subject to class
action lawsuits which allege violations of federal and state laws and
regulations, including the propriety of collecting various fees and charges.
Class action lawsuits may be filed in the future against the mortgage banking
industry.
93
<PAGE> 94
THE ACQUISITIONS
THE HLI ACQUISITION
On March 15, 1996 HomeSide, Inc. acquired from Bank of Boston all of the
outstanding stock of HLI. Certain assets and liabilities of HLI were retained by
Bank of Boston, including HLI's mortgage retail production operations in New
England.
The Issuer paid approximately $139.2 million in cash and issued 495,715
shares of Class A Voting Common Stock of HomeSide, Inc. ("Class A Common
Stock"), representing approximately 45% of the outstanding Class A Common Stock
(having a value of approximately $86.8 million), to Bank of Boston in
consideration of all the stock of HLI. Also in connection with the HLI
Acquisition, Bank of Boston paid approximately $1.0 million in cash for 5,714
shares of HomeSide's Class C Non-Voting Common Stock ("Class C Common Stock"),
representing 100% of the outstanding Class C Common Stock. Additionally,
HomeSide agreed that if it acquired directly or indirectly all or any portion of
the capital stock or all or any substantial portion of the assets of another
person during the six-month period from the closing of the HLI Acquisition,
HomeSide would pay to Bank of Boston, on the effective date of such acquisition,
cash in an additional amount determined pursuant to a formula set forth in the
Stock Purchase Agreement between HomeSide and Bank of Boston dated December 11,
1995, as amended. Accordingly, upon the consummation of the HHI Acquisition,
HomeSide paid an additional $5.0 million in cash to Bank of Boston.
Simultaneously with the closing of the HLI Acquisition, THL purchased
459,643 shares of Class A Common Stock, representing approximately 41% of the
outstanding Class A Common Stock, for approximately $80.4 million in cash and
MDP purchased 153,214 shares of Class A Common Stock, representing approximately
14% of the outstanding Class A Common Stock, for approximately $26.8 million in
cash. HomeSide also reserved shares of its Class A Common Stock for issuance to
members of management of HomeSide at a price of $175.00 per share (the same
price paid by the other Investors). Management of HomeSide has, since May 15,
1996, purchased a total of 23,117 shares of Class A Stock for an aggregate
purchase price of approximately $4.0 million. Simultaneously with the closing of
the HLI Acquisition, HomeSide, Inc. also issued 5,714 shares of its Class B
Non-Voting Common Stock ("Class B Common Stock"), representing 100% of the
outstanding Class B Common Stock, to Smith Barney Inc. in consideration of
services rendered to HomeSide in connection with the HLI Acquisition pursuant to
an agreement dated March 14, 1996. Immediately following consummation of the HLI
Acquisition, Bank of Boston sold its shares of Class C Common Stock to an
unaffiliated third party pursuant to an agreement dated March 13, 1996.
Upon consummation of the HLI Acquisition, HLI terminated its former line of
credit with Bank of Boston and entered into a new credit agreement with certain
other lenders. In connection with the HHI Acquisition, HLI terminated its credit
facility entered into on March 15, 1996 and entered into a new credit agreement.
See "Description of Bank Credit Agreement". Also in connection with the HLI
Acquisition, HomeSide entered into various contractual arrangements with Bank of
Boston and its affiliates regarding the provision of certain operational
services between the parties and the purchase by HomeSide from Bank of Boston of
certain mortgage production and servicing rights of Bank of Boston. See "Certain
Relationships and Related Transactions".
THE HHI ACQUISITION
On May 31, 1996, HomeSide, Inc. acquired from Barnett all of the
outstanding stock of HHI. Certain assets and liabilities of HHI were retained by
Barnett, including those assets of HHI and its subsidiaries (other than Honolulu
Mortgage) associated with the loan origination or production activities of such
entities.
As consideration for all the stock of HHI, HomeSide, Inc. paid Barnett
approximately $228.2 million in cash. In connection with the HHI Acquisition,
Siesta, an affiliate of Barnett, BKB, THL and MDP paid to HomeSide, Inc.
approximately $118.0 million, $31.2 million, $8.1 million and $2.7 million,
respectively, in cash in exchange for shares of Class A Common Stock. As a
result, Siesta owns approximately 33% of HomeSide, Inc., and THL and MDP,
collectively, and BKB each own approximately 33% of HomeSide, Inc.
94
<PAGE> 95
Upon consummation of the HHI Acquisition, HHI and its subsidiaries
terminated their former line of credit with Barnett. In connection with the HHI
Acquisition, HomeSide has entered into various contractual arrangements with
Barnett regarding the provision of certain operational services between the
parties and the purchase by HomeSide from Barnett of certain mortgage production
and servicing rights of Barnett. See "Certain Relationships and Related
Transactions".
Upon closing of the HHI Acquisition, the Issuer contributed all of the
stock of HLI to HHI, whereupon HLI became a wholly-owned subsidiary of HHI. All
of HHI's servicing portfolio was transferred to HLI, except for HHI's GNMA
loans, which HHI retained. All of HHI's former subsidiaries, except Honolulu
Mortgage, were merged with and into HLI. All new business is expected to be
carried on by HLI or one of its subsidiaries. The Issuer may in the future
dissolve HHI if this would cause administrative convenience without adverse tax
or business consequences.
The following table sets forth the approximate sources and uses of cash and
equity related to (i) the HLI Acquisition and (ii) the HHI Acquisition as of the
respective dates of acquisition:
<TABLE>
<CAPTION>
HLI
ACQUISITION
HLI HHI AND
ACQUISITION ACQUISITION HHI
(MARCH 15, 1996) (MAY 31, 1996) ACQUISITION
---------------- -------------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
SOURCES:
Issuance of common stock.............................. $ 200.0 $160.0 $ 360.0
Notes Offering........................................ 112.5 87.5 200.0
Borrowings under Bank Credit Agreement................ 1,479.1 408.3 1,887.4
Cash acquired......................................... 23.2 11.2 34.4
-------- ------ --------
Total Sources.................................... $1,814.8 $667.0 $2,481.8
======== ====== ========
USES:
Acquisition of HLI.................................... $ 225.9 $ -- $ 225.9
Acquisition of HHI.................................... -- 228.2 228.2
Net purchase of certain Bank of Boston assets(a)...... 292.1 -- 292.1
Net purchase of certain Barnett assets................ -- 44.7 44.7
Repayment of pre-acquisition facility................. 1,256.0 378.1 1,634.1
Payment of debt issuance, acquisition and Offering
expenses............................................ 38.8 11.0 49.8
Contingent payment to Bank of Boston.................. -- 5.0 5.0
Pro forma cash balances............................... 2.0 -- 2.0
-------- ------ --------
Total Uses....................................... $1,814.8 $667.0 $2,481.8
======== ====== ========
</TABLE>
- ---------------
(a) Represents the net effect of purchasing loans held for sale previously
attributable to participations of an affiliate of Bank of Boston of $507.3
million and excluding net assets retained by Bank of Boston of $215.2
million.
95
<PAGE> 96
MANAGEMENT
<TABLE>
The following table sets forth the name, age and position with the Issuer
and/or HLI of each person who is an executive officer or director of the Issuer
and HLI:
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Joe K. Pickett.............. 50 Chairman of the Board and Chief Executive Officer (HLI
and the Issuer); Director (HLI and the Issuer)
Hugh R. Harris.............. 45 President and Chief Operating Officer (HLI and the
Issuer); Director (HLI and the Issuer)
Kevin D. Race............... 36 Vice President, Chief Financial Officer and Treasurer
(the Issuer); Executive Vice President and Chief
Financial Officer (HLI)
Robert J. Jacobs............ 43 Secretary and Vice President (the Issuer); Executive
Vice President, Secretary and General Counsel (HLI);
Director (HLI)
Betty L. Francis............ 49 Vice President (the Issuer); Chief Credit Officer and
Executive Vice President (HLI)
Mark. F. Johnson............ 41 Vice President (the Issuer); Executive Vice President --
Secondary Marketing and Production (HLI)
William Glasgow, Jr......... 46 Vice President (the Issuer); Executive Vice President
(HLI)
Daniel T. Scheuble.......... 37 Vice President (the Issuer); Executive Vice President --
Technology (HLI)
Thomas H. Fish.............. 63 Vice President and Assistant Secretary (the Issuer);
Executive Vice President and Assistant Secretary (HLI)
Charles D. Gilmer........... 48 Senior Vice President and Treasurer (HLI)
Ann R. Mackey............... 38 Senior Vice President and Finance Director (HLI)
Thomas M. Hagerty........... 33 Director (the Issuer); Risk Management Committee (the
Issuer)
David V. Harkins............ 55 Director (the Issuer)
Justin S. Huscher........... 42 Director (the Issuer); Risk Management Committee (the
Issuer)
Peter J. Manning............ 57 Director (the Issuer)
William J. Shea............. 48 Director (the Issuer)
Kathleen M. McGillycuddy.... 46 Director (the Issuer); Risk Management Committee (the
Issuer)
Hinton F. Nobles, Jr. ...... 51 Director (the Issuer)
Douglas K. Freeman.......... 45 Director (the Issuer)
Charles W. Newman........... 46 Director (the Issuer)
</TABLE>
The Board of Directors of the Issuer consists of eleven members, two
directors designated by the Fund, one director designated by MDP, three
directors designated by each of Siesta and BKB and two directors who are members
of management selected by at least five of the other directors in office. Each
of the officers and directors shall serve until their successors are elected and
qualified or until their earlier resignation or removal. It is expected that
officers and directors will be elected annually. See "Certain Relationships and
Related Transactions -- Amended and Restated Shareholder Agreement."
JOE K. PICKETT has served as Chairman of the Board and Chief Executive
Officer of HLI since April 1990 and as Chairman of the Board, Chief Executive
Officer and a Director of the Issuer since March 14, 1996. From October 1994
through October 1995, Mr. Pickett served concurrently as President of the
Mortgage Bankers Association of America. Mr. Pickett also serves as a Director
of FNMA.
HUGH R. HARRIS has served as President and Chief Operating Officer of HLI
since January 1993 and as President, Chief Operating Officer and a Director of
the Issuer since March 14, 1996. From January 1988 to January 1993, Mr. Harris
served as Vice Chairman of HLI in charge of production and secondary marketing.
96
<PAGE> 97
KEVIN D. RACE has served as Executive Vice President and Chief Financial
Officer of HLI and Vice President, Chief Financial Officer and Treasurer of the
Issuer since October 1996. From 1993 to 1996, Mr. Race served as Executive Vice
President, Chief Financial Officer and Treasurer of Fleet Mortgage Group. In
1996, Mr. Race was named President of Fleet Mortgage Group. In 1989, Mr. Race
served in the mortgage capital markets and non-conforming products areas of
Fleet Mortgage Group. From 1985 to 1989, Mr. Race served as Vice President and
National Product Manager for Mortgage Baked Securities for Citicorp. From 1982
to 1985, Mr. Race served in the secondary marketing area of North American
Mortgage Company.
ROBERT J. JACOBS has served as Executive Vice President and Secretary of
HLI since February 2, 1996. Mr. Jacobs has served as a Director of HLI since
March 14, 1996. Mr. Jacobs has also served as Secretary of the Issuer since
March 14, 1996 and as Vice President of the Issuer since April 10, 1996. From
1987 to 1996, Mr. Jacobs served as a Senior Vice President and Chief Legal
Officer of Chase Manhattan Mortgage Corporation, and served as General Counsel
for Citicorp Savings of Florida from 1984 to 1986. Mr. Jacobs currently serves
as President and Legislative Chairman of the Mortgage Bankers Association of
Florida.
BETTY L. FRANCIS has served as Chief Credit Officer and as Executive Vice
President of HLI since October 1996 and as Vice President of the Issuer since
April 10, 1996. Ms. Francis served from March 1994 to October 1996 as Chief
Financial Officer of HLI. Ms. Francis served from April 1993 to March 1994 as
the Senior Finance Officer of the Personal Banking Group, and from April 1990 to
April 1993 as the Comptroller of Bank of Boston and BKBC. Ms. Francis is a
Trustee of Commonwealth Energy Services, a gas and electric utility in
Massachusetts.
MARK F. JOHNSON has served as Executive Vice President of Secondary
Marketing and Production of HLI since April 1, 1992. From 1988 to 1992, Mr.
Johnson served as Senior Vice President and Director of Wholesale Lending for
HLI. Mr. Johnson also has served as Vice President of the Issuer since April 10,
1996.
WILLIAM GLASGOW, JR. has served as Executive Vice President of HLI since
July 1991. From October 1989 to July 1991, Mr. Glasgow served as Senior Vice
President with Citicorp Mortgage Inc. in St. Louis, Missouri. Mr. Glasgow has
also served as Vice President of the Issuer since April 10, 1996.
DANIEL T. SCHEUBLE has served as Executive Vice President for Technology,
Loan Processing and Consumer Direct Lending of HLI since 1993. From 1990 to
1992, Mr. Scheuble served as a Senior Technology and Operational Manager at The
First National Bank of Boston. Mr. Scheuble has also served as Vice President of
the Issuer since April 10, 1996.
THOMAS H. FISH has served as Executive Vice President of HLI since 1988.
Mr. Fish has served as Assistant Secretary of HLI since March 14, 1996. Mr. Fish
served as Secretary and General Counsel of HLI from 1988 to March 14, 1996.
CHARLES D. GILMER has served as Senior Vice President and Treasurer of HLI
since October 1993. Mr. Gilmer previously served as the Director of Liability
Management for Citicorp from November 1989 to October 1993.
ANN R. MACKEY has served as Senior Vice President and Finance Director of
HLI since July 1993. From September 1992 to July 1993, Ms. Mackey served as a
manager in International Risk Management for Bank of Boston. Ms. Mackey
previously served as Senior Audit Manager at KPMG Peat Marwick from 1985 to
1992.
THOMAS M. HAGERTY served as Treasurer of the Issuer from March 14, 1996 to
October 1996. Mr. Hagerty served as President of the Issuer from its
organization, December 11, 1995 through March 14, 1996. Mr. Hagerty has served
as a Director of HomeSide since December 11, 1995. Mr. Hagerty has been employed
by the Thomas H. Lee Company since 1988, and currently serves as a Managing
Director. Mr. Hagerty is also a Vice President and Trustee of THL Equity Trust
III, the General Partner of THL Equity Advisors III Limited Partnership, which
is the General Partner of Thomas H. Lee Equity Fund III, L.P. Mr. Hagerty also
serves as a Director of Select Beverages, Inc., TAC Bancshares, Inc. and TAC GP
Corporation.
97
<PAGE> 98
DAVID V. HARKINS has served as a Director of the Issuer since December 11,
1995. Mr. Harkins has been employed by the Thomas H. Lee Company since 1986 and
currently serves as a Senior Managing Director. Mr. Harkins has been Chairman
and Director of National Dentex Corporation, an operator of dental laboratories,
since 1983. Mr. Harkins also serves as Senior Vice President and Trustee of
Thomas H. Lee Advisors I, and T.H. Lee Mezzanine II, affiliates of ML-Lee
Acquisition Fund, L.P., and the ML-Lee Acquisition Funds, respectively,
President and Trustee of THL Equity Trust III, the General Partner of THL Equity
Advisors III Limited Partnership, which is the General Partner of Thomas H. Lee
Equity Fund III, L.P. and is a Director of Stanley Furniture Company, Inc.,
First Alert, Inc., and various private corporations.
JUSTIN S. HUSCHER has served as a Director of the Issuer since December 11,
1995. Mr. Huscher has been principally employed as a Vice President of Madison
Dearborn Partners, Inc. since January 1993. From April 1990 until January 1993,
Mr. Huscher served as Senior Investment Manager of First Chicago Venture
Capital. Mr. Huscher is a member of the operating committees of the general
partners of Huntway Partners, L.P. and Golden Oak Mining Company, L.P.,
respectively, and a member of the board of directors of Bay State Paper Holding
Company and Buckeye Cellulose Corporation.
PETER J. MANNING has served as a Director of the Issuer since December 11,
1995. Mr. Manning has been employed by Bank of Boston and BKBC as Executive
Director, Mergers & Acquisitions since 1993. From 1990 to 1993, Mr. Manning
served as Executive Vice President, Chief Financial Officer and Treasurer of
BKBC and Chief Financial Officer of Bank of Boston.
WILLIAM J. SHEA has served as a Director of the Issuer since October 2,
1996. Mr. Shea has served as Vice Chairman, Chief Financial Officer and
Treasurer of BKBC since June 30, 1996. Mr. Shea served as Executive Vice
President, Chief Financial Officer and Treasurer of BKBC from December, 1992
through June 30, 1996. Prior to joining BKBC, Mr. Shea spent 19 years with
Coopers and Lybrand where he was Vice Chairman and Senior Partner.
KATHLEEN M. MCGILLYCUDDY has served as a Director of the Issuer since March
14, 1996. Ms. McGillycuddy has been employed by Bank of Boston since 1992 and
currently serves as Group Managing Director, Global Asset Liability Management.
Previously, Ms. McGillycuddy was employed by Fleet/Norstar Bank as Executive
Vice President, Corporate Liquidity and Funds Management from 1991 to 1992 and
by Bank of New England as Executive Vice President, Corporate Liquidity and
Capital Markets Manager prior to 1991.
HINTON F. NOBLES JR. has served as a Director of Issuer since May 31, 1996.
Mr. Nobles has been employed by Barnett Banks, Inc. since 1974 and currently
serves as Executive Vice President and a member of the Management Executive
Committee. He was elected Vice President in 1981, Senior Vice President for
Special Services in 1983 and Executive Vice President in 1985. Mr. Nobles was
named to his current position in 1989.
DOUGLAS K. FREEMAN has served as a Director of Issuer since May 31, 1996.
Mr. Freeman joined Barnett Banks, Inc. in 1991 and currently serves as Chief
Consumer Credit Executive and a member of Barnett's Management Operating
Committee. From 1991 to 1995 Mr. Freeman served as Chief Corporate Banking
Executive. Previously, Mr. Freeman was employed by Wells Fargo Bank as Executive
Vice President of Business Banking and by Citizens & Southern Corporation as
Senior Vice President of Product and Sales Management. Mr. Freeman is past
chairman of the Consumer Bankers Association. He also chairs the Governor's
Capital Partnership Board of Florida and serves on the board of The Small
Business Foundation of America, Inc.
CHARLES W. NEWMAN has served as a Director of Issuer since May 31, 1996.
Mr. Newman has been employed by Barnett Banks, Inc. since 1983 and currently
serves as Chief Financial Officer and a member of the Management Executive
Committee. From 1983 to 1991, Mr. Newman served as Vice President and Deputy
Controller, Senior Vice President and Controller, and Executive Vice President
of Barnett Banks, Inc. Mr. Newman was elected to his current position in 1992.
98
<PAGE> 99
EXECUTIVE COMPENSATION
Following the HLI Acquisition, the annual salaries of HomeSide's Chief
Executive Officer and HomeSide's four other most highly compensated executive
officers whose total annual salary will exceed $100,000 are as follows: Joe K.
Pickett, $312,500; Hugh R. Harris, $300,000; Mark F. Johnson, $200,000; William
Glasgow, $200,000 and Charles D. Gilmer, $175,000. Although none of HomeSide's
executive officers are party to any employment or non-competition agreements
with HomeSide and HomeSide is not, therefore, contractually obligated to
continue to pay such salaries, it is expected that the annual salaries of the
named executive officers will not be reduced during the executive officers' term
of employment with HomeSide.
Pursuant to severance agreements with HLI, certain executive officers,
including each of the named executive officers, will be entitled to severance
benefits if he is terminated, or constructively terminated through diminution in
job responsibilities or compensation following an acquisition. If such named
executive officer offers to remain in the employ of HomeSide for one year
following any such acquisition, and is either terminated during that first year
or has his job responsibilities or compensation diminished, he is entitled to a
severance benefit. The severance benefit will be a lump sum payment in cash
equal in the case of each of Messrs. Pickett and Harris to the sum of (i) twice
his annual salary in effect at the time of termination, (ii) his annual bonus
received for the preceding two years and (iii) a pro rata portion of the bonus
he would have received for the year in which termination occurs (paid at the
time the amount of such bonus would have been determined). The severance benefit
for the other named executive officers will be equal to the sum of (i) such
officer's annual salary in effect at the time of termination, (ii) his annual
bonus received for the preceding year, and (iii) a pro rata portion of the bonus
he would have received for the year in which termination occurs (paid at the
time the amount of such bonus would have been determined). The named executive
officers will also receive continued coverage under HomeSide's medical benefit
plans for one year following such termination, or two years following
termination in the case of Messrs. Pickett and Harris.
The named executive officers participate in the HomeSide 1996 Employee
Stock Option Plan under which 34,285 shares of Class A Common Stock are reserved
for issuance. Options issued under the plan may be either non-qualified or
incentive stock options and the options will be exercisable at such prices as
are set by the HomeSide Board of Directors. Under the plan, options will vest in
five equal installments in arrears, or 20% per year. Upon consummation of the
HHI Acquisition, non-qualified options to purchase 23,821 shares were granted at
an exercise price of $175 per share, including options to purchase the following
number of shares granted to the named executive officers: Joe K. Pickett, 4,762;
Hugh R. Harris, 4,762; Mark F. Johnson, 1,905; William Glasgow, 1,905; and
Charles D. Gilmer, 1,905.
HomeSide has also adopted a 1996 Time Accelerated Restricted Stock Option
Plan under which 68,576 shares of Class A Common Stock will initially be
reserved for issuance. Options granted under the plan will be non-qualified and
will be exercisable at such prices as are set by the Board of Directors. Options
granted under the plan will vest nine years from the date of grant, and may be
exercised at any time within six months thereafter. Vesting will accelerate upon
achievement of certain performance criteria. Upon consummation of the HHI
Acquisition, non-qualified options to purchase 47,642 shares were granted at an
exercise price of $175 per share, including options to purchase the following
number of shares granted to the named executive officers: Joe K. Pickett, 9,524;
Hugh R. Harris, 9,524; Mark F. Johnson, 3,810; William Glasgow, 3,810; and
Charles D. Gilmer, 3,810.
See "Certain Relationships and Related Transactions -- Management
Ownership" for information regarding shares of Class A Common Stock sold to
members of management.
99
<PAGE> 100
HLI HISTORICAL EXECUTIVE COMPENSATION
<TABLE>
The following table sets forth all compensation awarded to, earned by or
paid to HomeSide's Chief Executive Officer and HomeSide's four most highly
compensated Executive Officers other than the Chief Executive Officer whose
total annual salary and bonus exceeded $100,000 for all services rendered in all
capacities to HLI and its subsidiaries for HLI's fiscal year ended December 31,
1995. None of HomeSide's named executive officers received any compensation from
HHI during 1995.
SUMMARY COMPENSATION TABLE
<CAPTION>
LONG-TERM PAYOUTS
COMPENSATION AWARDS(2) ----------------------------
----------------------- LONG-TERM
ANNUAL COMPENSATION RESTRICTED SECURITIES INCENTIVE
NAME AND PRINCIPAL -------------------- STOCK UNDERLYING PLAN ALL OTHER
HLI POSITION YEAR SALARY(1) BONUS(1) AWARDS OPTIONS PAYOUTS(3) COMPENSATION(4)
- ------------------------------- ---- --------- -------- ---------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Joe K. Pickett................. 1995 $287,000 $200,000 $68,700 9,600 $215,156 $11,480
Chairman & CEO
Hugh R. Harris................. 1995 275,000 225,000 42,938 6,000 0 11,000
President
Charles D. Gilmer.............. 1995 170,769 155,000 0 0 0 0
Director, Risk Management
Mark F. Johnson................ 1995 190,577 125,000 28,625 4,000 0 7,623
Director,
Wholesale/Securities
Marketing
William Glasgow, Jr............ 1995 189,230 125,000 28,625 4,000 0 7,569
Director Loan Administration
<FN>
- ---------------
(1) The salary and bonus amounts presented were earned in 1995. The payment of certain of such amounts occurred in
1996. The amounts reflected in the table do not include the following bonuses paid to the named executive
officers in 1996 in connection with the closing of the HLI Acquisition: Mr. Pickett, $50,000; Mr. Harris,
$225,000; Mr. Gilmer, $175,000; Mr. Johnson, $200,000; and Mr. Glasgow, $200,000.
(2) Involves Common Stock of BKBC. As of December 31, 1995, the named executive officers held the following
number of restricted shares of BKBC Common Stock having the corresponding year-end market values:
AS OF DECEMBER 31, 1995
<CAPTION>
TOTAL NUMBER OF AGGREGATE
NAME RESTRICTED SHARES HELD MARKET VALUE
---------------------------------------------------------- ---------------------- ------------
<S> <C> <C>
Joe K. Pickett............................................ 5,600 $259,000
Hugh R. Harris............................................ 4,135 191,244
Charles D. Gilmer......................................... 0 0
Mark F. Johnson........................................... 1,784 82,510
William Glasgow, Jr....................................... 1,700 78,625
In connection with the HLI Acquisition, vesting on all of the restricted stock owned by HLI
employees, including the restricted stock listed above, was accelerated and all prior forfeiture and
transferability restrictions thereon were removed.
(3) Represents the dollar value of vested shares of performance restricted stock calculated by multiplying the
closing price of BKBC Common Stock on each vesting date by the number of shares that vested on that date.
(4) Includes matching employer contributions and credits under the Bank of Boston thrift-incentive plan and the
Bank of Boston deferred compensation plan for the named executive officers.
</TABLE>
100
<PAGE> 101
OPTION GRANTS IN 1995
The following table provides information on option grants with respect to
BKBC Common Stock in fiscal 1995 to the named executive officers. Pursuant to
applicable regulations of the Securities and Exchange Commission, the following
table also sets forth the hypothetical value which might have been realized with
respect to such options based on assumed rates of stock appreciation of 5% and
10% compounded annually from date of grant to March 15, 1996, the end of the
option terms:
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT
INDIVIDUAL GRANTS ASSUMED
----------------------- ANNUAL RATES
NUMBER OF OF STOCK PRICE
SECURITIES % OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS
OPTIONS GRANTED TO EXERCISE OPTION TERM
GRANTED EMPLOYEES PRICE EXPIRATION ------------------
NAME (#)(1) IN 1995 ($/SH) DATE 5% 10%
- ------------------------------------- ---------- ----------- --------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Joe K. Pickett....................... 9,600 .90 $28.625 3/15/96 $15,631 $31,362
Hugh R. Harris....................... 6,000 .53 $28.625 3/15/96 $ 9,769 $19,601
Charles D. Gilmer.................... 0 0 0 -- --
Mark F. Johnson...................... 4,000 .40 $28.625 3/15/96 $ 6,513 $13,067
William Glasgow, Jr.................. 4,000 .40 $28.625 3/15/96 $ 6,513 $13,067
</TABLE>
- ---------------
(1) All options were exercised prior to March 15, 1996.
AGGREGATED OPTION EXERCISES IN 1995
AND DECEMBER 31, 1995 OPTION VALUES
The following table provides information on option exercises during 1995
with respect to BKBC Common Stock and on the values of the named executive
officers' unexercised options at December 31, 1995:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED OPTIONS AT YEAR-END(#) OPTIONS AT YEAR-END
ON VALUE ---------------------------- ----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------- ---------- --------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Joe K. Pickett.............. 0 $ 0 32,100 4,800 $687,575 $ 84,600
Hugh R. Harris.............. 0 0 10,200 3,000 202,275 52,875
Charles D. Gilmer........... 0 0 0 0 0 0
Mark F. Johnson............. 0 0 5,200 2,000 108,250 35,250
William Glasgow, Jr......... 4,000 32,750 0 2,000 0 35,250
</TABLE>
In connection with the HLI Acquisition, vesting of all stock options listed
in the preceding table was accelerated and all such options listed as being
unexercised at year end were exercised with values realized as follows: Mr.
Pickett, $753,725; Mr. Harris, $248,550; Mr. Johnson, $139,900; and Mr. Glasgow,
$26,000.
101
<PAGE> 102
RETIREMENT BENEFITS
The following table shows the years of service and the estimated annual
retirement benefits that are payable at age 65 from BKBC to each of the named
executive officers in the form of a single lifetime annuity with an assumed
future annual interest rate of 6.3% through 1996 and 5.5% thereafter on each
individual's cash balance account:
<TABLE>
<CAPTION>
ESTIMATED ANNUAL
PRIOR YEARS OF SERVICE RETIREMENT
NAME AS OF 12/31/95 BENEFIT
- --------------------------------------------------------------- ---------------------- -----------------
<S> <C> <C>
Joe K. Pickett................................................. 15 $73,883
Hugh R. Harris................................................. 12 50,676
Charles D. Gilmer.............................................. 2 2,386
Mark F. Johnson................................................ 13 48,616
William Glasgow, Jr............................................ 4 6,836
</TABLE>
The estimates shown above reflect Bank of Boston's current cash balance
formula (under which credits are made annually to an individual's account at a
rate based on the individual's age and years of service), plus any accrued
benefits under the prior plan formula. These benefits are provided under a
combination of Bank of Boston's tax-qualified retirement plan and certain
supplemental plans.
102
<PAGE> 103
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
<TABLE>
The following table and the paragraphs that follow set forth information
with respect to the beneficial ownership of shares of the Issuer's voting
securities as of August 31, 1996 by (i) all shareholders of the Issuer who own
more than 5% of any class of such voting securities; (ii) each director who is a
stockholder; (iii) certain executive officers; and (iv) all directors and
executive officers as a group, as determined in accordance with Rule 13(d) under
the Securities Exchange Act of 1934.
<CAPTION>
NUMBER OF
SHARES OF
CLASS A PERCENTAGE
NAME OF BENEFICIAL OWNER COMMON STOCK OF CLASS
------------------------ ------------ ----------
<S> <C> <C>
The First National Bank of Boston...................... 674,200 32.96%
100 Federal Street
Boston, MA
Siesta Holdings, Inc. ................................. 674,200 32.96%
3800 Howard Hughes Parkway
Suite 1560
Las Vegas, NV
THL.................................................... 505,650 24.72%
75 State Street
Boston, MA
Madison Dearborn Capital Partners, L.P................. 168,550 8.24%
Three First National Plaza
Chicago, IL
Joe K. Pickett......................................... 4,572 *
Hugh R. Harris......................................... 4,286 *
Charles D. Gilmer...................................... 2,000 *
Mark F. Johnson........................................ 2,860 *
William Glasgow, Jr.................................... 2,572 *
Thomas M. Hagerty...................................... 1,482(1) *
David V. Harkins....................................... 2,333(2) *
All Directors and Executive Officers as a Group (19
persons)............................................. 22,951(3) 1.12%
<FN>
- ---------------
*Less than 1%.
(1) Does not include 504,168 shares owned by THL, as to which Mr. Hagerty
disclaims beneficial ownership.
(2) Does not include 503,317 shares owned by THL, as to which Mr. Harkins
disclaims beneficial ownership.
(3) Does not include the shares held by THL, Madison Dearborn Capital Partners,
L.P., The First National Bank of Boston and Siesta Holdings, Inc., with
which certain directors are affiliated.
</TABLE>
Each of the stockholders set forth above is party to a stockholder
agreement pursuant to which the parties have agreed to certain matters regarding
their ownership of shares of capital stock of the Issuer including, among other
things, election of directors, super majority voting requirements and preemptive
rights. See "Certain Relationships and Related Transactions -- Amended and
Restated Shareholder Agreement."
The Issuer has issued 24,095 shares of the Class A Common Stock to members
of management of HomeSide. HomeSide has also granted options to purchase shares
of the Class A Common Stock pursuant to employee stock option plans. See
"Management -- Executive Compensation," "The Acquisitions" and "Certain
Relationships and Related Transactions."
In addition to those shares of capital stock set forth in the preceding
table, 5,714 shares of Class B Common Stock (non-voting) of the Issuer are
beneficially owned by Smith Barney Inc. and 5,714 shares of Class C Common Stock
(non-voting) of the Issuer are beneficially owned by Robert Morrissey, each
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<PAGE> 104
constituting 100% of the respective class. Within 180 days of an initial public
offering of common stock of the Issuer, a holder of Class C Common Stock may
require the Issuer to purchase any portion of its shares of Class C Common Stock
at a price based upon the average bid prices for the preceding 20 days. In
addition, upon consummation of a merger or sale of substantially all the assets
of the Issuer, a holder of Class C Common Stock may require the Issuer to
purchase any portion of its shares of Class C Common Stock at an appraised fair
market value price.
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<PAGE> 105
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AMENDED AND RESTATED SHAREHOLDER AGREEMENT
Each of THL, MDP, Siesta Holdings, Inc. ("Siesta") and Bank of Boston
(collectively "Investors") and certain other stockholders named therein has
entered into an Amended and Restated Shareholder Agreement with HomeSide dated
May 31, 1996 in connection with the HHI Acquisition which provides for, among
other things, the following:
Election of Directors. The Board of Directors will consist of eleven
members, two directors designated by the Fund, one director designated by MDP,
three directors designated by Siesta, three directors designated by Bank of
Boston, and two directors who are members of management, one of whom will be the
Chairman and the other who will be the President (unless one person holds both
offices, in which case the other member shall be selected jointly by at least
five of the other directors in office). At such time as THL and MDP collectively
own less than one-third of the shares of Class A Common Stock owned by them on
the date of the closing of the HHI Acquisition, they collectively will be
entitled to designate only one director. Each of Siesta and the Bank of Boston
will also be entitled to designate only one director at such time as it owns
less than one-third of the Class A Common Stock owned by it on the closing of
the HHI Acquisition.
Super Majority Consent. A super-majority consent, consisting of a majority
of the directors designated by each of the Fund and MDP collectively, Barnett
and Bank of Boston will be required for: a merger or consolidation of HomeSide
or any of its subsidiaries or a sale of all or substantially all the assets or
stock of HomeSide or any of its subsidiaries where consideration received by the
stockholders of HomeSide is either (i) less than book value of HomeSide or the
relevant subsidiary or (ii) other than cash or securities which the Bank of
Boston or Barnett and their affiliates may lawfully hold; entering into
transactions with Barnett or its affiliates, the Bank of Boston or its
affiliates, THL or MDP or its affiliates; or the removal or election of
HomeSide's or HHI's Chairman, President, Chief Financial Officer or head of risk
management.
Risk Management Committee. The Board of Directors is required to establish
and maintain a Risk Management Committee to monitor execution of the interest
rate policies of HomeSide. Such Committee will at all times include two
representatives of each of Siesta and Bank of Boston and two representatives of
THL and MDP collectively.
Other Committees. Pursuant to the Registration Rights Agreement, described
below, THL has certain rights to demand the initial public offering of HomeSide
equity securities. The Amended and Restated Shareholder Agreement will also
provide THL and MDP "take-along" rights described below. During such time as THL
and MDP have such rights, the Board of Directors will establish an IPO committee
and a sale committee and delegate to them the authority, respectively to cause
HomeSide to undertake an initial public offering of HomeSide's capital stock
under the Securities Act and to cause HomeSide to undertake a merger or
consolidation of HomeSide or a sale of all or substantially all the stock or
assets of HomeSide in accordance with such take-along rights. The IPO and sale
committees will be comprised of members chosen by THL.
Preemptive Rights. Under certain circumstances, if HomeSide proposes to
issue any capital stock, each stockholder shall first have the opportunity to
purchase its pro rata portion of such capital stock, based upon a percentage of
the outstanding shares of Class A Common Stock held or deemed to be held by such
stockholder, upon the same terms as such securities are to be offered to the
proposed recipient.
Right of First Offer. In the event THL, MDP, Bank of Boston or Siesta
intend to transfer any capital stock of HomeSide to an unaffiliated third party,
the transferring stockholder must provide notice thereof to HomeSide and the
other stockholders party to the Amended and Restated Shareholder Agreement.
HomeSide (by action of a majority of the Board of Directors not designated by
the transferring stockholder) has the right, within 15 days of such notice, to
make an offer to buy the shares to be transferred, which offer may but need not
be accepted by the transferring stockholder. If HomeSide does not make such an
offer, or if HomeSide's Board of Directors intends to vote in favor of a sale or
merger of HomeSide or any of its subsidiaries, then the stockholders of HomeSide
shall have the right to offer to buy such stock or assets, which offer may but
need not be accepted by the transferring stockholder or Board of Directors, as
the case may be.
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<PAGE> 106
Co-Sale Rights. If a stockholder decides to sell shares of capital stock
of HomeSide owned by it, then the non-selling stockholders holding shares or
deemed to hold shares of the same class being sold shall have the right to sell
their pro rata percentage of the total number of shares of the class to be sold
to the proposed transferee on the same terms and conditions as the selling
stockholder.
Take-Along Rights. Subject to certain limitations, the stockholders will
be required to sell their shares of stock in the event THL and MDP desire to
sell their shares to an unaffiliated third party in an arm's-length transaction
but only while THL and MDP and their respective affiliates collectively own at
least 70% of the shares owned by them on the closing of the HLI Acquisition.
Prohibited Transfers. Transfers of capital stock to certain direct
competitors of Barnett or Bank of Boston will be prohibited without the consent
of Siesta or Bank of Boston, as the case may be.
Non-Competition. Subject to certain exceptions, including with respect to
certain acquisitions by any of the Investors, Barnett or certain of their
affiliates or an acquisition by another person of BKBC, Barnett or certain of
their affiliates, for a ten-year period, the Investors and Barnett will not
engage in certain acts in competition with HomeSide. Also, subject to certain
exceptions, HomeSide will agree that it will not market through retail branches,
for a ten-year period, any products or services which are competitive with
products or services then being marketed (i) by Barnett or its affiliates in
Florida (other than within a 50-mile radius of Jacksonville at the same level as
such products or services are being marketed on the date of the HHI Acquisition
Agreement) or (ii) by Bank of Boston or its affiliates in Massachusetts,
Connecticut, or Rhode Island.
Termination. Except for the provisions concerning certain related party
transactions, the Amended and Restated Shareholder Agreement shall terminate on
the first to occur of (i) consummation of one or more public offerings of equity
securities of HomeSide with aggregate offering price to the public of at least
$50,000,000 or (ii) the tenth anniversary of the Amended and Restated
Shareholder Agreement.
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
Subject to certain limitations, pursuant to the Amended and Restated
Registration Rights Agreement among HomeSide and the Investors dated May 31,
1996, upon the request of (i) holders of shares of Class A Common Stock
aggregating more than 50% of the number of shares of Class A Common Stock then
held by THL, (ii) the Bank of Boston, (iii) MDP, or (iv) Siesta (provided that
no request may be made for registration of securities with an expected aggregate
offering price to the public of less than $20,000,000), HomeSide will use its
best efforts to effect the registration of the Class A Common Stock requested by
such stockholder to be registered and the Class A Common Stock of all other
holders who have requested registration in connection therewith; provided that
(x) HomeSide is not required to effect more than two registrations pursuant to
any request made by any of the foregoing parties, and (y) prior to an initial
public offering of equity securities of HomeSide pursuant to the Securities Act
(so long as THL and MDP hold in the aggregate a greater percentage of Class A
Common Stock then outstanding than the Bank of Boston or Siesta), HomeSide need
not effect such registration unless the request is made by the holders of shares
of Class A Common Stock aggregating more than 50% of the Class A Common Stock
held by THL. Under certain circumstances, if HomeSide proposes to register
shares of its Class A Common Stock, it will, upon the written request of any
stockholder, register such requesting stockholder's Class A Common Stock,
subject to pro rata reduction in the event all securities requested to be
included in the registration statement cannot, in the opinion of the managing
underwriter, be so included.
In addition, following any transfer of 50% or more of the capital stock
collectively owned by THL, MDP and their affiliates on the HLI Acquisition
closing, THL's rights to a demand registration prior to an initial public
offering will terminate but will inure to the benefit its transferees.
EXCLUSIVE MARKETING AGREEMENTS
HomeSide has entered into a Marketing Agreement dated March 15, 1996 (the
"BKBC Marketing Agreement") with BKBC pursuant to which HomeSide and BKBC may
market services to HomeSide
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<PAGE> 107
customers who are also BKBC customers ("BKBC Customers") and other customers of
HomeSide. Under this agreement: (a) HomeSide has the exclusive right, subject to
certain limitations, to market to all customers any mortgage loan refinancings,
(b) HomeSide has the non-exclusive right to market first mortgage loans (other
than refinancings) to BKBC Customers and the exclusive right to market such
loans to other HomeSide customers, (c) HomeSide has the exclusive right to
market "other" mortgage loans to customers who are not BKBC Customers, and BKBC
has the exclusive right to market such mortgage loans to BKBC Customers, (d)
HomeSide has the non-exclusive right, subject to certain limitations, to offer
certain "Eligible Products" (mortgage credit insurance, relocation services,
title insurance, title search, appraisal services, private mortgage insurance,
escrow services, hazard insurance services and certain other products) to BKBC
Customers and the exclusive right to offer Eligible Products to other customers,
and (e) BKBC has the exclusive right to offer certain banking services to BKBC
Customers and the non-exclusive right to offer such services to other customers.
Under the Agreement BKBC may not engage in a formal program to solicit
HomeSide's customers for refinancings.
The term of the Marketing Agreement is the later of: (a) eight years, or
(b) the third anniversary of the termination of the Operating Agreement (which
has a term of five years). See "-- Other BKBC Agreements -- Operating
Agreement".
HomeSide has also entered into a Marketing Agreement dated May 31, 1996
(the "Barnett Marketing Agreement") with Barnett which is substantially similar
to the BKBC Marketing Agreement, except that it governs rights with respect to
"Barnett Customers" as defined therein rather than with respect to BKBC
Customers.
TRANSITIONAL SERVICES AGREEMENTS
Bank of Boston and its affiliate banks (the "BKB Banks") and HomeSide have
entered into a series of Transitional Services Agreements dated March 15, 1996,
pursuant to which the BKB Banks agreed to make available to HomeSide, at the BKB
Banks' cost, certain corporate services, including travel and relocation,
general ledger support, audit, payroll, retirement plans, computer services,
disbursement accounting, purchasing, telecommunications/workstation support and
human resources. HomeSide also agreed to make available to the BKB Banks, at
HomeSide's cost, certain administrative services, including mortgage loan
origination support, mortgage loan quality control services, affordable housing
loan support and pledged loan support services.
Barnett and HomeSide have entered into a Transitional Services Agreement
dated May 31, 1996, pursuant to which Barnett agreed to make available to
HomeSide office space and certain corporate services, including finance
services, accounting services, purchasing services, benefits and compensation
administration, human resources and staffing services and technology services.
HomeSide will reimburse Barnett for its cost of providing these items to
HomeSide.
The terms of the services provided under the Transitional Services
Agreements vary. As a general matter, the services will be provided to the
receiving party until the receiving party no longer requires the services, but
in no event later than December 31, 1996. The term may be extended for 90 days
for most services, upon 60 days' prior written notice.
OTHER BKBC AGREEMENTS
Operating Agreement
The BKB Banks and HomeSide have entered into an Operating Agreement, dated
March 15, 1996 (the "BKBC Operating Agreement"), which sets forth the parties'
roles with respect to new loan originations and servicing rights. With certain
exceptions, the BKB Banks are required to sell all mortgage loan production to
HomeSide during the term of the BKBC Operating Agreement. In particular, among
other things, the BKBC Operating Agreement: (a) describes the mortgage loan
products to be purchased by HomeSide from BKB Banks, (b) ensures that the BKB
Banks will receive the most favorable pricing and service released premiums
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<PAGE> 108
offered by HomeSide to mortgage brokers or, upon agreement of the parties,
correspondents, (c) describes HomeSide's customer service levels, (d) sets forth
warehouse and pipeline management rights and obligations, (e) describes the
technology support which the parties will provide to one another, (f) describes
the mortgage loan production and support functions to be provided by the
parties, (g) describes the reports and information to be provided periodically
by HomeSide to the BKB Banks, including, but not limited to, risk management,
internal performance and management reports, (h) sets forth the penalties to be
paid by the BKB Banks for failing to satisfy the buy price expiration dates, (i)
describes BKB Banks' mortgage loan repurchase obligations, and (j) restricts
HomeSide's ability to sell servicing rights relating to BKB Banks' portfolio
mortgage loans.
The fees to be paid by the BKB Banks to HomeSide for loan servicing are
"market" fees consistent with the fees charged by HomeSide to other mortgagees.
The term of the BKBC Operating Agreement is five years. The termination of
the BKBC Operating Agreement will not affect HomeSide's right to service
mortgage loans serviced prior to the termination date.
Brokered Loan Purchase and Sale Agreement
HomeSide and the BKB Banks have also entered into a Brokered Loan Purchase
and Sale Agreement, dated March 15, 1996, which describes the mortgage loans
which are eligible for sale to HomeSide by BKB, and related pricing and delivery
requirements for such loans. The BKB Banks will receive the most favorable
pricing offered by HomeSide to mortgage brokers or, upon agreement of the
parties, correspondents. Under certain conditions, the BKB Banks must indemnify
HomeSide or repurchase mortgage loans from HomeSide. The agreement provides
certain underwriting, appraisal, mortgage insurance and escrow requirements.
The term of the Brokered Loan Purchase Agreement is five years but will
automatically terminate upon the termination of the Operating Agreement.
PMSR Flow Agreement
HomeSide and the BKB Banks have entered into a PMSR Flow Agreement dated
March 15, 1996, which requires the BKB Banks, subject to certain exceptions, to
sell to HomeSide the servicing rights to the BKB Banks' portfolio mortgage
loans. The agreement also requires the BKB Banks to provide certain notices to
government agencies, flood service providers, insurance carriers and borrowers
upon the transfer of servicing rights to HomeSide. The agreement describes the
BKB Banks' obligation to prepare and record assignments of mortgage and pay tax,
service-related fees and flood service fees. Under certain conditions, the BKB
Banks must reimburse the servicing rights purchase price to HomeSide.
The term of the PMSR Flow Agreement is five years but will automatically
terminate upon the termination of the BKBC Operating Agreement.
Mortgage Loan Servicing Agreement
HomeSide and the BKB Banks have entered into a Mortgage Loan Servicing
Agreement dated March 15, 1996 (the "BKBC Servicing Agreement"), which requires
HomeSide, subject to certain exceptions, to service the BKB Banks' portfolio
mortgage loans. HomeSide is also required to use reasonable efforts to collect
mortgage loan payments, to remit principal and interest to the BKB Banks each
month and to perform general ledger reconciliations and other related tasks.
HomeSide is also required to perform certain default loan administration and
foreclosure activities. HomeSide will provide additional services for the BKB
Banks' private banking clients.
The servicing fees to be paid by the BKB Banks to HomeSide are market-based
fees consistent with the fees charged by HomeSide to other mortgagees.
The term of the BKBC Servicing Agreement is five years. The BKB Banks will
not be obligated to deliver portfolio mortgage loan servicing rights to HomeSide
upon the termination of the BKBC Operating Agreement. However, the termination
of the BKBC Operating Agreement will not affect HomeSide's right to
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<PAGE> 109
continue servicing the BKB Banks' portfolio loans that are being serviced by
HomeSide as of such termination date.
OTHER BARNETT AGREEMENTS
Operating Agreement
Barnett and HomeSide have entered into an Operating Agreement, dated May
31, 1996 (the "Barnett Operating Agreement"), which sets forth the parties'
roles with respect to new loan originations and servicing rights. With certain
exceptions, Barnett and its affiliate banks (the "Barnett Banks") are required
to sell all mortgage loan production to HomeSide during the term of the Barnett
Operating Agreement. In particular, among other things, the Barnett Operating
Agreement: (a) describes the mortgage loan products to be purchased by HomeSide
from Barnett Banks, (b) ensures that the Barnett Banks will receive the most
favorable pricing and servicing released premiums offered by HomeSide to
mortgage correspondents, (c) describes HomeSide's customer service levels, (d)
sets forth warehousing and pipeline management rights and obligations, (e)
describes the technology support which the parties will provide to one another,
(f) describes the mortgage loan production and support functions to be provided
by the parties, (g) describes the reports and information to be provided
periodically by HomeSide to the Barnett Banks, including, but not limited to,
risk management, internal performance and management reports, (h) sets forth
penalties to be paid by the Barnett Banks for failing to satisfy the buy price
expiration dates, (i) describes Barnett Banks' mortgage loan repurchase
obligations, and (j) restricts HomeSide's ability to sell servicing rights
relating to the Barnett Banks' portfolio mortgage loans. The fees to be paid by
the Barnett Banks to HomeSide for loan servicing are market-based fees
consistent with the fees charged by HomeSide to other mortgagees.
The term of the Barnett Operating Agreement is 5 years, subject to earlier
termination in certain specified instances. The termination of the Barnett
Operating Agreement will not affect HomeSide's rights to service mortgage loans
serviced prior to the termination date.
Correspondent Loan Purchase Agreement
HomeSide and Barnett Banks have entered into a Correspondent Loan Purchase
Agreement, dated May 16, 1996, which describes the mortgage loans which are
eligible for sale to HomeSide by the Barnett Banks and related pricing and
delivery requirements for such loans. The Barnett Banks will receive the most
favorable pricing offered by HomeSide to other correspondents. Under certain
conditions, the Barnett Banks must repurchase mortgage loans for HomeSide. The
Agreement provides certain underwriting, appraisal, mortgage insurance and
escrow requirements.
The term of the Correspondent Loan Purchase Agreement is 5 years but will
automatically terminate upon the termination of the Operating Agreement.
PMSR Flow Agreement
HomeSide and the Barnett Banks have entered into a PMSR Flow Agreement
dated May 31, 1996, which requires the Barnett Banks, subject to certain
exceptions, to sell to HomeSide the servicing rights to the Barnett Banks'
portfolio mortgage loans. The Agreement also requires the Barnett Banks to
provide certain notices to government agencies, flood service providers,
insurance carriers and borrowers upon the transfer of servicing rights to
HomeSide. The Agreement describes the Barnett Banks' obligation to prepare and
record assignments of mortgage and pay tax, service-related fees and flood
service fees. Under certain conditions, the Barnett Banks must reimburse the
servicing rights purchase price to HomeSide.
The term of the PMSR Flow Agreement is 5 years but will automatically
terminate upon the termination of the Barnett Operating Agreement.
Mortgage Loan Servicing Agreement
HomeSide and the Barnett Banks have entered into a Mortgage Loan Servicing
Agreement dated as of May 31, 1996 (the "Barnett Servicing Agreement") which
requires HomeSide, subject to certain exceptions,
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<PAGE> 110
to service the Barnett Banks' portfolio mortgage loans. HomeSide is also
required to use reasonable efforts to collect mortgage loan payments, to remit
principal and interest to the Barnett Banks each month and to perform general
ledger reconciliations and other related tasks. HomeSide is also required to
perform certain default loan administration and foreclosure activities. HomeSide
will provide additional services for the Barnett Banks' private banking clients.
The servicing fees to be paid by the Barnett Banks to HomeSide are
market-based fees consistent with those charged by HomeSide to other mortgagees.
The term of the Barnett Servicing Agreement is 5 years. The Barnett Banks
will not be obligated to deliver portfolio mortgage loan servicing rights to
HomeSide upon the termination of the Barnett Operating Agreement. However, the
termination of the Barnett Operating Agreement will not affect HomeSide's right
to continue servicing the Barnett Banks' portfolio loans that are being serviced
by HomeSide as of such termination date.
Each of the foregoing agreements described under "Certain Relationships and
Related Transactions" was entered into in connection with either the HLI
Acquisition or the HHI Acquisition. No additional consideration was paid or
received by HomeSide in connection with the execution and delivery thereof.
MANAGEMENT AGREEMENTS
HomeSide will pay the Thomas H. Lee Company (the "Lee Company"), Madison
Dearborn Partners, Inc., Bank of Boston and Barnett Banks, Inc. pursuant to
management agreements entered into in connection with the HLI Acquisition and
the HHI Acquisition, an annual management fee of $250,000, $83,333, $333,333 and
$333,333, respectively. Such management agreements have a term of five years
automatically extended for successive one year terms, except either party may
terminate the agreement by delivering notice thereof 90 days prior to the end of
any such term. The management agreements also terminate upon an initial public
offering of common stock of HomeSide.
MANAGEMENT OWNERSHIP
HomeSide has established option plans for employees of HomeSide pursuant to
which HomeSide will grant options to purchase shares of Class A Common Stock of
HomeSide equal to approximately 5% of the outstanding Class A Common Stock of
HomeSide.
In addition, certain members of management have purchased in the aggregate
24,095 shares of Class A Common Stock of HomeSide at a price of $175 per share,
the same price paid by the other Investors. In the case of certain purchasers,
the shares have been acquired with the proceeds of loans from HLI. Such loans
are evidenced by recourse notes secured by a pledge of the shares purchased,
having a term of approximately 5 years and bearing interest at 8.25% per annum.
In the case of the executive officers of HomeSide, the principal amount of such
indebtedness outstanding at June 17, 1996 was as follows: Mr. Pickett
($400,000); Mr. Harris ($350,000); Mr. Jacobs ($50,000); Ms. Francis ($100,000);
Mr. Johnson ($250,000); Mr. Glasgow ($225,000); Ms. Mackey ($10,000). The
management purchasers are party to a Management Stockholders' Agreement that
contains various restrictions on transfer. Management holders also have
piggyback registration rights. There is no right of repurchase by HomeSide upon
termination of employment. Upon death of a management shareholder, such
management shareholder's estate has a right to require HomeSide to acquire the
shares owned by such management shareholder and his or her permitted
transferees, subject to certain conditions and restrictions, for the lower of
$175 per share and fair market value.
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<PAGE> 111
DESCRIPTION OF BANK CREDIT AGREEMENT
Each of HLI and Honolulu Mortgage is a party to a credit agreement (the
"Bank Credit Agreement") that includes a warehouse credit facility (the
"Warehouse Credit Facility") and a servicing receivables credit facility
("Servicing Credit Facility") (collectively, the "Facilities"). The Bank Credit
Agreement provides for availability of up to $2.5 billion which may be used to
provide funds for HLI's and Honolulu Mortgage's business of making, originating,
acquiring and servicing mortgage loans.
WAREHOUSE CREDIT FACILITY
The Warehouse Credit Facility provides for availability up to $2.5 billion
of borrowings, less amounts borrowed under the Servicing Credit Facility,
governed by a borrowing base which includes pools of loans that are subject to
binding sale commitments or hedge contracts and certain mortgage-backed
securities. The Warehouse Credit Facility terminates on May 31, 1999 (the
"Warehouse Termination Date").
SERVICING CREDIT FACILITY
The Servicing Credit Facility provides for availability of up to $950.0
million of borrowings governed by a borrowing base which includes (i) eligible
receivables arising from HLI's or Honolulu Mortgage's, as the case may be,
required monthly principal and interest payments for FHLMC, FNMA and GNMA
mortgage-backed securities, (ii) eligible claims receivable related to
foreclosed loans serviced by BBMC, (iii) eligible receivables in respect of
payments of real estate taxes or receivables arising from insurance premiums in
respect of serviced loans, (iv) a portion of the value of the servicing
portfolio, (v) eligible receivables in respect of advances made by HLI or
Honolulu Mortgage, as the case may be, to repurchase certain loans which are to
be prepaid, and (vi) advances made by HLI or Honolulu Mortgage, as the case may
be, with respect to certain defaulted loans. The Servicing Credit Facility
terminates on the Warehouse Termination Date.
SECURITY
Borrowings under the Bank Credit Agreement are secured by (i) all mortgage
loans and mortgage-backed securities submitted for inclusion in the Warehouse
Credit Facility borrowing base and all take-out commitments and hedge contracts
related thereto, (ii) all servicing rights and hedge contracts and receivables
related thereto, and (iii) any other assets included in determining the
borrowing bases under the facilities. Borrowings under the facilities are
guaranteed by the Issuer. In addition, the Issuer has pledged to the Lenders (as
defined in the Bank Credit Agreement) all of the capital stock of HHI, HHI has
pledged all the capital stock of HLI and HLI has pledged all the capital stock
of its subsidiaries as security under the Bank Credit Agreement. Upon certain
events, including the achievement of unsecured long-term senior non-credit-
enhanced debt ("Rated Debt") ratings of at least A- by Standard & Poor's Rating
Services ("S&P") and at least A3 by Moody's Investor Services, Inc. ("Moody's"),
the Facilities become unsecured (except for the stock pledges). The Facilities
will again be required to be secured upon the occurrence of certain other
events.
OPTIONAL AND MANDATORY PREPAYMENTS
The entire unpaid principal balance under the Warehouse Credit Facility and
the Servicing Credit Facility will be due and payable on the Warehouse
Termination Date. HLI or Honolulu Mortgage, as the case may be, may prepay
(without premium) all or any part of the loans under the Bank Credit Agreement
or reduce the commitment (without penalty) under the Warehouse Credit Facility
at any time or from time to time in certain minimum increments following
specified notice periods. In addition, mandatory prepayments will be required
(i) in the amounts by which borrowings outstanding exceed the related borrowing
base at any time, (ii) with certain proceeds from debt issuances and (iii) with
proceeds of certain termination and similar fees under servicing agreements.
Amounts repaid under the Facilities may, absent any uncured or unwaived default
under the Bank Credit Agreement, be reborrowed during the term of the Warehouse
Credit Facility.
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INTEREST RATES AND FEES
Loans under the Bank Credit Agreement will bear interest at rates per
annum, based on, at HLI's option, (A) the highest of (i) Chemical Bank's prime
rate, (ii) the secondary market rate for certificates of deposit plus 1%, and
(iii) the federal funds rate in effect from time to time plus 0.5%, or (B) a
eurodollar rate, in each case based upon the rating of the Rated Debt as
announced by S&P, Fitch Investors Service, Inc. ("Fitch") and Moody's as
applicable, and in accordance with the following:
<TABLE>
<CAPTION>
APPLICABLE MARGIN APPLICABLE MARGIN APPLICABLE MARGIN
FOR WAREHOUSE FOR SERVICING FOR SERVICING
RATING LEVEL LOANS ADVANCE LOANS PORTFOLIO LOANS
----------------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
A- or higher....................... 0.350% 0.350% 0.600%
BBB+............................... 0.400% 0.400% 0.675%
BBB or BBB-........................ 0.450% 0.450% 0.750%
BB+ or BB.......................... 0.625% 0.625% 1.000%
BB- or lower....................... 0.625% 0.625% 1.500%
</TABLE>
For purposes of determining the applicable interest rate under the Bank
Credit Agreement, the applicable rating is deemed to be two increments higher
than the rating announced by both S&P and Fitch (or if different ratings are
announced, the lower of the two), such that if the Rated Debt was BB+, the rate
for purposes of the Bank Credit Agreement would be BBB. In the event that
Moody's issues a comparable debt rating and such rating (after adjusting to
increase by two increments) differs from the rating level in effect pursuant to
the above grid by (i) two increments or more, the applicable pricing level will
be deemed to be one pricing level below (i.e. having a larger margin) the higher
of such rating levels or (ii) one increment, the applicable pricing level shall
be deemed to be the higher (i.e. having a smaller margin) of such rating levels.
Until September 15, 1996, the "BBB or BBB-" rating level will apply to the Rated
Debt unless the actual rating level determined as set forth above is a lower
rating level. The margins set forth in the middle column above apply only to
portions of the Servicing Credit Facility borrowing base constituting advance
receivables, while the margins in last column above apply to all other portions
of the Servicing Credit Facility borrowing base.
The annual commitment fee on the Facilities ranges from 0.125% to 0.375% of
the commitments thereunder depending upon the rating of the Rated Debt.
RESTRICTIVE COVENANTS
The Bank Credit Agreement contains certain covenants that impose
limitations and requirements on HLI and the Issuer and their subsidiaries,
including limitations with respect to payments, dividends or distributions from
HLI to the Issuer, except that HLI may, so long as no event of default has
occurred and is continuing under the Bank Credit Agreement, (i) declare and pay
cash dividends to the Issuer in an amount equal to the actual taxes paid in cash
by the Issuer, (ii) declare and pay cash dividends to the Issuer to allow it to
redeem capital stock of the Issuer held by directors and employees pursuant to
employment arrangements of HLI, in an aggregate annual amount not to exceed
$2,000,000, (iii) declare and pay cash dividends to the Issuer to allow it to
redeem Class C Common Stock issued in connection with the HLI Acquisition in an
amount not to exceed $7,500,000 in the aggregate, (iv) subject to certain
conditions, declare and pay cash dividends to the Issuer, in an amount not to
exceed $75,000 in the aggregate in each fiscal year of HLI, (v) declare and pay
dividends to allow the Issuer to pay fees and expenses incurred in the
administration of its ordinary and normal activities and (vi) declare and pay
cash dividends to the Issuer in an amount equal to the actual interest payable
in cash by the Issuer on the Notes, provided, however, that no such payments or
distributions will be permitted when a payment default has occurred and is
continuing under the Bank Credit Agreement or during a "blocking period." A
"blocking period" occurs under the Bank Credit Agreement beginning upon the
delivery by the administrative agent thereunder to HLI and the Trustee under the
Indenture of a notice that a default or event of default exists under the Bank
Credit Agreement and continues until the earlier to occur of the 180th day
following delivery of such notice and the date such default or event of default
is cured or waived. Only one blocking period may be commenced within any 365
consecutive day period.
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<PAGE> 113
Other covenants in the Bank Credit Agreement will impose limitations on HLI
and its subsidiaries with respect to, among other things: (i) the incurrence of
certain additional indebtedness; (ii) the incurrence of liens; (iii) the making
of certain investments other than certain permitted investments; (iv)
fundamental changes in HLI's business activities or the sale or disposition of a
substantial part of HLI's business or the acquisition of substantially all of
the assets or stock of any other person other than the dissolution of inactive
subsidiaries of HLI or intercompany mergers, sales or consolidation; (v) capital
expenditures in excess of $10.0 million in any fiscal year; (vi) transactions
with affiliates; (vii) entering into new lines of business; (viii) making
optional prepayments or redeeming or purchasing any indebtedness evidenced by
the Notes or modifying any such indebtedness; or (ix) amending the material
terms of HomeSide's Stockholder Agreement; except that (a) the Special
Redemption Notes may be repaid in accordance with the terms of the Holdings
Guarantee (as defined in the Bank Credit Agreement), including any make-whole or
prepayment premium required by the terms thereof and (b) the Issuer may redeem
or repay, in an aggregate amount not to exceed $25,000,000, a portion of the
principal amount of the Notes with the proceeds of the issuance by the Issuer of
capital stock other than certain specifically enumerated issuances. These
covenants are subject to various other customary exceptions under the Bank
Credit Agreement.
HLI is also required to maintain compliance with certain financial
covenants, including:
(a) Maintaining a Minimum Consolidated Tangible Net Worth (as defined
in the Bank Credit Agreement) equal to the sum of (i) an amount equal to
80% of Adjusted Consolidated Tangible Net Worth (as defined in the Credit
Agreement) as of March 15, 1996 plus (ii) an amount equal to 50% of the
excess of (A) the aggregate amount of net proceeds received during the
period from March 15, 1996 through such date by the Issuer from the
issuance of capital stock other than to Investors over (B) the amount
thereof applied to prepay or redeem the Notes plus (iii) an amount equal to
80% of the sum of Consolidated Net Income (as defined in the Credit
Agreement) for each fiscal quarter for which Consolidated Net Income is
positive during the period from the March 15, 1996 through the last day of
the most recently ended fiscal quarter of HLI less (iv) the amount of
Restricted Payments (as defined in the Bank Credit Agreement) actually made
by HLI and permitted under the Bank Credit Agreement during the period
March 15, 1996 through such date (to the extent such Restricted Payments
were not deducted in determining such Adjusted Consolidated Tangible Net
Worth).
(b) Not permitting the ratio of Consolidated Total Liabilities (as
defined in the Bank Credit Agreement) to Adjusted Consolidated Tangible Net
Worth to exceed (i) 7.5:1.0 at any time during the period from March 15,
1996 through and including March 31, 1997 or (ii) 7.0:1.0 at any time
thereafter.
(c) Not permitting the ratio of Consolidated Servicing-Related Debt
(as defined in the Bank Credit Agreement) to Adjusted Consolidated Tangible
Net worth to exceed (i) 2.0:1.0 at any time during the period from March
15, 1996 through and including September 30, 1997, (ii) 1.75:1.0 at any
time during the period from and including October 1, 1997 through and
including September 30, 1998 or (iii) 1.5:1.0 thereafter.
(d) Not permitting (i) for any period beginning on March 15, 1996 and
ending on the earlier to occur of the last day of the fiscal year of HLI
first ending after March 15, 1996 or the last day of the fiscal quarter of
HLI ending on March 31, 1997, or (ii) for any period of four consecutive
fiscal quarters of HLI ending thereafter, the ratio of (A) the sum of (1)
Consolidated Cash Flow (as defined in the Bank Credit Agreement) for such
period plus (2) Consolidated Interest and Dividend Expense (as defined in
the Bank Credit Agreement) for such period to (B) Consolidated Interest and
Dividend Expense for such period to be less than 2.75:1.0.
EVENTS OF DEFAULT
The Bank Credit Agreement contains certain standard payment, covenant, and
bankruptcy-related events of default, as well as other events of default,
including, among other things, (i) the failure of HLI to pay any amount of
principal under the Bank Credit Agreement when due or any interest or fees under
the Bank Credit Agreement within five days after such amounts are due; (ii) the
failure of any party to a loan document (each, a "Loan Party") to comply with
any covenant, agreement, condition, provision, or term of any Loan
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<PAGE> 114
Document (as defined in the Bank Credit Agreement), provided that, in certain
cases, such Loan Party has a 30-day grace period in which to remedy such
failure; (iii) the default by the Issuer, HLI or any of its subsidiaries in
payment of indebtedness aggregating $15.0 million or more, or the default by the
Issuer, HLI or any of its subsidiaries in the observance of any agreement or
condition relating to indebtedness aggregating $15.0 million or more which
permits or causes the holder thereof to cause such indebtedness to become due
prior to its stated maturity; (iv) entry of unpaid judgments against HLI or any
subsidiary of HLI of $10.0 million or more other than judgments that have been
stayed pending appeal within 60 days of entry; (v) the occurrence of certain
events under the Employee Retirement Income Security Act of 1974, as amended
('ERISA"), that would have a material adverse effect on HLI and its
subsidiaries; (vi) except upon a Positive Security Event, the failure of any
Security Document (as defined in the Bank Credit Agreement) to remain in full
force and effect or any lien granted pursuant thereto to remain legal, valid and
enforceable; (vii) the failure of any Guarantee (as defined in the Bank Credit
Agreement) to remain in full force and effect, (viii) certain bankruptcy and
insolvency events; (ix) any execution or attachment whereby a substantial part
of HLI's property is taken or attempted to be taken and that is not vacated or
stayed within 60 days; and (x) certain changes of control relating to the Issuer
and HLI, including where (a) the Issuer ceases to own 100% of the capital stock
of HLI and/or the ownership of the Issuer by the Investors on March 15, 1995
falls below certain percentages or (b) a certain number of directors of the
Issuer as of March 15, 1995 fail to continue as directors of the Issuer.
114
<PAGE> 115
DESCRIPTION OF THE EXCHANGE NOTES
The Notes (including the Exchange Notes offered hereby) will be issued
pursuant to the terms of an indenture dated as of May 14, 1996 (the "Indenture")
between Homeside, Inc., as issuer, and The Bank of New York, as trustee (the
"Trustee"). The Indenture will be subject to and governed by the provisions of
the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The
following summary of the material provisions of the Indenture does not purport
to be complete and is subject to, and qualified in its entirety by reference to,
the provisions of the Indenture, including the definitions of certain terms
contained therein and those terms made part of the Indenture by reference to the
Trust Indenture Act. For definitions of certain capitalized terms used in the
following summary, see "-- Certain Definitions."
GENERAL
The Notes will mature on May 15, 2003, will be limited to $200 million
aggregate principal amount and will be secured as described below. Each Note
will bear interest at the rate set forth on the cover page hereof from May 14,
1996 or from the most recent interest payment date to which interest has been
paid or duly provided for, payable on November 15, 1996 and semiannually
thereafter on May 15 and November 15 in each year until the principal thereof is
paid or duly provided for to the Person in whose name the Note (or any
predecessor Note) is registered at the close of business on the May 1 or
November 1 next preceding such interest payment date. Interest will be computed
on the basis of a 360-day year comprised of twelve 30-day months. (Sections 311
and 314) The circumstances under which the interest rate may increase from the
rate set forth on the front cover hereof are described below.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes will be exchangeable and transferable, at the office or agency of
the Issuer in The City of New York maintained for such purposes (which initially
will be the office of the Trustee); provided, however, that, at the option of
the Issuer, interest may be paid by check mailed to the address of the Person
entitled thereto as such address shall appear on the security register.
(Sections 305 and 311) The Notes will be issued only in fully registered form
without coupons and only in denominations of $1,000 principal amount and any
integral multiple thereof. (Section 302) No service charge will be made for any
registration of transfer or exchange or redemption of Notes, but the Issuer may
require payment in certain circumstances of a sum sufficient to cover any tax or
other governmental charge that may be imposed in connection therewith. (Section
305)
SECURITY
The Notes will be secured by a second priority pledge, subject to a first
priority pledge in favor of the lenders under the Bank Credit Agreement, of all
of the capital stock of each of the Issuer's current and future Subsidiaries
held directly by the Issuer, including all of the capital stock of HLI held by
HHI (collectively, the "Pledged Stock"), together with profits and proceeds
therefrom and property received with respect to the Pledged Stock in addition
thereto, in exchange therefor or in substitution therefor (collectively, the
"Collateral").
So long as no Event of Default has occurred and is continuing, the Issuer
or HHI, as the case may be, will be entitled to receive and retain cash
dividends and other cash distributions on any of the Pledged Stock and will be
entitled to vote the Pledged Stock. The Bank Agent will, among other things,
have the right to direct and control any sale or other disposition of the
Collateral in foreclosure or other judicial proceedings or private sale, none of
which require the consent of holders of the Notes. Upon any such sale or
disposition of the Collateral, the lien securing the Notes will be automatically
extinguished, with the rights of the holders of the Notes in the event of such
sale being limited to the right to receive excess proceeds after payment in full
of all costs and expenses of sale or disposition and all indebtedness under the
Bank Credit Agreement. Any such excess proceeds will be applied, first to
amounts due to the Trustee, second to the payment of all amounts due and unpaid
on the Notes and, finally, any surplus to the Issuer or the applicable pledgor
or to whomever may be lawfully entitled to receive such surplus. The Notes are
not secured by any lien on, or other security interest in, any other properties
or assets of the Issuer or any other properties or assets of any Subsidiary. The
security
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<PAGE> 116
interest in the Collateral will not alter the effective subordination of the
Notes to the creditors of Subsidiaries whose stock is included in the
Collateral.
RANKING
The Notes will be senior obligations of the Issuer and the Indebtedness
evidenced by the Notes will rank pari passu in right of payment with all other
existing and future senior indebtedness of the Issuer. At August 31, 1996, the
aggregate outstanding principal amount of senior indebtedness of the Issuer was
approximately $2,288.2 million, of which $2,088.2 million represented the
guarantee by the Issuer of the indebtedness of its subsidiaries under the Bank
Credit Agreement.
The business operations of the Issuer are conducted through its
subsidiaries, and the Issuer is therefore ultimately dependent on the cash flow
of such subsidiaries to meet its obligations, including its obligations under
the Notes. All indebtedness of the Issuer, including the Notes, will be
effectively subordinated to all obligations of its subsidiaries, including all
obligations under the Bank Credit Agreement. At August 31, 1996, the Issuer's
subsidiaries had approximately $2,109.6 million of indebtedness outstanding. See
"Risk Factors -- Holding Company Structure; Effective Subordination; Limitation
on the Payment of Funds to Issuer by Subsidiaries."
SINKING FUND
The Notes will not be entitled to the benefit of any sinking fund.
REDEMPTION
<TABLE>
The Notes will be redeemable at the option of the Issuer, as a whole or
from time to time in part, at any time on or after May 15, 2001, on not less
than 30 nor more than 60 days' prior notice at the redemption prices (expressed
as percentages of principal amount) set forth below, together with accrued
interest, if any, to the redemption date, if redeemed during the 12-month period
beginning on May 15 of the years indicated below (subject to the right of
holders of record on relevant record dates to receive interest due on an
interest payment date):
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2001.............................................. 105.625%
2002.............................................. 102.813%
</TABLE>
(Section 1201)
In addition, at any time or from time to time prior to May 15, 1999, the
Issuer may redeem up to 35% of the aggregate principal amount of the Notes
within 60 days of one or more Equity Offerings with the net proceeds of such
offering at a redemption price equal to 111.25% of the principal amount thereof,
together with accrued interest, if any, to the date of redemption (subject to
the right of holders of record on relevant record dates to receive interest due
on an interest payment date); provided that immediately after giving effect to
any such redemption at least $75 million of the original aggregate principal
amount of the Notes remains outstanding. (Section 1201)
If less than all the Notes are to be redeemed, the particular Notes or
portions thereof to be redeemed will be selected not more than 60 days prior to
the redemption date by the Trustee by such method as the Trustee deems fair and
appropriate; provided, however, that no such partial redemption will reduce the
principal amount of a Note not redeemed to less than $1,000. Notice of
redemption will be mailed, first-class postage prepaid, at least 30 but not more
than 60 days before the redemption date to each holder of Notes to be redeemed
at its registered address. On and after the redemption date, interest will cease
to accrue on Notes or portions thereof called for redemption and accepted for
payment. (Sections 1204 and 1205)
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<PAGE> 117
CERTAIN COVENANTS
The Indenture will contain, among others, the following covenants:
Limitation on Indebtedness. The Issuer will not, and will not permit any
Subsidiary to, create, issue, assume, guarantee or in any manner become directly
or indirectly liable for the payment of, or otherwise incur (collectively,
"incur"), any Indebtedness (including any Acquired Indebtedness), other than
Permitted Indebtedness, unless at the time of such incurrence the Consolidated
Fixed Charge Coverage Ratio for the four full fiscal quarters immediately
preceding the incurrence of such Indebtedness, taken as one period (after giving
pro forma effect to (i) the incurrence of such Indebtedness and (if applicable)
the application of the net proceeds therefrom, including to refinance other
Indebtedness, as if such Indebtedness was incurred, and the application of such
proceeds occurred, on the first day of such four-quarter period, (ii) the
incurrence, repayment or retirement of any other Indebtedness by the Issuer and
its Subsidiaries since the first day of such four-quarter period as if such
Indebtedness was incurred, repaid or retired on the first day of such
four-quarter period (except that, in making such computation, the amount of
Indebtedness under any revolving credit facility shall be computed based upon
the average daily balance of such Indebtedness during such four-quarter period),
and (iii) the acquisition (whether by purchase, merger or otherwise) or
disposition (whether by sale, merger or otherwise) of any company, entity or
business acquired or disposed of by the Issuer or its Subsidiaries (including
the operations thereof), as the case may be, since the first day of such
four-quarter period, as if such acquisition or disposition occurred on the first
day of such four-quarter period), would have been at least equal to 2.5 to 1.0
and, on and after the date of consummation of the HHI Acquisition, would have
been at least equal to 3.0 to 1.0; provided (a) that with respect to the
incurrence of Indebtedness by the Issuer (other than Permitted Indebtedness)
that is permitted to be incurred only after giving effect to the proviso in the
definition of Consolidated Adjusted Net Income, such Indebtedness will not have
any Stated Maturity of principal earlier than the Stated Maturity of principal
of the Notes; (b) that no Inactive Subsidiary will be permitted to incur
Indebtedness pursuant to this paragraph or otherwise have any Indebtedness
outstanding except, in the case of HHI, its guarantee of Indebtedness of the
Issuer and the Subsidiaries under the Bank Credit Agreement; and (c) that the
Issuer will not be permitted to incur Indebtedness that is senior in right of
payment to the Notes. (Section 1008)
Limitation on Restricted Payments. (a) The Issuer will not, and will not
permit any Subsidiary, directly or indirectly, to take any of the following
actions:
(i) declare or pay any dividend on, or make any distribution to
holders of, any shares of the Capital Stock of the Issuer (other than
dividends or distributions payable solely in shares of its Qualified
Capital Stock or in options, warrants or other rights to acquire such
shares of Qualified Capital Stock);
(ii) purchase, redeem or otherwise acquire or retire for value,
directly or indirectly, any shares of Capital Stock of the Issuer or any
shares of Capital Stock of any Affiliate of the Issuer (other than shares
of Capital Stock of any Wholly Owned Subsidiary) or any options, warrants
or other rights to acquire such shares of Capital Stock;
(iii) declare or pay any dividend or make any distribution on any
shares of Capital Stock of any Subsidiary to any Person (other than with
respect to any shares of Capital Stock held by the Issuer or any Wholly
Owned Subsidiary) or purchase, redeem or otherwise acquire or retire for
value any shares of Capital Stock of any Subsidiary held by any Person
(other than the Issuer or any Wholly Owned Subsidiary);
(iv) make any principal payment on, or repurchase, redeem, defease or
otherwise acquire or retire for value, prior to any scheduled principal
payment, sinking fund payment or maturity, any Pari Passu Indebtedness or
Subordinated Indebtedness;
(v) make any Investment (other than any Permitted Investment) in any
Person; or
(vi) incur or suffer to exist any guarantee of Indebtedness of any
Affiliate of the Issuer (other than guarantees by the Issuer of
Indebtedness of any Wholly Owned Subsidiary);
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<PAGE> 118
(such payments or other actions described in (but not excluded from) clauses (i)
through (vi) are collectively referred to as "Restricted Payments"), unless at
the time of, and after giving effect to, the proposed Restricted Payment (the
amount of any such Restricted Payment, if other than cash, as determined by the
Board of Directors of the Issuer, whose determination shall be conclusive and
evidenced by a Board Resolution), (1) no Default or Event of Default shall have
occurred and be continuing, (2) the Issuer could incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
"Limitation on Indebtedness" covenant and (3) the aggregate amount of all
Restricted Payments declared or made after the date of the Indenture will not
exceed the sum of:
(A) 40% of the aggregate cumulative Consolidated Adjusted Net Income
accrued on a cumulative basis during the period beginning on April 1, 1995
and ending on the last day of the Issuer's last fiscal quarter ending prior
to the date of such proposed Restricted Payment (or, if such aggregate
cumulative Consolidated Adjusted Net Income shall be a loss, minus 100% of
such loss), plus
(B) the aggregate net cash proceeds received after the date of the
Indenture by the Issuer from the issuance or sale (other than to any
Subsidiary and other than in connection with the HHI Acquisition) of shares
of Qualified Capital Stock of the Issuer (including upon the exercise of
options, warrants or rights) or warrants, options or rights to purchase
shares of Qualified Capital Stock of the Issuer, plus
(C) the aggregate net cash proceeds received after the date of the
Indenture by the Issuer from the issuance or sale (other than to any
Subsidiary) of debt securities or Redeemable Capital Stock that have been
converted into or exchanged for shares of Qualified Capital Stock of the
Issuer, to the extent such securities were originally sold for cash,
together with the aggregate net cash proceeds received by the Issuer at the
time of such conversion or exchange.
(b) Notwithstanding paragraph (a) above, the Issuer and any Subsidiary may
take the following actions so long as (with respect to clauses (ii), (iii),
(iv), (v), (vi) and (vii)) no Default or Event of Default shall have occurred
and be continuing:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date such declaration complied with the
provisions of paragraph (a) above and such payment shall be deemed to have
been paid on such date of declaration for purposes of the calculation
required by the foregoing paragraph (a);
(ii) the purchase, redemption or other acquisition or retirement for
value of any shares of Capital Stock of the Issuer in exchange for, or out
of the net cash proceeds of, a substantially concurrent issuance and sale
(other than to a Subsidiary and other than with respect to the proceeds of
the HHI Acquisition) of shares of Qualified Capital Stock of the Issuer;
(iii) make any principal payment on, or purchase, redeem, defease or
otherwise acquire or retire for value any Subordinated Indebtedness in
exchange for, or out of the net cash proceeds of, a substantially
concurrent issuance and sale (other than to a Subsidiary) of shares of
Qualified Capital Stock of the Issuer;
(iv) the repurchase, retirement or other acquisition or retirement for
value of Common Stock of the Issuer held by any present or future employees
of the Issuer or any Subsidiary on the termination of their employment with
the Issuer or such Subsidiary, provided that the aggregate amount of such
Restricted Payments in any one fiscal year will not exceed $2.0 million;
(v) the redemption of the Class C non-voting Common Stock of the
Issuer, outstanding on the date of the Indenture, in accordance with the
terms thereof as in effect on such date, provided that the aggregate amount
of such Restricted Payment will not exceed $7.5 million;
(vi) loans to employees of the Issuer or any Subsidiary in an
aggregate amount not to exceed $2.5 million outstanding at any time; and
(vii) make any principal payment on, or purchase, redeem, defease or
otherwise acquire or retire for value any Subordinated Indebtedness in
exchange for, or out of the net cash proceeds of a substantially
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<PAGE> 119
concurrent incurrence (other than to a Subsidiary) of, Subordinated
Indebtedness of the Issuer so long as (A) the principal amount of such new
Indebtedness does not exceed the principal amount (or, if such Subordinated
Indebtedness being refinanced provides for an amount less than the
principal amount thereof to be due and payable upon a declaration of
acceleration thereof, such lesser amount as of the date of determination)
of the Subordinated Indebtedness being so purchased, redeemed, defeased,
acquired or retired, plus the lesser of the amount of any stated premium
required to be paid in connection with such refinancing pursuant to the
terms of the Subordinated Indebtedness being refinanced or the amount of
any premium actually paid at such time to refinance the Subordinated
Indebtedness, plus, in either case, the amount of reasonable expenses of
the Issuer incurred in connection with such refinancing, (B) such new
Subordinated Indebtedness is subordinated to the Notes to the same extent
as such Subordinated Indebtedness so purchased, redeemed, defeased,
acquired or retired and (C) such new Subordinated Indebtedness has an
Average Life longer than the Average Life of the Subordinated Indebtedness
being purchased, redeemed, defeased, acquired or retired and a final Stated
Maturity of principal later than the final Stated Maturity of principal of
the Subordinated Indebtedness being purchased, redeemed, defeased, acquired
or retired.
The actions described in clauses (i), (ii), (iii), (iv) and (v) of this
paragraph (b) shall be Restricted Payments that shall be permitted to be taken
in accordance with this paragraph (b) but shall reduce the amount that would
otherwise be available for Restricted Payments under clause (3) of paragraph (a)
and that the actions described in clauses (vi) and (vii) of this paragraph (b)
shall be Restricted Payments that shall be permitted to be taken in accordance
with this paragraph and shall not reduce the amount that would otherwise be
available for Restricted Payments under clause (3) of paragraph (a). (Section
1009)
Limitation on Issuances and Sales of Capital Stock of Subsidiaries. The
Issuer (a) will not permit any Subsidiary to issue or sell any shares of its
Capital Stock (other than to the Issuer or a Wholly Owned Subsidiary) and (b)
will not permit any Person (other than the Issuer or a Wholly Owned Subsidiary)
to own any shares of Capital Stock of any Subsidiary; provided, however, that
this covenant shall not prohibit (i) the issuance and sale of all, but not less
than all, of the issued and outstanding shares of Capital Stock of any
Subsidiary in compliance with the other provisions of the Indenture or (ii) the
issuance of director's qualifying shares in accordance with applicable law.
(Section 1012)
Limitation on Transactions with Affiliates. The Issuer will not, and will
not permit any Subsidiary to, directly or indirectly, enter into or suffer to
exist any transaction or series of related transactions with, or for the benefit
of, any Affiliate of the Issuer or any Subsidiary unless (a) such transaction is
solely between the Issuer and a Wholly Owned Subsidiary or (b) (i) such
transaction is in writing and on terms that are no less favorable to the Issuer
or such Subsidiary, as the case may be, than those that could have been obtained
in an arm's length transaction with third parties who are not Affiliates and
(ii) with respect to any transaction or series of related transactions involving
aggregate payments in excess of $5 million, the Issuer shall have delivered an
officers' certificate to the Trustee certifying that such transaction or series
of related transactions complies with clause (i) above and such transaction or
series of related transactions has been approved by the Board of Directors
(including a majority of the Disinterested Directors); provided that any
transaction or series of related transactions otherwise permitted under this
paragraph pursuant to which the Issuer or any Subsidiary will receive or render
value exceeding $15 million will not be permitted unless, prior to the
consummation of any such transaction or series of related transactions, the
Issuer has obtained a written opinion from a nationally recognized investment
banking firm to the effect that such transaction is on fair and reasonable terms
to the Issuer or such Subsidiary, and no less favorable to the Issuer or such
Subsidiary, as the case may be, than those which might be obtained at the time
from a Person who is not an Affiliate; provided, further, that this covenant
will not restrict (x) the Issuer from paying reasonable and customary regular
compensation and fees to directors of the Issuer or any Subsidiary who are not
employees of the Issuer or any Subsidiary, (y) any transaction between BKB or
Barnett and the Issuer or any Subsidiary, pursuant to an agreement in effect on
the date of the Indenture or required to be entered into as part of the HHI
Acquisition, as such agreement may be amended, renewed, extended, supplemented
or otherwise modified from time to time, provided that such agreement as so
amended, renewed, extended, supplemented or otherwise modified is not materially
less favorable to the Issuer or such Subsidiary, as the case may be, or to the
holders of the
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Notes, than such agreement as in effect on the date of the Indenture, and (z)
the purchase of any Mortgage-Backed Securities, Mortgage Loans or servicing
rights for Mortgage Loans by the Issuer or any of its Subsidiaries in the
ordinary course of the Issuer's or such Subsidiary's business. (Section 1013)
Limitation on Liens. The Issuer will not, and will not, with respect to
any Indebtedness or other obligation of the Issuer permit any Subsidiary to,
directly or indirectly, create, incur, assume or suffer to exist any Lien (other
than Permitted Liens) of any kind on or with respect to any of its property or
assets including any shares of stock or indebtedness of any Subsidiary, whether
owned at the date of the Indenture or thereafter acquired, or any income,
profits or proceeds therefrom, or assign or otherwise convey any right to
receive income thereon, unless (x) in the case of any Lien securing Subordinated
Indebtedness, the Notes are secured by a Lien on such property, assets or
proceeds that is senior in priority to such Lien and (y) in the case of any
other Lien, the Notes are equally and ratably secured with the obligation or
liability secured by such Lien. (Section 1011)
Purchase of Notes Upon a Change of Control. If a Change of Control shall
occur at any time, then each holder of Notes shall have the right to require
that the Issuer purchase such holder's Notes, in whole or in part in integral
multiples of $1,000, at a purchase price (the "Change of Control Purchase
Price") in cash in an amount equal to 101% of the principal amount thereof, plus
accrued interest, if any, to the date of purchase (the "Change of Control
Purchase Date"), pursuant to the offer described below (the "Change of Control
Offer") and the other procedures set forth in the Indenture.
Within 15 days following any Change of Control, the Issuer shall notify the
Trustee thereof and give written notice of such Change of Control to each holder
of Notes by first-class mail, postage prepaid, at the address appearing in the
security register, stating, among other things, (i) the purchase price and the
purchase date, which shall be a Business Day no earlier than 30 days nor later
than 60 days from the date such notice is mailed, or such later date as is
necessary to comply with requirements under the Exchange Act; (ii) that any Note
not tendered will continue to accrue interest; (iii) that, unless the Issuer
defaults in the payment of the purchase price, any Notes accepted for payment
pursuant to the Change of Control Offer shall cease to accrue interest after the
Change of Control Purchase Date; and (iv) certain other procedures that a holder
of Notes must follow to accept a Change of Control Offer or to withdraw such
acceptance.
If a Change of Control Offer is made, there can be no assurance that the
Issuer will have available funds sufficient to pay the Change of Control
Purchase Price for all of the Notes that might be delivered by holders of the
Notes seeking to accept the Change of Control Offer. The definition of change of
control under the Bank Credit Agreement is such that if a Change of Control (as
defined in the Indenture) occurs, then an event of default under the Bank Credit
Agreement either shall occur as a result thereof or shall have previously
occurred, unless waived by the lenders under the Bank Credit Agreement.
Indebtedness under the Bank Credit Agreement is senior to the indebtedness under
the Notes and the Notes will be effectively subordinated to the obligations of
the Issuer's subsidiaries. See "Prospectus Summary -- Terms of the Exchange
Notes -- Ranking." There can be no assurance that in the event of a Change of
Control the Issuer will be able to obtain the consents necessary to consummate a
Change of Control Offer from the lenders under agreements governing outstanding
Indebtedness which may prohibit such an offer. The failure of the Issuer to make
or consummate the Change of Control Offer or pay the Change of Control Purchase
Price when due would result in an Event of Default and would give the Trustee
and the holders of the Notes the rights described under "Events of Default."
One of the events which constitutes a Change of Control under the Indenture
is the disposition of "all or substantially all" of the Issuer's assets. This
term has not been interpreted under New York law (which is the governing law of
the Indenture) to represent a specific quantitative test. As a consequence, in
the event holders of the Notes elect to require the Issuer to purchase the Notes
and the Issuer elects to contest such election, there can be no assurance as to
how a court interpreting New York law would interpret the phrase.
The existence of a holder's right to require the Issuer to purchase such
holder's Notes upon a Change of Control may deter a third party from acquiring
the Issuer in a transaction which constitutes a Change of Control. The existence
of such right might also have an adverse effect on the market price of the
Company's
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securities, to the extent such market exists from time to time, or on the
Company's ability to obtain additional financing in the future.
The definition of "Change of Control" in the Indenture is limited in scope.
The provisions of the Indenture may not afford holders of Notes the right to
require the Issuer to purchase such Notes in the event of a highly leveraged
transaction or certain transactions with the Issuer's management or its
affiliates, including a reorganization, restructuring, merger or similar
transaction involving the Issuer (including, in certain circumstances, an
acquisition of the Issuer by management or its affiliates) that may adversely
affect holders of the Notes, if such transaction is not a transaction defined as
a Change of Control. See "-- Certain Definitions" for the definition of "Change
of Control." A transaction involving the Issuer's management or its affiliates,
or a transaction involving a recapitalization of the Issuer, would result in a
Change of Control if it is the type of transaction specified by such definition.
The Issuer will comply with the applicable tender offer rules including
Rule 14e-l under the Exchange Act, and any other applicable securities laws and
regulations in connection with a Change of Control Offer.
Limitation on Guarantees of Indebtedness by Subsidiaries. (a) The Issuer
will not permit any Subsidiary, directly or indirectly, to guarantee, assume or
in any other manner become liable for the payment of any Indebtedness of the
Issuer unless (i) (A) if such Subsidiary is not a Guarantor, such Subsidiary
simultaneously executes and delivers a supplemental indenture to the Indenture
providing for a Guarantee of payment of the Notes by such Subsidiary and (B)
with respect to any guarantee of Subordinated Indebtedness by a Subsidiary, any
such guarantee shall be subordinated to such Subsidiary's Guarantee with respect
to the Notes at least to the same extent as such Subordinated Indebtedness is
subordinated to the Notes and (ii) such Subsidiary waives and will not in any
manner whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against the Issuer
or any other Subsidiary as a result of any payment by such Subsidiary under its
Guarantee.
(b) Notwithstanding the foregoing, any Guarantee of the Notes created
pursuant to the provisions described in the foregoing paragraph shall provide by
its terms that it shall be automatically and unconditionally released and
discharged upon (i) any sale, exchange or transfer, to any Person that is not an
Affiliate of the Issuer, of all of the Issuer's and each Subsidiary's shares of
Capital Stock in, or all or substantially all the assets of, such Subsidiary
(which sale, exchange or transfer is not prohibited by the Indenture) or (ii)
the release by the holders of the Indebtedness of the Issuer described in the
preceding paragraph of their guarantee by such Subsidiary (including any deemed
release upon payment in full of all obligations under such Indebtedness, except
by or as a result of payment under such guarantee), at a time when (A) no other
Indebtedness of the Issuer has been guaranteed by such Subsidiary or (B) the
holders of all such other Indebtedness which is guaranteed by such Subsidiary
also release their guarantee by such Subsidiary (including any deemed release
upon payment in full of all obligations under such Indebtedness, except by or as
a result of payment under such guarantee). (Section 1014)
Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries. The Issuer will not, and will not permit any Subsidiary, directly
or indirectly, to create or otherwise cause or suffer to exist or become
effective any encumbrance or restriction of any kind on the ability of any
Subsidiary to (a) pay dividends, in cash or otherwise, or make any other
distributions on or in respect of its Capital Stock, (b) pay any Indebtedness
owed to the Issuer or any other Subsidiary, (c) make loans or advances to the
Issuer or any other Subsidiary or (d) transfer any of its properties or assets
to the Issuer or any other Subsidiary, except for such encumbrances or
restrictions existing under or by reason of (i) the Bank Credit Agreement,
provided that the Issuer will not permit any Subsidiary to, (A) amend, modify,
terminate or waive the Limitation on Restricted Payments or Limitation on
Investments, Loans and Advances covenants of the Bank Credit Agreement or the
definitions contained in the Bank Credit Agreement, in each case as in effect on
the date of the Indenture, or any similar covenants in any amendments, renewals,
extensions, substitutions, replacements, restatements, increases, refinancings,
restructurings, supplements or other modifications of the Bank Credit Agreement,
to provide for, in each case, greater restrictions than those in effect on the
date of the Indenture with respect to the right of any Subsidiary to make
distributions to, loans to or other investments in the Issuer or (B) add to the
Bank Credit Agreement any covenant directly addressing the matters covered by
the
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"Limitation on Restricted Payments" or "Limitation on Investments, Loans and
Advances" covenants thereunder, or any similar covenant in any amendment,
renewal, extension, substitution, replacement, restatement, increase,
refinancing, restructuring, supplement or other modification of the Bank Credit
Agreement, in any manner prohibited by clause (A) of this clause (d)(i), (ii)
applicable law, (iii) customary non-assignment provisions of any lease governing
a leasehold interest of the Issuer or any Subsidiary, (iv) any agreement or
other instrument of a Person acquired by the Issuer or any Subsidiary in
existence at the time of such acquisition (but not created in connection with,
or in contemplation thereof), which encumbrance or restriction is not applicable
to any Person, or the properties or assets of any Person, other than the Person,
or the property or assets of the Person, so acquired, or (v) any agreement that
extends, renews, refinances or replaces the agreements containing the
encumbrances or restrictions in the foregoing clause (iv), provided that the
terms and conditions of any such encumbrances or restrictions are not materially
less favorable to the holders of the Notes than those under or pursuant to the
agreement evidencing the Indebtedness so extended, renewed, refinanced or
replaced. (Section 1010)
Maintenance of Risk Management. The Issuer will establish and maintain a
risk management program with respect to its portfolio of Mortgage Loans and
servicing rights so as to reduce fluctuations in the value of its servicing
portfolio due to interest rate movements. (Section 1015)
Business Activities. (a) The Issuer will not, and will not permit any
Subsidiary to, engage in any business other than in the usual and ordinary
course of the mortgage banking business and other than which is consistent with
the industry standards in the mortgage banking industry.
(b) Notwithstanding paragraph (a) above, the Issuer will not permit HHI to
engage in any business other than the servicing of its mortgage portfolio, as in
existence on the date of the Indenture, in the usual and ordinary course of its
business and consistent with past practice. (Section 1016)
Reports. The Issuer will file on a timely basis with the Commission, to
the extent such filings are accepted by the Commission and whether or not the
Issuer has a class of securities registered under the Exchange Act, the annual
reports, quarterly reports and other documents that the Issuer would be required
to file if it were subject to Section 13 or 15 of the Exchange Act. The Issuer
will also be required (a) to file with the Trustee, and provide to each holder
of Notes, without cost to such holder, copies of such reports and documents
within 15 days after the date on which the Issuer files such reports and
documents with the Commission or the date on which the Issuer would be required
to file such reports and documents if the Issuer were so required and (b) if
filing such reports and documents with the Commission is not accepted by the
Commission or is prohibited under the Exchange Act, to supply at the Issuer's
cost copies of such reports and documents to any prospective holder of Notes
promptly upon written request. (Section 1019)
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Issuer will not, in a single transaction or through a series of related
transactions, consolidate with or merge with or into any other Person or sell,
assign, convey, transfer, lease or otherwise dispose of all or substantially all
of its properties and assets to any other Person or Persons, or permit any
Subsidiary to enter into any such transaction or series of transactions, if such
transaction or series of transactions, in the aggregate, would result in the
sale, assignment, conveyance, transfer, lease or other disposition of all or
substantially all of the properties and assets of the Issuer and its
Subsidiaries on a consolidated basis to any other Person or Persons, unless at
the time and after giving effect thereto (a) either (i) if the transaction is a
consolidation or merger, the Issuer will be the continuing corporation or (ii)
the Person (if other than the Issuer) formed by such consolidation or into which
the Issuer or such Subsidiary is merged or the Person that acquires by sale,
assignment, conveyance, transfer, lease or disposition all or substantially all
the properties and assets of the Issuer and its Subsidiaries on a consolidated
basis (the "Surviving Entity") (A) will be a corporation duly organized and
validly existing under the laws of the United States of America, any state
thereof or the District of Columbia and (B) will expressly assume, by a
supplemental indenture, in form and substance satisfactory to the Trustee, the
Issuer's obligation for the due and punctual payment of the principal of,
premium, if any, and interest on all the Notes and the performance and
observance of every covenant of the Indenture and the Pledge Agreement on the
part of the Issuer to be performed or observed; (b) immediately before and
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immediately after giving effect to such transaction or series of transactions on
a pro forma basis (and treating any obligation of the Issuer or any Subsidiary
incurred in connection with or as a result of such transaction or series of
transactions as having been incurred at the time of such transaction), no
Default or Event of Default will have occurred and be continuing; (c)
immediately after giving effect to such transaction or series of transactions on
a pro forma basis (and treating any obligation of the Issuer or any Subsidiary
incurred in connection with or as a result of such transaction or series of
transactions as having been incurred at the time of such transaction), the
Consolidated Net Worth of the Issuer (or of the Surviving Entity if the Issuer
is not the continuing obligor under the Indenture) is equal to or greater than
95% of the Consolidated Net Worth of the Issuer immediately prior to such
transaction or series of transactions; (d) immediately after giving effect to
such transaction or series of transactions on a pro forma basis (on the
assumption that the transaction or series of transactions occurred on the first
day of the four-quarter period immediately prior to the consummation of such
transaction or series of transactions with the appropriate adjustments with
respect to the transaction or series of transactions being included in such pro
forma calculation), the Issuer (or the Surviving Entity if the Issuer is not the
continuing obligor under the Indenture) could incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) under the provisions of the
"Limitation on Indebtedness" covenant; (e) each Guarantor, if any, unless it is
the other party to the transactions described above, shall have by supplemental
indenture confirmed that its Guarantee will apply to such Person's obligations
under the Indenture and the Notes; and (f) if any of the property or assets of
the Issuer or any of its Subsidiaries would thereupon become subject to any
Lien, the provisions of the "Limitation on Liens" covenant are complied with.
(Section 801)
Notwithstanding the foregoing, the Indenture permitted the mergers and
other corporate transactions effected in connection with the HHI Acquisition.
In connection with any such consolidation, merger, sale, assignment,
conveyance, transfer, lease or other disposition, the Issuer or the Surviving
Entity shall have delivered to the Trustee, in form and substance reasonably
satisfactory to the Trustee, an officers' certificate and an opinion of counsel,
each stating that such consolidation, merger, sale, assignment, conveyance,
transfer, lease or other disposition, and if a supplemental indenture is
required in connection with such transaction, such supplemental indenture,
comply with the requirements of the Indenture and that all conditions precedent
therein provided for relating to such transaction have been complied with.
(Section 801)
Upon any consolidation or merger, or any sale, assignment, conveyance,
transfer, lease or disposition of all or substantially all of the properties and
assets of the Issuer in accordance with the immediately preceding paragraphs in
which the Issuer is not the continuing obligor under the Indenture, the
Surviving Entity shall succeed to, and be substituted for, and may exercise
every right and power of, the Issuer under the Indenture with the same effect as
if such successor had been named as the Issuer therein. When a successor assumes
all the obligations of its predecessor under the Indenture, the Notes and the
Pledge Agreement, the predecessor shall be released from those obligations;
provided that in the case of a transfer by lease, the predecessor shall not be
released from the payment of principal, premium, if any, and interest on the
Notes. (Section 802)
EVENTS OF DEFAULT
The following will be "Events of Default" under the Indenture:
(i) default in the payment of any interest on any Note when it becomes
due and payable and continuance of such default for a period of 30 days;
(ii) default in the payment of the principal of, or premium, if any,
on any Note at its Maturity (upon acceleration, optional redemption,
required purchase or otherwise);
(iii) default in the performance, or breach, of the provisions
described in "Consolidation, Merger and Sale of Assets" or the failure to
make or consummate a Change of Control Offer in accordance with the
provisions of the "Purchase of Notes Upon a Change of Control" covenant;
(iv) default in the performance, or breach, of any covenant, warranty
or other agreement of the Issuer, any Guarantor or any Pledgor contained in
the Indenture, any Guarantee or any Pledge
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Agreement (other than a default in the performance, or breach, of a
covenant, warranty or agreement which is specifically dealt with in clauses
(i), (ii) or (iii) above) and continuance of such default or breach for a
period of 30 days after written notice shall have been given to the Issuer,
such Guarantor or such Pledgor by the Trustee or to the Issuer, such
Guarantor or such Pledgor and the Trustee by the holders of at least 25% in
aggregate principal amount of the Notes then outstanding;
(v) (a) one or more defaults in the payment of principal, premium, if
any, or interest on any Indebtedness of the Issuer aggregating $15 million
or more, when the same becomes due and payable at the stated maturity
thereof, and such default or defaults shall have continued after any
applicable grace period and shall not have been cured or waived, (b) one or
more defaults in the payment of any Hedge Termination Obligation of the
Issuer or any Subsidiary which is outstanding in amount aggregating $15
million or more when the same becomes due and payable, (c) one or more
defaults in the payment of principal on any Indebtedness of a Subsidiary
aggregating $15 million or more, when the same becomes due and payable at
the final Stated Maturity thereof or (d) Indebtedness or any Hedge
Termination Obligation of the Issuer or any Subsidiary aggregating $15
million or more shall have been accelerated or otherwise declared due and
payable, or required to be prepaid or repurchased (other than by regularly
scheduled required prepayment or a mandatory prepayment required in order
to cause Indebtedness under the Bank Credit Agreement not to exceed
available borrowing limits), prior to the stated maturity thereof;
(vi) any holder of any Indebtedness in excess of $15 million in the
aggregate of the Issuer or any Subsidiary that owns directly or indirectly
any Capital Stock of HHI or its successors shall notify the Issuer or such
Subsidiary of the intended sale or disposition of any assets of the Issuer
or any Subsidiary that have been pledged to or for the benefit of such
Person to secure such Indebtedness or shall commence proceedings, or take
action (including by way of set-off) to retain in satisfaction of any such
Indebtedness, or to collect on, seize, dispose of or apply, any such assets
of the Issuer or any Subsidiary pursuant to the terms of any agreement or
instrument evidencing any such Indebtedness of the Issuer or such
Subsidiary or in accordance with applicable law;
(vii) one or more judgments or orders shall be rendered against the
Issuer or any Subsidiary or any of their respective properties for the
payment of money, either individually or in an aggregate amount, in excess
of $20 million and shall not be discharged and either (A) an enforcement
proceeding shall have been commenced by any creditor upon such judgment or
order or (B) there shall have been a period of 60 consecutive days during
which a stay of enforcement of such judgment or order, by reason of a
pending appeal or otherwise, was not in effect;
(viii) any Guarantee ceases to be in full force and effect or is
declared null and void or any Guarantor denies that it has any further
liability under any Guarantee, or gives notice to such effect (other than
by reason of the termination of the Indenture or the release of any such
Guarantee in accordance with the Indenture);
(ix) any Pledge Agreement ceases to be in full force and effect or any
Pledgor denies or disaffirms its obligations under any Pledge Agreement or
the obligations under any Pledge Agreement cease to be secured by a
perfected security interest in any portion of the Collateral purported to
be pledged under any Pledge Agreement with respect thereto (other than in
accordance with the terms thereof); or
(x) the occurrence of certain events of bankruptcy, insolvency or
reorganization with respect to the Issuer or any Significant Subsidiary.
(Section 501)
If an Event of Default (other than as specified in clause (x) above) occurs
and is continuing, the Trustee or the holders of not less than 25% in aggregate
principal amount of the Notes then outstanding, by written notice to the Issuer
(and to the Trustee if such notice is given by the holders), may, and the
Trustee, upon the written request of such holders, shall declare the principal
of, premium, if any, and accrued interest on all of the outstanding Notes
immediately due and payable, and upon any such declaration such principal amount
of the Notes shall become immediately due and payable. If an Event of Default
specified in clause (x) above occurs and is continuing, then the principal of,
premium, if any, and accrued interest on all of the outstanding
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Notes shall ipso facto become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any holder of Notes.
(Section 502)
At any time after a declaration of acceleration under the Indenture, but
before a judgment or decree for payment of the money due has been obtained by
the Trustee, the holders of a majority in aggregate principal amount of the
outstanding Notes, by written notice to the Issuer and the Trustee, may rescind
and annul such declaration and its consequences if (a) the Issuer has paid or
deposited with the Trustee a sum sufficient to pay (i) all overdue interest on
all Notes, (ii) all unpaid principal of and premium, if any, on any outstanding
Notes that has become due otherwise than by such declaration of acceleration and
interest thereon at the rate borne by the Notes, (iii) to the extent that
payment of such interest is lawful, interest upon overdue interest at the rate
borne by the Notes, and (iv) all sums paid or advanced by the Trustee under the
Indenture and the reasonable compensation, expenses, disbursements and advances
of the Trustee, its agents and counsel; and (b) all Events of Default, other
than the non-payment of amounts of principal of, premium, if any, or interest on
the Notes that have become due solely by such declaration of acceleration, have
been cured or waived. No such rescission shall affect any subsequent default or
impair any right consequent thereon.
The holders of not less than a majority in aggregate principal amount of
the outstanding Notes may, on behalf of the holders of all the Notes, waive any
past defaults under the Indenture, any Guarantee or any Pledge Agreement, except
a default in the payment of the principal of, premium, if any, or interest on
any Note, or in respect of a covenant or provision which under the Indenture,
any Guarantee or any Pledge Agreement cannot be modified or amended without the
consent of the holder of each Note outstanding. (Section 513)
If a Default or an Event of Default occurs and is continuing and is known
to the Trustee, the Trustee will mail to each holder of the Notes notice of the
Default or Event of Default within 45 days after the occurrence thereof. Except
in the case of a Default or an Event of Default in payment of principal of,
premium, if any, or interest on any Notes, the Trustee may withhold the notice
to the holders of such Notes if a committee of its trust officers in good faith
determines that withholding the notice is in the interests of the holders of the
Notes. (Section 601)
The Issuer is required to furnish to the Trustee annual and quarterly
statements as to the performance by the Issuer, any Pledgor and any Guarantor of
their respective obligations under the Indenture and as to any default in such
performance. The Issuer is also required to notify the Trustee within five
Business Days of the occurrence of any Default.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Issuer may, at its option and at any time, elect to have the
obligations of the Issuer and any Guarantor upon the Notes discharged with
respect to the outstanding Notes ("defeasance"). Such defeasance means that the
Issuer and any such Guarantor will be deemed to have paid and discharged the
entire Indebtedness represented by the outstanding Notes and to have satisfied
all their other obligations under such Notes and the Indenture insofar as such
Notes are concerned except for (i) the rights of holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
on such Notes when such payments are due, (ii) the Issuer's obligations to issue
temporary Notes, register the transfer or exchange of any Notes, replace
mutilated, destroyed, lost or stolen Notes, maintain an office or agency for
payments in respect of the Notes and segregate and hold such payments in trust,
(iii) the rights, powers, trusts, duties and immunities of the Trustee and (iv)
the defeasance provisions of the Indenture. In addition, the Issuer may, at its
option and at any time, elect to have the obligations of the Issuer and any
Guarantor released with respect to certain covenants set forth in the Indenture,
and any omission to comply with such obligations shall not constitute a Default
or an Event of Default with respect to the Notes ("covenant defeasance").
(Sections 1101, 1102 and 1103)
In order to exercise either defeasance or covenant defeasance, (i) the
Issuer must irrevocably deposit or cause to be deposited with the Trustee, as
trust funds in trust, specifically pledged as security for, and dedicated solely
to, the benefit of the holders of the Notes, cash in United States dollars, or
U.S. Government Obligations (as defined in the Indenture), or a combination
thereof, in such amounts as will be sufficient, in
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the opinion of a nationally recognized firm of independent public accountants,
to pay and discharge the principal of, premium, if any, and interest on the
outstanding Notes on the Stated Maturity (or upon redemption, if applicable) of
such principal, premium, if any, or installment of interest; (ii) no Default or
Event of Default with respect to the Notes will have occurred and be continuing
on the date of such deposit or, insofar as an event of bankruptcy under clause
(x) of "Events of Default"above is concerned, at any time during the period
ending on the 91st day after the date of such deposit; (iii) such defeasance or
covenant defeasance will not result in a breach or violation of, or constitute a
default under, the Indenture or any material agreement or instrument to which
the Issuer or any Guarantor is a party or by which it is bound; (iv) in the case
of defeasance, the Issuer shall have delivered to the Trustee an opinion of
counsel stating that the Issuer has received from, or there has been published
by, the Internal Revenue Service a ruling, or since May 7, 1996, there has been
a change in applicable federal income tax law, in either case to the effect
that, and based thereon such opinion shall confirm that, the holders of the
outstanding Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such defeasance and will be subject to federal income
tax on the same amounts, in the same manner and at the same times as would have
been the case if such defeasance had not occurred; (v) in the case of covenant
defeasance, the Issuer shall have delivered to the Trustee an opinion of counsel
to the effect that the holders of the Notes outstanding will not recognize
income, gain or loss for federal income tax purposes as a result of such
covenant defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such covenant defeasance had not occurred; (vi) the Issuer shall have delivered
to the Trustee an opinion of counsel to the effect that the trust funds will not
be subject to any rights of holders of Indebtedness, including, without
limitation, any rights arising under the Indenture (other than the rights of the
holders of the Notes to be paid out of the proceeds of such trust funds) and
that after the 91st day following the deposit, the trust funds will not be
subject to the effect of any applicable bankruptcy, insolvency, reorganization
or similar law affecting creditors' rights generally; and (vii) the Issuer shall
have delivered to the Trustee an officers' certificate and an opinion of
counsel, each stating that all conditions precedent provided for relating to
either the defeasance or the covenant defeasance, as the case may be, have been
complied with. (Section 1104)
SATISFACTION AND DISCHARGE
The Indenture will cease to be of further effect (except as to surviving
rights of registration of transfer or exchange of the Notes as expressly
provided for in the Indenture) and the Trustee, at the expense of the Issuer,
will execute proper instruments acknowledging satisfaction and discharge of the
Indenture when (a) either (i) all the Notes theretofore authenticated and
delivered (other than destroyed, lost or stolen Notes which have been replaced
or paid and Notes for whose payment money has been deposited in trust with the
Trustee or any Paying Agent or segregated and held in trust by the Issuer and
thereafter repaid to the Issuer or discharged from such trust as provided for in
the Indenture) have been delivered to the Trustee for cancellation or (ii) all
Notes not theretofore delivered to the Trustee for cancellation (x) have become
due and payable, (y) will become due and payable at Stated Maturity within one
year or (z) are to be called for redemption within one year under arrangements
satisfactory to the Trustee for the giving of notice of redemption by the
Trustee in the name, and at the expense, of the Issuer, and the Issuer or any
Guarantor has irrevocably deposited or caused to be deposited with the Trustee
as trust funds in trust for such purpose an amount sufficient to pay and
discharge the entire Indebtedness on such Notes not theretofore delivered to the
Trustee for cancellation, for principal of, premium, if any, and interest on the
Notes to the date of such deposit (in the case of Notes which have become due
and payable) or to the Stated Maturity or redemption date, as the case may be;
(b) the Issuer or any Guarantor has paid or caused to be paid all sums payable
under the Indenture by the Issuer; and (c) the Issuer has delivered to the
Trustee an officers' certificate and an opinion of counsel, each stating that
all conditions precedent provided in the Indenture relating to the satisfaction
and discharge of the Indenture have been complied with, and that such
satisfaction and discharge will not result in a breach or violation of, or
constitute a default under, the Indenture or any other material agreement or
instrument to which the Issuer is a party or by which the Issuer is bound.
(Section 401)
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AMENDMENTS AND WAIVERS
Modifications and amendments of the Indenture, any Guarantee and any Pledge
Agreement may be entered into by the Issuer, each Guarantor, if any, each
Pledgor and the Trustee with the consent of the holders of a majority in
aggregate principal amount of the Notes then outstanding; provided, however,
that no such modification or amendment may, without the consent of the holder of
each outstanding Note affected thereby: (i) change the Stated Maturity of the
principal of, or any installment of interest on, any Note, or reduce the
principal amount thereof, premium, if any, or the rate of interest thereon or
waive a default in the payment of the principal of, premium, if any, or interest
on any such Note, or change the coin or currency in which the principal of any
Note or any premium or the interest thereon is payable, or impair the right to
institute suit for the enforcement of any such payment after the Stated Maturity
thereof (or, in the case of redemption, on or after the redemption date); (ii)
amend, change or modify the obligation of the Issuer to make and consummate a
Change of Control Offer in the event of a Change of Control in accordance with
the "Purchase of Notes Upon a Change of Control" covenant, including amending,
changing or modifying any definition relating thereto; (iii) reduce the
percentage in principal amount of outstanding Notes, the consent of whose
holders is required for any supplemental indenture or amendment or the consent
of whose holders is required for any waiver of compliance with certain
provisions of the Indenture, any Guarantee, or any Pledge Agreement; (iv) modify
any of the provisions of the Indenture, any Guarantee, or any Pledge Agreement
relating to the consent of holders or relating to the waiver of past defaults or
relating to the waiver of certain covenants, except to increase the percentage
of outstanding Notes required for such actions or to provide that certain other
provisions of the Indenture, any Guarantee or any Pledge Agreement cannot be
modified or waived without the consent of the holder of each Note affected
thereby; (v) except as otherwise permitted under "Consolidation, Merger and Sale
of Assets," consent to the assignment or transfer by the Issuer or any Guarantor
or any Pledgor of any of their rights or obligations under the Indenture, any
Guarantee or any Pledge Agreement; (vi) amend or modify any of the provisions of
the Indenture in any manner which subordinates the Notes in right of payment to
other Indebtedness of the Issuer or which subordinates any Guarantee in right of
payment to other Indebtedness of such Guarantor; or (vii) make any change in the
provisions of the Indenture or the Notes or any Guarantee or any Pledge
Agreement relating to the Collateral that adversely affects the interest of the
holders of the Notes. (Sections 902 and 903)
Notwithstanding the foregoing, without the consent of any holder of the
Notes, the Issuer, the Guarantors, if any, the Pledgors and the Trustee may
modify or amend the Indenture, any Guarantee or any Pledge Agreement: (a) to
evidence the succession of another Person to the Issuer, a Guarantor, a Pledgor
or any other obligor on the Notes, and the assumption by any such successor of
the covenants of the Issuer or such obligor or Guarantor or such Pledgor or in
the Indenture and in the Notes and in any Guarantee and in any Pledge Agreement
as permitted under "Consolidation, Merger and Sale of Assets"; (b) to add to the
covenants of the Issuer, any Guarantor, any Pledgor or any other obligor upon
the Notes for the benefit of the holders of the Notes or to surrender any right
or power conferred upon the Issuer or any Guarantor or any Pledgor or any other
obligor upon the Notes, as applicable, in the Indenture, in the Notes, in any
Guarantee or in any Pledge Agreement; (c) to cure any ambiguity, or to correct
or supplement any provision in the Indenture, the Notes, any Guarantee or any
Pledge Agreement which may be defective or inconsistent with any other provision
in the Indenture, the Notes, any Pledge Agreement or any Guarantee or make any
other provisions with respect to matters or questions arising under the
Indenture, the Notes, any Pledge Agreement or any Guarantee; provided that, in
each case, such provisions shall not adversely affect the interest of the
holders of the Notes; (d) to comply with the requirements of the Commission in
order to effect or maintain the qualification of the Indenture under the Trust
Indenture Act; (e) to add a Guarantor or Pledgor under the Indenture; (f) to
evidence and provide for the acceptance of the appointment of a successor
Trustee under the Indenture; or (g) to mortgage, pledge, hypothecate or grant a
security interest in favor of the Trustee for the benefit of the holders of the
Notes as additional security for the payment and performance of the Issuer's and
any Guarantor's obligations under the Indenture, in any property, or assets,
including any of which are required to be mortgaged, pledged or hypothecated, or
in which a security interest is required to be granted to the Trustee pursuant
to the Indenture or otherwise. (Section 901)
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The holders of a majority in aggregate principal amount of the Notes
outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture. (Section 1020)
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. If an Event of Default has occurred and is continuing, the
Trustee will exercise such rights and powers vested in it under the Indenture
and use the same degree of care and skill in its exercise as a prudent Person
would exercise under the circumstances in the conduct of such Person's own
affairs.
The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee thereunder,
should it become a creditor of the Issuer, to obtain payment of claims in
certain cases or to realize on certain property received by it in respect of any
such claims, as security or otherwise. The Trustee is permitted to engage in
other transactions; provided, however, that if it acquires any conflicting
interest (as defined) it must eliminate such conflict or resign.
GOVERNING LAW
The Indenture, the Notes, any Guarantee and any Pledge Agreement will be
governed by, and construed in accordance with, the laws of the State of New
York.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person (a) existing at the
time such Person becomes a Subsidiary or (b) assumed in connection with the
acquisition of assets from such Person, in each case other than Indebtedness
incurred in connection with, or in contemplation of, such Person becoming a
Subsidiary or such acquisition. Acquired Indebtedness shall be deemed to be
incurred on the date of the related acquisition of assets from any Person or the
date the acquired Person becomes a Subsidiary.
"Affiliate" means, with respect to any specified Person (a) any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person or (b) any other Person that
owns, directly or indirectly, 10% or more of such specified Person's Capital
Stock or any executive officer or director of any such specified Person or other
Person. For the purposes of this definition, "control," when used with respect
to any specified Person, means the power to direct the management and policies
of such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Average Life" means, as of the date of determination with respect to any
Indebtedness, the quotient obtained by dividing (a) the sum of the products of
(i) the number of years from the date of determination to the date or dates of
each successive scheduled principal payment (including, without limitation, any
sinking fund requirements) of such Indebtedness multiplied by (ii) the amount of
each such principal payment by (b) the sum of all such principal payments.
"Bank Credit Agreement" means the Credit Agreement dated as of March 15,
1996 among HLI, the lenders parties thereto, Nationsbank of Texas, N.A., as
Syndication Agent, Bankers Trust Company, as Documentation Agent, The First
National Bank of Boston, as Collateral Agent, and Chemical Bank, as
administrative agent for said lenders, as such agreement may be amended,
renewed, extended, substituted, replaced, restated, increased, refinanced,
restructured, supplemented or otherwise modified from time to time (including,
without limitation, any successive amendments, renewals, extensions,
substitutions, replacements, restatements, increases, refinancings,
restructurings, supplements or other modifications of the foregoing).
"Bankruptcy Law" means Title 11, United States Bankruptcy Code of 1978, as
amended, or any similar United States federal or state law relating to
bankruptcy, insolvency, receivership, winding-up, liquidation, reorganization or
relief of debtors or any amendment to, succession to or change in any such law.
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"Capital Stock" means, with respect to any person, any and all shares,
interests, partnership interests, participations, rights in or other equivalents
(however designated) of such Person's equity, including any Preferred Stock, and
any rights (other than debt securities convertible into such equity), warrants
or options exchangeable for or convertible into such equity, whether now
outstanding or issued after the date of the Indenture.
"Capitalized Lease Obligation" means any obligation to pay rent or other
amounts under a lease of (or other agreement conveying the right to use) any
property (whether real, personal or mixed) that is required to be classified and
accounted for as a capital lease obligation under generally accepted accounting
principles, and, for purposes of the Indenture, the amount of such obligation at
any date shall be the capitalized amount thereof at such date, determined in
accordance with such principles.
"Cash Equivalents" means (a) securities with maturities of one year or less
from the date of acquisition issued or fully guaranteed or insured by the United
States Government or any agency thereof; (b) certificates of deposit and
Eurodollar time deposits with maturities of one year or less from the date of
acquisition and overnight bank deposits of any commercial bank having capital
and surplus in excess of $500,000,000; (c) commercial paper of a domestic issuer
rated at least A-1 by S&P or P-1 by Moody's, (d) securities with maturities of
one year or less from the date of acquisition issued or fully guaranteed by any
state, commonwealth or territory of the United States, by any political
subdivision or taxing authority of any such state, commonwealth or territory or
by any foreign government, the securities of which state, commonwealth,
territory, political subdivision, taxing authority or foreign government (as the
case may be) are rated at least A by S&P or A2 by Moody's, or (e) shares of
money market mutual or similar funds which invest exclusively in assets
satisfying the requirements of clauses (a) through (d) of this definition.
"Change of Control" means the occurrence of any of the following events:
(a) the Issuer ceases to directly or indirectly own 100% of the Capital Stock
(other than directors' qualifying shares) of HLI; (b) any "person" or "group"
(as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), other
than Permitted Holders, is or becomes the "beneficial owner" (as defined in
Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person shall be
deemed to have "beneficial ownership" of all securities that such Person has the
right to acquire, whether such right is exercisable immediately or only after
the passage of time), directly or indirectly, of more than 40% of the total
outstanding Voting Stock of the Issuer; (c) the Issuer consolidates with, or
merges with or into, another Person or conveys, transfers, leases or otherwise
disposes of all or substantially all of its assets to any Person, or any Person
consolidates with, or merges with or into, the Issuer, in any such event
pursuant to a transaction in which the outstanding Voting Stock of the Issuer is
converted into or exchanged for cash, securities or other property, other than
any such transaction (i) where the outstanding Voting Stock of the Issuer is not
converted or exchanged at all (except to the extent necessary to reflect a
change in the jurisdiction of incorporation of the Issuer) or is converted into
or exchanged for (A) Voting Stock (other than Redeemable Capital Stock) of the
surviving or transferee corporation or (B) cash, securities and other property
(other than Capital Stock of the entity surviving such transaction) in an amount
that could be paid by the Issuer as a Restricted Payment as described under the
"Limitation on Restricted Payments" covenant (and such amount shall be treated
as a Restricted Payment subject to the provisions of the Indenture as described
under the "Limitation on Restricted Payments" covenant) and (ii) immediately
after such transaction, no "person" or "group" (as such terms are used in
Sections 13(d) and 14(d) of the Exchange Act), other than Permitted Holders, is
the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act, except that a Person shall be deemed to have "beneficial ownership" of all
securities that such Person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of 50% or more of the total outstanding Voting Stock of the
surviving or transferee corporation; (d) Continuing Directors shall at any time
cease to constitute a majority of the Board of Directors of the Issuer; or (e)
the Issuer is liquidated or dissolved or adopts a plan of liquidation or
dissolution other than in a transaction which complies with the provisions
described under "Consolidation, Merger and Sale of Assets."
"Consolidated Adjusted Net Income" means, for any period, the consolidated
net income (or loss) of the Issuer and all Subsidiaries for such period as
determined in accordance with GAAP, adjusted by excluding,
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without duplication, (a) any net after-tax extraordinary gains or losses (less
all fees and expenses relating thereto), (b) any net after-tax gains or losses
(less all fees and expenses relating thereto) attributable to asset dispositions
other than in the ordinary course of business (sales of servicing rights being
deemed to be in the ordinary course of business), (c) the portion of net income
(or loss) of any Person (other than the Issuer or a Subsidiary) in which the
Issuer or any Subsidiary has an ownership interest, except to the extent of the
amount of dividends or other distributions actually paid to the Issuer or any
Subsidiary in cash dividends or distributions during such period, (d) the net
income (or loss) of any Person combined with the Issuer or any Subsidiary on a
"pooling of interests" basis attributable to any period prior to the date of
combination, (e) cash paid during such period (to the extent deducted in
determining Consolidated Adjusted Net Income during such period), which cash was
paid for the purchase of Hedge Contracts related to Servicing Rights (i) during
the period beginning five business days prior to and ending five business days
after the date of the closing of the HLI Acquisition and (ii) so long as the
closing date of the HHI Acquisition occurs on or before August 15, 1996, through
the end of the one month period after such closing date in an aggregate amount
not to exceed $25 million under this clause (ii) and (f) the net income of any
Subsidiary to the extent that the declaration or payment of dividends or similar
distributions by such Subsidiary is not at the date of determination permitted,
directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to such Subsidiary or its stockholders; provided, that,
for the purpose of determining whether an incurrence of Indebtedness (1) by the
Issuer will be permitted pursuant to the "Limitation on Indebtedness" covenant,
the entire net income of each Subsidiary that is subject to a restriction under
the Bank Credit Agreement and/or any other instrument or agreement governing any
Indebtedness of such Subsidiary of the type set forth in clause (f) above will
be included in determining Consolidated Adjusted Net Income so long as the Bank
Credit Agreement and such other agreement or instrument governing such
Indebtedness permits such Subsidiary to declare and pay cash dividends or make
similar distributions sufficient to pay interest on the Indebtedness being
incurred and any other Indebtedness of the Issuer in existence as of the date of
determination and (2) by a Subsidiary (the "Borrowing Subsidiary") will be
permitted pursuant to the "Limitation on Indebtedness" covenant, the entire net
income of the Borrowing Subsidiary will be included in determining Consolidated
Adjusted Net Income and the entire net income of each other Subsidiary that is
subject to a restriction under the Bank Credit Agreement and/or any other
instrument or agreement governing any Indebtedness of such Subsidiary of the
type set forth in clause (f) above will be included in determining Consolidated
Adjusted Net Income so long as the Bank Credit Agreement and such other
agreement or instrument governing such Indebtedness permits such other
Subsidiary to declare and pay cash dividends or make similar distributions
sufficient to pay interest on the Indebtedness being incurred and any other
Indebtedness of the Borrowing Subsidiary in existence as of the date of
determination.
"Consolidated Fixed Charge Coverage Ratio" means, for any period, the ratio
of (a) the sum of, without duplication, (i) Consolidated Adjusted Net Income,
Consolidated Interest Expense, Consolidated Income Tax Expense and Consolidated
Non-cash Charges deducted in computing Consolidated Adjusted Net Income, minus
(ii) the aggregate amount of after tax unrealized gains (less all fees and
expenses relating thereto) attributable to Hedge Contracts related to Servicing
Rights included in computing Consolidated Adjusted Net Income, in each case, for
such period to (b) the sum of (i) Consolidated Interest Expense and (ii) cash
dividends due (whether or not declared) on Preferred Stock by the Issuer and any
Subsidiary (to any Person other than the Issuer and any Subsidiary), in each
case for such period. Gains or losses on Hedge Contracts related to Servicing
Rights are unrealized until the Hedge Contracts expire or the position is
closed.
"Consolidated Income Tax Expense" means, for any period, the provision for
federal, state, local and foreign income taxes of the Issuer and all
Subsidiaries for such period as determined on a consolidated basis in accordance
with GAAP.
"Consolidated Interest Expense" means, for any period, without duplication,
the sum of (i) the interest expense of the Issuer and its Subsidiaries for such
period, including, without limitation, (A) amortization of debt discount, (B)
the amortization of the net cost of Interest Rate Agreements (including
discounts), (C) the interest portion of any deferred payment obligation and (D)
amortization of debt issuance costs (excluding from this clause (i) interest
expense of the Issuer and its Subsidiaries for such period on any
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Mortgage Warehouse Debt, including, without limitation and with respect to such
Mortgage Warehouse Debt, (x) amortization of debt discount and (y) amortization
of debt issuance costs), plus (ii) the interest component of Capitalized Lease
Obligations of the Issuer and its Subsidiaries during such period, plus (iii)
any decrease in interest expense resulting from compensating balances held by
any lenders to the Issuer or its Subsidiaries, in each case as determined on a
consolidated basis in accordance with GAAP; provided that (x) the Consolidated
Interest Expense attributable to interest on any Indebtedness computed on a pro
forma basis and (A) bearing a floating interest rate shall be computed as if the
rate in effect on the date of computation had been the applicable rate for the
entire period and (B) which was not outstanding during the period for which the
computation is being made but which bears, at the option of the Issuer, a fixed
or floating rate of interest, shall be computed by applying at the option of the
Issuer, either the fixed or floating rate, and (y) in making such computation,
the Consolidated Interest Expense attributed to interest on any Indebtedness
under a revolving credit facility computed on a pro forma basis shall be
computed based upon the average daily balance of such Indebtedness during the
applicable period.
"Consolidated Net Worth" means, at any date, the stockholders' equity of
the Issuer less the amount of such stockholders' equity attributable to
Redeemable Capital Stock or treasury stock of the Issuer and any Subsidiary, as
determined on a consolidated basis in accordance with GAAP.
"Consolidated Non-cash Charges" means, for any period, the aggregate
depreciation, amortization and other non-cash items (including unrealized losses
attributable to Hedge Contracts relating to Servicing Rights) of the Issuer and
any Subsidiary reducing Consolidated Adjusted Net Income for such period,
determined on a consolidated basis in accordance with GAAP (excluding any such
non-cash charge that requires an accrual of or reserve for cash charges for any
future period).
"Continuing Directors" shall mean, collectively, (i) all members of the
board of directors of the Company on the date of Indenture and (ii) all members
of the board of directors of the Company who assume office after the date of
Indenture and whose nomination for election by the Company's shareholders was
approved by a majority of the Continuing Directors or was otherwise approved
under the terms of the Stockholder Agreement, dated as of December 11, 1995, as
amended by Amendment No. 1, dated as of March 4, 1996, among the principal
stockholders of the Company.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disinterested Director" means, with respect to any transaction or series
of transactions in respect of which the Board of Directors is required to
deliver a resolution of the Board of Directors under the Indenture, a member of
the Board of Directors who does not have any material direct or indirect
financial interest in or with respect to such transaction or series of
transactions.
"Equity Offering" means an underwritten primary public offering by the
Issuer of its Common Stock pursuant to an effective registration under the
Securities Act.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied, that
are in effect on the date of the Indenture.
"guarantee" means, as applied to any obligation, (a) a guarantee (other
than by endorsement of negotiable instruments for collection in the ordinary
course of business), direct or indirect, in any manner, of any part or all of
such obligation and (b) an agreement, direct or indirect, contingent or
otherwise, the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limiting the foregoing, the
payment of amounts drawn down by letters of credit.
"Guarantee" means any guarantee of the obligations of the Issuer under the
Indenture and the Notes by any Subsidiary in accordance with the provisions of
the Indenture. When used as a verb, "Guarantee" shall have a corresponding
meaning.
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"Guarantor" means any Subsidiary that incurs a Guarantee.
"Hedge Contract" means in respect of any Mortgage Loan, Mortgaged-Backed
Securities or servicing rights for Mortgage Loans, a contract to buy or sell an
instrument on the futures market, cash forward market, private investor whole
loan market or options market, or an option or financial future purchased over
the counter for future delivery of such instrument, in respect of interest rate
risks associated with such Mortgage Loans, Mortgage-Backed Securities and
servicing rights for Mortgage Loans.
"Hedge Termination Obligation" means any termination amount or other amount
payable by the Issuer or any of its Subsidiaries upon the early termination, by
reason of the occurrence of a default or other termination event thereunder of
any interest rate protection agreement, interest rate option, interest rate cap
or other interest rate hedge arrangement providing to the Issuer or any of its
Subsidiaries protection against changes in interest rates.
"Inactive Subsidiary" means (a) HHI and (b) any other Subsidiary that has
(i) no active operations or (ii) substantially no assets (other than Investments
in Capital Stock of other Subsidiaries).
"Indebtedness" means, with respect to any Person, without duplication, (a)
all liabilities of such Person for borrowed money (including overdrafts) or for
the deferred purchase price of property or services, excluding any trade
payables and other accrued current liabilities incurred in the ordinary course
of business, but including, without limitation, all obligations, contingent or
otherwise, of such Person in connection with any letters of credit and
acceptances issued under letter of credit facilities, acceptance facilities or
other similar facilities, (b) all obligations of such Person evidenced by bonds,
notes, debentures or other similar instruments, (c) all indebtedness of such
Person created or arising under any conditional sale or other title retention
agreement with respect to property acquired by such Person (even if the rights
and remedies of the seller or lender under such agreement in the event of
default are limited to repossession or sale of such property), but excluding
trade payables arising in the ordinary course of business, (d) all Capitalized
Lease Obligations of such Person, (e) all obligations of such Person under or in
respect of Interest Rate Agreements, (f) all Indebtedness referred to in (but
not excluded from) the preceding clauses of other Persons and all dividends of
other Persons, the payment of which is secured by (or for which the holder of
such Indebtedness has an existing right, contingent or otherwise, to be secured
by) any Lien upon or with respect to property (including, without limitation,
accounts and contract rights) owned by such Person, even though such Person has
not assumed or become liable for the payment of such Indebtedness (the amount of
such obligation being deemed to be the lesser of the value of such property or
asset or the amount of the obligation so secured), (g) all guarantees by such
Person of Indebtedness referred to in this definition of any other Person, (h)
all Redeemable Capital Stock of such Person valued at the greater of its
voluntary or involuntary maximum fixed repurchase price plus accrued and unpaid
dividends and (i) any amendment, supplement, modification, deferral, renewal,
extension, refunding or refinancing of any Indebtedness of the types referred to
in clauses (a) through (h) above; provided that this definition of Indebtedness
shall not include obligations under any Hedge Contract. For purposes hereof, the
"maximum fixed repurchase price" of any Redeemable Capital Stock which does not
have a fixed repurchase price shall be calculated in accordance with the terms
of such Redeemable Capital Stock as if such Redeemable Capital Stock were
purchased on any date on which Indebtedness shall be required to be determined
pursuant to the Indenture, and if such price is based upon, or measured by, the
fair market value of such Redeemable Capital Stock, such fair market value shall
be determined in good faith by the board of directors of the issuer of such
Redeemable Capital Stock.
"Interest Rate Agreements" means any interest rate protection agreements in
the form of a swap or similar agreement designed to protect against or manage
exposure to fluctuations in interest rates relating to any floating rate
Indebtedness of the Issuer or its Subsidiaries.
"Investment" means, with respect to any Person, any direct or indirect
advance, loan or other extension of credit or capital contribution to (by means
of any transfer of cash or other property to others or any payment for property
or services for the account or use of others), or any purchase, acquisition or
ownership by such Person of any Capital Stock, bonds, notes, debentures or other
securities or evidences of Indebtedness issued or owned by, any other Person and
all other items that would be classified as investments on a balance sheet
prepared in accordance with GAAP.
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"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation, assignment for security, claim, or
preference or priority or other encumbrance upon or with respect to any property
of any kind, real or personal, movable or immovable, owned on the date of the
Indenture or thereafter acquired. A Person shall be deemed to own subject to a
Lien any property which such Person has acquired or holds subject to the
interest of a vendor or lessor under any conditional sale agreement, capital
lease or other title retention agreement.
"Maturity" means, with respect to any Note, the date on which any principal
of such Note becomes due and payable as therein provided or as provided in the
Indenture, whether at the Stated Maturity with respect to such principal or by
declaration of acceleration, notice of redemption or purchase or otherwise.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Mortgage" means a mortgage or deed of trust on real property which has
been improved by a completed single family (i.e., one to four family units)
dwelling unit (i.e., a detached house, townhouse or condominium).
"Mortgage-Backed Security" means any security (including a participation
certificate) owned by a Subsidiary issued by the Federal Home Loan Mortgage
Corporation, the Federal National Mortgage Association or the Government
National Mortgage Association or any successor to any of the foregoing, that
represents an interest in a pool of Mortgage Loans.
"Mortgage Loan" means a Mortgage Note and the related Mortgage.
"Mortgage Note" means a promissory note which has a term not exceeding 30
years evidencing a loan or advance which is secured by a Mortgage.
"Mortgage Warehouse Debt" means Indebtedness of any Person under any
warehouse line of credit, mortgage loan repurchase agreement or similar facility
or under any commercial paper program that (a) is incurred for the purpose of
funding the origination or purchase of Mortgage Loans or Mortgage Notes that are
intended to be sold to investors and (b) in the case of any warehouse line of
credit or similar facility is, or, in the case of any commercial paper program,
the letters of credit or revolving credit facility providing credit enhancement
or liquidity backup for such commercial paper program are, secured by Mortgage
Loans, Mortgage Notes, Mortgage-Backed Securities or any combination thereof
owned by such Person.
"Pari Passu Indebtedness" means any Indebtedness of the Issuer that is pari
passu in right of payment with the Notes.
"Permitted Holders" means, as of the date of determination, The Bank of
Boston Corporation, Thomas H. Lee Company, Madison Dearborn Partners, Inc. and
the Affiliates of such Persons.
"Permitted Indebtedness" means one or more of the following:
(a) Servicing Secured Indebtedness, provided that the aggregate amount
of such Indebtedness outstanding pursuant to this clause (a), when added to
the aggregate amount of Indebtedness issued pursuant to clause (k) of this
definition of Permitted Indebtedness, may not exceed, prior to the
consummation of the HHI Acquisition, $700 million and thereafter $950
million; provided, further, that all Servicing Secured Indebtedness
outstanding under the Bank Credit Agreement as of the date of the Indenture
and as of the date of the consummation of the HHI Acquisition (and, in each
case, any refinancings of such outstanding Indebtedness) will be deemed to
have been incurred pursuant to this clause (a);
(b) Indebtedness of the Issuer pursuant to the Notes;
(c) Indebtedness of the Issuer or any Subsidiary outstanding on the
date of the Indenture (other than Indebtedness outstanding under the Bank
Credit Agreement and refinancings thereof) and listed on a schedule
thereto;
(d) Indebtedness of the Issuer owing to any Wholly Owned Subsidiary;
provided that any Indebtedness of the Issuer owing to any such Subsidiary
is made pursuant to an intercompany note and is
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subordinated in right of payment from and after such time as the Notes
shall become due and payable (whether at Stated Maturity, upon acceleration
or otherwise) to the payment and performance of the Issuer's obligations
under the Notes; provided, further, that any disposition, pledge or
transfer of any such Indebtedness to a Person (other than a disposition,
pledge or transfer to the Issuer or another Wholly Owned Subsidiary) shall
be deemed to be an incurrence of such Indebtedness by the Issuer not
permitted by this clause (d);
(e) Indebtedness of a Wholly Owned Subsidiary owing to the Issuer or
to another Wholly Owned Subsidiary of the Issuer; provided that any such
Indebtedness is made pursuant to an unsubordinated intercompany note;
provided, further, that (i) any disposition, pledge or transfer of any such
Indebtedness to a Person (other than a disposition, pledge or transfer to
the Issuer or another Wholly Owned Subsidiary) shall be deemed to be an
incurrence of such Indebtedness by such Wholly Owned Subsidiary not
permitted by this clause (e) and (ii) any transaction pursuant to which any
Wholly Owned Subsidiary, which is owed Indebtedness by any other
Subsidiary, ceases to be a Wholly Owned Subsidiary shall be deemed to be an
incurrence of such Indebtedness not permitted by this clause (e);
(f) guarantees of any Subsidiary of Indebtedness of the Issuer entered
into in accordance with the provisions of the "Limitation on Guarantees of
Indebtedness by Subsidiaries" covenant;
(g) the guarantee of the Issuer with respect to the Indebtedness of
any Subsidiary under the Bank Credit Agreement;
(h) the guarantees of the Issuer's Subsidiaries with respect to the
Indebtedness under the Bank Credit Agreement;
(i) secured Indebtedness of Subsidiaries, incurred in the ordinary
course of business, not to exceed $100 million in aggregate principal
amount outstanding at any time;
(j) unsecured Indebtedness of Subsidiaries, incurred in the ordinary
course of business, not to exceed $20 million in aggregate principal amount
outstanding at any time;
(k) Indebtedness of any Subsidiary related to the maintenance of
balances with the lender of such Indebtedness arising under a line of
credit (i) which has a term not in excess of one year, (ii) which is
secured by Cash Equivalents having an aggregate value not materially in
excess of the outstanding amount under such line of credit and (iii) with
respect to which the net interest expense thereon (after giving effect to
compensating balances) is not in excess of the interest income earned on
the collateral securing such line of credit; provided that the aggregate
amount of Indebtedness outstanding pursuant to this clause (k), when added
to the aggregate amount of Servicing Secured Indebtedness outstanding
pursuant to clause (a) of this definition of Permitted Indebtedness, may
not exceed, prior to the consummation of the HHI Acquisition, $700 million
and thereafter $950 million;
(l) intra-day overdrafts of any Subsidiary on dealer clearance
accounts arising in connection with trade settlements for Mortgage-Backed
Securities;
(m) letters of credit issued by the Issuer or any Subsidiary for the
benefit of the Governmental National Mortgage Association and any successor
thereto in connection with final pool certifications;
(n) repurchase agreements (including "gestation" repo transactions)
entered into in the ordinary course of a Subsidiaries' mortgage banking
business and relating to Mortgage Loans and Mortgage-Backed Securities;
(o) the endorsement of negotiable instruments by the Issuer or any
Subsidiary for deposit or collection or similar transactions in the
ordinary course of business;
(p) Mortgage Warehouse Debt of the Issuer or any Subsidiary;
(q) Indebtedness under Interest Rate Agreements, provided that such
agreements relate to Indebtedness permitted pursuant to the "Limitation on
Indebtedness" covenant; and
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(r) any renewals, extensions, substitutions, refinancings or
replacements (each, for purposes of this clause, a "refinancing") of any
Indebtedness described in clauses (b) and (c) of this definition, including
any successive refinancings, so long as (i) any such new Indebtedness shall
be in a principal amount that does not exceed the principal amount (or, if
such Indebtedness being refinanced provides for an amount less than the
principal amount thereof to be due and payable upon a declaration of
acceleration thereof, such lesser amount as of the date of determination)
so refinanced, plus the lesser of the amount of any premium required to be
paid in connection with such refinancing pursuant to the terms of the
Indebtedness refinanced or the amount of any premium actually paid at such
time to refinance the Indebtedness, plus, in either case, the amount of
reasonable expenses of incurred in connection with such refinancing, (ii)
such new Indebtedness has an Average Life longer than the remaining Average
Life of the Indebtedness so renewed, extended, substituted, refinanced or
replaced and a final Stated Maturity later than the final Stated Maturity
of the Indebtedness so renewed, extended, substituted, refinanced or
replaced; and (iii) in the case of any refinancing of Subordinated
Indebtedness, such new Indebtedness is made subordinate to the Notes at
least to the same extent as the Indebtedness being refinanced, provided
that Indebtedness of the Issuer may not be refinanced by Indebtedness of
any Subsidiary of the Issuer pursuant to this clause (r);
provided, however, that any Indebtedness of a Subsidiary permitted pursuant to
this definition of Permitted Indebtedness shall not be permitted with respect to
a Subsidiary that is an Inactive Subsidiary.
"Permitted Investments" means any of the following:
(a) Investments in Cash Equivalents, provided that at no time shall
any obligor (other than the United States Government) be the obligor under
more than 10%, if such obligor has a long term Indebtedness rating of A- or
better but less than AA by S&P (or, if unavailable, the equivalent rating
of Moody's), or 25%, if such obligor has a long term Indebtedness rating of
AA or better by S&P (or, if unavailable, the equivalent rating of Moody's),
of the Issuer's Cash Equivalents at such time;
(b) Investments in the Issuer or any Wholly Owned Subsidiary engaged
in the mortgage banking business;
(c) intercompany Indebtedness to the extent permitted under clauses
(d) and (e) of the definition of "Permitted Indebtedness";
(d) negotiable instruments held for deposit or collection in the
ordinary course of business, except to the extent that they would
constitute Investments in Affiliates;
(e) Investments in stock, obligations or securities received in
settlement of debts owing to the Issuer or a Subsidiary as a result of
foreclosure, perfection or enforcement of any Lien, in each case in the
ordinary course of business;
(f) travel, moving and other advances made to officers, employees and
consultants in the ordinary course of business;
(g) Investments by the Issuer or any Subsidiary in another Person, if
as a result of such Investment (i) such other Person becomes a Subsidiary
or (ii) such other Person is merged or consolidated with or into, or
transfers or conveys all or substantially all of its assets to, the Issuer
or a Subsidiary; and
(h) Investments in Mortgage Loans, Mortgage-Backed Securities,
mortgage servicing rights and Hedge Contracts, in each case made in the
ordinary course of business.
"Permitted Liens" means the following types of Liens as to which no
enforcement, collection, execution, levy or foreclosure proceeding shall have
been consummated:
(a) The pledge of the Capital Stock of any Subsidiary as security for
Indebtedness permitted pursuant to the "Limitation on Indebtedness"
covenant;
(b) Liens (other than Liens securing Indebtedness under the Bank
Credit Agreement) existing as of the date of the Indenture;
(c) Liens on any property or assets of a Subsidiary granted in favor
of the Issuer;
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(d) Liens securing the Notes;
(e) Liens arising by reason of (i) security for payment of workmen's
compensation or insurance consistent with past practice, (ii) good faith
deposits in connection with tenders, contracts (other than contracts for
the payment of money) or leases entered into in the ordinary course of
business or (iii) deposits to secure public or statutory obligations, or in
lieu of surety or appeal bonds;
(f) any interest or title of a lessor under any Capitalized Lease
Obligation so long as such Indebtedness is permitted under the "Limitations
on Indebtedness" covenant;
(g) Liens of mechanics, materialmen, laborers, employees or suppliers
or any similar Liens arising by operation of law incurred in the ordinary
course of business securing obligations that are not overdue by a period of
more than 30 days;
(h) Liens arising by reason of zoning restrictions, easements,
licenses, reservations, provisions, covenants, conditions, waivers,
restrictions on the use of property or minor irregularities of title (and
with respect to leasehold interests, mortgages, obligations, liens and
other encumbrances incurred, created, assumed or permitted to exist and
arising by, through or under a landlord or owner of the leased property,
with or without consent of the lessee), none of which materially impairs
the use of any parcel of property material to the operation of the business
of the Issuer and its Subsidiaries taken as a whole or the value of such
property for the purpose of such business;
(i) Liens arising by reason of surveys, exceptions, defects of title,
encumbrances, easements, reservations of, or rights of others for, rights
of way, sewers, electric lines, telegraph or telephone lines or other
similar purposes or zoning or other restrictions as to the use of real
property not materially interfering with the ordinary conduct of the
business of the Issuer and its Subsidiaries taken as a whole;
(j) Liens arising out of judgments or orders that have been adequately
bonded or with respect to which a stay of execution has been obtained
pending an appeal or proceeding for review; and
(k) Liens securing Acquired Indebtedness created prior to (and not in
connection with or in contemplation of) the incurrence of such Indebtedness
by the Issuer or any Subsidiary; provided that such Lien does not extend to
any property or assets of the Issuer or any Subsidiary other than the
assets acquired in connection with the incurrence of such Acquired
Indebtedness;
(l) Liens securing Interest Rate Agreements permitted to be incurred
pursuant to clause (q) of the definition of "Permitted Indebtedness";
(m) Liens arising from purchase money mortgages and purchase money
security interests incurred in the normal and ordinary course of the
business of the Issuer; provided that (i) the related Indebtedness shall
not be secured by any property or assets of the Issuer or any Subsidiary
other than the property and assets so acquired and (ii) the Lien securing
such Indebtedness shall be created within 60 days of such acquisition;
(n) any Lien securing any Mortgage Warehouse Debt of the Issuer or any
Subsidiary secured primarily by Mortgage Loans held for sale;
(o) any Lien arising under a binding agreement pursuant to which the
Issuer or any Subsidiary is obligated to sell identifiable Mortgage Loans,
which Lien encumbers such Mortgage Loans and secures the Issuer's or a
Subsidiary's obligation to sell and deliver such Mortgage Loans under such
agreement; provided, in each such case the Mortgage Loans are sold or
released from such Liens under such binding agreement within 90 days of the
entering into of such binding agreement; and
(p) any extension, renewal or replacement, in whole or in part, of any
Lien described in the foregoing clauses (a), (b) and (k); provided that (i)
the amount of security is not thereby increased, (ii) the aggregate amount
of Indebtedness or other obligations secured by the Lien after such
extension, renewal or replacement does not exceed the aggregate amount of
Indebtedness or other obligations secured by the existing Lien prior to
such extension, renewal or replacement plus an amount equal to the lesser
of (A) the stated premium required to be paid with such an extension,
renewal or replacement pursuant to the terms of the Indebtedness or (B) the
amount of any premium actually paid by the Issuer or the Subsidiary, as the
case may be, to accomplish such extension, renewal or replacement and (iii)
the
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Indebtedness secured by such Lien is permitted under the provisions of the
"Limitation on Indebtedness" covenant.
"Person" means any individual, corporation, partnership, business trust,
joint venture, association, joint stock company, trust, unincorporated
organization, limited liability company or other entity, or government or any
agency or political subdivision thereof.
"Pledge Agreement" means the Pledge Agreement, dated as of the date of the
Indenture, by the Issuer in favor of the Trustee and any future Pledge Agreement
entered into by the Issuer or any Subsidiary in favor of the Trustee, pursuant
to the Indenture, in each case, in the form attached to the Indenture.
"Pledgor" means the Issuer and any Subsidiary that is a "Pledgor" under a
Pledge Agreement.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participation or other equivalents (however designated) of such
Person's preferred or preference stock whether now outstanding, or issued after
the date of the Indenture, and including, without limitation, all classes and
series of preferred or preference stock of such Person.
"Qualified Capital Stock" of any person means any and all Capital Stock of
such person other than Redeemable Capital Stock.
"Redeemable Capital Stock" means any class or series of Capital Stock that,
either by its terms, by the terms of any security into which it is convertible
or exchangeable or by contract or otherwise, is, or upon the happening of an
event or passage of time would be, required to be redeemed prior to the final
Stated Maturity of the Notes or is redeemable at the option of the holder
thereof at any time prior to such final Stated Maturity, or is convertible into
or exchangeable for debt securities at any time prior to such final Stated
Maturity.
"S&P" means Standard and Poor's Ratings Group, a division of McGraw- Hill,
Inc., and its successors.
"Servicing Rights" means, at any date of determination, the mortgage loan
servicing rights and related receivables owned by the Issuer and its
Subsidiaries.
"Servicing Secured Indebtedness" means Indebtedness of the Issuer and
Subsidiaries under the Bank Credit Agreement and/or other agreement or facility,
other than Mortgage Warehouse Debt, that is secured by, among other things, a
first priority security interest in Servicing Rights, and is advanced based only
on the value of such Servicing Rights.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date of
the Indenture.
"Stated Maturity" means, when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which the principal of such Note or such installment of interest is due
and payable, and, when used with respect to any other Indebtedness, means the
date specified in the instrument governing such Indebtedness as the fixed date
on which the principal of such Indebtedness, or any installment of interest
thereon, is due and payable.
"Subordinated Indebtedness" means Indebtedness of the Issuer that is
expressly subordinated in right of payment to the Notes.
"Subsidiary" of the Issuer means a corporation, partnership, joint venture,
limited liability company, trust, estate or other entity of which (or in which)
more than 50% of (a) the issued and outstanding Voting Stock, (b) the interest
in the capital or profits of such partnership or joint venture or (c) the
beneficial interest in such trust or estate is at the time directly or
indirectly owned or controlled by the Issuer, by the Issuer and one or more of
its other Subsidiaries or by one or more of the Issuer's other Subsidiaries.
"Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939 as in
force on the date as of which this Indenture was executed, except as provided
with respect to the conformity of supplemental indentures with TIA.
"Voting Stock" means any class or classes of Capital Stock pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the board of directors, managers,
trustees or other voting members of the governing body of any Person
(irrespective of whether or
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not, at the time, stock of any other class or classes shall have, or might have,
voting power by reason of the happening of any contingency).
"Wholly Owned Subsidiary" means any Subsidiary of the Issuer of which 100%
of the outstanding Capital Stock is owned by the Issuer or another Wholly Owned
Subsidiary of the Issuer.
BOOK-ENTRY DELIVERY AND FORM
The certificates representing the Notes will be issued in fully registered
form, without coupons. Except as described in the next paragraph, the Notes will
be deposited with, or on behalf of, The Depository Trust Company, New York, New
York ("DTC"), and registered in the name of Cede & Co., as DTC's nominee in the
form of a global Note certificate (the "Global Certificate") or will remain in
the custody of the Trustee pursuant to a FAST Balance Certificate Agreement
between DTC and the Trustee.
Initial Notes originally purchased by or transferred to (i) institutional
"accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act) who are not "qualified institutional buyers" (as defined in Rule
144A under the Securities Act ("QIBS")), (ii) except as described below, persons
outside the United States pursuant to sales in accordance with Regulation S
under the Securities Act or (iii) any other Persons who are not QIBs
(collectively, "Non-Global Purchasers") will be issued in registered form
without coupons (the "Certificated Notes"). Upon the transfer to a QIB of
Certificated Notes initially issued to a Non-Global Purchaser, such Certificated
Notes will be exchanged for an interest in the Global Certificate or in the
Notes in the custody of the Trustee representing the principal amount of notes
being transferred.
Notes originally purchased by persons outside the United States pursuant to
sales in accordance with Regulation S under the Securities Act will be
represented upon issuance by a temporary global Note certificate (the "Temporary
Certificate") which will not be exchangeable for Certificated Notes until the
expiration of the "40-day restricted period" within the meaning of Rule
903(c)(3) or Regulation S under the Securities Act. The Temporary Certificate
will be registered in the name of, and held by, a temporary certificate holder
until the expiration of such 40-day period, at which time the Temporary
Certificate will be delivered to the Trustee in exchange for Certificated Notes
registered in the names requested by such temporary certificate holder. In
addition, until the expiration of such 40-day period, transfers of interest in
the Temporary Certificate can only be effect through such temporary certificate
holder in accordance with the requirements set forth in "Notice to Investors."
DESCRIPTION OF THE INITIAL NOTES
The terms of the Initial Notes are substantially identical in all respects
(including principal amount, interest rate and maturity) to the terms of the
Exchange Notes for which they may be exchanged pursuant to this Exchange Offer,
except that the Initial Notes are not freely transferable by holders thereof and
were issued subject to certain covenants regarding registration as provided
therein and in the Registration Rights Agreement (which covenants will terminate
and be of no further force or effect upon completion of this Exchange Offer).
See "Registration Rights Agreement."
BOOK-ENTRY; DELIVERY AND FORM
The certificates representing the Exchange Notes will be issued in fully
registered form. The Exchange Notes initially will each be represented by a
single, permanent global certificate in definitive, fully registered form (the
"Global Note") and will be deposited with the Trustee as custodian for DTC and
registered in the name of a nominee of DTC.
The Global Note. Upon the issuance of the Global Note, DTC or its
custodian will credit, on its internal system, the respective principal amount
of Exchange Notes, of the individual beneficial interests represented by such
global securities to the respective accounts of persons who have accounts with
such depositary. Such accounts initially will be designated by or on behalf of
the Initial Purchasers. Ownership of beneficial interests in the Global Note
will be limited to persons who have accounts with DTC ("participants") or
persons who hold interests through participants. Ownership of beneficial
interests in the Global Note will be shown on, and the transfer of that
ownership will be effected only through records maintained by DTC or its nominee
(with
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respect to interests of participants) and the records of participants (with
respect to interests of persons other than participants).
So long as DTC, or its nominee, is the registered owner or holder of the
Global Note. DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Exchange Notes represented by such Global Note for
all purposes under the Indenture and the Exchange Notes. No beneficial owner of
an interest in the Global Note will be able to transfer that interest except in
accordance with DTC's applicable procedures, in addition to those provided for
under the Indenture.
Payments of the principal of, premium (if any) and interest on, the Global
Note, will be made to DTC or its nominee, as the case may be, as the registered
owner thereof. Neither the Issuer, the Trustee nor any Paying Agent will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Note or
for maintaining, supervising or reviewing any records relating to such
beneficial ownership interest.
The Issuer expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest in respect of the Global Note, will
credit participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Note as
shown on the records of DTC or its nominee. The Issuer also expects that
payments by participants will be governed by standing instructions and customary
practice, as is now the case with securities held for the accounts of customers
registered in the names of nominees for such customers. Such payments will be
the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in clearinghouse funds. If a
holder requires physical delivery of a certificated note for any reason,
including to sell Exchange Notes to persons in states which require physical
delivery of such Exchange Notes, or to pledge such Exchange Notes, such holder
must transfer its interest in the Global Note, in accordance with the normal
procedures of DTC and the procedures set forth in the Indenture.
DTC has advised the Issuer that it will take any action permitted to be
taken by a holder of Exchange Notes (including the presentation of Exchange
Notes for exchange as described below) only at the direction of one or more
participants to whose account the DTC interests in the Global Note is credited
and only in respect of such portion of the aggregate principal amount of
Exchange Notes as to which such participant or participants has or have given
such direction. However, if there is an Event of Default under the Exchange
Notes, DTC will exchange the Global Note for certificated notes, which it will
distribute to its participants.
DTC has advised the Issuer as follows: DTC is a limited purpose trust
Issuer organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC, it is under
no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Issuer nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
Certificated Notes. If DTC is at any time unwilling or unable to continue
as a depositary for the Global Note and a successor depositary is not appointed
by the Issuer within 90 days, Certificated Notes will be issued in exchange for
the Global Note.
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EXCHANGE OFFER; REGISTRATION RIGHTS
The Issuer entered into a registration rights agreement with the Initial
Purchasers (the "Registration Rights Agreement") pursuant to which the Issuer
agreed, for the benefit of the holders of the Initial Notes, at the Issuer's
cost, to use its best efforts (i) to file the Exchange Offer Registration
Statement within 45 days after the date of the original issue of the Initial
Notes with the Commission with respect to the Exchange Offer for the Exchange
Notes, which will have terms identical in all material respects to the Initial
Notes (except that the Exchange Notes will not contain terms with respect to
transfer restrictions or interest rate increases as described herein) and (ii)
to cause the Exchange Offer Registration Statement to be declared effective
under the Securities Act within 90 days after the date of the original issue of
the Notes. Promptly after the Exchange Offer Registration Statement has been
declared effective, the Issuer will offer the Exchange Notes in exchange for
surrender of the Initial Notes. The Issuer will keep the Exchange Offer open for
not less than 30 days (or longer if required by applicable law) after the date
notice of the Exchange Offer is mailed to the holders of the Initial Notes. For
each Initial Note validly tendered to the Issuer pursuant to the Exchange Offer
and not withdrawn by the holder thereof, the holder of such Initial Note will
receive an Exchange Note having a principal amount equal to that of the tendered
Initial Note. Interest on each Exchange Note will accrue from the last interest
payment date on which interest was paid on the tendered Initial Note in exchange
therefor or, if no interest has been paid on such Initial Note, from the date of
its original issue.
Based on existing interpretations of the Securities Act by the staff of the
Commission set forth in several no action letters to third parties, and subject
to the immediately following sentence, the Issuer believes that the Exchange
Notes issued pursuant to the Exchange Offer may be offered for resale, resold
and otherwise transferred by holders thereof without further registration under
the Securities Act. However, any purchaser of Notes who is an "affiliate" of the
Issuer or who intends to participate in the Exchange Offer for the purpose of
distributing the Exchange Notes (i) will not be able to rely on the
interpretation by the staff of the Commission set forth in the above referenced
no action letters, (ii) will not be able to tender Notes in the Exchange Offer
and (iii) must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any sale or transfer of the Notes,
unless such sale or transfer is made pursuant to an exemption from such
requirements.
Each holder of the Initial Notes (other than certain specified holders) who
wishes to exchange Initial Notes for Exchange Notes in the Exchange Offer will
be required to make certain representations, including that (i) it is not an
affiliate of the Issuer, (ii) any Exchange Notes to be received by it were
acquired in the ordinary course of its business and (iii) at the time of
commencement of the Exchange Offer, it has no arrangement with any person to
participate in the distribution (within the meaning of the Securities Act) of
the Exchange Notes. In addition, in connection with any resales of Exchange
Notes, any broker-dealer (a "Participating Broker-Dealer") who acquired the
Notes for its own account as a result of market-making activities or other
trading activities must deliver a prospectus meeting the requirements of the
Securities Act. The Commission has taken the position that Participating
Broker-Dealers may fulfill their prospectus delivery requirements with respect
to the Exchange Notes (other than a resale of an unsold allotment from the
original sale of the Notes) with the prospectus contained in the Exchange Offer
Registration Statement. Under the Registration Rights Agreement, the Issuer is
required to allow Participating Broker-Dealers and other persons, if any,
subject to similar prospectus delivery requirements to use the prospectus
contained in the Exchange Offer Registration Statement in connection with the
resale of such Exchange Notes.
In the event that any changes in law or the applicable interpretations of
the staff of the Commission do not permit the Issuer to effect the Exchange
Offer or if for any other reason the Exchange Offer Registration Statement is
not declared effective within 90 days after the original issuance of the Notes,
the Exchange Offer is not consummated within 120 days after the original issue
of the Notes, any holder of the Notes (other than the Initial Purchasers) is not
eligible to participate in the Exchange Offer or upon the request of any Initial
Purchaser under certain circumstances, the Issuer will at its cost, (a) as
promptly as practicable, file with the Commission the Shelf Registration
Statement covering resales of the Notes, (b) use its best efforts to cause the
Shelf Registration Statement to be declared effective under the Securities Act
by the 120th day after the original issue of the Notes (or promptly in the event
of a request by any Initial Purchaser) and (c) use its best
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efforts to keep effective the Shelf Registration Statement for a period of three
years after its effective date (or for a period of one year after such effective
date if such Shelf Registration Statement is filed at the request of the Initial
Purchasers or, for such shorter period, when all of the Notes covered by the
Shelf Registration Statement have been sold pursuant thereto). The Issuer will,
in the event of the filing of a Shelf Registration Statement, provide to each
holder of the Notes copies of the prospectus which is a part of the Shelf
Registration Statement, notify each such holder when the Shelf Registration
Statement for the Notes has become effective and take certain other actions as
are required to permit unrestricted resales of the Notes. A holder of Notes who
sells such Notes pursuant to the Shelf Registration Statement generally will be
required to be named as a selling securityholder in the related prospectus and
to deliver the prospectus to purchasers, will be subject to certain of the civil
liability provisions under the Securities Act in connection with such sales and
will be bound by the provisions of the Registration Rights Agreement which are
applicable to such a holder (including certain indemnification obligations). In
addition, each holder of the Notes will be required to deliver information to be
used in connection with the Shelf Registration Statement and to provide comments
on the Shelf Registration Statement within the time periods set forth in the
Registration Rights Agreement in order to have their Notes included in the Shelf
Registration Statement and to benefit from the provisions regarding liquidated
damages set forth in the following paragraph.
In the event that either (i) the Exchange Offer Registration Statement is
not filed with the Commission on or prior to the 45th day after the date of
original issue of the Notes, (ii) the Exchange Offer Registration Statement is
not declared effective on or prior to the 90th day after the date of original
issue of the Notes or (iii) the Exchange Offer is not consummated on or prior to
the 120th day after the date of original issue of the Notes or a Shelf
Registration Statement is not declared effective on or prior to the 120th day
after the date of original issue of the Notes, the interest rate borne by the
Notes shall be increased by one-half of one percent per annum following such
45-day period in the case of (i) above, such 90-day period in the case of clause
(ii) above or such 120-day period in the case of (iii) above, which rate will be
increased by an additional one-half of one percent per annum for each 90-day
period that any such additional interest continues to accrue; provided that the
aggregate increase in such interest rate will in no event exceed one percent per
annum. Upon (x) the filing of the Exchange Offer Registration Statement after
the 45 day period described in clause (i) above, (y) the effectiveness of the
Exchange Offer Registration Statement after the 90-day period described in
clause (ii) above or (z) the day before the date of the consummation of the
Exchange Offer or the effectiveness of a Shelf Registration Statement, as the
case may be, after the 120-day period described in clause (iii) above, the
interest rate borne by the Notes from the date of such filing, effectiveness or
the day before the date of the consummation, as the case may be, will be reduced
by the full amount of such increase from the original interest rate set forth on
the cover of this Offering Memorandum; provided, however, that, if after any
such reduction in interest rate, a different event specified in clause (i), (ii)
or (iii) above occurs, the interest rate may again be increased and thereafter
reduced pursuant to the foregoing provisions.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which is available upon request to the Issuer.
141
<PAGE> 142
INCOME TAX CONSIDERATIONS
Holders of the Notes should consult their own tax advisors with respect to
their particular circumstances and with respect to the effects of state, local
or foreign tax laws to which they may be subject.
HomeSide has been advised by its counsel, Hutchins, Wheeler & Dittmar, A
Professional Corporation, that in its opinion the following summary fairly
describes the material United States federal income tax consequences expected to
apply to the exchange of Initial Notes for Exchange Notes and the ownership and
disposition of Exchange Notes under currently applicable law. The discussion
does not cover all aspects of federal taxation that may be relevant to, or the
actual tax effect that any of the matters described herein will have on,
particular holders, and does not address state, local, foreign or other tax
laws. Further, the federal income tax treatment of a holder of the Initial Notes
and the Exchange Notes may vary depending on the holder's particular situation.
Certain holders (including insurance companies, tax-exempt organizations,
financial institutions, broker-dealers, taxpayers subject to the alternative
minimum tax and foreign persons) may be subject to special rules not discussed
below. The description assumes that holders of the Initial Notes and the
Exchange Notes will hold the Initial Notes and the Exchange Notes as "capital
assets" (generally, property held for investment purposes) within the meaning of
Section 1221 of the Code.
THE EXCHANGE
An exchange of Initial Notes for Exchange Notes will be treated as a
"non-event" for federal income tax purposes because the Exchange Notes will not
be considered to differ materially in kind or extent from the Initial Notes. As
a result, no federal income tax consequences will result to holders exchanging
Initial Notes for Exchange Notes.
THE EXCHANGE NOTES
Interest Payments on the Exchange Notes. The Initial Notes were not issued
with original issue discount. The stated interest on the Initial Notes and
Exchange Notes should be considered to be "qualified stated interest" and,
therefore, will be includible in a holder's gross income (except to the extent
attributable to accrued interest at the time of purchase) as ordinary income for
federal income tax purposes in accordance with a holder's tax method of
accounting.
Tax Basis. A holder's adjusted tax basis (determined by taking into
account accrued interest at the time of purchase) in an Exchange Note received
in exchange for an Initial Note will equal the cost of the Initial Note to such
holder, increased by the amounts of market discount previously included in
income by the holder and reduced by any principal payments received by such
holder with respect to the Exchange Notes and by amortized bond premium. A
holder's adjusted tax basis in an Exchange Note purchased by such holder will be
equal to the price paid for such an Exchange Note (determined by taking into
account accrued interest at the time of purchase), increased by market discount
previously included in income by the holder and reduced by any principal
payments received by such holder with respect to an Exchange Note and by
amortized bond premium. See "Market Discount and Bond Premium" below.
Sale, Exchange or Retirement. Upon the sale, exchange or retirement of an
Exchange Note, a holder will recognize taxable gain or loss, if any, equal to
the difference between the amount realized on the sale, exchange or retirement
and such holder's adjusted tax basis in such Exchange Note. Such gain or loss
will be a capital gain or loss (except to the extent of any accrued market
discount), and will be a long-term capital gain or loss if the Exchange Note has
been held for more than one year at the time of such sale, exchange or
retirement.
Market Discount and Bond Premium. Holders should be aware that the market
discount provisions of the Code may affect the Exchange Notes. These rules
generally provide that a holder who purchases Exchange Notes for an amount which
is less than their principal amount will be considered to have purchased the
Exchange Notes at a "market discount" equal to the amount of such difference.
Such holder will be required to treat any gain realized upon the disposition of
the Exchange Note as interest income to the extent of the market discount that
is treated as having accrued during the period that such holder held such
142
<PAGE> 143
Exchange Note, unless an election is made to include such market discount in
income on a current basis. A holder of an Exchange Note who acquires the
Exchange Note at a market discount and who does not elect to include market
discount in income on a current basis may also be required to defer the
deduction of a portion of the interest on any indebtedness incurred or continued
to purchase or carry the Exchange Note until the holder disposes of such
Exchange Note in a taxable transaction.
If a holder's tax basis in an Exchange Note immediately after acquisition
exceeds the stated redemption price at maturity of such Exchange Note, such
holder may be eligible to elect to deduct such excess as amortizable bond
premium pursuant to Section 171 of the Code.
Purchasers of the Exchange Notes should consult their own tax advisors as
to the application to such purchasers of the market discount and bond premium
rules.
HOLDERS OF THE INITIAL NOTES ARE URGED TO CONSULT THEIR TAX ADVISORS
REGARDING THE PARTICULAR TAX CONSEQUENCES TO THEM OF ACQUIRING, OWNING OR
DISPOSING OF THE INITIAL NOTES AND THE EXCHANGE NOTES, INCLUDING THE APPLICATION
OF FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS, AND POSSIBLE FUTURE CHANGES IN
SUCH FEDERAL TAX LAWS.
143
<PAGE> 144
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be
issued by a broker-dealer in connection with resales of Exchange Notes received
in exchange for Initial Notes where such Notes were acquired as a result of
market-making activities or other trading activities. The Issuer has agreed that
for a period of 180 days after the Expiration Date, it will make this
Prospectus, as amended or supplemented, available to any broker-dealer for use
in connection with any such resale. In addition, until January 20, 1997, all
dealers effecting transactions in the Exchange Notes may be required to deliver
a prospectus.
The Issuer will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the Exchange Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such market prices or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such brokerdealer and/or the
purchasers of any such Exchange Notes. Any broker-dealer that resells Exchange
Notes that were received by it for its own account pursuant to the Exchange
Offer and any broker or dealer that participates in a distribution of such
Exchange Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of Exchange Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date the Issuer will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the Letter
of Transmittal. The Issuer has agreed to pay all expenses incident to the
Exchange Offer other than commissions or concessions of any brokers or dealers
and will indemnify the holders of the Notes (including any brokerdealers)
against certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the Exchange Notes offered hereby will be passed upon for
the Issuer by Hutchins, Wheeler & Dittmar, A Professional Corporation, Boston,
Massachusetts.
EXPERTS
The balance sheet of HomeSide, Inc. as of March 14, 1996, included in this
Prospectus and elsewhere in the registration statement, has been audited by
Arthur Andersen LLP, independent certified public accountants, as indicated in
their report with respect thereto, and is included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
The consolidated balance sheets of BancBoston Mortgage Corporation, as of
December 31, 1995 and 1994 and the related consolidated statements of operations
and retained earnings and cash flows for each of the three years in the period
ended December 31, 1995, included in this Prospectus and elsewhere in the
registration statement, have been audited by Coopers & Lybrand L.L.P.,
independent accountants, as indicated in their report with respect thereto, and
is included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said reports.
The consolidated balance sheets of Barnett Mortgage Company and
subsidiaries as of December 31, 1995 and 1994 and the related consolidated
statements of operations, stockholder's equity, and cash flows for each of the
three years in the period ended December 31, 1995, included in this registration
statement, have been audited by Arthur Andersen LLP, independent certified
public accountants, as indicated in their report with
144
<PAGE> 145
respect thereto, and is included herein in reliance upon the authority of said
firm as experts in accounting and auditing in giving said reports.
The consolidated statements of financial condition of BancPLUS Financial
Corporation and subsidiary as of December 31, 1994 and 1993 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended, included in this Prospectus and elsewhere in the
registration statement, have been audited by KPMG Peat Marwick LLP, independent
auditors, as set forth in their report included herein. In that report, that
firm states that with respect to a certain subsidiary, Honolulu Mortgage
Company, Inc., its opinion is based on the report of other independent auditors,
namely Ernst & Young LLP. The financial statements referred to above have been
included herein in reliance upon the authority of those firms as experts in
accounting and auditing in giving said reports.
145
<PAGE> 146
<TABLE>
INDEX TO FINANCIAL STATEMENTS
<CAPTION>
PAGE NO.
--------
<S> <C>
HOMESIDE, INC.
Consolidated Balance Sheet at August 31, 1996.................................... F-2
Consolidated Statement of Income and Retained Earnings for the Three Months Ended
August 31, 1996 and the Period March 16, 1996 through August 31, 1996......... F-3
Consolidated Statement of Cash Flows for the Period March 16, 1996 through August
31, 1996...................................................................... F-4
Notes to Consolidated Financial Statements....................................... F-5
HOMESIDE, INC.
Report of Independent Certified Public Accountants............................... F-15
Balance Sheet at March 14, 1996.................................................. F-16
Notes to Balance Sheet........................................................... F-17
BANCBOSTON MORTGAGE CORPORATION (ACQUIRED BY HOMESIDE, INC. ON MARCH 15, 1996 AND
NOW KNOWN AS HOMESIDE LENDING, INC.)
Consolidated Balance Sheets at December 31, 1995 and March 15, 1996.............. F-19
Consolidated Statements of Income and Retained Earnings (Deficit) for the Quarter
Ended March 31, 1995 and the Period January 1, 1996 through March 15, 1996.... F-20
Consolidated Statements of Cash Flows for the Quarter Ended March 31, 1995 and
the Period January 1, 1996 through March 15, 1996............................. F-21
Notes to Consolidated Financial Statements....................................... F-22
BARNETT MORTGAGE COMPANY (ACQUIRED BY HOMESIDE, INC. ON MAY 31, 1996 AND NOW KNOWN
AS HOMESIDE HOLDINGS, INC.)
Consolidated Statements of Operations for the Period April 1, 1996 to May 30,
1996, the Period January 1, 1996 to May 30, 1996 and the Three and Six Months
Ended June 30, 1995........................................................... F-24
Consolidated Statements of Cash Flows for the Period January 1, 1996 to May 30,
1996 and the Six Months Ended June 30, 1995................................... F-25
Notes to Consolidated Financial Statements....................................... F-26
BANCBOSTON MORTGAGE CORPORATION (ACQUIRED BY HOMESIDE, INC. ON MARCH 15, 1996 AND
NOW KNOWN AS HOMESIDE LENDING, INC.)
Report of Independent Accountants................................................ F-27
Consolidated Balance Sheets at December 31, 1994 and 1995........................ F-28
Consolidated Statements of Operations and Retained Earnings for the Years Ended
December 31, 1993, 1994 and 1995.............................................. F-29
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1993, 1994 and 1995.............................................. F-30
Notes to Consolidated Financial Statements....................................... F-32
BARNETT MORTGAGE COMPANY (ACQUIRED BY HOMESIDE, INC. ON MAY 31, 1996 AND NOW KNOWN
AS HOMESIDE HOLDINGS, INC.)
Report of Independent Certified Public Accountants............................... F-47
Consolidated Balance Sheets at December 31, 1994 and 1995........................ F-48
Consolidated Statements of Operations for the Years Ended
December 31, 1993, 1994 and 1995.............................................. F-49
Consolidated Statements of Stockholder's Equity for the Years Ended
December 31, 1993, 1994 and 1995.............................................. F-50
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1993, 1994 and 1995.............................................. F-51
Notes to Consolidated Financial Statements....................................... F-52
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY (ACQUIRED BY BARNETT MORTGAGE COMPANY
ON FEBRUARY 28, 1995)
Independent Auditors' Report..................................................... F-64
Consolidated Statements of Financial Condition at December 31, 1993 and 1994..... F-65
Consolidated Statements of Operations for the Years Ended December 31, 1993 and
1994.......................................................................... F-66
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1993 and 1994.................................................... F-67
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993 and
1994.......................................................................... F-68
Notes to Consolidated Financial Statements....................................... F-69
</TABLE>
F-1
<PAGE> 147
HOMESIDE, INC.
<TABLE>
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<CAPTION>
AUGUST 31, 1996
---------------
<S> <C>
ASSETS
Cash and cash equivalents................................................... $ 27,991
Mortgage loans held for sale, net........................................... 1,290,841
Mortgage servicing rights receivable, net................................... 1,428,117
Accounts receivable......................................................... 119,658
Premises and equipment, net................................................. 29,918
Other assets................................................................ 38,413
----------
Total Assets................................................................ $2,934,938
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable to banks...................................................... $2,088,232
Accounts payable and accrued liabilities.................................... 162,038
Deferred income taxes payable............................................... 88,121
Long term debt.............................................................. 221,426
----------
Total Liabilities........................................................... 2,559,817
----------
Common stock:
Class A voting, $.01 par value, 2,500,000 shares authorized and
2,046,861 shares issued and outstanding............................... 20
Class B non-voting, $.01 par value, 5,714 shares authorized, issued and
outstanding........................................................... --
Class C non-voting, $1.00 par value, 5,714 shares authorized, issued
and outstanding....................................................... 6
Additional paid in capital.................................................. 360,174
Retained earnings........................................................... 16,621
----------
376,821
Less: Notes received in payment for capital stock........................... (1,700)
----------
Total stockholders' equity.................................................. 375,121
----------
Total Liabilities and Stockholders' Equity.................................. $2,934,938
==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-2
<PAGE> 148
HOMESIDE, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<CAPTION>
FOR THE PERIOD FROM
FOR THE THREE MARCH 16, 1996
MONTHS ENDED TO
AUGUST 31, 1996 AUGUST 31, 1996
---------------- --------------------
<S> <C> <C>
REVENUES:
Mortgage servicing fees.............................. $ 83,349 $124,834
Amortization of mortgage servicing rights............ (40,464) (56,906)
-------- --------
Net servicing revenue........................... 42,885 67,928
Interest income...................................... 22,270 34,989
Interest expense..................................... (23,920) (38,882)
-------- --------
Net interest expense............................ (1,650) (3,893)
Net mortgage origination revenue..................... 16,273 27,083
Other income......................................... 355 462
-------- --------
Total revenue........................................ 57,863 91,580
EXPENSES:
Salaries and employee benefits....................... 21,177 32,657
Occupancy and equipment.............................. 3,084 4,930
Servicing losses on investor-owned loans............. 4,058 7,996
Other expenses....................................... 12,523 17,868
-------- --------
40,842 63,451
Income before income taxes........................... 17,021 28,129
Income tax expense................................... 6,954 11,508
-------- --------
Net income........................................... 10,067 16,621
Retained earnings at beginning of period............. 6,554 --
-------- --------
Retained earnings at end of period................... $ 16,621 $ 16,621
======== ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-3
<PAGE> 149
HOMESIDE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
MARCH 16, 1996
TO
AUGUST 31, 1996
--------------------
<S> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net income............................................................. $ 16,621
Amortization........................................................... 59,410
Depreciation........................................................... 1,885
Servicing losses on investor-owned loans............................... 7,996
Deferred income tax expense............................................ 11,508
Capitalized excess servicing rights.................................... (9,240)
Mortgage loans originated and purchased for sale....................... (5,554,807)
Proceeds and principal repayments of mortgage loans held for sale...... 5,136,890
Change in accounts receivable.......................................... (19,106)
Change in other assets and accounts payable and accrued liabilities.... 9,692
-----------
Net cash used in operating activities.................................. (339,151)
-----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of premises and equipment..................................... (2,758)
Acquisition of mortgage servicing rights............................... (247,649)
Purchase of risk management contracts.................................. (78,889)
Acquisition of BBMC, net of cash acquired.............................. (133,392)
Acquisition of BMC, net of cash acquired............................... (106,244)
-----------
Net cash used in investing activities.................................. (568,932)
-----------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Net borrowings from banks.............................................. 603,899
Issuance of bridge financing........................................... 90,000
Repayment of bridge financing.......................................... (90,000)
Issuance of notes...................................................... 200,000
Payment of debt issue costs............................................ (20,321)
Repayment of long term debt............................................ (269)
Proceeds from issuance of common stock................................. 152,765
-----------
Net cash provided by financing activities.............................. 936,074
-----------
Net increase in cash................................................... 27,991
Cash and cash equivalents at beginning of period....................... --
-----------
Cash and cash equivalents at end of period............................. $ 27,991
===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-4
<PAGE> 150
HOMESIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of HomeSide,
Inc. ("HomeSide" or the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
in accordance with Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management of the Company,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the period
from March 16, 1996 (date operations began) to August 31, 1996, and the three
months ended August 31, 1996, are not necessarily indicative of the results that
may be expected for the fiscal year ended February 28, 1997.
The accompanying interim financial statements of HomeSide have been
prepared for the period March 16, 1996 to August 31, 1996 to coincide with the
commencement of operations of HomeSide as discussed in "ORGANIZATION" below and
the end of the Company's second fiscal quarter based on a February 28 year end.
The financial statements for the second quarter 1997 include the period June 1,
1996 to August 31, 1996. The financial statements presented include the results
of operations of the Company's wholly-owned operating subsidiary, HomeSide
Lending, Inc., and beginning June 1, 1996, the results of operations of the
servicing activities of Barnett Mortgage Company ("BMC") acquired on May 31,
1996.
References to the first quarter of 1997 relate to the period March 16, 1996
to May 31, 1996. References to the second quarter of 1997 relate to the three
months ended August 31, 1996. Year to date operating results include the period
March 16, 1996 to August 31, 1996.
2. ORGANIZATION
On December 11, 1995, HomeSide was formed by an investor group, consisting
of Thomas H. Lee Company and Madison Dearborn Partners ("Investors"), and signed
a definitive stock purchase agreement with The First National Bank of Boston
("Bank of Boston") for the purpose of acquiring certain assets and liabilities
of the mortgage banking business ("BBMC") owned by Bank of Boston. The
transaction closed on March 15, 1996 and HomeSide began operations on March 16,
1996 through its operating subsidiary, HomeSide Lending, Inc.
On May 31, 1996, Barnett Banks, Inc. ("Barnett") sold certain of its
mortgage banking operations, primarily its servicing portfolio and proprietary
mortgage banking software systems to HomeSide. Barnett received cash and an
ownership interest in HomeSide. For more information on these acquisitions see
Note 4.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Risk Management of Mortgage Loan Originations
HomeSide has a risk management program in place to offset the risk that a
change in interest rates will result in a decrease in the value of HomeSide's
mortgage loan inventory and commitments to originate loans. To manage its
interest rate risk exposure, HomeSide enters into forward sales agreements and
purchases option contracts. These agreements and contracts are not considered
trading instruments and are primarily entered into for purposes of managing
interest rate risk relative to commitments to originate mortgage loans against
market value declines resulting from fluctuations in interest rates.
F-5
<PAGE> 151
HOMESIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The cost of option contracts to manage HomeSide's fixed and variable rate
loan origination commitments are capitalized and amortized as an adjustment of
gain or loss on the sale of the loan over the life of the underlying option
contract. Unamortized premiums are included in other assets in the accompanying
consolidated balance sheet. HomeSide is not exposed to loss beyond its initial
outlay to acquire the option contract.
Risk Management of Mortgage Servicing Rights
Mortgage servicing rights are a significant asset of HomeSide and possess
economic value as they permit the owner to receive a portion of the interest
coupon from the mortgagor for performing specified servicing activities. Because
the underlying mortgage loan note permits the borrower to prepay the loan, the
value of the related servicing rights tends to diminish in periods of declining
interest rates and increase in value in periods of rising rates. This tendency
of the mortgage servicing rights portfolio to change in value with changes in
interest rates subjects HomeSide to substantial interest rate risk, which
directly affects the volatility of reported earnings as capitalized mortgage
servicing rights are carried at the lower of amortized cost or fair value. It is
the policy of HomeSide to mitigate this risk through its risk management
program.
Qualifying risk management instruments with a demonstrated ability to
mitigate this risk are used in this program. The risk management instruments
used by HomeSide have characteristics such that they tend to increase in value
as interest rates decline. Conversely, these risk management instruments tend to
decline in value as interest rates rise. Accordingly, changes in value of these
contracts will tend to move inversely with changes in value of HomeSide's
mortgage servicing rights.
To date, option contracts on U.S. Treasury bond futures have been purchased
to manage interest rate risk on HomeSide's mortgage servicing rights. These
option contracts are designated as hedges on the purchase date and such
designation must be at a level at least as specific as the level at which
mortgage servicing rights are evaluated for impairment. The option contracts are
marked-to-market with changes in market value deferred and recognized as an
adjustment to the cost of the related mortgage servicing right asset being
hedged. As a result, any changes in market value that are deferred are amortized
and evaluated for impairment in the same manner as the related mortgage
servicing rights. Correlation between changes in value of the option and changes
in the value of HomeSide's mortgage servicing rights is assessed on a quarterly
basis to ensure that high correlation is maintained over the term of the hedging
program.
At August 31, 1996, the cost basis of the option premium included in other
assets was $19,455,000, the market value of the contracts. Further, losses on
the market value of risk management contracts of $74,699,000, including realized
losses of $33,471,000, were deferred as a component of mortgage servicing
rights. At any point in time, HomeSide's maximum loss exposure on its option
contracts is limited to the amount paid for such contracts.
Mortgage loans
Mortgage loans held for sale are carried at the lower of aggregate cost or
fair value. Fair value is based on the contract prices at which the mortgage
loans will be sold or, if the loans are not committed for sale, the current
market price.
Loans are placed on non-accrual status when any portion of the principal or
interest is ninety days past due or earlier when concern exists as to the
ultimate collectibility of principal or interest. When loans are placed on
nonaccrual status, the related interest receivable is reversed against interest
income of the current period. Interest payments received on nonaccrual loans are
applied as a reduction of the principal balance when concern exists as to the
ultimate collection of principal; otherwise, such payments are recognized as
interest income. Loans are removed from nonaccrual status when principal and
interest become current and they are estimated to be fully collectible.
F-6
<PAGE> 152
HOMESIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Mortgage servicing rights
Mortgage servicing rights are initially recorded at fair value as of their
date of acquisition or origination. Purchased mortgage servicing rights ("PMSR")
represent the value of rights to service mortgage loans originated by others.
Originated mortgage servicing rights ("OMSR") represent the value of mortgage
servicing rights associated with mortgage loans originated by HomeSide. OMSR are
capitalized in accordance with Statement of Financial Accounting Standards No.
122, "Accounting for Mortgage Servicing Rights" ("SFAS 122"). Mortgage servicing
rights are amortized as a reduction of servicing fee income over the estimated
servicing period in proportion to the estimated future net cash flows from the
loans serviced.
SFAS 122 also requires that capitalized mortgage servicing rights be
evaluated for impairment based on the fair value of these rights. For purposes
of determining impairment, HomeSide's mortgage servicing rights are stratified
based on interest rate and type of loan (conventional/government). Impairment,
if any, is recognized through a valuation allowance for each impaired stratum
and included in the amortization of mortgage servicing rights. No impairment of
mortgage servicing rights was recorded during the period ended August 31, 1996.
Mortgage servicing rights also includes excess mortgage servicing
receivables ("EMSR"), which represent the present value of servicing fee income
in excess of a normal servicing fee. When loans are sold, the estimated excess
servicing is recognized as income and amortized over the estimated servicing
period in proportion to the estimated future aggregate net cash flows from the
loans serviced. Remaining asset balances are evaluated for impairment based on
current estimates of future discounted cash flows. Such write-downs are included
in amortization of mortgage servicing rights.
<TABLE>
The following table presents a breakdown of the components of mortgage
servicing rights at August 31, 1996:
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Mortgage servicing rights and excess servicing
receivables........................................... $1,401,062
Deferred losses on hedge contracts...................... 83,961
----------
1,485,023
Less: Accumulated amortization.......................... (56,906)
----------
$1,428,117
==========
</TABLE>
Accounts receivable
Accounts receivable includes advances, consisting primarily of payments for
property taxes and insurance premiums, as well as principal and interest
remitted to investors before they are collected from mortgagors, made in
connection with loan servicing activities. Accounts receivable also includes
loans purchased from mortgage-backed securities serviced by HomeSide for others
and mortgage claims filed primarily with the FHA and the VA.
Premises and equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are amortized over the lesser
of the estimated life of the improvement or the term of the lease.
Deferred Charges
Included in other assets are deferred charges of $19,604,000, representing
costs incurred to obtain a $2.5 billion line of credit from an independent
syndicate of banks and costs incurred in the issuance of $200,000,000 of
long-term debt. The deferred charges are being amortized to interest expense
over the terms of the related line of credit (3 years) and long-term debt (7
years).
F-7
<PAGE> 153
HOMESIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Mortgage servicing fees
Mortgage servicing fees represent fees earned for servicing mortgage loans
owned by investors. The fees are generally calculated on the outstanding
principal balances of the loans serviced and are recognized as income on an
accrual basis.
Servicing losses on investor-owned loans
HomeSide records losses attributable to servicing FHA and VA loans for
investors. These amounts include actual losses for final disposition of loans,
accrued interest for which payment has been denied, and estimates for potential
losses based on HomeSide's experience as a servicer of government loans.
A reserve for estimated servicing losses on investor-owned loans is
available for potential losses related to the mortgage servicing portfolio and
is included in the balance of accounts payable and accrued liabilities.
Interest Expense
Interest expense is reduced by credits received on borrowings with
depository institutions for custodial balances placed with such institutions.
Net mortgage origination revenue
Net mortgage origination revenue includes gains and losses from sales of
mortgage loans.
Income taxes
HomeSide accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under the
Statement, current tax liabilities or assets are recognized through charges or
credits to the current tax provision for the estimated taxes payable or
refundable for the current year.
Deferred tax liabilities are recognized for temporary differences that will
result in amounts taxable in the future and deferred tax assets are recognized
for temporary differences and tax benefit carryforwards that will result in
amounts deductible or creditable in the future. Net deferred tax liabilities or
assets are recognized through charges or credits to the deferred tax provision.
A deferred tax valuation reserve is established if it is more likely than not
that all or a portion of the deferred tax assets will not be realized. Changes
in the deferred tax valuation reserve are recognized through charges or credits
to the deferred tax provision.
The effect of enacted changes in tax law, including changes in tax rates,
on deferred tax assets and liabilities is recognized in income in the period
that includes the enactment date.
4. ACQUISITIONS
Acquisition of BancBoston Mortgage Corporation
On March 15, 1996, HomeSide acquired from Bank of Boston all of the
outstanding stock of BBMC, which was subsequently renamed HomeSide Lending, Inc.
Certain assets and liabilities of BBMC were retained by Bank of Boston,
including BBMC's mortgage retail production operations in New England.
HomeSide paid $139,500,000 in cash and issued $86,750,000 in stock to Bank
of Boston in consideration for certain assets, net of assumed liabilities and
the stock of BBMC. The stock issued to Bank of Boston was assigned a value of
$175.00 per share, the same per share amount paid by the Investors. On May 31,
1996, HomeSide paid an additional $5,000,000 to Bank of Boston in connection
with the closing of the BMC acquisition. The transaction was accounted for under
the purchase method of accounting and, accordingly, the results of operations of
HomeSide Lending, Inc. are included from the date of purchase. The assets and
liabilities of BBMC were recorded by HomeSide at their fair values at March 15,
1996, which totaled $1,525,314,000 and $1,221,808,000, respectively. The total
purchase price paid for BBMC, including
F-8
<PAGE> 154
HOMESIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
transaction costs and interest, was $247,403,000. The excess of fair value of
net assets acquired over cost was $56,103,000 and was allocated entirely to
mortgage servicing rights. The excess is being amortized over the estimated
servicing period in proportion to the estimated future net cash flows from the
loans serviced, in the same manner as mortgage servicing rights.
Acquisition of Barnett Mortgage Company
On May 31, 1996, HomeSide acquired from Barnett Banks, Inc. ("Barnett")
certain assets, net of assumed liabilities, and the outstanding common stock of
BMC, which was subsequently renamed HomeSide Holdings, Inc. HomeSide Holdings,
Inc. then became the parent company of HomeSide Lending, Inc. and transferred
all of the assets and liabilities of HomeSide Holdings, Inc., with the exception
of HomeSide Holdings, Inc.'s GNMA servicing rights, to HomeSide Lending, Inc.
Certain assets and liabilities of BMC were retained by Barnett, including those
assets of BMC and its subsidiaries (other than Honolulu Mortgage Company, Inc.)
associated with the loan origination or production activities of such entities.
HomeSide paid $228,234,000 in cash to Barnett in consideration for certain
assets, net of assumed liabilities, and the stock of BMC. In connection with the
BMC Acquisition, an affiliate of Barnett purchased 674,200 shares of HomeSide
Class A Common Stock for an aggregate purchase price of $117,985,000, or $175.00
per share, the same per share amount paid by the Investors and Bank of Boston.
The transaction was accounted for under the purchase method of accounting and,
accordingly, the results of operations of HomeSide include BMC from the date of
acquisition. The assets and liabilities of BMC were recorded by HomeSide at
their fair values at May 31, 1996, which totaled $764,825,000 and $516,129,000,
respectively. The total purchase price paid for BMC, including transaction costs
and interest, was $235,432,000. The excess of fair value of net assets acquired
over cost was $13,264,000 and was allocated entirely to mortgage servicing
rights. The excess is being amortized over the estimated servicing period in
proportion to the estimated future net cash flows from the loans serviced, in
the same manner as mortgage servicing rights.
The assets acquired and liabilities assumed in each of the transactions
noted above have been recorded at their estimated fair value as of the date of
the acquisition. Changes in those estimates may affect the amounts recorded and
the resulting allocation of purchase price.
<TABLE>
Unaudited pro forma statements of operations for the year ended December
31, 1995 and the period from March 16, 1996 to August 31, 1996, assuming BBMC
and BMC had been acquired as of January 1, 1995, and assuming BMC had been
acquired as of March 15, 1996 are as follows (in millions):
<CAPTION>
PRO FORMA PRO FORMA
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1995 AUGUST 31, 1996
----------------- ---------------
<S> <C> <C>
Net servicing revenue....................................... $ 237.4 $ 78.7
Net warehouse interest expense.............................. (5.5) (2.2)
Net mortgage origination revenue............................ 0.7 28.1
Other income................................................ 0.7 0.5
------- ------
Total revenues............................................ 233.3 105.1
Expenses.................................................... (144.1) (76.5)
------- ------
Income before income taxes.................................. 89.2 28.6
Income tax expense.......................................... (36.5) (11.7)
------- ------
Net income................................................ $ 52.7 $ 16.9
======= ======
</TABLE>
The purchase accounting adjustments in the above pro forma statements of
operations are based on the actual purchase price and the amount of assets
actually acquired. In addition, gains on sales of mortgage servicing rights are
not included in net servicing revenue in these pro forma results. No adjustments
have been made for restructuring costs that might have been incurred during the
periods presented or for cost efficiencies that might have been realized.
Accordingly, these pro forma results are not indicative of future results.
F-9
<PAGE> 155
HOMESIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. NOTES PAYABLE TO BANKS
HomeSide borrows funds on a demand basis from a syndicate of banks under a
$2.5 billion line of credit collateralized by substantially all of HomeSide
Lending, Inc.'s assets. The line of credit is used to provide funds for HomeSide
Lending, Inc.'s business of making, originating, acquiring and servicing
mortgage loans. The line of credit includes both a warehouse credit facility and
servicing secured credit facility, of which the servicing secured facility is
capped at $950 million. The line of credit terminates on May 31, 1999. The line
of credit agreement contains covenants that impose limitations and restrictions
on HomeSide, including the maintenance of certain net worth and ratio
requirements. The amount of the unused line of credit was $411,768,000 as of
August 31, 1996.
Drawings under the line of credit bear interest at rates per annum, based
on, at HomeSide's option (A) the highest of (i) the lead bank's prime rate, (ii)
the secondary market rate of certificates of deposit plus 100 basis points, and
(iii) the federal funds rate in effect from time to time plus 0.5%, or (B) a
eurodollar rate. As of August 31, 1996, the weighted average interest rate on
the amounts borrowed was 6.18%.
6. LONG TERM DEBT
On May 14, 1996, HomeSide issued $200,000,000 of 11.25% notes maturing on
May 15, 2003 and paying interest semiannually in arrears on May 15 and November
15 of each year, commencing on November 15, 1996. The notes are redeemable at
the option of HomeSide, in whole or in part, at any time on or after May 15,
2001, at certain pre-set redemption prices. The indenture contains covenants
that impose limitations and restrictions on HomeSide, including the maintenance
of certain net worth and ratio requirements. In accordance with certain of these
restrictions, effective August 15, 1996, the interest rate on the notes was
increased to 11.75% until the registration statement for the exchange notes
discussed below is declared effective by the Securities and Exchange Commission
and such exchange notes are issued.
The notes were initially issued as part of a private placement offering.
HomeSide has filed a Form S-4 with the SEC to register notes, with terms
identical to the private placement notes, under the Securities Act of 1933. The
private placement notes can be exchanged for the notes registered under the
Securities Act of 1933, when such registration becomes effective.
<TABLE>
HomeSide also has a mortgage note payable on its headquarters building that
is due in 2017 and bears interest at 9.50%. HomeSide's main office building is
pledged as collateral. Principal payments due on the mortgage note payable are
as follows:
<CAPTION>
(IN THOUSANDS)
<S> <C>
1997........................................................ $ 110
1998........................................................ 234
1999........................................................ 258
2000........................................................ 283
2001........................................................ 312
Thereafter.................................................. 12,481
-------
$13,678
=======
</TABLE>
7. STOCKHOLDERS' EQUITY
On March 15, 1996, in connection with the BBMC acquisition discussed in
Note 4, Thomas H. Lee Company and Madison Dearborn Capital Partners
(collectively the "Investors") contributed cash of $107,250,000 for 612,857
shares of HomeSide's Class A Voting Common Stock ("Class A shares"). Also on
March 15, 1996, HomeSide issued 495,715 Class A shares and cash to Bank of
Boston in exchange for BBMC. The Class A shares issued to Bank of Boston were
assigned a value of $86,750,000.
Simultaneously with the closing of the BBMC acquisition, HomeSide also
issued 5,714 shares of its Class B Non-Voting Common Stock to Smith Barney, Inc.
in consideration of services rendered to HomeSide in connection with the BBMC
acquisition. Bank of Boston also paid $1,000,000 in cash for 5,714 shares of
F-10
<PAGE> 156
HOMESIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
HomeSide's Class C Non-Voting Common Stock ("Class C shares"). Bank of Boston
then sold the Class C shares to an unaffiliated third party.
On May 31, 1996, in connection with the BMC acquisition discussed in Note
4, Bank of Boston, the Investors and certain directors and executive managers of
HomeSide contributed a total of approximately $46,015,000 in cash for 262,945
shares of HomeSide's Class A shares. In August 1996, another 1,144 shares were
purchased by certain executives for approximately $200,000. Approximately,
$1,700,000 of the amount contributed by certain directors and management was
financed by HomeSide Lending, Inc. and, accordingly, is reported as a reduction
of stockholders' equity of HomeSide. Also on May 31, 1996, HomeSide issued
674,200 Class A shares and cash to Barnett in exchange for BMC. The Class A
shares issued to Barnett were assigned a value of $117,985,000.
<TABLE>
The following is a breakdown of HomeSide's' Class A common stock ownership
as of August 31, 1996, including the effect of the BMC acquisition:
<CAPTION>
CASH SHARES
CONTRIBUTED ISSUED
------------ ---------
<S> <C> <C>
Bank of Boston........................................... $117,985,000 674,200
Barnett.................................................. 117,985,000 674,200
Investors................................................ 117,985,000 674,200
Directors and management................................. 4,245,000 24,261
------------ ---------
$358,200,000 2,046,861
============ =========
</TABLE>
8. STOCK OPTIONS
HomeSide has established the HomeSide 1996 Employee Stock Option Plan under
which 34,285 Class A shares are reserved for issuance. Options issued under the
plan may be either non-qualified or incentive stock options and the options will
be exercisable at such prices as are set by HomeSide's board of directors. Under
the plan, options will vest in five equal installments in arrears. During the
period March 16, 1996 to August 31, 1996, options to purchase 24,012 shares were
granted at an exercise price of $175 per share. To date, there have been no
exercises or cancellations of options under this plan.
HomeSide has also adopted a 1996 Time Accelerated Restricted Stock Option
Plan under which 68,576 Class A shares are reserved for issuance. Options
granted under this plan will be non-qualified and will be exercisable at such
prices as are set by the board of directors. Options granted under the plan will
vest nine years from the date of grant. Vesting will accelerate upon the
achievement of certain performance criteria. During the period March 16, 1996 to
August 31, 1996, options to purchase 48,024 shares were granted at an exercise
price of $175 per share. To date, there have been no exercises or cancellations
of options under this plan.
There was no compensation expense associated with the above option grants
since the exercise price was equal to the estimated fair value of the Class A
shares at the date of grant.
9. SUPPLEMENTAL CASH FLOW INFORMATION
During the period March 16, 1996 to August 31, 1996, HomeSide extended
loans totaling $1,700,000 to certain members of management in consideration for
10,288 shares of Class A Voting Common Stock ("Class A shares").
In connection with the acquisitions of BBMC and BMC, HomeSide recorded
non-cash assets and assumed liabilities, including fair value adjustments, of
approximately $2,251,676,000 and $1,737,937,000, respectively. As part of the
purchase price of BBMC and BMC, HomeSide issued 495,714 Class A shares with a
value of $86,750,000 and 674,200 Class A shares with a value of $117,985,000 to
Bank of Boston and
F-11
<PAGE> 157
HOMESIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Barnett, respectively. In addition, HomeSide issued 5,714 shares of Class B
Non-Voting Common Stock ("Class B shares") in exchange for certain services
performed in connection with the acquisition of BBMC. The Class B shares were
valued at $175.00 per share, or $1,000,000.
HomeSide paid $29,010,000 and $1,000 of interest and income taxes,
respectively, during the period ended August 31, 1996.
10. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No 107, Disclosures about Fair Value of Financial Instruments,
requires disclosure of fair value information about financial instruments
whether or not recognized in the balance sheet, for which it is practicable to
estimate fair value.
Financial instruments include such items as mortgage loans held for sale,
mortgage loans held for investment, interest rate contracts, notes payable, and
other instruments.
Fair value estimates are made as of a specific point in time based on the
characteristics of the financial instruments and the relevant market
information. Where available, quoted market prices are used. In other cases,
fair values are based on estimates using other valuation techniques, such as
discounting estimated future cash flows using a rate commensurate with the risks
involved or other acceptable methods. These techniques involve uncertainties and
are significantly affected by the assumptions used and the judgments made
regarding risk characteristics of various financial instruments, prepayments,
discount rates, estimates of future cash flows, future suspected loss
experience, and other factors. Changes in assumptions could significantly affect
these estimates. Derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized in
an immediate sale of the instrument. Also because of differences in
methodologies and assumptions used to estimate fair value, the Company's fair
values should not be compared to those of other companies.
Under the Statement, fair value estimates are based on existing financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Company. For certain assets and
liabilities, the information required under the Statement is supplemented with
additional information relevant to an understanding of the fair value.
The methods and assumptions used to estimate the fair values of each class
of financial instruments are as follows:
Cash and cash equivalents
The carrying amount reported in the balance sheet approximates fair value.
Mortgage loans held for sale
Fair values are based on the estimated value at which the loans could be
sold in the secondary market. These loans are priced to be sold with servicing
rights retained, as is the Company's normal business practice.
Accounts receivable
Carrying amounts are considered to approximate fair value. All amounts that
are assumed to be uncollectible within a reasonable time are written off.
Risk management contracts
Fair values are estimated based on actual market quotes or option models.
F-12
<PAGE> 158
HOMESIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Notes payable to banks
The carrying amount of the notes payable to banks reported in the balance
sheet approximates its fair value.
Long-term debt
Fair value of long-term debt is estimated by discounting estimated future
cash flows using a rate commensurate with the risks involved.
Commitments to originate mortgage loans
Fair value is estimated using quoted market prices for securities backed by
similar loans adjusted for differences in loan characteristics.
Forward contracts to sell mortgages
Forward contracts to sell mortgages, which represent legally binding
agreements to sell loans to permanent investors at a specified price or yield,
are valued using market prices for securities backed by similar loans and are
reflected in the fair values of the mortgages held for sale, to the extent that
these commitments relate to mortgage loans already originated, or of the related
commitments to extend credit.
Options on mortgage-backed securities
The fair values of options are estimated based on actual market quotes. In
some instances, quoted prices for the underlying loans or option models are
used.
Fair Value
<TABLE>
The fair values of the Company's financial instruments as of August 31,
1996 are as follows:
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents............................................. $ 27,991 $ 27,991
Mortgage loans held for sale.......................................... 1,290,841 1,290,841
Accounts receivable................................................... 119,658 119,658
Risk management contracts............................................. 19,455 19,455
Other assets.......................................................... 18,958 18,958
LIABILITIES
Notes payable to banks................................................ 2,088,232 2,088,232
Long-term debt........................................................ 221,426 221,426
OFF-BALANCE SHEET(1)
Commitments to originate mortgage loans............................... -- (14,591)
Mandatory forward contracts to sell mortgages......................... -- 9,582
Options on mortgage-backed securities................................. -- 4,357
<FN>
- ---------------
(1) Parenthesis denote a liability
</TABLE>
Fair value estimates are made as of a specific point in time, based on
relevant market data and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale the Company's entire holding of a particular financial instrument.
Because no active market exists for some portion of the Company's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, current interest rates
and prepayment trends, risk characteristics of various financial instruments,
and other factors.
F-13
<PAGE> 159
HOMESIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and, therefore, cannot be determined with
precision. Changes in any of these assumptions used in calculating fair value
would also significantly affect the estimates. Further, the fair value estimates
were calculated as of August 31, 1996. Changes in market interest rates and
prepayment assumptions could significantly change the fair value.
11. RISK MANAGEMENT OF FINANCIAL INSTRUMENTS
<TABLE>
As discussed in Note 3, HomeSide purchases options contracts on U.S.
Treasury bond futures to manage the interest rate risk related to the value of
HomeSide's mortgage servicing rights. A summary of HomeSide's investments in
purchased option instruments as of August 31, 1996 is as follows:
<S> <C>
Notional amount of U.S. Treasury bond future options............... $25.4 billion
Fair value of outstanding options.................................. $19.5 million
</TABLE>
Cash requirements for HomeSide's option contracts are limited to the
initial premium paid. The amount of contracts purchased depends on certain
factors, such as interest rates and growth in the mortgage servicing portfolio.
HomeSide is subject to market risk to the extent that interest rates fluctuate;
however, the purpose of the option contracts is to hedge the value of its
mortgage servicing rights portfolio, which tends to react inversely with changes
in the value of HomeSide's option contracts. HomeSide's credit risk on its
option contracts is limited since the option contracts are traded on a national
exchange, which guarantees performance by the counterparty.
12. CONTINGENCIES
HomeSide, along with its subsidiaries, is a defendant in a number of legal
proceedings arising in the normal course of business. HomeSide, in management's
estimation, has recorded adequate reserves in the financial statements for
pending litigation. Management, after reviewing all actions and proceedings
pending against or involving HomeSide, considers that the aggregate liabilities
or loss, if any, resulting from the final outcome of these proceedings will not
have a material effect on the financial position, operations or liquidity of
HomeSide.
For five years following the consummation of the acquisition of BMC, which
occurred on May 31, 1996, Barnett Banks, Inc. is obligated to repurchase or
reimburse HomeSide for any credit losses related to $101.0 million of loans
serviced with recourse, which is less than 1.0% of HomeSide's total mortgage
servicing portfolio.
F-14
<PAGE> 160
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and
the Board of Directors of
HomeSide, Inc.:
We have audited the accompanying balance sheet of HOMESIDE, INC. (a Delaware
corporation) as of March 14, 1996. This financial statement is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of HomeSide, Inc. as of March 14,
1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Jacksonville, Florida
April 10, 1996, except for Note 3,
as to which the date is May 31, 1996
F-15
<PAGE> 161
HOMESIDE, INC.
<TABLE>
BALANCE SHEET
MARCH 14, 1996
(NOTE 1)
<S> <C>
ASSETS
Total assets................................................................. $ 0
=============
STOCKHOLDERS' EQUITY
COMMON STOCK:
Class A voting, $.01 par value, 1,500,000 shares authorized and
1,131,429 shares subscribed............................................ $ 11,314
Class B non-voting, $.01 par value, 5,714 shares authorized and
subscribed............................................................. 57
Class C non-voting, $1.00 par value, 5,714 shares authorized and
subscribed............................................................. 5,714
-------------
17,085
ADDITIONAL PAID-IN CAPITAL................................................... 199,982,915
SUBSCRIPTION RECEIVABLE...................................................... (200,000,000)
-------------
Total stockholders' equity.............................................. $ 0
=============
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-16
<PAGE> 162
HOMESIDE, INC.
NOTES TO BALANCE SHEET
MARCH 14, 1996
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
On December 11, 1995, HomeSide, Inc. ("HomeSide") was formed for the
purpose of acquiring BancBoston Mortgage Corporation ("BBMC"), the mortgage
banking subsidiary of The First National Bank of Boston ("BKB"), which is a
wholly-owned subsidiary of Bank of Boston Corporation ("Bank of Boston"). In
December 1995, Bank of Boston signed an agreement with HomeAmerica Capital Inc.
(currently known as HomeSide, Inc.) to sell BBMC. HomeSide expects to adopt a
fiscal year ended February 28 and accordingly will report quarterly results for
the quarters ended May 31, August 31, November 30 and February 28.
HomeSide will initially be capitalized by the issuance of 1,131,429 shares
of Class A voting common stock, 5,714 shares of Class B non-voting common stock,
and 5,714 shares of Class C non-voting common stock. Each of these shares will
be purchased for approximately $175 per share.
On March 15, 1996, HomeSide completed the acquisition of all of the
outstanding stock of BBMC, which was subsequently renamed HomeSide Lending, Inc.
Certain assets and liabilities of BBMC were retained by Bank of Boston,
including BBMC's mortgage retail production operations in New England.
HomeSide paid $139,150,000 in cash and issued $86,750,000 in stock to Bank
of Boston in consideration for certain assets, net of assumed liabilities, and
the stock of BBMC. On May 31, 1996, HomeSide paid an additional $5.0 million to
Bank of Boston in connection with the closing of the acquisition of Barnett
Mortgage Company ("BMC"). The transaction was accounted for under the purchase
method of accounting. The assets and liabilities of BBMC were recorded by
HomeSide at their fair market values at March 15, 1996, which totaled $1.5
billion and $1.2 billion, respectively. The total purchase price paid for BBMC,
including transaction costs and interest, was $247.2 million.
On March 4, 1996, HomeSide entered into an agreement to acquire BMC, the
mortgage banking subsidiary of Barnett Banks, Inc. ("Barnett").
HomeSide's business consists primarily of:
- Mortgage production: the origination and purchase of residential single
family mortgage loans through all major channels including correspondents
(including BKB and after the BMC acquisition, Barnett), mortgage brokers,
co-issue partners, telemarketing, affinity programs and retail branches;
- Secondary marketing: the sale of residential single family mortgage loans
as pools underlying mortgage-backed securities guaranteed by governmental
or quasi-governmental agencies or as whole loans to investors; and
- Servicing: the administration, collection, and remittance of monthly
mortgage principal and interest payments, the collection and payment of
property taxes and insurance premiums and the management of certain loan
default activities.
The "Risk Factors" section in the accompanying offering memorandum should
be read in connection with these financial statements.
2. CONTINGENCIES
BBMC is a defendant in a number of legal proceedings arising in the normal
course of business. BBMC, in management's estimation, had recorded adequate
reserves in its financial statements for pending litigation. Management, after
reviewing all actions and proceedings pending against or involving BBMC,
considers that the aggregate liabilities or loss, if any, resulting form the
final outcome of these proceedings will not have a material effect on the
financial position or results of operations of BBMC.
F-17
<PAGE> 163
3. SUBSEQUENT EVENTS
On May 15, 1996, HomeSide issued $200 million of 11.25% senior secured
second priority notes ("Notes"). The Notes mature May 15, 2003 and pay interest
semiannually in arrears on May 15 and November 15 of each year, commencing
November 15, 1996. The Notes are redeemable at the option of HomeSide, in whole
or in part, at any time on or after May 15, 2001, at certain pre-set redemption
prices. Upon issuance, $90.0 million of the proceeds were used to repay bridge
financing incurred in the acquisition of BBMC, $87.5 million was placed into
escrow pending completion of the BMC acquisition, $6.5 million was used to pay
underwriting expenses and the remaining $16.0 million was retained by HomeSide.
The $87.5 million was released from escrow, and forwarded to HomeSide, on May
31, 1996 upon completion of the BMC acquisition as discussed below.
On May 31, 1996, HomeSide completed the acquisition of all of the
outstanding common stock of BMC, which was subsequently renamed HomeSide
Holdings, Inc. ("HHI"). HHI then became the parent company of HLI and it
transferred all of the assets and liabilities of HHI, with the exception of
HHI's GNMA servicing rights, to HLI. Certain assets and liabilities of BMC were
retained by Barnett, including those assets of BMC and its subsidiaries (other
than Honolulu Mortgage Company ("Honolulu Mortgage")) associated with the loan
origination or production activities of such entities.
HomeSide paid approximately $228.2 million in cash to Barnett in
consideration for certain assets, net of assumed liabilities, and the stock of
BMC. The transaction was accounted for under the purchase method of accounting.
The assets and liabilities of BMC were recorded by HomeSide at their fair market
values at May 31, 1996, which totaled $777.6 million and $520.7 million,
respectively. The total purchase price paid for BMC, including transaction
costs, was approximately $235.3 million. In addition to the cash Barnett
received, Siesta Holdings, Inc. ("Siesta"), an affiliate of Barnett, purchased
an ownership interest in HomeSide. As of May 31, 1996, (i) Bank of Boston, (ii)
Thomas H. Lee Equity Fund III, L.P. and certain affiliates of Thomas H. Lee
Company and Madison Dearborn Capital Partners, L.P., collectively, and (iii)
Siesta each owned one-third of HomeSide.
In connection with the BMC acquisition, HLI and its wholly owned
subsidiary, Honolulu Mortgage entered into a $2.5 billion senior secured
revolving credit facility maturing on May 31, 1999 with third party financial
institutions that replaced a line of credit entered into by HLI on March 15,
1996 in connection with the BBMC acquisition, which replaced BBMC's former line
of credit with Bank of Boston, and BMC's former line of credit with Barnett.
HLI's and Honolulu Mortgage's new facility provides for availability up to $2.5
billion, with the servicing commitment portion capped at $950 million. The new
credit facility provides financing for HLI's and Honolulu Mortgage's ongoing
operations, including the origination and servicing of residential mortgage
loans, other working capital and general corporate purposes. The facility is
secured primarily by all of HLI's and Honolulu Mortgage's assets.
F-18
<PAGE> 164
BANCBOSTON MORTGAGE CORPORATION
(Acquired by HomeSide, Inc. on March 15, 1996 and now known as HomeSide Lending,
Inc.)
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1995 MARCH 15, 1996
----------------- --------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
<CAPTION>
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents..................................... $ 830 $ 23,216
Mortgage loans:
Held for sale............................................ 388,436 641,465
Held for investment...................................... 33,183 65,068
Accounts receivable........................................... 82,473 45,183
Accounts receivable from Bank of Boston and affiliates........ 343 --
Pool loan purchases........................................... 65,272 56,261
Mortgage claims receivable, net............................... 45,422 17,563
Mortgage servicing rights receivable, net..................... 533,891 522,469
Excess mortgage servicing rights receivable, net.............. 17,447 20,393
Accrued and deferred income taxes............................. 40,724 77,257
Real estate acquired.......................................... 2,627 2,797
Premises and equipment, net................................... 25,386 25,071
Other assets.................................................. 18,269 16,159
--------- ----------
Total assets.................................................. $1,254,303 $1,512,902
========= ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Note payable to Bank of Boston................................ $ 966,000 $1,256,000
Accounts payable and accrued liabilities...................... 51,683 130,382
Accrued income taxes payable.................................. 36,213 --
Long term debt................................................ 13,816 13,790
--------- ----------
Total liabilities............................................. 1,067,712 1,400,172
--------- ----------
Common stock, $1 par value per share; 10,000 shares
authorized;
100 shares issued and outstanding........................... -- --
Additional paid in capital.................................... 156,666 156,666
Retained earnings (accumulated deficit)....................... 29,925 (43,936)
--------- ----------
Total stockholder's equity.................................... 186,591 112,730
--------- ----------
Total liabilities and stockholder's equity.................... $1,254,303 $1,512,902
======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE> 165
BANCBOSTON MORTGAGE CORPORATION
(Acquired by HomeSide, Inc. on March 15, 1996 and now known as HomeSide Lending,
Inc.)
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (DEFICIT)
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE QUARTER JANUARY 1, 1996
ENDED THROUGH
MARCH 31, 1995 MARCH 15, 1996
--------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
(UNAUDITED)
Revenues:
Mortgage servicing fees..................................... $ 43,657 $ 38,977
Gain (loss) on hedge contracts.............................. 3,612 (128,795)
Amortization of mortgage servicing rights................... (23,103) (7,245)
---------- ---------
Net servicing revenue.................................. 24,166 (97,063)
Interest income............................................. 4,122 8,423
Interest expense............................................ (6,079) (10,089)
---------- ---------
Net interest revenue................................... (1,957) (1,666)
Net mortgage origination revenue............................ (1,083) 7,638
Gain on sale of servicing rights............................ 4,285 --
Other income................................................ 13 253
---------- ---------
Total revenue.......................................... 25,424 (90,838)
Expenses:
Salaries and employee benefits.............................. 11,696 10,287
Occupancy and equipment..................................... 2,358 2,041
Servicing losses on investor-owned loans.................... 733 5,560
Real estate acquired........................................ 218 291
Other expenses.............................................. 4,713 7,377
---------- ---------
19,718 25,556
Income (loss) before income taxes........................... 5,706 (116,394)
Income tax expense (benefit)................................ 2,277 (42,533)
---------- ---------
Net income (loss)........................................... 3,429 (73,861)
Retained (deficit) earnings at beginning of period.......... (28,901) 29,925
---------- ---------
Accumulated deficit at end of period........................ $ (25,472) $ (43,936)
========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE> 166
BANCBOSTON MORTGAGE CORPORATION
(Acquired by HomeSide, Inc. on March 15, 1996 and now known as HomeSide Lending,
Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE PERIOD
QUARTER JANUARY 1, 1996
ENDED THROUGH
MARCH 31, 1995 MARCH 15, 1996
-------------- ---------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
<CAPTION>
(UNAUDITED)
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss).......................................... $ 3,429 $ (73,861)
Amortization............................................... 23,185 7,327
Depreciation............................................... 769 719
Servicing losses on investor-owned loans................... 733 5,560
Write down of real estate owned............................ 109 1,067
Gain (loss) on risk management contracts................... (3,612) 128,795
Loss on sale of mortgage servicing rights.................. (4,285) --
Capitalized excess mortgage servicing receivable........... 355 (3,967)
Mortgage loans originated and purchased for sale........... (426,918) (2,027,741)
Proceeds and principal repayments of mortgage loans held
for sale................................................. 627,155 1,774,712
Change in accounts receivable.............................. 394 37,633
Change in accrued and deferred income taxes................ (3,371) (72,746)
Change in pool loan purchases.............................. (2,269) 9,011
Change in mortgage claims receivable....................... 477 25,863
Change in other assets and accounts payable and accrued
liabilities.............................................. (18,578) 75,167
--------- -----------
Net cash provided by (used in) operating activities............. 197,573 (112,461)
--------- -----------
Cash flows used in investing activities:
Net origination of loans held for investment............... (71,908) (31,885)
Purchase of premises and equipment......................... (668) (404)
Purchase and origination of mortgage servicing rights...... (6,934) (60,171)
Proceeds from (purchase of) risk management contracts...... 3,262 (63,426)
Proceeds from sale of mortgage servicing rights............ 4,285 --
Proceeds from sale of real estate owned.................... 559 759
--------- -----------
Net cash used in investing activities........................... (71,404) (155,127)
--------- -----------
Cash flows (used in) provided by financing activities:
Net (repayments to) borrowings from Bank of Boston......... (130,522) 290,000
Repayment of long term debt................................ (46) (26)
--------- -----------
Net cash (used in) provided by financing activities........ (130,568) 289,974
--------- -----------
Net (decrease) increase in cash................................. (4,399) 22,386
Cash at beginning of period................................ 5,653 830
--------- -----------
Cash at end of period........................................... $ 1,254 $ 23,216
========= ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest................................................... $ 9,165 $ 9,211
========= ==========
Income taxes............................................... $ 5,648 $ 30,213
========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE> 167
BANCBOSTON MORTGAGE CORPORATION
(Acquired by HomeSide, Inc. on March 15, 1996 and now known as HomeSide Lending,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of BancBoston
Mortgage Corporation (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
in accordance with Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements and should be read in conjunction with the
audited consolidated financial statements of the Company for the year ended
December 31, 1995. In the opinion of management of the Company, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the period January 1,
1996 to March 15, 1996 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1996.
The accompanying interim financial statements of the Company have been
prepared for the period January 1, 1996 to March 15, 1996, the date the Company
was sold, as discussed in "ORGANIZATION" below. Results of operations for
periods subsequent to March 15, 1996 will be included in future financial
statements of HomeSide, Inc. Results of operations for the three months ended
March 31, 1995 have been presented for comparative purposes.
2. ORGANIZATION
Prior to March 15, 1996, the Company was a wholly-owned subsidiary of the
First National Bank of Boston (Bank of Boston), which is a wholly-owned
subsidiary of Bank of Boston Corporation. Upon the close of business on March
15, 1996, Bank of Boston Corporation sold the Company to certain affiliates of
Thomas H. Lee Company and Madison Dearborn Capital Partner, L.P. (Investors),
creating an independent mortgage company, which was named HomeSide, Inc. Under
terms of the transaction, Bank of Boston received cash and an equity interest in
the new company. The investors retained a majority interest in the new company.
On May 31, 1996, Barnett Banks, Inc. (Barnett) sold Barnett Mortgage
Company (now HomeSide Holdings, Inc.), which owned certain of Barnett's mortgage
banking operations, primarily its servicing portfolio and proprietary mortgage
banking software systems, to HomeSide, Inc. Barnett received cash and an
affiliate of Barnett acquired an ownership interest in HomeSide, Inc. for cash.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's accounting policies are discussed in Note 2 of the audited
consolidated financial statements of the Company for the year ended December 31,
1995. The accounting policies of the Company for the periods presented in the
accompanying interim financial statements conform to the policies presented in
the audited consolidated financial statements for the year ended December 31,
1995, except for the adoption of Statement of Financial Accounting Standards No.
122, "Accounting for Mortgage Servicing Rights" (SFAS 122).
On January 1, 1996, the Company adopted SFAS 122 which, among other
provisions, requires that the value of mortgage servicing rights associated with
mortgage loans originated by an entity be capitalized as assets. The value of
the Company's originated mortgage servicing rights (OMSR) is determined by
allocating the total costs of the mortgage loans between the loans and the
mortgage servicing rights based on their relative fair values. Previously, OMSR
were included with the cost of the related loans and considered in determining
the gain or loss on sale when the loans were sold. Through March 15, 1996, the
Company capitalized $2,067,000 of OMSR, which had the effect of increasing net
mortgage origination revenue by $2,067,000 for the period January 1, 1996 to
March 15, 1996 since a portion of the basis of loans originated for sale was
allocated to OMSR.
F-22
<PAGE> 168
BANCBOSTON MORTGAGE CORPORATION
(Acquired by HomeSide, Inc. on March 15, 1996 and now known as HomeSide Lending,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS 122 also requires that capitalized mortgage servicing rights be
evaluated for impairment based on the fair value of these rights. For purposes
of determining impairment, the Company's mortgage servicing rights are
stratified based on interest rate and type of loan (conventional/government).
Impairment, if any, is recognized through a valuation allowance for each
impaired stratum. The Company did not record any impairment charges related to
its mortgage servicing right portfolio for the period January 1, 1996 to March
15, 1996. Since SFAS 122 prohibits retroactive application, historical
accounting results have not been restated and, accordingly, the accounting
results for the quarter ended March 31, 1995 are not directly comparable with
the period January 1, 1996 to March 15, 1996.
4. RISK MANAGEMENT ACTIVITIES
As discussed in the Company's audited financial statements for the year
ended December 31, 1995, the Company has a risk management policy designed to
protect the economic value of its mortgage servicing portfolio from declines in
value due to increases in estimated prepayment speeds, which are primarily
influenced by declines in interest rates. During the first quarter of 1996,
long-term interest rates increased, reversing the declining trend which
prevailed during 1995. As a result, from January 1, 1996 to March 15, 1996, the
Company recognized a loss on risk management contracts of $128,795,000, which
included a reversal of $86,500,000 in unrealized gains recognized during 1995.
F-23
<PAGE> 169
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD APRIL 1, 1996 TO MAY 30, 1996,
THE PERIOD JANUARY 1, 1996 TO MAY 30, 1996 AND
THE THREE AND SIX MONTHS ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
FOR THE THREE APRIL 1, 1996 FOR THE SIX JANUARY 1,
MONTHS ENDED TO MAY 30, MONTHS ENDED 1996 TO MAY
JUNE 30, 1995 1996 JUNE 30, 1995 30, 1996
------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Mortgage Origination Revenue:
Mortgage origination fees....... $ 3,469,496 $ 1,646,405 $ 6,004,619 $ 7,288,487
Gain on sales of loans, net..... 994,681 (3,382,960) 1,513,615 482,097
------------- -------------- -------------- --------------
Total mortgage origination
revenue.................. 4,464,177 (1,736,555) 7,518,234 7,770,584
------------- -------------- -------------- --------------
Interest Income (Expense):
Interest income................. 4,420,002 5,637,821 7,002,527 14,216,288
Interest expense, substantially
all to affiliates............. (6,766,123 ) (3,479,782) (9,684,960) (9,574,047)
------------- -------------- -------------- --------------
Net interest income
(expense)................ (2,346,121 ) 2,158,039 (2,682,433) 4,642,241
------------- -------------- -------------- --------------
Mortgage Servicing Revenue:
Mortgage servicing income....... 22,438,636 15,706,692 35,723,498 38,833,222
Mortgage servicing income from
affiliates.................... 6,407,273 5,464,308 12,502,709 13,626,195
Amortization of capitalized
mortgage servicing rights..... (12,123,793 ) (8,455,734) (20,474,792) (25,467,112)
------------- -------------- -------------- --------------
Net mortgage servicing revenue... 16,722,116 12,715,266 27,751,415 26,992,305
------------- -------------- -------------- --------------
Other Income......................... 6,203,385 1,678,385 7,054,383 1,739,967
------------- -------------- -------------- --------------
Total revenues.................. 25,043,557 14,815,135 39,641,599 41,145,097
------------- -------------- -------------- --------------
Expenses:
Salaries and benefits........... 14,300,768 10,401,903 23,433,243 25,172,581
General and administrative...... 12,119,341 6,816,094 20,402,735 20,748,278
Occupancy and equipment......... 2,424,081 1,568,623 3,941,229 3,719,982
Amortization of goodwill........ 1,673,052 928,449 2,225,827 2,323,547
------------- -------------- -------------- --------------
Total expenses............. 30,517,242 19,715,069 50,003,034 51,964,388
------------- -------------- -------------- --------------
Loss Before Income Taxes............. (5,473,685 ) (4,899,934) (10,361,435) (10,819,291)
Income Tax Benefit................... (2,117,689 ) (914,901) (2,876,941) (2,476,272)
------------- -------------- -------------- --------------
Net Loss............................. $ (3,355,996 ) $ (3,985,033) $ (7,484,494) $ (8,343,019)
============= ============ ============== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE> 170
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD JANUARY 1, 1996 TO MAY 30, 1996 AND
THE SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
FOR THE SIX FOR THE PERIOD
MONTHS ENDED JANUARY 1, 1996
JUNE 30, 1995 TO MAY 30, 1996
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................. $ (7,484,494) $ (8,343,019)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Amortization of purchased mortgage servicing rights... 19,334,513 24,141,074
Amortization of excess servicing fees................. 1,140,279 1,326,038
Amortization of goodwill.............................. 2,225,827 2,323,547
Depreciation and amortization of property and
equipment........................................... 1,379,438 1,389,879
Capitalization of excess servicing fees............... (131,847) (6,436,908)
Gain on sale of mortgage servicing rights............. (4,849,738) --
Proceeds from sale of mortgage servicing rights....... 8,393,052 --
Origination of loans held for sale.................... (1,068,052,000) (1,204,553,000)
Sales of mortgage loans held for sale................. 992,831,897 1,422,203,868
Changes in assets and liabilities:
Accounts receivable, net......................... 1,770,362 32,354,311
Other assets..................................... 787,082 (22,768,003)
Accounts payable and accrued liabilities......... (4,477,798) (17,277,852)
Other, net....................................... 106,024 --
--------------- ---------------
Total adjustments........................... (49,542,909) 232,702,954
--------------- ---------------
Net cash (used in) provided by operating
activities................................ (57,027,403) 224,359,935
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchased and originated mortgage servicing rights....... (3,149,621) (17,869,158)
Net increase in loans held for investment................ (8,709,611) (14,137,015)
Net increase in real estate owned........................ (484,074) (837,758)
Purchase of property and equipment, net of retirements... (437,833) (647,946)
Net assets acquired by Barnett........................... -- 10,784,220
Business acquisitions, net of cash acquired.............. (158,747,064) --
--------------- ---------------
Net cash used in investing activities............ (171,528,203) (22,707,657)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in notes payable................. 70,819,419 (233,671,822)
Capital contributions.................................... 167,331,263 28,233,505
--------------- ---------------
Net cash provided by (used in) financing
activities................................................. 238,150,682 (205,438,317)
--------------- ---------------
NET INCREASE (DECREASE) IN CASH............................ 9,595,076 (3,786,039)
CASH AT BEGINNING OF PERIOD................................ 3,900,572 14,987,783
============== ==============
CASH AT END OF PERIOD...................................... $ 13,495,648 $ 11,201,744
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE> 171
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 30, 1996 AND JUNE 30, 1995
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Barnett
Mortgage Company ("BMC") and its wholly owned subsidiaries, BancPLUS Financial
Corporation ("BancPLUS") and Loan America Financial Corporation ("LAFC"). Wholly
owned subsidiaries of BancPLUS include BancPLUS Mortgage Corp. and Honolulu
Mortgage Company, Inc. ("HMC"). As discussed in Note 2, BancPLUS and LAFC were
acquired in 1995 and 1994, respectively. These acquisitions were accounted for
as purchases; therefore, BancPLUS and LAFC are included in the consolidated
financial statements from their respective dates of acquisition. BMC is a wholly
owned subsidiary of Barnett Banks, Inc. (the "Parent"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
2. ORGANIZATION
On February 28, 1995, BMC completed the acquisition of BancPLUS for
approximately $167 million in cash. BancPLUS and its wholly owned subsidiaries
are full service mortgage bankers based in San Antonio, Texas and Honolulu,
Hawaii, who had total assets of $244 million and a servicing portfolio of $13.9
billion at the date of acquisition. The purchase price in excess of net assets
acquired was $113 million.
On October 1, 1994, BMC completed the acquisition of LAFC for $60 million.
LAFC was a Miami based wholesale mortgage banking company which had assets of
$180 million and a servicing portfolio of approximately $4 billion at the date
of acquisition. The purchase price in excess of net assets acquired was $29
million.
On May 31, 1996, the parent sold BMC to HomeSide, Inc. Barnett received
cash and an affiliate of Barnett received an ownership interest in HomeSide,
Inc. for cash. As of May 31, 1996, BMC ceased to exist as a separate company and
operations for periods subsequent to that date will be included in the results
of operations of HomeSide, Inc. Accordingly, a May 31, 1996, balance sheet is
not presented for BMC and statement of operations data does not include periods
subsequent to May 30, 1996.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BMC's accounting policies are discussed in Note 1 of the audited
consolidated financial statements for the year ended December 31, 1995. The
accounting policies of BMC for the periods presented in the accompanying interim
financial statements conform to the policies presented in the audited
consolidated financial statements for the year ended December 31, 1995, except
for the adoption of Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights" ("SFAS 122").
On January 1, 1996, BMC adopted SFAS 122 which, among other provisions,
requires that the value of mortgage servicing rights associated with mortgage
loans originated by an entity be capitalized as assets. The adoption of SFAS 122
resulted in capitalized originated mortgage servicing rights ("OMSR") of
$5,892,000 and $13,353,000 for the periods April 1, 1996 to May 30, 1996 and
January 1, 1996 to May 30, 1996, respectively.
SFAS 122 requires that capitalized mortgage servicing rights be evaluated
for impairment based on the fair value of these rights. For purposes of
determining impairment, BMC's mortgage servicing rights are stratified based on
interest rate, fixed rate versus adjustable rate, and type of loan (conventional
versus government). Impairment, if any, is recognized through a valuation
allowance for each stratum. BMC did not recognize any impairment charges related
to its mortgage servicing rights portfolio for the periods April 1, 1996 to May
30, 1996 and January 1, 1996 to May 30, 1996.
Since SFAS 122 prohibits retroactive application, historical accounting
results have not been restated and, accordingly, the accounting results for the
periods April 1, 1996 to May 30, 1996 and January 1, 1996 to May 30, 1996 are
not directly comparable with the three and six months ended June 30, 1995.
F-26
<PAGE> 172
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
BancBoston Mortgage Corporation
We have audited the accompanying consolidated balance sheets of BancBoston
Mortgage Corporation as of December 31, 1994 and 1995, and the related
consolidated statements of operations and retained earnings and cash flows for
each of the three years in the period then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of BancBoston
Mortgage Corporation as of December 31, 1994 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period then ended, in conformity with generally accepted accounting
principles.
As discussed in Notes 2 and 10, BancBoston Mortgage Corporation adopted
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, and changed its method of accounting for purchased mortgage servicing
rights, effective January 1, 1993. BancBoston Mortgage Corporation also changed
its method of accounting for mortgage servicing fee income, effective January 1,
1994.
COOPERS & LYBRAND L.L.P.
Jacksonville, Florida
January 18, 1996, except
for the second paragraph
of Note 1 and the fifth
paragraph of Note 2, as to
which the date is March 4, 1996
F-27
<PAGE> 173
BANCBOSTON MORTGAGE CORPORATION
(Acquired by HomeSide, Inc. on March 15, 1996 and now known as HomeSide Lending,
Inc.)
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
AT DECEMBER 31,
-------------------------
1994 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash................................................................ $ 5,653 $ 830
Mortgage loans
Held for sale..................................................... 271,215 388,436
Held for investment............................................... 28,589 33,183
Purchased mortgage servicing rights, net............................ 415,815 533,891
Excess mortgage servicing receivable, net........................... 15,333 17,447
Accounts receivable................................................. 66,390 82,473
Accounts receivable from Bank of Boston and affiliates.............. 373 343
Pool loan purchases................................................. 77,477 65,272
Mortgage claims receivable, net..................................... 48,835 45,422
Deferred tax asset.................................................. 31,012 40,724
Real estate acquired................................................ 924 2,627
Premises and equipment, net......................................... 25,279 25,386
Other assets........................................................ 19,992 18,269
---------- ----------
Total Assets.............................................. $1,006,887 $1,254,303
========== ==========
LIABILITIES & STOCKHOLDER'S EQUITY
Note payable to Bank of Boston...................................... $ 779,021 $ 966,000
Accounts payable and accrued liabilities............................ 81,269 51,683
Accrued income taxes................................................ 4,825 36,213
Long-term debt...................................................... 14,007 13,816
---------- ----------
Total Liabilities......................................... 879,122 1,067,712
---------- ----------
Commitments and Contingencies (Notes 1, 9, 11, 13 and 15)
Stockholder's Equity:
Common stock, $1 par value per share: 10,000 shares authorized;
100 shares issued and outstanding
Additional paid-in capital........................................ 156,666 156,666
Retained earnings (Accumulated deficit)........................... (28,901) 29,925
---------- ----------
Total Stockholder's Equity..................................... 127,765 186,591
---------- ----------
Total Liabilities & Stockholder's Equity.................. $1,006,887 $1,254,303
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 174
BANCBOSTON MORTGAGE CORPORATION
(Acquired by HomeSide, Inc. on March 15, 1996 and now known as HomeSide Lending,
Inc.)
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1993 1994 1995
--------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Mortgage servicing fees................................ $ 111,822 $140,491 $ 173,038
Gain (loss) on risk management contracts............... 6,688 (6,702) 108,702
Amortization of mortgage servicing rights.............. (112,492) (66,801) (108,013)
--------- -------- ---------
Net servicing revenue............................... 6,018 66,988 173,727
--------- -------- ---------
Interest income........................................ 50,156 31,585 24,324
Interest expense....................................... (44,199) (33,952) (27,128)
--------- -------- ---------
Net interest revenue................................ 5,957 (2,367) (2,804)
--------- -------- ---------
Net mortgage origination revenue....................... 6,173 4,983 3,417
Gain on sales of servicing rights...................... 651 10,862 10,230
Other income........................................... 50 147 511
--------- -------- ---------
Total Revenue.................................. 18,849 80,613 185,081
--------- -------- ---------
Expenses:
Salaries and employee benefits......................... 33,096 40,370 45,381
Occupancy and equipment................................ 7,966 9,012 10,009
Servicing losses on investor-owned loans............... 2,770 7,177 9,981
Real estate acquired................................... 1,600 253 1,054
Other expenses......................................... 22,058 19,326 21,896
--------- -------- ---------
Total Expenses................................. 67,490 76,138 88,321
--------- -------- ---------
Income (loss) before income taxes and cumulative
effects of changes in accounting principles............ (48,641) 4,475 96,760
Income tax expense (benefit) before cumulative
effects of changes in accounting principles:
Current................................................ (1,425) 4,773 47,646
Deferred............................................... (15,859) (2,248) (9,712)
--------- -------- ---------
Total Income Tax Expense (Benefit)............. (17,284) 2,525 37,934
--------- -------- ---------
Income (loss) before cumulative effects of changes
in accounting principles............................... (31,357) 1,950 58,826
Cumulative effect on prior years of:
Change in purchased mortgage servicing rights (PMSR)
valuation method, net of tax........................... (59,921) -- --
Change in accounting for income taxes.................... 6,093 -- --
Change in accounting for mortgage servicing fee income,
net of tax............................................. -- 3,455 --
--------- -------- ---------
Net Income (Loss)................................... (85,185) 5,405 58,826
Retained Earnings (Accumulated Deficit), January 1....... 50,879 (34,306) (28,901)
--------- -------- ---------
Retained Earnings (Accumulated Deficit), December 31..... $ (34,306) $(28,901) $ 29,925
========= ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE> 175
BANCBOSTON MORTGAGE CORPORATION
(Acquired by HomeSide, Inc. on March 15, 1996 and now known as HomeSide Lending,
Inc.)
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1993 1994 1995
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows (used in) provided by operating
activities:
Net income (loss)................................. $ (85,185) $ 5,405 $ 58,826
Adjustments to reconcile net income (loss) to cash
(used in) provided by operations:
Cumulative effects of change in:
PMSR valuation, net of tax................... 59,921 -- --
Accounting for income taxes.................. (6,093) -- --
Accounting for mortgage servicing fees, net
of tax.................................... -- (3,455) --
Amortization................................... 117,177 67,207 108,404
Depreciation................................... 2,243 2,621 3,133
Servicing losses on investor-owned loans....... 2,770 7,177 9,981
Deferred tax benefit........................... (15,859) (2,248) (9,712)
Gain on sale of mortgage servicing rights...... (651) (10,862) (10,230)
(Gain) loss on risk management contracts....... (6,688) 6,702 (108,702)
Write down of real estate acquired............. 1,113 1,066 1,699
Capitalized excess mortgage servicing
receivable................................... (13,557) (3,653) (7,513)
Mortgage loans originated and purchased for
sale......................................... (8,525,347) (4,673,100) (4,816,964)
Proceeds and principal repayments of mortgage
loans held for sale.......................... 8,395,528 5,005,969 4,694,909
Change in accounts receivable.................. (13,827) (7,482) (16,053)
Change in pool loan purchases.................. (1,345) 9,002 12,205
Change in mortgage claims receivable........... (13,681) 4,574 (5,383)
Change in accrued income taxes................. (3,584) (1,231) 31,388
Change in other assets and accounts payable and
accrued liabilities.......................... (3,154) (13,051) (11,899)
----------- ----------- -----------
Net cash (used in) provided by operating
activities................................... (110,219) 394,641 (65,911)
----------- ----------- -----------
Cash flows used in investing activities:
Principal payments on mortgage loans
held for investment............................ 7,038 11,216 12,966
Purchase of premises and equipment................ (4,170) (5,355) (3,141)
Acquisition of Bell Mortgage...................... -- -- (891)
Purchase of mortgage servicing rights............. (124,693) (164,047) (193,013)
Proceeds from risk management contracts, net...... 6,688 (9,641) 27,120
Proceeds from real estate acquired................ 5,010 2,773 2,610
Proceeds from sales of mortgage servicing
rights......................................... 651 10,862 28,649
----------- ----------- -----------
Net cash used in investing activities.......... (109,476) (154,192) (125,700)
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE> 176
BANCBOSTON MORTGAGE CORPORATION
(Acquired by HomeSide, Inc. on March 15, 1996 and now known as HomeSide Lending,
Inc.)
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1993 1994 1995
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows provided by (used in) financing
activities:
Borrowings from Bank of Boston.................... 7,674,500 3,988,224 3,669,085
Repayments to Bank of Boston...................... (7,455,481) (4,228,214) (3,482,106)
Repayment of long-term debt....................... (159) (173) (191)
----------- ----------- -----------
Net cash provided by (used in) financing
activities................................... 218,860 (240,163) 186,788
----------- ----------- -----------
Net (decrease) increase in cash..................... (835) 286 (4,823)
Cash at January 1................................. 6,202 5,367 5,653
----------- ----------- -----------
Cash at December 31............................... $ 5,367 $ 5,653 $ 830
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest....................................... $ 44,809 $ 32,819 $ 27,498
=========== =========== ===========
Income taxes................................... $ 2,158 $ 7,864 $ 16,258
=========== =========== ===========
Supplemental schedule of non-cash investing
activities:
BBMC purchased bulk mortgage servicing rights
during the years 1993, 1994 and 1995. In
conjunction with purchases, liabilities were
assumed as follows:
Accounts payable.................................. $ 14,586 $ 60,188 $ 23,022
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE> 177
BANCBOSTON MORTGAGE CORPORATION
(Acquired by HomeSide, Inc. on March 15, 1996 and now known as HomeSide Lending,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
BancBoston Mortgage Corporation (BBMC) is a wholly-owned subsidiary of The
First National Bank of Boston (Bank of Boston), which is a wholly-owned
subsidiary of Bank of Boston Corporation. In December 1995, Bank of Boston
Corporation signed an agreement with Thomas H. Lee Company and Madison Dearborn
Partners (Investors) to sell BBMC, creating an independent mortgage company.
Under the terms of the agreement, Bank of Boston will receive cash and an equity
interest in the new company. The Investors will acquire a majority interest in
the new company. The transaction is expected to close in the first half of 1996.
On March 4, 1996, Barnett Banks, Inc. (Barnett) entered into an agreement
to sell certain of its mortgage banking operations, primarily its servicing
portfolio and proprietary mortgage banking software systems to the new company.
Barnett will receive cash and an ownership interest in the new company. The
transaction is expected to close in the second quarter of 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements include BBMC and its wholly-owned
subsidiaries. All material intercompany transactions have been eliminated.
Certain reclassifications have been made to the 1993 and 1994 financial
statements to conform to the 1995 presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Interest rate products
BBMC enters into financial agreements and purchases financial instruments
as part of its interest rate risk management strategy. These agreements are not
considered trading instruments and are primarily entered into for purposes of
managing the prepayment risk associated with mortgage servicing rights and
interest rate risk relative to commitments to originate mortgage loans against
market value declines resulting from fluctuations in interest rates. These
instruments and agreements are designated as a part of BBMC's risk management
strategy and are linked to the related assets being managed.
BBMC acquires financial instruments, including derivative contracts (risk
management contracts), to partially protect the value of mortgage servicing
rights from the effects of prepayment activity caused by interest rate declines.
These financial instruments increase or decrease in value in an inverse
relationship to changes in market interest rates. Accordingly, as interest rates
decline, these financial instruments will increase in value, and as interest
rates increase, these financial instruments will decline in value. The value of
these financial instruments will fluctuate daily with interest rate changes, and
these fluctuations may be significant. However, the decline in the value of
these financial instruments is limited to the value recorded in the balance
sheet. These financial instruments primarily include options on U.S. treasury
futures, forward contracts, and interest rate floors.
As of March 4, 1996, due to rising interest rates, the risk management
contracts had declined in value by the carrying amount recorded on the balance
sheet at December 31, 1995 (see Note 14).
The cost of option contracts to manage BBMC's fixed and variable rate loan
origination commitments are capitalized and amortized as an adjustment of gain
or loss over the life of the underlying option contract.
F-32
<PAGE> 178
BANCBOSTON MORTGAGE CORPORATION
(Acquired by HomeSide, Inc. on March 15, 1996 and now known as HomeSide Lending,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Unamortized premiums are included in other assets on the balance sheet. At
December 31, 1995, BBMC had call options to purchase mortgage-backed securities
with a total face amount of $315.0 million. The unamortized premiums associated
with these options was $1.1. million at December 31, 1995. There were no put
options outstanding as of the balance sheet date.
Short-term option contracts that are used to manage interest rate risk on
BBMC's mortgage servicing rights are marked-to-market with gains or losses
recognized in current income. The current market value of these option contracts
are included in the balance of capitalized mortgage servicing rights. At
December 31, 1995, the current market value of these option contracts included
in mortgage servicing rights was $84.9 million. Unrealized gains (losses) at
December 31, 1995 and 1994 included in the consolidated statements of operations
were $86.5 million and ($2.9) million for 1995 and 1994, respectively. All gains
and losses recognized in 1993 were realized.
Mortgage loans
Mortgage loans held for sale are carried at the lower of aggregate cost or
fair value. Fair value is based on the contract prices at which the mortgage
loans will be sold or, if the loans are not committed for sale, the current
market price. Loan origination fees and certain direct costs are deferred until
the related mortgage loans are sold.
Mortgage loans held for investment are stated at the lower of cost or fair
value at the time the permanent investment decisions are made. Discounts, if
any, are amortized over the anticipated life of the investment.
Loans are placed on nonaccrual status when any portion of the principal or
interest is ninety days past due or earlier when concern exists as to the
ultimate collectibility of principal or interest. When loans are placed on
nonaccrual status, the related interest receivable is reversed against interest
income of the current period. Interest payments received on nonaccrual loans are
applied as a reduction of the principal balance when concern exists as to the
ultimate collection of principal; otherwise, such payments are recognized as
interest income. Loans are removed from nonaccrual status when principal and
interest become current and they are estimated to be fully collectible.
Purchased and originated mortgage servicing rights
Purchased mortgage servicing rights (PMSR) represent the cost of purchasing
the right to service mortgage loans originated by others. PMSR are amortized as
a reduction of servicing fee income over the estimated servicing period in
proportion to the estimated future net cash flows from the loans serviced.
Remaining PMSR asset balances are evaluated for impairment by determining their
estimated recoverable amount through applying the discount rate in effect at the
time the servicing was purchased to the estimated future aggregate net cash
flows from the underlying mortgages. The carrying value is written down for any
impairment; such write-downs are included in the amortization of mortgage
servicing rights. Prior to 1993, this valuation was performed on an undiscounted
basis.
In May 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 122, Accounting for
Mortgage Servicing Rights. This Statement, among other provisions, requires that
the value of mortgage servicing rights associated with mortgage loans originated
by an entity be capitalized as assets. The value of originated mortgage
servicing rights (OMSR) is determined by allocating the total costs of the
mortgage loans between the loans and the mortgage servicing rights based on
their relative fair values. Presently, OMSR are included with the cost of the
related loans and considered in determining the gain or loss on sale when the
loans are sold. Also, the new Statement requires that capitalized mortgage
servicing rights be evaluated for impairment based on the fair value of these
rights. For the purposes of determining impairment, mortgage servicing rights
that are capitalized after the adoption of this Statement
F-33
<PAGE> 179
BANCBOSTON MORTGAGE CORPORATION
(Acquired by HomeSide, Inc. on March 15, 1996 and now known as HomeSide Lending,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
are stratified based on one or more of the predominate risk characteristics of
the underlying loans. Impairment is recognized through a valuation allowance for
each impaired stratum.
The Statement applies prospectively to fiscal years beginning after
December 15, 1995. BBMC plans to adopt the Statement beginning January 1, 1996.
The actual effect of implementing this new Statement on BBMC's financial
position and results of operations will depend on factors including the amount
and mix of originated and purchased production, the level of interest rates, and
market estimates of future prepayment rates.
Accordingly, BBMC cannot determine at this time the ultimate impact on its
future earnings of applying the new methodologies of recording all mortgage
servicing rights as assets, of calculating impairment, and of applying the other
provisions of the Statement.
Excess mortgage servicing receivable
Excess mortgage servicing receivable (EMSR) represents the present value of
servicing fee income in excess of a normal servicing fee. When loans are sold,
the estimated excess servicing is recognized as income and amortized over the
estimated servicing period in proportion to the estimated future aggregate net
cash flows from the loans serviced. Remaining asset balances are evaluated for
impairment based on current estimates of future discounted cash flows. Such
write-downs are included in amortization of mortgage servicing rights.
Accounts receivable
Accounts receivable includes advances made in connection with loan
servicing activities. These advances consist primarily of payments for property
taxes and insurance premiums, as well as, principal and interest remitted to
investors before they are collected from mortgagors.
Pool loan purchases
Pool loan purchases are carried at cost and consist of FHA-insured,
VA-guaranteed, and conventional loans purchased from mortgage-backed securities
serviced by BBMC for others. At the purchase date, these loans were delinquent
or in the process of foreclosure or repayment. Losses associated with pool loan
purchases are largely reimbursed by the insurer.
Mortgage claims receivable
Mortgage claims receivable includes claims filed primarily with the FHA and
the VA. These receivables are carried at cost, less an allowance for estimated
amounts that are not collectible from the mortgage insuring agencies.
Real estate acquired
Real estate acquired includes properties on which BBMC has foreclosed and
taken title. It is initially reported at the lower of the carrying value of the
loan or the fair value of the real estate obtained, less estimated selling
costs. The excess, if any, of the loan balance over the fair value of the
property at the time of transfer to real estate acquired is charged to the
reserve for estimated servicing losses on investor-owned loans. Subsequent
declines in the value of the property and costs related to holding the property
are charged against income.
F-34
<PAGE> 180
BANCBOSTON MORTGAGE CORPORATION
(Acquired by HomeSide, Inc. on March 15, 1996 and now known as HomeSide Lending,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Premises and equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are amortized over the lesser
of the estimated life of the improvement or the term of the lease.
Other assets
Other assets consist primarily of a prepaid pension asset of $10.1 million,
allocated from the Bank of Boston, and the excess of cost over fair value of net
assets acquired. The excess of cost over fair value of net assets acquired is
amortized using a straight-line basis over periods varying from seven to
twenty-five years.
Mortgage servicing fees
Mortgage servicing fees represent fees earned for servicing mortgage loans
owned by investors. The fees are generally calculated on the outstanding
principal balances of the loans serviced and are recognized as income on an
accrual basis. Prior to 1994, these fees were recorded as income when the
payments were received.
Servicing losses on investor-owned loans
BBMC records losses attributable to servicing FHA and VA loans for
investors. These amounts include actual losses for final disposition of loans,
accrued interest for which payment has been denied, and estimates for potential
losses based on BBMC's experience as a servicer of government loans.
A reserve for estimated servicing losses on investor-owned loans is
available for potential losses related to the mortgage servicing portfolio and
is included in the balance of accounts payable and accrued liabilities.
Net mortgage origination revenue
Net mortgage origination revenue includes gains and losses from sales of
mortgage loans, deferred origination fees and expenses, and the present value of
gains from the EMSR.
Income taxes
BBMC files its federal tax return through inclusion in Bank of Boston
Corporation's consolidated return. Accordingly, Bank of Boston's federal tax
provision is allocated to all member subsidiaries as if each member were a
separate taxpayer. However, the timing of utilization of certain of BBMC's tax
attributes may differ from a stand-alone tax-paying basis.
BBMC accounts for income taxes in accordance with SFAS No. 109, Accounting
for Income Taxes, which was prospectively adopted effective January 1, 1993.
Note 10 includes additional information with respect to the adoption of this
Statement. Under the Statement, current tax liabilities or assets are recognized
through charges or credits to the current tax provision for the estimated taxes
payable or refundable for the current year.
Deferred tax liabilities are recognized for temporary differences that will
result in amounts taxable in the future and deferred tax assets are recognized
for temporary differences and tax benefit carryforwards that will result in
amounts deductible or creditable in the future. Net deferred tax liabilities or
assets are recognized through charges or credits to the deferred tax provision.
A deferred tax valuation reserve is established if it is more likely than not
that all or a portion of the deferred tax assets will not be realized. Changes
in the deferred tax valuation reserve are recognized through charges or credits
to the deferred tax provision.
F-35
<PAGE> 181
BANCBOSTON MORTGAGE CORPORATION
(Acquired by HomeSide, Inc. on March 15, 1996 and now known as HomeSide Lending,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effect of enacted changes in tax law, including changes in tax rates,
on deferred tax assets and liabilities is recognized in income in the period
that includes the enactment date.
Accounting changes
Effective January 1, 1993, BBMC elected to change its method of valuing its
mortgage servicing rights from an undiscounted basis to a discounted basis to
conform its financial reporting to the regulatory accounting rules adopted by
the bank regulators in 1993.
The cumulative effect to January 1, 1993 of adopting this change in
accounting principle was an increase in net loss of approximately $59.9 million,
which is net of $30.9 million of income tax benefit. Effective January 1, 1994,
BBMC changed its method of accounting for mortgage servicing fees from the cash
basis to the accrual basis. The cumulative effect to January 1, 1994 of this
accounting change was an increase in net income of approximately $3.5 million,
which is net of income taxes of $1.9 million.
<TABLE>
BBMC's income (loss) before income taxes and cumulative effects of changes
in accounting principles and net income (loss) for 1993 and 1994, as if the
changes for the valuing of mortgage servicing rights and the change in
accounting for mortgage servicing fees had been retroactively applied, would
have been as follows:
<CAPTION>
1993 1994
-------- ------
(IN THOUSANDS)
<S> <C> <C>
Income (loss) before income taxes and cumulative effects of
changes in accounting principles............................... $(48,013) $4,475
-------- ------
Net income (loss)................................................ $(24,850) $1,950
======== ======
</TABLE>
3. PURCHASED MORTGAGE SERVICING RIGHTS AND EXCESS MORTGAGE SERVICING RECEIVABLE
<TABLE>
PMSR consist of the following:
<CAPTION>
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
PMSR....................................................... $ 732,775 $ 954,931
Accumulated amortization................................... (316,960) (421,040)
--------- ---------
Balance at December 31..................................... $ 415,815 $ 533,891
========= =========
</TABLE>
<TABLE>
EMSR consists of the following:
<CAPTION>
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
EMSR......................................................... $ 60,419 $ 66,465
Accumulated amortization..................................... (45,086) (49,018)
-------- --------
Balance at December 31....................................... $ 15,333 $ 17,447
======== ========
</TABLE>
F-36
<PAGE> 182
BANCBOSTON MORTGAGE CORPORATION
(Acquired by HomeSide, Inc. on March 15, 1996 and now known as HomeSide Lending,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. RESERVE FOR ESTIMATED SERVICING LOSSES ON INVESTOR-OWNED LOANS
<TABLE>
An analysis of the reserve for estimated servicing losses on investor-owned
loans is as follows:
<CAPTION>
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at January 1.................................. $(5,000) $(4,700) $(6,650)
Servicing losses on investor-owned loans.............. (2,770) (7,177) (9,981)
Charge-offs........................................... 3,462 5,304 7,473
Recoveries............................................ (392) (77) (242)
------- ------- -------
Balance at December 31................................ $(4,700) $(6,650) $(9,400)
======= ======= =======
</TABLE>
5. MORTGAGE SERVICING PORTFOLIO
BBMC's residential mortgage servicing portfolio totaled $37.9 billion and
$41.5 billion at December 31, 1994 and 1995, respectively, and included
mortgage-backed securities of $24.0 billion and $28.5 billion in 1994 and 1995,
respectively. In addition, BBMC's commercial loan servicing portfolio totaled
$1.0 billion and $0.9 billion in 1994 and 1995, respectively. Related fiduciary
funds are segregated in trust accounts, principally deposited with Bank of
Boston, and are not included in the accompanying consolidated financial
statements.
BBMC has in force an errors and omissions policy in the amount of $20
million. Fidelity coverage up to a limit of $75 million, subject to a $1 million
deductible, is provided under a Bank of Boston master program.
6. PREMISES AND EQUIPMENT
<TABLE>
Premises and equipment consist of the following:
<CAPTION>
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land......................................................... $ 4,086 $ 4,086
Building..................................................... 14,251 14,477
Furniture and equipment...................................... 24,300 26,870
Leasehold improvements....................................... 752 824
-------- --------
43,389 46,257
Accumulated depreciation and amortization.................... (18,110) (20,871)
-------- --------
Balance at December 31....................................... $ 25,279 $ 25,386
======== ========
</TABLE>
7. NOTE PAYABLE TO BANK OF BOSTON
BBMC borrows funds on a demand basis from Bank of Boston under a $1.25
billion line of credit, collateralized by substantially all of BBMC's assets. At
December 31, 1994 and 1995, the interest rate was 8.5% and 6.8%, respectively,
less the benefit received from balances held at Bank of Boston. Interest
expense, net of this benefit, was $25.0 million, $24.6 million, and $20.5
million in 1993, 1994, and 1995, respectively.
F-37
<PAGE> 183
BANCBOSTON MORTGAGE CORPORATION
(Acquired by HomeSide, Inc. on March 15, 1996 and now known as HomeSide Lending,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LONG-TERM DEBT
<TABLE>
Long-term debt consists of a 30-year mortgage note, payable monthly with
interest at 9 1/2%, maturing in 2017. BBMC's main office building is pledged as
collateral. Principal payments due on long-term debt are as follows:
<CAPTION>
(IN THOUSANDS)
<S> <C>
1996........................................... $ 210
1997........................................... 231
1998........................................... 233
1999........................................... 279
2000........................................... 307
Thereafter..................................... 12,556
-------
Total Due............................ $13,816
=======
</TABLE>
9. EMPLOYEE BENEFITS
BBMC participates with Bank of Boston and its affiliates in a
non-contributory defined benefit pension plan (Plan) covering substantially all
full-time employees. Bank of Boston funds the Plan in compliance with the
requirements of the Employee Retirement Income Security Act.
The Plan is an account balance defined benefit plan in which each employee
has an account to which amounts are allocated based on level of pay and years of
service and which grows at a specific rate of interest. Benefits accrued prior
to 1989 are based on years of service, highest average compensation, and social
security benefits. Expense (income) associated with this Plan was ($0.9)
million, ($1.1) million and $0.5 million in 1993, 1994 and 1995, respectively.
BBMC also maintains non-qualified deferred compensation and retirement
plans for certain officers. All benefits provided under these plans are unfunded
and any payments to plan participants are made by BBMC. As of December 31, 1994
and 1995, approximately $0.8 million and $0.7 million, respectively, were
included in accrued expenses and other liabilities for these plans. For the
years ended December 31, 1993, 1994, and 1995, expense related to these plans
was $0.1 million, $0.2 million and $0.2 million, respectively.
BBMC also participates with Bank of Boston and its affiliates in a thrift
incentive plan. Under this plan, employer contributions are generally based on
the amount of eligible employee contributions. The amounts charged to operating
expense under this plan were $0.5 million, $0.8 million, and $0.2 million in
1993, 1994, and 1995, respectively.
BBMC participates with Bank of Boston and its affiliates by providing
certain health and life insurance benefits for retired employees. Eligible
employees currently receive credits up to $10 thousand based on years of
service, which are used to purchase post-retirement health care coverage. Life
insurance coverage is dependent on years of service at retirement. Amounts
charged to employee benefits expense for these benefits were $0.6 million in
1993, $0.6 million in 1994, and $0.5 million in 1995.
F-38
<PAGE> 184
BANCBOSTON MORTGAGE CORPORATION
(Acquired by HomeSide, Inc. on March 15, 1996 and now known as HomeSide Lending,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
The components of post-retirement benefits expense for the three years
ended December 31 were as follows:
<CAPTION>
1993 1994 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost (benefits earned during the period).............. $ 44 $ 63 $ 53
Interest cost on projected benefit obligation................. 280 282 264
Amortization:
Unrecognized net asset...................................... 250 250 250
Unamortized gain............................................ (20) (11) (53)
---- ---- ----
Net post-retirement benefit cost.............................. $554 $584 $514
==== ==== ====
</TABLE>
<TABLE>
BBMC's unfunded accumulated post-retirement benefit obligation for the two
years ended December 31 was as follows:
<CAPTION>
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accumulated post-retirement benefit obligation for retirees...... $ 3,711 $ 3,515
Unrecognized net gain............................................ 1,385 1,541
Unrecognized net obligation...................................... (4,500) (4,250)
------- -------
Post-retirement benefit liability................................ $ 596 $ 806
======= =======
</TABLE>
<TABLE>
Assumptions used in actuarial computations were:
<CAPTION>
1993 1994 1995
------------- ------------- -------------
<S> <C> <C> <C>
Rate of increase in future
compensation
levels.............................. 4.50% 4.50% 4.50%
Weighted average discount rate........ 7.50% 8.25% 7.25%
Medical inflation rate................ 12% declining 11% declining 8% declining
to 5% in 2001 to 5% in 2001 to 5% in 1999
</TABLE>
An increase of 1% in the assumed health care cost trend rate would result
in an increase of 4.8%, 5.9%, and 5.8% in the accumulated post-retirement
benefit obligation and 4.1%, 4.9%, and 4.9% in annual post-retirement benefit
expense in 1993, 1994, and 1995, respectively.
10. INCOME TAXES
<TABLE>
The components of the net deferred tax asset at December 31 are as follows:
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
(IN THOUSANDS)
PMSR............................................................. $27,223 $34,008
EMSR............................................................. 9,303 8,957
Reserve for estimated servicing losses on investor-owned loans... 2,529 3,657
Other............................................................ (2,385) (1,301)
Valuation reserve................................................ (5,658) (4,597)
------- -------
Net deferred tax assets, net of reserve.......................... $31,012 $40,724
======= =======
</TABLE>
The deferred tax assets, net of the valuation reserve, can be realized from
the reversal of existing deferred tax liabilities and by carryback to previous
years with taxable income. The valuation reserve has been primarily established
against state deferred tax assets where carryback is not permitted.
F-39
<PAGE> 185
BANCBOSTON MORTGAGE CORPORATION
(Acquired by HomeSide, Inc. on March 15, 1996 and now known as HomeSide Lending,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
The components of the provision for (benefit from) income taxes for the
years ending December 31 are as follows:
<CAPTION>
1993 1994 1995
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current tax provision (benefit)...................... $ (1,425) $ 4,773 $47,646
Deferred tax
Benefit on income.................................. (15,859) (2,587) (8,651)
Change in valuation reserve........................ -- 339 (1,061)
-------- ------- -------
Net deferred tax benefit............................. (15,859) (2,248) (9,712)
Income tax provision (benefit) before cumulative
effect of changes in accounting principles......... (17,284) 2,525 37,934
Change in accounting for:
PMSR............................................... (30,868) -- --
Income taxes....................................... (6,093) -- --
Mortgage servicing fee............................. -- 1,860 --
-------- ------- -------
Total income tax provision (benefit)................. $(54,245) $ 4,385 $37,394
======== ======= =======
</TABLE>
Effective January 1, 1993, BBMC adopted prospectively SFAS No. 109, which
principally affects accounting for deferred taxes. The cumulative effect to
January 1, 1993 of adopting this new Standard was a decrease in net loss of $6.1
million.
<TABLE>
The following table reconciles the expected federal tax provision (benefit)
on income (loss) before cumulative effect of changes in accounting principles,
based on the federal statutory tax rate of 35% in 1993, 1994, and 1995, to the
actual tax provision (benefit) before cumulative effect of changes in accounting
principles:
<CAPTION>
1993 1994 1995
-------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Expected tax provision (benefit) applicable to income (loss)
before cumulative effect of changes in accounting
principles.................................................. $(17,024) $1,567 $33,866
Effect of:
State income taxes, net of federal tax benefits............. -- 381 3,774
Federal tax rate change to 35% on deferred tax assets....... (408) -- --
Other....................................................... 148 577 294
-------- ------ -------
Actual tax provision (benefit) before cumulative effect of
changes in accounting principles............................ $(17,284) $2,525 $37,934
======== ====== =======
</TABLE>
F-40
<PAGE> 186
BANCBOSTON MORTGAGE CORPORATION
(Acquired by HomeSide, Inc. on March 15, 1996 and now known as HomeSide Lending,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. LEASE COMMITMENTS
<TABLE>
BBMC leases office facilities and equipment under noncancelable leases that
include renewal options and escalation clauses which extend into 1999. Rental
expense for leases of office facilities and equipment was $3.6 million in both
1993 and 1994 and $3.9 million in 1995. BBMC's minimum future lease commitments
are as follows:
<CAPTION>
(IN THOUSANDS)
<S> <C>
1996................................................... $1,996
1997................................................... 622
1998................................................... 280
1999................................................... 52
Thereafter............................................. --
------
Total........................................ $2,950
======
</TABLE>
12. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
BBMC purchases financial instruments and enters into financial agreements
with off-balance sheet risk in the normal course of business through the
origination and selling of mortgage loans and the management of the risk of
fluctuations in interest rates. These instruments involve, to varying degrees,
elements of credit and interest rate risk. Credit risk is the possibility that a
loss may occur if a counterparty to a transaction fails to perform according to
the terms of the contract. Interest rate risk is the possibility that a change
in interest rates will cause the value of a financial instrument to decrease or
become more costly to settle. Financial instruments primarily used by BBMC
include commitments to extend credit, mandatory and optional forward
commitments, commitments to purchase mortgage servicing rights, and other
instruments to minimize the interest rate risk of capitalized servicing assets,
primarily options on treasury bond futures.
Options and forward contracts
BBMC purchases options and forward contracts to protect the value of
mortgage servicing assets from exposure to increases in prepayment activity and
to reduce the impact of interest rate fluctuations on its lending commitments.
The notional amount of the options and forward contracts is the amount upon
which interest and other payments under the contract are based and is generally
not exchanged. Therefore, the notional amounts should not be taken as the
measure of credit risk or a reflection of future cash requirements. The risk
associated with options and forwards is the exposure to current and expected
market movements in the interest rates and the ability of the counterparties to
meet the terms of the contracts. The cash requirements associated with these
options and forward contracts, aside from the initial purchase price, are
minimal. These contracts generally require future performance on the part of the
counterparty upon exercise of the option or execution of the forward contract by
BBMC.
BBMC is exposed to credit loss in the event of nonperformance by the
counterparties to the various instruments. BBMC controls credit and market risk
associated with interest rate products by establishing and monitoring limits as
to the types and degree of risks that may be undertaken. BBMC's exposure to
credit risk in the event of default by the counterparties for the options is
$123.3 million which was due at December 31, 1995.
BBMC's exposure to credit risk in the event of default by the counterparty
for mandatory forward commitments to sell mortgage loans is the difference
between the contract price and the current market price, offset by any available
margins retained by BBMC or an independent clearing agent. The amount of credit
risk as of December 31, 1995, if all counterparties failed completely and if the
margins, if any, retained by BBMC
F-41
<PAGE> 187
BANCBOSTON MORTGAGE CORPORATION
(Acquired by HomeSide, Inc. on March 15, 1996 and now known as HomeSide Lending,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
or an independent clearing were to become unavailable, was approximately $24.1
million for mandatory forward commitments of mortgage-backed securities.
<TABLE>
The following is a summary of BBMC's notional amounts and fair values of
interest rate products as of December 31, 1994 and 1995.
<CAPTION>
1994 1995
---------------------- ------------------------
ESTIMATED ESTIMATED
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUE(1) AMOUNT VALUE(1)
-------- --------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Purchased commitments to sell mortgage loans:
Mandatory forward contracts.................... $286,430 $4,413 $1,169,559 $ (9,798)
Options on mortgage-backed securities.......... 87,000 172 315,000 --
Risk management contracts:
Purchased...................................... 371,000 2,157 3,107,500 118,753
Sold........................................... -- -- 295,000 (33,833)
<FN>
- ---------------
(1) Fair value represents the amount at which a given instrument could be
exchanged in an arms length transaction with a third party as of the balance
sheet date.
(2) See Note 14 for additional disclosures on fair value of financial
instruments.
</TABLE>
Commitments to originate mortgage loans
BBMC regularly enters into commitments to originate mortgage loans at a
future date subject to compliance with stated conditions. Commitments to
originate mortgage loans have off-balance sheet risk to the extent BBMC does not
have matching commitments to sell loans, which exposes BBMC to lower of cost or
market valuation adjustments in a rising interest rate environment.
Additionally, the extension of a commitment, which is subject to BBMC's credit
review and approval policies, gives rise to credit exposure when certain
borrowing conditions are met and the loan is made. Until such time, it
represents only potential exposure. The obligation to lend may be voided if the
customer's financial condition deteriorates or if the customer fails to meet
certain conditions. Commitments to originate mortgage loans do not necessarily
reflect future cash requirements since some of the commitments are expected to
expire without being drawn upon. Commitments to originate mortgage loans totaled
$194.5 million at December 31, 1994 and $885.6 million at December 31, 1995.
Mortgage loans sold with recourse
BBMC sells mortgage loans with recourse to various investors and retains
the servicing rights on these loans. The total outstanding balance of loans sold
with recourse does not necessarily represent future cash outflows. The total
outstanding principal balance of loans sold with recourse was $9.0 million at
December 31, 1994 and $6.8 million at December 31, 1995.
Servicing commitments to investors
BBMC is required to submit to certain investors, primarily GNMA, guaranteed
principal and interest payments from the underlying mortgage loans regardless of
actual collections.
Purchase mortgage servicing rights commitments
BBMC routinely enters into commitments to purchase mortgage servicing
rights associated with mortgages originated by third parties, subject to
compliance with stated conditions. These commitments to
F-42
<PAGE> 188
BANCBOSTON MORTGAGE CORPORATION
(Acquired by HomeSide, Inc. on March 15, 1996 and now known as HomeSide Lending,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purchase mortgage servicing rights, expiring during 1996, correspond to mortgage
loans having an aggregate loan principal balance of approximately $2.7 billion
at December 31, 1995.
Geographical concentration of credit risk
BBMC is engaged in business nationwide and has no material concentration of
credit risk in any geographic region.
13. OTHER RELATED PARTY TRANSACTIONS
BBMC services mortgage loans for Bank of Boston and its affiliates. The
balances of those portfolios totaled $3.3 billion and $2.0 billion at December
31, 1994 and 1995, respectively. Related servicing fees are included in mortgage
servicing fees and were $5.4 million, $8.4 million and $7.6 million in 1993,
1994, and 1995, respectively.
BBMC reimburses Bank of Boston and its affiliates for certain occupancy and
supplies costs. Total costs reimbursed were $.0.7 million in 1993, 1994, and
1995.
BBMC services real estate acquired by the Bank of Boston and its
affiliates. Related expenses are reimbursed and were $0.3 million in 1993, $2.1
million in 1994, and $1.7 million in 1995.
An affiliate of Bank of Boston purchases a 99.25% participation in
mortgages in the process of being sold to permanent investors. The principal
balances sold under this agreement aggregated approximately $3.6 billion and
$6.5 billion in 1994 and 1995, respectively.
BBMC purchased mortgage servicing rights from Bank of Boston during 1995
and capitalized $4.8 million in mortgage servicing rights associated with this
transaction.
BBMC sold mortgage loans to Bank of Boston and its affiliates in its normal
course of business. These sales totaled $1.3 billion, $0.4 billion, and $0.5
billion in 1993, 1994, and 1995, respectively. Included in mortgage loans held
for sale at December 31 are loans which will be sold to Bank of Boston and its
affiliates totaling $94.5 million and $18.1 million for 1994 and 1995,
respectively.
Miscellaneous administrative services are provided by related companies.
These services did not have a material impact on the consolidated financial
statements.
14. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
requires disclosure of fair value information about financial instruments
whether or not recognized in the balance sheet, for which it is practicable to
estimate fair value.
Financial instruments include such items as mortgage loans held for sale,
mortgage loans held for investment, interest rate contracts, notes payable, and
other instruments.
Fair value estimates are made as of a specific point in time based on the
characteristics of the financial instruments and the relevant market
information. Where available, quoted market prices are used. In other cases,
fair values are based on estimates using other valuation techniques, such as
discounting estimated future cash flows using a rate commensurate with the risks
involved or other acceptable methods. These techniques involve uncertainties and
are significantly affected by the assumptions used and the judgments made
regarding risk characteristics of various financial instruments, prepayments,
discount rates, estimates of future cash flows, future expected loss experience,
and other factors. Changes in assumptions could significantly affect these
estimates. Derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in an immediate
sale of the instrument. Also, because of differences
F-43
<PAGE> 189
BANCBOSTON MORTGAGE CORPORATION
(Acquired by HomeSide, Inc. on March 15, 1996 and now known as HomeSide Lending,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in methodologies and assumptions used to estimate fair value, BBMC's fair values
should not be compared to those of other companies.
Under the Statement, fair value estimates are based on existing financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of BBMC. For certain assets and
liabilities, the information required under the Statement is supplemented with
additional information relevant to an understanding of the fair value.
The methods and assumptions used to estimate the fair values of each class
of financial instruments are as follows:
Cash
The carrying amount reported in the balance sheet approximates fair value.
Mortgages held for sale
Fair values are based on the estimated value at which the loans could be
sold in the secondary market. These loans are priced to be sold with servicing
rights retained, as is BBMC's normal business practice.
Mortgages held for investment
Fair value is estimated using market quotes for securities backed by
similar loans or by discounting contractual cash flows, adjusted for credit risk
and prepayment estimates. These loans are priced with servicing rights retained.
Discount rates are obtained from secondary market sources.
Accounts receivable, pool loan purchases, and mortgage claims receivable, net
Carrying amounts are considered to approximate fair value. All amounts that
are assumed to be uncollectible within a reasonable time are written off.
Excess mortgage servicing receivable
Fair value is based on the present value of expected future net cash flows
and the current estimated servicing life.
Risk management contracts
Fair values are estimated based on actual market quotes or option models.
Note payable to Bank of Boston
The carrying amount of the note payable to Bank of Boston reported in the
balance sheet approximates its fair value.
Long-term debt
Fair value of long-term debt is estimated by discounting estimated future
cash flows using a rate commensurate with the risks involved.
Commitments to originate mortgage loans
Fair value is estimated using quoted market prices for securities backed by
similar loans adjusted for differences in loan characteristics.
F-44
<PAGE> 190
BANCBOSTON MORTGAGE CORPORATION
(Acquired by HomeSide, Inc. on March 15, 1996 and now known as HomeSide Lending,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Forward contracts to sell mortgages
Forward contracts to sell mortgages, which represent legally binding
agreements to sell loans to permanent investors at a specified price or yield,
are valued using market prices for securities backed by similar loans and are
reflected in the fair values of the mortgages held for sale, to the extent that
these commitments relate to mortgage loans already originated, or of the related
commitments to extend credit.
Options on mortgage-backed securities
The fair values of options are estimated based on actual market quotes. In
some instances, quoted prices for the underlying loans or option models are
used.
<TABLE>
The estimated fair values of BBMC's financial instruments are as follows:
<CAPTION>
1994 1995
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Cash.................................... $ 5,653 $ 5,653 $ 830 $ 830
Mortgages held for sale................. 271,215 272,535 388,436 395,984
Mortgages held for investment........... 28,589 26,988 33,183 35,003
Accounts receivable..................... 66,763 66,763 82,816 82,816
Pool loan purchases..................... 77,477 77,477 65,272 65,272
Mortgage claims receivable.............. 48,835 48,835 45,422 45,422
Excess mortgage servicing receivable.... 15,333 20,700 17,447 19,117
Risk management contracts, classified
as PMSR, and other assets(2).......... 3,727 2,157 84,520 84,920
LIABILITIES
Note payable to Bank of Boston.......... 779,021 779,021 966,000 966,000
Long-term debt.......................... 14,007 13,853 13,816 16,211
OFF-BALANCE SHEET(1)
Commitments to originate mortgage
loans................................. (1,455) 1,094
Mandatory forward contracts to sell
mortgages(2).......................... 4,413 (9,798)
Options on mortgage-backed
securities(2)......................... 172 --
Risk management contracts............... (6,998) --
<FN>
- ---------------
(1) Parentheses denote a liability
(2) See Note 12 for additional disclosures on notional amounts
</TABLE>
Fair value estimates are made as of a specific point in time, based on
relevant market data and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale BBMC's entire holding of a particular financial instrument. Because no
active market exists for some portion of BBMC's financial instruments, fair
value estimates are based on judgments regarding future expected loss
experience, current economic conditions, current interest rates and repayment
trends, risk characteristics of various financial instruments, and other
factors.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and, therefore, cannot be determined with
precision. Changes in any of these assumptions used in calculating fair value
would also significantly affect the estimates. Further, the fair value estimates
were calculated as of
F-45
<PAGE> 191
BANCBOSTON MORTGAGE CORPORATION
(Acquired by HomeSide, Inc. on March 15, 1996 and now known as HomeSide Lending,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1994 and 1995. Changes in market interest rates and prepayment
assumption could significantly change the fair value.
15. CONTINGENCIES
BBMC is a defendant in a number of legal proceedings arising in the normal
course of business. BBMC, in management's estimation, has recorded adequate
reserves in the financial statements for pending litigation. Management, after
reviewing all actions and proceedings pending against or involving BBMC,
considers that the aggregate liability or loss, if any, resulting from the final
outcome of these proceedings will not have a material effect on the financial
position or results of operations of BBMC.
During 1994, BBMC settled a class action lawsuit pertaining to escrow
practices. BBMC agreed to change its escrow calculations to the aggregate method
and, as a result, refunded approximately $45.0 million in excess escrow balance
to mortgagors. In addition, BBMC paid interest on these excess funds in the
amount of approximately $1.3 million. The change in escrow calculations did not
have a material impact on the consolidated financial statements.
16. ACQUISITION OF BELL MORTGAGE
On June 1, 1995, BBMC purchased the assets and liabilities of Bell Mortgage
Company (Bell Mortgage), a privately-held mortgage origination company located
in Minneapolis, Minnesota, for $0.9 million in cash. The acquisition of Bell
Mortgage was accounted for as a purchase. Accordingly, the purchase price was
allocated to net assets acquired based upon their estimated fair market value.
As of a result of the acquisition, goodwill of $0.4 million was recorded and is
being amortized over a 7-year period using the straight-line method.
Also, under the terms of the agreement, the shareholders of Bell Mortgage
will receive additional contingent cash payments based on Bell Mortgage reaching
specific performance goals over the next 3 years. These additional cash payments
will be recorded as additions to goodwill and will be amortized over the
remainder of the original 7-year period using the straight-line method.
Results of operations after the acquisition date are included in the 1995
consolidated financial statements. Proforma financial results would not have
been materially different as a result of this acquisition.
F-46
<PAGE> 192
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholder of
Barnett Mortgage Company:
We have audited the accompanying consolidated balance sheets of BARNETT
MORTGAGE COMPANY (a Florida corporation and a wholly owned subsidiary of Barnett
Banks, Inc.) and subsidiaries as of December 31, 1994 and 1995 and the related
consolidated statements of operations, stockholder's equity, and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Barnett Mortgage Company and
subsidiaries as of December 31, 1994 and 1995 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Jacksonville, Florida
March 8, 1996
F-47
<PAGE> 193
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
<TABLE>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
ASSETS
CASH............................................................ $ 3,900,572 $ 14,987,783
MORTGAGE LOANS:
Held for sale, net............................................ 183,913,568 465,879,840
Held for investment, net...................................... 14,699,097 19,225,181
CAPITALIZED MORTGAGE SERVICING RIGHTS:
Purchased mortgage servicing rights, net...................... 85,574,002 240,059,235
Excess mortgage servicing rights, net......................... 6,887,431 10,729,518
ACCOUNTS RECEIVABLE, Net:
Mortgage claims receivable.................................... 14,667,507 40,810,317
Amounts due from affiliates................................... 170,894 3,296,638
Other receivables............................................. 3,704,721 20,784,599
PROPERTY AND EQUIPMENT, net..................................... 18,565,631 25,263,834
REAL ESTATE OWNED, net.......................................... 731,091 600,061
GOODWILL, net................................................... 25,690,047 138,674,988
OTHER ASSETS.................................................... 967,476 14,318,185
------------ ------------
$359,472,037 $994,630,179
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Notes payable................................................. $248,214,485 $653,055,514
Drafts payable................................................ 9,208,104 11,573,446
Accounts payable and accrued liabilities...................... 9,791,502 63,789,362
Deferred tax liability........................................ 7,355,676 34,383,877
------------ ------------
Total liabilities..................................... 274,569,767 762,802,199
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $100 par value; 10,000 shares authorized,
issued, and outstanding.................................... 1,000,000 1,000,000
Additional paid-in capital.................................... 81,141,958 248,453,974
Retained earnings (accumulated deficit)....................... 2,760,312 (17,625,994)
------------ ------------
Total stockholder's equity............................ 84,902,270 231,827,980
------------ ------------
$359,472,037 $994,630,179
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-48
<PAGE> 194
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<CAPTION>
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
MORTGAGE ORIGINATION REVENUE:
Mortgage origination fees...................... $ 357,900 $ 3,276,304 $ 17,103,976
Gain (loss) on sales of loans, net............. 5,687,882 691,969 (13,920,382)
------------ ------------ ------------
Total mortgage origination revenue..... 6,045,782 3,968,273 3,183,594
------------ ------------ ------------
INTEREST INCOME (EXPENSE):
Interest income................................ 855,053 3,459,860 27,264,470
Interest expense, substantially all to
affiliates.................................. (1,415,372) (4,911,433) (20,427,661)
------------ ------------ ------------
Net interest income (expense).......... (560,319) (1,451,573) 6,836,809
------------ ------------ ------------
MORTGAGE SERVICING REVENUE:
Mortgage servicing income...................... 20,559,829 27,130,545 83,502,311
Mortgage servicing income from affiliates...... 18,325,974 20,016,790 25,057,174
Amortization of capitalized mortgage servicing
rights...................................... (11,547,048) (17,783,184) (48,282,193)
Gain on sales of servicing..................... 0 0 9,096,134
------------ ------------ ------------
Net mortgage servicing revenue......... 27,338,755 29,364,151 69,373,426
------------ ------------ ------------
OTHER INCOME..................................... 6,296,519 4,491,999 2,592,125
------------ ------------ ------------
Total revenues......................... 39,120,737 36,372,850 81,985,954
------------ ------------ ------------
EXPENSES:
Salaries and benefits.......................... 13,913,978 17,473,917 53,070,150
General and administrative..................... 12,432,134 14,923,734 41,849,355
Affiliate profit sharing....................... 10,773,786 3,533,551 6,242,191
Occupancy and equipment........................ 1,809,949 2,702,169 5,959,537
Amortization of goodwill....................... 0 259,275 4,839,536
------------ ------------ ------------
Total expenses......................... 38,929,847 38,892,646 111,960,769
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES................ 190,890 (2,519,796) (29,974,815)
INCOME TAX PROVISION (BENEFIT)................... 87,040 (461,411) (9,588,509)
------------ ------------ ------------
NET INCOME (LOSS)................................ $ 103,850 $ (2,058,385) $(20,386,306)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-49
<PAGE> 195
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<CAPTION>
RETAINED
ADDITIONAL EARNINGS
COMMON PAID-IN (ACCUMULATED
STOCK CAPITAL DEFICIT) TOTAL
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1992.......... $1,000,000 $ 16,910,146 $ 4,714,847 $ 22,624,993
Capital contributions............. 0 3,527,674 0 3,527,674
Net income........................ 0 0 103,850 103,850
---------- ------------ ------------ ------------
BALANCE, December 31, 1993.......... 1,000,000 20,437,820 4,818,697 26,256,517
Capital contributions............. 0 60,704,138 0 60,704,138
Net loss.......................... 0 0 (2,058,385) (2,058,385)
---------- ------------ ------------ ------------
BALANCE, December 31, 1994.......... 1,000,000 81,141,958 2,760,312 84,902,270
Capital contributions............. 0 167,312,016 0 167,312,016
Net loss.......................... 0 0 (20,386,306) (20,386,306)
---------- ------------ ------------ ------------
BALANCE, December 31, 1995.......... $1,000,000 $248,453,974 $(17,625,994) $231,827,980
========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-50
<PAGE> 196
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(NOTE 7)
<CAPTION>
1993 1994 1995
------------ ------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................. $ 103,850 $ (2,058,385) $ (20,386,306)
------------ ------------- ---------------
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Amortization of purchased mortgage servicing
rights.................................... 9,321,064 15,288,479 45,816,361
Amortization of excess servicing fees....... 2,225,984 2,494,705 2,465,832
Amortization of goodwill.................... 0 259,275 4,839,536
Depreciation and amortization of property
and equipment............................. 1,430,339 1,776,267 3,191,009
Capitalization of excess servicing fees..... (3,657,824) (1,258,180) (7,081,112)
Origination of loans held for sale.......... 0 (508,150,116) (3,318,208,729)
Sales of mortgage loans held for sale....... 0 456,864,511 3,106,918,971
Proceeds from sales of mortgage servicing
rights.................................... 0 0 10,437,502
Gain on sales of servicing rights........... 0 0 (9,096,134)
Deferred income tax provision (benefit)..... (309,391) 91,933 (1,250,725)
Changes in assets and liabilities:
Accounts receivable, net.................. (3,931,488) 2,067,746 (8,164,924)
Other assets.............................. (292,732) 1,254,075 (11,285,808)
Accounts payable and accrued
liabilities............................ (11,438,834) (7,700,318) 9,488,879
Other, net................................ 209,676 45,104 6,807,216
------------ ------------- ---------------
Total adjustments...................... (6,443,206) (36,966,519) (165,122,126)
------------ ------------- ---------------
Net cash used in operating
activities........................... (6,339,356) (39,024,904) (185,508,432)
------------ ------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchased mortgage servicing rights............ (31,569,835) (22,487,973) (21,563,279)
Net increase in loans held for investment...... (457,402) (1,593,575) (3,152,365)
Net increase (decrease) in real estate owned... (421) (166,405) 1,751,036
Purchases of property and equipment, net of
retirements................................. (4,232,868) (220,543) (556,054)
Business acquisitions, net of cash acquired.... 0 (58,824,244) (158,747,064)
------------ ------------- ---------------
Net cash used in investing
activities........................... (36,260,526) (83,292,740) (182,267,726)
------------ ------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in notes payable.................. 43,004,351 64,990,122 211,666,829
Capital contributions.......................... 0 59,765,851 167,196,540
------------ ------------- ---------------
Net cash provided by financing
activities........................... 43,004,351 124,755,973 378,863,369
------------ ------------- ---------------
NET INCREASE IN CASH............................. 404,469 2,438,329 11,087,211
CASH AT BEGINNING OF YEAR........................ 1,057,774 1,462,243 3,900,572
------------ ------------- ---------------
CASH AT END OF YEAR.............................. $ 1,462,243 $ 3,900,572 $ 14,987,783
============ ============= ===============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-51
<PAGE> 197
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
1. SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
Barnett Mortgage Company and its wholly owned subsidiaries (the "Company")
originate, purchase, and service residential mortgage loans. The Company
operates nationally with offices in 25 states.
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and prevailing practices within the mortgage
banking industry.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of Barnett
Mortgage Company ("BMC") and its wholly owned subsidiaries, BancPLUS Financial
Corporation ("BancPLUS") and Loan America Financial Corporation ("LAC").
Wholly-owned subsidiaries of BancPLUS include BancPLUS Mortgage Corp. and
Honolulu Mortgage Company ("HMC"). As discussed in Note 2, BancPLUS and LAC were
acquired in 1994 and 1995, respectively. These acquisitions were accounted for
as purchases; therefore, BancPLUS and LAC are included in the consolidated
financial statements from their respective dates of acquisition. BMC is a wholly
owned subsidiary of Barnett Banks, Inc. (the "Parent"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain previously reported amounts have been reclassified to conform to
current presentation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosed amount of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Mortgage Loans
Mortgage loans held for sale are carried at the lower of aggregate cost or
market. Cost is defined as the unpaid principal balance of the mortgage loans,
adjusted for discounts and premiums, including deferred costs and fees.
Differences between the net carrying amount of mortgage loans held for sale and
the amount received from the sale, net of the recognition of any commitment fees
paid, are recognized as gains or losses from the sale of mortgage loans. At
December 31, 1994 and 1995, mortgage loans held for sale were carried at cost,
which was less than their market values. Mortgage loans held for sale originated
by the Parent's banking subsidiaries (the "Affiliate Banks") are not included in
the Company's mortgage loans held for sale. These loans are funded and owned by
the Affiliate Banks. The Company will purchase such loans from the Affiliate
Banks and sell them to the secondary market simultaneously. Gains and losses
from the sales of loans are recorded in the accompanying statements of
operations. At December 31, 1995, the Affiliate Banks owned approximately
$135,323,000 in mortgage loans held for sale.
Mortgage loans held for investment are stated at the lower of cost or fair
market value at the time the permanent investment decisions are made and
primarily consist of (i) mortgage loans originated on behalf of employees of the
Parent and the Affiliate Banks who are relocating, (ii) seasoned loans obtained
in acquisitions by the Affiliate Banks which management has chosen to retain
rather than sell, and (iii) loans in the final stages of foreclosure which were
repurchased by the Company.
F-52
<PAGE> 198
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest income on mortgage loans is recorded on the accrual basis. Loans
are placed on nonaccrual status and accrued interest is reversed when the
collectibility of interest and principal is uncertain, generally after the loans
become 120 days past due.
Capitalized Mortgage Servicing Rights
Capitalized mortgage servicing rights include purchased mortgage servicing
rights ("PMSRs") and excess servicing fees. The Company capitalizes the cost of
purchased mortgage servicing rights ("bulk"), servicing rights acquired through
the purchase of mortgage loans originated by others ("flow") and servicing
rights acquired in connection with acquisitions ("acquired") (Note 2). These
amounts are capitalized and amortized in proportion to and over the life of the
net servicing income, primarily using a discounted cash flow method for flow and
acquired purchases and to a maximum of seven years using the
sum-of-the-years-digits method for bulk purchases. PMSRs, net, represent PMSRs
of $116,326,941 and $308,722,024 at December 31, 1994 and 1995, respectively,
net of accumulated amortization of $30,752,939 and $68,662,789, respectively.
Excess servicing fees are stated net of accumulated amortization and
represent the present value of servicing yields in excess of industry standards.
These amounts are capitalized and amortized over the estimated life of the
underlying loans, primarily to a maximum of eight years using the
sum-of-the-years-digits method, to provide for the recognition of a normal
servicing fee in each year. Excess servicing fees, net, represent excess
servicing fees at December 31, 1994 and 1995 of $14,876,068 and $20,640,470,
respectively, net of accumulated amortization of $7,988,637 and $9,910,952,
respectively.
The Company evaluates the effect of prepayments on the net realizable value
of purchased mortgage servicing rights and excess servicing fees on a
disaggregated undiscounted basis. If needed, the Company records additional
amortization or write-downs based on this evaluation.
Accounts Receivable
Mortgage claims receivable includes loan servicing advances made in
connection with loan servicing activities and claims receivable. Loan servicing
advances consist primarily of payments for property taxes and insurance
premiums, as well as principal and interest remitted to investors before they
are collected from mortgagors. Claims receivable includes claims filed on
foreclosed mortgages, primarily with the FHA and the VA.
Reserves for estimated losses on loan servicing advances are based on
management's continuing evaluation of potential losses. The allowance for losses
included in accounts receivable was $320,654 and $1,542,989 at December 31, 1994
and 1995, respectively.
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation.
Depreciation is provided on a straight-line basis using estimated useful lives
of 12 to 50 years for buildings and improvements and 3 to 20 years for furniture
and equipment. Leasehold improvements are amortized over their estimated useful
lives or the terms of the related leases, whichever is shorter.
Real Estate Owned
Real estate owned represents real estate acquired by foreclosure and is
carried at the lower of cost or appraised value minus estimated costs to sell.
Any additional declines are charged to other expense and are recorded in a
valuation reserve on an asset-by-asset basis. Net costs of maintaining and
operating foreclosed properties are charged to expense as incurred.
F-53
<PAGE> 199
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred Commitment Fees
Deferred commitment fees, which are included in other assets, primarily
consist of fees paid to permanent investors to ensure the ultimate sale of loans
and put option fees paid for the option of selling mortgage-backed securities.
Fees paid to permanent investors are recognized as an adjustment to the sales
price when loans are sold. Any gain or loss resulting from either the exercise
or expiration of put option fees is included in gain (loss) on sales of loans.
Goodwill
Net assets acquired in purchase transactions (Note 2) are recorded at fair
value at the date of acquisition. Goodwill, representing the excess of the
purchase price over the fair value of the net assets purchased, is being
amortized on a straight-line basis over 25 years. The Company reviews its
goodwill periodically for events or changes in circumstances that may indicate
that the carrying amounts of the assets are not recoverable on an undiscounted
cash flow basis.
Reserve for Losses
A reserve for losses is maintained for estimated foreclosure losses. The
required level of reserves is determined on an undiscounted basis by analysis of
such factors such as the prevailing stages of delinquencies, anticipated
reinstatement rates from the various stages of delinquency, and loss experience
on similar loans serviced. This reserve represents that portion of the estimated
foreclosure losses for which the Company does not have an outstanding receivable
as of the date of the financial statements, but for which an expected loss is
estimated based on loan delinquencies and other characteristics of the loans
serviced. This reserve is included in accounts payable and accrued liabilities
in the accompanying financial statements.
Mortgage Origination Fees
Mortgage origination fees consist primarily of (i) fees received from
borrowers on loans originated for sale, (ii) fees received from certain
correspondents, and (iii) fees received from an affiliate (Note 5). Mortgage
origination fees are deferred and recognized as income when the related loans
are sold.
Mortgage Servicing Revenue
Mortgage servicing fees consist primarily of servicing fees and late
charges received for servicing loans owned by investors and affiliates.
Servicing fees are calculated on the basis of the outstanding principal balance
of loans serviced and are recorded as income when received. Loan servicing costs
are charged to expense as incurred.
Late charges are recognized when assessed and are recorded in mortgage
claims receivable net of an allowance for estimated waived or otherwise
uncollectible amounts. Accrued late fees, net of allowance, totaled $1,998,380
and $1,554,393 at December 31, 1994 and 1995, respectively. In addition, amounts
greater than 120 days past due are written off.
Statement of Financial Accounting Standards No. 122
In May 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 122, "Accounting for
Mortgage Servicing Rights". This statement, among other provisions, requires
that the value of mortgage servicing rights associated with mortgage loans
originated by an entity be capitalized as assets. The value of originated
mortgage servicing rights ("OMSRs") is determined by allocating the total cost
of the mortgage loans between the loans and the mortgage servicing rights based
on their relative fair values. Presently, OMSRs are included with the cost of
the related loans and
F-54
<PAGE> 200
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
considered in determining the gain or loss on sale when the loans are sold.
Also, the statement requires that capitalized mortgage servicing rights be
evaluated for impairment based on the fair value of these rights. For the
purposes of determining impairment, mortgage servicing rights that are
capitalized after the adoption of this statement are stratified based on one or
more of the predominate risk characteristics of the underlying loans. Impairment
is recognized through a valuation allowance for each impaired stratum.
The statement applies prospectively to fiscal years beginning after
December 15, 1995. The Company plans to adopt the statement beginning January 1,
1996. The actual effect of implementing this statement on the Company's
financial position and results of operations will depend on factors determined
at the end of a reporting period, including the amount and mix of originated and
purchased production, the level of interest rates, and market estimates of
future prepayment rates. Accordingly, the Company cannot determine at this time
the ultimate impact on its future earnings of applying the new methodologies of
recording all mortgage servicing rights as assets, of calculating impairment,
and of applying the other provisions of the statement; however, the adoption of
the statement will accelerate the timing of income recognition from origination
activities.
Consolidated Statements of Cash Flows
The Company defines cash as cash in banks.
2. ACQUISITIONS
On February 28, 1995, the Company completed the acquisition of BancPLUS for
approximately $167 million in cash. BancPLUS and its wholly owned subsidiaries,
BancPLUS Mortgage Corp. and HMC, are full-service mortgage bankers based in San
Antonio, Texas, and Honolulu, Hawaii, who had total assets of $244 million and a
servicing portfolio of $13.9 billion at the date of acquisition. The purchase
price in excess of net assets acquired was $113 million.
On October 1, 1994, the Company completed the acquisition of LAC for $60
million. LAC was a Miami-based wholesale mortgage banking company which had
assets of $180 million and a servicing portfolio of approximately $4 billion at
the date of acquisition. The purchase price in excess of net assets acquired, as
adjusted for changes in estimates in 1995, was $29 million.
<TABLE>
These acquisitions are included in the consolidated financial statements
from their respective dates of acquisition. Unaudited pro forma statements of
operations for 1994 and 1995, assuming BancPLUS and LAC had been acquired as of
January 1, 1994, are as follows (in thousands):
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Mortgage origination revenue.................................. $ 26,149 $ 4,631
Interest income (expense), net................................ (148) 6,137
Mortgage servicing revenue.................................... 87,437 74,646
Other income.................................................. 5,830 2,744
--------- ---------
Total revenues...................................... 119,268 88,158
Expenses...................................................... (136,439) (115,997)
--------- ---------
Loss before income taxes and affiliate profit sharing......... (17,171) (27,839)
Affiliate profit sharing...................................... (3,534) (6,242)
Income tax benefit............................................ 4,741 10,780
--------- ---------
Net loss............................................ $ (15,964) $ (23,301)
========= =========
</TABLE>
F-55
<PAGE> 201
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The above pro forma statements of operations assume that the Parent contributed
capital equal to the purchase price as of January 1, 1994. The purchase
accounting adjustments are reflected based on the actual purchase price and the
amount of assets actually acquired. In addition, gains on sales of mortgage
servicing rights are included in mortgage servicing revenue in these pro forma
results. No adjustments have been made for restructuring costs that might have
been incurred during the periods presented or for cost efficiencies that might
have been realized. Accordingly, these pro forma results are not indicative of
future results.
3. PROPERTY AND EQUIPMENT
<TABLE>
Property and equipment at December 31, 1994 and 1995 consisted of the
following:
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Building and improvements......................... $14,720,814 $23,494,585
Furniture and equipment........................... 11,584,787 12,881,277
----------- -----------
26,305,601 36,375,862
Less accumulated depreciation..................... 7,739,970 11,112,028
----------- -----------
$18,565,631 $25,263,834
=========== ===========
</TABLE>
4. INCOME TAXES
The Company's results of operations are included in the Parent's
consolidated income tax return. The Company's income tax provision and related
asset or liability are computed based on income tax rates as if the Company
filed a separate income tax return. Pursuant to a tax-sharing agreement with the
Parent, the Company is reimbursed for the tax effect of current operating losses
utilized in the consolidated return.
<TABLE>
The components of the provision (benefit) for income taxes for the years
ended December 31, 1993, 1994, and 1995 are as follows:
<CAPTION>
1993 1994 1995
--------- --------- -----------
<S> <C> <C> <C>
Current:
Federal.............................. $ 377,258 $(514,431) $(7,504,840)
State................................ 19,173 (38,913) (832,944)
--------- --------- -----------
396,431 (553,344) (8,337,784)
--------- --------- -----------
Deferred:
Federal.............................. (296,983) 87,016 (1,080,141)
State................................ (12,408) 4,917 (170,584)
--------- --------- -----------
(309,391) 91,933 (1,250,725)
--------- --------- -----------
Provision (benefit) for income taxes... $ 87,040 $(461,411) $(9,588,509)
========= ========= ===========
</TABLE>
F-56
<PAGE> 202
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
The differences between federal income tax computed at the statutory rate
of 35 percent and the actual tax provision are shown below:
<CAPTION>
1993 1994 1995
-------- ----------- ------------
<S> <C> <C> <C>
Income (loss) before taxes................... $190,890 $(2,519,796) $(29,974,815)
======== =========== ============
Tax provision (benefit) at the statutory
rate....................................... $ 66,812 $ (881,929) $(10,491,185)
Increase (decrease) in taxes:
State income tax, net of federal benefit... 4,590 (22,098) (539,470)
Goodwill................................... 0 90,746 1,693,838
Other...................................... 15,638 351,870 (251,692)
-------- ----------- ------------
Total income tax provision
(benefit)........................ $ 87,040 $ (461,411) $ (9,588,509)
======== =========== ============
Effective tax rate........................... 46% (18)% (32)%
======== =========== ============
</TABLE>
<TABLE>
Deferred income taxes reflect the impact of temporary differences between
the financial statement carrying amounts and the tax bases of assets and
liabilities due to differences in the timing of recognition of revenues and
expenses and differences related to acquisitions. The tax effects of temporary
differences which create deferred tax assets and liabilities at December 31,
1994 and 1995 are detailed below:
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Reserves................................................ $ 0 $ 5,109,268
Net operating loss carryforwards........................ 4,044,430 3,146,010
Late charges............................................ 629,351 954,969
Property and equipment.................................. 651,825 321,215
Other................................................... 930,060 1,571,175
----------- -----------
Gross deferred tax assets....................... 6,255,666 11,102,637
Valuation allowance............................. 0 (3,146,010)
----------- -----------
Deferred tax asset.............................. 6,255,666 7,956,627
----------- -----------
Deferred tax liabilities:
Capitalized servicing rights............................ 13,310,651 41,520,994
Other................................................... 300,691 819,510
----------- -----------
Deferred tax liability.......................... 13,611,342 42,340,504
----------- -----------
Net deferred tax liability................................ $ 7,355,676 $34,383,877
=========== ===========
</TABLE>
The Company's $34,383,877 net deferred tax liability includes a valuation
allowance of $3,146,010, representing LAC's preaffiliation federal and state net
operating loss carryforwards for which realization is uncertain.
5. RELATED-PARTY TRANSACTIONS
The Company services loans (Note 8) for the Affiliate Banks. Total loan
servicing income relating to loans owned by the Affiliate Banks was
approximately $18,326,000, $20,017,000, and $25,057,000 in 1993, 1994, and 1995,
respectively.
Through March 1995, the Company received earnings credits from the Parent
or its subsidiaries in exchange for maintaining fiduciary deposit accounts.
Revenue recognized as a result of this arrangement was
F-57
<PAGE> 203
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$2,456,000, $2,365,000, and $523,000 in 1993, 1994, and 1995, respectively, and
has been included in other income. Subsequent to March 1995, the Company
received earnings credits in the form of reduced interest expense.
Notes payable at December 31, 1995, includes advances from lines of credit
with the Parent and the Affiliate Banks which bear interest at a rate of LIBOR
plus 1%, reduced in proportion to compensating balances maintained with
Affiliate Banks.
Amounts payable to the Parent and Affiliate Banks which are included in
accounts payable and accrued liabilities at December 31, 1994 and 1995 were
$2,170,000 and $7,680,000, respectively.
The Company performs certain centralized processing functions for certain
Affiliate Banks. Included in other income was approximately $2,559,000,
$2,171,000, and $1,972,000 in fees for these services for the years ended
December 31, 1993, 1994, and 1995, respectively.
<TABLE>
The Company recorded certain expenses related to transactions with the
Parent and the Affiliate Banks as follows:
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Management fees............................. $ 465,729 $ 721,141 $ 2,914,794
Affiliate revenue sharing................... 10,773,786 3,533,551 6,242,191
Rent expense................................ 1,267,130 1,292,498 1,316,448
Interest expense............................ 1,415,372 3,281,503 17,588,548
Information processing support.............. 328,556 1,953,244 3,505,484
Internal audit fees......................... 91,933 358,800 421,392
----------- ----------- -----------
$14,342,506 $11,140,737 $31,988,857
=========== =========== ===========
</TABLE>
The Company pays its Parent a management fee for traditional corporate
support functions, such as accounting operations, financial reporting and
analysis, human resources, marketing, and strategic planning. Affiliate revenue
sharing is a distribution to the Affiliate Banks and is based on each
affiliate's annual loan production.
The Parent funds certain additions to building and improvements through
capital contributions. The Parent made noncash capital contributions of
$3,527,674, $938,287, and $115,476 to the Company for the net cost of building
facilities in 1993, 1994, and 1995, respectively. In addition, the Parent has
made additional capital contributions to fund acquisitions. During 1994 and
1995, the Parent contributed $59,800,000 and $167,100,000, respectively to the
Company to fund the acquisitions of LAC and BancPLUS, respectively.
LAC and BancPLUS Mortgage Corp. sell a certain amount of their loan
production to an Affiliate Bank. Total loans sold to the Affiliate Bank, at
cost, during 1994 and 1995 were $204 million and $324 million, respectively.
Additionally, BMC charges the Affiliate Bank a fee, which totaled $509,000 and
$809,000 during 1994 and 1995, respectively, for arranging these transactions
and providing certain support services.
F-58
<PAGE> 204
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
6. NOTES PAYABLE
At December 31, 1994, LAC had available mortgage warehouse credit
facilities which permitted the Company to borrow a maximum amount of $275
million, collateralized by the mortgage loans held for sale by LAC. The
following table summarizes information regarding these facilities as of December
31, 1994:
<S> <C>
Balance at end of year....................................... $ 174,015,589
Weighted average interest rate at end of year................ 7.23%
Maximum amount outstanding................................... $ 174,015,589
Average amount outstanding................................... 150,825,062
Contractual interest rate at end of year..................... 1.25% to 8.5%
Weighted average interest rate during the year............... 5.58%
</TABLE>
These facilities expired on May 27, 1995. The Company replaced these
facilities with a borrowing arrangement from the Parent and the Affiliate Banks
(Note 5). Also, during 1995, the Company entered into a credit facility for $200
million, of which $0 was outstanding at December 31, 1995.
7. SUPPLEMENTAL CASH FLOW INFORMATION
The Company transferred $890,203, $235,000, and $1,669,000 from mortgage
loans to real estate acquired by foreclosure in 1993, 1994, and 1995,
respectively. These transactions have been excluded from the accompanying
consolidated statements of cash flows.
For the years ended December 31, 1993, 1994, and 1995, income taxes of
$255,605, $396,431 and $2,852,641, respectively, were paid to the Parent.
Interest paid during the same years was $1,259,372, $4,578,611 and $18,529,118,
respectively.
8. LOAN SERVICING
The Company was servicing 243,116 and 445,665 loans at December 31, 1994
and 1995, respectively. The remaining principal balances on serviced loans
totaled approximately $18.4 billion and $33.4 billion at December 31, 1994 and
1995, respectively. At December 31, 1995, the geographic distribution of loans
serviced was 38% in Florida, 14% in California, and 48% in other states. Loans
serviced for others are not included in the accompanying consolidated balance
sheets. The accompanying balance sheets also do not include funds held in
fiduciary deposit accounts, as these funds are not assets of the Company. These
amounts averaged $262,000,000 and $407,000,000 during 1994 and 1995,
respectively.
In connection with its loan servicing activities, the Company makes certain
payments of property taxes and insurance premiums in advance of collecting them
from specific mortgagors and makes certain payments of attorneys' fees and other
costs related to loans in foreclosure. Also, in connection with servicing
mortgage-backed securities guaranteed by Government National Mortgage
Association ("GNMA") or Federal National Mortgage Association ("FNMA"), the
Company advances certain principal and interest payments to security holders
prior to their collection from specific mortgagors. These advances are presented
as receivables in the accompanying consolidated balance sheets.
Conforming conventional loans serviced by the Company are securitized
through FNMA or Federal Home Loan Mortgage Corporation ("FHLMC") programs on a
nonrecourse basis, whereby foreclosure losses are generally the responsibility
of FNMA and FHLMC and not the Company. Similarly, the government loans serviced
by the Company are securitized through GNMA programs, whereby the Company is
insured against loss by the FHA or partially guaranteed against loss by the VA.
F-59
<PAGE> 205
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is exposed to potential losses on loans partially guaranteed by
the VA in the event the VA elects to pay its guarantee amount instead of
repurchasing the loans. The Company incurred losses of $809,000, in 1995, but
did not incur any significant losses in 1993 or 1994 related to these loans. The
Company has also fulfilled certain pool commitments with loans that were sold
with recourse. Total principal outstanding of loans sold with recourse was
$64,415,000 and $144,490,000 at December 31, 1994 and 1995, respectively.
Management believes that its reserves for losses are adequate for any
contingencies that may arise from these loans.
9. COMMITMENTS AND CONTINGENCIES
The Company's fidelity bond requirements are satisfied through a policy
with underwriters at Lloyd's of London ("Lloyd's"). Maximum coverage is
$75,000,000 per occurrence, with a self-insurance program covering losses under
the deductible of $5,000,000 for the Parent as a whole. The Company is only
liable for losses up to its $250,000 deductible. At December 31, 1995, the
Company had errors and omissions insurance coverage through a policy with
Lloyd's in the amount of $35,000,000. Premiums on both policies have been paid
through August 1996.
The Company leases office space and equipment under various operating
leases expiring through 1998. Substantially all lease agreements for office
space contain renewal options and provide for increases in rental payments based
on the lessor's operating costs or the consumer price index.
<TABLE>
The following is a schedule of future minimum rental payments, exclusive of
any contingent operating charges under certain leasing arrangements that have
initial or remaining noncancelable lease terms in excess of one year at December
31, 1995:
<S> <C>
Year ending December 31:
1996................................................... $2,274,796
1997................................................... 1,200,805
1998................................................... 681,885
1999................................................... 395,047
----------
Total.......................................... $4,552,533
==========
</TABLE>
The Company is a party to certain pending legal proceedings arising from
matters incidental to its business. In the opinion of management and counsel,
the aggregate unreserved liability or loss, if any, of legal proceedings will
not have a significant effect on the consolidated financial condition, results
of operations or liquidity of the Company.
10. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments as of December 31, 1995 is made in accordance with the requirements
of SFAS No. 107, "Disclosures About Fair Value of Financial Instruments." The
estimated fair value amounts have been determined by the Company using available
market information and appropriate valuation methodologies. However,
considerable judgment is necessary to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of
F-60
<PAGE> 206
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
different market assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts:
<CAPTION>
1994
-------------------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
------------ ------------
<S> <C> <C>
Assets:
Cash................................................ $ 3,900,572 $ 3,900,572
Accounts receivable, net............................ 18,543,122 18,543,122
Mortgage loans held for sale, net................... 183,913,568 185,101,884
Mortgage loans held for investment, net............. 14,699,097 14,365,427
Liabilities:
Notes payable....................................... 248,214,485 248,214,485
Accounts payable and accrued liabilities............ 9,791,502 9,791,502
Off-balance sheet financial instruments:
Commitments to extend credit and sell loans......... 0 605,854
</TABLE>
<TABLE>
<CAPTION>
1995
-------------------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
------------ ------------
<S> <C> <C>
Assets:
Cash................................................ $ 14,987,783 $ 14,987,783
Accounts receivable, net............................ 64,891,554 64,891,554
Mortgage loans held for sale, net................... 465,879,840 471,241,851
Mortgage loans held for investment, net............. 19,225,181 19,225,181
Liabilities:
Notes payable....................................... 653,055,514 653,055,514
Accounts payable and accrued liabilities............ 63,789,362 63,789,362
Off-balance sheet financial instruments:
Commitments to extend credit and sell loans......... 0 (4,084,450)
</TABLE>
The fair value estimates as of December 31, 1994 and 1995 are based on
pertinent information available to management as of the respective dates.
Although management is not aware of any factors that would significantly affect
the estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since those dates, and
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
The following describes the methods and assumptions used by the Company in
estimating fair value amounts:
Cash, Accounts Receivable, Notes Payable, and Accounts Payable and Accrued
Liabilities
The carrying amount approximates fair value.
Mortgage Loans Held for Sale
Fair value is estimated using the quoted market prices for securities
backed by similar types of loans and dealer commitments to purchase loans on a
servicing retained basis.
F-61
<PAGE> 207
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Mortgage Loans Held for Investment
Fair value is estimated using quoted market prices for sales of whole loans
with similar characteristics, such as repricing dates, product type, and size.
In 1995, management's estimates of fair value of these loans does not materially
differ from cost.
Off-Balance Sheet Financial Instruments
Fair value represents the gain or loss on the Company's unclosed
commitments to originate or purchase loans and the Company's commitments to sell
loans. Both types of commitments take into consideration the remaining terms of
the agreements and the present creditworthiness of the counterparties.
11. DERIVATIVE FINANCIAL INSTRUMENTS AND FINANCIAL
INSTRUMENTS WITH OFF-BALANCE SHEET RISK
During December, 1995, the Company purchased options to buy $500 million of
U.S. Treasury securities in order to reduce its exposure to the impact of
falling interest rates on the value of its capitalized mortgage servicing
assets. The cost of the options of $6,600,000, net of accumulated amortization
of $41,000, is included in other assets. These options were terminated in
January 1996 and the realized gain was reflected as a reduction of PMSRs.
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business through the production and sale of mortgage
loans and the management of interest rate risk. These instruments include
short-term commitments (interest rate and points) to extend credit,
mortgage-backed securities mandatory forward commitments, put options to sell
mortgage-backed securities, and loans sold with recourse. These instruments
involve, to varying degrees, elements of credit and interest rate risk.
The Company's exposure to credit loss in the event of nonperformance by the
other party for commitments to extend credit, mortgage-backed securities
mandatory forward commitments, put options to sell mortgage-backed securities,
and loans sold with recourse is represented by the contractual or notional
amounts of these instruments. As these off-balance sheet financial instruments
have essentially the same credit risk involved in extending loans, the Company
generally uses the same credit and collateral policies in making these
commitments and conditional obligations as it does for on-balance sheet
instruments.
<TABLE>
At December 31, 1994 and 1995, financial instruments having potential
credit risk in excess of those reported in the consolidated balance sheets are
as follows:
<CAPTION>
CONTRACTUAL OR NOTIONAL AMOUNTS 1994 1995
------------------------------- ------------ ------------
<S> <C> <C>
Commitments to extend credit.............................. $133,000,000 $418,000,000
Commitments to sell mortgage loans and mortgage-backed
securities.............................................. 288,000,000 863,000,000
Loans sold with recourse.................................. 64,415,000 144,490,000
</TABLE>
12. CONCENTRATION OF CREDIT RISK
The Company has identified certain credit risk concentrations in relation
to its on- and off-balance sheet financial instruments. A credit risk
concentration results when the Company has a significant credit exposure to an
individual or a group engaged in similar activities or is affected similarly by
economic conditions.
A significant portion of the Company's financial instruments is transacted
with other financial institutions, various government agencies, and individual
investors. The Company does not have a credit risk
F-62
<PAGE> 208
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
concentration with any one financial institution, agency, or individual.
However, of the loans held by the Company and sold with recourse, a majority are
secured by residential real estate in Florida.
13. RETIREMENT PLAN
<TABLE>
The Company participates in the Parent's retirement, management and
incentive compensation, and health and welfare plans. The Company's share of
pension and 401(k) plans' costs and expenses allocated annually by the Parent
are as follows:
<CAPTION>
PENSION 401(K)
PLANS PLAN
-------- --------
<S> <C> <C>
Year ended December 31:
1993......................................................... $ 96,192 $240,367
1994......................................................... 143,148 245,739
1995......................................................... 268,938 837,956
</TABLE>
The Company remits amounts expensed to the Parent for retirement plans and
for health and welfare plans. Amounts for the management and incentive
compensation plans are remitted directly to employees or to plans maintained on
their behalf.
Information from the Parent's retirement plans' administrator is not
available to permit the Company to determine its share of the vested and
nonvested retirement plan benefit obligations and plan assets. The weighted
average discount rate and rate of increase in future compensation levels used in
determining the actual present value of the projected benefit obligations were
8.90% and 4.50%, respectively, in 1994 and 7.30% and 4.00% in 1995. The expected
long-term rate of return on assets was 9.00% and 9.50% in 1994 and 1995,
respectively.
The Parent has estimated the accumulated postretirement benefit obligation
on a consolidated basis only and allocates costs to each subsidiary. No specific
estimate has been made for each subsidiary.
14. SUBSEQUENT EVENT
On March 4, 1996, the Parent entered into a transaction in which the stock
of Barnett Mortgage Company would be acquired by a newly formed entity in
exchange for one-third ownership of the new entity and cash. Under the terms of
the transaction, the Parent would retain its mortgage production units, continue
to originate mortgages and retain certain other assets.
F-63
<PAGE> 209
INDEPENDENT AUDITORS' REPORT
Board of Directors
BancPLUS Financial Corporation:
We have audited the accompanying consolidated statements of financial
condition of BancPLUS Financial Corporation and subsidiary as of December 31,
1993 and 1994, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the financial
statements of Honolulu Mortgage Company, Inc., a wholly-owned subsidiary of
BancPLUS Mortgage Corp., which statements reflect total assets constituting 16%
and 20% and total revenues constituting 17% and 14% of the related 1993 and 1994
consolidated totals, respectively. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for Honolulu Mortgage Company, Inc., is based
solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of BancPLUS Financial Corporation and
subsidiary as of December 31, 1993 and 1994, and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.
As discussed in note 2(j) to the consolidated financial statements, the
Company changed its method of accounting for income taxes in 1993 to adopt the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."
KPMG PEAT MARWICK LLP
San Antonio, Texas
March 17, 1995
F-64
<PAGE> 210
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
<TABLE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1993 AND 1994
(IN THOUSANDS OF DOLLARS, EXCEPT FOR SHARE DATA)
<CAPTION>
1993 1994
-------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents.............................................. $ 4,096 $ 7,901
Mortgage loans held for sale, at lower of cost or market (note 6)...... 417,695 120,871
Accounts receivable and accrued interest, net of allowance for
uncollectible amounts of $3,031 in 1993 and $2,621 in 1994........... 33,941 29,836
Mortgage loan administration contracts, net of accumulated amortization
of $91,079 in 1993 and $116,167 in 1994 (note 3)..................... 118,265 117,716
Real estate acquired through foreclosure............................... 599 1,694
Properties and equipment, net (note 4)................................. 10,595 10,435
Prepaid expenses and other assets...................................... 8,100 5,640
-------- --------
Total assets................................................. $593,291 $294,093
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable (note 5)............................................... 508,342 237,586
Accounts payable and accrued expenses................................ 54,073 23,490
Reserves for losses.................................................. 13,300 11,400
-------- --------
Total liabilities............................................ 575,715 272,476
-------- --------
Commitments and contingencies (notes 3, 5, 6, 8, 10 and 11)
Stockholders' equity (note 5):
Common stock, par value $.01 per share -- 200,000 shares authorized;
100,000 shares issued and outstanding............................. 1 1
Preferred stock, par value $.01 per share ($10,000 liquidation
preference) -- 100,000,000 shares authorized; 1,284,783 and
1,460,125 shares issued and outstanding in 1993 and 1994,
respectively...................................................... 13 15
Additional paid-in capital........................................... 20,174 20,173
Retained earnings (accumulated deficit).............................. (2,612) 1,428
-------- --------
Total stockholders' equity................................... 17,576 21,617
-------- --------
Total liabilities and stockholders' equity................... $593,291 $294,093
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-65
<PAGE> 211
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993 AND 1994
(IN THOUSANDS OF DOLLARS)
<CAPTION>
1993 1994
-------- -------
<S> <C> <C>
INCOME
Loan administration..................................................... $ 69,471 $ 62,253
Loan origination........................................................ 42,053 16,184
Gain on sale of mortgage loan administration contracts.................. 11,334 24,348
Interest income, net of interest expense of $23,732 in 1993 and $15,959
in 1994.............................................................. (1,004) (2,019)
Other................................................................... 1,199 1,190
-------- --------
Total income.................................................... 123,053 101,956
-------- --------
EXPENSES
Personnel............................................................... 48,977 42,798
Occupancy and equipment................................................. 5,803 6,924
Provision for foreclosure costs......................................... 4,528 3,050
Amortization of mortgage loan administration contracts.................. 58,808 25,175
Other general and administrative........................................ 17,198 15,797
-------- --------
Total expenses.................................................. 135,314 93,744
-------- --------
Income (loss) before income taxes, extraordinary item, and
cumulative effect of a change in accounting principle........... (12,261) 8,212
Income taxes (note 9)..................................................... (4,228) 3,107
-------- --------
Income (loss) before extraordinary item and cumulative effect of
a change in accounting principle................................ (8,033) 5,105
Extraordinary loss resulting from extinguishment of debt, net of income
tax benefit of $548 (note 5)............................................ -- (1,064)
Cumulative effect on prior years of a change in accounting for income
taxes................................................................... (264) --
-------- --------
Net income (loss)............................................... $ (8,297) $ 4,041
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-66
<PAGE> 212
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993 AND 1994
(IN THOUSANDS OF DOLLARS)
<CAPTION>
RETAINED
ADDITIONAL EARNINGS TOTAL
COMMON PREFERRED PAID-IN (ACCUMULATED STOCKHOLDERS'
STOCK STOCK CAPITAL DEFICIT) EQUITY
------ --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992....... $1 $12 $20,175 $ 5,685 $25,873
Net loss......................... -- -- -- (8,297) (8,297)
Preferred stock
dividends-in-kind............. -- 1 (1) -- --
-- --- ------- ------- -------
Balance at December 31, 1993....... 1 13 20,174 (2,612) 17,576
Net income....................... -- -- -- 4,041 4,041
Preferred stock
dividends-in-kind............. -- 2 (1) (1) --
-- --- ------- ------- -------
Balance at December 31, 1994....... $1 $15 $20,173 $ 1,428 $21,617
== === ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-67
<PAGE> 213
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993 AND 1994
(IN THOUSANDS OF DOLLARS)
<CAPTION>
1993 1994
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................................. $ (8,297) $ 4,041
----------- -----------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation............................................... 1,559 1,958
Amortization............................................... 58,832 25,199
Provision for foreclosure costs............................ 4,528 3,050
Capitalized excess servicing fees.......................... (1,161) (330)
Non-cash interest expense.................................. 1,168 1,497
Gain on sales of servicing................................. (11,334) (24,348)
Proceeds from sales of servicing........................... 8,924 32,065
Extraordinary loss resulting from extinguishment of debt... -- 1,064
Cumulative effect of a change in accounting principle...... 264 --
Deferred tax benefit....................................... (4,583) (270)
Changes in operating assets and liabilities:
Increase in accounts receivable and other assets......... (9,040) (4,713)
Loans originated or acquired for sale.................... (3,240,339) (1,703,896)
Proceeds from sales of loans............................. 3,127,539 1,991,424
Net increase (decrease) in warehouse debt................ 110,735 (269,085)
Increase (decrease) in accounts payable and accrued
expenses.............................................. 9,823 (9,647)
----------- -----------
Total adjustments to net income (loss)................ 56,915 43,968
----------- -----------
Net cash provided by operating activities............. 48,618 48,009
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of mortgage loan administration contracts........... (33,455) (38,198)
Real estate acquired through foreclosure...................... (1,421) (1,648)
Proceeds from sales of foreclosed real estate................. 816 1,259
Purchases of properties and equipment......................... (4,117) (1,796)
----------- -----------
Net cash used in investing activities................. (38,177) (40,383)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable................................... 725,150 400,936
Principal payments on notes payable........................... (739,084) (402,630)
Loan fees paid................................................ -- (2,127)
----------- -----------
Net cash used in financing activities................. (13,934) (3,821)
----------- -----------
Net increase (decrease) in cash and cash
equivalents......................................... (3,493) 3,805
CASH AND CASH EQUIVALENTS
Beginning of year............................................. 7,589 4,096
----------- -----------
End of year................................................... $ 4,096 $ 7,901
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-68
<PAGE> 214
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993 AND 1994
(1) REPORTING ENTITY
BancPLUS Financial Corporation (the Company) was incorporated in 1991 for
the purpose of acquiring all of the capital stock of BancPLUS Mortgage Corp.
(BancPLUS Mortgage), and its only substantive operations to date have involved
such activities. The purchase of the stock of BancPLUS Mortgage was effective as
of September 1, 1991.
The accompanying consolidated financial statements include the operations
of the Company and BancPLUS Mortgage. All significant intercompany balances and
transactions have been eliminated in consolidation.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Mortgage Loans Held for Sale
Mortgage loans held for sale are stated at the lower of cost or market
value as determined in the aggregate. The cost basis of mortgage loans includes
loan principal outstanding, adjusted for discounts or premiums. Loan fees and
direct costs associated with the origination of mortgage loans, which are
deferred and recognized when the loans are sold, are reflected as deferred
revenue in the financial statements. Commitment fees paid to permanent investors
are recognized as expense when the related loans are sold or when it becomes
evident that the commitment will not be used. The market value of mortgage loans
covered by investor commitments is based on commitment prices. The market value
of uncommitted mortgage loans is determined by current investor yield
requirements. Differences between the carrying amounts of mortgage loans and
sales proceeds are recognized at the time of sale.
When mortgage loans are sold with servicing rights retained and the actual
servicing fees to be received differ from normal servicing fees for similar
loans, an additional gain or loss is recognized. This gain or loss represents
the present value of the difference between the actual and the normal servicing
fees over the remaining lives of the loans, adjusted for anticipated
prepayments. The excess servicing fees receivable resulting from the recognition
of these gains are included in mortgage loan administration contracts.
Loans are placed on nonaccrual status when any portion of the principal or
interest is ninety days past due or earlier when concern exists as to the
ultimate collectibility of principal or interest. When loans are placed on
nonaccrual status, the related interest receivable is reversed against interest
income of the current period. Interest payments received on nonaccrual loans are
applied as a reduction of the principal balance when concern exists as to the
ultimate collection of principal; otherwise, such payments are recognized as
interest income. Loans are removed from nonaccrual status when principal and
interest become current and they are estimated to be fully collectible.
(b) Allowance for Uncollectible Receivables
An allowance is maintained for estimated uncollectible advances made
primarily in connection with BancPLUS Mortgage's responsibilities as servicer
for loans in Government National Mortgage Association (GNMA) pools. The
allowance represents that portion of the advances made as of the date of the
financial statements that are not expected to be reimbursed. The allowance is
increased by provisions charged to earnings and reduced by receivable
charge-offs, net of recoveries.
(c) Mortgage Loan Administration Contracts
Mortgage loan administration contracts are recorded at cost, which does not
exceed the present value of future net servicing income, net of amortization.
Mortgage loan administration contracts are amortized in the
F-69
<PAGE> 215
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
current period on an accelerated method that approximates the proportion that
current net servicing income bears to anticipated total net servicing income
from the related loans. In connection with the periodic evaluation of the
amortization of mortgage loan administration contracts, the Company compares the
recorded investment in mortgage loan administration contracts to the value of
the expected future net servicing income determined on a disaggregated,
undiscounted basis. Differences representing an excess of recorded investment
over expected future net servicing income are charged to earnings through an
additional current period charge to amortization.
Included in mortgage loan administration contracts at December 31, 1994 was
$2,428,000 of excess servicing fees receivable. This amount represents the
present value of future servicing fees in excess of the normal fee. These
receivables are amortized in the current period on an accelerated method that
approximates the proportion that the current servicing fees bear to anticipated
total servicing fees to be received from the related loans. The receivable
balance is revalued periodically using current prepayment estimates and original
discount rates and, if so indicated, is written down to the present value of the
estimated remaining future excess service fee revenue through an additional
charge to amortization. If the receivable balance is less than the present value
of the estimated remaining future excess service fee revenue due to favorable
prepayment experience, amortization is adjusted prospectively.
(d) Reserve for Losses
A reserve for losses is maintained for estimated foreclosure losses
associated primarily with BancPLUS Mortgage's responsibilities as servicer for
loans in GNMA pools. The required level of reserves is determined on an
undiscounted basis by analysis of such factors as the prevailing level of loan
delinquencies, anticipated reinstatement rates from the various stages of
delinquency, and loss experience on similar loans serviced. This reserve
represents that portion of the estimated foreclosure losses for which BancPLUS
Mortgage does not have an outstanding receivable as of the date of the financial
statements, but for which an expected loss is estimable based on loan
delinquencies and other characteristics of the loans serviced. The reserve is
increased by provisions charged to earnings and by purchase price adjustments on
certain acquisitions of mortgage loan administration contracts. The reserve is
reduced by charge-offs, net of recoveries.
(e) Real Estate Acquired Through Foreclosure
Real estate properties acquired through foreclosure are recorded at the
lower of cost or fair value on their acquisition dates and at the lower of such
initial amount or current fair value thereafter.
(f) Properties and Equipment
Properties and equipment are stated at cost less accumulated depreciation
and are depreciated using the straight-line method over their estimated useful
lives.
Maintenance, repairs, and minor renewals are charged to expense.
Betterments and major renewals are capitalized. Upon retirement or disposition,
both the asset cost and the related accumulated depreciation are written off and
gains or losses are included in operations.
(g) Loan Administration
Loan administration fees represent a participation in interest collections
on loans serviced for investors, normally based on a stipulated percentage of
the outstanding monthly principal balance of the loans. Loan administration fees
are recognized as income when received. Loan administration costs are charged to
expense as incurred.
F-70
<PAGE> 216
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(h) Loan Origination
Fees and direct loan costs associated with the origination of single-family
residential loans held for sale are recognized when the related loans are sold.
Direct loan costs have not been reclassified against loan origination income.
(i) Cash Equivalents
Cash equivalents include all highly liquid investments with a maturity of
three months or less at the date of acquisition.
(j) Federal Income Taxes
BancPLUS Financial Corporation files a consolidated federal income tax
return which includes the operations of BancPLUS Mortgage.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" and has reported the
cumulative effect of this change in accounting for income taxes in the
consolidated statement of operations for the year ended December 31, 1993.
Statement 109 required a change from the deferred method of accounting for
income taxes required under APB Opinion 11 to the asset and liability method of
accounting for income taxes. Under the asset and liability method specified in
Statement 109, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recoverable or settled. Under Statement 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in the period that includes the enactment date.
(3) SERVICING INFORMATION
BancPLUS Mortgage acts as a correspondent for investors in securing and
servicing loans. BancPLUS Mortgage was servicing approximately 197,000 loans
with an aggregate unpaid principal balance of approximately $14,013,000,000 at
December 31, 1994. Amounts capitalized in connection with acquiring the right to
service mortgage loans were approximately $35,970,000 and $25,980,000 for the
years ended December 31, 1993 and 1994, respectively.
As of December 31, 1994, 24% of the servicing portfolio balance was secured
by properties in California, 13% in Texas, and 13% in Hawaii. There were no
other state concentrations in excess of 10% and there were loans in all 50
states. The portfolio included approximately 26% Federal Housing Administration
(FHA) loans in Government National Mortgage Association (GNMA) pools and 11%
Department of Veterans Affairs (VA) loans in GNMA pools. Federal National
Mortgage Association (FNMA) loans comprised approximately 37% of the portfolio
and Federal Home Loan Mortgage Corporation (FHLMC) loans comprised approximately
19% of the portfolio. The remaining 7% of the portfolio was spread among various
other investors.
BancPLUS Mortgage is generally required to advance, from corporate funds,
escrow and foreclosure costs for loans which it services. A portion of these
advances is not recoverable for the loans in GNMA pools. Upon foreclosure, an
FHA or VA property is typically conveyed to the Department of Housing and Urban
Development (HUD) or VA. However, VA has the authority to deny conveyance of the
foreclosed property and to reimburse BancPLUS Mortgage based on a percentage of
the loan's outstanding principal balance. BancPLUS Mortgage assumes
responsibility for the disposition of properties on which VA has denied
conveyance.
F-71
<PAGE> 217
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Included in the servicing portfolio at December 31, 1994 were approximately
$79,656,000 of loans serviced for FNMA or private investors and $1,166,000 of
uninsured conventional loans for which there is recourse to BancPLUS Mortgage in
the event of foreclosure.
Anticipated losses associated with these activities are provided for in the
consolidated financial statements. Actual losses have been within management's
expectations.
Custodial funds for the payment of insurance and taxes and unremitted
principal and interest are segregated in separate bank accounts excluded from
BancPLUS Mortgage's assets and liabilities. Such custodial funds approximated
$212,754,000 at December 31, 1994.
The Company carries blanket fidelity bond coverage in the aggregate amount
of $15,700,000 and errors and omissions coverage in the aggregate amount of
$16,000,000 at December 31, 1994.
(4) PROPERTIES AND EQUIPMENT
<TABLE>
The following is a detail of properties and equipment at December 31, 1993
and 1994 (in thousands):
<CAPTION>
ESTIMATED
USEFUL LIFE
IN YEARS 1993 1994
----------- ------- -------
<S> <C> <C> <C>
Building and improvements............................ 5 - 30 $ 6,660 $ 7,186
Data processing equipment............................ 3 - 7 3,439 4,109
Furniture, fixtures, and equipment................... 5 - 7 3,573 4,042
------- -------
13,672 15,337
Less accumulated depreciation........................ (3,077) (4,902)
------- -------
Properties and equipment, net.............. $10,595 $10,435
======= =======
</TABLE>
(5) NOTES PAYABLE
<TABLE>
Notes payable consisted of the following at December 31, 1993 and 1994 (in
thousands):
<CAPTION>
1993 1994
-------- --------
<S> <C> <C>
Committed operating lines of credit:
Mortgage loans credit facility............................... $258,645 $ 88,239
Receivables credit facility.................................. 12,183 3,800
Working capital credit facility.............................. 2,600 --
Pool advance credit facility................................. -- 198
-------- --------
Total committed operating lines of credit................. 273,428 92,237
Uncommitted operating lines of credit:
Mortgage loans and mortgage backed securities credit
facility.................................................. 123,444 24,764
Term debt.................................................... 62,500 76,368
Subordinated notes........................................... 40,857 40,880
Mortgage on corporate headquarters........................... 3,613 3,337
Notes payable to related party............................... 4,500 --
-------- --------
Total notes payable.................................. $508,342 $237,586
======== ========
</TABLE>
The committed operating lines permitted BancPLUS Mortgage to borrow an
aggregate maximum amount of $282,000,000 at December 31, 1994. These agreements
expire during 1995. The uncommitted operating lines permitted BancPLUS Mortgage
to borrow an additional aggregate maximum amount of
F-72
<PAGE> 218
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$275,000,000 at December 31, 1994. These agreements also expire during 1995.
Borrowings under these agreements bear interest at rates ranging from the
federal funds rate plus 1% to a range of prime minus .75% to prime plus 1.25%,
reduced in proportion to compensating balances maintained at the banks.
Commitment fees paid relating to committed operating lines of credit outstanding
at December 31, 1994 totaled $901,000 and ranged from .31% to .57%. These
amounts are amortized over the term of the commitments and are included as a
component of interest expense. Non-usage fees for the committed operating lines
range from .125% to .25%.
These operating lines of credit are secured by mortgage loans and mortgage
backed securities and all rights relating to or to be reimbursed for principal
and interest advances and foreclosure advances. All of these operating lines of
credit are cross-collateralized and cross-defaulted.
The agreements provide for various financial covenants, the most
restrictive of which place limitations on debt, other investments, transactions
with affiliates, and the payment of dividends. The agreements also require the
maintenance of certain financial ratios, including minimums for net worth,
portfolio size, and funds from operations. As of December 31, 1994, BancPLUS
Mortgage was in compliance with all requirements of the creditor banks.
BancPLUS Mortgage had notes payable outstanding to a group of banks which
provided $76,368,000 of acquisition term financing at December 31, 1994. The
notes mature in 2000 and bear interest at prime plus 1.25%, reduced in
proportion to the amount of compensating balances maintained at the banks.
Quarterly installments of principal in the amount of $3,632,000 plus interest
are due through the year 1999. A final principal payment of $3,728,000 plus
interest is due February 7, 2000. The notes are secured by the servicing
portfolios of both BancPLUS Mortgage and Honolulu Mortgage Company, Inc., a
wholly-owned subsidiary of BancPLUS Mortgage (subject to the restrictions
required by GNMA, FNMA, and FHLMC), and all of the issued and outstanding shares
of capital stock of certain BancPLUS Mortgage subsidiaries. These notes contain
financial covenants similar to those contained in the operating lines of credit
agreements. BancPLUS Mortgage met all of the requirements of the creditor banks
at December 31, 1994.
As of December 31, 1993 and 1994, BancPLUS Financial Corporation had
$41,000,000 of 11.5% subordinated notes outstanding. The notes become due
February 26, 2001 with annual redemptions of one-third of the original principal
to begin February 26, 1999. In connection with the issuance of those notes, the
note holders also acquired warrants to purchase 9,170 Stock Units (see note 10).
BancPLUS Mortgage has executed as co-maker with its subsidiary, Fiesta
Investments, Inc., a mortgage in the face amount of $4,150,000 to provide
financing for the purchase and improvement of its corporate headquarters. As of
December 31, 1994, $3,337,000 was outstanding on the note, which bears interest
at prime plus 1% (prime plus 2% beginning in 1995). The note requires monthly
principal installments of approximately $23,000 and matures on December 31,
1996.
Substantially all of the BancPLUS Mortgage debt is guaranteed by BancPLUS
Financial Corporation.
Aggregate cash payments for interest were $22,779,000 and $14,733,000
during the years ended December 31, 1993 and 1994, respectively.
During the first quarter of 1994, BancPLUS Mortgage refinanced all of its
operating lines of credit and term debt through a group of banks. As a result of
this refinancing, the Company recognized an extraordinary loss of $1,064,000
resulting from the write-off of certain unamortized commitment fees relating to
the refinanced debt.
F-73
<PAGE> 219
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) COMMITMENTS AND CONTINGENCIES
BancPLUS Mortgage had commitments at set prices and rates, which generally
were less than a year in duration, to make and purchase loans of approximately
$61,259,000 and to sell loans of approximately $107,344,000 at December 31,
1994. BancPLUS Mortgage also had commitments to make and purchase loans of
approximately $55,200,000 at December 31, 1994 for which prices and rates had
not been set. Market risk exists on the commitments to make and purchase loans
for which prices and rates are set as a result of potential future fluctuations
in mortgage interest rates. To mitigate this risk, BancPLUS Mortgage has entered
into sales agreements which, viewed independent of the related commitments to
make or purchase loans, are subject to offsetting market risk should there be
fluctuations in mortgage interest rates. All loans in the warehouse are covered
by these forward sales agreements. BancPLUS Mortgage conducts forward sales on a
percentage of the loans in process and, to a lesser extent, may use options to
hedge all or a portion of any remaining loans in process. Gains or losses on
options are deferred and recognized at the time the related mortgage loans are
sold or upon expiration of the option term. At December 31, 1994, such options
had a carrying value of $197,000 and a fair value of $134,000.
All loans are collateralized by the underlying real estate. The gross
amount of the commitments to make and purchase loans represents BancPLUS
Mortgage's maximum exposure to credit risk. To mitigate credit risk, BancPLUS
Mortgage securitizes and sells conventional loans on a non-recourse basis, and
securitizes and sells government loans through programs under which VA partially
guarantees or FHA insures BancPLUS Mortgage against credit risk.
BancPLUS Mortgage has been named as a defendant in various lawsuits arising
in the normal course of business. Management intends to vigorously defend the
lawsuits and is of the opinion that their resolution will not have a material
adverse effect on the accompanying financial statements.
<TABLE>
BancPLUS Mortgage has obligations under various operating leases. Lease
expense was $3,670,000 and $4,628,000 for the years ended December 31, 1993 and
1994, respectively. Additionally, BancPLUS Mortgage leases a portion of its
corporate headquarters facility to outside tenants. The future minimum rent
payments and receipts as of December 31, 1994 relating to these leasing
activities were as follows (in thousands):
<CAPTION>
LEASE LEASE
PAYMENTS INCOME
-------- ------
<S> <C> <C>
1995...................................................... $2,272 $601
1996...................................................... 1,713 449
1997...................................................... 978 247
1998...................................................... 532 95
1999 and thereafter....................................... 399 13
</TABLE>
(7) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments", requires that the Company disclose
estimated fair values for its financial instruments. Fair value estimates along
with the methods and assumptions used in developing such estimates are set forth
below for the Company's financial instruments.
Cash, Receivables and Payables -- The carrying amount approximates fair
value because these instruments are of short duration and do not present
significant credit concerns.
Mortgage Loans Held for Sale -- The fair value of mortgage loans held for
sale and covered by investor commitments is based on commitment prices. The fair
value of uncommitted mortgage loans is determined using current investor yield
requirements.
F-74
<PAGE> 220
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Excess Servicing Fees Receivable -- The fair value of excess servicing fees
receivable is determined by discounting the expected future cash flows using
current prepayment estimates.
Notes Payable -- The carrying amount approximates fair value due to the
variable interest rates associated with this debt. The fair value of the
subordinated notes is determined in accordance with the redemption requirements
of the notes.
<TABLE>
The estimated fair values of the Company's financial instruments are
summarized as follows (in thousands):
<CAPTION>
AT DECEMBER 31, 1994
-----------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents.................................... $ 7,901 $ 7,901
Mortgage loans held for sale................................. 120,871 120,895
Receivables, net of allowance................................ 29,836 29,836
Excess servicing fees receivable............................. 2,428 4,230
-------- --------
Total financial assets............................... $161,036 $162,862
======== ========
FINANCIAL LIABILITIES:
Notes payable................................................ 237,586 237,706
Payables..................................................... 23,490 23,490
-------- --------
Total financial liabilities.......................... $261,076 $261,196
======== ========
UNRECOGNIZED FINANCIAL INSTRUMENTS:
Fixed commitments to make and purchase loans................. 61,259 61,294
Floating commitments to make and purchase loans.............. 51,359 51,359
-------- --------
Total commitments to make and purchase loans......... $112,618 $112,653
======== ========
Commitments to sell loans, into which specific loans have not
been allocated............................................ $ 14,830 $ 14,877
======== ========
</TABLE>
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no ready market exists for a portion of the
Company's financial instruments, fair value estimates are based on judgments
regarding future expected losses, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets that are not considered
financial instruments include mortgage loan administration contracts, net of
excess servicing fees receivable and properties and equipment. In addition, the
tax ramifications related to the realization of unrealized gains and losses can
have a significant effect on fair value estimates and have not been considered
in the estimates.
F-75
<PAGE> 221
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) EMPLOYEE BENEFIT PLANS
BancPLUS Mortgage sponsors a savings and investment plan in which employees
may contribute a portion of their compensation. BancPLUS Mortgage matches a
portion of employee contributions, subject to the plan's defined vesting
schedule.
Honolulu Mortgage Company, Inc. sponsors a retirement plan which covers
substantially all of its employees. This retirement plan includes an employee
savings option with partial matching by Honolulu Mortgage Company, Inc. Annual
contributions are discretionary as defined in the plan agreement and such
contributions are funded on a current basis.
Total expense relating to these plans was $468,000 and $680,000 for the
years ended December 31, 1993 and 1994, respectively.
(9) INCOME TAXES
<TABLE>
The components of income taxes for the years ended December 31, 1993 and
1994 were as follows (in thousands):
<CAPTION>
1993 1994
------- ------
<S> <C> <C>
Current expense........................................... $ 355 $3,377
Deferred benefit.......................................... (4,583) (270)
------ ------
Total................................................ $(4,228) $3,107
====== ======
</TABLE>
<TABLE>
The expected income taxes for the years ended December 31, 1993 and 1994
differ from the recorded amounts as follows (in thousands):
<CAPTION>
1993 1994
-------- ------
<S> <C> <C>
Income (loss) before income taxes, extraordinary item, and
cumulative effect of a change in accounting principle........ $(12,261) $8,212
======== ======
Income tax at 34% statutory rate............................... (4,169) 2,792
Increase (decrease) in tax resulting from:
State and local income taxes................................. 28 248
Other, net................................................... (87) 67
-------- ------
Income tax expense (benefit)......................... $ (4,228) $3,107
======== ======
</TABLE>
F-76
<PAGE> 222
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1993 and 1994 are presented below (in thousands):
<CAPTION>
1993 1994
------ ------
<S> <C> <C>
Deferred tax assets:
Accruals not currently deductible for income tax purposes...... $ 673 $1,005
Valuation allowances........................................... 5,475 4,771
Excess of tax over book basis for organization costs........... 896 700
Properties and equipment, principally due to differences in
depreciation................................................ 130 88
Deferred installment sale income............................... -- 304
Other.......................................................... 103 150
------ ------
Total deferred tax assets.............................. 7,277 7,018
------ ------
Deferred tax liabilities:
Excess of book over tax basis for mortgage loan administration
contracts................................................... 5,972 5,136
Accounts receivable, principally due to allowance for
uncollectible accounts...................................... 412 533
Other.......................................................... -- 186
------ ------
Total deferred tax liabilities......................... 6,384 5,855
------ ------
Net deferred tax asset................................. $ 893 $1,163
====== ======
</TABLE>
Management believes that realization of the deferred tax assets is more
likely than not based on the expectation that such benefits will be utilized in
future consolidated tax returns.
At December 31, 1993, the net deferred tax asset of $893,000 was comprised
of $1,377,000 of deferred income tax benefit (included in prepaid expenses and
other assets) and $484,000 of deferred state income taxes payable (included in
accounts payable and accrued expenses). Prepaid expenses and other assets also
included $983,000 of current income taxes recoverable at December 31, 1993. At
December 31, 1994, the net deferred tax asset of $1,163,000 was comprised of
$1,473,000 of deferred income tax benefit (included in prepaid expenses and
other assets) and $310,000 of deferred state income taxes payable (included in
accounts payable and accrued expenses). Accounts payable and accrued expenses
also included $1,411,000 of current income taxes payable at December 31, 1994.
Aggregate cash payments for income taxes were $1,907,000 and $1,470,000
during the years ended December 31, 1993 and 1994, respectively.
(10) STOCKHOLDERS' EQUITY AND RELATED PARTY TRANSACTIONS
Under a Management Shareholders Agreement between the Company and its
shareholders, certain restrictions exist with respect to the transfer of shares
between shareholders which provide that the Company has a right of first refusal
on any transfer of shares to third parties. The terms of this Management
Shareholders Agreement include provisions whereby the Company may be required to
acquire the outstanding shares of specified "management shareholders" at "fair
value" in the event of termination of employment of such individuals in certain
cases. The agreement provides that any requirement of the Company to purchase
shares of terminated management shareholders expires on the day the common stock
of the Company is listed or admitted to trading on a national securities
exchange or quoted by NASDAQ.
The Company's preferred stock outstanding has a stated $1.30 per share
annual dividend which is payable quarterly and is cumulative. The Company
declared preferred stock dividends-in-kind, recorded at par value, of 159,300
and 181,041 shares during 1993 and 1994, respectively of which 41,755 and 47,454
were issued
F-77
<PAGE> 223
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
January 1, 1994 and 1995, respectively. The preferred shares have a liquidation
preference of $10 per share (exclusive of accrued dividends) and are redeemable
at the Company's option on or after October 31, 1996 for $10 per share.
In connection with the issuance of the 11.5% subordinated notes, the note
holders acquired warrants to purchase 9,170 Stock Units at a price of $202.71
per Unit. The warrants expire February 26, 2001. Each Stock Unit entitles the
holder to acquire 1 share of common stock and 10.271 shares of preferred stock
as of the warrant issuance date, adjusted proportionately for subsequent
issuances of stock. The value of the warrants of $186,000 was allocated to
additional paid in capital at the date of issuance.
Effective October 18, 1991, the Company granted options to the Chairman and
Chief Executive Officer of BancPLUS Mortgage to purchase up to 5,263 shares of
common stock at $95 per share and 52,632 shares of preferred stock at $9.50 per
share. The options are exercisable immediately and expire in ten years. Any
exercise must be made to acquire a proportionate number of common and preferred
shares. As of December 31, 1994, none of the options had been exercised.
From time to time, the Company's mortgage banking subsidiaries may make
mortgage loans to its officers and employees in the normal course of business.
The terms of such mortgage loans will be substantially similar to those provided
to the public, but may, in certain circumstances, be more favorable to such
officers or employees. It is the Company's policy to waive the origination fee
on officer and employee residential mortgage loans. Such mortgage loans are sold
to investors in the secondary market in the ordinary course of business.
Substantially all of the Company's net assets are attributable to BancPLUS
Mortgage's net assets, which are restricted. (See Note 5).
(11) BANCPLUS GROUP PERFORMANCE SHARE PLAN
Effective April 28, 1993, the Company adopted the BancPLUS Group
Performance Share Plan, pursuant to which designated employees of BancPLUS
Mortgage may be awarded "Performance Shares" entitling them to cash bonus
payments in the event of (1) distributions to common shareholders (after
outstanding preferred stock has been effectively redeemed and specified
distributions have been made to existing common shareholders), (2) termination
of employment in certain cases or (3) a change of control of the Company. These
Performance Shares vest ratably over a five-year period subsequent to the date
of grant unless the Company determines a different vesting schedule at the time
of grant. As of December 31, 1994, none of the events which trigger a cash bonus
have occurred.
A maximum of 3,627 Performance Shares are currently authorized under the
BancPLUS Group Performance Share Plan. As of December 31, 1994, a total of 3,500
Performance Shares have been issued under the Plan.
(12) SUBSEQUENT EVENTS
On February 28, 1995, all of the outstanding stock of BancPLUS Financial
Corporation was acquired by Barnett Mortgage Company. Barnett Mortgage Company
is a wholly-owned subsidiary of Barnett Banks, Inc., a registered bank holding
company headquartered in Jacksonville, Florida. The acquisition will be
accounted for as a purchase.
On February 28, 1995, the Company also repaid all its subordinated notes
outstanding and redeemed all of its outstanding preferred stock, stock warrants,
stock options, and Performance Shares. Additionally, BancPLUS Mortgage repaid
the mortgage on its corporate headquarters.
F-78
<PAGE> 224
================================================================================
NO DEALER, SALESPERSON, OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY HOMESIDE. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE EXCHANGE
NOTES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF HOMESIDE SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 15
The Exchange Offer.................... 23
Capitalization........................ 29
Unaudited Pro Forma Consolidated
Financial Information............... 30
Selected Consolidated Financial
Information......................... 37
Management's Discussion and Analysis
of Financial Condition and Results
of Operations -- HomeSide........... 42
Management's Discussion and Analysis
of Financial Condition and Results
of Operations -- HLI................ 48
Management's Discussion and Analysis
of Financial Condition and Results
of Operations -- HHI................ 61
Industry Overview..................... 72
Business.............................. 76
Overview............................ 76
HLI................................. 78
Acquisition of HHI.................. 87
The Acquisitions...................... 94
Management............................ 96
Security Ownership of Certain
Beneficial Owners and Management.... 103
Certain Relationships and Related
Transactions........................ 105
Description of Bank Credit
Agreement........................... 111
Description of the Exchange Notes..... 115
Description of the Initial Notes...... 138
Book Entry; Delivery and Form......... 138
Exchange Offer; Registration Rights... 140
Income Tax Considerations............. 142
Plan of Distribution.................. 144
Legal Matters......................... 144
Experts............................... 144
Index to Financial Statements......... F-1
</TABLE>
================================================================================
================================================================================
$200,000,000
[HOMESIDE LOGO]
OFFER TO EXCHANGE $1,000 IN PRINCIPAL AMOUNT OF 11 1/4% SERIES B SENIOR SECURED
SECOND PRIORITY NOTES DUE 2003 FOR EACH OF $1,000 IN PRINCIPAL AMOUNT OF
OUTSTANDING 11 1/4% SENIOR SECURED SECOND PRIORITY NOTES DUE 2003
---------------------------
PROSPECTUS
---------------------------
OCTOBER 22, 1996
===============================================================================
<PAGE> 225
THE EXCHANGE AGENT
FOR THE EXCHANGE OFFER IS:
THE BANK OF NEW YORK
By Registered or Certified Mail:
The Bank of New York
Reorganization Section
101 Barclay Street - 7E
New York, New York 10286
Attention: Reorganization Section
By Hand:
The Bank of New York
Reorganization Section
101 Barclay Street - 7E
New York, New York 10286
Attention: Enrique Lopez
By Overnight Courier:
The Bank of New York
Reorganization Section
101 Barclay Street - 7E
New York, New York 10286
Attention: Enrique Lopez
By Facsimile:
The Bank of New York
(212) 571-3080
Confirm by telephone:
(212) 815-2742
