<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 5, 1997
REGISTRATION NO. 333
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
------------------------
<TABLE>
HOMESIDE LENDING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<S> <C> <C>
FLORIDA 6162 59-2725415
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
7301 BAYMEADOWS WAY
JACKSONVILLE, FL 32256
(904) 281-3000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
ROBERT J. JACOBS, EXECUTIVE VICE PRESIDENT AND SECRETARY
HOMESIDE LENDING, INC.
7301 BAYMEADOWS WAY
JACKSONVILLE, FL 32256
(904) 281-3000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES OF ALL COMMUNICATIONS TO:
<TABLE>
<S> <C> <C>
MARY ELLEN O'MARA AND JONATHAN B. MILLER
HUTCHINS, WHEELER & DITTMAR BROWN & WOOD LLP
A PROFESSIONAL CORPORATION ONE WORLD TRADE CENTER
101 FEDERAL STREET NEW YORK, NEW YORK 10048
BOSTON, MASSACHUSETTS 02110 (212) 839-5300
(617) 951-6600
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
================================================================================
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED PRICE (1) FEE
- --------------------------------------------------------------------------------------------------------------
Debt Securities................... $1,000,000,000 $303,031
- --------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) Estimated pursuant to Rule 457 under the Securities Act of 1933 solely for
the purpose of calculating the registration fee.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
===============================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED FEBRUARY 5, 1997
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED , 1997)
$1,000,000,000
HOMESIDE LENDING, INC.
MEDIUM-TERM NOTES
DUE NINE MONTHS OR MORE FROM DATE OF ISSUE
------------------------
HomeSide Lending, Inc. (the "Issuer") may offer from time to time up to
$1,000,000,000 aggregate initial offering price, or the equivalent thereof in
one or more foreign or composite currencies, of its Medium-Term Notes Due Nine
Months or More From Date of Issue (the "Notes"). Such aggregate initial offering
price is subject to reduction as a result of the sale by the Issuer of other
Debt Securities described in the accompanying Prospectus. Each Note will mature
on any day nine months or more from the date of issue, as specified in the
applicable pricing supplement hereto (each, a "Pricing Supplement"), and may be
subject to redemption at the option of the Issuer or repayment at the option of
the Holder thereof, in each case, in whole or in part, prior to its Stated
Maturity Date, if specified in the applicable Pricing Supplement. In addition,
each Note will be denominated and/or payable in United States dollars or a
foreign or composite currency, as specified in the applicable Pricing
Supplement. The Notes, other than Foreign Currency Notes, will be issued in
minimum denominations of $1,000 and integral multiples thereof, unless otherwise
specified in the applicable Pricing Supplement, while Foreign Currency Notes
will be issued in the minimum denominations specified in the applicable Pricing
Supplement.
The Issuer may issue Notes that bear interest at fixed rates ("Fixed Rate
Notes") or at floating rates ("Floating Rate Notes"). The applicable Pricing
Supplement will specify whether a Floating Rate Note is a Regular Floating Rate
Note, a Floating Rate/Fixed Rate Note or an Inverse Floating Rate Note and
whether the rate of interest thereon is determined by reference to one or more
of the CD Rate, the CMT Rate, the Commercial Paper Rate, the Eleventh District
Cost of Funds Rate, the Federal Funds Rate, LIBOR, the Prime Rate or the
Treasury Rate (each, an "Interest Rate Basis"), or any other interest rate basis
or formula, as adjusted by any Spread and/or Spread Multiplier. Interest on each
Floating Rate Note will accrue from its date of issue and, unless otherwise
specified in the applicable Pricing Supplement, will be payable monthly,
quarterly, semiannually or annually in arrears, as specified in the applicable
Pricing Supplement, and on the Maturity Date. Unless otherwise specified in the
applicable Pricing Supplement, the rate of interest on each Floating Rate Note
will be reset daily, weekly, monthly, quarterly, semiannually or annually, as
specified in the applicable Pricing Supplement. Interest on each Fixed Rate Note
will accrue from its date of issue and, unless otherwise specified in the
applicable Pricing Supplement, will be payable semiannually in arrears on
and
of each year and on the Maturity Date. The Issuer may also issue Discount Notes,
Indexed Notes and Amortizing Notes.
The interest rate, or formula for the determination of the interest rate, if
any, applicable to each Note and the other variable terms thereof will be
established by the Issuer on the date of issue of such Note and will be
specified in the applicable Pricing Supplement. Interest rates or formulas and
other terms of Notes are subject to change by the Issuer, but no such change
will affect any Note previously issued or as to which an offer to purchase has
been accepted by the Issuer.
Each Note will be issued in book-entry form (a "Book-Entry Note") or in
fully registered certificated form (a "Certificated Note"), as specified in the
applicable Pricing Supplement. Each Book-Entry Note will be represented by one
or more fully registered global securities (the "Global Securities") deposited
with or on behalf of The Depository Trust Company (or such other depositary
identified in the applicable Pricing Supplement) (the "Depository") and
registered in the name of the Depository or the Depository's nominee. Interests
in the Global Securities will be shown on, and transfers thereof will be
effected only through, records maintained by the Depository (with respect to its
participants) and the Depository's participants (with respect to beneficial
owners). Except in limited circumstances, Book-Entry Notes will not be
exchangeable for Certificated Notes.
SEE "RISK FACTORS" COMMENCING ON PAGE S-11 FOR A DISCUSSION OF CERTAIN
RISKS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NOTES
OFFERED HEREBY.
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 SUPPLEMENT, THE PROSPECTUS OR ANY
SUPPLEMENT HERETO. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
==================================================================================================================================
<CAPTION>
<S> <C> <C> <C>
PRICE TO AGENTS' DISCOUNTS PROCEEDS TO
PUBLIC(1) AND COMMISSIONS(1)(2) ISSUER(1)(3)
Per Note............................. 100% [.125% - .750%] [99.875% - 99.250%]
- ----------------------------------------------------------------------------------------------------------------------------------
Total(4)............................. $1,000,000,000 $ -$ $ -$
==================================================================================================================================
</TABLE>
(1) Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Chase Securities Inc., NationsBank Capital Markets, Inc. and Smith Barney
Inc. (the "Agents"), individually or in a syndicate, may purchase Notes, as
principal, from the Issuer for resale to investors and other purchasers at
varying prices relating to prevailing market prices at the time of resale as
determined by the applicable Agent or, if so specified in the applicable
Pricing Supplement, for resale at a fixed offering price. Unless otherwise
specified in the applicable Pricing Supplement, any Note sold to an Agent as
principal will be purchased by such Agent at a price equal to 100% of the
principal amount thereof less a percentage of the principal amount equal to
the commission applicable to an agency sale (as described below) of a Note
of identical maturity. If agreed to by the Issuer and an Agent, such Agent
may utilize its reasonable efforts on an agency basis to solicit offers to
purchase the Notes at 100% of the principal amount thereof, unless otherwise
specified in the applicable Pricing Supplement. The Issuer will pay a
commission to an Agent, ranging from [.125% to .750%] of the principal
amount of a Note, depending upon its stated maturity, sold through an Agent.
Commissions with respect to Notes with stated maturities in excess of 30
years that are sold through such Agent will be negotiated between the Issuer
and such Agent at the time of such sale. See "Plan of Distribution."
(2) The Issuer has agreed to indemnify the Agents against, and to provide
contribution with respect to, certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Plan of Distribution."
(3) Before deducting expenses payable by the Issuer estimated at $ .
(4) Or the equivalent thereof in one or more foreign or composite currencies.
------------------------
The Notes are being offered on a continuing basis by the Issuer to or
through the Agents. Unless otherwise specified in the applicable Pricing
Supplement, the Notes will not be listed on any securities exchange. There is no
assurance that the Notes offered hereby will be sold or, if sold, that there
will be a secondary market for the Notes or liquidity in the secondary market if
one develops. The Issuer reserves the right to cancel or modify the offer made
hereby without notice. The Issuer or an Agent, if it solicits the offer on an
agency basis, may reject any offer to purchase Notes in whole or in part. See
"Plan of Distribution."
------------------------
MERRILL LYNCH & CO.
CHASE SECURITIES INC.
NATIONSBANK CAPITAL MARKETS, INC.
SMITH BARNEY INC.
The date of this Prospectus Supplement is , 1997.
<PAGE> 3
IN CONNECTION WITH AN OFFERING OF NOTES PURCHASED BY ONE OR MORE AGENTS AS
PRINCIPAL ON A FIXED OFFERING PRICE BASIS, SUCH AGENT(S) MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF NOTES AT A LEVEL
ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING,
IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
------------------------
Unless otherwise referred to herein or the context otherwise requires,
references to "HomeSide" shall mean HomeSide Lending, Inc. (the "Issuer"), a
Florida corporation, and its consolidated subsidiaries. The Issuer was formerly
known as BancBoston Mortgage Corporation ("BBMC"). The Issuer is an indirect
wholly-owned subsidiary of HomeSide, Inc. (the "Parent"), a Delaware
corporation. The Parent was formed in December 1995, but had no operations prior
to its acquisition of BBMC on March 15, 1996 (hereafter the "HLI Acquisition"),
which was accounted for as a purchase transaction. BBMC prior to its acquisition
is hereinafter sometimes referred to as "HLI". The Parent acquired Barnett
Mortgage Company ("BMC"), now known as HomeSide Holdings, Inc. ("HHI"), on May
31, 1996 (the "HHI Acquisition"), which was accounted for as a purchase
transaction. HHI is a wholly-owned subsidiary of the Parent, and the Issuer is a
wholly-owned subsidiary of HHI. All of the assets and liabilities of HHI, except
for certain portions of HHI's GNMA servicing rights, have been transferred to
the Issuer. BBMC and BMC operated on a fiscal year end of December 31. The
Parent, HHI and the Issuer have adopted a February 28 fiscal year end and all
references herein to 1997 refer to the fiscal year ending February 28, 1997.
All combined or pro forma financial information for HomeSide as of November
30, 1996 or for the period March 16, 1996 to November 30, 1996 has been prepared
using HomeSide information as of November 30, 1996 or for the period beginning
March 16, 1996 and HHI information (excluding the net income related to the
assets retained by HHI) beginning April 1, 1996 to May 30, 1996. All information
for HomeSide presented as of or for the period ended March 31, 1996 has been
prepared by combining information for BBMC for the period ended March 15, 1996
with information for HomeSide for the period 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.
S-2
<PAGE> 4
- --------------------------------------------------------------------------------
PROSPECTUS SUPPLEMENT 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
Supplement or the Prospectus.
HOMESIDE
HomeSide is one of the largest full-service residential mortgage banking
companies in the United States, formed through the acquisition of the mortgage
banking operations of The First National Bank of Boston ("Bank of Boston" or
"BKB") and Barnett Banks, Inc. ("Barnett"). HomeSide's strategy emphasizes
variable cost mortgage origination and low cost servicing. On a combined basis
HomeSide's origination volume and servicing portfolio would have been $14.7
billion and $73.9 billion, respectively, for and as of the year ended December
31, 1995, ranking HomeSide as the 5th largest originator and 7th largest
servicer in the United States for 1995 based on data published by National
Mortgage News. For and as of the nine months ended November 30, 1996, HomeSide's
loan originations and acquisitions were $18.9 billion and its servicing
portfolio was $87.7 billion.
The residential mortgage market totaled over $3.6 trillion in 1995 and is
the second largest debt market in the world, exceeded only by the United States
Treasury market. The residential mortgage market has grown at a compound annual
rate of approximately 8% since 1985. HomeSide competes in a mortgage banking
market which is highly fragmented with no single company controlling or
dominating 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.
Residential mortgage lenders compete primarily on the basis of loan pricing and
service, making effective cost management essential. The industry has
experienced rapid consolidation which has been accelerated by the introduction
of significant technology improvements and the economies of scale present in
mortgage servicing. The top 25 mortgage loan servicers have increased their
aggregate market share from 20.7% in 1990 to 39.1% in 1995.
HomeSide's business strategy is to increase the volume of its loan
originations and the size of its servicing portfolio while continuing to improve
operating efficiencies. In originating mortgages, HomeSide focuses on variable
cost channels of production, including correspondent, broker, consumer direct,
affinity, and co-issue sources. HomeSide also pursues strategic relationships
such as its existing 5-year agreements to acquire and service residential
mortgage loans from BKB and Barnett production sources, which, for the period
May 31, 1996 through November 30, 1996, represented 19.5% of HomeSide's loan
production. Management believes that these variable cost channels of production
deliver consistent origination opportunities for HomeSide without the fixed cost
investment associated with traditional retail mortgage branch networks. HomeSide
believes that its ongoing investment in technology will further enhance and
expand existing processing capabilities and improve its efficiency. Based on
independent surveys of direct cost per loan and loans serviced per employee,
management believes that HomeSide has been one of the industry's most efficient
mortgage servicers.
HomeSide plans to build its core operations through (i) improved economies
of scale in servicing costs; (ii) increased productivity using proprietary
technology; and (iii) expanded and diversified variable cost origination
channels. In addition, HomeSide intends to pursue additional loan portfolio
acquisitions and strategic origination relationships similar to the existing BKB
and Barnett arrangements.
HomeSide's business activities consist primarily of:
- Mortgage production: origination and purchase of residential single
family mortgage loans through multiple channels including
correspondents, strategic partners (BKB and Barnett), mortgage
brokers, co-issue partners, direct consumer telemarketing and affinity
programs;
- Servicing: administration, collection and remittance of monthly
mortgage principal and interest payments, collection and payment of
property taxes and insurance premiums and management of certain loan
default activities;
- --------------------------------------------------------------------------------
S-3
<PAGE> 5
- --------------------------------------------------------------------------------
- Secondary marketing: 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 or
private securities to investors; and
- Risk management: management of a program designed primarily to
protect the economic performance of the servicing portfolio that could
otherwise be adversely affected by increased loan prepayments due to
declines in interest rates.
Ownership. The Issuer is an indirect wholly-owned subsidiary of the
Parent. Thomas H. Lee Equity Fund III, L.P. (the "Fund") and certain affiliates
of Thomas H. Lee Company (collectively, "THL"), Madison Dearborn Capital
Partners, L.P. ("MDP"), Bank of Boston and Siesta Holdings, Inc., an affiliate
of Barnett ("Siesta") own in the aggregate approximately 79% of the outstanding
common stock, par value $0.01 per share, of the Parent (the "Common Stock").
THL, MDP, Bank of Boston and Siesta are collectively referred to herein as the
"Principal Shareholders." See "Security Ownership of Certain Beneficial Owners
and Management" in the accompanying Prospectus.
RISK FACTORS
See "Risk Factors" starting on page S-11 for a discussion of certain
factors which should be considered by prospective investors in evaluating an
investment in the securities offered hereby.
- --------------------------------------------------------------------------------
S-4
<PAGE> 6
- --------------------------------------------------------------------------------
HOMESIDE
SUMMARY UNAUDITED HISTORICAL FINANCIAL AND OPERATING INFORMATION
The following table sets forth summary unaudited historical financial and
operating information for the Issuer and its subsidiaries for the period ended
May 31, 1996, for each of the three months ended August 31, 1996 and November
30, 1996 and for the period March 16, 1996 to November 30, 1996. As a result of
the acquisition of HHI by the Parent on May 31, 1996, certain assets and
liabilities were transferred to the Issuer and consequently are included in
results for HomeSide as of and for the period commencing May 31, 1996. Such
information should be read in conjunction with, and is qualified in its entirety
by reference to, HomeSide's consolidated financial statements, pro forma
financial information and related notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE THREE FOR THE THREE FOR THE PERIOD
MARCH 16, 1996 MONTHS ENDED MONTHS ENDED MARCH 16, 1996
TO MAY 31, 1996 AUGUST 31, 1996 NOVEMBER 30, 1996 TO NOVEMBER 30, 1996
--------------- --------------- ----------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Mortgage servicing fees.......... $ 41,485 $ 82,179 $ 90,492 $ 214,156
Amortization of mortgage
servicing rights............... (16,442) (39,753) (48,120) (104,315)
----------- ----------- ----------- -----------
Net servicing revenue.......... 25,043 42,426 42,372 109,841
Interest income.................. 12,719 22,270 25,241 60,230
Interest expense................. (12,592) (17,684) (16,140) (46,416)
----------- ----------- ----------- -----------
Net interest revenue........... 127 4,586 9,101 13,814
Net mortgage origination
revenue........................ 10,810 16,273 16,521 43,604
Other income..................... 107 355 79 541
----------- ----------- ----------- -----------
Total revenues......... 36,087 63,640 68,073 167,800
Expenses:
Salaries and employee benefits... 11,480 21,177 20,650 53,307
Occupancy and equipment.......... 1,846 3,084 3,337 8,267
Servicing losses on
investor-owned loans........... 3,938 4,058 4,957 12,953
Other expenses................... 5,345 12,196 11,391 28,932
----------- ----------- ----------- -----------
Total expenses......... 22,609 40,515 40,335 103,459
Income before income taxes....... 13,478 23,125 27,738 64,341
Income tax expense............... 5,526 9,481 11,373 26,380
----------- ----------- ----------- -----------
Net income(e).................... $ 7,952 $ 13,644 $ 16,365 $ 37,961
=========== =========== =========== ===========
SELECTED OPERATING DATA:
Volume of loans originated and
acquired....................... $ 3,780,236 $ 9,565,199(b) $ 5,540,875 $18,886,310(b)
Loan servicing portfolio
(at period end)................ 77,351,849 84,818,725(b) 87,712,746 87,712,746
Loan servicing portfolio
(average during the period).... 43,670,497(a) 81,223,664 86,535,928 69,643,494(c)
Weighted average interest rate
for the servicing portfolio (at
period end).................... 7.86% 7.92% 7.91% 7.91%
Weighted average servicing fee
for the servicing portfolio (at
period end).................... 0.367% 0.363% 0.359% 0.359%
EBITDA(d)........................ $ 43,743 $ 83,720 $ 93,868 $ 221,331
Ratio of EBITDA to total interest
expense........................ 3.47x 4.73x 5.82x 4.77x
</TABLE>
(footnotes on following page)
- --------------------------------------------------------------------------------
S-5
<PAGE> 7
<TABLE>
<CAPTION>
AT AT AT
MAY 31, 1996 AUGUST 31, 1996 NOVEMBER 30, 1996
------------ --------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Mortgage loans held for sale...................... $ 974,484 $ 1,290,841 $ 1,101,229
Mortgage servicing rights......................... 1,216,106 1,409,226 1,321,639
Total assets...................................... 2,640,669 2,909,346 2,833,601
Warehouse credit facility......................... 954,994 1,245,591 1,074,583
Long-term debt(e)................................. 968,059 864,067 957,508
Total liabilities................................. 2,101,703 2,356,705 2,276,265
Total stockholder's equity........................ 538,966 552,641 557,336
</TABLE>
- ---------------
(a) Period information is for the period March 1, 1996 through May 31, 1996.
(b) Includes bulk purchases of $4.1 billion.
(c) Period information is for the period March 1, 1996 through November 30,
1996.
(d) EBITDA represents earnings before total interest expense, taxes,
depreciation and amortization, including amortization of mortgage servicing
rights. Depreciation and amortization, excluding amortization of mortgage
servicing rights, was $1.2 million, $3.2 million, $1.9 million and $6.3
million for the period March 16, 1996 to May 31 1996, the three months ended
August 31, 1996 and November 30, 1996 and the period March 16, 1996 to
November 30, 1996, respectively. In addition to EBITDA, other major elements
of cash flows from investing and financing activities are important in
determining available cash flow. Cash flows used in operating activities
totalled $127.0 million, $210.5 million and $169.0 million for the period
March 16, 1996 to May 31, 1996, the three months ended August 31, 1996 and
the period March 16, 1996 to November 30, 1996, respectively, and cash flows
provided by operating activities totalled $168.6 million for the three
months ended November 30, 1996. EBITDA includes substantially all
expenditures for operating expenses.
Cash flows used in investing activities were $363.2 million, $205.8 million,
$106.8 million and $675.7 million for the period March 16, 1996 to May 31
1996, the three months ended August 31, 1996 and November 30, 1996 and the
period March 16, 1996 to November 30, 1996, respectively.
The Bank Credit Agreement, as hereinafter defined, represents the major
source of financing for cash flows. Cash flow provided by financing
activities totalled $748.6 million, $185.9 million and $845.9 million for
the period March 16, 1996 to May 31 1996, the three months ended August 31,
1996 and the period March 16, 1996 to November 30, 1996, respectively. Cash
flow used in financing activities was $88.6 million for the three months
ended November 30, 1996. Unused line of credit totalled approximately $449.3
million at November 30, 1996.
Management believes that the presentation of EBITDA facilities the reader's
evaluation of the Issuer'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.
(e) On May 14, 1996 the Parent issued $200 million of 11.25% Notes due 2003. All
of the outstanding common stock of HomeSide and HHI is pledged as security
on the notes. The only significant asset of the Parent is its investment in
HomeSide and HHI common stock. The Parent is dependent on cash payments from
HomeSide to service its debt obligations. The notes, and related interest
expense, are not reflected in the financial statements of HomeSide.
S-6
<PAGE> 8
- --------------------------------------------------------------------------------
HOMESIDE
SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
The summary unaudited pro forma consolidated financial information for
HomeSide set forth below has been derived from financial information included in
the accompanying Prospectus and all such information is presented on a pro forma
basis, giving effect to the HHI Acquisition and the HLI Acquisition by the
Parent. In addition, the unaudited pro forma consolidated financial information
gives effect to the issuance of Common Stock by the Parent to the public as if
such transaction occurred on March 16, 1996, for income statement data as if
each such transaction had occurred on March 15, 1996. 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 information should be read in
conjunction with, and is qualified in its entirety by reference to, the
historical financial statements of BBMC and HHI and the unaudited pro forma
consolidated financial information for HomeSide and the related notes thereto
included in the accompanying Prospectus.
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE FOR THE
PERIOD THREE THREE PERIOD
FOR THE YEAR MARCH 16, MONTHS MONTHS MARCH 16,
ENDED 1996 ENDED ENDED 1996 TO
DECEMBER 31, TO MAY 31, AUGUST 31, NOVEMBER 30, NOVEMBER 30,
1995 1996 1996 1996 1996
------------ ---------- ---------- ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Revenues:
Mortgage servicing fees........................ $ 296.4 $ 61.3 $ 82.1 $ 90.5 $ 233.9
Gain on risk management contracts(a)........... 108.7 -- -- -- --
Amortization of mortgage servicing rights...... (170.0) (25.7) (39.8) (48.1) (113.6)
------- ------- ------- ------- -------
Net servicing revenue........................ 235.1 35.6 42.3 42.4 120.3
Interest income................................ 66.9 19.3 22.3 25.2 66.8
Interest expense............................... (49.0) (14.7) (17.1) (15.5) (47.3)
------- ------- ------- ------- -------
Net interest revenue......................... 17.9 4.6 5.2 9.7 19.5
Net mortgage origination revenue............... 0.7 11.8 16.3 16.5 44.6
Other income................................... 0.7 0.1 0.4 0.1 0.6
------- ------- ------- ------- -------
Total revenues........................ 254.4 52.1 64.2 68.7 185.0
Total expenses........................ 142.7 35.3 40.6 40.3 116.2
------- ------- ------- ------- -------
Income before income taxes..................... 111.7 16.8 23.6 28.4 68.8
Income tax expense............................. 45.7 6.9 9.7 11.7 28.3
------- ------- ------- ------- -------
Net income(e).................................. $ 66.0 $ 9.9 $ 13.9 $ 16.7 $ 40.5
======= ======= ======= ======= =======
SELECTED OPERATING DATA:
Volume of loans originated and acquired........ $14,652 $ 4,762 $ 9,565(c) $ 5,541 $19,868(c)
Loan servicing portfolio (at period end)....... 73,886 77,352 84,819(c) 87,713 87,713
Loan servicing portfolio (average during the
period)...................................... 68,873 76,708(b) 81,224 86,536 69,643(d)
Weighted average interest rate for the
servicing portfolio (at period end).......... 8.01% 7.86% 7.92% 7.91% 7.91%
Weighted average servicing fee for the
servicing portfolio (at period end).......... 0.351% 0.355% 0.363% 0.359% 0.359%
</TABLE>
(footnotes on following page)
- --------------------------------------------------------------------------------
S-7
<PAGE> 9
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AT
NOVEMBER 30, 1996
-------------------------
ACTUAL AS ADJUSTED(f)
---------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
SELECTED BALANCE SHEET DATA:
Total assets.................................................................. $2,833,601 $2,833,601
Warehouse credit facility..................................................... 1,074,583 1,074,583
Long-term debt(e)............................................................. 957,508 918,710
Total liabilities............................................................. 2,276,265 2,237,467
Total stockholder's equity.................................................... 557,336 596,134
<FN>
- ---------------
(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. See Note 3 of HomeSide's November 30, 1996
financial statements on F-5 in the accompanying Prospectus for a description
of HomeSide's hedge accounting policy.
(b) Period information is for the period March 1, 1996 through May 31, 1996.
(c) Includes bulk purchases of $4.1 billion.
(d) Period information is for the period March 1, 1996 through November 30,
1996.
(e) On May 14, 1996, the Parent issued $200 million of 11.25% Notes due 2003.
All of the outstanding common stock of HomeSide and HHI is pledged as
security on the notes. The only significant asset of the Parent is its
investment in HomeSide common stock. The Parent is dependent on cash
payments from HomeSide to service its debt obligations. The notes, and
related interest expense, are not reflected in the financial statements of
HomeSide.
(f) Adjusted to give effect to the sale of Common Stock by the Parent and the
application of a portion of the net proceeds contributed to HomeSide as if
such transaction had occurred on November 30, 1996. See "Index to Financial
Statements -- Unaudited Pro Forma Consolidated Financial Information" in the
accompanying Prospectus.
</TABLE>
- --------------------------------------------------------------------------------
S-8
<PAGE> 10
- --------------------------------------------------------------------------------
HLI
SUMMARY HISTORICAL FINANCIAL AND OPERATING INFORMATION
The following table sets forth summary historical financial and operating
information for HLI (formerly BancBoston Mortgage Corporation) for the periods
prior to its acquisition by the Parent. Such information should be read in
conjunction with, and is qualified in its entirety by reference to, the
consolidated financial statements, pro forma financial information and related
notes included in the accompanying Prospectus.
<TABLE>
<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 stockholder's
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>
- --------------------------------------------------------------------------------
S-9
<PAGE> 11
- --------------------------------------------------------------------------------
HHI
SUMMARY HISTORICAL FINANCIAL AND OPERATING INFORMATION
The following table sets forth summary historical financial and operating
information for HHI (formerly Barnett Mortgage Company) for the periods prior to
its acquisition by the Parent. Such information should be read in conjunction
with, and is qualified in its entirety by reference to, the consolidated
financial statements, pro forma financial information and related notes included
in the accompanying Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, FOR THE THREE FOR THE PERIOD
------------------------------------------------------- MONTHS ENDED APRIL 1, 1996
1991 1992 1993 1994(A) 1995(B) JUNE 30, 1995 TO 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 stockholder's equity..... 19,406 22,625 26,257 84,902 231,828 244,735 (e)
<CAPTION>
FOR THE SIX FOR THE PERIOD
MONTHS ENDED JANUARY 1, 1996
JUNE 30, 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 stockholder's equity..... 244,735 (e)
<FN>
- ---------------
(a) Includes operations of Loan America Financial Corporation since its
acquisition in October 1994.
(b) Includes operations of BancPLUS Financial Corporation since its acquisition
in February 1995.
(c) Information not available for 1991 and 1992.
(d) BMC 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) BMC 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 as of May 31, 1996.
</TABLE>
- --------------------------------------------------------------------------------
S-10
<PAGE> 12
RISK FACTORS
In addition to the other information in this Prospectus Supplement and the
accompanying Prospectus, the following factors should be considered carefully
before investing in the securities offered hereby.
AVAILABILITY OF FUNDING SOURCES; SUBSTANTIAL LEVERAGE
HomeSide requires substantial financing for its business operations. Such
financing is currently provided under a credit agreement entered into by the
Issuer on January 31, 1997, which amended and restated the credit agreement
originally entered into in connection with the HHI Acquisition (the "Bank Credit
Agreement"). As of November 30, 1996, the Issuer had aggregate outstanding
indebtedness of approximately $2,010.8 million, and $449.3 million of additional
availability under the Bank Credit Agreement. HomeSide may incur additional
indebtedness in the future, subject to certain limitations contained in the
instruments governing its current indebtedness. The financial statements of the
Issuer do not reflect debt issued by the Parent. See Note 7 of Notes to
Consolidated Financial Statements of HomeSide on F-11 in the accompanying
Prospectus.
The degree to which HomeSide is leveraged could have important consequences
to holders of the securities offered hereby, 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, 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;
and (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.
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 refinance its bank credit facilities or the securities offered hereby are
financial market conditions and the value and performance of the Issuer prior to
the time of such refinancing. There can be no assurance that any such
refinancing can be successfully completed. See "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Homeside -- Liquidity and Capital Resources," "Description of Bank Credit
Agreement," "Description of the Parent Notes" and "Description of Debt
Securities" in the accompanying Prospectus.
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.
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 in the industry 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 becomes negative, HomeSide's results of operations could be
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- HomeSide -- Liquidity and Capital
Resources" in the accompanying Prospectus.
S-11
<PAGE> 13
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
Fannie Mae, Federal Home Loan Mortgage Corporation ("FHLMC" or "Freddie Mac")
and the private investors to whom HomeSide sells loans based on this analysis.
To the extent that this strategy utilized by HomeSide is not successful,
HomeSide's profitability may be adversely affected. For each year since 1990,
HomeSide has not experienced secondary market losses.
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 their mortgage loans become greater. 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. 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 servicing rights to a third party or the proceeds from such a sale. 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. See
"Business -- HomeSide -- Servicing Portfolio Hedging Program" in the
accompanying Prospectus.
HLI recognized a gain on risk management contracts of $108.7 million in
1995, of which $86.5 million was unrealized. During the first calendar 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 16, 1996 to August 31, 1996, long-term
interest rates continued to increase. Accordingly, the risk management contracts
declined in total value by $74.7 million from March 16, 1996 to August 31, 1996.
During the three months ended November 30, 1996, interest rates declined and the
value of risk management contracts increased by $133.3 million. 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.
See "Business -- HomeSide -- Servicing Portfolio Hedging Program" in the
accompanying Prospectus.
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 representations 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, acquires and sells. Accordingly,
HomeSide believes that future charges to net income relating to loan repurchases
may
S-12
<PAGE> 14
be necessary as loan origination volume increases. See
"Business -- HomeSide -- Secondary Marketing" in the accompanying Prospectus.
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 advance
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 Federal Housing Administration ("FHA") and Veterans Administration
("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 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. HLI's servicing losses
on investor-owned loans totaled $2.8 million, $7.2 million and $10.0 million for
the years 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.
HomeSide's servicing losses on investor-owned loans were $13.0 million for the
period March 16, 1996 to November 30, 1996, also 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. With respect to 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.
Economic downturns in states in which HomeSide has a significant
concentration of business could have an adverse impact on HomeSide's results of
operations. Loans in Florida and California represented 19.6% and 15.6%,
respectively, of HomeSide's servicing portfolio at November 30, 1996.
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.
Furthermore, increasing consolidation in the mortgage industry is leading to an
increased market share for the largest mortgage companies. At the same time,
Fannie Mae and FHLMC are developing technologies and business practices that
could reduce their reliance on large mortgage companies for loan production and
enable them to access smaller producers for volume. 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
relation-
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ships 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,
Fannie Mae, FHLMC, Government National Mortgage Association ("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 Fannie
Mae, FHLMC, GNMA and HUD and to comply with each regulatory entity's own
financial requirements. HomeSide's business is also subject to examination by
Fannie Mae, 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, the Real Estate Settlement Procedures Act
("RESPA"), the Fair Housing Act, and the regulations promulgated thereunder,
which, among other provisions, prohibit discrimination, prohibit unfair and
deceptive trade practices, and require the disclosure of certain basic
information to mortgagors concerning credit terms and settlement costs, limit
fees and charges paid by borrowers and lenders, and otherwise regulate terms and
conditions of credit and the procedures by which credit is offered and
administered. 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. Such regulatory requirements
are subject to change from time to time and may in the future become more
restrictive, thereby making compliance more difficult or expensive or otherwise
restricting HomeSide's ability to conduct its business as such business is now
conducted.
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 (either directly or through the Parent), HomeSide (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.
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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 and paying 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. In recently denying a motion to dismiss in a purported class action
brought against certain unrelated mortgage companies in a federal court in
Virginia, the court stated that the payment of certain fees to mortgage brokers
violates RESPA. No prediction can be made as to whether the ultimate decision in
such class action will be adverse to the defendant mortgage companies, and,
while the matter is still in a preliminary stage, based upon available
information, management of HomeSide believes that an adverse result ultimately
having general application to the mortgage banking industry (including
HomeSide), would not have a material adverse impact on the consolidated
financial position of HomeSide, nor upon the consolidated results of operations
for any fiscal period. See "Business -- HomeSide -- Litigation" in the
accompanying Prospectus.
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 Fannie Mae, FHLMC, GNMA
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 Fannie Mae, FHLMC, GNMA 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 Fannie Mae, 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.
LIMITED OPERATING HISTORY AS AN INDEPENDENT COMPANY; RELATIONSHIP WITH BKB AND
BARNETT
Prior to the consummation of the HLI Acquisition, HLI was 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.
Accordingly, HomeSide no longer relies on such entities and there can be no
assurances that it will be able to successfully operate as an independent
company. See "Certain Relationships and Related Transactions" in the
accompanying Prospectus.
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PRINCIPAL SHAREHOLDERS
The Principal Shareholders of the Parent collectively own approximately 79%
of the outstanding shares of Common Stock of the Parent. Accordingly, the
Principal Shareholders of the Parent, if they act in concert, are able to
control the election of the Board of Directors of the Parent and thus the
direction and future operations of the Issuer without the supporting vote of any
other stockholder of the Parent, including decisions regarding acquisitions and
other business opportunities, the declaration of dividends and the issuance of
additional shares of Common Stock and other securities. Certain decisions
concerning the operations or financial structure of HomeSide may present
conflicts of interest between the owners of the Parent's capital stock and the
holders of the securities offered hereby. See "Security Ownership of Certain
Beneficial Owners and Management" and "Certain Relationships and Related
Transactions" in the accompanying Prospectus.
CERTAIN RISK FACTORS RELATING TO THE NOTES
This Prospectus Supplement does not describe all of the risks of an
investment in Notes, whether resulting from such Notes being denominated or
payable in or determined by reference to a currency or composite currency other
than United States dollars or to one or more interest rate, currency or other
indices or formulas, or otherwise. The Issuer and the Agents disclaim any
responsibility to advise prospective investors of such risks as they exist at
the date of this Prospectus Supplement or as they change from time to time.
Prospective investors should consult their own financial and legal advisors as
to the risks entailed by an investment in such Notes and the suitability of
investing in such Notes in light of their particular circumstances. Such Notes
are not an appropriate investment for investors who are unsophisticated with
respect to foreign currency transactions or transactions involving the
applicable interest rate or currency index or other indices or formulas.
Prospective investors should carefully consider, among other factors, the
matters described below.
STRUCTURE RISKS
An investment in Notes indexed, as to principal, premium, if any, and/or
interest, if any, to one or more interest rate, currency (including exchange
rates and swap indices between currencies or composite currencies) or other
indices or formulas, either directly or inversely, entails significant risks
that are not associated with similar investments in a conventional fixed rate or
floating rate debt security. Such risks include, without limitation, the
possibility that such indices or formulas may be subject to significant changes,
that no interest will be payable in respect of such Notes or will be payable at
a rate lower than one applicable to a conventional fixed rate or floating rate
debt security issued by the Issuer at the same time, that repayment of the
principal and/or premium, if any, in respect of such Notes may occur at times
other than that expected by the investors, and that the investors could lose all
or a substantial portion of principal and/or premium, if any, payable with
respect to such Notes on the Maturity Date (as defined under "Description of
Notes--General"). Such risks depend on a number of interrelated factors,
including economic, financial and political events, over which the Issuer has no
control. Additionally, if the formula used to determine the amount of principal,
premium, if any, and/or interest, if any, payable with respect to such Notes
contains a multiplier or leverage factor, the effect of any change in the
applicable index or indices or formula or formulas will be magnified. In recent
years, values of certain indices and formulas have been highly volatile and such
volatility may be expected to continue in the future. Fluctuations in the value
of any particular index or formula that have occurred in the past are not
necessarily indicative, however, of fluctuations that may occur in the future.
Any optional redemption feature of Notes might affect the market value of
such Notes. Since the Issuer may be expected to redeem such Notes when
prevailing interest rates are relatively low, holders generally will not be able
to reinvest the redemption proceeds in a comparable security at an effective
interest rate as high as the current interest rate on such Notes.
ABSENCE OF PUBLIC MARKET
Prior to the offering of any Notes hereby, there has been no public market
for such Notes and there can be no assurance that an active market for such
Notes will develop or continue after the offering thereof, or as
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to the price at which holders would be able to sell such Notes. Unless otherwise
specified in the applicable Pricing Supplement, HomeSide does not intend to
apply for listing of the securities offered hereby on any securities exchange or
through the National Association of Securities Dealers Automated Quotation
System. See "Plan of Distribution."
The secondary market, if any, for Notes will be affected by a number of
factors independent of the creditworthiness of the Issuer and the value of the
applicable index or indices or formula or formulas, including the complexity and
volatility of each such index or formula, the method of calculating the
principal, premium, if any, and/or interest, if any, in respect of such Notes,
the time remaining to the maturity of such Notes, the outstanding amount of such
Notes, any redemption features of such Notes, the amount of other debt
securities linked to such index or formula and the level, direction and
volatility of market interest rates generally. Such factors also will affect the
market value of such Notes. In addition, certain Notes may be designed for
specific investment objectives or strategies and, therefore, may have a more
limited secondary market and experience more price volatility than conventional
debt securities. Holders may not be able to sell such Notes readily or at prices
that will enable them to realize their anticipated yield. No investor should
purchase Notes unless such investor understands and is able to bear the risk
that such Notes may not be readily saleable, that the value of such Notes will
fluctuate over time and that such fluctuations may be significant.
EXCHANGE RATES AND EXCHANGE CONTROLS
An investment in Foreign Currency Notes (as defined under "Description of
Notes--General") entails significant risks that are not associated with a
similar investment in a debt security denominated and payable in United States
dollars. Such risks include, without limitation, the possibility of significant
changes in the rate of exchange between the United States dollar and the
Specified Currency (as defined under "Description of Notes--General") and the
possibility of the imposition or modification of exchange controls by the
applicable governments or monetary authorities. Such risks generally depend on
factors over which the Issuer has no control, such as economic, financial and
political events and the supply and demand for the applicable currencies or
composite currencies. In addition, if the formula used to determine the amount
of principal, premium, if any, and/or interest, if any, payable with respect to
Foreign Currency Notes contains a multiplier or leverage factor, the effect of
any change in the applicable currencies or composite currencies will be
magnified. In recent years, rates of exchange between the United States dollar
and foreign or composite currencies have been highly volatile and such
volatility may be expected to continue in the future. Fluctuations in any
particular exchange rate that have occurred in the past are not necessarily
indicative, however, of fluctuations that may occur in the future. Depreciation
of the Specified Currency applicable to a Foreign Currency Note against the
United States dollar would result in a decrease in the United States dollar-
equivalent yield of such Foreign Currency Note, in the United States
dollar-equivalent value of the principal and premium, if any, payable on the
Maturity Date of such Foreign Currency Note, and, generally, in the United
States dollar-equivalent market value of such Foreign Currency Note.
Governments or monetary authorities have imposed from time to time, and may
in the future impose or revise, exchange controls at or prior to the date on
which any payment of principal of, or premium, if any, or interest, if any, on,
a Foreign Currency Note is due, which could affect exchange rates as well as the
availability of the Specified Currency on such date. Even if there are no
exchange controls, it is possible that the Specified Currency would not be
available on the applicable payment date due to other circumstances beyond the
control of the Issuer. In such cases, the Issuer will be entitled to satisfy its
obligations in respect of such Foreign Currency Note in United States dollars.
See "Special Provisions Relating to Foreign Currency Notes--Availability of
Specified Currency."
CREDIT RATINGS
The credit ratings assigned to the Issuer's medium-term note program may
not reflect the potential impact of all risks related to structure and other
factors on the value of the Notes. Accordingly, prospective investors should
consult their own financial and legal advisors as to the risks entailed by an
investment in the Notes and the suitability of investing in such Notes in light
of their particular circumstances.
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DESCRIPTION OF NOTES
The Notes will be issued as a series of Debt Securities under an Indenture,
dated as of 1997, as amended or modified from time to time (the
"Indenture"), between the Issuer and , as trustee (the
"Trustee"). The Indenture is subject to, and governed by, the Trust Indenture
Act of 1939, as amended. The following summary of certain provisions of the
Notes and the Indenture does not purport to be complete and is qualified in its
entirety by reference to the actual provisions of the Notes and the Indenture.
Capitalized terms used but not defined herein shall have the meanings given to
them in the accompanying Prospectus, the Notes or the Indenture, as the case may
be. The term "Debt Securities," as used in this Prospectus Supplement, refers to
all debt securities, including the Notes, issued and issuable from time to time
under the Indenture. The following description of Notes will apply to each Note
offered hereby unless otherwise specified in the applicable Pricing Supplement.
GENERAL
All Debt Securities, including the Notes, issued and to be issued under the
Indenture will be unsecured general obligations of the Issuer and will rank pari
passu with all other unsecured and unsubordinated indebtedness of the Issuer
from time to time outstanding. The Indenture does not limit the aggregate
initial offering price of Debt Securities that may be issued thereunder and Debt
Securities may be issued thereunder from time to time in one or more series up
to the aggregate initial offering price from time to time authorized by the
Issuer for each series. The Issuer may, from time to time, without the consent
of the holders of the Notes, provide for the issuance of Notes or other Debt
Securities under the Indenture in addition to the $ 00,000,000 aggregate initial
offering price of Notes offered hereby.
The Notes are currently limited to up to $1,000,000,000 aggregate initial
offering price, or the equivalent thereof in one or more foreign or composite
currencies. Each Note will mature on any day nine months or more from its date
of issue (the "Stated Maturity Date"), as specified in the applicable Pricing
Supplement, unless the principal thereof (or any installment of principal
thereof) becomes due and payable prior to the Stated Maturity Date, whether by
the declaration of acceleration of maturity, notice of redemption at the option
of the Issuer, notice of the holder's option to elect repayment or otherwise
(the Stated Maturity Date or such prior date, as the case may be, is herein
referred to as the "Maturity Date" with respect to the principal of such Note
repayable on such date). Unless otherwise specified in the applicable Pricing
Supplement, interest-bearing Notes will either be Fixed Rate Notes or Floating
Rate Notes, as specified in the applicable Pricing Supplement. The Issuer may
also issue Discount Notes, Indexed Notes and Amortizing Notes (as such terms are
hereinafter defined).
Unless otherwise specified in the applicable Pricing Supplement, the Notes
will be denominated in, and payments of principal, premium, if any, and/or
interest, if any, in respect thereof will be made in, United States dollars. The
Notes also may be denominated in, and payments of principal, premium, if any,
and/or interest, if any, in respect thereof may be made in, one or more foreign
or composite currencies ("Foreign Currency Notes"). See "Special Provisions
Relating to Foreign Currency Notes--Payment of Principal, Premium, if any, and
Interest, if any." The currency or composite currency in which a particular Note
is denominated (or, if such currency or composite currency is no longer legal
tender for the payment of public and private debts, such other currency or
composite currency of the relevant country which is then legal tender for the
payment of such debts) is herein referred to as the "Specified Currency" with
respect to such Note. References herein to "United States dollars," "U.S.
dollars" or "$" are to the lawful currency of the United States of America (the
"United States").
Unless otherwise specified in the applicable Pricing Supplement, purchasers
are required to pay for the Notes in the applicable Specified Currencies. At the
present time, there are limited facilities in the United States for the
conversion of United States dollars into foreign or composite currencies and
vice versa, and commercial banks do not generally offer non-United States dollar
checking or savings account facilities in the United States. The Agent from or
through which a Foreign Currency Note is purchased will be prepared to arrange
for the conversion of United States dollars into the Specified Currency in order
to enable the purchaser to pay for such Foreign Currency Note, provided that a
request is made to such Agent on or prior to
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the fifth Business Day (as hereinafter defined) preceding the date of delivery
of such Foreign Currency Note, or by such other day as determined by such Agent.
Each such conversion will be made by such Agent on such terms and subject to
such conditions, limitations and charges as such Agent may from time to time
establish in accordance with its regular foreign exchange practices. All costs
of exchange will be borne by the purchaser of each such Foreign Currency Note.
See "Special Provisions Relating to Foreign Currency Notes."
Interest rates offered by the Issuer with respect to the Notes may differ
depending upon, among other factors, the aggregate principal amount of Notes
purchased in any single transaction. Notes with different variable terms other
than interest rates may also be offered concurrently to different investors.
Interest rates or formulas and other terms of Notes are subject to change by the
Issuer from time to time, but no such change will affect any Note previously
issued or as to which an offer to purchase has been accepted by the Issuer.
Each Note will be issued as a Book-Entry Note represented by one or more
fully registered Global Securities or as a fully registered Certificated Note.
The minimum denominations of each Note other than a Foreign Currency Note will
be $1,000 and integral multiples thereof, unless otherwise specified in the
applicable Pricing Supplement, while the minimum denominations of each Foreign
Currency Note will be specified in the applicable Pricing Supplement.
Payments of principal of, and premium, if any, and interest, if any, on,
Book-Entry Notes will be made by the Issuer through the Trustee to the
Depository. See "--Book-Entry Notes." In the case of Certificated Notes, payment
of principal and premium, if any, due on the Maturity Date will be made in
immediately available funds upon presentation and surrender thereof (and, in the
case of any repayment on an Optional Repayment Date, upon submission of a duly
completed election form in accordance with the provisions described below) at
the office or agency maintained by the Issuer for such purpose in the Borough of
Manhattan, The City of New York, currently the corporate trust office of the
Trustee located at . Payment of interest, if any, due on the
Maturity Date of a Certificated Note will be made to the person to whom payment
of the principal thereof and premium, if any, thereon shall be made. Payment of
interest, if any, due on a Certificated Note on any Interest Payment Date (as
hereinafter defined) other than the Maturity Date will be made by check mailed
to the address of the Holder entitled thereto as such address shall appear in
the Security Register of the Issuer. Notwithstanding the foregoing, a holder of
$10,000,000 (or, if the Specified Currency is other than United States dollars,
the equivalent thereof in such Specified Currency) or more in aggregate
principal amount of Certificated Notes (whether having identical or different
terms and provisions) will be entitled to receive interest payments, if any, on
any Interest Payment Date other than the Maturity Date by wire transfer of
immediately available funds if appropriate wire transfer instructions have been
received in writing by the Trustee not less than 15 days prior to such Interest
Payment Date. Any such wire transfer instructions received by the Trustee shall
remain in effect until revoked by such Holder. For special payment terms
applicable to Foreign Currency Notes, see "Special Provisions Relating to
Foreign Currency Notes--Payment of Principal, Premium, if any, and Interest, if
any."
As used herein, "Business Day" means any day, other than a Saturday or
Sunday, that is neither a legal holiday nor a day on which banking institutions
are authorized or required by law, regulation or executive order to close in The
City of New York; provided, however, that, with respect to Foreign Currency
Notes, such day is also not a day on which banking institutions are authorized
or required by law, regulation or executive order to close in the Principal
Financial Center (as hereinafter defined) of the country issuing the Specified
Currency (unless the Specified Currency is European Currency Units ("ECU"), in
which case such day is also not a day that appears as an ECU non-settlement day
on the display designated as "ISDE" on the Reuter Monitor Money Rates Service
(or is not a day designated as an ECU non-settlement day by the ECU Banking
Association) or, if ECU non-settlement days do not appear on that page (and are
not so designated), a day that is not a day on which payments in ECU cannot be
settled in the international interbank market); provided, further, that, with
respect to Notes as to which LIBOR is an applicable Interest Rate Basis, such
day is also a London Business Day (as hereinafter defined). "London Business
Day" means a day on which dealings in the Designated LIBOR Currency (as
hereinafter defined) are transacted in the London interbank market.
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"Principal Financial Center" means (i) the capital city of the country
issuing the Specified Currency (except as described in the immediately preceding
paragraph with respect to ECU) or (ii) the capital city of the country to which
the Designated LIBOR Currency, if applicable, relates (or, in the case of ECU,
Luxembourg), except, in each case, that with respect to United States dollars,
Australian dollars, Canadian dollars, Deutsche marks, Dutch guilders, Italian
lire and Swiss francs, the "Principal Financial Center" shall be The City of New
York, Sydney, Toronto, Frankfurt, Amsterdam, Milan (solely in the case of clause
(i) above) and Zurich, respectively.
Book-Entry Notes may be transferred or exchanged only through the
Depository. See "--Book-Entry Notes." Registration of transfer or exchange of
Certificated Notes will be made at the office or agency maintained by the Issuer
for such purpose in the Borough of Manhattan, The City of New York, currently
the corporate trust office of the Trustee located at . No
service charge will be made by the Issuer or the Trustee for any such
registration of transfer or exchange of Notes, but the Issuer may require
payment of a sum sufficient to cover any tax or other governmental charge that
may be imposed in connection therewith (other than exchanges pursuant to the
Indenture not involving any transfer).
[The defeasance and covenant defeasance provisions contained in the
Indenture shall apply to the Notes.]
REDEMPTION AT THE OPTION OF THE ISSUER
Unless otherwise specified in the applicable Pricing Supplement, the Notes
will not be subject to any sinking fund. The Notes will be redeemable at the
option of the Issuer prior to the Stated Maturity Date only if an Initial
Redemption Date is specified in the applicable Pricing Supplement. If so
specified, the Notes will be subject to redemption at the option of the Issuer
on any date on and after the applicable Initial Redemption Date in whole or from
time to time in part in increments of $1,000 or such other minimum denomination
specified in such Pricing Supplement (provided that any remaining principal
amount thereof shall be at least $1,000 or such minimum denomination), at the
applicable Redemption Price (as hereinafter defined), together with unpaid
interest accrued thereon to the date of redemption, on written notice given to
the holders thereof not more than 60 nor less than 30 calendar days prior to the
date of redemption and in accordance with the provisions of the Indenture.
"Redemption Price," with respect to a Note, means an amount equal to the Initial
Redemption Percentage specified in the applicable Pricing Supplement (as
adjusted by the Annual Redemption Percentage Reduction, if applicable)
multiplied by the unpaid principal amount to be redeemed. The Initial Redemption
Percentage, if any, applicable to a Note shall decline at each anniversary of
the Initial Redemption Date by an amount equal to the applicable Annual
Redemption Percentage Reduction, if any, until the Redemption Price is equal to
100% of the unpaid principal amount to be redeemed. For a discussion of the
redemption of Discount Notes, see "--Discount Notes."
REPAYMENT AT THE OPTION OF THE HOLDER
The Notes will be repayable by the Issuer at the option of the holders
thereof prior to the Stated Maturity Date only if one or more Optional Repayment
Dates are specified in the applicable Pricing Supplement. If so specified, the
Notes will be subject to repayment at the option of the holders thereof on any
Optional Repayment Date in whole or from time to time in part in increments of
$1,000 or such other minimum denomination specified in the applicable Pricing
Supplement (provided that any remaining principal amount thereof shall be at
least $1,000 or such other minimum denomination), at a repayment price equal to
100% of the unpaid principal amount to be repaid, together with unpaid interest
accrued thereon to the date of repayment. For any Note to be repaid, such Note
must be received, together with the form thereon entitled "Option to Elect
Repayment" duly completed, by the Trustee at its office maintained for such
purpose in the Borough of Manhattan, The City of New York, currently the
corporate trust office of the Trustee located at , not more
than 60 nor less than 30 calendar days prior to the date of repayment. Exercise
of such repayment option by the holder will be irrevocable. For a discussion of
the repayment of Discount Notes, see "--Discount Notes."
Only the Depository may exercise the repayment option in respect of Global
Securities representing Book-Entry Notes. Accordingly, Beneficial Owners (as
hereinafter defined) of Global Securities that desire to
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have all or any portion of the Book-Entry Notes represented by such Global
Securities repaid must instruct the Participant (as hereinafter defined) through
which they own their interest to direct the Depository to exercise the repayment
option on their behalf by delivering the related Global Security and duly
completed election form to the Trustee as aforesaid. In order to ensure that
such Global Security and election form are received by the Trustee on a
particular day, the applicable Beneficial Owner must so instruct the Participant
through which it owns its interest before such Participant's deadline for
accepting instructions for that day. Different firms may have different
deadlines for accepting instructions from their customers. Accordingly,
Beneficial Owners should consult the Participants through which they own their
interest for the respective deadlines for such Participants. All instructions
given to Participants from Beneficial Owners of Global Securities relating to
the option to elect repayment shall be irrevocable. In addition, at the time
such instructions are given, each such Beneficial Owner shall cause the
Participant through which it owns its interest to transfer such Beneficial
Owner's interest in the Global Security or Securities representing the related
Book-Entry Notes, on the Depository's records, to the Trustee. See "--Book-Entry
Notes."
If applicable, the Issuer will comply with the requirements of Section
14(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and the rules promulgated thereunder, and any other securities laws or
regulations in connection with any such repayment.
The Issuer may at any time purchase Notes at any price or prices in the
open market or otherwise. Notes so purchased by the Issuer may, at the
discretion of the Issuer, be held, resold or surrendered to the Trustee for
cancellation.
INTEREST
General
Unless otherwise specified in the applicable Pricing Supplement, each
interest-bearing Note will bear interest from its date of issue at the rate per
annum, in the case of a Fixed Rate Note, or pursuant to the interest rate
formula, in the case of a Floating Rate Note, in each case as specified in the
applicable Pricing Supplement, until the principal thereof is paid or duly made
available for payment. Unless otherwise specified in the applicable Pricing
Supplement, interest payments in respect of Fixed Rate Notes and Floating Rate
Notes will be made in an amount equal to the interest accrued from and including
the immediately preceding Interest Payment Date in respect of which interest has
been paid or duly made available for payment (or from and including the date of
issue, if no interest has been paid or duly made available for payment) to but
excluding the applicable Interest Payment Date or the Maturity Date, as the case
may be (each, an "Interest Period").
Interest on Fixed Rate Notes and Floating Rate Notes will be payable in
arrears on each Interest Payment Date and on the Maturity Date. Unless otherwise
specified in the applicable Pricing Supplement, the first payment of interest on
any such Note originally issued between a Record Date (as hereinafter defined)
and the related Interest Payment Date will be made on the Interest Payment Date
immediately following the next succeeding Record Date to the holder on such next
succeeding Record Date. Unless otherwise specified in the applicable Pricing
Supplement, a "Record Date" shall be the fifteenth calendar day (whether or not
a Business Day) immediately preceding the related Interest Payment Date.
Fixed Rate Notes
Interest on Fixed Rate Notes will be payable on and
of each year or on such other date(s) specified in the applicable
Pricing Supplement (each, an "Interest Payment Date" with respect to Fixed Rate
Notes) and on the Maturity Date. Unless otherwise specified in the applicable
Pricing Supplement, interest on Fixed Rate Notes will be computed on the basis
of a 360-day year of twelve 30-day months.
If any Interest Payment Date or the Maturity Date of a Fixed Rate Note
falls on a day that is not a Business Day, the required payment of principal,
premium, if any, and/or interest will be made on the next succeeding Business
Day as if made on the date such payment was due, and no interest will accrue on
such
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payment for the period from and after such Interest Payment Date or the Maturity
Date, as the case may be, to the date of such payment on the next succeeding
Business Day.
Floating Rate Notes
Interest on Floating Rate Notes will be determined by reference to the
applicable Interest Rate Basis or Interest Rate Bases, which may, as described
below, include (i) the CD Rate, (ii) the CMT Rate, (iii) the Commercial Paper
Rate, (iv) the Eleventh District Cost of Funds Rate, (v) the Federal Funds Rate,
(vi) LIBOR, (vii) the Prime Rate, (viii) the Treasury Rate, or (ix) such other
Interest Rate Basis or interest rate formula as may be specified in the
applicable Pricing Supplement. The applicable Pricing Supplement will specify
certain terms with respect to which each Floating Rate Note is being delivered,
including: whether such Floating Rate Note is a "Regular Floating Rate Note," a
"Floating Rate/Fixed Rate Note" or an "Inverse Floating Rate Note," the Fixed
Rate Commencement Date, if applicable, Fixed Interest Rate, if applicable,
Interest Rate Basis or Bases, Initial Interest Rate, if any, Initial Interest
Reset Date, Interest Reset Dates, Interest Payment Dates, Index Maturity,
Maximum Interest Rate and/or Minimum Interest Rate, if any, and Spread and/or
Spread Multiplier, if any, as such terms are defined below. If one or more of
the applicable Interest Rate Bases is LIBOR or the CMT Rate, the applicable
Pricing Supplement will also specify the Designated LIBOR Currency and
Designated LIBOR Page or the Designated CMT Maturity Index and Designated CMT
Telerate Page, respectively, as such terms are defined below.
The interest rate borne by the Floating Rate Notes will be determined as
follows:
(i) Unless such Floating Rate Note is designated as a "Floating
Rate/Fixed Rate Note" or an "Inverse Floating Rate Note," or as having an
Addendum attached or having "Other/Additional Provisions" apply, in each
case relating to a different interest rate formula, such Floating Rate Note
will be designated as a "Regular Floating Rate Note" and, except as
described below or in the applicable Pricing Supplement, will bear interest
at the rate determined by reference to the applicable Interest Rate Basis
or Bases (a) plus or minus the applicable Spread, if any, and/or (b)
multiplied by the applicable Spread Multiplier, if any. Commencing on the
Initial Interest Reset Date, the rate at which interest on such Regular
Floating Rate Note shall be payable shall be reset as of each Interest
Reset Date; provided, however, that the interest rate in effect for the
period, if any, from the date of issue to the Initial Interest Reset Date
will be the Initial Interest Rate.
(ii) If such Floating Rate Note is designated as a "Floating
Rate/Fixed Rate Note," then, except as described below or in the applicable
Pricing Supplement, such Floating Rate Note will bear interest at the rate
determined by reference to the applicable Interest Rate Basis or Bases (a)
plus or minus the applicable Spread, if any, and/or (b) multiplied by the
applicable Spread Multiplier, if any. Commencing on the Initial Interest
Reset Date, the rate at which interest on such Floating Rate/Fixed Rate
Note shall be payable shall be reset as of each Interest Reset Date;
provided, however, that (y) the interest rate in effect for the period, if
any, from the date of issue to the Initial Interest Reset Date will be the
Initial Interest Rate and (z) the interest rate in effect for the period
commencing on the Fixed Rate Commencement Date to the Maturity Date shall
be the Fixed Interest Rate, if such rate is specified in the applicable
Pricing Supplement or, if no such Fixed Interest Rate is specified, the
interest rate in effect thereon on the day immediately preceding the Fixed
Rate Commencement Date.
(iii) If such Floating Rate Note is designated as an "Inverse Floating
Rate Note," then, except as described below or in the applicable Pricing
Supplement, such Floating Rate Note will bear interest at the Fixed
Interest Rate minus the rate determined by reference to the applicable
Interest Rate Basis or Bases (a) plus or minus the applicable Spread, if
any, and/or (b) multiplied by the applicable Spread Multiplier, if any;
provided, however, that, unless otherwise specified in the applicable
Pricing Supplement, the interest rate thereon will not be less than zero.
Commencing on the Initial Interest Reset Date, the rate at which interest
on such Inverse Floating Rate Note shall be payable shall be reset as of
each Interest Reset Date; provided, however, that the interest rate in
effect for the period, if any, from the date of issue to the Initial
Interest Reset Date will be the Initial Interest Rate.
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The "Spread" is the number of basis points to be added to or subtracted
from the related Interest Rate Basis or Bases applicable to such Floating Rate
Note. The "Spread Multiplier" is the percentage of the related Interest Rate
Basis or Bases applicable to such Floating Rate Note by which such Interest Rate
Basis or Bases will be multiplied to determine the applicable interest rate on
such Floating Rate Note. The "Index Maturity" is the period to maturity of the
instrument or obligation with respect to which the related Interest Rate Basis
or Bases will be calculated.
Unless otherwise specified in the applicable Pricing Supplement, the
interest rate with respect to each Interest Rate Basis will be determined in
accordance with the applicable provisions below. Except as set forth above or in
the applicable Pricing Supplement, the interest rate in effect on each day shall
be (i) if such day is an Interest Reset Date, the interest rate determined as of
the Interest Determination Date (as hereinafter defined) immediately preceding
such Interest Reset Date or (ii) if such day is not an Interest Reset Date, the
interest rate determined as of the Interest Determination Date immediately
preceding the most recent Interest Reset Date.
The applicable Pricing Supplement will specify whether the rate of interest
on the related Floating Rate Note will be reset daily, weekly, monthly,
quarterly, semiannually or annually or on such other specified basis (each, an
"Interest Reset Period") and the dates on which such rate of interest will be
reset (each, an "Interest Reset Date"). Unless otherwise specified in the
applicable Pricing Supplement, the Interest Reset Dates will be, in the case of
Floating Rate Notes which reset: (i) daily, each Business Day; (ii) weekly, the
Wednesday of each week (with the exception of weekly reset Floating Rate Notes
as to which the Treasury Rate is an applicable Interest Rate Basis, which will
reset the Tuesday of each week, except as described below); (iii) monthly, the
third Wednesday of each month (with the exception of monthly reset Floating Rate
Notes as to which the Eleventh District Cost of Funds Rate is an applicable
Interest Rate Basis, which will reset on the first calendar day of the month);
(iv) quarterly, the third Wednesday of March, June, September and December of
each year; (v) semiannually, the third Wednesday of the two months specified in
the applicable Pricing Supplement; and (vi) annually, the third Wednesday of the
month specified in the applicable Pricing Supplement; provided, however, that,
with respect to Floating Rate/Fixed Rate Notes, the rate of interest thereon
will not reset after the applicable Fixed Rate Commencement Date. If any
Interest Reset Date for any Floating Rate Note would otherwise be a day that is
not a Business Day, such Interest Reset Date will be postponed to the next
succeeding Business Day, except that in the case of a Floating Rate Note as to
which LIBOR is an applicable Interest Rate Basis and such Business Day falls in
the next succeeding calendar month, such Interest Reset Date will be the
immediately preceding Business Day.
The interest rate applicable to each Interest Reset Period commencing on
the related Interest Reset Date will be the rate determined by the Calculation
Agent as of the applicable Interest Determination Date and calculated on or
prior to the Calculation Date (as hereinafter defined), except with respect to
LIBOR and the Eleventh District Cost of Funds Rate, which will be calculated on
such Interest Determination Date. The "Interest Determination Date" with respect
to the CD Rate, the CMT Rate, the Commercial Paper Rate, the Federal Funds Rate
and the Prime Rate will be the second Business Day immediately preceding the
applicable Interest Reset Date; the "Interest Determination Date" with respect
to the Eleventh District Cost of Funds Rate will be the last working day of the
month immediately preceding the applicable Interest Reset Date on which the
Federal Home Loan Bank of San Francisco (the "FHLB of San Francisco") publishes
the Index (as hereinafter defined); and the "Interest Determination Date" with
respect to LIBOR will be the second London Business Day immediately preceding
the applicable Interest Reset Date, unless the Designated LIBOR Currency is
British pounds sterling, in which case the "Interest Determination Date" will be
the applicable Interest Reset Date. With respect to the Treasury Rate, the
"Interest Determination Date" will be the day in the week in which the
applicable Interest Reset Date falls on which day Treasury Bills (as hereinafter
defined) are normally auctioned (Treasury Bills are normally sold at an auction
held on Monday of each week, unless that day is a legal holiday, in which case
the auction is normally held on the following Tuesday, except that such auction
may be held on the preceding Friday); provided, however, that if an auction is
held on the Friday of the week preceding the applicable Interest Reset Date, the
"Interest Determination Date" will be such preceding Friday; provided, further,
that if the Interest Determination Date would otherwise fall on an Interest
Reset Date, then such Interest Reset Date will be postponed to the next
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succeeding Business Day. The "Interest Determination Date" pertaining to a
Floating Rate Note the interest rate of which is determined by reference to two
or more Interest Rate Bases will be the most recent Business Day which is at
least two Business Days prior to the applicable Interest Reset Date for such
Floating Rate Note on which each Interest Rate Basis is determinable. Each
Interest Rate Basis will be determined as of such date, and the applicable
interest rate will take effect on the applicable Interest Reset Date.
Notwithstanding the foregoing, a Floating Rate Note may also have either or
both of the following: (i) a Maximum Interest Rate, or ceiling, that may accrue
during any Interest Period and (ii) a Minimum Interest Rate, or floor, that may
accrue during any Interest Period. In addition to any Maximum Interest Rate that
may apply to any Floating Rate Note, the interest rate on Floating Rate Notes
will in no event be higher than the maximum rate permitted by New York law, as
the same may be modified by United States law of general application.
Except as provided below or in the applicable Pricing Supplement, interest
will be payable, in the case of Floating Rate Notes which reset: (i) daily,
weekly or monthly, on the third Wednesday of each month or on the third
Wednesday of March, June, September and December of each year, as specified in
the applicable Pricing Supplement; (ii) quarterly, on the third Wednesday of
March, June, September and December of each year; (iii) semiannually, on the
third Wednesday of the two months of each year specified in the applicable
Pricing Supplement; and (iv) annually, on the third Wednesday of the month of
each year specified in the applicable Pricing Supplement (each, an "Interest
Payment Date" with respect to Floating Rate Notes) and, in each case, on the
Maturity Date. If any Interest Payment Date other than the Maturity Date for any
Floating Rate Note would otherwise be a day that is not a Business Day, such
Interest Payment Date will be postponed to the next succeeding Business Day,
except that in the case of a Floating Rate Note as to which LIBOR is an
applicable Interest Rate Basis and such Business Day falls in the next
succeeding calendar month, such Interest Payment Date will be the immediately
preceding Business Day. If the Maturity Date of a Floating Rate Note falls on a
day that is not a Business Day, the required payment of principal, premium, if
any, and interest will be made on the next succeeding Business Day as if made on
the date such payment was due, and no interest will accrue on such payment for
the period from and after the Maturity Date to the date of such payment on the
next succeeding Business Day.
All percentages resulting from any calculation on Floating Rate Notes will
be rounded to the nearest one hundred-thousandth of a percentage point, with
five one-millionths of a percentage point rounded upwards (e.g., 9.876545% (or
.09876545) would be rounded to 9.87655% (or .0987655)), and all amounts used in
or resulting from such calculation on Floating Rate Notes will be rounded, in
the case of United States dollars, to the nearest cent or, in the case of a
foreign or composite currency, to the nearest unit (with one-half cent or unit
being rounded upwards).
With respect to each Floating Rate Note, accrued interest is calculated by
multiplying its principal amount by an accrued interest factor. Such accrued
interest factor is computed by adding the interest factor calculated for each
day in the applicable Interest Period. Unless otherwise specified in the
applicable Pricing Supplement, the interest factor for each such day will be
computed by dividing the interest rate applicable to such day by 360, in the
case of Floating Rate Notes for which an applicable Interest Rate Basis is the
CD Rate, the Commercial Paper Rate, the Eleventh District Cost of Funds Rate,
the Federal Funds Rate, LIBOR or the Prime Rate, or by the actual number of days
in the year in the case of Floating Rate Notes for which an applicable Interest
Rate Basis is the CMT Rate or the Treasury Rate. Unless otherwise specified in
the applicable Pricing Supplement, the interest factor for Floating Rate Notes
for which the interest rate is calculated with reference to two or more Interest
Rate Bases will be calculated in each period in the same manner as if only the
applicable Interest Rate Basis specified in the applicable Pricing Supplement
applied.
Unless otherwise specified in the applicable Pricing Supplement,
will be the "Calculation Agent." Upon request of the holder
of any Floating Rate Note, the Calculation Agent will disclose the interest rate
then in effect and, if determined, the interest rate that will become effective
as a result of a determination made for the next succeeding Interest Reset Date
with respect to such Floating Rate Note. Unless otherwise specified in the
applicable Pricing Supplement, the "Calculation Date," if applicable, pertaining
to any Interest Determination Date will be the earlier of (i) the tenth calendar
day after such
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Interest Determination Date or, if such day is not a Business Day, the next
succeeding Business Day or (ii) the Business Day immediately preceding the
applicable Interest Payment Date or the Maturity Date, as the case may be.
Unless otherwise specified in the applicable Pricing Supplement, the
Calculation Agent shall determine each Interest Rate Basis in accordance with
the following provisions.
CD Rate. Unless otherwise specified in the applicable Pricing Supplement,
"CD Rate" means, with respect to any Interest Determination Date relating to a
Floating Rate Note for which the interest rate is determined with reference to
the CD Rate (a "CD Rate Interest Determination Date"), the rate on such date for
negotiable United States dollar certificates of deposit having the Index
Maturity specified in the applicable Pricing Supplement as published by the
Board of Governors of the Federal Reserve System in "Statistical Release
H.15(519), Selected Interest Rates" or any successor publication ("H.15(519)")
under the heading "CDs (Secondary Market)," or, if not published by 3:00 P.M.,
New York City time, on the related Calculation Date, the rate on such CD Rate
Interest Determination Date for negotiable United States dollar certificates of
deposit of the Index Maturity specified in the applicable Pricing Supplement as
published by the Federal Reserve Bank of New York in its daily statistical
release "Composite 3:30 P.M. Quotations for U.S. Government Securities" or any
successor publication ("Composite Quotations") under the heading "Certificates
of Deposit." If such rate is not yet published in either H.15(519) or Composite
Quotations by 3:00 P.M., New York City time, on the related Calculation Date,
then the CD Rate on such CD Rate Interest Determination Date will be calculated
by the Calculation Agent and will be the arithmetic mean of the secondary market
offered rates as of 10:00 A.M., New York City time, on such CD Rate Interest
Determination Date, of three leading nonbank dealers in negotiable United States
dollar certificates of deposit in The City of New York (which may include the
Agents or their affiliates) selected by the Calculation Agent for negotiable
United States dollar certificates of deposit of major United States money center
banks for negotiable certificates of deposit with a remaining maturity closest
to the Index Maturity specified in the applicable Pricing Supplement in an
amount that is representative for a single transaction in that market at that
time; provided, however, that if the dealers so selected by the Calculation
Agent are not quoting as mentioned in this sentence, the CD Rate determined as
of such CD Rate Interest Determination Date will be the CD Rate in effect on
such CD Rate Interest Determination Date.
CMT Rate. Unless otherwise specified in the applicable Pricing Supplement,
"CMT Rate" means, with respect to any Interest Determination Date relating to a
Floating Rate Note for which the interest rate is determined with reference to
the CMT Rate (a "CMT Rate Interest Determination Date"), the rate displayed on
the Designated CMT Telerate Page under the caption "...Treasury Constant
Maturities...Federal Reserve Board Release H.15...Mondays Approximately 3:45
P.M.," under the column for the Designated CMT Maturity Index for (i) if the
Designated CMT Telerate Page is 7055, the rate on such CMT Rate Interest
Determination Date and (ii) if the Designated CMT Telerate Page is 7052, the
weekly or monthly average, as specified in the applicable Pricing Supplement,
for the week or the month, as applicable, ended immediately preceding the week
or the month, as applicable, in which the related CMT Rate Interest
Determination Date falls. If such rate is no longer displayed on the relevant
page or is not displayed by 3:00 P.M., New York City time, on the related
Calculation Date, then the CMT Rate for such CMT Rate Interest Determination
Date will be such treasury constant maturity rate for the Designated CMT
Maturity Index as published in H.15(519). If such rate is no longer published or
is not published by 3:00 P.M., New York City time, on the related Calculation
Date, then the CMT Rate on such CMT Rate Interest Determination Date will be
such treasury constant maturity rate for the Designated CMT Maturity Index (or
other United States Treasury rate for the Designated CMT Maturity Index) for the
CMT Rate Interest Determination Date with respect to such Interest Reset Date as
may then be published by either the Board of Governors of the Federal Reserve
System or the United States Department of the Treasury that the Calculation
Agent determines to be comparable to the rate formerly displayed on the
Designated CMT Telerate Page and published in H.15(519). If such information is
not provided by 3:00 P.M., New York City time, on the related Calculation Date,
then the CMT Rate on the CMT Rate Interest Determination Date will be calculated
by the Calculation Agent and will be a yield to maturity, based on the
arithmetic mean of the secondary market offered rates as of approximately 3:30
P.M., New York City time, on such CMT Rate Interest Determination
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Date reported, according to their written records, by three leading primary
United States government securities dealers in The City of New York (which may
include the Agents or their affiliates) (each, a "Reference Dealer") selected by
the Calculation Agent (from five such Reference Dealers selected by the
Calculation Agent and eliminating the highest quotation (or, in the event of
equality, one of the highest) and the lowest quotation (or, in the event of
equality, one of the lowest)), for the most recently issued direct noncallable
fixed rate obligations of the United States ("Treasury Notes") with an original
maturity of approximately the Designated CMT Maturity Index and a remaining term
to maturity of not less than such Designated CMT Maturity Index minus one year.
If the Calculation Agent is unable to obtain three such Treasury Note
quotations, the CMT Rate on such CMT Rate Interest Determination Date will be
calculated by the Calculation Agent and will be a yield to maturity based on the
arithmetic mean of the secondary market offered rates as of approximately 3:30
P.M., New York City time, on such CMT Rate Interest Determination Date of three
Reference Dealers in The City of New York (from five such Reference Dealers
selected by the Calculation Agent and eliminating the highest quotation (or, in
the event of equality, one of the highest) and the lowest quotation (or, in the
event of equality, one of the lowest)), for Treasury Notes with an original
maturity of the number of years that is the next highest to the Designated CMT
Maturity Index and a remaining term to maturity closest to the Designated CMT
Maturity Index and in an amount of at least $100 million. If three or four (and
not five) of such Reference Dealers are quoting as described above, then the CMT
Rate will be based on the arithmetic mean of the offered rates obtained and
neither the highest nor the lowest of such quotes will be eliminated; provided,
however, that if fewer than three Reference Dealers so selected by the
Calculation Agent are quoting as mentioned herein, the CMT Rate determined as of
such CMT Rate Interest Determination Date will be the CMT Rate in effect on such
CMT Rate Interest Determination Date. If two Treasury Notes with an original
maturity as described in the second preceding sentence have remaining terms to
maturity equally close to the Designated CMT Maturity Index, the Calculation
Agent will obtain quotations for the Treasury Note with the shorter remaining
term to maturity.
"Designated CMT Telerate Page" means the display on the Dow Jones Telerate
Service (or any successor service) on the page specified in the applicable
Pricing Supplement (or any other page as may replace such page on such service)
for the purpose of displaying Treasury Constant Maturities as reported in
H.15(519). If no such page is specified in the applicable Pricing Supplement,
the Designated CMT Telerate Page shall be 7052 for the most recent week.
"Designated CMT Maturity Index" means the original period to maturity of
the U.S. Treasury securities (either 1, 2, 3, 5, 7, 10, 20 or 30 years)
specified in the applicable Pricing Supplement with respect to which the CMT
Rate will be calculated or, if no such maturity is specified in the applicable
Pricing Supplement, 2 years.
Commercial Paper Rate. Unless otherwise specified in the applicable
Pricing Supplement, "Commercial Paper Rate" means, with respect to any Interest
Determination Date relating to a Floating Rate Note for which the interest rate
is determined with reference to the Commercial Paper Rate (a "Commercial Paper
Rate Interest Determination Date"), the Money Market Yield (as hereinafter
defined) on such date of the rate for commercial paper having the Index Maturity
specified in the applicable Pricing Supplement as published in H.15(519) under
the heading "Commercial Paper." In the event that such rate is not published by
3:00 P.M., New York City time, on the related Calculation Date, then the
Commercial Paper Rate on such Commercial Paper Rate Interest Determination Date
will be the Money Market Yield of the rate for commercial paper having the Index
Maturity specified in the applicable Pricing Supplement as published in
Composite Quotations under the heading "Commercial Paper" (with an Index
Maturity of one month or three months being deemed to be equivalent to an Index
Maturity of 30 days or 90 days, respectively). If such rate is not yet published
in either H.15(519) or Composite Quotations by 3:00 P.M., New York City time, on
the related Calculation Date, then the Commercial Paper Rate on such Commercial
Paper Rate Interest Determination Date will be calculated by the Calculation
Agent and will be the Money Market Yield of the arithmetic mean of the offered
rates at approximately 11:00 A.M., New York City time, on such Commercial Paper
Rate Interest Determination Date of three leading dealers of commercial paper in
The City of New York (which may include the Agents or their affiliates) selected
by the Calculation Agent for commercial paper having the Index Maturity
specified in the applicable Pricing Supplement placed for an industrial issuer
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whose bond rating is "Aa", or the equivalent, from a nationally recognized
statistical rating organization; provided, however, that if the dealers so
selected by the Calculation Agent are not quoting as mentioned in this sentence,
the Commercial Paper Rate determined as of such Commercial Paper Rate Interest
Determination Date will be the Commercial Paper Rate in effect on such
Commercial Paper Rate Interest Determination Date.
"Money Market Yield" means a yield (expressed as a percentage) calculated
in accordance with the following formula:
D X 360
Money Market Yield = -------------- X 100
360 - (D X M)
where "D" refers to the applicable per annum rate for commercial paper quoted on
a bank discount basis and expressed as a decimal, and "M" refers to the actual
number of days in the applicable Interest Reset Period.
Eleventh District Cost of Funds Rate. Unless otherwise specified in the
applicable Pricing Supplement, "Eleventh District Cost of Funds Rate" means,
with respect to any Interest Determination Date relating to a Floating Rate Note
for which the interest rate is determined with reference to the Eleventh
District Cost of Funds Rate (an "Eleventh District Cost of Funds Rate Interest
Determination Date"), the rate equal to the monthly weighted average cost of
funds for the calendar month immediately preceding the month in which such
Eleventh District Cost of Funds Rate Interest Determination Date falls, as set
forth under the caption "11th District" on Telerate Page 7058 as of 11:00 A.M.,
San Francisco time, on such Eleventh District Cost of Funds Rate Interest
Determination Date. If such rate does not appear on Telerate Page 7058 on such
Eleventh District Cost of Funds Rate Interest Determination Date, then the
Eleventh District Cost of Funds Rate on such Eleventh District Cost of Funds
Rate Interest Determination Date shall be the monthly weighted average cost of
funds paid by member institutions of the Eleventh Federal Home Loan Bank
District that was most recently announced (the "Index") by the FHLB of San
Francisco as such cost of funds for the calendar month immediately preceding
such Eleventh District Cost of Funds Rate Interest Determination Date. If the
FHLB of San Francisco fails to announce the Index on or prior to such Eleventh
District Cost of Funds Rate Interest Determination Date for the calendar month
immediately preceding such Eleventh District Cost of Funds Rate Interest
Determination Date, the Eleventh District Cost of Funds Rate determined as of
such Eleventh District Cost of Funds Rate Interest Determination Date will be
the Eleventh District Cost of Funds Rate in effect on such Eleventh District
Cost of Funds Rate Interest Determination Date.
Federal Funds Rate. Unless otherwise specified in the applicable Pricing
Supplement, "Federal Funds Rate" means, with respect to any Interest
Determination Date relating to a Floating Rate Note for which the interest rate
is determined with reference to the Federal Funds Rate (a "Federal Funds Rate
Interest Determination Date"), the rate on such date for United States dollar
federal funds as published in H.15(519) under the heading "Federal Funds
(Effective)" or, if not published by 3:00 P.M., New York City time, on the
related Calculation Date, the rate on such Federal Funds Rate Interest
Determination Date as published in Composite Quotations under the heading
"Federal Funds/Effective Rate." If such rate is not published in either
H.15(519) or Composite Quotations by 3:00 P.M., New York City time, on the
related Calculation Date, then the Federal Funds Rate on such Federal Funds Rate
Interest Determination Date will be calculated by the Calculation Agent and will
be the arithmetic mean of the rates for the last transaction in overnight United
States dollar federal funds arranged by three leading brokers of federal funds
transactions in The City of New York (which may include the Agents or their
affiliates) selected by the Calculation Agent prior to 9:00 A.M., New York City
time, on such Federal Funds Rate Interest Determination Date; provided, however,
that if the brokers so selected by the Calculation Agent are not quoting as
mentioned in this sentence, the Federal Funds Rate determined as of such Federal
Funds Rate Interest Determination Date will be the Federal Funds Rate in effect
on such Federal Funds Rate Interest Determination Date.
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LIBOR. Unless otherwise specified in the applicable Pricing Supplement,
"LIBOR" means the rate determined in accordance with the following provisions:
(i) With respect to any Interest Determination Date relating to a
Floating Rate Note for which the interest rate is determined with reference
to LIBOR (a "LIBOR Interest Determination Date"), LIBOR will be either: (a)
if "LIBOR Reuters" is specified in the applicable Pricing Supplement, the
arithmetic mean of the offered rates (unless the Designated LIBOR Page by
its terms provides only for a single rate, in which case such single rate
shall be used) for deposits in the Designated LIBOR Currency having the
Index Maturity specified in such Pricing Supplement, commencing on the
applicable Interest Reset Date, that appear (or, if only a single rate is
required as aforesaid, appears) on the Designated LIBOR Page as of 11:00
A.M., London time, on such LIBOR Interest Determination Date, or (b) if
"LIBOR Telerate" is specified in the applicable Pricing Supplement or if
neither "LIBOR Reuters" nor "LIBOR Telerate" is specified in the applicable
Pricing Supplement as the method for calculating LIBOR, the rate for
deposits in the Designated LIBOR Currency having the Index Maturity
specified in such Pricing Supplement, commencing on such Interest Reset
Date, that appears on the Designated LIBOR Page as of 11:00 A.M., London
time, on such LIBOR Interest Determination Date. If fewer than two such
offered rates so appear, or if no such rate so appears, as applicable,
LIBOR on such LIBOR Interest Determination Date will be determined in
accordance with the provisions described in clause (ii) below.
(ii) With respect to a LIBOR Interest Determination Date on which
fewer than two offered rates appear, or no rate appears, as the case may
be, on the Designated LIBOR Page as specified in clause (i) above, the
Calculation Agent will request the principal London offices of each of four
major reference banks (which may include affiliates of the Agents) in the
London interbank market, as selected by the Calculation Agent, to provide
the Calculation Agent with its offered quotation for deposits in the
Designated LIBOR Currency for the period of the Index Maturity specified in
the applicable Pricing Supplement, commencing on the applicable Interest
Reset Date, to prime banks in the London interbank market at approximately
11:00 A.M., London time, on such LIBOR Interest Determination Date and in a
principal amount that is representative for a single transaction in the
Designated LIBOR Currency in such market at such time. If at least two such
quotations are so provided, then LIBOR on such LIBOR Interest Determination
Date will be the arithmetic mean of such quotations. If fewer than two such
quotations are so provided, then LIBOR on such LIBOR Interest Determination
Date will be the arithmetic mean of the rates quoted at approximately 11:00
A.M., in the applicable Principal Financial Center, on such LIBOR Interest
Determination Date by three major banks (which may include affiliates of
the Agents) in such Principal Financial Center selected by the Calculation
Agent for loans in the Designated LIBOR Currency to leading European banks,
having the Index Maturity specified in the applicable Pricing Supplement
and in a principal amount that is representative for a single transaction
in the Designated LIBOR Currency in such market at such time; provided,
however, that if the banks so selected by the Calculation Agent are not
quoting as mentioned in this sentence, LIBOR determined as of such LIBOR
Interest Determination Date will be LIBOR in effect on such LIBOR Interest
Determination Date.
"Designated LIBOR Currency" means the currency or composite currency
specified in the applicable Pricing Supplement as to which LIBOR shall be
calculated or, if no such currency or composite currency is specified in the
applicable Pricing Supplement, United States dollars.
"Designated LIBOR Page" means (a) if "LIBOR Reuters" is specified in the
applicable Pricing Supplement, the display on the Reuter Monitor Money Rates
Service (or any successor service) on the page specified in such Pricing
Supplement (or any other page as may replace such page on such service) for the
purpose of displaying the London interbank rates of major banks for the
Designated LIBOR Currency, or (b) if "LIBOR Telerate" is specified in the
applicable Pricing Supplement or neither "LIBOR Reuters" nor "LIBOR Telerate" is
specified in the applicable Pricing Supplement as the method for calculating
LIBOR, the display on the Dow Jones Telerate Service (or any successor service)
on the page specified in such Pricing Supplement (or any other page as may
replace such page on such service) for the purpose of displaying the London
interbank rates of major banks for the Designated LIBOR Currency.
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Prime Rate. Unless otherwise specified in the applicable Pricing
Supplement, "Prime Rate" means, with respect to any Interest Determination Date
relating to a Floating Rate Note for which the interest rate is determined with
reference to the Prime Rate (a "Prime Rate Interest Determination Date"), the
rate on such date as such rate is published in H.15(519) under the heading "Bank
Prime Loan." If such rate is not published prior to 3:00 P.M., New York City
time, on the related Calculation Date, then the Prime Rate shall be the
arithmetic mean of the rates of interest publicly announced by each bank that
appears on the Reuters Screen USPRIME1 Page (as hereinafter defined) as such
bank's prime rate or base lending rate as in effect for such Prime Rate Interest
Determination Date. If fewer than four such rates appear on the Reuters Screen
USPRIME1 Page for such Prime Rate Interest Determination Date, then the Prime
Rate shall be the arithmetic mean of the prime rates or base lending rates
quoted on the basis of the actual number of days in the year divided by a
360-day year as of the close of business on such Prime Rate Interest
Determination Date by four major money center banks (which may include
affiliates of the Agents) in The City of New York selected by the Calculation
Agent. If fewer than four such quotations are so provided, then the Prime Rate
shall be the arithmetic mean of four prime rates quoted on the basis of the
actual number of days in the year divided by a 360-day year as of the close of
business on such Prime Rate Interest Determination Date as furnished in The City
of New York by the major money center banks, if any, that have provided such
quotations and by a reasonable number of substitute banks or trust companies
(which may include affiliates of the Agents) to obtain four such prime rate
quotations, provided such substitute banks or trust companies are organized and
doing business under the laws of the United States, or any State thereof, each
having total equity capital of at least $500 million and being subject to
supervision or examination by Federal or State authority, selected by the
Calculation Agent to provide such rate or rates; provided, however, that if the
banks or trust companies so selected by the Calculation Agent are not quoting as
mentioned in this sentence, the Prime Rate determined as of such Prime Rate
Interest Determination Date will be the Prime Rate in effect on such Prime Rate
Interest Determination Date.
"Reuters Screen USPRIME1 Page" means the display on the Reuter Monitor
Money Rates Service (or any successor service) on the "USPRIME1" page (or such
other page as may replace the USPRIME1 page on such service) for the purpose of
displaying prime rates or base lending rates of major United States banks.
Treasury Rate. Unless otherwise specified in the applicable Pricing
Supplement, "Treasury Rate" means, with respect to any Interest Determination
Date relating to a Floating Rate Note for which the interest rate is determined
by reference to the Treasury Rate (a "Treasury Rate Interest Determination
Date"), the rate from the auction held on such Treasury Rate Interest
Determination Date (the "Auction") of direct obligations of the United States
("Treasury Bills") having the Index Maturity specified in the applicable Pricing
Supplement, as such rate is published in H.15(519) under the heading "Treasury
Bills-auction average (investment)" or, if not published by 3:00 P.M., New York
City time, on the related Calculation Date, the auction average rate of such
Treasury Bills (expressed as a bond equivalent on the basis of a year of 365 or
366 days, as applicable, and applied on a daily basis) as otherwise announced by
the United States Department of the Treasury. In the event that the results of
the Auction of Treasury Bills having the Index Maturity specified in the
applicable Pricing Supplement are not reported as provided by 3:00 P.M., New
York City time, on the related Calculation Date, or if no such Auction is held,
then the Treasury Rate will be calculated by the Calculation Agent and will be a
yield to maturity (expressed as a bond equivalent on the basis of a year of 365
or 366 days, as applicable, and applied on a daily basis) of the arithmetic mean
of the secondary market bid rates, as of approximately 3:30 P.M., New York City
time, on such Treasury Rate Interest Determination Date, of three leading
primary United States government securities dealers (which may include the
Agents or their affiliates) selected by the Calculation Agent, for the issue of
Treasury Bills with a remaining maturity closest to the Index Maturity specified
in the applicable Pricing Supplement; provided, however, that if the dealers so
selected by the Calculation Agent are not quoting as mentioned in this sentence,
the Treasury Rate determined as of such Treasury Rate Interest Determination
Date will be the Treasury Rate in effect on such Treasury Rate Interest
Determination Date.
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OTHER/ADDITIONAL PROVISIONS; ADDENDUM
Any provisions with respect to the Notes, including the specification and
determination of one or more Interest Rate Bases, the calculation of the
interest rate applicable to a Floating Rate Note, the Interest Payment Dates,
the Stated Maturity Date, any redemption or repayment provisions or any other
term relating thereto, may be modified and/or supplemented as specified under
"Other/Additional Provisions" on the face thereof or in an Addendum relating
thereto, if so specified on the face thereof and described in the applicable
Pricing Supplement.
DISCOUNT NOTES
The Issuer may offer Notes ("Discount Notes") from time to time that have
an Issue Price (as specified in the applicable Pricing Supplement) that is less
than 100% of the principal amount thereof (i.e., par) by more than a percentage
equal to the product of 0.25% and the number of full years to the Stated
Maturity Date. Discount Notes may not bear any interest currently or may bear
interest at a rate that is below market rates at the time of issuance. The
difference between the Issue Price of a Discount Note and par is referred to
herein as the "Discount." In the event of redemption, repayment or acceleration
of maturity of a Discount Note, the amount payable to the holder of such
Discount Note will be equal to the sum of (i) the Issue Price (increased by any
accruals of Discount) and, in the event of any redemption of such Discount Note
(if applicable), multiplied by the Initial Redemption Percentage (as adjusted by
the Annual Redemption Percentage Reduction, if applicable) and (ii) any unpaid
interest accrued thereon to the date of such redemption, repayment or
acceleration of maturity, as the case may be.
Unless otherwise specified in the applicable Pricing Supplement, for
purposes of determining the amount of Discount that has accrued as of any date
on which a redemption, repayment or acceleration of maturity occurs for a
Discount Note, such Discount will be accrued using a constant yield method. The
constant yield will be calculated using a 30-day month, 360-day year convention,
a compounding period that, except for the Initial Period (as hereinafter
defined), corresponds to the shortest period between Interest Payment Dates for
the applicable Discount Note (with ratable accruals within a compounding
period), a coupon rate equal to the initial coupon rate applicable to such
Discount Note and an assumption that the maturity of such Discount Note will not
be accelerated. If the period from the date of issue to the initial Interest
Payment Date for a Discount Note (the "Initial Period") is shorter than the
compounding period for such Discount Note, a proportionate amount of the yield
for an entire compounding period will be accrued. If the Initial Period is
longer than the compounding period, then such period will be divided into a
regular compounding period and a short period with the short period being
treated as provided in the preceding sentence. The accrual of the applicable
Discount may differ from the accrual of original issue discount for purposes of
the Internal Revenue Code of 1986, as amended (the "Code"), certain Discount
Notes may not be treated as having original issue discount within the meaning of
the Code, and Notes other than Discount Notes may be treated as issued with
original issue discount for federal income tax purposes. See "United States
Federal Income Tax Considerations".
INDEXED NOTES
The Issuer may from time to time offer Notes ("Indexed Notes") with the
amount of principal, premium and/or interest payable in respect thereof to be
determined with reference to the price or prices of specified commodities or
stocks, to the exchange rate of one or more designated currencies (including a
composite currency such as the ECU) relative to an indexed currency or to other
items, in each case as specified in the applicable Pricing Supplement. In
certain cases, holders of Indexed Notes may receive a principal payment on the
Maturity Date that is greater than or less than the principal amount of such
Indexed Notes depending upon the relative value on the Maturity Date of the
specified indexed item. Information as to the method for determining the amount
of principal, premium, if any, and/or interest, if any, payable in respect of
Indexed Notes, certain historical information with respect to the specified
indexed item and any material tax considerations associated with an investment
in Indexed Notes will be specified in the applicable Pricing Supplement. See
also "Risk Factors."
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AMORTIZING NOTES
The Issuer may from time to time offer Notes ("Amortizing Notes") with the
amount of principal thereof and interest thereon payable in installments over
the term of such Notes. Unless otherwise specified in the applicable Pricing
Supplement, interest on each Amortizing Note will be computed on the basis of a
360-day year of twelve 30-day months. Payments with respect to Amortizing Notes
will be applied first to interest due and payable thereon and then to the
reduction of the unpaid principal amount thereof. Further information concerning
additional terms and provisions of Amortizing Notes will be specified in the
applicable Pricing Supplement, including a table setting forth repayment
information for such Amortizing Notes.
BOOK-ENTRY NOTES
The Issuer has established a depositary arrangement with The Depository
Trust Company with respect to the Book-Entry Notes, the terms of which are
summarized below. Any additional or differing terms of the depositary
arrangement with respect to the Book-Entry Notes will be described in the
applicable Pricing Supplement.
Upon issuance, all Book-Entry Notes of like tenor and terms up to
$200,000,000 aggregate principal amount will be represented by a single Global
Security. Each Global Security representing Book-Entry Notes will be deposited
with, or on behalf of, the Depository and will be registered in the name of the
Depository or a nominee of the Depository. No Global Security may be transferred
except as a whole by a nominee of the Depository to the Depository or to another
nominee of the Depository, or by the Depository or such nominee to a successor
of the Depository or a nominee of such successor.
So long as the Depository or its nominee is the registered owner of a
Global Security, the Depository or its nominee, as the case may be, will be the
sole holder of the Book-Entry Notes represented thereby for all purposes under
the Indenture. Except as otherwise provided below, the Beneficial Owners of the
Global Security or Securities representing Book-Entry Notes will not be entitled
to receive physical delivery of Certificated Notes and will not be considered
the holders thereof for any purpose under the Indenture, and no Global Security
representing Book-Entry Notes shall be exchangeable or transferable.
Accordingly, each Beneficial Owner must rely on the procedures of the Depository
and, if such Beneficial Owner is not a Participant, on the procedures of the
Participant through which such Beneficial Owner owns its interest in order to
exercise any rights of a holder under such Global Security or the Indenture. The
laws of some jurisdictions require that certain purchasers of securities take
physical delivery of such securities in certificated form. Such limits and laws
may impair the ability to transfer beneficial interests in a Global Security
representing Book-Entry Notes.
Unless otherwise specified in the applicable Pricing Supplement, each
Global Security representing Book-Entry Notes will be exchangeable for
Certificated Notes of like tenor and terms and of differing authorized
denominations in a like aggregate principal amount, only if (i) the Depository
notifies the Issuer that it is unwilling or unable to continue as Depository for
the Global Securities or the Issuer becomes aware that the Depository has ceased
to be a clearing agency registered under the Exchange Act and, in any such case,
the Issuer shall not have appointed a successor to the Depository within 60 days
thereafter, (ii) the Issuer, in its sole discretion, determines that the Global
Securities shall be exchangeable for Certificated Notes or (iii) an Event of
Default shall have occurred and be continuing with respect to the Notes under
the Indenture. Upon any such exchange, the Certificated Notes shall be
registered in the names of the Beneficial Owners of the Global Security or
Securities representing Book-Entry Notes, which names shall be provided by the
Depository's relevant Participants (as identified by the Depository) to the
Trustee.
The following is based on information furnished by the Depository:
The Depository will act as securities depository for the Book-Entry
Notes. The Book-Entry Notes will be issued as fully registered securities
registered in the name of Cede & Co. (the Depository's partnership
nominee). One fully registered Global Security will be issued for each
issue of Book-Entry Notes, each in the aggregate principal amount of such
issue, and will be deposited with the Depository. If, however, the
aggregate principal amount of any issue exceeds $200,000,000, one Global
Security will be
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issued with respect to each $200,000,000 of principal amount and an
additional Global Security will be issued with respect to any remaining
principal amount of such issue.
The Depository is a limited-purpose trust company organized under the
New York Banking Law, a "banking organization" within the meaning of the
New York Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code,
and a "clearing agency" registered pursuant to the provisions of Section
17A of the Exchange Act. The Depository holds securities that its
participants ("Participants") deposit with the Depository. The Depository
also facilitates the settlement among Participants of securities
transactions, such as transfers and pledges, in deposited securities
through electronic computerized book-entry changes in Participants'
accounts, thereby eliminating the need for physical movement of securities
certificates. Direct Participants of the Depository ("Direct Participants")
include securities brokers and dealers (including the Agents), banks, trust
companies, clearing corporations and certain other organizations. The
Depository is owned by a number of its Direct Participants and by the New
York Stock Exchange, Inc., the American Stock Exchange, Inc., and the
National Association of Securities Dealers, Inc. Access to the Depository's
system is also available to others such as securities brokers and dealers,
banks and trust companies that clear through or maintain a custodial
relationship with a Direct Participant, either directly or indirectly
("Indirect Participants"). The rules applicable to the Depository and its
Participants are on file with the Securities and Exchange Commission.
Purchases of Book-Entry Notes under the Depository's system must be
made by or through Direct Participants, which will receive a credit for
such Book-Entry Notes on the Depository's records. The ownership interest
of each actual purchaser of each Book-Entry Note represented by a Global
Security ("Beneficial Owner") is in turn to be recorded on the records of
Direct Participants and Indirect Participants. Beneficial Owners will not
receive written confirmation from the Depository of their purchase, but
Beneficial Owners are expected to receive written confirmations providing
details of the transaction, as well as periodic statements of their
holdings, from the Direct Participants or Indirect Participants through
which such Beneficial Owner entered into the transaction. Transfers of
ownership interests in a Global Security representing Book-Entry Notes are
to be accomplished by entries made on the books of Participants acting on
behalf of Beneficial Owners. Beneficial Owners of a Global Security
representing Book-Entry Notes will not receive Certificated Notes
representing their ownership interests therein, except in the event that
use of the book-entry system for such Book-Entry Notes is discontinued.
To facilitate subsequent transfers, all Global Securities representing
Book-Entry Notes which are deposited with, or on behalf of, the Depository
are registered in the name of the Depository's nominee, Cede & Co. The
deposit of Global Securities with, or on behalf of, the Depository and
their registration in the name of Cede & Co. effect no change in beneficial
ownership. The Depository has no knowledge of the actual Beneficial Owners
of the Global Securities representing the Book-Entry Notes; the
Depository's records reflect only the identity of the Direct Participants
to whose accounts such Book-Entry Notes are credited, which may or may not
be the Beneficial Owners. The Participants will remain responsible for
keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by the Depository to
Direct Participants, by Direct Participants to Indirect Participants, and
by Direct Participants and Indirect Participants to Beneficial Owners will
be governed by arrangements among them, subject to any statutory or
regulatory requirements as may be in effect from time to time.
Neither the Depository nor Cede & Co. will consent or vote with
respect to the Global Securities representing the Book-Entry Notes. Under
its usual procedures, the Depository mails an Omnibus Proxy to the Issuer
as soon as possible after the applicable record date. The Omnibus Proxy
assigns Cede & Co.'s consenting or voting rights to those Direct
Participants to whose accounts the Book-Entry Notes are credited on the
applicable record date (identified in a listing attached to the Omnibus
Proxy).
Principal, premium, if any, and/or interest, if any, payments on the
Global Securities representing the Book-Entry Notes will be made in
immediately available funds to the Depository. The Depository's practice is
to credit Direct Participants' accounts on the applicable payment date in
accordance with their respective holdings shown on the Depository's records
unless the Depository has reason to believe that it
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will not receive payment on such date. Payments by Participants to
Beneficial Owners will be governed by standing instructions and customary
practices, as is the case with securities held for the accounts of
customers in bearer form or registered in "street name," and will be the
responsibility of such Participant and not of the Depository, the Trustee
or the Issuer, subject to any statutory or regulatory requirements as may
be in effect from time to time. Payment of principal, premium, if any,
and/or interest, if any, to the Depository is the responsibility of the
Issuer and the Trustee, disbursement of such payments to Direct
Participants shall be the responsibility of the Depository, and
disbursement of such payments to the Beneficial Owners shall be the
responsibility of Direct Participants and Indirect Participants.
If applicable, redemption notices shall be sent to Cede & Co. If less
than all of the Book-Entry Notes of like tenor and terms are being
redeemed, the Depository's practice is to determine by lot the amount of
the interest of each Direct Participant in such issue to be redeemed.
A Beneficial Owner shall give notice of any option to elect to have
its Book-Entry Notes repaid by the Issuer, through its Participant, to the
Trustee, and shall effect delivery of such Book-Entry Notes by causing the
Direct Participant to transfer the Participant's interest in the Global
Security or Securities representing such Book-Entry Notes, on the
Depository's records, to the Trustee. The requirement for physical delivery
of Book-Entry Notes in connection with a demand for repayment will be
deemed satisfied when the ownership rights in the Global Security or
Securities representing such Book-Entry Notes are transferred by Direct
Participants on the Depository's records.
The Depository may discontinue providing its services as securities
depository with respect to the Book-Entry Notes at any time by giving
reasonable notice to the Issuer or the Trustee. Under such circumstances,
in the event that a successor securities depository is not obtained,
Certificated Notes are required to be printed and delivered.
The Issuer may decide to discontinue use of the system of book-entry
transfers through the Depository (or a successor securities depository). In
that event, Certificated Notes will be printed and delivered.
The information in this section concerning the Depository and the
Depository's system has been obtained from sources that the Issuer believes to
be reliable, but the Issuer takes no responsibility for the accuracy thereof.
SPECIAL PROVISIONS RELATING TO FOREIGN CURRENCY NOTES
GENERAL
Unless otherwise specified in the applicable Pricing Supplement, Foreign
Currency Notes will not be sold in, or to residents of, the country issuing the
applicable currency. The information set forth in this Prospectus Supplement is
directed to prospective purchasers who are United States residents and, with
respect to Foreign Currency Notes, is by necessity incomplete. The Issuer and
the Agents disclaim any responsibility to advise prospective purchasers who are
residents of countries other than the United States with respect to any matters
that may affect the purchase, holding or receipt of payments of principal of,
and premium, if any, and interest, if any, on, Foreign Currency Notes. Such
persons should consult their own financial and legal advisors with regard to
such matters. See "Risk Factors--Exchange Rates and Exchange Controls."
PAYMENT OF PRINCIPAL, PREMIUM, IF ANY, AND INTEREST, IF ANY
Unless otherwise specified in the applicable Pricing Supplement, the Issuer
is obligated to make payments of principal of, and premium, if any, and
interest, if any, on, a Foreign Currency Note in the Specified Currency. Any
such amounts payable by the Issuer in the Specified Currency will be converted
by the exchange rate agent named in the applicable Pricing Supplement (the
"Exchange Rate Agent") into United States dollars for payment to Holders unless
otherwise specified in the applicable Pricing Supplement or the holder of such
Foreign Currency Note elects, in the manner hereinafter described, to receive
such amounts in the Specified Currency.
Any United States dollar amount to be received by a holder of a Foreign
Currency Note will be based on the highest bid quotation in The City of New York
received by the Exchange Rate Agent at approximately 11:00 A.M., New York City
time, on the second Business Day preceding the applicable payment date from
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three recognized foreign exchange dealers (one of whom may be the Exchange Rate
Agent) selected by the Exchange Rate Agent and approved by the Issuer for the
purchase by the quoting dealer of the Specified Currency for United States
dollars for settlement on such payment date in the aggregate amount of such
Specified Currency payable to all holders of Foreign Currency Notes scheduled to
receive United States dollar payments and at which the applicable dealer commits
to execute a contract. All currency exchange costs will be borne by the holders
of such Foreign Currency Notes by deductions from such payments. If three such
bid quotations are not available, payments will be made in the Specified
Currency.
Holders of Foreign Currency Notes may elect to receive all or a specified
portion of any payment of principal, premium, if any, and/or interest, if any,
in the Specified Currency by submitting a written request for such payment to
the Trustee at its corporate trust office in The City of New York on or prior to
the applicable Record Date or at least fifteen calendar days prior to the
Maturity Date, as the case may be. Such written request may be mailed or hand
delivered or sent by cable, telex or other form of facsimile transmission.
Holders of Foreign Currency Notes may elect to receive all or a specified
portion of all future payments in the Specified Currency and need not file a
separate election for each payment. Such election will remain in effect until
revoked by written notice to the Trustee, but written notice of any such
revocation must be received by the Trustee on or prior to the applicable Record
Date or at least fifteen calendar days prior to the Maturity Date, as the case
may be. Holders of Foreign Currency Notes to be held in the name of a broker or
nominee should contact such broker or nominee to determine whether and how an
election to receive payments in the Specified Currency may be made.
Unless otherwise specified in the applicable Pricing Supplement, if the
Specified Currency is other than United States dollars, a Beneficial Owner of
the related Global Security or Securities which elects to receive payments of
principal, premium, if any, and/or interest, if any, in the Specified Currency
must notify the Participant through which it owns its interest on or prior to
the applicable Record Date or at least fifteen calendar days prior to the
Maturity Date, as the case may be, of such Beneficial Owner's election. Such
Participant must notify the Depository of such election on or prior to the third
Business Day after such Record Date or at least twelve calendar days prior to
the Maturity Date, as the case may be, and the Depository will notify the
Trustee of such election on or prior to the fifth Business Day after such Record
Date or at least ten calendar days prior to the Maturity Date, as the case may
be. If complete instructions are received by the Participant from the Beneficial
Owner and forwarded by the Participant to the Depository, and by the Depository
to the Trustee, on or prior to such dates, then such Beneficial Owner will
receive payments in the Specified Currency.
Payments of the principal of, and premium, if any, and/or interest, if any,
on, Foreign Currency Notes which are to be made in United States dollars will be
made in the manner specified herein with respect to Notes denominated in United
States dollars. See "Description of Notes--General." Payments of interest, if
any, on Foreign Currency Notes which are to be made in the Specified Currency on
an Interest Payment Date other than the Maturity Date will be made by check
mailed to the address of the holders of such Foreign Currency Notes as they
appear in the Security Register, subject to the right to receive such interest
payments by wire transfer of immediately available funds under the circumstances
described under "Description of Notes--General." Payments of principal of, and
premium, if any, and/or interest, if any, on, Foreign Currency Notes which are
to be made in the Specified Currency on the Maturity Date will be made by wire
transfer of immediately available funds to an account with a bank designated at
least fifteen calendar days prior to the Maturity Date by each holder thereof,
provided that such bank has appropriate facilities therefor and that the
applicable Foreign Currency Note is presented and surrendered at the office or
agency maintained by the Issuer for such purpose in the Borough of Manhattan,
The City of New York, currently the corporate trust office of the Trustee
located at , in time for the Trustee to make such payments
in such funds in accordance with its normal procedures.
AVAILABILITY OF SPECIFIED CURRENCY
Except as set forth below, if the Specified Currency for a Foreign Currency
Note is not available for the required payment of principal, premium, if any,
and/or interest, if any, in respect thereof due to the imposition of exchange
controls or other circumstances beyond the control of the Issuer, the Issuer
will be entitled to satisfy its obligations to the holder of such Foreign
Currency Note by making such payment in United States
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dollars on the basis of the Market Exchange Rate, computed by the Exchange Rate
Agent, on the second Business Day prior to such payment or, if such Market
Exchange Rate is not then available, on the basis of the most recently available
Market Exchange Rate, or as otherwise specified in the applicable Pricing
Supplement.
If the Specified Currency for a Foreign Currency Note is a composite
currency that is not available for the required payment of principal, premium,
if any, and/or interest, if any, in respect thereof due to the imposition of
exchange controls or other circumstances beyond the control of the Issuer, the
Issuer will be entitled to satisfy its obligations to the holder of such Foreign
Currency Note by making such payment in United States dollars on the basis of
the equivalent of the composite currency in United States dollars. The component
currencies of the composite currency for this purpose (the "Component
Currencies") shall be the currency amounts that were components of the composite
currency as of the last day on which the composite currency was used. The
equivalent of the composite currency in United States dollars shall be
calculated by aggregating the United States dollar equivalents of the Component
Currencies. The United States dollar equivalent of each of the Component
Currencies shall be determined by the Exchange Rate Agent on the basis of the
Market Exchange Rate on the second Business Day prior to the required payment
or, if such Market Exchange Rate is not then available, on the basis of the most
recently available Market Exchange Rate for each such Component Currency, or as
otherwise specified in the applicable Pricing Supplement.
If the official unit of any Component Currency is altered by way of
combination or subdivision, the number of units of the currency as a Component
Currency shall be divided or multiplied in the same proportion. If two or more
Component Currencies are consolidated into a single currency, the amounts of
those currencies as Component Currencies shall be replaced by an amount in such
single currency equal to the sum of the amounts of the consolidated Component
Currencies expressed in such single currency. If any Component Currency is
divided into two or more currencies, the amount of the original Component
Currency shall be replaced by the amounts of such two or more currencies, the
sum of which shall be equal to the amount of the original Component Currency.
The "Market Exchange Rate" for a Specified Currency other than United
States dollars means the noon dollar buying rate in The City of New York for
cable transfers for such Specified Currency as certified for customs purposes
(or, if not so certified, as otherwise determined) by the Federal Reserve Bank
of New York. Any payment made in United States dollars under such circumstances
where the required payment is in a Specified Currency other than United States
dollars will not constitute an Event of Default under the Indenture with respect
to the Notes.
All determinations referred to above made by the Exchange Rate Agent shall
be at its sole discretion and shall, in the absence of manifest error, be
conclusive for all purposes and binding on the holders of the Foreign Currency
Notes.
JUDGMENTS
Under current New York law, a state court in the State of New York
rendering a judgment in respect of a Foreign Currency Note would be required to
render such judgment in the Specified Currency, and such foreign currency
judgment would be converted into United States dollars at the exchange rate
prevailing on the date of entry of such judgment. Accordingly, the holder of
such Foreign Currency Note would be subject to exchange rate fluctuations
between the date of entry of such foreign currency judgment and the time the
amount of such foreign currency judgment is paid to such holder in United States
dollars and converted by such holder into the Specified Currency. It is not
certain, however, whether a non-New York state court would follow the same rules
and procedures with respect to conversions of foreign currency judgments.
The Issuer will indemnify the holder of any Note against any loss incurred
by such holder as a result of any judgment or order being given or made for any
amount due under such Note and such judgment or order requiring payment in a
currency or composite currency (the "Judgment Currency") other than the
Specified Currency, and as a result of any variation between (i) the rate of
exchange at which the Specified Currency amount is converted into the Judgment
Currency for the purpose of such judgment or order, and (ii) the rate of
exchange at which the holder of such Note, on the date of payment of such
judgment or order, is able to purchase the Specified Currency with the amount of
the Judgment Currency actually received by such holder, as the case may be.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain United States Federal income tax
consequences of the purchase, ownership and disposition of the Notes is based
upon laws, regulations, rulings and decisions now in effect, all of which are
subject to change (including changes in effective dates) or possible differing
interpretations. It deals only with Notes held as capital assets and does not
purport to deal with persons in special tax situations, such as financial
institutions, insurance companies, regulated investment companies, dealers in
securities or currencies, persons holding Notes as a hedge against currency
risks or as a position in a "straddle" for tax purposes, or persons whose
functional currency is not the United States dollar. It also does not deal with
holders other than original purchasers (except where otherwise specifically
noted). Persons considering the purchase of the Notes should consult their own
tax advisors concerning the application of United States Federal income tax laws
to their particular situations as well as any consequences of the purchase,
ownership and disposition of the Notes arising under the laws of any other
taxing jurisdiction.
As used herein, the term "U.S. Holder" means a beneficial owner of a Note
that is for United States Federal income tax purposes (i) a citizen or resident
of the United States, (ii) a corporation, partnership or other entity created or
organized in or under the laws of the United States or of any political
subdivision thereof, (iii) an estate or trust the income of which is subject to
United States Federal income taxation regardless of its source or (iv) any other
person whose income or gain in respect of a Note is effectively connected with
the conduct of a United States trade or business. As used herein, the term
"non-U.S. Holder" means a beneficial owner of a Note that is not a U.S. Holder.
U.S. HOLDERS
Payments of Interest
Payments of interest on a Note generally will be taxable to a U.S. Holder
as ordinary interest income at the time such payments are accrued or are
received (in accordance with the U.S. Holder's regular method of tax
accounting).
Original Issue Discount
The following summary is a general discussion of the United States Federal
income tax consequences to U.S. Holders of the purchase, ownership and
disposition of Notes issued with original issue discount ("Original Issue
Discount Notes"). The following summary is based upon final Treasury regulations
(the "OID Regulations") released by the Internal Revenue Service ("IRS") on
January 27, 1994, as amended on June 11, 1996, under the original issue discount
provisions of the Code.
For United States Federal income tax purposes, original issue discount is
the excess of the stated redemption price at maturity of a Note over its issue
price, if such excess equals or exceeds a de minimis amount (generally 1/4 of 1%
of the Note's stated redemption price at maturity multiplied by the number of
complete years to its maturity from its issue date or, in the case of a Note
providing for the payment of any amount other than qualified stated interest (as
hereinafter defined) prior to maturity, multiplied by the weighted average
maturity of such Note). The issue price of each Note in an issue of Notes equals
the first price at which a substantial amount of such Notes has been sold
(ignoring sales to bond houses, brokers, or similar persons or organizations
acting in the capacity of underwriters, placement agents, or wholesalers). The
stated redemption price at maturity of a Note is the sum of all payments
provided by the Note other than "qualified stated interest" payments. The term
"qualified stated interest" generally means stated interest that is
unconditionally payable in cash or property (other than debt instruments of the
issuer) at least annually at a single fixed rate. In addition, under the OID
Regulations, if a Note bears interest for one or more accrual periods at a rate
below the rate applicable for the remaining term of such Note (e.g., Notes with
teaser rates or interest holidays), and if the greater of either the resulting
foregone interest on such Note or any "true" discount on such Note (i.e., the
excess of the Note's stated principal amount over its issue price) equals or
exceeds a specified de minimis amount, then the stated interest on the Note
would be treated as original issue discount rather than qualified stated
interest.
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Payments of qualified stated interest on a Note are taxable to a U.S.
Holder as ordinary interest income at the time such payments are accrued or are
received (in accordance with the U.S. Holder's regular method of tax
accounting). A U.S. Holder of an Original Issue Discount Note must include
original issue discount in income as ordinary interest for United States Federal
income tax purposes as it accrues under a constant yield method in advance of
receipt of the cash payments attributable to such income, regardless of such
U.S. Holder's regular method of tax accounting. In general, the amount of
original issue discount included in income by the initial U.S. Holder of an
Original Issue Discount Note is the sum of the daily portions of original issue
discount with respect to such Original Issue Discount Note for each day during
the taxable year (or portion of the taxable year) on which such U.S. Holder held
such Original Issue Discount Note. The "daily portion" of original issue
discount on any Original Issue Discount Note is determined by allocating to each
day in any accrual period a ratable portion of the original issue discount
allocable to that accrual period. An "accrual period" may be of any length and
the accrual periods may vary in length over the term of the Original Issue
Discount Note, provided that each accrual period is no longer than one year and
each scheduled payment of principal or interest occurs either on the final day
of an accrual period or on the first day of an accrual period. The amount of
original issue discount allocable to each accrual period is generally equal to
the difference between (i) the product of the Original Issue Discount Note's
adjusted issue price at the beginning of such accrual period and its yield to
maturity (determined on the basis of compounding at the close of each accrual
period and appropriately adjusted to take into account the length of the
particular accrual period) and (ii) the amount of any qualified stated interest
payments allocable to such accrual period. The "adjusted issue price" of an
Original Issue Discount Note at the beginning of any accrual period is the sum
of the issue price of the Original Issue Discount Note plus the amount of
original issue discount allocable to all prior accrual periods minus the amount
of any prior payments on the Original Issue Discount Note that were not
qualified stated interest payments. Under these rules, U.S. Holders generally
will have to include in income increasingly greater amounts of original issue
discount in successive accrual periods.
A U.S. Holder who purchases an Original Issue Discount Note for an amount
that is greater than its adjusted issue price as of the purchase date and less
than or equal to the sum of all amounts payable on the Original Issue Discount
Note after the purchase date other than payments of qualified stated interest,
will be considered to have purchased the Original Issue Discount Note at an
"acquisition premium." Under the acquisition premium rules, the amount of
original issue discount which such U.S. Holder must include in its gross income
with respect to such Original Issue Discount Note for any taxable year (or
portion thereof in which the U.S. Holder holds the Original Issue Discount Note)
will be reduced (but not below zero) by the portion of the acquisition premium
properly allocable to the period.
Under the OID Regulations, Floating Rate Notes and Indexed Notes ("Variable
Notes") are subject to special rules whereby a Variable Note will qualify as a
"variable rate debt instrument" if (a) its issue price does not exceed the total
noncontingent principal payments due under the Variable Note by more than a
specified de minimis amount and (b) it provides for stated interest, paid or
compounded at least annually, at current values of (i) one or more qualified
floating rates, (ii) a single fixed rate and one or more qualified floating
rates, (iii) a single objective rate, or (iv) a single fixed rate and a single
objective rate that is a qualified inverse floating rate.
A "qualified floating rate" is any variable rate where variations in the
value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Note is denominated. Although a multiple of a qualified floating rate
will generally not itself constitute a qualified floating rate, a variable rate
equal to the product of a qualified floating rate and a fixed multiple that is
greater than .65 but not more than 1.35 will constitute a qualified floating
rate. A variable rate equal to the product of a qualified floating rate and a
fixed multiple that is greater than .65 but not more than 1.35, increased or
decreased by a fixed rate, will also constitute a qualified floating rate. In
addition, under the OID Regulations, two or more qualified floating rates that
can reasonably be expected to have approximately the same values throughout the
term of the Variable Note (e.g., two or more qualified floating rates with
values within 25 basis points of each other as determined on the Variable Note's
issue date) will be treated as a single qualified floating rate. Notwithstanding
the foregoing, a variable rate that would otherwise constitute a qualified
floating rate but which is subject to one or more restrictions such as a maximum
numerical limitation
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(i.e., a cap) or a minimum numerical limitation (i.e., a floor) may, under
certain circumstances, fail to be treated as a qualified floating rate under the
OID Regulations unless such cap or floor is fixed throughout the term of the
Note. An "objective rate" is a rate that is not itself a qualified floating rate
but which is determined using a single fixed formula and which is based upon
objective financial or economic information. A rate will not qualify as an
objective rate if it is based on information that is within the control of the
issuer (or a related party) or that is unique to the circumstances of the issuer
(or a related party), such as dividends, profits or the value of the issuer's
stock (although a rate does not fail to be an objective rate merely because it
is based on the credit quality of the issuer). A "qualified inverse floating
rate" is any objective rate where such rate is equal to a fixed rate minus a
qualified floating rate, as long as variations in the rate can reasonably be
expected to inversely reflect contemporaneous variations in the qualified
floating rate. The OID Regulations also provide that if a Variable Note provides
for stated interest at a fixed rate for an initial period of one year or less
followed by a variable rate that is either a qualified floating rate or an
objective rate and if the variable rate on the Variable Note's issue date is
intended to approximate the fixed rate (e.g., the value of the variable rate on
the issue date does not differ from the value of the fixed rate by more than 25
basis points), then the fixed rate and the variable rate together will
constitute either a single qualified floating rate or objective rate, as the
case may be.
If a Variable Note that provides for stated interest at either a single
qualified floating rate or a single objective rate throughout the term thereof
qualifies as a "variable rate debt instrument" under the OID Regulations and if
interest on such Note is unconditionally payable in cash or property (other than
debt instruments of the issuer) at least annually, then all stated interest on
such Note will constitute qualified stated interest and will be taxed
accordingly. Thus, a Variable Note that provides for stated interest at either a
single qualified floating rate or a single objective rate throughout the term
thereof and that qualifies as a "variable rate debt instrument" under the OID
Regulations will generally not be treated as having been issued with original
issue discount unless the Variable Note is issued at a "true" discount (i.e., at
a price below the Note's stated principal amount) in excess of a specified de
minimis amount. The amount of qualified stated interest and the amount of
original issue discount, if any, that accrues during an accrual period on such
Variable Note is determined under the rules applicable to fixed rate debt
instruments by assuming that the variable rate is a fixed rate equal to (i) in
the case of a qualified floating rate or qualified inverse floating rate, the
value as of the issue date, of the qualified floating rate or qualified inverse
floating rate, or (ii) in the case of an objective rate (other than a qualified
inverse floating rate), a fixed rate that reflects the yield that is reasonably
expected for the Variable Note. The qualified stated interest allocable to an
accrual period is increased (or decreased) if the interest actually paid during
an accrual period exceeds (or is less than) the interest assumed to be paid
during the accrual period pursuant to the foregoing rules.
In general, any other Variable Note that qualifies as a "variable rate debt
instrument" will be converted into an "equivalent" fixed rate debt instrument
for purposes of determining the amount and accrual of original issue discount
and qualified stated interest on the Variable Note. The OID Regulations
generally require that such a Variable Note be converted into an "equivalent"
fixed rate debt instrument by substituting any qualified floating rate or
qualified inverse floating rate provided for under the terms of the Variable
Note with a fixed rate equal to the value of the qualified floating rate or
qualified inverse floating rate, as the case may be, as of the Variable Note's
issue date. Any objective rate (other than a qualified inverse floating rate)
provided for under the terms of the Variable Note is converted into a fixed rate
that reflects the yield that is reasonably expected for the Variable Note. In
the case of a Variable Note that qualifies as a "variable rate debt instrument"
and provides for stated interest at a fixed rate in addition to either one or
more qualified floating rates or a qualified inverse floating rate, the fixed
rate is initially converted into a qualified floating rate (or a qualified
inverse floating rate, if the Variable Note provides for a qualified inverse
floating rate). Under such circumstances, the qualified floating rate or
qualified inverse floating rate that replaces the fixed rate must be such that
the fair market value of the Variable Note as of the Variable Note's issue date
is approximately the same as the fair market value of an otherwise identical
debt instrument that provides for either the qualified floating rate or
qualified inverse floating rate rather than the fixed rate. Subsequent to
converting the fixed rate into either a qualified floating rate or a qualified
inverse floating rate, the Variable Note is then converted into an "equivalent"
fixed rate debt instrument in the manner described above.
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Once the Variable Note is converted into an "equivalent" fixed rate debt
instrument pursuant to the foregoing rules, the amount of original issue
discount and qualified stated interest, if any, are determined for the
"equivalent" fixed rate debt instrument by applying the general original issue
discount rules to the "equivalent" fixed rate debt instrument and a U.S. Holder
of the Variable Note will account for such original issue discount and qualified
stated interest as if the U.S. Holder held the "equivalent" fixed rate debt
instrument. Each accrual period appropriate adjustments will be made to the
amount of qualified stated interest or original issue discount assumed to have
been accrued or paid with respect to the "equivalent" fixed rate debt instrument
in the event that such amounts differ from the actual amount of interest accrued
or paid on the Variable Note during the accrual period.
If a Variable Note does not qualify as a "variable rate debt instrument"
under the OID Regulations, then the Variable Note would be treated as a
contingent payment debt obligation. It is not entirely clear under current law
how a Variable Note would be taxed if such Note were treated as a contingent
payment debt obligation. U.S. Holders should be aware that on June 11, 1996 the
Treasury Department issued final regulations (the "CPDI Regulations") concerning
the proper United States Federal income tax treatment of contingent payment debt
instruments. In general, the CPDI Regulations would cause the timing and
character of income, gain or loss reported on a contingent payment debt
instrument to substantially differ from the timing and character of income, gain
or loss reported on a contingent payment debt instrument under general
principles of current United States Federal income tax law. Specifically, the
CPDI Regulations generally require a U.S. Holder of such an instrument to
include future contingent and noncontingent interest payments in income as such
interest accrues based upon a projected payment schedule. Moreover, in general,
under the CPDI Regulations, any gain recognized by a U.S. Holder on the sale,
exchange, or retirement of a contingent payment debt instrument will be treated
as ordinary income and all or a portion of any loss realized could be treated as
ordinary loss as opposed to capital loss (depending upon the circumstances). The
CPDI Regulations apply to debt instruments issued on or after August 13, 1996.
The proper United States Federal income tax treatment of Variable Notes that are
treated as contingent payment debt obligations will be more fully described in
the applicable Pricing Supplement. Furthermore, any other special United States
Federal income tax considerations, not otherwise discussed herein, which are
applicable to any particular issue of Notes will be discussed in the applicable
Pricing Supplement.
Certain of the Notes (i) may be redeemable at the option of the Issuer
prior to their stated maturity (a "call option") and/or (ii) may be repayable at
the option of the holder prior to their stated maturity (a "put option"). Notes
containing such features may be subject to rules that differ from the general
rules discussed above. Investors intending to purchase Notes with such features
should consult their own tax advisors, since the original issue discount
consequences will depend, in part, on the particular terms and features of the
purchased Notes.
U.S. Holders may generally, upon election, include in income all interest
(including stated interest, acquisition discount, original issue discount, de
minimis original issue discount, market discount, de minimis market discount,
and unstated interest, as adjusted by any amortizable bond premium or
acquisition premium) that accrues on a debt instrument by using the constant
yield method applicable to original issue discount, subject to certain
limitations and exceptions.
Short-Term Notes
Notes that have a fixed maturity of one year or less ("Short-Term Notes")
will be treated as having been issued with original issue discount. In general,
an individual or other cash method U.S. Holder is not required to accrue such
original issue discount unless the U.S. Holder elects to do so. If such an
election is not made, any gain recognized by the U.S. Holder on the sale,
exchange or maturity of the Short-Term Note will be ordinary income to the
extent of the original issue discount accrued on a straight-line basis, or upon
election under the constant yield method (based on daily compounding), through
the date of sale or maturity, and a portion of the deductions otherwise
allowable to the U.S. Holder for interest on borrowings allocable to the
Short-Term Note will be deferred until a corresponding amount of income is
realized. U.S. Holders who report income for United States Federal income tax
purposes under the accrual method, and certain other holders including banks and
dealers in securities, are required to accrue original issue discount on a
Short-
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Term Note on a straight-line basis unless an election is made to accrue the
original issue discount under a constant yield method (based on daily
compounding).
Market Discount
If a U.S. Holder purchases a Note, other than an Original Issue Discount
Note, for an amount that is less than its issue price (or, in the case of a
subsequent purchaser, its stated redemption price at maturity) or, in the case
of an Original Issue Discount Note, for an amount that is less than its adjusted
issue price as of the purchase date, such U.S. Holder will be treated as having
purchased such Note at a "market discount," unless such market discount is less
than a specified de minimis amount.
Under the market discount rules, a U.S. Holder will be required to treat
any partial principal payment (or, in the case of an Original Issue Discount
Note, any payment that does not constitute qualified stated interest) on, or any
gain realized on the sale, exchange, retirement or other disposition of, a Note
as ordinary income to the extent of the lesser of (i) the amount of such payment
or realized gain or (ii) the market discount which has not previously been
included in income and is treated as having accrued on such Note at the time of
such payment or disposition. Market discount will be considered to accrue
ratably during the period from the date of acquisition to the maturity date of
the Note, unless the U.S. Holder elects to accrue market discount on the basis
of semiannual compounding.
A U.S. Holder may be required to defer the deduction of all or a portion of
the interest paid or accrued on any indebtedness incurred or maintained to
purchase or carry a Note with market discount until the maturity of the Note or
certain earlier dispositions, because a current deduction is only allowed to the
extent the interest expense exceeds an allocable portion of market discount. A
U.S. Holder may elect to include market discount in income currently as it
accrues (on either a ratable or semiannual compounding basis), in which case the
rules described above regarding the treatment as ordinary income of gain upon
the disposition of the Note and upon the receipt of certain cash payments and
regarding the deferral of interest deductions will not apply. Generally, such
currently included market discount is treated as ordinary interest for United
States Federal income tax purposes. Such an election will apply to all debt
instruments acquired by the U.S. Holder on or after the first day of the first
taxable year to which such election applies and may be revoked only with the
consent of the IRS.
Premium
If a U.S. Holder purchases a Note for an amount that is greater than the
sum of all amounts payable on the Note after the purchase date other than
payments of qualified stated interest, such U.S. Holder will be considered to
have purchased the Note with "amortizable bond premium" equal in amount to such
excess. A U.S. Holder may elect to amortize such premium using a constant yield
method over the remaining term of the Note and may offset interest otherwise
required to be included in respect of the Note during any taxable year by the
amortized amount of such excess for the taxable year. However, if the Note may
be optionally redeemed after the U.S. Holder acquires it at a price in excess of
its stated redemption price at maturity, special rules would apply which could
result in a deferral of the amortization of some bond premium until later in the
term of the Note. Any election to amortize bond premium applies to all taxable
debt instruments then owned and thereafter acquired by the U.S. Holder on or
after the first day of the first taxable year to which such election applies and
may be revoked only with the consent of the IRS.
Disposition of a Note
Except as discussed above, upon the sale, exchange or retirement of a Note,
a U.S. Holder generally will recognize taxable gain or loss equal to the
difference between the amount realized on the sale, exchange or retirement
(other than amounts representing accrued and unpaid interest) and such U.S.
Holder's adjusted tax basis in the Note. A U.S. Holder's adjusted tax basis in a
Note generally will equal such U.S. Holder's initial investment in the Note
increased by any original issue discount included in income (and accrued market
discount, if any, if the U.S. Holder has included such market discount in
income) and decreased by the amount of any payments, other than qualified stated
interest payments, received and amortizable bond
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premium taken with respect to such Note. Such gain or loss generally will be
long-term capital gain or loss if the Note were held for more than one year.
NOTES DENOMINATED, OR IN RESPECT OF WHICH INTEREST IS PAYABLE, IN A FOREIGN
CURRENCY
As used herein, "Foreign Currency" means a currency or composite currency
other than U.S. dollars.
Payments of Interest in a Foreign Currency
Cash Method. A U.S. Holder who uses the cash method of accounting for
United States Federal income tax purposes and who receives a payment of interest
on a Note (other than original issue discount or market discount) will be
required to include in income the U.S. dollar value of the Foreign Currency
payment (determined on the date such payment is received) regardless of whether
the payment is in fact converted to U.S. dollars at that time, and such U.S.
dollar value will be the U.S. Holder's tax basis in such Foreign Currency.
Accrual Method. A U.S. Holder who uses the accrual method of accounting
for United States Federal income tax purposes, or who otherwise is required to
accrue interest prior to receipt, will be required to include in income the U.S.
dollar value of the amount of interest income (including original issue discount
or market discount and reduced by amortizable bond premium to the extent
applicable) that has accrued and is otherwise required to be taken into account
with respect to a Note during an accrual period. The U.S. dollar value of such
accrued income will be determined by translating such income at the average rate
of exchange for the accrual period or, with respect to an accrual period that
spans two taxable years, at the average rate for the partial period within the
taxable year. A U.S. Holder may elect, however, to translate such accrued
interest income using the rate of exchange on the last day of the accrual period
or, with respect to an accrual period that spans two taxable years, using the
rate of exchange on the last day of the taxable year. If the last day of an
accrual period is within five business days of the date of receipt of the
accrued interest, a U.S. Holder may translate such interest using the rate of
exchange on the date of receipt. The above election will apply to other debt
obligations held by the U.S. Holder and may not be changed without the consent
of the IRS. A U.S. Holder should consult a tax advisor before making the above
election. A U.S. Holder will recognize exchange gain or loss (which will be
treated as ordinary income or loss) with respect to accrued interest income on
the date such income is received. The amount of ordinary income or loss
recognized will equal the difference, if any, between the U.S. dollar value of
the Foreign Currency payment received (determined on the date such payment is
received) in respect of such accrual period and the U.S. dollar value of
interest income that has accrued during such accrual period (as determined
above).
Purchase, Sale and Retirement of Notes
A U.S. Holder who purchases a Note with previously owned Foreign Currency
will recognize ordinary income or loss in an amount equal to the difference, if
any, between such U.S. Holder's tax basis in the Foreign Currency and the U.S.
dollar fair market value of the Foreign Currency used to purchase the Note,
determined on the date of purchase.
Except as discussed above with respect to Short-Term Notes, upon the sale,
exchange or retirement of a Note, a U.S. Holder will recognize taxable gain or
loss equal to the difference between the amount realized on the sale, exchange
or retirement and such U.S. Holder's adjusted tax basis in the Note. Such gain
or loss generally will be capital gain or loss (except to the extent of any
accrued market discount not previously included in the U.S. Holder's income) and
will be long-term capital gain or loss if at the time of sale, exchange or
retirement the Note has been held by such U.S. Holder for more than one year. To
the extent the amount realized represents accrued but unpaid interest, however,
such amounts must be taken into account as interest income, with exchange gain
or loss computed as described in "Payments of Interest in a Foreign Currency"
above. If a U.S. Holder receives Foreign Currency on such a sale, exchange or
retirement the amount realized will be based on the U.S. dollar value of the
Foreign Currency on the date the payment is received or the Note is disposed of
(or deemed disposed of as a result of a material change in the terms of such
Note). In the case of a Note that is denominated in Foreign Currency and is
traded on an established securities market, a cash basis U.S. Holder (or, upon
election, an accrual basis U.S. Holder) will determine
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the U.S. dollar value of the amount realized by translating the Foreign Currency
payment at the spot rate of exchange on the settlement date of the sale. A U.S.
Holder's adjusted tax basis in a Note will equal the cost of the Note to such
holder, increased by the amounts of any market discount or original issue
discount previously included in income by the holder with respect to such Note
and reduced by any amortized acquisition or other premium and any principal
payments received by the holder. A U.S. Holder's tax basis in a Note, and the
amount of any subsequent adjustments to such holder's tax basis, will be the
U.S. dollar value of the Foreign Currency amount paid for such Note, or of the
Foreign Currency amount of the adjustment, determined on the date of such
purchase or adjustment.
Gain or loss realized upon the sale, exchange or retirement of a Note that
is attributable to fluctuations in currency exchange rates will be ordinary
income or loss which will not be treated as interest income or expense. Gain or
loss attributable to fluctuations in exchange rates will equal the difference
between the U.S. dollar value of the Foreign Currency principal amount of the
Note, determined on the date such payment is received or the Note is disposed
of, and the U.S. dollar value of the Foreign Currency principal amount of the
Note, determined on the date the U.S. Holder acquired the Note. Such Foreign
Currency gain or loss will be recognized only to the extent of the total gain or
loss realized by the U.S. Holder on the sale, exchange or retirement of the
Note.
Original Issue Discount
In the case of an Original Issue Discount Note or Short-Term Note, (i)
original issue discount is determined in units of the Foreign Currency, (ii)
accrued original issue discount is translated into U.S. dollars as described in
"Payments of Interest in a Foreign Currency--Accrual Method" above and (iii) the
amount of Foreign Currency gain or loss on the accrued original issue discount
is determined by comparing the amount of income received attributable to the
discount (either upon payment, maturity or an earlier disposition), as
translated into U.S. dollars at the rate of exchange on the date of such
receipt, with the amount of original issue discount accrued, as translated
above.
Premium and Market Discount
In the case of a Note with market discount, (i) market discount is
determined in units of the Foreign Currency, (ii) accrued market discount taken
into account upon the receipt of any partial principal payment or upon the sale,
exchange, retirement or other disposition of the Note (other than accrued market
discount required to be taken into account currently) is translated into U.S.
dollars at the exchange rate on such disposition date (and no part of such
accrued market discount is treated as exchange gain or loss) and (iii) accrued
market discount currently includible in income by a U.S. Holder for any accrual
period is translated into U.S. dollars on the basis of the average exchange rate
in effect during such accrual period, and the exchange gain or loss is
determined upon the receipt of any partial principal payment or upon the sale,
exchange, retirement or other disposition of the Note in the manner described in
"Payments of Interest in a Foreign Currency--Accrual Method" above with respect
to computation of exchange gain or loss on accrued interest.
With respect to a Note issued with amortizable bond premium, such premium
is determined in the relevant Foreign Currency and reduces interest income in
units of the Foreign Currency. Although not entirely clear, a U.S. Holder should
recognize exchange gain or loss equal to the difference between the U.S. dollar
value of the bond premium amortized with respect to a period, determined on the
date the interest attributable to such period is received, and the U.S. dollar
value of the bond premium determined on the date of the acquisition of the Note.
Exchange of Foreign Currencies
A U.S. Holder will have a tax basis in any Foreign Currency received as
interest or on the sale, exchange or retirement of a Note equal to the U.S.
dollar value of such Foreign Currency, determined at the time the interest is
received or at the time of the sale, exchange or retirement. Any gain or loss
realized by a U.S. Holder on a sale or other disposition of Foreign Currency
(including its exchange for U.S. dollars or its use to purchase Notes) will be
ordinary income or loss.
S-42
<PAGE> 44
NON-U.S. HOLDERS
A non-U.S. Holder will not be subject to United States Federal income taxes
on payments of principal, premium (if any) or interest (including original issue
discount, if any) on a Note, unless such non-U.S. Holder is a direct or indirect
10% or greater shareholder of the Issuer, a controlled foreign corporation
related to the Issuer or a bank receiving interest described in section
881(c)(3)(A) of the Code. To qualify for the exemption from taxation, the last
United States payor in the chain of payment prior to payment to a non-U.S.
Holder (the "Withholding Agent") must have received in the year in which a
payment of interest or principal occurs, or in either of the two preceding
calendar years, a statement that (i) is signed by the beneficial owner of the
Note under penalties of perjury, (ii) certifies that such owner is not a U.S.
Holder and (iii) provides the name and address of the beneficial owner. The
statement may be made on an IRS Form W-8 or a substantially similar form, and
the beneficial owner must inform the Withholding Agent of any change in the
information on the statement within 30 days of such change. If a Note is held
through a securities clearing organization or certain other financial
institutions, the organization or institution may provide a signed statement to
the Withholding Agent. However, in such case, the signed statement must be
accompanied by a copy of the IRS Form W-8 or the substitute form provided by the
beneficial owner to the organization or institution. The Treasury Department is
considering implementation of further certification requirements aimed at
determining whether the issuer of a debt obligation is related to holders
thereof.
Generally, a non-U.S. Holder will not be subject to Federal income taxes on
any amount which constitutes capital gain upon retirement or disposition of a
Note, provided the gain is not effectively connected with the conduct of a trade
or business in the United States by the non-U.S. Holder. Certain other
exceptions may be applicable, and a non-U.S. Holder should consult its tax
advisor in this regard.
The Notes will not be includible in the estate of a non-U.S. Holder unless
the individual is a direct or indirect 10% or greater shareholder of the Issuer
or, at the time of such individual's death, payments in respect of the Notes
would have been effectively connected with the conduct by such individual of a
trade or business in the United States.
BACKUP WITHHOLDING
Backup withholding of United States Federal income tax at a rate of 31% may
apply to payments made in respect of the Notes to registered owners who are not
"exempt recipients" and who fail to provide certain identifying information
(such as the registered owner's taxpayer identification number) in the required
manner. Generally, individuals are not exempt recipients, whereas corporations
and certain other entities generally are exempt recipients. Payments made in
respect of the Notes to a U.S. Holder must be reported to the IRS, unless the
U.S. Holder is an exempt recipient or establishes an exemption. Compliance with
the identification procedures described in the preceding section would establish
an exemption from backup withholding for those non-U.S. Holders who are not
exempt recipients.
In addition, upon the sale of a Note to (or through) a broker, the broker
must withhold 31% of the entire purchase price, unless either (i) the broker
determines that the seller is a corporation or other exempt recipient or (ii)
the seller provides, in the required manner, certain identifying information
and, in the case of a non-U.S. Holder, certifies that such seller is a non-U.S.
Holder (and certain other conditions are met). Such a sale must also be reported
by the broker to the IRS, unless either (i) the broker determines that the
seller is an exempt recipient or (ii) the seller certifies its non-U.S. status
(and certain other conditions are met). Certification of the registered owner's
non-U.S. status would be made normally on an IRS Form W-8 under penalties of
perjury, although in certain cases it may be possible to submit other
documentary evidence.
Any amounts withheld under the backup withholding rules from a payment to a
beneficial owner would be allowed as a refund or a credit against such
beneficial owner's United States Federal income tax provided the required
information is furnished to the IRS.
S-43
<PAGE> 45
PLAN OF DISTRIBUTION
The Notes are being offered on a continuing basis for sale by the Issuer to
or through Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Chase Securities Inc., NationsBank Capital Markets, Inc. and Smith
Barney Inc. (the "Agents"). The Agents, individually or in a syndicate, may
purchase Notes, as principal, from the Issuer from time to time for resale to
investors and other purchasers at varying prices relating to prevailing market
prices at the time of resale as determined by the applicable Agent or, if so
specified in the applicable Pricing Supplement, for resale at a fixed offering
price. If agreed to by the Issuer and an Agent, such Agent may also utilize its
reasonable efforts on an agency basis to solicit offers to purchase the Notes at
100% of the principal amount thereof, unless otherwise specified in the
applicable Pricing Supplement. The Issuer will pay a commission to an Agent,
ranging from [.125% to .750%] of the principal amount of each Note, depending
upon its stated maturity, sold through such Agent as an agent of the Issuer.
Commissions with respect to Notes with stated maturities in excess of 30 years
that are sold through an Agent as an agent of the Issuer will be negotiated
between the Issuer and such Agent at the time of such sale.
Unless otherwise specified in the applicable Pricing Supplement, any Note
sold to an Agent as principal will be purchased by such Agent at a price equal
to 100% of the principal amount thereof less a percentage of the principal
amount equal to the commission applicable to an agency sale of a Note of
identical maturity. An Agent may sell Notes it has purchased from the Issuer as
principal to certain dealers less a concession equal to all or any portion of
the discount received in connection with such purchase. Such Agent may allow,
and such dealers may reallow, a discount to certain other dealers. After the
initial offering of Notes, the offering price (in the case of Notes to be resold
on a fixed offering price basis), the concession and the reallowance may be
changed.
The Issuer reserves the right to withdraw, cancel or modify the offer made
hereby without notice and may reject offers in whole or in part (whether placed
directly with the Issuer or through an Agent). Each Agent will have the right,
in its discretion reasonably exercised, to reject in whole or in part any offer
to purchase Notes received by it on an agency basis.
Unless otherwise specified in the applicable Pricing Supplement, payment of
the purchase price of the Notes will be required to be made in immediately
available funds in the Specified Currency in The City of New York on the date of
settlement. See "Description of Notes--General."
Upon issuance, the Notes will not have an established trading market. The
Notes will not be listed on any securities exchange. The Agents may from time to
time purchase and sell Notes in the secondary market, but the Agents are not
obligated to do so, and there can be no assurance that there will be a secondary
market for the Notes or that there will be liquidity in the secondary market if
one develops. From time to time, the Agents may make a market in the Notes, but
the Agents are not obligated to do so and may discontinue any market-making
activity at any time.
The Agents may be deemed to be "underwriters" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"). The Issuer has agreed
to indemnify the Agents against, and to provide contribution with respect to,
certain liabilities (including liabilities under the Securities Act). The Issuer
has agreed to reimburse the Agents for certain other expenses.
In the ordinary course of its business, the Agents and their affiliates
have engaged and may in the future engage in investment and commercial banking
transactions with the Issuer and certain of its affiliates. See "Plan of
Distribution" in the accompanying Prospectus.
From time to time, the Issuer may issue and sell other Debt Securities
described in the accompanying Prospectus, and the amount of Notes offered hereby
is subject to reduction as a result of such sales.
S-44
<PAGE> 46
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED FEBRUARY 5, 1997
PROSPECTUS
- ----------
$1,000,000,000
HOMESIDE LENDING, INC.
DEBT SECURITIES
------------------------
HomeSide Lending, Inc. (the "Issuer" or "HomeSide") may offer from time to
time, in one or more series, its debt securities (the "Debt Securities") in the
amounts, at prices and on the terms to be determined at the time of the
offering. The Debt Securities may be issued in one or more series or issuances
and will have an aggregate initial public offering price of up to $1,000,000,000
(or the equivalent thereof, based on the applicable exchange rate at the time of
sale, in one or more foreign currencies, currency units or composite currencies
as shall be designated by the Issuer). Certain specific terms of the Debt
Securities in respect of which this Prospectus is being delivered are set forth
in the accompanying Prospectus Supplement (the "Prospectus Supplement"),
including, where applicable, the specific title, the aggregate principal amount,
aggregate offering price, the denomination, the maturity, the premium, if any,
the interest rate (which may be fixed, floating or adjustable), if any, the time
and method of calculating payment of interest, if any, the place or places where
principal of, premium, if any, and interest, if any, on such Debt Securities
will be payable, the currency in which principal of, premium, if any, and
interest, if any on such Debt Securities will be payable, any terms of
redemption at the option of the Issuer, or repayment at the option of the
holder, any sinking fund provisions, any other special terms, and the public
offering price and other terms of the offering and sale thereof. If so specified
in the applicable Prospectus Supplement, Debt Securities of a series may be
issued in whole or in part in the form of one or more temporary or permanent
global securities.
The applicable Prospectus Supplement also will contain information, where
applicable, about certain U.S. federal income tax considerations relating to,
and any listing on a securities exchange of, the Debt Securities covered by such
Prospectus Supplement.
Unless otherwise specified in a Prospectus Supplement, the Debt Securities,
when issued, will be unsecured and unsubordinated obligations of the Issuer and
will rank pari passu in right of payment with all other unsecured and
unsubordinated indebtedness of the Issuer.
------------------------
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 Debt Securities may be sold through underwriting syndicates represented
by managing underwriters, by underwriters without a syndicate, through agents
designated from time to time, or directly to institutional purchasers. Any such
managing underwriters, underwriters or agents may include Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Chase Securities Inc.,
NationsBank Capital Markets, Inc. and Smith Barney Inc. The names of any
underwriters or agents of the Issuer involved in the sale of the Debt Securities
in respect of which this Prospectus is being delivered and any applicable
commissions or discounts are set forth in the Prospectus Supplement. See "Plan
of Distribution." This Prospectus may not be used to consummate sales of Debt
Securities unless accompanied by a Prospectus Supplement.
------------------------
The date of this Prospectus is , 1997
<PAGE> 47
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE DEBT SECURITIES
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL ON THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
------------------------
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A
SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW
HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT
FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH
FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR
A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE
MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON,
SECURITY, OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY
PROSPECTIVE PURCHASER, CUSTOMER, OR CLIENT ANY REPRESENTATION INCONSISTENT WITH
THE PROVISIONS OF THIS PARAGRAPH.
ADDITIONAL INFORMATION
The Issuer has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement," which term shall include all amendments, exhibits, annexes and
schedules thereto) pursuant to the Securities Act of 1933 (the "Act" or the
"Securities Act"), and the rules and regulations promulgated thereunder,
covering the securities 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, reference is made to such
Registration Statement. The Registration Statement may 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's audited annual financial statements, unaudited quarterly
financial statements and certain other reports will be furnished to the Trustee
under the Indenture. Following the effectiveness of the Registration Statement
under the Securities Act, the Issuer will be subject to the reporting
requirements of Section 15(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). Notwithstanding that the Issuer may not be required to
remain subject to the reporting requirements of Section 13 or Section 15(d) of
the Exchange Act, so long as any of the Debt Securities are outstanding, the
Issuer will continue to file with the Commission and provide to the Trustee and,
upon request, to the holders of the Debt Securities, annual reports containing
financial statements audited by its independent certified public accountants and
quarterly reports containing unaudited financial statements for each of the
first three quarters of each fiscal year.
------------------------
2
<PAGE> 48
HOMESIDE
HLI, the mortgage banking subsidiary of Bank of Boston, was acquired by the
Parent on March 15, 1996. HHI, the mortgage banking subsidiary of Barnett was
acquired by the Parent on May 31, 1996. Upon the acquisition of HHI by the
Parent, all of the assets and liabilities of HHI, with the exception of certain
GNMA servicing rights, were transferred to the Issuer. HHI is a wholly-owned
subsidiary of the Parent, and the Issuer is a wholly-owned subsidiary of HHI.
The Issuer was incorporated in Florida on September 18, 1986. HomeSide's
executive offices are located at 7301 Baymeadows Way, Jacksonville, Florida
32256, telephone number (904) 281-3000.
HomeSide is one of the largest full-service residential mortgage banking
companies in the United States, formed through the acquisition of the mortgage
banking operations of The First National Bank of Boston ("Bank of Boston" or
"BKB") and Barnett Banks, Inc. ("Barnett"). HomeSide's strategy emphasizes
variable cost mortgage origination and low cost servicing. On a combined basis
HomeSide's origination volume and servicing portfolio would have been $14.7
billion and $73.9 billion, respectively, as of and for the year ended December
31, 1995, ranking HomeSide as the 5th largest originator and 7th largest
servicer in the United States for 1995 based on data published by National
Mortgage News. As of and for the nine months ended November 30, 1996, HomeSide's
loan originations and acquisitions were $18.9 billion and the servicing
portfolio was $87.7 billion.
The residential mortgage market totaled over $3.6 trillion in 1995 and is
the second largest debt market in the world, exceeded only by the United States
Treasury market. The residential mortgage market has grown at a compound annual
rate of approximately 8% since 1985. HomeSide competes in a mortgage banking
market which is highly fragmented with no single company controlling or
dominating 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.
Residential mortgage lenders compete primarily on the basis of loan pricing and
service, making effective cost management essential. The industry has
experienced rapid consolidation which has been accelerated by the introduction
of significant technology improvements and the economies of scale present in
mortgage servicing. The top 25 mortgage loan servicers have increased their
aggregate market share from 20.7% in 1990 to 39.1% in 1995.
HomeSide's business strategy is to increase the volume of its loan
originations and the size of its servicing portfolio while continuing to improve
operating efficiencies. In originating mortgages, HomeSide focuses on variable
cost channels of production, including correspondent, broker, consumer direct,
affinity, and co-issue sources. HomeSide also pursues strategic relationships
such as its existing 5-year agreements to acquire and service residential
mortgage loans from BKB and Barnett production sources, which, for the period
May 31, 1996 through November 30, 1996, represented 19.5% of HomeSide's loan
production. Management believes that these variable cost channels of production
deliver consistent origination opportunities for HomeSide without the fixed cost
investment associated with traditional retail mortgage branch networks. HomeSide
believes that its ongoing investment in technology will further enhance and
expand existing processing capabilities and improve its efficiency. Based on
independent surveys of direct cost per loan and loans serviced per employee,
management believes that HomeSide has been one of the industry's most efficient
mortgage servicers.
HomeSide plans to build its core operations through (i) improved economies
of scale in servicing costs; (ii) increased productivity using proprietary
technology; and (iii) expanded and diversified variable cost origination
channels. In addition, HomeSide intends to pursue additional loan portfolio
acquisitions and strategic origination relationships similar to the existing BKB
and Barnett arrangements.
HomeSide's business activities consist primarily of:
- Mortgage production: origination and purchase of residential single
family mortgage loans through multiple channels including
correspondents, strategic partners (BKB and Barnett), mortgage
brokers, co-issue partners, direct consumer telemarketing and affinity
programs;
- Servicing: administration, collection and remittance of monthly
mortgage principal and interest payments, collection and payment of
property taxes and insurance premiums and management of certain loan
default activities;
3
<PAGE> 49
- Secondary marketing: 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 or
private securities to investors; and
- Risk management: management of a program designed primarily to
protect the economic performance of the servicing portfolio that could
otherwise be adversely affected by increased loan prepayments due to
declines in interest rates.
For the period March 16, 1996 to November 30, 1996, HomeSide purchased and
acquired loan production of $18.9 billion. Its servicing portfolio was $87.7
billion at November 30, 1996.
The table below sets forth the historical production and servicing
portfolio volumes for HLI and HHI.
HLI AND HHI COMBINED PRODUCTION AND SERVICING SUMMARY
<TABLE>
<CAPTION>
YEARS ENDED AND AT DECEMBER 31,
-----------------------------------------------
1991 1992 1993 1994 1995 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(b)
HHI(a)............................. 1,945 3,507 3,360 3,410 5,767 2,538(c)
------- ------- ------- ------- ------- ------
Combined production.............. $ 6,382 $12,167 $14,731 $12,345 $14,652 $6,725
======= ======= ======= ======= ======= ======
SERVICING PORTFOLIO
HLI................................ $20,601 $23,706 $27,999 $37,971 $41,555
HHI................................ 10,034 11,524 13,085 18,411 33,411
------- ------- ------- ------- -------
Combined servicing portfolio..... $30,635 $35,230 $41,084 $56,382 $74,966
======= ======= ======= ======= =======
<FN>
- ---------------
(a) If Loan America Financial Corporation ("LAFC" or "Loan America") and
BancPLUS Financial Corporation 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.
(b) Period information is for January 1, 1996 through March 15, 1996.
(c) Period information is for January 1, 1996 through May 31, 1996.
</TABLE>
The table below sets forth the servicing statistics for HomeSide:
HOMESIDE SERVICING STATISTICS
<TABLE>
<CAPTION>
PRO FORMA
HOMESIDE FOR THE
HLI AND HHI
ACQUISITIONS AT ACTUAL AT
DECEMBER 31, 1995 NOVEMBER 30, 1996
----------------- -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
FHA/VA............................................ $24,823 $31,431
Conventional...................................... 48,429 51,389
------- -------
Total serviced unpaid principal balance
("UPB")...................................... 73,252(a) 82,820(b)
ARM (adjustable rate mortgages)................... 23% 26%
Fixed............................................. 77% 74%
Weighted average coupon........................... 8.01% 7.91%
Weighted average servicing fee (% of UPB)......... 0.351%(c) 0.359%
Weighted average maturity (months)................ 278 279
<FN>
- ---------------
(a) Excludes loans purchased not yet on servicing system of approximately $0.6
billion.
(b) Excludes loans purchased not yet on servicing system of $4.9 billion.
(c) HHI's weighted average servicing fees are adjusted to reflect market rates
under contractual arrangements between HomeSide and Barnett.
</TABLE>
4
<PAGE> 50
USE OF PROCEEDS
Except as may be otherwise stated in the applicable Prospectus Supplement,
HomeSide intends to use the net proceeds from the sale of the securities offered
hereby for working capital and general corporate purposes, which may include
reduction of amounts outstanding under the Bank Credit Agreement. The loans
under the Bank Credit Agreement mature on February 14, 2000 and as of November
30, 1996 carry a weighted average interest on amounts borrowed of 5.98% per
annum. See "Description of Bank Credit Agreement."
5
<PAGE> 51
SELECTED CONSOLIDATED FINANCIAL INFORMATION
SELECTED UNAUDITED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION OF HOMESIDE
The selected unaudited consolidated financial and operating information of
HomeSide set forth below is for the period March 16, 1996 to May 31, 1996, each
of the three months ended August 31, 1996 and November 30, 1996 and the period
March 16, 1996 to November 30, 1996 and should be read in conjunction with, and
is qualified in its entirety by reference to, the Consolidated Financial
Statements and the notes thereto and in conjunction 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
these periods and the consolidated balance sheet data at November 30, 1996 are
unaudited but, in the opinion of management, contain all material adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation. The results of operations for the periods ended November 30, 1996
are not necessarily indicative of results to be expected for the full year.
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE THREE FOR THE THREE
MARCH 16, 1996 MONTHS ENDED MONTHS ENDED FOR THE PERIOD
TO MAY 31, AUGUST 31, NOVEMBER 30, MARCH 16, 1996 TO
1996 1996 1996 NOVEMBER 30, 1996
-------------- -------------- ---------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues:
Mortgage servicing fees............. $ 41,485 $ 82,179 $ 90,492 $ 214,156
Amortization of mortgage servicing
rights............................ (16,442) (39,753) (48,120) (104,315)
----------- ----------- ----------- -----------
Net servicing revenue............. 25,043 42,426 42,372 109,841
Interest income..................... 12,719 22,270 25,241 60,230
Interest expense.................... (12,592) (17,684) (16,140) (46,416)
----------- ----------- ----------- -----------
Net interest revenue.............. 127 4,586 9,101 13,814
Net mortgage origination revenue.... 10,810 16,273 16,521 43,604
Other income........................ 107 355 79 541
----------- ----------- ----------- -----------
Total revenues............ 36,087 63,640 68,073 167,800
Expenses:
Salaries and employee benefits...... 11,480 21,177 20,650 53,307
Occupancy and equipment............. 1,846 3,084 3,337 8,267
Servicing losses on investor-owned
loans............................. 3,938 4,058 4,957 12,953
Other expenses...................... 5,345 12,196 11,391 28,932
----------- ----------- ----------- -----------
Total expenses............ 22,609 40,515 40,335 103,459
Income before income taxes.......... 13,478 23,125 27,738 64,341
Income tax expense.................. 5,526 9,481 11,373 26,380
----------- ----------- ----------- -----------
Net income(e)....................... $ 7,952 $ 13,644 $ 16,365 $ 37,961
=========== =========== =========== ===========
SELECTED OPERATING DATA:
Volume of loans originated and
acquired.......................... $ 3,780,236 $ 9,565,199(b) $ 5,540,875 $18,886,310(b)
Loan servicing portfolio (at period
end).............................. 77,351,849 84,818,725(b) 87,712,746 87,712,746
Loan servicing portfolio (average
outstanding during the period).... 43,670,497(a) 81,223,664 86,535,928 69,643,494(c)
Weighted average interest rate for
the servicing portfolio (at period
end).............................. 7.86% 7.92% 7.91% 7.91%
Weighted average servicing fee for
the servicing portfolio (at period
end).............................. 0.367% 0.363% 0.359% 0.359%
Ratio of earnings to fixed
charges........................... 2.05x(d) 2.28x(d) 2.67x(d) 2.35x(d)
(footnotes on following page)
</TABLE>
6
<PAGE> 52
<TABLE>
<CAPTION>
AT
NOVEMBER 30, 1996
-------------------------
ACTUAL AS ADJUSTED(F)
---------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
SELECTED BALANCE SHEET DATA:
Mortgage loans held for sale.................................................. $1,101,229 $1,101,229
Mortgage servicing rights..................................................... 1,321,639 1,321,639
Total assets.................................................................. 2,833,601 2,833,601
Warehouse credit facility..................................................... 1,074,583 1,074,583
Long-term debt(e)............................................................. 957,508 918,710
Total liabilities............................................................. 2,276,265 2,237,467
Total stockholder's equity.................................................... 557,336 596,134
</TABLE>
- ---------------
(a) Period information is for March 1, 1996 through May 31, 1996.
(b) Includes bulk purchases of $4.1 billion.
(c) Period information is for March 1, 1996 through November 30, 1996.
(d) The ratio of earnings to fixed charges does not include the effect of $200
million of 11.25% Notes due 2003 (the "Parent Notes") which were issued by
the Parent on May 14, 1996. The Parent Notes are not reflected in the
consolidated financial statements of HomeSide, however, debt service on the
Parent Notes is highly dependent on the ability of HomeSide to generate
funds sufficient to meet such obligations.
(e) On May 14, 1996 the Parent issued $200 million of Parent Notes. All of the
outstanding common stock of HomeSide and HHI is pledged as security on the
notes. The only significant asset of the Parent is its investment in
HomeSide and HHI common stock. The Parent is dependent on cash payments from
HomeSide to service its debt obligations. The Parent Notes, and related
interest expense, are not reflected in the financial statements of HomeSide.
(f) Adjusted to give effect to the sale of Common Stock by the Parent and the
application of a portion of the net proceeds contributed to HomeSide as if
such transaction had occurred on November 30, 1996. For additional
information see "Index to Financial Statements -- Unaudited Pro Forma
Consolidated Financial Information."
7
<PAGE> 53
SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION OF HLI
The selected consolidated financial information of HLI (formerly BancBoston
Mortgage Corporation) set forth below has been derived from the financial
statements of HLI and the related notes thereto for the periods prior to its
acquisition by the Parent. The selected consolidated financial information
should be read in conjunction with, and is qualified in its entirety by
reference to, HLI's Consolidated Financial Statements and the Notes thereto, and
"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(d)
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(d)
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(d)
Weighted average interest
rate (at period end)..... 9.65% 9.05% 8.07% 7.91% 7.97% 7.90% 7.92%(d)
Weighted average servicing
fee (average for
period).................. 0.400% 0.390% 0.372% 0.389% 0.383% 0.384% 0.380%(d)
Ratio of earnings to fixed
charges.................. 2.06x --(e) --(e) 1.13x 4.40x 1.88x --(e)
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 stockholder's
equity................... 215,379 207,545 122,360 127,765 186,591 131,194 112,730
<FN>
- ---------------
(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 on F-40.
(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 Notes 2 and 10 of Notes to Consolidated Financial Statements on F-40 and
F-47, respectively.
(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 on F-40.
(d) Period information is for the period January 1, 1996 to March 31, 1996 and
period end information is at March 31, 1996.
(e) Fixed charges exceeded income before income taxes, cumulative effect 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.
</TABLE>
8
<PAGE> 54
SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION OF HHI
The selected consolidated financial information of HHI (formerly Barnett
Mortgage Company) set forth below has been derived from the financial statements
of HHI and the related notes thereto for the periods prior to its acquisition by
the Parent. The selected consolidated financial information should be read in
conjunction with, and is qualified in its entirety by reference to, HHI's
Consolidated Financial Statements and the Notes thereto and in conjunction 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 6,816 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 --(f) --(f) --(f) --(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)
(footnotes on following page)
</TABLE>
9
<PAGE> 55
- ---------------
(a) Includes Loan America since its acquisition in October 1994.
(b) Includes BancPLUS Financial Corporation 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 effect 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 the Parent on May 31, 1996 and, accordingly, all of its
assets and liabilities are included in the consolidated balance sheet of the
Parent as of May 31, 1996.
10
<PAGE> 56
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- HOMESIDE
MARCH 16, 1996 TO NOVEMBER 30, 1996
AND THE THREE MONTHS ENDED NOVEMBER 30, 1996
GENERAL
The Issuer is the primary operating subsidiary of HomeSide, Inc. (the
"Parent"). The Parent was formed on December 11, 1995 by an investor group,
consisting of Thomas H. Lee Company and its affiliates and Madison Dearborn
Partners (collectively, the "Investors"), and signed a definitive stock purchase
agreement with The First National Bank of Boston ("Bank of Boston" or "BKB") 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.
On May 31, 1996, Barnett Banks, Inc. ("Barnett") sold certain of its
mortgage banking operations ("HHI"), primarily its servicing portfolio and
proprietary mortgage banking software systems, to the Parent. Barnett received
cash and an ownership interest in the Parent. Barnett Mortgage Company was
subsequently renamed HomeSide Holdings, Inc. For more information on these
acquisitions see Note 4 of Notes to Consolidated Financial Statements of the
Issuer on F-9. From May 31, 1996 until the January 1997 public offering of
Common Stock of the Parent each of the Investors as a group, Bank of Boston and
Barnett owned approximately one-third of the Parent. Following the public
offering, the Investors as a group, Bank of Boston and Barnett own in the
aggregate approximately 79% of the outstanding Common Stock of the Parent.
The Issuer, in conjunction with the Parent, has adopted a February 28
fiscal year end. The consolidated financial statements of HomeSide have been
prepared for the period March 16, 1996 to November 30, 1996 to coincide with the
Parent's acquisition of HLI and the end of HomeSide's third quarter of fiscal
1997. 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 the
historical financial statements of HLI and 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 BKB and all of BMC's production channels
were retained by Barnett. The results of operations for the three months ended
November 30, 1996 are, therefore, most directly comparable to the results of
operations for the three months ended August 31, 1996. Results of operations
prior to May 31, 1996 do not include the results of operations of HHI, which was
acquired by the Parent on May 31, 1996.
Mortgage banking is a specialized branch of the financial services industry
which primarily involves (i) originating and purchasing mortgage loans
("origination" and/or "production"); (ii) selling the originated mortgages to
third parties either as mortgage-backed securities or as whole loans ("secondary
marketing"); (iii) servicing of mortgage loans on behalf of the ultimate
purchasers, which includes the collection and disbursement of payments of
mortgage principal and interest, the collection of payments of taxes and
insurance premiums to pay property taxes and insurance premiums, and management
of certain loan default activities (collectively, "servicing"); and (iv) the
purchase and sale of the rights to service mortgage loans.
Mortgage bankers originate loans generally through two channels: wholesale
and direct. Wholesale origination involves the origination of mortgage loans
from sources other than homeowners, including mortgage brokers and other
mortgage lenders. Direct 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 relocation programs. Once originated or purchased, mortgage bankers
hold the loans temporarily ("warehousing") until they are sold, typically
earning an interest spread equal to the difference between the loan's interest
rate and the cost of
11
<PAGE> 57
financing the loan. 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").
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, 1996 to May 31, 1996, and each of the three months ended
August 31, 1996 and November 30, 1996 and the period March 16, 1996 to November
30, 1996. References to the first quarter of fiscal 1997 relate to the period
March 16, 1996 to May 31, 1996. References to the second quarter of fiscal 1997
relate to the three months ended August 31, 1996 and references to the third
quarter of fiscal 1997 relate to the three months ended November 30, 1996.
Loan Production Activities
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE THREE FOR THE THREE FOR THE PERIOD
MARCH 16, 1996 MONTHS ENDED MONTHS ENDED MARCH 16, 1996 TO
TO MAY 31, 1996 AUGUST 31, 1996 NOVEMBER 30, 1996 NOVEMBER 30, 1996
--------------- --------------- ----------------- -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Correspondent (includes volumes
purchased from BKB and
Barnett)....................... $1,893 $2,950 $3,249 $ 8,092
Co-issue (a)..................... 1,419 2,208 1,985 5,612
Broker........................... 220 155 168 543
------ ------ ------ -------
Total wholesale.................. 3,532 5,313 5,402 14,247
Direct........................... 248 179 139 566
------ ------ ------ -------
Total purchases.................. 3,780 5,492 5,541 14,813
Bulk acquisitions................ -- 4,073 -- 4,073
------ ------ ------ -------
Total purchases and
acquisitions................... $3,780 $9,565 $5,541 $18,886
====== ====== ====== =======
<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>
During each of the second and third quarters of fiscal 1997, HomeSide's
loan production totaled approximately $5.5 billion. Total loan production
increased from $3.8 billion in the period March 16, 1996 to May 31, 1996 to $5.5
billion for the three months ended August 31, 1996. This increase was due to the
additional production resulting from the acquisition of HHI on May 31, 1996 and
growth in HomeSide's existing wholesale channel. In addition, HomeSide made bulk
servicing acquisitions of $4.1 billion during the second quarter of fiscal 1997.
12
<PAGE> 58
Servicing Portfolio
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE THREE FOR THE THREE FOR THE PERIOD
MARCH 1, 1996 TO MONTHS ENDED MONTHS ENDED MARCH 1, 1996 TO
MAY 31, 1996 AUGUST 31, 1996 NOVEMBER 30, 1996 NOVEMBER 30, 1996
---------------- --------------- ----------------- -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Balance at beginning of period....... $41,844 $77,351 $84,819 $41,844
Acquisition of HHI................... 33,082 -- -- 33,082
Other additions...................... 4,102 9,842 5,244 19,188
------- ------- ------- -------
Total additions................. 37,184 9,842 5,244 52,270
------- ------- ------- -------
Scheduled amortization............... 212 470 494 1,176
Prepayments.......................... 1,321 1,702 1,529 4,552
Foreclosures......................... 130 137 106 373
Sale of servicing.................... 14 65 221 300
------- ------- ------- -------
Total reductions................ 1,677 2,374 2,350 6,401
------- ------- ------- -------
Balance at end of period............. $77,351 $84,819 $87,713 $87,713
======= ======= ======= =======
</TABLE>
At November 30, 1996, HomeSide's servicing portfolio stood at $87.7 billion
compared to $84.8 billion at August 31, 1996, $77.4 billion at May 31, 1996 and
$41.8 billion at March 1, 1996. The number of loans being serviced at November
30, 1996 was 1,068,000, compared to 1,041,000 as of August 31, 1996, 966,000 as
of May 31, 1996 and 492,000 as of March 1, 1996. HomeSide's strategy is to build
its mortgage servicing portfolio and benefit from the economies of scale
inherent in the business.
RESULTS OF OPERATIONS
Summary
HomeSide reported net income of $16.4 million during the third quarter of
fiscal 1997 compared to net income of $13.6 million during the second quarter of
fiscal 1997 and $8.0 million during the first quarter of fiscal 1997. Net income
for the period March 16, 1996 to November 30, 1996 was $38.0 million. Total
revenue for the third quarter of fiscal 1997 was primarily comprised of net
servicing revenue of $42.4 million, net interest revenue of $9.1 million, and
net mortgage origination revenue of $16.5 million. These revenues were partially
offset by operating expenses of $40.3 million and income taxes of $11.4 million.
The primary reason for the growth in revenues was increased net interest revenue
during the third quarter of fiscal 1997 as compared to the second quarter of
fiscal 1997. Higher average balances of mortgage loans held for sale during the
third fiscal quarter compared to the second fiscal quarter contributed to the
$3.0 million increase in interest income. Lower short-term interest rates and
the improved pricing on borrowings under the Bank Credit Agreement lowered the
interest expense for third quarter of fiscal 1997 compared to the second fiscal
quarter.
HomeSide reported net income of $13.6 million during the second quarter of
fiscal 1997 compared to net income of $8.0 million during the first quarter of
fiscal 1997. Total revenue for the second quarter was primarily comprised of net
servicing revenue of $42.4 million, net interest revenue of $4.6 million and net
mortgage origination revenue of $16.3 million. These revenues were partially
offset by operating expenses of $40.5 million and income tax expense of $9.5
million. The primary reason for the increase in revenues and expenses during the
second quarter as compared to the first quarter was 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 of
fiscal 1997 results.
Net Servicing Revenue
During the third quarter of fiscal 1997, HomeSide had net servicing revenue
of $42.4 million, compared to net servicing revenue of $42.4 million during the
second quarter of fiscal 1997. Net servicing revenue during the third quarter of
fiscal 1997 was comprised of mortgage servicing fees of $90.5 million, offset by
mortgage servicing rights amortization of $48.1 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 third
quarter of fiscal 1997 was 0.368% compared to 0.367% during the second quarter
of fiscal 1997. Amortization of mortgage servicing rights is recorded over the
estimated servicing period in proportion to estimated servicing revenue and
increased from $39.8 million in the second quarter of fiscal 1997 to $48.1
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<PAGE> 59
million in the third quarter of fiscal 1997 as a result of a higher average
servicing portfolio balance and higher projected mortgage loan prepayment
speeds.
During the second quarter of fiscal 1997, HomeSide had net servicing
revenue of $42.4 million, compared to net servicing revenue of $25.0 million
during the first quarter of fiscal 1997. Net servicing revenue during the second
quarter of fiscal 1997 was comprised of mortgage servicing fees of $82.2
million, offset by mortgage servicing rights amortization of $39.8 million.
HomeSide's weighted average servicing fee during the second quarter of fiscal
1997 was 0.367% compared to 0.389% during the first quarter of fiscal 1997. The
decrease in the weighted average servicing fee was due to the servicing rights
acquired from HHI. These servicing rights generally had lower servicing 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 of fiscal 1997 to $39.8 million in the second
quarter of fiscal 1997 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 loan 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. 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 and therefore, the value of the servicing
portfolio declines as prepayments increase.
During the period March 16, 1996 to November 30, 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.
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. The 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 periods 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.
Since HomeSide's inception, cumulative gains and losses on risk management
contracts resulted in a $60.2 million net gain which reduced the cost basis of
mortgage servicing rights at November 30, 1996. Of the $60.2 million of net
gains included in the carrying value of HomeSide's mortgage servicing rights
portfolio, $133.3 million of gains occurred during the third quarter of fiscal
1997 and offset deferred losses of $74.7 million recorded during the first and
second quarters of fiscal 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 servicing portfolio.
The fair value of open risk management contracts at November 30, 1996 was $162.4
million, which was equal to their carrying amount because the options are
marked-to-market at each reporting date. 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 on F-5 for a description of
HomeSide's accounting policy for its risk management contracts. See Notes 10 and
11 of Notes to Consolidated Financial Statements on pages F-12 through F-14 for
additional fair value disclosures with respect to HomeSide's risk management
contracts.
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<PAGE> 60
Net Interest Revenue
Net interest revenue was $4.6 million during the second quarter of fiscal
1997 compared to $9.1 million during the third quarter of fiscal 1997. Net
interest revenue during the third quarter of fiscal 1997 was comprised of
interest income of $25.2 million, which was offset by interest expense of $16.1
million on HomeSide's borrowings. Interest income and expense during the second
quarter of fiscal 1997 were $22.3 million and $17.7 million, respectively. The
increase in interest income during the third quarter of fiscal 1997 was the
result of an increase in the average balance of loans held for sale from $1.3
billion in the second quarter of fiscal 1997 to $1.4 billion during the third
quarter of fiscal 1997. Interest expense decreased from $17.7 million in the
second quarter of fiscal 1997 to $16.1 million during the third quarter of
fiscal 1997. Lower short-term interest rates and the improved pricing on
borrowings under the Bank Credit Agreement contributed to this reduction.
Net interest revenue increased from $0.1 million during the first quarter
of fiscal 1997 to $4.6 million during the second quarter of fiscal 1997. Net
interest revenue during the second quarter was comprised of interest income of
$22.3 million and was offset by interest expense of $17.7 million on HomeSide's
borrowings. Interest income and expense during the first quarter of fiscal 1997
were $12.7 million and $12.6 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 mortgage loans held for sale from $770
million in the first quarter of fiscal 1997 to $1.3 billion during the second
quarter of fiscal 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 fiscal 1997, respectively. The Parent's acquisition of HHI on May 31,
1996, and subsequent transfer of assets to HomeSide, generally contributed to
the increased balances of mortgage loans held for sale and borrowings. Interest
income during the second quarter was also positively affected by a general
increase in long-term interest rates during the second quarter.
Interest expense for HomeSide does not include interest expense associated
with $200 million of 11.25% Parent Notes issued by the Parent. Payment of
principal and interest on these notes is dependent on the cash flows generated
by HomeSide and HHI. During the first, second and third quarters of fiscal 1997,
the Parent recorded interest expense on the Parent Notes of $2.3 million, $6.0
million and $6.0 million, respectively.
Net Mortgage Origination Revenue
Net mortgage origination revenue was $16.5 million during the third quarter
of fiscal 1997 compared to $16.3 million during the second quarter of fiscal
1997, a $0.2 million 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 third quarter of fiscal 1997, slightly
higher than the second quarter of fiscal 1997 loan production, excluding bulk
acquisitions. HomeSide's primary origination activities during the second and
third quarters of fiscal 1997 took place through correspondent and co-issue
channels. Currently, HomeSide expects these channels to continue to be the
primary loan origination sources in the future.
Net mortgage origination revenue was $16.3 million during the second
quarter of fiscal 1997 compared to $10.8 million during the first quarter of
fiscal 1997, a 51% increase. As noted above, loan production, exclusive of bulk
servicing acquisitions, was $5.5 billion for the second quarter of fiscal 1997,
$1.7 billion, or 45% higher than the first fiscal quarter loan production of
$3.8 billion. The increase in loan production is reflective of the production
from the preferred seller relationship with Barnett established as part of the
HHI Acquisition. HomeSide's primary origination activities during the first and
second quarters of fiscal 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 decreased $0.5 million, or 2.5%,
from $21.2 million in the second quarter of fiscal 1997 to $20.7 million during
the third quarter of fiscal 1997. The decrease was due to the continuing
integration of the Barnett servicing operations. The average number of full-time
equivalent
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<PAGE> 61
employees fell from 1,879 during the second quarter of fiscal 1997 to 1,708
during the third quarter of fiscal 1997.
Salaries and employee benefits expense increased $9.7 million, or 84%, from
$11.5 million in the first quarter of fiscal 1997 to $21.2 million during the
second quarter of fiscal 1997. The increase was due to growth in the number of
employees 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 fiscal 1997 to 1,879 during the second quarter of fiscal 1997.
Occupancy and Equipment Expense
Occupancy and equipment expense increased $0.2 million from $3.1 million
during the second quarter of fiscal 1997 to $3.3 million during the third
quarter of fiscal 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.
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
fiscal 1997. The increase in occupancy and equipment expense was 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 from $4.1 million for
the second quarter of fiscal 1997 to $5.0 million for the third quarter of
fiscal 1997, a 22% increase. Servicing losses on investor-owned loans primarily
represent anticipated losses primarily 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.
Servicing losses on investor-owned loans increased slightly from $3.9
million for the first quarter of fiscal 1997 to $4.1 million for the second
quarter of fiscal 1997, a 3% increase.
Included in the balance of accounts payable and accrued liabilities at
November 30, 1996 is a reserve for estimated servicing losses on investor-owned
loans of $21.6 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 decreased $0.8 million from $12.2 million for the second
quarter of fiscal 1997 to $11.4 million during the third quarter of fiscal 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. Future production
levels are dependent on the level of long-term interest rates and other economic
factors, which are difficult to accurately predict.
Other expense increased $6.9 million from $5.3 million for the first
quarter of fiscal 1997 to $12.2 million during the second quarter of fiscal
1997.
Provision for Income Taxes
HomeSide's provision for income taxes was $11.4 million during the third
quarter of fiscal 1997, an increase of $1.9 million over the $9.5 million
provision recorded during the second quarter of fiscal 1997. The provision for
income taxes for the period March 16, 1996 to May 31, 1996 was $5.5 million. The
effective income tax rate for the first, second and third quarters of fiscal
1997 was approximately 41%.
LIQUIDITY AND CAPITAL RESOURCES
Operations
Net cash used in operations was $169.0 million for the period March 16,
1996 to November 30, 1996. The primary uses of cash in operations were 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.
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<PAGE> 62
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 $675.7 million during the period
March 16, 1996 to November 30, 1996. Cash used in investing activities was
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 HomeSide's
hedging program. During the period March 16, 1996 to November 30, 1996, HomeSide
also made payments of $133.4 million and $106.2 million to acquire 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 HomeSide'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 November 30, 1996, HomeSide had $845.9
million of net cash provided by financing activities. The primary sources of
cash from financing activities during the period were $346.4 million of capital
contributed from the Parent and net borrowings under HomeSide's line of credit
of $526.5 million. Cash used in financing activities was used to fund operations
of the Parent, primarily interest payment obligations on the Parent Notes, and
the payment of debt issue costs related to the Bank Credit Agreement.
Cash from financing activities was also provided by the three-year senior
secured revolving credit facility that was entered into by the Issuer on March
15, 1996 and re-issued as part of the Bank Credit Agreement 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 the Issuer and the servicing rights retained by HHI. The
$2.5 billion commitment is comprised of a servicing secured credit facility,
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 Issuer'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 under the Bank Credit Agreement and other bank
facilities which may be entered into from time to time, as well as from the
issuance of Debt Securities in the public markets. There can be no assurance
that such additional bank facilities will be available or that market conditions
at any given time will be such that public issuances of Debt Securities can be
effected on favorable terms. On January 15, 1997, the Issuer entered into a
short term credit facility with The Chase Manhattan Bank in an aggregate
principal amount of $85 million. The facility expires March 1, 1997 and drawings
thereunder bear interest at the greater of (i) The Chase Manhattan Bank's prime
rate, (ii) the secondary market rate for certificates of deposit (grossed up for
maximum statutory requirements) plus 1% and (iii) the federal funds effective
rate from time to time plus 0.5%.
On January 31, 1997, the Bank Credit Facility was amended and restated in
connection with the issuance of the Parent's Common Stock to the public. See
"Description of Bank Credit Agreement."
HomeSide expects to pay dividends to the Parent only to the extent
necessary to meet debt obligations and income tax expense of the Parent. The
ability of HomeSide to pay dividends to the Parent for other purposes is
restricted by covenants contained in the Bank Credit Agreement. During the
period March 16, 1996 to November 30, 1996, HomeSide declared and paid dividends
of $13,820,000 to the Parent. For more information, see Note 7 of Notes to
Consolidated Financial Statements of HomeSide.
During the period March 16, 1996 to November 30, 1996, net cash used in
operations and investing activities was $169.0 million and $675.7 million,
respectively, while cash provided by financing activities was
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<PAGE> 63
$845.9 million, resulting in a net increase in cash of $1.2 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 bank
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 mortgage 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 ("FASB") issued
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS
125"). SFAS 125, 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 recognizes 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. SFAS
125 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 expects that the impact of SFAS 125 on the
results of operations, financial condition, or liquidity of HomeSide will be
immaterial.
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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 are
included in the 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 -- HLI 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, maintaining records of
loans and escrows and management of certain loan default activities. 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. 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 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 were recorded at the lower of
amortized cost or market value.
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<PAGE> 65
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 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. 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 entitled "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
was 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 was 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.
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<PAGE> 66
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, were included in the cost basis of the mortgage loans and, therefore,
they were 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 reflected 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 was 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.
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
was 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.
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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 was 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.
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
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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, the Issuer 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, the Issuer 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 the Issuer on March 15, 1996 in connection with
the HLI Acquisition and HHI's former line of credit with Barnett. The new
facility was replaced by the Bank Credit Agreement, which 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. The Issuer's
total borrowing capacity under the Bank Credit Agreement is $2.5 billion, with
the servicing commitment portion capped at $950 million. The Bank Credit
Agreement provides financing for HomeSide's ongoing operations, including the
origination and servicing of residential mortgage loans, other working capital
and general corporate purposes. See "Description of Bank Credit Agreement."
On May 14, 1996, the Parent issued $200 million principal amount of the
Parent Notes. The Parent 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 Parent Notes are redeemable at the option of the Parent, 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. The Parent intends to repay $70 million principal amount of the
Parent Notes with a portion of the proceeds from the January 1997 public
offering of the Parent's Common Stock.
The Issuer 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 the Issuer'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 $112.5 million and $155.1
million, respectively, while cash provided by financial activities amounted to
$290.0 million, resulting in a net increase in cash of $22.4 million. The Issuer
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
facilities and other bank facilities which may be entered into from time to
time, as well as from the issuance of Debt Securities in the public markets.
There can be no assurance that such additional bank facilities will be available
or that market conditions at any given time will be such that public issuances
of Debt Securities can be effected on favorable terms. The Issuer 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, the Issuer'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.
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 the Parent. At the closing of
the HLI Acquisition, Bank of Boston received cash and approximately a 45% equity
interest in the Parent. Also at the closing of the HLI Acquisition, THL and MDP
collectively acquired approximately a 55% interest in the Parent.
On March 4, 1996, the Parent 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
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<PAGE> 69
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 the Parent such that each of (i) Siesta, (ii) BKB, and
(iii) THL and MDP, collectively, owns approximately a 33% interest in the
Parent.
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 of HLI on F-54 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 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
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.
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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 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 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.
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<PAGE> 71
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 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
Fannie Mae, United States total residential mortgage originations declined from
$1,020 billion in 1993 to $769 billion in 1994 and $654 billion in 1995.
During 1994 and 1995, HLI incurred net interest expense of $2.4 million and
$2.8 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
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<PAGE> 72
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%.
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%.
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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.
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 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 1994 and 1995, 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 was 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.
28
<PAGE> 74
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.
Provision for Income Taxes
HLI recorded a provision for income taxes of $2.5 million and $37.9 million
for 1994 and 1995, 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 was 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
were 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 on F-47 and F-48.
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 of HLI on F-40 and F-47 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
29
<PAGE> 75
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 was related to an increase in mortgage loans purchased through 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; Results of Risk Management Activities".
New Accounting Standard
In May 1995, FASB 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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<PAGE> 76
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 the Parent. Under the terms of the sale, the Parent 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, 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 Corp. ("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. ("Barnett") sold certain of its
mortgage banking operations, primarily its servicing portfolio and proprietary
mortgage banking software systems to the Parent, as discussed above. Barnett
received cash and an ownership interest in the Parent. As a result of the
acquisition of HHI by the Parent, HHI ceased to originate loans as a separate
company and operations for periods subsequent to that date will be included in
the results of operations of the Company. 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.
The following table sets forth the composition of HHI's servicing
portfolio.
<TABLE>
<CAPTION>
AT MAY 30,
1996
----------
(DOLLARS
IN
MILLIONS)
<S> <C>
FHA/VA......................................................... $ 5,588
Conventional................................................... 27,494
-------
Total................................................ $33,082
=======
</TABLE>
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<PAGE> 77
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 the Parent, 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.
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
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<PAGE> 78
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.
The following table sets forth HHI origination activity:
<TABLE>
<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 Consolidated Financial Statements of HHI on F-34. 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 the Parent 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 the Parent on May 31, 1996.
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 was due to the comparison of the two months data versus three months
data, which was a result of the sale of HHI to the Parent 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 on F-64 and F-65 for the year ended
December 31, 1995.
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<PAGE> 79
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:
<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 OMSR. OMSR
income results from the January 1, 1996 implementation of SFAS 122. The
requirements of SFAS 122 are discussed in Note 1 to the Consolidated Financial
Statements of HHI on F-62. 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.
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<PAGE> 80
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 on
F-64 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.
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 were the lines of credit with
Barnett and its affiliates, to which some of HHI's assets were pledged as
collateral. These lines of credit were 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 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 Company. At the closing of the HHI Acquisition, the Company acquired HHI's
and its subsidiaries' $33.4 billion servicing portfolio and servicing platform,
its proprietary mortgage servicing software and Honolulu Mortgage, a
full-service mortgage banking company in Honolulu, Hawaii.
35
<PAGE> 81
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 BPFC, a full-service mortgage company with a
$13.9 billion servicing portfolio. Headquartered in San Antonio, Texas,
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.
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.
The following table sets forth the composition of HHI's servicing
portfolio:
<TABLE>
<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.
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<PAGE> 82
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.
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
37
<PAGE> 83
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.
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
====== ====== ======
<FN>
- ---------------
(a) Since date of acquisition by HHI.
</TABLE>
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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<PAGE> 84
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 on F-64.
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.
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; Results of Risk Management Activities".
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<PAGE> 85
New Accounting Standard
In May 1995, FASB 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> 86
INDUSTRY OVERVIEW
MORTGAGE MARKET
Mortgage bankers operate in the second largest debt market in the world,
which is exceeded only by the United States Treasury market. 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 an 8% compound 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 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)
-----------------------------
TOTAL PURCHASE REFINANCING FIXED ADJUSTABLE
ORIGINATIONS(A) (% OF TOTAL) (% OF TOTAL) RATE(b)(c)(e) RATE(b)(d)(e)
--------------------- ------------ -------------- ------------- --------------
(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
<FN>
- ---------------
(a) Source: Fannie Mae
(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.
</TABLE>
SECONDARY MORTGAGE MARKETS
The secondary mortgage market and its evolution have been significantly
influenced by two government-sponsored enterprises, Fannie Mae and FHLMC, and
one government agency, GNMA (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 Fannie Mae 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
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<PAGE> 87
conform ("conforming loans") with standards established by Fannie Mae or FHLMC
or by the FHA or 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
$214,600, 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, Fannie Mae, FHLMC, and GNMA mortgage-backed securities accounted for,
in the aggregate, $1.4 trillion, or 42.0% of total residential 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>
1995 ORIGINATIONS SERVICING PORTFOLIO AT DECEMBER 31, 1995
<C> <S> <C> <C> <C> <C>
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
<FN>
- ---------------
Source: National Mortgage News.
</TABLE>
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
42
<PAGE> 88
in mortgage banking, especially those related to servicing, has reduced costs
significantly for industry participants.
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 20.7% in 1990 to 39.1% in 1995.
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<PAGE> 89
BUSINESS
HOMESIDE
HomeSide is one of the largest full-service residential mortgage banking
companies in the United States, formed through the acquisition by the Parent of
the mortgage banking operations of The First National Bank of Boston ("Bank of
Boston" or "BKB") and Barnett Banks, Inc. ("Barnett"). See "The Acquisitions."
HomeSide's strategy emphasizes variable cost mortgage origination and low cost
servicing. On a combined basis HomeSide's origination volume and servicing
portfolio would have been $14.7 billion and $73.9 billion, respectively, for and
as of the year ended December 31, 1995, ranking HomeSide as the 5th largest
originator and 7th largest servicer in the United States for 1995 based on data
published by National Mortgage News. For and as of the nine months ended
November 30, 1996, HomeSide's loan originations and acquisitions were $18.9
billion and its servicing portfolio was $87.7 billion.
The residential mortgage market totaled over $3.6 trillion in 1995 and is
the second largest debt market in the world, exceeded only by the United States
Treasury market. The residential mortgage market has grown at a compound annual
rate of approximately 8% since 1985. HomeSide competes in a mortgage banking
market which is highly fragmented with no single company controlling or
dominating 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.
Residential mortgage lenders compete primarily on the basis of loan pricing and
service, making effective cost management essential. The industry has
experienced rapid consolidation which has been accelerated by the introduction
of significant technology improvements and the economies of scale present in
mortgage servicing. The top 25 mortgage loan servicers have increased their
aggregate market share from 20.7% in 1990 to 39.1% in 1995.
HomeSide's business strategy is to increase the volume of its loan
originations and the size of its servicing portfolio while continuing to improve
operating efficiencies. In originating mortgages, HomeSide focuses on variable
cost channels of production, including correspondent, broker, consumer direct,
affinity, and co-issue sources. HomeSide pursues strategic relationships such as
its existing 5-year agreements to acquire residential mortgage loans from BKB
and Barnett production sources, which, for the period May 31, 1996 through
November 30, 1996, represented 19.5% of HomeSide's loan production. Management
believes that these variable cost channels of production deliver consistent
origination opportunities for HomeSide without the fixed cost investment
associated with traditional retail mortgage branch networks. HomeSide believes
that its ongoing investment in technology will further enhance and expand
existing processing capabilities and improve its efficiency. Based on
independent surveys of direct cost per loan and loans serviced per employee,
management believes that HomeSide has been one of the industry's most efficient
mortgage servicers.
HomeSide plans to build its core operations through (i) improved economies
of scale in servicing costs; (ii) increased productivity using proprietary
technology; and (iii) expanded and diversified variable cost origination
channels. In addition, HomeSide intends to pursue additional loan portfolio
acquisitions and strategic origination relationships similar to the existing BKB
and Barnett arrangements.
HomeSide's business activities consist primarily of:
- Mortgage production: origination and purchase of residential single
family mortgage loans through multiple channels including
correspondents, strategic partners (BKB and Barnett), mortgage
brokers, co-issue partners, direct consumer telemarketing and affinity
programs;
- Servicing: administration, collection and remittance of monthly
mortgage principal and interest payments, collection and payment of
property taxes and insurance premiums and management of certain loan
default activities;
- Secondary marketing: 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 or
private securities to investors; and
- Risk management: management of a program designed primarily to
protect the economic performance of the servicing portfolio that could
otherwise be adversely affected by loan prepayments due to declines in
interest rates.
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<PAGE> 90
PRODUCTION
HomeSide participates in several origination channels, with a focus on
wholesale originations. Since the HLI Acquisition, wholesale channels
(correspondent, co-issue and broker) have represented more than 95% of
HomeSide's total production. No single source within the correspondent or broker
channels accounted for more than 2% of total production during the period March
16, 1996 to November 30, 1996. 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
HomeSide's origination channels:
RESIDENTIAL LOAN PRODUCTION BY CHANNEL
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE THREE FOR THE THREE FOR THE PERIOD
MARCH 16, 1996 MONTHS ENDED MONTHS ENDED MARCH 16, 1996
TO MAY 31, 1996 (B) AUGUST 31, 1996 NOVEMBER 30, 1996 TO NOVEMBER 30, 1996
------------------- --------------- ----------------- --------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Wholesale:
Correspondent (includes
volumes purchased from
BKB and Barnett)...... $ 1,893 $ 2,950 $ 3,249 $ 8,092
Co-issue(a).............. 1,419 2,208 1,985 5,612
Broker................... 220 155 168 543
------- ------- ------- -------
Total wholesale....... 3,532 5,313 5,402 14,247
Direct..................... 248 179 139 566
------- ------- ------- -------
Total production...... 3,780 5,492 5,541 14,813
Bulk acquisitions(a)....... -- 4,073 -- 4,073
------- ------- ------- -------
Total production and
acquisitions........ $ 3,780 $ 9,565 $ 5,541 $ 18,886
======= ======= ======= =======
</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.
(b) The Parent acquired HHI, and transferred all the assets and liabilities of
HHI, except for certain servicing rights, to the Issuer, on May 31, 1996 and
therefore HHI's loan production is not included in these amounts. During the
three months ended May 31, 1996, HHI's loan production totaled $1.5 billion.
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 78% of the total production in
the period March 16, 1996 to November 30, 1996. HomeSide also offers other
products, such as 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's largest markets by state in
the period ended November 30, 1996 were California (17.5% of UPB of production),
Florida (9.1%), Texas (7.5%), Georgia (5.7%), and Maryland (5.5%).
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 and
centralized direct production, the use of contract and delegated underwriters, a
high degree of automation in its processing and direct originations and quality
control. HomeSide plans to expand production through its low cost wholesale and
direct 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.
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<PAGE> 91
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.
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 pre-closing 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.
DIRECT PRODUCTION
HomeSide's direct 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 acquired HLI's telemarketing system which was
established in May 1995. HomeSide believes that these efforts will have a
significant effect on increasing the percentage of loans captured by the direct
division from loan prepayments in HomeSide's servicing portfolio. Refinancing
retention represents the percentage of loans refinanced through HomeSide's
direct channel that were serviced by HomeSide prior to refinancing.
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
receives one frequent flyer mile for every dollar of interest paid on time.
HomeSide offers loans in four out of five geographic regions in the United
States, along with two other lenders in each region. Each lender receives 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 the 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.
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Under the terms of the HLI and HHI Acquisitions, BKB has retained all of
its retail production facilities in the New England area and Barnett retained
all of its loan production facilities except for Honolulu Mortgage. Upon selling
HLI and HHI to the Parent, BKB and Barnett entered into exclusive five-year
agreements to sell, subject to certain limitations, all loans originated from
these sources to HomeSide on a broker or correspondent basis at market rates. In
1996, HomeSide sold or closed HLI'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 Fannie Mae,
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 such 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 a statistical sample of all closed loans monthly for review.
The sample generally comprises 3 1/2% - 4% of all loans closed each month. 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 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 by
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 HomeSide or,
ultimately, the originating correspondent. Correspondents or co-issue partners
are required to repurchase
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any flawed loans originated by them. See "Risk Factors -- Loan Delinquencies and
Defaults on Loans" in the Prospectus Supplement.
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 Fannie Mae and FHLMC for Fannie
Mae MBS or FHLMC participation certificates, respectively. HomeSide pays certain
guarantee fees to the Agencies in connection with these programs and then sells
the GNMA, Fannie Mae and FHLMC securities to securities dealers. A limited
number of mortgage loans (i.e. non-conforming loans) are sold to private
investors. In the period March 16, 1996 to November 30, 1996, approximately 92%
of the mortgage loans originated by HomeSide were sold to GNMA (48%), Fannie Mae
(31%) or FHLMC (13%). 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 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.
HomeSide uses the Quantitative Risk Management 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 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 originations and sell loans
on a break-even basis. For the period March 16, 1996 to November 30, 1996,
HomeSide has not experienced secondary marketing losses on an aggregate basis.
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.
HomeSide anticipates that the sale of servicing rights will not be a significant
component of its business strategy in the future. Since its formation, HomeSide
has also maintained a risk management program designed to protect, within
certain
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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>
FOR THE PERIOD FOR THE THREE FOR THE THREE FOR THE PERIOD
MARCH 1, 1996 MONTHS ENDED MONTHS ENDED MARCH 1, 1996
TO MAY 31, 1996 AUGUST 31, 1996 NOVEMBER 30, 1996 TO NOVEMBER 30, 1996
--------------- ---------------- ------------------ --------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Balance, beginning of
period...................... $41,844 $ 77,351 $ 84,819 $ 41,844
Total additions............. 37,184 9,842 5,244 52,270
Scheduled amortization........ 212 470 494 1,176
Prepayments................... 1,321 1,702 1,529 4,552
Foreclosures.................. 130 137 106 373
Servicing sales............... 14 65 221 300
------- ------- ------- -------
Total reductions............ 1,677 2,374 2,350 6,401
------- ------- ------- -------
Balance, end of period........ $77,351 $ 84,819 $ 87,713 $ 87,713
======= ======= ======= =======
</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
0.359% at November 30, 1996. 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.
As part of the HHI Acquisition, the Parent acquired and contributed to the
Issuer a full-service mortgage company in Hawaii, Honolulu Mortgage. Honolulu
Mortgage's servicing portfolio totaled $1.9 billion at November 30, 1996 and its
loan production was $257.4 million since its acquisition on May 31, 1996. In
January 1997, Honolulu Mortgage entered into an agreement to sell substantially
all the assets of Honolulu Mortgage to an unaffiliated third party. The sale is
expected to close in February 1997. This sale is not expected to materially
affect HomeSide's financial results.
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. Using a variety
of factors, including loans serviced per employee and direct cost per loan,
management believes that HomeSide is one of the nation's most efficient
servicers based on industry surveys. Management believes that its low cost
servicing provides it with a competitive advantage in the industry.
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<PAGE> 95
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 64.7% of outstanding UPB of
the total servicing portfolio of HomeSide at November 30, 1996, while the
largest volume by state is Florida with a 19.6% share of the total portfolio at
November 30, 1996. 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.
At November 30, 1996, HomeSide's servicing portfolio consisted of $31.4
billion of FHA/VA servicing and $51.4 billion of conventional servicing.
SERVICING PORTFOLIO BY STATE(a)
<TABLE>
<CAPTION>
AT NOVEMBER 30, 1996
------------------------
STATE UPB % OF UPB
----- ----------- --------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Florida...................................................... $16,262 19.6%
California................................................... 12,934 15.6
Texas........................................................ 5,081 6.1
Massachusetts................................................ 4,199 5.1
Maryland..................................................... 3,865 4.7
Georgia...................................................... 3,251 3.9
Virginia..................................................... 3,087 3.7
Illinois..................................................... 2,692 3.3
Colorado..................................................... 2,240 2.7
Other(b)..................................................... 29,209 35.3
------- -----
Total........................................................ $82,820 100.0%
======= =====
<FN>
- ---------------
(a) Servicing statistics are based on loans serviced by HomeSide and exclude
loans purchased not yet on servicing system.
(b) No other state represents more than 2.7% of HomeSide's servicing portfolio.
</TABLE>
SERVICING PORTFOLIO BY COUPON(a)
<TABLE>
<CAPTION>
AT NOVEMBER 30, 1996
---------------------------------------
CUMULATIVE
INTEREST RATE UPB % OF UPB % OF UPB
------------- ----------- -------- -----------
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C>
Less than 6.0%............................................ $ 1,016 1.2% 1.2%
6.0% to 6.9%.............................................. 9,254 11.2 12.4
7.0% to 7.9%.............................................. 34,698 41.9 54.3
8.0% to 8.9%.............................................. 26,843 32.4 86.7
9.0% to 9.9%.............................................. 7,198 8.7 95.4
10.0% to 10.9%............................................ 2,963 3.6 99.0
Over 11.0%................................................ 848 1.0 100.0
------- -----
Total........................................... $82,820 100.0%
======= =====
<FN>
- ---------------
(a) Servicing statistics are based on loans serviced by HomeSide and exclude
loans purchased not yet on servicing system.
</TABLE>
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<PAGE> 96
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. 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 $13.0 million for the period March 16,
1996 to November 30, 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 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.
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 HomeSide's delinquency and foreclosure experience.
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 May 31, 1996.......................... 2.97% 0.60% 0.35% 3.92% 0.66%
At August 31, 1996....................... 3.08% 0.64% 0.48% 4.20% 0.95%
At November 30, 1996..................... 3.50% 0.68% 0.58% 4.76% 1.02%
</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> 97
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" in the Prospectus Supplement and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
HomeSide -- Results of Operations -- Risk Management Activities".
The FASB has been evaluating the accounting for derivative financial
instruments and hedging activities. The FASB has issued an exposure draft and
numerous comments have been received. It is unclear what changes will ultimately
be made to such exposure draft. 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.
Management of HomeSide is unable to predict what effect, if any, changes in
accounting principles would have on HomeSide's financial statements or
HomeSide's use of hedge accounting.
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 March 1, 1996 serviced approximately 522,000 loans with a
servicing staff of approximately 400. HHI had servicing operations located in
Jacksonville, Florida, San Antonio, Texas, and Honolulu, Hawaii. Approximately
11,000 loans are serviced at Honolulu Mortgage. In January 1997, Honolulu
Mortgage entered into an agreement to sell substantially all the assets of
Honolulu Mortgage to an unaffiliated third party. The sale is expected to close
in February 1997. HomeSide plans to integrate the existing former HLI portfolio
with the former HHI portfolio in stages based on the capacity and capabilities
of each of the respective servicing sites. HomeSide has completed the transfer
of its approximately 145,000 loans at HHI's Jacksonville facility to San Antonio
for servicing.
In addition to the physical consolidation of servicing operations, HomeSide
intends to pursue the conversion of 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. 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 by HomeSide in order
to operate more efficiently. HomeSide has outsourced HHI's hazard insurance, tax
payments and default functions to specialized vendors, as was the historic
practice at HLI. The consolidation of the two servicing operations in
Jacksonville is expected to result in a reduction in headcount. 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.
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EMPLOYEES
As of November 30, 1996, HomeSide had approximately 1,718 total employees,
substantially all of whom were full-time employees. 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. The Issuer 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, Honolulu Mortgage
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.
REGULATION
HomeSide's mortgage banking business is subject to the rules and
regulations of HUD, FHA, VA, Fannie Mae, 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 Fannie Mae, FHLMC,
GNMA and HUD and to comply with each regulatory entity's own financial
requirements. HomeSide's business is also subject to examination by Fannie Mae,
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, the Real Estate Settlement Procedures
Act, the Fair Housing Act, and the regulations promulgated thereunder, which,
among other provisions, prohibit discrimination, prohibit unfair and deceptive
trade practices and require the disclosure of certain basic information to
mortgagors concerning credit terms and settlement costs, limit fees and charges
paid by borrowers and lenders, and otherwise regulate terms and conditions of
credit and the procedures by which credit is offered and administered. 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. Such regulatory requirements are subject to
change from time to time and may in the future become more restrictive, thereby
making compliance more difficult or expensive or otherwise restricting
HomeSide's ability to conduct its business as such business is now conducted.
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 or the Parent, HomeSide (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> 99
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 --
Regulation, Possible Changes and Related Matters" in the Prospectus Supplement.
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 and paying various fees and
charges. Class action lawsuits may be filed in the future against the mortgage
banking industry. In recently denying a motion to dismiss in a purported class
action brought against certain unrelated mortgage companies in a federal court
in Virginia, the court stated that the payment of certain fees to mortgage
brokers violates RESPA. No prediction can be made as to whether the ultimate
decision in such class action will be adverse to the defendant mortgage
companies, and, while the matter is still in a preliminary stage, based upon
available information, management of HomeSide believes that an adverse result
ultimately having general application to the mortgage banking industry
(including HomeSide), would not have a material adverse impact on the
consolidated financial position of HomeSide, nor upon the consolidated results
of operations for any fiscal period.
54
<PAGE> 100
HLI -- HISTORICAL BUSINESS
HLI, at the time its loan servicing and production operations were acquired
by the Parent, was one of the largest full-service mortgage banking companies in
the United States, emphasizing wholesale mortgage originations and low cost
mortgage servicing. As of and 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. HomeSide is headquartered in
Jacksonville, Florida. The following discussion summarizes HLI's operations up
to the date it was acquired by the Parent.
PRODUCTION
HLI participated in several origination channels, with a focus on wholesale
originations. In 1995, wholesale channels (correspondent, co-issue and broker)
represented approximately 90% of HLI's total production. No single source within
the correspondent or broker channels accounted for more than 2% of total
production in 1995. HLI's other origination channels included telemarketing,
affinity programs and retail branches. HLI also purchased servicing rights in
bulk from time to time. This multi-channel production base provided 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
====== ====== ======= ======= ====== ======
<FN>
- ---------------
(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.
</TABLE>
HLI competed nationwide by offering a wide variety of mortgage products
designed to respond to consumer needs and tailored to address market
competition. HLI was 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.
HLI's national loan production operation resulted in geographically diverse
originations, enabling HLI to diversify its risk across many markets in the
United States. HLI originated 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 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%).
55
<PAGE> 101
SECONDARY MARKETING
HLI customarily sold all loans that it originated while retaining the
servicing rights to such loans. HLI aggregated mortgage loans into pools and
sold these pools, as well as individual mortgage loans, to investors principally
at prices established under forward sales commitments. In 1995, approximately
83% of the mortgage loans originated by HLI were sold to GNMA (43%), Fannie Mae
(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 HLI were sold to GNMA (48%), Fannie Mae (35%) or
FHLMC (9%). The remaining approximately 8% were sold to private investors. For
each year since 1990, HLI has not experienced secondary marketing losses.
LOAN SERVICING
HLI derived its revenues predominantly from its servicing operations. Since
1991, HLI's servicing portfolio has grown as originations and bulk servicing
acquisitions have exceeded scheduled principal reductions, prepayments,
foreclosures and sales of servicing rights. Since 1994, HLI 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>
Over the past five years, HLI's servicing portfolio grew steadily, from
$20.6 billion at December 31, 1991 to $41.6 billion at December 31, 1995, a 19%
compounded annual growth rate. HLI's weighted average servicing fee was 0.386%
at December 31, 1995.
SERVICING PORTFOLIO COMPOSITION
HLI originated and purchased servicing rights for mortgage loans
nationwide. The broad geographic distribution of HLI's servicing portfolio
reflected the national scope of HLI'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 HLI at December 31, 1995,
and March 31, 1996, respectively, while the largest volume by state was
California with a 16.8% and 16.9% share of the total portfolio at December 31,
1995 and March 31, 1996, respectively.
56
<PAGE> 102
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
======= ======= ======= ======= ======= =======
<FN>
- ---------------
(a) Servicing statistics are based on loans serviced by HLI and exclude loans
purchased not yet on servicing system.
</TABLE>
SERVICING PORTFOLIO BY STATE(a)
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995 AT MARCH 31, 1996
------------------------ ------------------------
STATE UPB % OF UPB UPB % OF UPB
----- ----------- -------- ----------- --------
(DOLLARS IN (DOLLARS IN
MILLIONS) 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%
======= ===== ======= =====
<FN>
- ---------------
(a) Servicing statistics are based on loans serviced by HLI and exclude loans
purchased not yet on servicing system.
(b) No other state represents more than 3.0% of HLI's servicing portfolio.
</TABLE>
57
<PAGE> 103
SERVICING PORTFOLIO BY COUPON(A)
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995 AT MARCH 31, 1996
--------------------------------------- ---------------------------------------
CUMULATIVE CUMULATIVE
INTEREST RATE UPB % OF UPB % OF UPB UPB % OF UPB % OF UPB
- ------------------------- ----------- -------- ---------- ----------- -------- ----------
(DOLLARS IN (DOLLARS IN
MILLIONS) 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%
======= ===== ======= =====
<FN>
- ---------------
(a) Statistics based on loans serviced by HLI and exclude loans purchased not
yet on servicing system.
</TABLE>
LOAN SERVICING CREDIT ISSUES
For HLI, 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. HLI's historical delinquency and foreclosure
rate experience on VA loans has generally been consistent with that of the
industry.
Set forth below is a comparison of HLI'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 HLI ........................... 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 HLI............................ 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 HLI............................ 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 HLI............................ 2.65 0.56 0.59 3.80 1.00
</TABLE>
58
<PAGE> 104
HHI -- HISTORICAL BUSINESS
Prior to its acquisition by the Parent, 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 Fannie Mae, 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. The following discussion
summarizes HHI's operations up to the date it was acquired by the Parent.
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 Parent acquired HHI's and its
subsidiaries' $33.0 billion servicing portfolio and servicing platform, its
proprietary mortgage servicing software, and Honolulu Mortgage, including its
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 the Issuer,
except for certain portions of 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 mortgage loan 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 sells, subject to certain
limitations, to HomeSide all of its mortgage loan production on market terms
pursuant to an exclusive, five-year correspondent contract, with the exception
of the loans held by Barnett. However, Barnett sells HomeSide the servicing
rights related to these loans on a co-issue basis. Under the terms of its
correspondent agreement, loans originated through the Barnett network are
underwritten on a delegated basis. HomeSide performs the secondary marketing
functions of pricing and hedging related to the correspondent production.
59
<PAGE> 105
Like HLI, HHI 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,
------------------------------------------ FIVE MONTHS ENDED
1991 1992 1993 1994 1995 MAY 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
====== ====== ====== ====== ====== ======
<FN>
- ---------------
(a) Since date of acquisitions by HHI.
</TABLE>
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 five months ended May 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 Fannie Mae. 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,
Fannie Mae, 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 HomeSide 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 had 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.
60
<PAGE> 106
CHANGES IN SERVICING PORTFOLIO
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
January 1st balance........................... $ 9,243 $10,034 $11,524 $13,085 $18,411 $33,411
Total additions(a).......................... 2,039 3,744 5,237 7,469 20,312 1,526
Reductions.................................... 1,248 2,254 3,016 2,143 4,241 1,911
Servicing sales............................... 0 0 660 0 1,071 7
------- ------- ------- ------- ------- -------
Total reductions............................ 1,248 2,254 3,676 2,143 5,312 1,918
------- ------- ------- ------- ------- -------
December 31st balance or end of period
balance..................................... $10,034 $11,524 $13,085 $18,411 $33,411 $33,019
======= ======= ======= ======= ======= =======
<FN>
- ---------------
(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.
</TABLE>
SERVICING PORTFOLIO COMPOSITION
Historically, HHI was primarily a servicer of conventional loans,
consisting of Fannie Mae and FLHMC product. The acquisition of HHI's servicing
portfolio reduced the percentage of HomeSide's government loans in the combined
servicing portfolios. 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>
AT DECEMBER 31, AT
------------------------------- MARCH 31,
1993 1994 1995 1996
------- ------- ------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
FHA/VA........................................................ $ 1,032 $ 1,082 $ 6,023 $ 5,586
Conventional.................................................. 12,053 17,329 27,388 27,433
------- ------- ------- -------
Total serviced (UPB)...................................... $13,085 $18,411 $33,411 $33,019
======= ======= ======= =======
ARM........................................................... 48% 41% 28% 27%
Fixed......................................................... 52% 59% 72% 73%
Weighted average coupon....................................... 7.34% 7.44% 8.05% 8.04%
Weighted average servicing fee (% of UPB)..................... 0.259% 0.261% 0.277% 0.346%
Weighted average maturity (months)............................ 257 259 261 260
</TABLE>
61
<PAGE> 107
The following table sets forth information regarding the geographic
distribution of HHI's servicing portfolio at March 31, 1996. Because of
Barnett's market presence in Florida, that state comprised approximately 38.8%
share of HHI's total portfolio at such date:
SERVICING PORTFOLIO BY STATE
<TABLE>
<CAPTION>
% OF
STATE UPB UPB
------------------------------------------------------ -------------------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C>
Florida............................................... $12,803 38.8%
California............................................ 4,689 14.2
Texas................................................. 1,739 5.3
Massachusetts......................................... 236 0.7
Maryland.............................................. 536 1.6
Virginia.............................................. 491 1.5
Georgia............................................... 870 2.6
Hawaii................................................ 2,015 6.1
Illinois.............................................. 1,060 3.2
Washington............................................ 864 2.6
Other................................................. 7,716 23.4
------- -----
Total....................................... $33,019 100.0%
======= =====
</TABLE>
The following table sets forth the coupon stratification of HHI's servicing
portfolio at March 31, 1996:
SERVICING PORTFOLIO BY COUPON
<TABLE>
<CAPTION>
% OF CUMULATIVE
INTEREST RATE UPB UPB % OF UPB
----------------------------------------- -------------------- ----- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Less than 6.0%........................... $ 195 0.6% 0.6%
6.0% to 6.9%............................. 4,075 12.3 12.9
7.0% to 7.9%............................. 12,236 37.1 50.0
8.0% to 8.9%............................. 10,904 33.0 83.0
9.0% to 9.9%............................. 3,390 10.3 93.3
10.0% to 10.9%........................... 1,615 4.9 98.2
Over 11.0%............................... 604 1.8 100.0
------- -----
Total.......................... $33,019 100.0%
======= =====
</TABLE>
62
<PAGE> 108
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 a pool existing at May 31, 1996, Barnett is
obligated to purchase these loans from HomeSide for the following five-year
period. See "Certain Relationships and Related Transactions".
63
<PAGE> 109
THE ACQUISITIONS
THE HLI ACQUISITION
On March 15, 1996 the Parent 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 Parent paid approximately $139.2 million in cash and issued 8,427,155
shares of Common Stock, representing approximately 45% of the then outstanding
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 97,138
shares of the Parent's Class C Non-Voting Common Stock ("Class C Common Stock"),
representing 100% of the outstanding Class C Common Stock. Additionally, the
Parent 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, the
Parent 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 the Parent and Bank of Boston dated December
11, 1995, as amended. Accordingly, upon the consummation of the HHI Acquisition,
the Parent paid an additional $5.0 million in cash to Bank of Boston.
Simultaneously with the closing of the HLI Acquisition, THL purchased
7,813,931 shares of Common Stock of the Parent, representing approximately 41%
of the then outstanding Common Stock, for approximately $80.4 million in cash
and MDP purchased 2,604,638 shares of Common Stock, representing approximately
14% of the then outstanding Common Stock, for approximately $26.8 million in
cash. The Parent also reserved shares of its Common Stock for issuance to
members of management of HomeSide at a price of $10.294 per share (the same
price paid by the Investors). Management of HomeSide has, since May 15, 1996,
purchased a total of 441,592 shares of Common Stock of the Parent, for an
aggregate purchase price of approximately $4.5 million. Simultaneously with the
closing of the HLI Acquisition, the Parent also issued 97,138 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 the Parent 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, HomeSide modified its
credit facility entered into on March 15, 1996 by entering into the Bank 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, the Parent 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, the Parent 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 the Parent
approximately $118.0 million, $31.2 million, $8.1 million and $2.7 million,
respectively, in cash in exchange for shares of Common Stock of the Parent. As a
result, immediately prior to the January 1997 public offering of Common Stock of
the Parent, Siesta owned approximately 33% of the Parent, and THL and MDP,
collectively, and BKB each owned approximately 33% of the Parent.
64
<PAGE> 110
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 Parent contributed all of the
stock of HLI to HHI, whereupon the Issuer became a wholly-owned subsidiary of
HHI. All of HHI's servicing portfolio was transferred to HomeSide, except for
certain of HHI's GNMA loans, which HHI retained. All of HHI's former
subsidiaries, except Honolulu Mortgage, were merged with and into the Issuer.
All new business is expected to be carried on by HomeSide. The Parent 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 of Parent.................... $ 200.0 $160.0 $ 360.0
Notes offering of Parent.............................. 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 and acquisition 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
======== ====== ========
<FN>
- ---------------
(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.
</TABLE>
65
<PAGE> 111
MANAGEMENT
The following table sets forth the name, age and position with the Issuer
and Parent of each person who is an executive officer or director of the Issuer
or Parent.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- --- --------------------------------------------------------
<S> <C> <C>
Joe K. Pickett.............. 51 Chairman of the Board and Chief Executive Officer (the
Issuer and the Parent); Director (the Issuer and the
Parent)
Hugh R. Harris.............. 45 President and Chief Operating Officer (the Issuer and
the Parent); Director (the Issuer and the Parent)
Kevin D. Race............... 36 Vice President, Chief Financial Officer and Treasurer
(the Parent); Executive Vice President and Chief
Financial Officer (the Issuer)
Robert J. Jacobs............ 44 Secretary and Vice President (the Parent); Executive
Vice President, Secretary and General Counsel (the
Issuer); Director (the Issuer)
Betty L. Francis............ 50 Vice President (the Parent); Chief Credit Officer and
Executive Vice President (the Issuer)
Mark. F. Johnson............ 42 Vice President (the Parent); Executive Vice President --
Secondary Marketing and Production (the Issuer)
William Glasgow, Jr......... 47 Vice President (the Parent); Executive Vice President
(the Issuer)
Daniel T. Scheuble.......... 38 Vice President (the Parent); Executive Vice President --
Technology (the Issuer)
Thomas H. Fish.............. 64 Vice President and Assistant Secretary (the Parent);
Executive Vice President and Assistant Secretary (the
Issuer)
W. Blake Wilson............. 31 Senior Vice President, Director of Capital Markets (the
Issuer)
Charles D. Gilmer........... 49 Senior Vice President and Treasurer (the Issuer)
Ann R. Mackey............... 39 Senior Vice President and Finance Director (the Issuer)
Thomas M. Hagerty........... 34 Director (the Parent); Risk Management Committee (the
Parent)
David V. Harkins............ 55 Director (the Parent)*
Justin S. Huscher........... 43 Director (the Parent); Risk Management Committee (the
Parent)**
Peter J. Manning............ 57 Director (the Parent)**
William J. Shea............. 48 Director (the Parent)*
Kathleen M. McGillycuddy.... 47 Director (the Parent); Risk Management Committee (the
Parent)
Hinton F. Nobles, Jr. ...... 51 Director (the Parent)
Douglas K. Freeman.......... 46 Director (the Parent)*
Charles W. Newman........... 47 Director (the Parent)**
<FN>
- ---------------
* Also serves as a member of the Compensation Committee of the Parent.
** Also serves as a member of the Audit Committee of the Parent.
</TABLE>
The directors of the Issuer are elected each year by vote of HHI, a
wholly-owned subsidiary of the Parent. 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 corporate officers of the Issuer
will be appointed annually by its Board of Directors.
JOE K. PICKETT has served as Chairman of the Board and Chief Executive
Officer of the Issuer since April 1990 and as Chairman of the Board, Chief
Executive Officer and a Director of the Parent 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 Fannie Mae.
66
<PAGE> 112
HUGH R. HARRIS has served as President and Chief Operating Officer of the
Issuer since January 1993 and as President, Chief Operating Officer and a
Director of the Parent 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. Mr. Harris currently serves as a Director of Republic Mortgage
Insurance Company (RMIC).
KEVIN D. RACE has served as Executive Vice President and Chief Financial
Officer of the Issuer and Vice President, Chief Financial Officer and Treasurer
of the Parent 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 Backed 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
the Issuer 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 Parent
since March 14, 1996 and as Vice President of the Parent 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 the Issuer since October 1996 and as Vice President of the Parent
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 the Issuer 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 Parent since April
10, 1996.
WILLIAM GLASGOW, JR. has served as Executive Vice President of the Issuer
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 Parent since April 10, 1996.
DANIEL T. SCHEUBLE has served as Executive Vice President for Technology,
Loan Processing and Consumer Direct Lending of the Issuer since 1993. From 1990
to 1992, Mr. Scheuble served as a Senior Technology and Operational Manager at
Bank of Boston. Mr. Scheuble has also served as Vice President of the Parent
since April 10, 1996.
THOMAS H. FISH has served as Executive Vice President of the Issuer 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.
W. BLAKE WILSON has served as Senior Vice President and Director of Capital
Markets of the Issuer since June, 1996. Before joining HLI, Mr. Wilson served in
Capital Markets for Prudential Home Mortgage ("PHM") from 1992 through June,
1996. Prior to joining PHM, he worked in KPMG Peat Marwick's National Mortgage
and Structured Finance Group in Washington, D.C.
CHARLES D. GILMER has served as Senior Vice President and Treasurer of the
Issuer 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
the Issuer 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 Parent from March 14, 1996 to
October 1996. Mr. Hagerty served as President of the Parent from its
organization, December 11, 1995 through March 14,
67
<PAGE> 113
1996. Mr. Hagerty has served as a Director of the Parent 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.
DAVID V. HARKINS has served as a Director of the Parent 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 Parent 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.
PETER J. MANNING has served as a Director of the Parent since December 11,
1995. Mr. Manning has been employed by Bank of Boston and BKBC as Executive Vice
President, 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 Parent since October 2,
1996. Mr. Shea has served as Vice Chairman, Chief Financial Officer and
Treasurer of BKBC since October 28, 1993. Mr. Shea served as Executive Vice
President, Chief Financial Officer and Treasurer of BKBC from December, 1992
through October 28, 1993. 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 Parent 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 the Parent since May 31,
1996. Mr. Nobles has been employed by Barnett 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 the Parent since May 31,
1996. Mr. Freeman joined Barnett 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 the Parent since May 31,
1996. Mr. Newman has been employed by Barnett 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. Mr.
Newman was elected to his current position in 1992.
68
<PAGE> 114
EXECUTIVE COMPENSATION
Following the HLI Acquisition, the annual salaries of the Issuer's Chief
Executive Officer and the Issuer's five other most highly compensated executive
officers whose total annual salary will exceed $100,000 are as follows: Joe K.
Pickett, $312,000; Hugh R. Harris, $300,000; Kevin D. Race, $250,000; Mark F.
Johnson, $200,000; William Glasgow, $200,000 and Charles D. Gilmer, $175,000.
Although none of the Issuer's executive officers are party to any employment or
non-competition agreements with the Issuer, and the Issuer 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 the Issuer.
Pursuant to severance agreements with the Issuer, 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 the Issuer 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 the Issuer'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 Parent's 1996 Employee
Stock Option Plan under which 582,845 shares of Common Stock of the Parent 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 Parent's Board of Directors. Under the plan, options will vest in
five equal installments in arrears, or 20% per year. Non-qualified options to
purchase 447,066 shares have been granted (of which, options to purchase 6,494
shares have since been cancelled) at an exercise price of $10.294 per share,
including options to purchase the following number of shares granted to the
named executive officers: Joe K. Pickett, 80,954; Hugh R. Harris, 80,954; Mark
F. Johnson, 32,385; William Glasgow, 32,385; Charles D. Gilmer, 32,385; and
Kevin D. Race, 32,385.
The Parent has also adopted a 1996 Time Accelerated Restricted Stock Option
Plan under which 1,165,724 shares of Common Stock of the Parent 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 Parent's 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. Non-qualified
options to purchase 894,132 shares have been granted (of which, options to
purchase 12,988 shares have since been cancelled) under this plan at an exercise
price of $10.294 per share, including options to purchase the following number
of shares granted to the named executive officers: Joe K. Pickett, 161,908; Hugh
R. Harris, 161,908; Mark F. Johnson, 64,770; William Glasgow, 64,770; Charles D.
Gilmer, 64,770; and Kevin D. Race, 64,770.
See "Certain Relationships and Related Transactions -- Management
Ownership" for information regarding shares of Common Stock of the Parent sold
to members of management.
69
<PAGE> 115
HLI HISTORICAL EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by or
paid to the Issuer's Chief Executive Officer and the Issuer'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 the Issuer's named executive officers received any compensation
from HHI during 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------------------
PAYOUTS
AWARDS(b) ----------
----------------------- LONG-TERM
ANNUAL COMPENSATION RESTRICTED SECURITIES INCENTIVE
NAME AND PRINCIPAL -------------------- STOCK UNDERLYING PLAN ALL OTHER
HLI POSITION YEAR SALARY(a) BONUS(a) AWARDS OPTIONS PAYOUTS(c) COMPENSATION(d)
- ------------------------------- ---- --------- -------- ---------- ---------- ---------- ---------------
<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>
- ---------------
(a) 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.
(b) 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:
</TABLE>
AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
TOTAL NUMBER OF AGGREGATE
NAME RESTRICTED SHARES HELD MARKET VALUE
---------------------------------------------------------- ---------------------- ------------
<S> <C> <C>
Joe K. Pickett............................................ 5,600 $259,000
Hugh R. Harris............................................ 4,135 191,244
Charles D. Gilmer......................................... 0 0
Mark F. Johnson........................................... 1,784 82,510
William Glasgow, Jr....................................... 1,700 78,625
</TABLE>
In connection with the HLI Acquisition, vesting on all of the restricted
stock owned by HLI employees, including the restricted stock listed above,
was accelerated and all prior forfeiture and transferability restrictions
thereon were removed.
(c) Represents the dollar value of vested shares of performance restricted stock
calculated by multiplying the closing price of BKBC Common Stock on each
vesting date by the number of shares that vested on that date.
(d) Includes matching employer contributions and credits under the Bank of
Boston thrift-incentive plan and the Bank of Boston deferred compensation
plan for the named executive officers.
70
<PAGE> 116
OPTION GRANTS IN 1995
The following table provides information on option grants with respect to
BKBC Common Stock in fiscal 1995 to the named executive officers. Pursuant to
applicable regulations of the Commission, the following table also sets forth
the hypothetical value which might have been realized with respect to such
options based on assumed rates of stock appreciation of 5% and 10% compounded
annually from date of grant to March 15, 1996, the end of the option terms:
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT
INDIVIDUAL GRANTS ASSUMED
----------------------------------------------- ANNUAL RATES
NUMBER OF OF STOCK PRICE
SECURITIES % OF TOTAL APPRECIATION
UNDERLYING OPTIONS FOR
OPTIONS GRANTED TO EXERCISE OPTION TERM
GRANTED EMPLOYEES PRICE EXPIRATION ------------------
NAME (#)(a) IN 1995 ($/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
<FN>
- ---------------
(a) All options were exercised prior to March 15, 1996.
</TABLE>
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.
71
<PAGE> 117
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 cash balance formula as
of December 31, 1995 (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.
72
<PAGE> 118
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
CAPITAL STOCK OF THE ISSUER
All of the outstanding common stock of HHI, consisting of 10,000 shares, is
owned by the Parent, and all of the outstanding common stock of the Issuer,
consisting of 100 shares, is owned by HHI.
CAPITAL STOCK OF THE PARENT
The following table and the paragraphs that follow set forth information
with respect to the beneficial ownership of shares of the Parent's voting
securities as of February 5, 1997 by (i) all shareholders of the Parent 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 Section 13(d) of
the Exchange Act.
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF PERCENTAGE OF VOTING
NAME OF BENEFICIAL OWNER COMMON STOCK STOCK OUTSTANDING
------------------------ ------------ --------------------
<S> <C> <C>
The First National Bank of Boston............ 11,461,400 26.42%
100 Federal Street
Boston, MA
Siesta Holdings, Inc. ....................... 11,461,400 26.42%
3800 Howard Hughes Parkway
Suite 1560
Las Vegas, NV
THL.......................................... 8,596,050 19.82%
75 State Street
Boston, MA
Madison Dearborn Capital Partners, L.P....... 2,865,350 6.60%
Three First National Plaza
Chicago, IL
Joe K. Pickett............................... 77,724 *
Hugh R. Harris............................... 72,862 *
Kevin D. Race................................ 29,155 *
Charles D. Gilmer............................ 34,000 *
William Glasgow.............................. 43,724 *
Mark F. Johnson.............................. 48,620 *
Thomas M. Hagerty............................ 25,194(a) *
David V. Harkins............................. 39,661(b) *
All Directors and Executive Officers as a
Group (21 persons)......................... 429,046(c) *
<FN>
- ---------------
* Less than 1%.
(a) Does not include 8,570,856 shares owned by THL, as to which Mr. Hagerty
disclaims beneficial ownership.
(b) Does not include 8,556,389 shares owned by THL, as to which Mr. Harkins
disclaims beneficial ownership.
(c) Does not include the shares held by THL, MDP, Bank of Boston and Siesta,
with which certain directors are affiliated.
</TABLE>
Each of the Principal Shareholders and certain of the stockholders set
forth above are party to a stockholder agreement which places certain
limitations on transactions with affiliated parties. All other terms of the
stockholder agreement have been terminated. See "Certain Relationships and
Related Transactions -- Amended and Restated Shareholder Agreement."
The Parent has issued 441,592 shares of the Parent's Common Stock to
members of management of HomeSide. The Parent has also granted options to
purchase shares of the Parent's Common Stock pursuant to employee stock option
plans. See "Management -- Executive Compensation," "The Acquisitions" and
"Certain Relationships and Related Transactions."
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<PAGE> 119
In addition to those shares of capital stock set forth in the preceding
table, 97,138 shares of Class C Common Stock (non-voting) of the Parent are
beneficially owned by Robert Morrissey, constituting 100% of the outstanding
Class C Common Stock. Within 180 days of the initial public offering of common
stock of the Parent, a holder of Class C Common Stock may require the Parent to
purchase any portion of its shares of Class C Common Stock at a price based upon
the average bid prices of the Common Stock for the preceding 20 days. In
addition, upon consummation of a merger or sale of substantially all the assets
of the Parent, a holder of Class C Common Stock may require the Parent to
purchase any portion of its shares of Class C Common Stock at an appraised fair
market value price.
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<PAGE> 120
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AMENDED AND RESTATED SHAREHOLDER AGREEMENT
Each of the Principal Shareholders and certain other stockholders named
therein entered into an Amended and Restated Shareholder Agreement with the
Parent dated May 31, 1996 in connection with the HHI Acquisition (the
"Shareholder Agreement"). The Shareholder Agreement terminated upon the
consummation of the January 1997 public offering of Common Stock of the Parent,
except for provisions pursuant to which the Parent has agreed not to enter into
transactions with certain affiliated parties except on terms which the Parent
could have received in comparable arms-length transactions.
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
Subject to certain limitations, pursuant to the Amended and Restated
Registration Rights Agreement among the Parent and the Principal Shareholders
dated May 31, 1996, upon the request of (i) holders of shares of Common Stock of
the Parent aggregating more than 50% of the number of shares of such 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), the
Parent will use its best efforts to effect the registration of the Common Stock
of the Parent requested by such stockholder to be registered and the Common
Stock of all other holders who have requested registration in connection
therewith; provided that the Parent is not required to effect more than two
registrations pursuant to any request made by any of the foregoing parties.
Under certain circumstances, if the Parent proposes to register shares of its
Common Stock, it will, upon the written request of any stockholder, register
such requesting stockholder's 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.
EXCLUSIVE MARKETING AGREEMENTS
The Issuer 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 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 BKBC Marketing Agreement, BKBC may not engage in a formal program
to solicit HomeSide's customers for refinancings.
The term of the BKBC 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" below.
The Issuer 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.
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<PAGE> 121
TRANSITIONAL SERVICES AGREEMENTS
Bank of Boston and its affiliate banks (the "BKB Banks") and the Issuer
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 the Issuer 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 reimburses 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 the Issuer 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 receive the most favorable pricing and service released
premiums offered by HomeSide to correspondent lenders, (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 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
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 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.
Correspondent Loan Purchase and Sale Agreement
The Issuer and the BKB Banks have also entered into a Correspondent Loan
Purchase and Sale Agreement, dated March 15, 1996 (the "BKB Correspondent Loan
Purchase Agreement"), which describes the mortgage loans eligible for sale to
HomeSide by BKB, and related pricing and delivery requirements for such loans.
The BKB Banks receive the most favorable pricing offered by HomeSide to
correspondent lenders. 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.
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<PAGE> 122
The term of the BKB Correspondent Loan Purchase Agreement is five years but
will automatically terminate upon the termination of the Operating Agreement.
PMSR Flow Agreement
The Issuer 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
The Issuer 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 provides additional services for the BKB Banks'
private banking clients.
The servicing fees 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 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 the Issuer 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 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 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 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 paid by the Barnett Banks to HomeSide for
loan servicing are market-based fees consistent with the fees charged by
HomeSide to other mortgagees.
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<PAGE> 123
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
The Issuer and Barnett Banks have entered into a Correspondent Loan
Purchase Agreement, dated May 16, 1996 (the "Barnett Correspondent Loan Purchase
Agreement"), 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 receive the most favorable pricing offered by
HomeSide to other correspondents. Under certain conditions, the Barnett Banks
must repurchase mortgage loans for HomeSide. The Barnett Correspondent Loan
Purchase Agreement provides certain underwriting, appraisal, mortgage insurance
and escrow requirements.
The term of the Barnett Correspondent Loan Purchase Agreement is 5 years
but will automatically terminate upon the termination of the Barnett Operating
Agreement.
PMSR Flow Agreement
The Issuer and the Barnett Banks have entered into a PMSR Flow Agreement
dated May 31, 1996 ("PMSR Flow Agreement"), 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
The Issuer 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, 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 provides additional services
for the Barnett Banks' private banking clients.
The servicing fees 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
The Issuer agreed to pay the Thomas H. Lee Company, MDP, Bank of Boston and
Barnett pursuant to management agreements entered into in connection with the
HLI Acquisition and the HHI Acquisition, an annual management fee of $250,000,
$83,334, $333,333 and $333,333, respectively. Such management
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<PAGE> 124
agreements had a term of five years automatically extended for successive one
year terms, except either party could terminate the agreement by delivering
notice thereof 90 days prior to the end of any such term. The management
agreements terminated upon consummation of the January 1997 offering of Common
Stock of the Parent.
MANAGEMENT OWNERSHIP
The Parent has established option plans for employees of HomeSide pursuant
to which the Parent has reserved 1,748,569 shares of its Common Stock for grants
to employees of HomeSide.
In addition, certain members of management have purchased in the aggregate
441,592 shares of Common Stock of the Parent at a price of $10.294 per share,
the same price paid by the Principal Shareholders. 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 executives
executed promissory notes for the purchase of their Common Stock in the
following amounts: Mr. Pickett ($400,000); Mr. Harris ($350,000); Mr. Jacobs
($50,000); Mr. Race ($150,000); Ms. Francis ($100,000); Mr. Johnson ($250,000);
Mr. Wilson ($50,000); 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 the Parent
upon termination of employment. Upon death of a management shareholder, such
management shareholder's estate has a right to require the Parent 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
$10.294 per share and fair market value.
DESCRIPTION OF BANK CREDIT AGREEMENT
Each of the Issuer and Honolulu Mortgage is a party to 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
the Issuer'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 loans that are subject to binding
sale commitments or hedge contracts and certain mortgage-backed securities. The
borrowing base used for determining availability under the Warehouse Credit
Facility is reduced by the principal amount of commercial paper of the Issuer
outstanding. The Warehouse Credit Facility terminates on February 14, 2000 (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 the Issuer's or Honolulu Mortgage's, as the case may
be, required monthly principal and interest payments for FHLMC, Fannie Mae and
GNMA mortgage-backed securities, (ii) eligible claims receivable related to
foreclosed loans serviced by the Issuer or Honolulu Mortgage, (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 the Issuer or Honolulu Mortgage, as the case may be, to
repurchase certain loans which are to be prepaid, and (vi) advances made by the
Issuer or Honolulu Mortgage, as the case may be, with respect to certain
defaulted loans. The amount of servicing portfolio included in the borrowing
base used for determining availability under the Servicing Credit Facility is
reduced by the principal amount of medium term notes of the Issuer outstanding.
The Servicing Credit Facility terminates on the Warehouse Termination Date.
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<PAGE> 125
SECURITY
Borrowings under the facilities are guaranteed by the Parent. In addition,
the Parent 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 the
Issuer and the Issuer has pledged all the capital stock of its subsidiaries as
security under the Bank Credit Agreement. Upon certain events, including the
Issuer having ratings on its unsecured long-term senior non-credit-enhanced debt
("Rated Debt") of less than BBB by Standard & Poor's Rating Services ("S&P") and
less than Baa2 by Moody's Investor Services, Inc. ("Moody's"), the Facilities
also become 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. The
Facilities will again become unsecured (except for the stock pledges) 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. The Issuer 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.
INTEREST RATES AND FEES
Loans under the Bank Credit Agreement bear interest at rates per annum,
based on, at the Issuer's option, (A) the highest of (i) Chase Manhattan 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 with a margin based upon the rating of the Rated
Debt as announced by S&P and Moody's, 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- (A3) or higher.................. 0.350% 0.350% 0.550%
BBB+ (Baa1)........................ 0.375% 0.375% 0.625%
BBB (Baa2)......................... 0.375% 0.375% 0.625%
BBB- (Baa3)........................ 0.450% 0.450% 0.750%
BB+ (Ba1) or lower................. 0.600% 0.600% 1.000%
</TABLE>
In the event that at any time the Moody's rating differs from the S&P
rating then in effect (i) by two increments or more, the applicable rating level
shall be that which would apply to a rating one increment lower than the higher
of the Moody's rating and the S&P rating or (ii) by one increment, the
applicable rating level shall be that which would apply to the higher of the
Moody's rating and the S&P rating. 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.
In addition to the foregoing interest rates, the Issuer has the ability
under the Bank Credit Agreement to solicit offers from the Banks for improved
interest rates on an advance by advance basis and, upon receipt of any such
offers, to obtain interest rates for some of its borrowings at more favorable
interest rates.
The annual commitment fee on the Facilities ranges from 0.100% to 0.250% of
the commitments thereunder depending upon the rating of the Rated Debt.
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RESTRICTIVE COVENANTS
The Bank Credit Agreement contains certain covenants that impose
limitations and requirements on HomeSide, HHI and the Parent, including
limitations with respect to payments, dividends or distributions from the Issuer
to the Parent.
Other covenants in the Bank Credit Agreement impose limitations on HomeSide
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 HomeSide's business activities or the sale or disposition of a substantial
part of HomeSide'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 the Issuer or intercompany mergers, sales or consolidation; (v)
capital expenditures in excess of $15.0 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 the Parent's Shareholder Agreement. These covenants are
subject to various other customary exceptions under the Bank Credit Agreement.
The Issuer is also required to maintain compliance with certain financial
covenants, including:
(a) Maintaining an Adjusted 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
Bank Credit Agreement) as of February 14, 1997 plus (ii) an amount equal to
50% of the excess of (A) the aggregate amount of net proceeds received
during the period from February 14, 1997 through such date by the Company
from the issuance of capital stock other than to Principal Shareholders
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 Bank Credit Agreement) for each fiscal quarter for which
Consolidated Net Income is positive during the period from February 14,
1997 through the last day of the most recently ended fiscal quarter of the
Issuer less (iv) the amount of Restricted Payments (as defined in the Bank
Credit Agreement) actually made by the Issuer and permitted under the Bank
Credit Agreement during the period February 14, 1997 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) 7.75:1.0 at any time during the period from February
14, 1997 through and including August 31, 1997, (ii) 7.5:1.0 at any time
during the period from September 1, 1997 through and including November 30,
1998 or (iii) 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 February
14, 1997 through and including August 31, 1997, (ii) 1.75:1.0 at any time
during the period from and including September 1, 1997 through and
including August 31, 1998 or (iii) 1.5:1.0 at any time thereafter.
(d) Not permitting (i) for the period of three consecutive fiscal
quarters of HomeSide ending on February 28, 1997, or (ii) for any period of
four consecutive fiscal quarters of HomeSide 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
3.0:1.0.
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 the Issuer to pay
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<PAGE> 127
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
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 Parent, the Issuer or any of its subsidiaries
in payment of indebtedness aggregating $15.0 million or more, or the default by
the Parent, the Issuer 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
HomeSide of $12.0 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 HomeSide; (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 the Issuer'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 Parent and the Issuer, including
where (a) HHI ceases to own 100% of the capital stock of the Issuer and/or the
ownership of the Parent by the Principal Shareholders on February 14, 1997 falls
below certain percentages or (b) a certain number of directors of the Parent as
of February 14, 1997 fail to continue as directors of the Parent.
OTHER LENDING ARRANGEMENTS
On January 15, 1997 the Issuer entered into a Loan Agreement with The Chase
Manhattan Bank ("Chase") pursuant to which it may borrow up to $85.0 million on
a revolving basis (the "Revolving Loans"). The Revolving Loans bear interest at
a rate per annum equal to the highest of (x) Chase's prime rate, as announced
from time to time; (y) the secondary market rate for certificates of deposit
(grossed up for maximum statutory requirements) plus 1%; and (z) the federal
funds effective rate announced from time to time plus 0.5%. The Revolving Loans
mature on March 1, 1997 and are secured by ceratin servicing assets of the
Issuer.
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DESCRIPTION OF THE PARENT NOTES
The Parent has outstanding $200,000,000 in aggregate principal amount of
11 1/4% Series B Senior Secured Second Priority Notes due 2003 issued pursuant
to the terms of an indenture dated as of May 14, 1996 (the "Parent Note
Indenture") between the Parent, as issuer, and The Bank of New York, as trustee
("BONY"). The following summary of the material provisions of the Parent Note
Indenture does not purport to be complete and is subject to, and qualified in
its entirety by reference to, the provisions of the Parent Note Indenture. The
Parent Notes will mature on May 15, 2003 and bear interest at the rate of
11 1/4% per annum. The Parent Notes are 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 Parent's current and
future subsidiaries held directly by the Parent, including all of the capital
stock of the Issuer held by HHI. The Parent Notes are not secured by any lien
on, or other security interest in, any other properties or assets of the Parent
or its subsidiaries. The Parent Notes are senior obligations of the Parent and
the Indebtedness evidenced by the Parent Notes will rank pari passu in right of
payment with all other existing and future senior indebtedness of the Parent.
The Parent Notes are redeemable at the option of the Parent, 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):
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2001.............................................. 105.625%
2002.............................................. 102.813%
</TABLE>
In addition, at any time or from time to time prior to May 15, 1999, the
Parent may redeem up to 35% of the aggregate principal amount of the Parent
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 Parent Notes remains outstanding.
The Parent Note Indenture contains covenants which, among other things,
limit the right of the Parent or its subsidiaries to incur indebtedness, permit
liens to exist on its properties, pay dividends on or make distributions to
holders of the Parent's capital stock, purchase or redeem any shares of the
Parent's capital stock, sell or issue additional shares of the capital stock of
its subsidiaries, consolidate or merge with any other persons or sell all or
substantially all of its assets.
The Parent Note Indenture provides that if a change of control (which term
is specifically defined in the Parent Note Indenture) shall occur at any time,
then each holder of Parent Notes shall have the right to require that the Parent
purchase such holder's Parent Notes, in whole or in part in integral multiples
of $1,000, at a 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. Among the events which constitute a change of control under the Parent
Note Indenture is the acquisition by a person or group of more than 40% of the
outstanding voting stock of the Parent. The Parent Note Indenture contains
certain standard payment, covenant and bankruptcy-related events of default,
including, among other things, (i) the failure of the Parent to pay any interest
payment within thirty days after such amounts are due; (ii) the failure of any
person party to the Parent Note Indenture or any guaranty or pledge executed in
connection therewith to perform any covenant, warranty or other agreement
contained in the Parent Note Indenture, such guaranty or pledge; (iii) the
failure of the Parent to pay any of its indebtedness aggregating $15 million or
more when such amounts become due (after giving effect to applicable grace
periods, cures and waivers); (iv) any pledge or guarantee given to secure the
Parent Notes ceases to be in full force and effect; or (v) the occurrence of
certain events of bankruptcy, insolvency or reorganization with respect to the
Parent or any of its subsidiaries deemed significant.
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DESCRIPTION OF DEBT SECURITIES
The following description of the terms of the Debt Securities sets forth
certain general terms and provisions of the Debt Securities. The extent, if any,
to which such general provisions do not apply to the Debt Securities offered by
any Prospectus Supplement will be described in such Prospectus Supplement.
The Debt Securities are to be issued under an indenture (the "Indenture"),
between the Issuer and , as Trustee (the "Trustee"), a copy of which
is filed as an exhibit to the Registration Statement of which this Prospectus
forms a part. Each series of Debt Securities issued pursuant to the Indenture
will be issued pursuant to an amendment or supplement thereto in the form of a
supplemental indenture or pursuant to an Officers' Certificate, in each case
delivered pursuant to resolutions of the Board of Directors of the Issuer and in
accordance with the provisions of Section 3.1 or Article 9 of the Indenture, as
the case may be. The terms of the Debt Securities include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "TIA"). The Debt Securities are subject
to all such terms, and the holders of Debt Securities are referred to the
Indenture and the TIA for a statement of such terms.
The following summaries of certain provisions of the Indenture and the Debt
Securities are not complete and are qualified in their entirety by reference to
the provisions of the Indenture, including the definitions of capitalized terms
used herein without definition. Unless otherwise indicated capitalized terms
have the meaning given them in the Indenture. A copy of the Indenture is
available for inspection at the corporate trust office of the Trustee or upon
request from the Issuer. See "Available Information."
GENERAL
The Indenture does not limit the aggregate principal amount of Debt
Securities that may be issued thereunder from time to time in one or more
series.
The Debt Securities will constitute unsecured and unsubordinated
indebtedness of the Issuer and will rank pari passu in right of payment with the
Issuer's other unsecured and unsubordinated indebtedness. However, the Debt
Securities will be effectively subordinated to all present and future secured
indebtedness of the Issuer as to the assets of the Issuer securing such
indebtedness and to the claims of creditors of the Issuer's subsidiaries as to
the assets of such subsidiaries. As of December 31, 1996, the Issuer had an
aggregate of $2,069.0 million of total indebtedness, all of which was secured.
Other than as described below under "Consolidation, Merger and Transfer of
Assets," the Indenture does not contain any provision that would limit the
ability of the Issuer to incur indebtedness or to substantially reduce or
eliminate the Issuer's assets or that would afford holders of Debt Securities
protection in the event of a decline in the credit quality of the Issuer or a
takeover, recapitalization or highly leveraged or similar transaction involving
the Issuer. In addition, subject to the limitations set forth under
"Consolidation, Merger and Transfer of Assets," the Issuer may, in the future,
enter into certain transactions, such as the sale of all or substantially all of
its assets or the merger or consolidation of the Issuer, that would increase the
amount of the Issuer's indebtedness or substantially reduce or eliminate the
Issuer's assets, which may have an adverse effect on the Issuer's ability to
service its indebtedness, including the Debt Securities. Reference is made to
the Prospectus Supplement relating to the particular series of Debt Securities
offered thereby, to the extent not otherwise described herein, for any
information with respect to any deletions from, modifications of or additions to
the Events of Default described below or covenants of the Issuer contained in
the Indenture, including any addition of a covenant or other provision providing
event risk or similar protection. The Bank Credit Agreement and the Parent Notes
Indenture contain certain covenants restricting the Issuer's ability to incur
indebtedness. Such covenants permit the Issuer to issue Debt Securities in an
aggregate principal amount of up to $ at , . See "Description of
Bank Credit Agreement" and "Description of the Parent Notes."
The Indenture provides that there may be more than one Trustee thereunder,
each with respect to one or more series of Debt Securities. Any Trustee under
the Indenture may resign or be removed with respect to one or more series of
Debt Securities, and a successor Trustee may be appointed to act with respect to
such series
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<PAGE> 130
(Section 6.8). In the event that two or more persons are acting as Trustee with
respect to different series of Debt Securities, each such Trustee shall be a
Trustee of a trust under the Indenture separate and apart from the trust
administered by any other Trustee (Section 6.9), and, except as otherwise
indicated herein, any action described herein to be taken by the Trustee may be
taken by each such Trustee with respect to, and only with respect to, the one or
more series of Debt Securities for which it is Trustee under the Indenture.
Reference is made to the Prospectus Supplement and pricing supplement, if
any, relating to the particular series of Debt Securities offered thereby for a
description of the terms of such Debt Securities in respect of which this
Prospectus is being delivered, including, where applicable: (i) the designation,
aggregate principal amount and authorized denominations of such Debt Securities;
(ii) the percentage of the principal amount at which such Debt Securities will
be issued; (iii) the date (or the manner of determining or extending the date or
dates) on which the principal of such Debt Securities will be payable; (iv)
whether such Debt Securities will be issued in fully registered form or in
bearer form or any combination thereof; (v) whether such Debt Securities will be
issued in the form of one or more global securities and whether such global
securities are to be issuable in a temporary global form or permanent global
form; (vi) if other than U.S. dollars, the currency or currencies or currency
unit or units in which Debt Securities may be purchased or in which principal,
premium (if any) and any interest may be payable is at the election of the
Issuer or the purchaser, the manner in which such an election may be made and
the terms of such election; (vii) the rate or rates per annum at which such Debt
Securities will bear interest, if any, or the method or methods of determination
of such rate or rates and the basis upon which interest will be calculated if
other than that of a 360-day year consisting of twelve 30-day months; (viii) the
date or dates from which such interest, if any, on such Debt Securities will
accrue or the method or methods, if any, by which such date or dates are to be
determined, the date or dates on which such interest, if any, will be payable,
the date on which payment of such interest, if any, will commence and the
Regular Record Dates for such Interest Payment Dates, if any; (ix) the date or
dates, if any, on or after which, or the period or periods, if any, within
which, and the price or prices at which the Debt Securities may, pursuant to any
optional redemption provisions, be redeemed at the option of the Issuer or the
holder thereof and the other terms and provisions of such optional redemption;
(x) information with respect to book-entry procedures relating to global Debt
Securities; (xi) whether and under what circumstances the Issuer will pay
Additional Amounts as contemplated by Section 10.4 of the Indenture (the term
"interest," as used in this Prospectus, shall include such Additional Amounts)
on such Debt Securities to any holder who is a United States Alien (as defined
in the Indenture)(including any modification to the definition of such terms
contained in the Indenture as originally executed) in respect of any tax,
assessment or governmental charge and, if so, whether the Issuer will have the
option to redeem such Debt Securities rather than pay such Additional Amounts
(and the terms of any such option); (xii) any deletions from, modifications of
or additions to the Events of Default or covenants of the Issuer with respect to
any such Debt Securities; (xiii) if either or both of Section 4.2(2) relating to
defeasance or Section 4.2(3) relating to covenant defeasance shall not be
applicable to the Debt Securities of such series, or any covenants in addition
to those specified in Section 4.2(3) relating to the Debt Securities of such
series shall be subject to covenant defeasance, and any deletions from, or
modifications or additions to, the provision of Article 4 of the Indenture
relating to satisfaction and discharge in respect of the Debt Securities of such
series; (xiv) any index or other method used to determine the amount of payments
of principal, premium (if any) and interest, if any, on such Debt Securities;
(xv) if a trustee other than is named for such Debt Securities, the name
of such trustee; and (xvi) any other specific terms of the Debt Securities
(Section 3.1). All Debt Securities of any one series need not be issued at the
same time and all the Debt Securities of any one series need not bear interest
at the same rate or mature on the same date (Section 3.1).
If any of the Debt Securities are sold for foreign currencies or foreign
currency units or if the principal of, or premium, if any, or interest, if any,
on any series of Debt Securities is payable in foreign currencies or foreign
currency units, the restrictions, elections, tax consequences, specific terms
and other information with respect to such Debt Securities and such foreign
currencies or foreign currency units will be set forth in the applicable
Prospectus Supplement.
One or more series of Debt Securities may be sold at a substantial discount
below their stated principal amount, bearing no interest or interest at a rate
which at the time of issuance is below market rates. One or
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<PAGE> 131
more series of Debt Securities may be floating rate debt securities, and may be
exchangeable for fixed rate debt securities. Federal income tax consequences and
special considerations applicable to any such series will be described in the
Prospectus Supplement relating thereto.
DENOMINATIONS, INTEREST, REGISTRATION AND TRANSFER
Unless otherwise indicated in the Prospectus Supplement relating thereto,
the Debt Securities will be issued only in fully registered form without coupons
(Section 3.2). Debt Securities denominated in U.S. dollars will be issued in
denominations of $1,000 or any integral multiple thereof unless otherwise
provided in the Prospectus Supplement relating thereto (Section 3.2).
Unless otherwise indicated in the Prospectus Supplement relating thereto,
the principal of, and any premium or interest on, any series of Debt Securities
will be payable at the corporate trust office of the Trustee, initially at
, New York, New York [zip code], provided that, at the option of the
Issuer, payment of interest may be made by check mailed to the address of the
Person entitled thereto as it appears in the related Security Register or by
wire transfer of funds to such Person at an account maintained within the United
States (Sections 3.1, 3.7 and 10.2).
Any interest not punctually paid or duly provided for on any Interest
Payment Date with respect to a Debt Security ("Defaulted Interest") will
forthwith cease to be payable to the holder of such Debt Security on the
applicable regular record date and may either be paid to the Person in whose
name such Debt Security is registered at the close of business on a special
record date (the "Special Record Date") for the payment of such Defaulted
Interest to be fixed by the Trustee, notice whereof shall be given to the holder
of such Debt Security not less than ten days prior to such Special Record Date,
or may be paid at any time in any other lawful manner, all as more completely
described in the Indenture (Section 3.7).
Subject to certain limitations imposed upon Debt Securities issued in
book-entry form, the Debt Securities of any series will be exchangeable for
other Debt Securities of the same series and of a like aggregate principal
amount and tenor of different authorized denominations upon surrender of such
Debt Securities at the corporate trust office of the Trustee referred to above
(Section 3.5). In addition, subject to certain limitations imposed upon Debt
Securities issued in book-entry form, the Debt Securities of any series may be
surrendered for conversion or registration or transfer or exchange thereof at
the corporate trust office of the Trustee. Every Debt Security surrendered for
conversion, registration of transfer or exchange must be duly endorsed or
accompanied by a written instrument of transfer (Section 3.5). No service charge
will be made for any registration of transfer or exchange of any Debt
Securities, but the Issuer may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith (Section 3.5).
If the applicable Prospectus Supplement refers to any transfer agent (in
addition to the Trustee) initially designated by the Issuer with respect to any
series of Debt Securities, the Issuer may at any time rescind the designation of
any such transfer agent or approve a change in the location through which any
such transfer agent acts, except that the Issuer will be required to maintain a
transfer agent in each place of payment for such series. The Issuer may at any
time designate additional transfer agents with respect to any series of Debt
Securities (Section 10.2).
Neither the Issuer nor the Trustee shall be required to (i) issue, register
the transfer of or exchange Debt Securities of any series during a period
beginning at the opening of business 15 days before any selection of Debt
Securities of that series to be redeemed and ending at the close of business on
the day of mailing of the relevant notice of redemption; (ii) register the
transfer of or exchange any Debt Security, or portion thereof, called for
redemption, except the unredeemed portion of any Debt Security being redeemed in
part; or (iii) issue, register the transfer of or exchange any Debt Security
that has been surrendered for repayment at the option of the holder, except the
portion, if any, of such Debt Security not to be so repaid (Section 3.5).
No Debt Security shall be entitled to any benefit under the Indenture or be
valid or obligatory for any purpose unless there appears on such Debt Security a
certificate of authentication substantially in the form provided for in the
Indenture duly executed by the Trustee by manual signature of one of its
authorized officers, and such certificate upon any Debt Security shall be
conclusive evidence, and the only evidence, that
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such Debt Security has been duly authenticated and delivered under the Indenture
and is entitled to the benefits of the Indenture (Section 3.3).
CONSOLIDATION, MERGER AND TRANSFER OF ASSETS
The Indenture provides that the Issuer may not (i) consolidate with or
merge into any Person or convey, transfer or lease its properties and assets as
an entirety or substantially as an entirety to any Person, or (ii) permit any
Person to consolidate with or merge into the Issuer, or convey, transfer or
lease its properties and assets as an entirety or substantially as an entirety
to the Issuer, unless (a) in the case of (i) above, such Person is organized and
existing under the laws of the United States of America, and State thereof or
the District of Columbia and shall expressly assume, by supplemental indenture
satisfactory in form to the Trustee, the due and punctual payment of the
principal of and premium, if any, and interest on all of the Debt Securities,
and the performance of the Issuer's obligations under the Indenture and the Debt
Securities; (b) immediately after giving effect to such transaction and treating
any indebtedness which becomes an obligation of the Issuer or a Subsidiary as a
result of such transaction as having been incurred by the Issuer or such
Subsidiary at the time to such transaction, no Event of Default, and no event
which after notice or lapse of time or both would become an Event of Default,
shall have happened and be continuing; and (c) certain other conditions are met
(Section 8.1).
ADDITIONAL COVENANT AND/OR MODIFICATIONS TO THE COVENANTS DESCRIBED ABOVE
Any additional covenants of the Issuer and/or modifications to the
covenants described above with respect to any Debt Securities or series thereof
will be described in the Prospectus Supplement relating thereto.
EVENTS OF DEFAULT, NOTICE AND WAIVER
Each of the following events will constitute an Event of Default with
respect to any series of Debt Securities issued under the Indenture (whatever
the reason for such Event of Default and whether it shall be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body): (i) default in the payment of any interest
on any Debt Security of such series, or any Additional Amounts payable with
respect thereto, when such interest becomes or such Additional Amounts become
due and payable, and continuance of such default for a period of 30 days; (ii)
default in the payment of principal of or any premium on any Debt Security of
such series, or any Additional Amounts payable with respect thereto, when such
principal or premium becomes or such Additional Amounts become due and payable
either at maturity, upon any redemption, by declaration of acceleration or
otherwise; (iii) default in the deposit of any sinking fund payment, when and as
due by the terms of any Debt Security of such series; (iv) default in the
performance, or breach, of any covenant or warranty of the Issuer contained in
the Indenture for the benefit of such series or in the Debt Securities of such
series, and the continuance of such default or breach for period of 60 days
after there has been given written notice as provided in the Indenture; (v) if
any event of default as defined in any mortgage, indenture or instrument under
which there may be issued, or by which there may be secured or evidenced, any
Indebtedness (as defined below) of the Issuer or any Subsidiary, whether such
Indebtedness now exists or shall hereafter be created, shall happen and shall
result in such Indebtedness in principal amount in excess of [$ ,000,000]
becoming or being declared due and payable prior to the date on which it would
otherwise become due and payable, and such acceleration shall not be rescinded
or annulled within a period of 10 days after there shall have been given written
notice as provided in the Indenture; (vi) the Issuer or any Subsidiary shall
fail within 60 days to pay, bond or otherwise discharge any uninsured judgment
or court order for the payment of money in excess of [$ ,000,000], which is not
stayed on appeal or is not otherwise being appropriately contested in good
faith; (vii) certain events in bankruptcy, insolvency or reorganization of the
Issuer or any Subsidiary, and (viii) any other Event of Default provided in or
pursuant to the Indenture with respect to Debt Securities of such series
(Section 5.1). The term "Indebtedness" means, with respect to any Person,
without duplication, (a) any liability of such Person (1) for borrowed money, or
under any reimbursement obligation relating to a letter of credit, or (2)
evidenced by a bond, note, debenture or similar instrument, or (3) for payment
obligations arising under any conditional sale or other title retention
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arrangement (including a purchase money obligation) given in connection with the
acquisition of any businesses, properties or assets of any kind, or (4) for the
payment of money relating to a capitalized lease obligation; (b) any liability
of others of a type described in the preceding clause (a) that such Person has
guaranteed or that is otherwise its legal liability; and (c) any amendment,
supplement, modification, deferral, renewal, extension or refunding of any
liability of the types referred to in clauses (a) and (b) above (Section 1.1).
If an Event of Default with respect to the Debt Securities of any series
(other than an Event of Default described in (vii) of the preceding paragraph)
occurs and is continuing, either the Trustee or the holders of at least 25% in
principal amount of the outstanding Debt Securities of such series by written
notice as provided in the Indenture may declare the principal amount (or such
lesser amount as may be provided for in the Debt Securities of such series) of
all outstanding Debt Securities of such series to be due and payable immediately
(Section 5.2). At any time after a declaration of acceleration has been made,
but before a judgment or decree for payment of money has been obtained by the
Trustee, and subject to applicable law and certain other provisions of the
Indenture, the holders of a majority in aggregate principal amount of the Debt
Securities of such series may, under certain circumstances, rescind and annul
such acceleration (Section 5.2). An Event of Default described in (vii) of the
preceding paragraph shall cause the principal amount and accrued interest (or
such lesser amount as provided for in the Debt Securities of such series) to
become immediately due and payable without any declaration or other act by the
Trustee or any holder (Section 5.2).
The Indenture provides that, within 90 days after the occurrence of any
event which is, or after notice or lapse of time or both would become, an Event
of Default thereunder with respect to the Debt Securities of any series (a
"default"), the Trustee shall transmit, in the manner set forth in the
Indenture, notice of such default to the holders of the Debt Securities of such
series unless such default has been cured or waived; provided, however, that
except in the case of a default in the payment of principal of, or premium, if
any, or interest, if any, on, or Additional Amounts or any sinking fund or
purchase fund installment with respect to, any Debt Security of such series, the
Trustee may withhold such notice if and so long as the board of directors, the
executive committee or a trust committee of directors and/or Responsible
Officers of the Trustee in good faith determine that the withholding of such
notice is in the best interest of the holders of Debt Securities of such series;
and provided, further, that in the case of any default of the character
described in (v) of the second preceding paragraph, no such notice to holders
will be given until at least 30 days after the occurrence thereof (Section 6.2).
If an Event of Default occurs and is continuing with respect to the Debt
Securities of any series, the Trustee may in its discretion proceed to protect
and enforce its rights and the rights of the holders of Debt Securities of such
series by all appropriate judicial proceedings (Section 5.3).
The Indenture provides that, subject to the duty of the Trustee during any
default to act with the required standard of care, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request or direction of any of the holders of Debt Securities, unless such
holders shall have offered to the Trustee reasonable indemnity (Section 6.1).
Subject to such provisions for the indemnification of the Trustee, and subject
to applicable law and certain other provisions of the Indenture, the holders of
a majority in aggregate principal amount of the outstanding Debt Securities of
any series will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or exercising
any trust or power conferred on the Trustee, with respect to the Debt Securities
of such series (Section 5.12).
Under the Indenture, the Issuer is required to furnish the Trustee annually
a statement as to performance by the Issuer of certain of its obligations under
the Indenture and as to any default in such performance (Section 7.4). The
Issuer is also required to deliver to the Trustee, within five days after
occurrence thereof, written notice of any Event of Default or any event which
after notice or lapse of time or both would constitute an Event of Default
(Section 10.9).
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MODIFICATION AND WAIVER
Modification and amendments of the Indenture may be made by the Issuer and
the Trustee with the consent of the holders of not less than a majority in
aggregate principal amount of the outstanding Debt Securities of each series
affected thereby; provided, however, that no such modification or amendment may,
without the consent of the holder of each outstanding Debt Security affected
thereby, (i) change the Stated Maturity (except as otherwise permitted in the
Indenture in connection with Debt Securities for which the Stated Maturity is
extendible) of the principal of, or any premium or installment of interest on,
or any Additional Amounts with respect to, any Debt Security, (ii) reduce the
principal amount of, or the rate (or modify the calculation of such rate) of
interest (except as otherwise permitted in the Indenture in connection with Debt
Securities for which the interest rate may be reset) on, or any Additional
Amounts with respect to, or any premium payable upon the redemption of, any Debt
Security, (iii) change the obligation of the Issuer to pay Additional Amounts
with respect to any Debt Security or reduce the amount of the principal of an
Original Issue Discount Security that would be due and payable upon a
declaration of acceleration of the Maturity thereof or the amount thereof
provable in bankruptcy, (iv) change the redemption provisions of any Debt
Security or adversely affect the right of repayment at the option of any holder
of any Debt Security, (v) change the place of payment or the coin or currency in
which the principal of, any premium or interest on or any Additional Amounts
with respect to any Debt Security is payable, (vi) impair the right to institute
suit for the enforcement of any payment on or after the Stated Maturity of any
Debt Security (or, in the case of redemption, on or after the Redemption Date
or, in the case of repayment at the option of any holder, on or after the date
for repayment), (vii) reduce the percentage in principal amount of the
outstanding Debt Securities, the consent of whose holders is required in order
to take certain actions, (viii) reduce the requirements for quorum or voting by
holders of Debt Securities in Section 15.4 of the Indenture, (ix) modify any of
the provisions in the Indenture regarding the waiver of past defaults and the
waiver of certain covenants by the holders of Debt Securities except to increase
any percentage vote required or to provide that certain other provisions of the
Indenture cannot be modified or waived without the consent of the holder of each
Debt Security affected thereby, (x) make any change that adversely affects the
right to convert or exchange any Debt Security into or for common stock of the
Issuer or other securities in accordance with its terms, or (xi) modify any of
the above provisions (Section 9.2).
The holders of at least a majority in aggregate principal amount of the
Debt Securities of any series may, on behalf of the holders of all Debt
Securities of such series, waive compliance by the Issuer with certain
restrictive provisions of the Indenture (Section 10.8). The holders of not less
than a majority in aggregate principal amount of the outstanding Debt Securities
of any series may, on behalf of the holders of all Debt Securities of such
series, waive any past default and its consequences under the Indenture with
respect to the Debt Securities of such series, except a default (a) in the
payment of principal of (or premium, if any), any interest on or any Additional
Amounts with respect to Debt Securities of such series or (b) in respect of a
covenant or provision of the Indenture that cannot be modified or amended
without the consent of the holder of each Debt Security of any series (Section
5.13).
The Indenture also contains provisions permitting the Issuer and the
Trustee, without the consent of any holders of Debt Securities under such
Indenture, to enter into supplemental indentures, in form satisfactory to the
Trustee, for any of the following purposes: (i) to evidence the succession of
another corporation to the Issuer and the assumption by such successor of the
obligations and covenants of the Issuer contained in the Indenture and in the
Debt Securities; (ii) to add to the covenants of the Issuer, for the benefit of
the holders of all or any series of Debt Securities issued under the Indenture
(and if such covenants are to be for the benefit of less than all series of Debt
Securities issued under the Indenture, stating that such covenants are expressly
being included solely for the benefit of such series), or to surrender any right
or power herein conferred upon the Issuer; (iii) to add any additional Events of
Default (and if such Events of Default are to be applicable to less than all
series of Debt Securities issued under the Indenture, stating that such Events
of Default are expressly being included solely to be applicable to such series);
(iv) to add or change any of the provisions of the Indenture to such extent as
shall be necessary to permit or facilitate the issuance of Debt Securities in
bearer form, registrable or not registrable as to principal, and with or without
interest coupons; (v) to change or eliminate any of the provisions of the
Indenture, provided that any such change or elimination shall become
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<PAGE> 135
effective only when there is no Debt Security outstanding of any series created
prior to the execution of such supplemental indenture which is entitled to the
benefit of such provision; (vi) to establish the form or terms of Debt
Securities of any series as otherwise permitted by the Indenture; (vii) to
evidence and provide for the acceptance of appointment under the Indenture by a
successor Trustee with respect to the Debt Securities of one or more series
issued under the Indenture and to add to or change any of the provisions of the
Indenture as shall be necessary to provide for or facilitate the administration
of the trusts thereunder by more than one Trustee, pursuant to the requirements
of the Indenture; (viii) to secure the Debt Securities issued under the
Indenture; (ix) to cure any ambiguity, to correct or supplement any provision in
such Indenture which may be defective or inconsistent with any other provision
of the Indenture, or to make any other provisions with respect to matters or
questions arising under the Indenture which shall not be inconsistent with any
provision of the Indenture, provided such other provisions shall not adversely
affect the interests of the holders of Debt Securities of any series issued
under the Indenture in any material respect; or (x) to modify, eliminate or add
to the provisions of the Indenture to such extent as shall be necessary to
effect the qualification of the Indenture under the TIA or under any similar
federal statue subsequently enacted and to add to the Indenture such other
provisions as may be expressly required under the TIA (Section 9.1).
The Indenture provides that in determining whether the holders of the
requisite principal amount of Outstanding Debt Securities of a series have given
any request, demand, authorization, direction, notice, consent or waiver
thereunder or whether a quorum is present at a meeting of holders of Debt
Securities, (i) the principal amount of an Original Issue Discount Security that
shall be deemed to be outstanding shall be the amount of the principal thereof
that would be due and payable as of the date of such determination upon
declaration of acceleration of the maturity thereof, (ii) the principal amount
of a Debt Security denominated in a foreign currency that shall be deemed
outstanding shall be the U.S. dollar equivalent, determined on the issue date
for such Debt Security, of the principal amount (or, in the case of an Original
Issue Discount Security, the U.S. dollar equivalent on the issue date of such
Debt Security of the amount determined as provided in (i) above), (iii) the
principal amount of an Indexed Security that shall be deemed outstanding shall
be the principal face amount of such Indexed Security at original issuance,
unless otherwise provided with respect to such Indexed Security pursuant to
Section 3.1 of the Indenture, and (iv) Debt Securities owned by the Issuer or
any other obligor upon the Debt Securities or any Affiliate of the Issuer or of
such other obligor shall be disregarded (Section 1.1).
The Indenture contains provisions for convening meetings of the holders of
Debt Securities of a series (Section 15.1). A meeting may be called at any time
by the Trustee, and also, upon request, by the Company or the holders of at
least 10% in principal amount of the Outstanding Debt Securities of such series,
in any such case upon notice given as provided in the Indenture (Section 15.2).
Except for any consent that must be given by the holder of each Debt Security
affected by certain modifications and amendments of the Indenture, any
resolution presented at a meeting or adjourned meeting duly reconvened at which
a quorum is present may be adopted by the affirmative vote of the holders of a
majority in principal amount of the Outstanding Debt Securities of that series;
provided, however, that, except as referred to above, any resolution with
respect to any request, demand, authorization, direction, notice, consent,
waiver or other action that may be made, given or taken by the holders of a
specified percentage, which is less than a majority, in principal amount of the
Outstanding Debt Securities of a series may be adopted at a meeting or adjourned
meeting duly reconvened at which a quorum is present by the affirmative vote of
the holders of such specified percentage in principal amount of the Outstanding
Debt Securities of that series. Any resolution passed or decision taken at any
meeting of holders of Debt Securities of any series duly held in accordance with
the Indenture will be binding on all holders of Debt Securities of that series.
The quorum at any meeting called to adopt a resolution, and at any reconvened
meeting, will be Persons holding or representing a majority in principal amount
of the Outstanding Debt Securities of a series; provided, however, that if any
action is to be taken at such meeting with respect to a consent or waiver which
may be given by the holders of not less than a specified percentage in principal
amount of the Outstanding Debt Securities of a series, the Persons holding or
representing such specified percentage in principal amount of the Outstanding
Debt Securities of such series will constitute a quorum (Section 15.4).
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<PAGE> 136
Notwithstanding the foregoing provisions, if any action is to be taken at a
meeting of holders of Debt Securities of any series with respect to any request,
demand, authorization, direction, notice, consent, waiver or other action that
the Indenture expressly provides may be made, given or taken by the holders of a
specified percentage in principal amount of all Outstanding Debt Securities
affected thereby, or of the holders of such series and one or more additional
series: (i) there shall be no minimum quorum requirement for such meeting and
(ii) the principal amount of the Outstanding Debt Securities of such series that
vote in favor of such request, demand, authorization, direction, notice,
consent, waiver or other action shall be taken into account in determining
whether such request, demand, authorization, direction, notice, consent, waiver
or other action has been made, given or taken under the Indenture (Section
15.4).
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
The Issuer may discharge certain obligations to holders of any series of
Debt Securities that have not already been delivered to the Trustee for
cancellation and that either have become due and payable or will become due and
payable within one year (or scheduled for redemption within one year) by
depositing with the Trustee, in trust, funds in U.S. dollars or in the Foreign
Currency in which such Debt Securities are payable in an amount sufficient to
pay the entire indebtedness on such Debt Securities with respect to principal
(and premium, if any) and interest to the date of such deposit (if such Debt
Securities have become due and payable) or to the Maturity thereof, as the case
may be (Section 4.1).
The Indenture provides that, unless the provisions of Section 4.2 thereof
are made inapplicable to the Debt Securities of or within any series pursuant to
Section 3.1 thereof, the Issuer may elect either (a) to defease and be
discharged from any and all obligations with respect to such Debt Securities
(except for, among other things, the obligation to pay Additional Amounts, if
any, upon the occurrence of certain events of taxation, assessment or
governmental charge with respect to payments on such Debt Securities and other
obligations to register the transfer or exchange of such Debt Securities, to
replace temporary or mutilated, destroyed, lost or stolen Debt Securities, to
maintain an office or agency with respect to such Debt Securities and to hold
moneys for payment in trust) ("defeasance") or (b) to be released from its
obligations with respect to such Debt Securities under the covenants described
under "Consolidation, Merger and Transfer of Assets" above or, if provided
pursuant to Section 3.1 of the Indenture, its obligations with respect to any
other covenant, and any omission to comply with such obligations shall not
constitute a default or an Event of Default with respect to such Debt Securities
("covenant defeasance"). Defeasance or covenant defeasance, as the case may be,
shall be conditioned upon the irrevocable deposit by the Company with the
Trustee, in trust, of an amount in U.S. dollars or in the Foreign Currency in
which such Debt Securities are payable at Stated Maturity, or Government
Obligations (as defined below), or both, applicable to such Debt Securities
which through the scheduled payment of principal and interest in accordance with
their terms will provide money in an amount sufficient to pay the principal of
(and premium, if any) and interest on such Debt Securities on the scheduled due
dates therefor (Section 4.2).
Such a trust may only be established if, among other things, (i) the
applicable defeasance or covenant defeasance does 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 it is bound,
(ii) no Event of Default or event which with notice or lapse of time or both
would become an Event of Default with respect to the Debt Securities to be
defeased shall have occurred and be continuing on the date of establishment of
such a trust and, with respect to defeasance only, at any time during the period
ending on the 123rd day after such date and (iii) the Issuer has delivered to
the Trustee an Opinion of Counsel (as specified in the Indenture) to the effect
that the holders of such Debt Securities will not recognize income, gain or loss
for U.S. federal income tax purposes as a result of such defeasance or covenant
defeasance and will be subject to U.S. 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 or covenant defeasance had not occurred, and such Opinion of Counsel,
in the case of defeasance, must refer to and be based upon a letter ruling of
the Internal Revenue Service received by the Issuer, a Revenue Ruling published
by the Internal Revenue Service or a change in applicable U.S. federal income
tax law occurring after the date of the Indenture (Section 4.2).
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<PAGE> 137
"Foreign Currency" means any currency, currency unit or composite currency,
including, without limitation, the ECU, issued by the government of one or more
countries other than the United States of America or by any recognized
confederation or association of such governments (Section 1.1).
"Government Obligations" means securities which are (i) direct obligations
of the United States of America or the government or the governments in the
confederation which issued the Foreign Currency in which the Debt Securities of
a particular series are payable, for the payment of which its full faith and
credit is pledged or (ii) obligations of a Person controlled or supervised by
and acting as an agency or instrumentality of the United States of America or
such government or governments, in each case where the timely payment or
payments thereunder are unconditionally guaranteed as a full faith and credit
obligation by the United States of America or such other government or
governments, and which, in the case of clause (i) or (ii), are not callable or
redeemable at the option of the issuer or issuers thereof, and shall also
include a depository receipt issued by a bank or trust company as custodian with
respect to any such Government Obligation or a specific payment of interest on
or principal of or any other amount with respect to any such Government
Obligation held by such custodian for the account of the holder of such
depository receipt, provided that (except as required by law) such custodian is
not authorized to make any deduction from the amount payable to the holder of
such depository receipt from any amount received by the custodian with respect
to the Government Obligation or the specific payment of interest on or principal
of or any other amount with respect to the Government Obligation evidenced by
such depository receipt (Section 1.1).
If after the Issuer has deposited funds and/or Government Obligations to
effect defeasance or covenant defeasance with respect to Debt Securities of any
series, (a) the holder of a Debt Security of such series is entitled to, and
does, elect pursuant to Section 3.1 of the Indenture or the terms of such Debt
Security to receive payment in a currency other than that in which such deposit
has been made in respect of such Debt Security or (b) a Conversion Event (as
defined below) occurs in respect of the Foreign Currency in which such deposit
has been made, the indebtedness represented by such Debt Security shall be
deemed to have been, and will be fully discharged and satisfied through the
payment of the principal of (and premium, if any) and interest if any, on such
Debt Security as such Debt Security becomes due out of the proceeds yielded by
converting the amount or other properties so deposited in respect of such Debt
Security into the currency in which such Debt Security becomes payable as a
result of such election or such Conversion Event based on (x) in the case of
payments made pursuant to clause (a) above, the applicable market exchange rate
for such currency in effect on the second business day prior to such payment
date, or (y) with respect to a Conversion Event, the applicable market exchange
rate for such Foreign Currency in effect (as nearly as feasible) at the time of
the Conversion Event (Section 4.2).
"Conversion Event" means the cessation of use of (i) a Foreign Currency
other than the ECU both by the government of the country or the confederation
which issued such Foreign Currency and for the settlement of transactions by a
central bank or other public institutions of or within the international banking
community (ii) the ECU both within the European Monetary System and for the
settlement of transactions by public institutions of or within the European
Union or (iii) any currency unit or composite currency other than the ECU for
the purposes for which it was established. All payments of principal of (and
premium, if any) and interest on any Debt Security that are payable in a Foreign
Currency that ceases to be used by the government or confederation of issuance
shall be made in U.S. dollars (Section 1.1).
In the event the Issuer effects covenant defeasance with respect to any
Debt Securities and such Debt Securities are declared due and payable because of
the occurrence of any Event of Default other than an Event of Default with
respect to Sections 10.5 and 10.6 of the Indenture (which Sections would no
longer be applicable to such Debt Securities after such covenant defeasance) or
with respect to any other covenant as to which there has been covenant
defeasance, the amount in such Foreign Currency in which such Debt Securities
are payable, and Government Obligations on deposit with the Trustee, will be
sufficient to pay amounts due on such Debt Securities at the time of the Stated
Maturity but may not be sufficient to pay amounts due on such Debt Securities at
the time of the acceleration resulting from such Event of Default. However, the
Issuer would remain liable to make payment of such amounts due at the time of
acceleration.
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<PAGE> 138
GLOBAL SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more global securities ("Global Securities") that will be
deposited with, or on behalf of, a depository (the "Depository") identified in
the Prospectus Supplement relating to such series. Global Securities may be
issued in either registered or bearer form and in either temporary or permanent
form. Unless and until it is exchanged in whole or in part for individual
certificates evidencing Debt Securities in definitive form represented thereby,
a Global Security may not be transferred except as a whole by the Depository for
such Global Security to a nominee of such Depository or by a nominee of such
Depository to such Depository or another nominee of such Depository or by such
Depository or any such nominee to a successor of such Depository or a nominee of
such successor.
The specific terms of the depositary arrangement with respect to a series
of Debt Securities will be described in the Prospectus Supplement relating to
such series.
BEARER SECURITIES
The Issuer also may offer from time to time Debt Securities in bearer form
("Bearer Securities") outside the United States at varying prices and terms.
Such offerings of Bearer Securities may be separate from, or simultaneous with,
offerings of registered Securities in the United States. The Bearer Securities
are not offered by this Prospectus and may not be purchased by U.S. persons
other than foreign branches of certain U.S. financial institutions. For purposes
of this Prospectus, "U.S. person" means a citizen, national or resident of the
United States, a corporation, partnership or other entity created or organized
in or under the laws of the United States or any political subdivision thereof,
or an estate or trust which is subject to United States income taxation
regardless of its source of income.
GOVERNING LAW
The Indenture and the Debt Securities will be governed by, and construed in
accordance with, the laws of the State of New York.
REGARDING THE TRUSTEE
The Trustee is permitted to engage in other transactions with the Issuer
and its subsidiaries and affiliates from time to time provided that if the
Trustee acquires any conflicting interest it must eliminate such conflict upon
the occurrence of an Event of Default, or else resign.
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<PAGE> 139
PLAN OF DISTRIBUTION
The Issuer may sell the Debt Securities being offered hereby: (i) through
one or more underwriters or dealers; (ii) through agents; (iii) directly to a
limited number of purchasers or to a single purchaser; or (iv) through a
combination of any such methods of sale. Such underwriters, agents or dealers
may include, and may include a group of underwriters managed by, one or more of
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch & Co."), Chase Securities Inc., NationsBank Capital Markets,
Inc. and Smith Barney Inc. The Prospectus Supplement with respect to each series
of Debt Securities will set forth the terms of the offering of the Debt
Securities of such series, including the name or names of any underwriters,
dealers or agents, the purchase price of such Debt Securities, the proceeds to
the Issuer from such sale, any underwriting discounts and other items
constituting underwriters' compensation or agents' commissions, any initial
public offering price, any discounts or concessions allowed or reallowed or paid
to dealers, and any securities exchanges on which the Debt Securities of such
series may be listed. Only underwriters or agents named in the Prospectus
Supplement are deemed to be underwriters or agents in connection with the Debt
Securities offered hereby.
If one or more underwriters are used in the sale, the Debt Securities will
be acquired by such underwriters for their own account and may be resold from
time to time in one or more transactions, including negotiated transactions, at
a fixed public offering price, or at varying prices determined at the time of
sale. The Debt Securities may be offered to the public through underwriting
syndicates represented by managing underwriters or by one or more underwriters
without a syndicate. Unless otherwise set forth in the Prospectus Supplement,
the obligations of the underwriters to purchase Debt Securities will be subject
to certain conditions precedent and the underwriters will be obligated to
purchase all the Debt Securities of a series if any are purchased. Any initial
public offering price and any discounts or concessions allowed or reallowed or
paid to dealers may be changed from time to time.
The Debt Securities may be sold directly by the Issuer or through agents
designated by the Issuer from time to time. Any agent involved in the offer or
sale of the Debt Securities in respect of which this Prospectus is delivered
will be named, and any commissions payable by the Issuer to such agent will be
set forth, in the Prospectus Supplement or any supplement thereto. Unless
otherwise indicated in the Prospectus Supplement, any such agent will be acting
on a reasonable efforts basis for the period of its appointment.
If so indicated in the Prospectus Supplement, the Issuer will authorize
agents, underwriters or dealers to solicit offers by certain specified entities
to purchase Debt Securities from the Issuer at the public offering price set
forth in the Prospectus Supplement pursuant to delayed delivery contracts
providing for payment and delivery on a specified date. Institutions with which
such contracts may be made include commercial and savings banks, insurance
companies, pension funds, investment companies, educational and charitable
institutions and others, but in all cases such institutions must be approved by
the Issuer. The obligations of any purchaser under such contracts will be
subject to the condition that the purchase of the offered Debt Securities shall
not at the time of delivery be prohibited under the laws of the jurisdiction to
which such purchaser is subject. The underwriters and such other agents will not
have any responsibility in respect of the validity of performance of such
contracts.
Agents and underwriters may from time to time purchase and sell Debt
Securities in the secondary market, but are not obligated to do so, and there
can be no assurance that there will be a secondary market for the Debt
Securities or that there will be liquidity in the secondary market if one
develops. From time to time, agents and underwriters may, but are not obligated
to, make a market in the Debt Securities.
Agents and underwriters may be entitled under agreements entered into with
the Issuer to indemnification by the Issuer against certain civil liabilities,
including liabilities under the Securities Act of 1933, or to contribution with
respect to payments which the agents or underwriters may be required to make in
respect thereof.
Agents and underwriters may be customers of, engage in transactions with or
perform services for, the Issuer or its affiliates in the ordinary course of
business. The Issuer has entered into an arrangement in the ordinary course of
business with an affiliate of Merrill Lynch & Co. to sell to such affiliate, and
provide
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<PAGE> 140
ongoing lending services and subservicing for, certain mortgage loans originated
by the Issuer. Smith Barney Inc. currently owns beneficially 97,138 shares of
Common Stock of the Parent, representing approximately 0.229% of the total
outstanding capital stock of the Parent. Chase Securities Inc. ("CSI") is an
affiliate of Chase, which is administrative agent and a lender under the Bank
Credit Agreement, and the lender under the Revolving Loans. CSI, Chase and/or
certain of their affiliates have engaged in and may in the future engage in
general financing and banking transactions with the Issuer and certain of its
subsidiaries and affiliates in the ordinary course of business. An affiliate of
CSI owns approximately a one percent interest in Thomas H. Lee Equity Fund III,
L.P., which together with certain of its affiliates, owns more than 10% of the
Parent's Common Stock. In addition, NationsBank Capital Markets, Inc. is an
affiliate of NationsBank, a lender under the Bank Credit Agreement.
The place and time of delivery for the Debt Securities of any series in
respect of which this Prospectus is delivered are set forth in the accompanying
Prospectus Supplement.
LEGAL MATTERS
Certain legal matters with respect to the securities offered hereby will be
passed upon for the Issuer by Hutchins, Wheeler & Dittmar, A Professional
Corporation, Boston, Massachusetts and for any underwriters or agents by Brown &
Wood LLP, New York, New York.
EXPERTS
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, 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 Prospectus,
and the related financial statement schedule included elsewhere in the
Registration Statement, have 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 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 the related financial
statement schedules included 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.
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<PAGE> 141
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
HOMESIDE LENDING, INC.
Unaudited Consolidated Balance Sheet at November 30, 1996.................................. F-2
Unaudited Consolidated Statement of Income and Retained Earnings for the Three Months Ended
November 30, 1996 and the Period March 16, 1996 through November 30, 1996................ F-3
Unaudited Consolidated Statement of Cash Flows for the Period March 16, 1996 through
November 30, 1996........................................................................ F-4
Notes to Unaudited Consolidated Financial Statements....................................... F-5
HOMESIDE LENDING, INC.
Unaudited Pro Forma Consolidated Financial Information..................................... F-16
Unaudited Pro Forma Consolidated Income Statement for the Period March 16, 1996 to November
30, 1996................................................................................. F-17
Unaudited Pro Forma Consolidated Income Statement for the Year Ended December 31, 1995..... F-19
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-24
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-25
Consolidated Statements of Cash Flows for the Quarter Ended March 31, 1995 and the Period
January 1, 1996 through March 15, 1996................................................... F-26
Notes to Consolidated Financial Statements................................................. F-27
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-29
Consolidated Statements of Cash Flows for the Period January 1, 1996 to May 30, 1996 and
the Six Months Ended June 30, 1995....................................................... F-30
Notes to Consolidated Financial Statements................................................. F-31
BANCBOSTON MORTGAGE CORPORATION (ACQUIRED BY HOMESIDE, INC. ON MARCH 15, 1996 AND NOW KNOWN
AS HOMESIDE LENDING, INC.)
Report of Independent Accountants.......................................................... F-32
Consolidated Balance Sheets at December 31, 1994 and 1995.................................. F-33
Consolidated Statements of Operations and Retained Earnings for the Years Ended December
31, 1993, 1994 and 1995.................................................................. F-34
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and
1995..................................................................................... F-35
Notes to Consolidated Financial Statements................................................. F-43
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-52
Consolidated Balance Sheets at December 31, 1994 and 1995.................................. F-53
Consolidated Statements of Operations for the Years Ended December 31, 1993, 1994 and
1995..................................................................................... F-54
Consolidated Statements of Stockholder's Equity for the Years Ended December 31, 1993, 1994
and 1995................................................................................. F-55
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and
1995..................................................................................... F-56
Notes to Consolidated Financial Statements................................................. F-57
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY (ACQUIRED BY BARNETT MORTGAGE COMPANY ON
FEBRUARY 28, 1995)
Independent Auditors' Report............................................................... F-69
Consolidated Statements of Financial Condition at December 31, 1993 and 1994............... F-70
Consolidated Statements of Operations for the Years Ended December 31, 1993 and 1994....... F-71
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1993 and
1994..................................................................................... F-72
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993 and 1994....... F-73
Notes to Consolidated Financial Statements................................................. F-74
</TABLE>
F-1
<PAGE> 142
HOMESIDE LENDING, INC.
UNAUDITED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOVEMBER 30, 1996
-----------------
<S> <C>
ASSETS
Cash and cash equivalents............................................. $ 1,183
Mortgage loans held for sale, net..................................... 1,101,229
Mortgage servicing rights receivable, net............................. 1,321,639
Accounts receivable................................................... 173,145
Premises and equipment, net........................................... 29,221
Other assets.......................................................... 207,184
----------
Total Assets.......................................................... $2,833,601
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Notes payable to banks................................................ $2,010,813
Accounts payable and accrued liabilities.............................. 140,550
Deferred income taxes payable......................................... 103,624
Long term debt........................................................ 21,278
----------
Total Liabilities..................................................... 2,276,265
----------
Common stock:
Common stock, $1.00 par value, 100 shares authorized, issued and
outstanding, all pledged as a second priority pledge on
long-term debt of the Parent Company (Notes 1 and 7)............ --
Additional paid in capital............................................ 533,195
Retained earnings..................................................... 24,141
----------
Total Stockholder's Equity............................................ 557,336
----------
Total Liabilities and Stockholder's Equity............................ $2,833,601
==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-2
<PAGE> 143
HOMESIDE LENDING, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FOR THE THREE PERIOD FROM
MONTHS ENDED MARCH 16, 1996 TO
NOVEMBER 30, NOVEMBER 30,
1996 1996
------------- -----------------
<S> <C> <C>
REVENUES:
Mortgage servicing fees....................................... $ 90,492 $ 214,156
Amortization of mortgage servicing rights..................... (48,120) (104,315)
-------- ---------
Net servicing revenue.................................... 42,372 109,841
Interest income............................................... 25,241 60,230
Interest expense.............................................. (16,140) (46,416)
-------- ---------
Net interest revenue..................................... 9,101 13,814
Net mortgage origination revenue.............................. 16,521 43,604
Other income.................................................. 79 541
-------- ---------
Total revenue............................................ 68,073 167,800
EXPENSES:
Salaries and employee benefits................................ 20,650 53,307
Occupancy and equipment....................................... 3,337 8,267
Servicing losses on investor-owned loans...................... 4,957 12,953
Other expenses................................................ 11,391 28,932
-------- ---------
Total expenses........................................... 40,335 103,459
Income before income taxes.................................... 27,738 64,341
Income tax expense............................................ 11,373 26,380
-------- ---------
Net income.................................................... 16,365 37,961
Retained earnings at beginning of period...................... 21,596 --
Less: Dividends declared and paid to HomeSide, Inc............ (13,820) (13,820)
-------- ---------
Retained earnings at end of period............................ $ 24,141 $ 24,141
======== =========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-3
<PAGE> 144
HOMESIDE LENDING, INC.
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM
MARCH 16, 1996 TO
NOVEMBER 30, 1996
-----------------
<S> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net income............................................................. $ 37,961
Amortization........................................................... 107,396
Depreciation........................................................... 3,178
Servicing losses on investor-owned loans............................... 12,953
Deferred income tax expense............................................ 26,380
Capitalized excess servicing rights.................................... (16,373)
Mortgage loans originated and purchased for sale....................... (9,081,815)
Proceeds and principal repayments of mortgage loans held for sale...... 8,853,510
Change in accounts receivable.......................................... (78,235)
Change in other assets and accounts payable and accrued liabilities.... (33,941)
-----------
Net cash used in operating activities.................................. (168,986)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of premises and equipment..................................... (3,354)
Acquisition of mortgage servicing rights............................... (344,288)
Net purchases of risk management contracts............................. (88,438)
Acquisition of BBMC, net of cash acquired.............................. (133,392)
Acquisition of BMC, net of cash acquired............................... (106,244)
-----------
Net cash used in investing activities.................................. (675,716)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Net borrowings from banks.............................................. 526,480
Payment of debt issue costs............................................ (12,773)
Repayment of long term debt............................................ (417)
Capital contribution from parent....................................... 346,415
Dividends paid to parent............................................... (13,820)
-----------
Net cash provided by financing activities.............................. 845,885
Net increase in cash................................................... 1,183
Cash and cash equivalents at beginning of period....................... --
-----------
Cash and cash equivalents at end of period............................. $ 1,183
===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-4
<PAGE> 145
HOMESIDE LENDING, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of HomeSide
Lending, Inc. ("HomeSide") 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 HomeSide, all
material 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 November 30, 1996 and the
three months ended November 30, 1996 are not necessarily indicative of the
results that may be expected for the fiscal year ended February 28, 1997.
HomeSide is an indirect wholly-owned subsidiary of HomeSide, Inc. (the
"Parent") (see Note 2). The Parent has no operations and its only significant
assets are its investment in HHI, HomeSide and capitalized debt issuance costs.
The Parent has $200 million in outstanding long-term debt. All of the stock of
HomeSide is pledged as collateral on the debt of the Parent. The Parent is
dependent upon dividends from HHI and HomeSide for the cash flow to service the
Parent's debt.
The accompanying interim financial statements of HomeSide have been
prepared for the period March 16, 1996 to November 30, 1996 to coincide with the
commencement of operations of the Parent as discussed in "ORGANIZATION" below
and the end of the Parent's third fiscal quarter based on a February 28 year
end. The financial statements for the third quarter of fiscal 1997 include the
period September 1, 1996 to November 30, 1996.
References to the first quarter of fiscal 1997 relate to the period March
16, 1996 to May 31, 1996. References to the second quarter of fiscal 1997 relate
to the three months ended August 31, 1996. References to the third quarter of
fiscal 1997 relate to the three months ended November 30, 1996. Year to date
operating results include the period March 16, 1996 to November 30, 1996.
2. ORGANIZATION
On December 11, 1995, the Parent was formed by an investor group,
consisting of Thomas H. Lee Company and Madison Dearborn Partners (collectively,
the "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. HomeSide, Inc. is the parent company of HomeSide, which is
the primary operating entity. The BBMC transaction closed on March 15, 1996 and
HomeSide, Inc. began operations on March 16, 1996 through its operating
subsidiary, HomeSide.
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 the Parent. Barnett received cash and an
ownership interest in the Parent. 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.
F-5
<PAGE> 146
HOMESIDE LENDING, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 November 30, 1996, the carrying value of the risk management contracts
included in other assets was $162,351,000, the market value of the contracts.
Further, net gains on risk management contracts of $60,181,000 were deferred as
a component of mortgage servicing rights as of November 30, 1996. During the
third fiscal quarter, $133,348,000 of gains were deferred as a component of
mortgage servicing rights, which offset the deferred losses recorded as of the
end of the second fiscal quarter. Of the gains deferred during the third fiscal
quarter, $107,256,000 were realized. At any point in time, HomeSide's maximum
loss exposure on its option contracts is limited to the amount paid for such
contracts.
F-6
<PAGE> 147
HOMESIDE LENDING, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
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.
The following table presents a breakdown of the components of mortgage
servicing rights at November 30, 1996:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Mortgage servicing rights and excess servicing receivables....... $1,486,135
Deferred gains on risk management contracts, net................. (60,181)
----------
1,425,954
Less: Accumulated amortization................................... (104,315)
----------
$1,321,639
==========
</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
F-7
<PAGE> 148
HOMESIDE LENDING, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $10,297,000, representing
costs incurred to obtain a $2.5 billion line of credit from an independent
syndicate of banks. The deferred charges are being amortized to interest expense
over the term of the related line of credit (3 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.
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.
F-8
<PAGE> 149
HOMESIDE LENDING, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. ACQUISITIONS
Acquisition of BancBoston Mortgage Corporation
On March 15, 1996, the Parent 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 made cash payments of $139,500,000 and issued $86,750,000 of
common stock of HomeSide, Inc. 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 $5,000,000 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 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 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, the Parent acquired from Barnett certain assets, net of
assumed liabilities, and the outstanding common stock of BMC, which was
subsequently renamed HomeSide Holdings, Inc. (the "BMC Acquisition"). 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 certain portions 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 made cash payments of $228,234,000 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 11,461,400 shares of
common stock of the Parent for an aggregate purchase price of $117,985,000. 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.
F-9
<PAGE> 150
HOMESIDE LENDING, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Unaudited pro forma statements of operations for the year ended December
31, 1995 and the period from March 16, 1996 to November 30, 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):
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED PRO FORMA PERIOD
DECEMBER 31, MARCH 16, 1996 TO
1995 NOVEMBER 30, 1996
---------------- -----------------
<S> <C> <C>
Net servicing revenue.................. $235.1 $ 120.3
Net warehouse interest (expense)
revenue.............................. 17.9 17.8
Net mortgage origination revenue....... 0.7 44.6
Other income........................... 0.7 0.6
------- -------
Total revenues.................... 254.4 183.3
Expenses............................... (142.7) (116.2)
------- -------
Income before income taxes............. 111.7 67.1
Income tax expense..................... (45.7) (27.7)
------- -------
Net income........................ $ 66.0 $ 39.4
------- -------
</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. In
addition, no adjustments have been made for the capital contributions received
from the Parent in connection with the Parent's offering of common stock to the
public in January 1997. Accordingly, these pro forma results are not indicative
of future results.
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's
assets and the servicing rights retained by HHI. The line of credit is used to
provide funds for HomeSide'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. (See "Description of Bank Credit Agreement"). The amount of
the unused line of credit was $449,261,000 as of November 30, 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 November 30, 1996, the weighted average interest rate on
the amounts borrowed was 5.98%.
On January 15, 1997, HomeSide entered into a short term credit facility
with The Chase Manhattan Bank in an aggregate principal amount of $85 million.
The facility expires March 1, 1997 and drawings thereunder bear interest at the
greater of (i) The Chase Manhattan Bank's prime rate, (ii) the secondary market
rate for certificates of deposit (grossed up for maximum statutory requirements)
plus 1%, and (iii) the federal funds effective rate from time to time plus 0.5%.
F-10
<PAGE> 151
HOMESIDE LENDING, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG TERM DEBT
HomeSide 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:
<TABLE>
<CAPTION>
FISCAL YEAR (IN THOUSANDS)
-----------
<S> <C>
1997........................................................ $ 56
1998........................................................ 234
1999........................................................ 258
2000........................................................ 283
2001........................................................ 312
Thereafter.................................................. 12,481
-------
$13,624
=======
</TABLE>
7. LONG TERM DEBT OF PARENT AND TRANSACTIONS WITH AFFILIATES
On May 14, 1996, the Parent issued $200,000,000 of 11.25% notes ("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 the Parent, 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 addition, the Notes
are secured by the common stock of HomeSide, Inc. and the common stock of each
of its subsidiaries. In accordance with certain of these restrictions, effective
August 15, 1996, the interest rate on the Notes was increased to 11.75% until
the exchange notes discussed below were issued.
The Notes were initially issued as part of a private placement offering.
The Parent filed a Form S-4 with the SEC to register notes, with terms identical
to the Notes, under the Securities Act of 1933 (such registered notes also
referred to herein as the "Notes"). The registration statement was declared
effective during October 1996. The exchange was completed on December 9, 1996.
The exchange notes are obligations of the Parent and are not included in
the consolidated financial statements of HomeSide. However, ultimate repayment
of principal and interest on the notes is dependent on the cash flows of
HomeSide. During the period ended November 30, 1996, HomeSide funded $11,563,000
of interest payments on the Notes.
On February 5, 1997, the Parent issued 8,452,500 shares of its common stock
to the public at a price of $15.00 per share. The net proceeds from the offering
will be used to repay $70 million of the Notes at a premium of $7.9 million. The
remaining $38.8 million of net proceeds were contributed to HomeSide as
additional capital and used to repay amounts outstanding under the Bank Credit
Agreement.
F-11
<PAGE> 152
HOMESIDE LENDING, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the period from March 16, 1996 to November 30, 1996, HomeSide paid
$13,820,000 in dividends to the Parent to enable the Parent to service the debt
and pay certain debt issuance costs. Total remaining debt service requirements
(principal and interest) of the Parent which must be funded by dividends
received from HomeSide (including pro forma requirements related to the
repayment of $70,000,000 in principal amount of Notes from the net proceeds of
the Parent's common stock offering) are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR HISTORICAL PRO FORMA
------------------------------------------------------------- ---------- ---------
<S> <C> <C>
1997......................................................... $ -- $ --
1998......................................................... 22,500 14,625
1999......................................................... 22,500 14,625
2000......................................................... 22,500 14,625
2001......................................................... 22,500 14,625
Thereafter................................................... 256,250 106,563
-------- --------
$ 346,250 $ 165,063
======== ========
</TABLE>
HomeSide fulfills servicing obligations on behalf of HHI with respect to
certain GNMA loans with an unpaid principal balance ("UPB") of approximately
$1.0 billion as of November 30, 1996. Since the acquisition of BMC on May 31,
1996, HomeSide allocates to HHI a portion of the servicing fee income it
receives based on the UPB of loans it services on behalf of HHI. HomeSide also
allocates to HHI a portion of the costs incurred to service the loans and fund
the related servicing rights. The allocation of income and expense to HHI did
not have a material impact on HomeSide's results of operations for the periods
presented.
8. STOCKHOLDER'S EQUITY
HomeSide's capital structure consists of 100 shares of authorized and
issued, $1.00 per share par value common stock which is wholly-owned by HomeSide
Holdings, Inc., a wholly-owned subsidiary of the Parent. The common stock of
HomeSide is pledged as security for the Parent Notes discussed in Note 7 of
Notes to Consolidated Financial Statements.
9. SUPPLEMENTAL CASH FLOW INFORMATION
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.
HomeSide paid $46,117,000 and $1,000 of interest and income taxes,
respectively, during the period ended November 30, 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
F-12
<PAGE> 153
HOMESIDE LENDING, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, HomeSide'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 HomeSide. 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 HomeSide'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.
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.
F-13
<PAGE> 154
HOMESIDE LENDING, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value
The fair values of HomeSide's financial instruments as of November 30, 1996
are as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents....................... $ 1,183 $ 1,183
Mortgage loans held for sale.................... 1,101,229 1,101,229
Accounts receivable............................. 173,145 173,145
Risk management contracts....................... 162,351 162,351
Other assets.................................... 44,833 44,833
LIABILITIES
Notes payable to banks.......................... 2,010,813 2,010,813
Long-term debt.................................. 21,278 21,278
OFF-BALANCE SHEET(1)
Commitments to originate mortgage loans......... -- 20,836
Mandatory forward contracts to sell mortgages... -- (19,954)
Options on mortgage-backed securities........... -- (391)
<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 HomeSide's entire holding of a particular financial instrument. Because
no active market exists for some portion of HomeSide'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.
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 November 30, 1996. Changes in market interest rates and
prepayment assumptions could significantly change the fair value.
11. RISK MANAGEMENT OF FINANCIAL INSTRUMENTS
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 November 30, 1996 is as follows:
<TABLE>
<S> <C>
Notional amount of U.S. Treasury bond future options........... $3.5 billion
Fair value of outstanding options.............................. $162.4 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.
F-14
<PAGE> 155
HOMESIDE LENDING, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. CONTINGENCIES
HomeSide, along with its parent, 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 BMC Acquisition, which
occurred on May 31, 1996, Barnett 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.
13. SUBSEQUENT EVENTS
In February 1997, HomeSide filed a Shelf Registration Statement in
connection with a public offering of various debt securities. The proceeds from
the issuance of such securities, if drawn upon, will be used to fund HomeSide's
operations and to repay portions of borrowings under the Bank Credit Agreement.
On February 5, 1997, the Parent issued 8,452,500 shares of its Common Stock
to the public at a price of $15.00 per share. A portion of the net proceeds from
the Offering will be used to repay $70 million of the Parent's $200 million
11.25% notes at a premium of $7.9 million. The remaining net proceeds of $38.8
million will be contributed to HomeSide as additional capital and will be used
to repay borrowings under the Bank Credit Facility.
F-15
<PAGE> 156
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 as though such
transactions occurred on January 1, 1995. In addition, the unaudited
consolidated financial information gives effect to the offering of Common Stock
to the public by the Parent as if such transaction occurred on March 16, 1996.
Results of operations for the period March 16, 1996 to November 30, 1996 include
the period March 16, 1996 to November 30, 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. Results of operations for the period ended November 30, 1996
reflect the consummation of such offering and the application of the proceeds
thereof as if such transactions had occurred on March 16, 1996. 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 had in fact occurred as of the dates and is not intended to
project HomeSide's financial position or results of operations that may be
achieved for any future period.
F-16
<PAGE> 157
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
FOR THE PERIOD MARCH 16, 1996 TO NOVEMBER 30, 1996(a)
(IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA
HOMESIDE HHI HHI ACQUISITION CAPITAL HOMESIDE AND
HISTORICAL(a) HISTORICAL(a) ADJUSTMENTS(b) CONTRIBUTION(c) HHI
------------- ------------- --------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Mortgage servicing fees...... $ 214.1 $20.6 $(0.8)(d) $ -- $233.9
Amortization of mortgage
servicing rights.......... (104.3) (8.3) (1.0)(e) -- (113.6)
------- ----- ----- ----- ------
Net servicing
revenue............ 109.8 12.3 (1.8) -- 120.3
Interest income.............. 60.2 4.9 1.7(f) -- 66.8
Interest expense............. (46.4) (3.5) 0.9(f) 1.7(m) (47.3)
------- ----- ----- ----- ------
Net interest
revenue............ 13.8 1.4 2.6 -- 19.5
Net mortgage origination
revenue................... 43.6 5.0 (4.0)(g) -- 44.6
Other income................. 0.6 0.7 (0.7)(h) -- 0.6
------- ----- ----- ----- ------
Total revenue........ 167.8 19.4 (3.9) 1.7 185.0
Expenses:
Salaries and employee
benefits.................. 53.3 10.4 (5.5)(i) -- 58.2
Occupancy and equipment...... 8.3 1.6 (1.2)(j) -- 8.7
Servicing losses on investor-
owned loans............... 12.9 -- -- -- 12.9
Other expenses............... 28.9 12.2 (4.7)(k) -- 36.4
------- ----- ----- ----- ------
Total expenses....... 103.4 24.2 (11.4) -- 116.2
Income before income taxes..... 64.4 (4.8) 7.5 1.7 68.8
Income tax expense............. 26.4 (0.9) 2.2(l) 0.6(l) 28.3
------- ----- ----- ----- ------
Net income..................... $ 38.0 $(3.9) $ 5.3 $ 1.1 $ 40.5
======= ===== ===== ===== ======
<FN>
- ---------------
(a) Reflects HomeSide's and HHI's historical consolidated financial statements
for the period March 16, 1996 to November 30, 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 as if such
acquisition 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) On January 30, 1997, the Parent issued 8,452,500 shares of its common stock
to the public at a price of $15.00 per share. The net proceeds from the
offering will be used to repay $70 million of the Parent's $200 million
11.25% notes at a premium of $7.9 million. The remaining $38.8 million of
net proceeds were contributed to HomeSide as additional capital and used to
repay amounts outstanding under the Bank Credit Agreement. The pro forma
adjustments assume such offering occurred on March 16, 1996.
(d) In connection with the HHI Acquisition, all of the assets and liabilities
of HHI were transferred to HomeSide, with the exception of certain
servicing rights associated with GNMA loans retained by HHI. Mortgage
servicing fees were reduced $0.8 million for servicing income earned on the
loans not transferred. The income was earned during the period prior to
being acquired by the Parent.
(e) Amortization was increased by $1.5 million to reflect the allocation of the
HHI purchase price to mortgage servicing rights and reduced $0.5 million to
reflect amortization on mortgage servicing rights retained by HHI.
(f) In 1996, HHI sold loans held for sale as participations to an affiliate of
Barnett. The funding source was replaced with the Bank Credit Agreement.
Consequently, interest income was increased by $1.7 million to adjust for
interest income passed to the participations.
</TABLE>
F-17
<PAGE> 158
Interest expense was reduced by $0.8 million to reflect the Bank Credit
Agreement and $0.1 million to reflect the funding of mortgage servicing
rights retained by HHI.
Pro Forma interest expense is comprised of the following components:
<TABLE>
<S> <C>
Warehouse interest expense.......................................... $(34.1)
Interest credit on escrow deposits.................................. 30.1
Other interest expense
Servicing secured interest expense................................ (20.0)
Other interest expense............................................ (2.7)
------
Total other interest expense........................................ (22.7)
------
Total interest expense.................................... $(26.7)
======
(g) Origination revenue of $4.0 million generated by the loan production units
retained by Barnett was eliminated.
(h) Barnett retained mortgage loans held for investment. The interest earned on
these loans of $0.7 million has been eliminated.
(i) 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.
(j) 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.
(k) Expenses have been reduced for mortgage loan production units retained by
Barnett and certain mortgage servicing obligations retained by HHI. Other
expenses have been adjusted to reflect amortization of debt issuance costs.
</TABLE>
<TABLE>
<S> <C>
Decrease in other expenses for loan production units retained by
Barnett............................................................ $(3.8)
Decrease in other expenses for mortgage servicing obligations
retained by HHI.................................................... (0.2)
Elimination of goodwill amortization................................. (1.0)
Amortization of debt issuance costs.................................. 0.3
-----
Net decrease in other expenses............................. $(4.7)
=====
<FN>
(l) Adjusts income tax expense for HomeSide's expected effective income tax
rate.
(m) Reduces interest expense to reflect the repayment of certain amounts
outstanding under the BankCredit Agreement with proceeds received from the
Parent's common stock offering. The pro forma adjustment was based on the
assumed repayment of $38.8 million of borrowings at an average rate of
6.16% from March 16, 1996 to November 30, 1996.
</TABLE>
- ---------------
Note: Numbers may not total or agree to financial statements due to rounding.
F-18
<PAGE> 159
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HOMESIDE HOMESIDE FOR
HLI HLI FOR THE HLI HHI HLI THE HLI AND HHI
HISTORICAL(a) ACQUISITION(b) ACQUISITION HISTORICAL(a) ACQUISITION(c) ACQUISITIONS
------------- -------------- --------------- ------------- -------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Mortgage servicing fees....... $ 173.0 $ 173.0 $ 108.6 $ 14.8(m) $ 296.4
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) (6.0)(o) (170.0)
------- ------ ------- ------- ------ -------
Net servicing revenue......... 173.7 (7.7) 166.0 60.3 8.8 235.1
Interest income............... 24.3 5.4(e) 29.7 27.3 9.9(p) 66.9
Interest expense.............. (27.1) 1.7(f) (25.4) (20.4) (3.2)(q) (49.0)
------- ------ ------- ------- ------ -------
Net interest revenue.......... (2.8) 7.1 4.3 6.9 6.7 17.9
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 (13.7) 171.3 82.0 1.1 254.4
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 (23.0)(w) 55.0
------- ------ ------- ------- ------ -------
Total expenses................ 88.3 (8.9) 79.4 112.0 (48.7) 142.7
Income before income tax
expense..................... 96.7 (4.8) 91.9 (30.0) 49.8 111.7
Income tax expense............ 37.9 (3.0)(l) 34.9 (9.6) 20.4(x) 45.7
------- ------ ------- ------- ------ -------
Net income.................... $ 58.8 $ (1.8) $ 57.0 $ (20.4) $ 29.4 $ 66.0(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. 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. 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 mortgage loans held for investment. The interest earned on
these loans of $7.9 million has been eliminated.
</TABLE>
F-19
<PAGE> 160
(f) Reflects the Bank Credit Agreement and initial HomeSide 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
Participations to affiliate of Bank of Boston................ (10.3)
Reduced benefit from escrow deposits......................... (2.6)
------
$ 1.7
======
</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..................................... (1.4)
------
Total other interest expense................................. (32.7)
------
Total interest expense............................. $(25.4)
======
<FN>
(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 costs of $3.6 million and
elimination of goodwill amortization of $0.3 million.
(l) Adjusts income tax expense for the HLI Acquisition and the Parent's equity
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.
In connection with the HHI Acquisition, all of the assets and liabilities
of HHI were transferred to HomeSide, with the exception of certain
servicing rights associated with GNMA loans retained by HHI. Mortgage
servicing fees were reduced $5.1 million for servicing income earned on
these loans during the year.
</TABLE>
<TABLE>
<S> <C>
Period BancPLUS not owned by HHI................................ $ 9.9
Servicing fee income............................................ 10.0
Servicing income on servicing retained by HHI................... (5.1)
-----
Net increase in mortgage servicing revenues................ $14.8
=====
</TABLE>
F-20
<PAGE> 161
(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 due to changes in
interest rates. No adjustments have been included to reflect the results of
a risk management program had one 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.
Amortization was decreased to reflect amortization on mortgage servicing
rights retained by HHI.
<TABLE>
<S> <C>
Amortization for BancPLUS during period not owned by HHI........ $(2.9)
Increased amortization.......................................... (5.9)
Amortization on mortgage servicing rights retained by HHI....... 2.8
-----
Net increase in amortization of mortgage servicing
rights................................................... $(6.0)
=====
<FN>
(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>
<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
====
<FN>
(q) Reflects the Bank Credit Agreement and the initial HomeSide capital
structure as well as interest expense incurred to fund the mortgage
servicing rights retained by HHI.
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>
<TABLE>
<S> <C>
New Bank Credit Agreement and capital structure................ $(1.6)
Interest expense to fund mortgage servicing rights retained by
HHI........................................................... 0.9
Period BancPLUS not owned by HHI............................... (1.9)
Reduced benefit from escrow deposits........................... (0.6)
-----
$(3.2)
=====
</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
Servicing secured interest expense................................ (13.9)
------
Total interest expense....................................... $(23.6)
======
<FN>
(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.
</TABLE>
F-21
<PAGE> 162
(t) Other income of $2.3 million generated by the branches retained by Barnett
was eliminated.
(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.
<TABLE>
<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)
======
<FN>
(v) Occupancy and equipment expenses of $4.2 million for loan production units
retained by Barnett have been eliminated.
(w) Expenses have been reduced for mortgage loan production units retained by
Barnett and certain mortgage servicing obligations retained by HHI. 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.
</TABLE>
<TABLE>
<S> <C>
Decrease in other expenses for loan production units retained
by Barnett.................................................... $(25.8)
Decrease in expenses for certain mortgage servicing obligations
retained by HHI............................................... (1.4)
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............................ $(23.0)
======
<FN>
(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.
</TABLE>
- ---------------
Note: Numbers may not total or agree to financial statements due to rounding.
F-22
<PAGE> 163
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-23
<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
----------------- --------------
(DOLLARS IN THOUSANDS)
(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-24
<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)
(UNAUDITED)
<S> <C> <C>
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-25
<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
-------------- ---------------
(DOLLARS IN THOUSANDS)
(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-26
<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-27
<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-28
<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 THREE APRIL 1, 1996 FOR THE SIX FOR THE PERIOD
MONTHS ENDED TO MAY 30, MONTHS ENDED JANUARY 1, 1996
JUNE 30, 1995 1996 JUNE 30, 1995 TO MAY 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-29
<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-30
<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-31
<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-32
<PAGE> 173
BANCBOSTON MORTGAGE CORPORATION
(Acquired by HomeSide, Inc. on March 15, 1996 and now known as HomeSide Lending,
Inc.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<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-33
<PAGE> 174
BANCBOSTON MORTGAGE CORPORATION
(Acquired by HomeSide, Inc. on March 15, 1996 and now known as HomeSide Lending,
Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<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-34
<PAGE> 175
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>
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-35
<PAGE> 176
BANCBOSTON MORTGAGE CORPORATION
(Acquired by HomeSide, Inc. on March 15, 1996 and now known as HomeSide Lending,
Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<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-36
<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-37
<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-38
<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-39
<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-40
<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.
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:
<TABLE>
<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
PMSR consist of the following:
<TABLE>
<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>
EMSR consists of the following:
<TABLE>
<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-41
<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
An analysis of the reserve for estimated servicing losses on investor-owned
loans is as follows:
<TABLE>
<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
Premises and equipment consist of the following:
<TABLE>
<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-42
<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
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:
<TABLE>
<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-43
<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)
The components of post-retirement benefits expense for the three years
ended December 31 were as follows:
<TABLE>
<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>
BBMC's unfunded accumulated post-retirement benefit obligation for the two
years ended December 31 was as follows:
<TABLE>
<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>
Assumptions used in actuarial computations were:
<TABLE>
<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
The components of the net deferred tax asset at December 31 are as follows:
<TABLE>
<CAPTION>
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
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-44
<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)
The components of the provision for (benefit from) income taxes for the
years ending December 31 are as follows:
<TABLE>
<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.
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:
<TABLE>
<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-45
<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
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:
<TABLE>
<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-46
<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.
The following is a summary of BBMC's notional amounts and fair values of
interest rate products as of December 31, 1994 and 1995.
<TABLE>
<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-47
<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-48
<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-49
<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.
The estimated fair values of BBMC's financial instruments are as follows:
<TABLE>
<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-50
<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-51
<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-52
<PAGE> 193
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
<TABLE>
<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-53
<PAGE> 194
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<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-54
<PAGE> 195
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<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-55
<PAGE> 196
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 YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(NOTE 7)
<TABLE>
<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-56
<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-57
<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-58
<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-59
<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.
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):
<TABLE>
<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-60
<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
Property and equipment at December 31, 1994 and 1995 consisted of the
following:
<TABLE>
<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.
The components of the provision (benefit) for income taxes for the years
ended December 31, 1993, 1994, and 1995 are as follows:
<TABLE>
<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-61
<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)
The differences between federal income tax computed at the statutory rate
of 35 percent and the actual tax provision are shown below:
<TABLE>
<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>
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:
<TABLE>
<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-62
<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.
The Company recorded certain expenses related to transactions with the
Parent and the Affiliate Banks as follows:
<TABLE>
<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-63
<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)
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:
<TABLE>
<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-64
<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.
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:
<TABLE>
<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.
F-65
<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)
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 different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts:
<TABLE>
<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.
F-66
<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 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.
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.
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:
<TABLE>
<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>
F-67
<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)
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 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
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:
<TABLE>
<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-68
<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-69
<PAGE> 210
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1993 AND 1994
(IN THOUSANDS OF DOLLARS, EXCEPT FOR SHARE DATA)
<TABLE>
<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-70
<PAGE> 211
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993 AND 1994
(IN THOUSANDS OF DOLLARS)
<TABLE>
<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-71
<PAGE> 212
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993 AND 1994
(IN THOUSANDS OF DOLLARS)
<TABLE>
<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-72
<PAGE> 213
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993 AND 1994
(IN THOUSANDS OF DOLLARS)
<TABLE>
<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-73
<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-74
<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-75
<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-76
<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
The following is a detail of properties and equipment at December 31, 1993
and 1994 (in thousands):
<TABLE>
<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
Notes payable consisted of the following at December 31, 1993 and 1994 (in
thousands):
<TABLE>
<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-77
<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-78
<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.
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):
<TABLE>
<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-79
<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.
The estimated fair values of the Company's financial instruments are
summarized as follows (in thousands):
<TABLE>
<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-80
<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
The components of income taxes for the years ended December 31, 1993 and
1994 were as follows (in thousands):
<TABLE>
<CAPTION>
1993 1994
------- ------
<S> <C> <C>
Current expense........................................... $ 355 $3,377
Deferred benefit.......................................... (4,583) (270)
------- ------
Total................................................ $(4,228) $3,107
======= ======
</TABLE>
The expected income taxes for the years ended December 31, 1993 and 1994
differ from the recorded amounts as follows (in thousands):
<TABLE>
<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-81
<PAGE> 222
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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):
<TABLE>
<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-82
<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-83
<PAGE> 224
===============================================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN CONTAINED OR INCORPORATED
BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT, THE APPLICABLE PRICING SUPPLEMENT OR
THE PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT,
THE APPLICABLE PRICING SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE ISSUER OR THE AGENTS. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT,
THE APPLICABLE PRICING SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE HEREUNDER
AND THEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE AFFAIRS OF THE ISSUER SINCE THE DATE HEREOF. THIS
PROSPECTUS SUPPLEMENT, THE APPLICABLE PRICING SUPPLEMENT AND THE PROSPECTUS DO
NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH
OFFER IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Summary.............................. S-3
Risk Factors.................................... S-11
Description of Notes............................ S-18
Special Provisions Relating to Foreign Currency
Notes......................................... S-33
Certain United States Federal Income Tax
Considerations................................ S-36
Plan of Distribution............................ S-44
PROSPECTUS
Additional Information.......................... 2
HomeSide........................................ 3
Use of Proceeds................................. 5
Selected Consolidated Financial Information..... 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations
-- HomeSide................................... 11
Management's Discussion and Analysis of
Financial Condition and Results of Operations
-- HLI........................................ 19
Management's Discussion and Analysis of
Financial Condition and Results of Operations
-- HHI........................................ 31
Industry Overview............................... 41
Business........................................ 44
HomeSide.................................... 44
HLI -- Historical Business.................. 55
HHI -- Historical Business.................. 59
The Acquisitions................................ 64
Management...................................... 66
Security Ownership of Certain Beneficial Owners
and Management................................ 73
Certain Relationships and Related
Transactions.................................. 75
Description of Bank Credit Agreement............ 79
Description of the Parent Notes................. 83
Description of Debt Securities.................. 84
Plan of Distribution............................ 94
Legal Matters................................... 95
Experts......................................... 95
Index to Financial Statements................... F-1
</TABLE>
UNTIL , 1997 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS
SUPPLEMENT), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS AND PROSPECTUS SUPPLEMENT. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS AND PROSPECTUS SUPPLEMENT, WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
===============================================================================
$1,000,000,000
LOGO
HOMESIDE LENDING, INC.
MEDIUM-TERM NOTES
DUE NINE MONTHS OR MORE
FROM DATE OF ISSUE
------------------------
PROSPECTUS SUPPLEMENT
------------------------
MERRILL LYNCH & CO.
CHASE SECURITIES INC.
NATIONSBANK CAPITAL MARKETS, INC.
SMITH BARNEY INC.
, 1997
===============================================================================
<PAGE> 225
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses in connection with the issuance and distribution of the
securities being registered hereby, other than underwriting discounts and
commissions, to be paid by the Registrants, are estimated as follows:
<TABLE>
<S> <C>
Registration fee under Securities Act........................... $303,031
Legal fees...................................................... *
Accounting fees................................................. *
Printing and engraving.......................................... *
Transfer agent fees............................................. *
Miscellaneous................................................... *
--------
Total...................................................... $ *
========
</TABLE>
- ---------------
* To be provided by Amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 607.0850 of the Florida Business Corporation Act permits a
corporation to indemnify its directors and officers against liability incurred
in their capacity as such or by reason of service at the request of the
corporation as a director, officer, employee or agent of another corporation (i)
if such director or officer acted in good faith and in a manner he or she
reasonably believed to be in, or not opposed to, the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful; and (ii) in certain
other circumstances.
Article IX of the By-laws of the HLI provides as follows:
INDEMNIFICATION
SEC. 1. The corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending, or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a Director or officer of the corporation or
served, at the written request of the President of the corporation, as a
Director or officer of another corporation (all of whom are hereinafter in this
Article referred to in the aggregate as "indemnified persons" and in the
singular as an "indemnified person") against expenses (including attorneys' fees
except as otherwise stated in Section 3 of this Article), judgements, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding, if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, has no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by a judgement, order, settlement, adjudication or
upon a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
SEC. 2. The corporation shall indemnify any indemnified person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgement in its favor against expenses (including attorneys' fees except as
otherwise stated in Section 3 of this Article) actually and reasonably incurred
by him in connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and except that no
indemnification shall be made in respect of any
II-1
<PAGE> 226
claim, issue or matter as to which such person shall have been adjudged to be
liable for negligence or misconduct in the performance of his duty to the
corporation unless and only to the extent that the court in which such action or
suit was brought shall determine upon application that, despite the adjudication
of liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which such court
shall deem proper.
SEC. 3. The corporation will be entitled to participate at it own expense
in the defense and, if it so elects, to assume the defense of any claim, action,
suit or proceeding. If the corporation elects to assume the defense, such
defense shall be conducted by counsel of good standing, chosen by it. In the
event the corporation elects to assume the defense of any such claim, action,
suit or proceeding and retain such counsel, the indemnified persons shall bear
the fees and expense of any additional counsel retained by them, unless there
are conflicting interests as between the corporation and the indemnified persons
that are for valid reasons objected to in writing by the indemnified persons.
SEC. 4. In discharging his duty to the corporation, an indemnified person,
when acting in good faith, may rely upon financial statements of the corporation
represented to him to be correct by the officer of the corporation having charge
of its books of accounts, or stated in a written report by an independent public
or certified public accountant or firm of such accountants fairly to reflect the
financial condition of such corporation.
SEC. 5. Any indemnification under this Article IX (unless ordered by a
court) shall be made only as authorized in the specific case upon a
determination (1) by the Board of Directors by a majority vote of a quorum
consisting of Directors who were not parties to such action, suit or proceeding,
or (2) if such quorum is not obtainable, or, even if obtainable, when a quorum
of disinterested Directors so directs, by independent legal counsel in a written
opinion that the indemnified person has met the standards of conduct set forth
in this Article IX or (3) by the stockholder or stockholders.
SEC. 6. Expenses incurred in defending a civil or criminal action, suit or
proceeding may be paid by the Corporation in advance of the final disposition of
such action, suit or proceeding as authorized by the Board of Directors in the
manner provided in Section 5 of this Article IX upon receipt of an undertaking
by or on behalf of the indemnified person to repay such amount unless it shall
ultimately be determined that he is entitled to be indemnified by the
corporation as authorized in this Article IX.
SEC. 7. The indemnification provided by this Article IX shall not be
deemed exclusive of any other rights to which any indemnified person may be
entitled under any agreement, vote of stockholders or disinterested Directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office and shall inure to the benefit of the
heirs, executors and administrators of such a person.
SEC. 8. The Board of Directors shall have power on behalf of the
corporation to grant indemnification to any person other than an indemnified
person to such extent as the Board in its discretion may from time to time and
at any time determine, but in no event to exceed the indemnification provided by
this Article IX.
SEC. 9. If any part of this Article IX shall be found, in any action, suit
or proceeding, to be invalid or ineffective, the validity and the effect of the
remaining parts shall not be affected.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years the Company has not issued any securities.
II-2
<PAGE> 227
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits. Unless otherwise indicated, all Exhibits are incorporated by
reference to the Parent's Registration Statement on Form S-4, No. 333-06737.
<TABLE>
<S> <C>
1.1* Form of Distribution Agreement.
3.1* Certificate of Incorporation of HomeSide Lending, Inc.
3.2* By-Laws of HomeSide Lending, Inc.
4.1** Form of Indenture.
4.2* Form of Fixed Rate Medium-Term Note.
4.3* Form of Floating Rate Medium-Term Note.
5.1* Opinion of Hutchins, Wheeler & Dittmar, A Professional Corporation regarding
legality of the securities being registered.
10.1 Stock Purchase Agreement dated December 11, 1995 between HomeAmerica Capital,
Inc. (currently known as HomeSide, Inc.) and The First National Bank of Boston
(the "BBMC Purchase Agreement").
10.2 Amendment No. 1, dated as of March 15, 1996, to the BBMC Purchase Agreement.
10.3 Marketing Agreement dated as of March 15, 1996 between HomeSide, Inc. and The
First National Bank of Boston.
10.4 Repurchase of Mortgage Loan Servicing Rights Letter Agreement between The
First National Bank of Boston and BancBoston Mortgage Corporation (currently
known as HomeSide Lending, Inc.)
10.5 Operating Agreement effective as of March 15, 1996 between The First National
Bank of Boston and BancBoston Mortgage Corporation (currently known as
HomeSide Lending, Inc.)
10.6 Brokered Loan Purchase and Sale Agreement dated as of March 15, 1996 between
BancBoston Mortgage Corporation (currently known as HomeSide Lending, Inc.)
and each of The First National Bank of Boston, Bank of Boston Connecticut,
Rhode Island Hospital Trust National Bank and Bank of Boston Florida, N.A.
10.7 Master Take-Out Commitment dated as of March 15, 1996 between BancBoston
Mortgage Corporation (currently known as HomeSide Lending, Inc.) and each of
The First National Bank of Boston, Bank of Boston Connecticut, Rhode Island
Hospital Trust National Bank and Bank of Boston Florida, N.A.
10.8 Neighborhood Assistance Corporation of America Mortgage Loan Take-Out
Commitment dated as of March 15, 1996 between BancBoston Mortgage Corporation
(currently known as HomeSide Lending, Inc.) and The First National Bank of
Boston.
10.9+ PMSR Flow Agreement dated as of March 15, 1996 between BancBoston Mortgage
Corporation (currently known as HomeSide Lending, Inc.) and each of The First
National Bank of Boston, Bank of Boston Connecticut, Rhode Island Hospital
Trust National Bank and Bank of Boston Florida, N.A.
10.10+ Mortgage Loan Servicing Agreement dated as of March 15, 1996 between
BancBoston Mortgage Corporation (currently known as HomeSide Lending, Inc.)
and each of The First National Bank of Boston, Bank of Boston Connecticut,
Rhode Island Hospital Trust National Bank and Bank of Boston Florida, N.A.
10.11 Stock Purchase Agreement dated as of March 4, 1996 between GrantAmerica, Inc.
(currently known as HomeSide, Inc.) and Barnett Banks, Inc. (the "BMC Purchase
Agreement").
10.12 Amendment No. 1, dated as of May 31, 1996, to the BMC Purchase Agreement.
10.13 Tax Indemnity Letter Agreement dated as of March 4, 1996 between Barnett
Mortgage Company (currently known as HomeSide Holdings, Inc.) and Barnett
Banks, Inc.
10.14 Amended and Restated Shareholder Agreement dated as of May 31, 1996 among
HomeSide, Inc. and the shareholders thereof.
10.15 Amended and Restated Registration Rights Agreement dated as of May 31, 1996
between HomeSide, Inc. and certain shareholders thereof.
</TABLE>
II-3
<PAGE> 228
<TABLE>
<S> <C>
10.16 Marketing Agreement dated as of May 31, 1996 between HomeSide, Inc. and
Barnett Banks, Inc.
10.17 Transitional Services Agreement dated as of May 31, 1996 between Barnett
Banks, Inc., Barnett Mortgage Company (currently known as HomeSide Holdings,
Inc.) and HomeSide, Inc.
10.18 Operating Agreement dated as of May 31, 1996 between HomeSide Lending, Inc.
and Barnett Banks, Inc.
10.19+ Mortgage Loan Servicing Agreement dated as of April, 1996 between HomeSide
Lending, Inc. and Barnett Banks, Inc.
10.20+ PMSR Flow Agreement dated as of May 31, 1996 between HomeSide Lending, Inc.
and Barnett Banks, Inc.
10.21 Correspondent Agreement dated May 16, 1996 between HomeSide Lending, Inc. and
Barnett Banks, Inc.
10.22 Delegated Underwriting Agreement dated as of May 15, 1996 between HomeSide
Lending, Inc. and HomeSide Holdings, Inc.
10.23* Amended and Restated Credit Agreement dated as of January 31, 1997 among
HomeSide Lending, Inc., Honolulu Mortgage Company, Inc., the Lenders parties
thereto and The Chase Manhattan Bank, as Administrative Agent (the "Credit
Agreement").
10.24* Amended and Restated Holdings Pledge Agreement dated as of February , 1997
between HomeSide, Inc. and The Chase Manhattan Bank, as Administrative Agent
for the Lenders parties to the Credit Agreement.
10.25* Amended and Restated HomeSide Pledge Agreement dated as of February , 1997
between HomeSide Lending, Inc. and The Chase Manhattan Bank, as Administrative
Agent for the Lenders parties to the Credit Agreement.
10.26* Amended and Restated BMC Pledge Agreement dated as of February , 1997
between HomeSide Holdings, Inc. and The Chase Manhattan Bank, as
Administrative Agent for the Lenders parties to the Credit Agreement.
10.27 Registration Rights Agreement dated as of May 14, 1996 among HomeSide, Inc.
and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Smith Barney Inc. and Friedman, Billings, Ramsey & Co., Inc.
10.28* Amended and Restated Holdings Guaranty dated as of February , 1997 by
HomeSide, Inc. in favor of The Chase Manhattan Bank, as Administrative Agent
for the Lenders parties to the Credit Agreement.
10.29* Amended and Restated HomeSide Guaranty dated as of February , 1997 by
HomeSide Lending, Inc. in favor of The Chase Manhattan Bank, as Administrative
Agent for the Lenders parties to the Credit Agreement.
10.30* Amended and Restated Subsidiaries Guaranty dated as of February , 1997 by
each of SWD Properties, Inc., Stockton Plaza, Inc., HomeSide Mortgage
Securities, Inc. and Honolulu Mortgage Company, Inc. in favor of The Chase
Manhattan Bank, as Administrative Agent for the Lenders parties to the Credit
Agreement.
10.31* Amended and Restated BMC Guaranty dated as of February , 1997 by HomeSide
Holdings, Inc. in favor of The Chase Manhattan Bank, as Administrative Agent
for the Lenders parties to the Credit Agreement.
10.32* Amended and Restated Security and Collateral Agency Agreement dated as of
February , 1997 between HomeSide Lending, Inc. and The Chase Manhattan Bank,
as Administrative Agent for the Lenders parties to the Credit Agreement.
10.33* Amended and Restated Security and Collateral Agency Agreement dated as of
February , 1997 between Honolulu Mortgage Company, Inc. and The Chase
Manhattan Bank, as Administrative Agent for the Lenders parties to the Credit
Agreement.
10.34* Amended and Restated Security and Collateral Agency Agreement dated as of
February , 1997 between HomeSide Holdings, Inc. and The Chase Manhattan
Bank, as Administrative Agent for the Lenders parties to the Credit Agreement.
10.35 Intercreditor Agreement dated as of May 31, 1996 between HomeSide, Inc.,
HomeSide Holdings, The Bank of New York, as Trustee, and Chemical Bank, as
Administrative Agent under the Credit Agreement.
</TABLE>
II-4
<PAGE> 229
<TABLE>
<S> <C>
10.36 HomeSide, Inc. Time Accelerated Restricted Stock Option Plan.
10.37 HomeSide, Inc. Non-Qualified Stock Option Plan.
10.38 Class B Non-Voting Common Stock Issuance Agreement dated as of March 14, 1996
between HomeSide, Inc. and Smith Barney Inc.
10.39 Transitional Services Agreement dated as of March 15, 1996 between The First
National Bank of Boston and BancBoston Mortgage Corporation (currently known
as HomeSide Lending, Inc.)
10.40 Transitional Services Agreement dated as of March 15, 1996 between The First
National Bank of Boston and BancBoston Mortgage Corporation (currently known
as HomeSide Lending, Inc.)
10.41 Management Agreement dated as of March 15, 1996 between BancBoston Mortgage
Corporation (currently known as HomeSide Lending, Inc.) and The First National
Bank of Boston.
10.42 Management Agreement dated as of March 15, 1996 between BancBoston Mortgage
Corporation (currently known as HomeSide Lending, Inc.) and Thomas H. Lee
Company.
10.43 Management Agreement dated as of March 15, 1996 between BancBoston Mortgage
Corporation (currently known as HomeSide Lending, Inc.) and Madison Dearborn
Partners, Inc.
10.44 Management Stockholder Agreement dated as of May 15, 1996 between HomeSide,
Inc., The First National Bank of Boston, Thomas H. Lee Equity Fund III, L.P.
and certain affiliates thereof, Madison Dearborn Capital Partners, L.P. and
certain employees of HomeSide, Inc. and its subsidiaries.
10.45 Management Agreement dated as of May 31, 1996 between HomeSide Lending, Inc.
and Barnett Banks, Inc.
10.46 Form of HomeSide Severance Agreement
10.47 Loan and Security Agreement dated January 15, 1997 between HomeSide Lending,
Inc. and The Chase Manhattan Bank.
12.1** HomeSide Lending, Inc. -- Computation of the Ratio of Earnings to Fixed
Charges.
12.2** BancBoston Mortgage Corporation -- Computation of the Ratio of Earnings to
Fixed Charges.
12.3** Barnett Mortgage Company -- Computation of the Ratio of the Ratio of Earnings
to Fixed Charges.
21.1 List of subsidiaries of HomeSide Lending, Inc.
23.1** Consent of Arthur Andersen LLP
23.2** Consent of Coopers & Lybrand L.L.P.
23.3** Consent of KPMG Peat Marwick LLP
23.4 Consent of Hutchins, Wheeler & Dittmar, A Professional Corporation (included
in Exhibit 5.1)
24.1 Powers of Attorney (contained on the signature page to this Registration
Statement).
25.1* Form of T-1 Statement of Eligibility Under Trust Indenture Act of 1939 of
[name of trustee].
27.1** Financial Data Schedule
<FN>
- ---------------
+ Portions of this Exhibit have been omitted pursuant to an order of the
Securities and Exchange Commission granting confidential treatment.
* This Exhibit will be filed with a subsequent amendment to this Registration
Statement.
** This Exhibit is filed with this Registration Statement.
</TABLE>
(b) Financial Statement Schedules.
Schedule II -- Valuation and Qualifying Accounts and Reserves For the three
years ended December 31, 1995 For Barnett Mortgage Company (at page S-1).
II-5
<PAGE> 230
Schedule II -- Valuation and Qualifying Accounts and Reserves For the year
ended December 31, 1994 For BancPLUS Financial Corporation and Subsidiary (at
page S-2).
Schedules other than those listed above have been omitted since the
information is not applicable, not required or is included in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions described under Item 14 above or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes (1) that for purposes of
determining any liability under the Act, the information omitted from the form
of prospectus filed as part of a registration statement in reliance upon Rule
430A and contained in the form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of this
registration statement as of the time it was declared effective; and (2) that
for the purpose of determining any liability under the Act, each post-effective
amendment that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-6
<PAGE> 231
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF JACKSONVILLE, STATE OF
FLORIDA, ON THE 5TH DAY OF FEBRUARY, 1997.
HOMESIDE LENDING, INC.
/s/ JOE K. PICKETT
By:
------------------------------------
JOE K. PICKETT
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ----------------------------------- ------------------
<C> <S> <C>
/s/ JOE K. PICKETT Chairman of the Board, Chief February 5, 1997
- ---------------------------------------- Executive Officer and Director
JOE K. PICKETT (Principal Executive Officer)
/s/ HUGH R. HARRIS President, Chief Operating Officer February 5, 1997
- ---------------------------------------- and Director
HUGH R. HARRIS
/s/ KEVIN D. RACE Executive Vice President and Chief February 5, 1997
- ---------------------------------------- Financial Officer (Principal
KEVIN D. RACE Financial and Accounting Officer)
/s/ ROBERT J. JACOBS Executive Vice President, February 5, 1997
- ---------------------------------------- Secretary, General Counsel and
ROBERT J. JACOBS Director
</TABLE>
II-7
<PAGE> 232
BARNETT MORTGAGE COMPANY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
-----------------------------------
BALANCE AT ACQUIRED CHARGED TO CHARGES TO BALANCE AT
BEGINNING FROM COSTS AND OTHER END
DESCRIPTION OF PERIOD BANCPLUS EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ----------------------------------- ---------- --------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Reserve for losses $ -- $11,300 $ $ -- $ -- $ 11,300
YEAR ENDED DECEMBER 31, 1994
Reserve for losses -- -- -- -- --
YEAR ENDED DECEMBER 31, 1993
Reserve for losses $ -- $ -- $ -- $ -- $ --
</TABLE>
S-1
<PAGE> 233
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE TWO YEARS ENDED DECEMBER 31, 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ------------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994
Reserve for losses $ 13,300 $-- $-- $ (1,900)(a) $ 11,400
Year ended December 31, 1993
Reserve for losses 14,700 -- -- (1,400)(a) 13,300
</TABLE>
- ---------------
(a) Represents losses incurred on dispositions of foreclosure claims and VA
buydowns.
S-2
<PAGE> 234
EXHIBIT INDEX
Unless otherwise indicated, all Exhibits are incorporated by reference to
the Parent's Registration Statement on Form S-4, No. 333-06737.
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
1.1* Form of Distribution Agreement.......................................
3.1* Certificate of Incorporation of HomeSide Lending, Inc................
3.2* By-Laws of HomeSide Lending, Inc.....................................
4.1** Form of Indenture....................................................
4.2* Form of Fixed Rate Medium-Term Note..................................
4.3* Form of Floating Rate Medium-Term Note...............................
5.1* Opinion of Hutchins, Wheeler & Dittmar, A Professional Corporation
regarding legality of the securities being registered................
10.1 Stock Purchase Agreement dated December 11, 1995 between HomeAmerica
Capital, Inc. (currently known as HomeSide, Inc.) and The First
National Bank of Boston (the "BBMC Purchase Agreement")..............
10.2 Amendment No. 1, dated as of March 15, 1996, to the BBMC Purchase
Agreement............................................................
10.3 Marketing Agreement dated as of March 15, 1996 between HomeSide, Inc.
and The First National Bank of Boston................................
10.4 Repurchase of Mortgage Loan Servicing Rights Letter Agreement between
The First National Bank of Boston and BancBoston Mortgage Corporation
(currently known as HomeSide Lending, Inc.)..........................
10.5 Operating Agreement effective as of March 15, 1996 between The First
National Bank of Boston and BancBoston Mortgage Corporation
(currently known as HomeSide Lending, Inc.)..........................
10.6 Brokered Loan Purchase and Sale Agreement dated as of March 15, 1996
between BancBoston Mortgage Corporation (currently known as HomeSide
Lending, Inc.) and each of The First National Bank of Boston, Bank of
Boston Connecticut, Rhode Island Hospital Trust National Bank and
Bank of Boston Florida, N.A..........................................
10.7 Master Take-Out Commitment dated as of March 15, 1996 between
BancBoston Mortgage Corporation (currently known as HomeSide Lending,
Inc.) and each of The First National Bank of Boston, Bank of Boston
Connecticut, Rhode Island Hospital Trust National Bank and Bank of
Boston Florida, N.A..................................................
10.8 Neighborhood Assistance Corporation of America Mortgage Loan Take-Out
Commitment dated as of March 15, 1996 between BancBoston Mortgage
Corporation (currently known as HomeSide Lending, Inc.) and The First
National Bank of Boston..............................................
10.9+ PMSR Flow Agreement dated as of March 15, 1996 between BancBoston
Mortgage Corporation (currently known as HomeSide Lending, Inc.) and
each of The First National Bank of Boston, Bank of Boston
Connecticut, Rhode Island Hospital Trust National Bank and Bank of
Boston Florida, N.A..................................................
10.10+ Mortgage Loan Servicing Agreement dated as of March 15, 1996 between
BancBoston Mortgage Corporation (currently known as HomeSide Lending,
Inc.) and each of The First National Bank of Boston, Bank of Boston
Connecticut, Rhode Island Hospital Trust National Bank and Bank of
Boston Florida, N.A..................................................
10.11 Stock Purchase Agreement dated as of March 4, 1996 between
GrantAmerica, Inc. (currently known as HomeSide, Inc.) and Barnett
Banks, Inc. (the "BMC Purchase Agreement")...........................
</TABLE>
<PAGE> 235
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
10.12 Amendment No. 1, dated as of May 31, 1996, to the BMC Purchase
Agreement............................................................
10.13 Tax Indemnity Letter Agreement dated as of March 4, 1996 between
Barnett Mortgage Company (currently known as HomeSide Holdings, Inc.)
and Barnett Banks, Inc...............................................
10.14 Amended and Restated Shareholder Agreement dated as of May 31, 1996
among HomeSide, Inc. and the shareholders thereof....................
10.15 Amended and Restated Registration Rights Agreement dated as of May
31, 1996 between HomeSide, Inc. and certain shareholders thereof.....
10.16 Marketing Agreement dated as of May 31, 1996 between HomeSide, Inc.
and Barnett Banks, Inc...............................................
10.17 Transitional Services Agreement dated as of May 31, 1996 between
Barnett Banks, Inc., Barnett Mortgage Company (currently known as
HomeSide Holdings, Inc.) and HomeSide, Inc...........................
10.18 Operating Agreement dated as of May 31, 1996 between HomeSide
Lending, Inc. and Barnett Banks, Inc.................................
10.19+ Mortgage Loan Servicing Agreement dated as of April, 1996 between
HomeSide Lending, Inc. and Barnett Banks, Inc........................
10.20+ PMSR Flow Agreement dated as of May 31, 1996 between HomeSide
Lending, Inc. and Barnett Banks, Inc.................................
10.21 Correspondent Agreement dated May 16, 1996 between HomeSide Lending,
Inc. and Barnett Banks, Inc..........................................
10.22 Delegated Underwriting Agreement dated as of May 15, 1996 between
HomeSide Lending, Inc. and HomeSide Holdings, Inc....................
10.23* Amended and Restated Credit Agreement dated as of January 31, 1997
among HomeSide Lending, Inc., Honolulu Mortgage Company, Inc., the
Lenders parties thereto and The Chase Manhattan Bank, as
Administrative Agent (the "Credit Agreement")........................
10.24* Amended and Restated Holdings Pledge Agreement dated as of February
, 1997 between HomeSide, Inc. and The Chase Manhattan Bank, as
Administrative Agent for the Lenders parties to the Credit
Agreement............................................................
10.25* Amended and Restated HomeSide Pledge Agreement dated as of February
, 1997 between HomeSide Lending, Inc. and The Chase Manhattan Bank,
as Administrative Agent for the Lenders parties to the Credit
Agreement............................................................
10.26* Amended and Restated BMC Pledge Agreement dated as of February ,
1997 between HomeSide Holdings, Inc. and The Chase Manhattan Bank, as
Administrative Agent for the Lenders parties to the Credit
Agreement............................................................
10.27 Registration Rights Agreement dated as of May 14, 1996 among
HomeSide, Inc. and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner
& Smith Incorporated, Smith Barney Inc. and Friedman, Billings,
Ramsey & Co., Inc....................................................
10.28* Amended and Restated Holdings Guaranty dated as of February , 1997
by HomeSide, Inc. in favor of The Chase Manhattan Bank, as
Administrative Agent for the Lenders parties to the Credit
Agreement............................................................
10.29* Amended and Restated HomeSide Guaranty dated as of February , 1997
by HomeSide Lending, Inc. in favor of The Chase Manhattan Bank, as
Administrative Agent for the Lenders parties to the Credit
Agreement............................................................
</TABLE>
<PAGE> 236
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
10.30* Amended and Restated Subsidiaries Guaranty dated as of February ,
1997 by each of SWD Properties, Inc., Stockton Plaza, Inc., HomeSide
Mortgage Securities, Inc. and Honolulu Mortgage Company, Inc. in
favor of The Chase Manhattan Bank, as Administrative Agent for the
Lenders parties to the Credit Agreement..............................
10.31* Amended and Restated BMC Guaranty dated as of February , 1997 by
HomeSide Holdings, Inc. in favor of The Chase Manhattan Bank, as
Administrative Agent for the Lenders parties to the Credit
Agreement............................................................
10.32* Amended and Restated Security and Collateral Agency Agreement dated
as of February , 1997 between HomeSide Lending, Inc. and The Chase
Manhattan Bank, as Administrative Agent for the Lenders parties to
the Credit Agreement.................................................
10.33* Amended and Restated Security and Collateral Agency Agreement dated
as of February , 1997 between Honolulu Mortgage Company, Inc. and
The Chase Manhattan Bank, as Administrative Agent for the Lenders
parties to the Credit Agreement......................................
10.34* Amended and Restated Security and Collateral Agency Agreement dated
as of February , 1997 between HomeSide Holdings, Inc. and The Chase
Manhattan Bank, as Administrative Agent for the Lenders parties to
the Credit Agreement.................................................
10.35 Intercreditor Agreement dated as of May 31, 1996 between HomeSide,
Inc., HomeSide Holdings, The Bank of New York, as Trustee, and
Chemical Bank, as Administrative Agent under the Credit Agreement....
10.36 HomeSide, Inc. Time Accelerated Restricted Stock Option Plan.........
10.37 HomeSide, Inc. Non-Qualified Stock Option Plan.......................
10.38 Class B Non-Voting Common Stock Issuance Agreement dated as of March
14, 1996 between HomeSide, Inc. and Smith Barney Inc.................
10.39 Transitional Services Agreement dated as of March 15, 1996 between
The First National Bank of Boston and BancBoston Mortgage Corporation
(currently known as HomeSide Lending, Inc.)..........................
10.40 Transitional Services Agreement dated as of March 15, 1996 between
The First National Bank of Boston and BancBoston Mortgage Corporation
(currently known as HomeSide Lending, Inc.)..........................
10.41 Management Agreement dated as of March 15, 1996 between BancBoston
Mortgage Corporation (currently known as HomeSide Lending, Inc.) and
The First National Bank of Boston....................................
10.42 Management Agreement dated as of March 15, 1996 between BancBoston
Mortgage Corporation (currently known as HomeSide Lending, Inc.) and
Thomas H. Lee Company................................................
10.43 Management Agreement dated as of March 15, 1996 between BancBoston
Mortgage Corporation (currently known as HomeSide Lending, Inc.) and
Madison Dearborn Partners, Inc.......................................
10.44 Management Stockholder Agreement dated as of May 15, 1996 between
HomeSide, Inc., The First National Bank of Boston, Thomas H. Lee
Equity Fund III, L.P. and certain affiliates thereof, Madison
Dearborn Capital Partners, L.P. and certain employees of HomeSide,
Inc. and its subsidiaries............................................
10.45 Management Agreement dated as of May 31, 1996 between HomeSide
Lending, Inc. and Barnett Banks, Inc.................................
10.46 Form of HomeSide Severance Agreement.................................
10.47 Loan and Security Agreement dated January 15, 1997 between HomeSide
Lending, Inc. and The Chase Manhattan Bank...........................
12.1** HomeSide Lending, Inc. -- Computation of the Ratio of Earnings to
Fixed Charges........................................................
</TABLE>
<PAGE> 237
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
12.2** BancBoston Mortgage Corporation -- Computation of the Ratio of
Earnings to Fixed Charges............................................
12.3** Barnett Mortgage Company -- Computation of the Ratio of the Ratio of
Earnings to Fixed Charges............................................
21.1 List of subsidiaries of HomeSide Lending, Inc........................
23.1** Consent of Arthur Andersen LLP.......................................
23.2** Consent of Coopers & Lybrand L.L.P...................................
23.3** Consent of KPMG Peat Marwick LLP.....................................
23.4 Consent of Hutchins, Wheeler & Dittmar, A Professional Corporation
(included in Exhibit 5.1)............................................
24.1 Powers of Attorney (contained on the signature page to this
Registration Statement)..............................................
25.1* Form of T-1 Statement of Eligibility Under Trust Indenture Act of
1939 of [name of trustee]............................................
27.1** Financial Data Schedule..............................................
<FN>
- ---------------
+ Portions of this Exhibit have been omitted pursuant to an order of the
Securities and Exchange Commission granting confidential treatment.
* This Exhibit will be filed with a subsequent amendment to this Registration
Statement.
** This Exhibit is filed with this Registration Statement.
</TABLE>
<PAGE> 1
HOMESIDE LENDING, INC.,
Issuer
to
, Trustee
---------------
INDENTURE
---------------
Dated as of , 1997
Debt Securities
<PAGE> 2
Reconciliation and tie between
Trust Indenture Act of 1939 (the "Trust Indenture Act")
and Indenture
Trust Indenture
Act Section Indenture Section
- --------------- -----------------
Section 310(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . 6.7
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.7
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.8
Section 312(a) . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2
Section 313(a) . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3
(b)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3
Section 314(a) . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4
(c)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2
(c)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2
(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2
(f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2
Section 316(a) (last sentence) . . . . . . . . . . . . . . . . . . 1.1
(a)(1)(A) . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2, 5.12
(a)(1)(B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.13
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.8
Section 317(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . 5.3
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3
Section 318(a) . . . . . . . . . . . . . . . . . . . . . . . . . . 1.8
- ----------
Note: This reconciliation and tie shall not, for any purpose, be deemed to be
part of the Indenture.
<PAGE> 3
TABLE OF CONTENTS
Recitals . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE 1
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
Section 1.1. Definitions. . . . . . . . . . . . . . . . . . 2
Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Additional Amounts . . . . . . . . . . . . . . . . . . . . . . . 2
Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Authenticating Agent . . . . . . . . . . . . . . . . . . . . . . 3
Authorized Newspaper . . . . . . . . . . . . . . . . . . . . . . 3
Authorized Officer . . . . . . . . . . . . . . . . . . . . . . . 3
Bearer Security . . . . . . . . . . . . . . . . . . . . . . . . 3
Board of Directors . . . . . . . . . . . . . . . . . . . . . . . 3
Board Resolution . . . . . . . . . . . . . . . . . . . . . . . . 3
Business Day, . . . . . . . . . . . . . . . . . . . . . . . . . 3
Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Company Request" and "Company Order . . . . . . . . . . . . . . 4
Conversion Event . . . . . . . . . . . . . . . . . . . . . . . . 4
Corporate Trust Office . . . . . . . . . . . . . . . . . . . . . 4
Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Coupon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
CUSIP number . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Defaulted Interest . . . . . . . . . . . . . . . . . . . . . . . 4
Dollars" or "$ . . . . . . . . . . . . . . . . . . . . . . . . . 4
ECU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
European Monetary System . . . . . . . . . . . . . . . . . . . . 5
European Union . . . . . . . . . . . . . . . . . . . . . . . . . 5
Event of Default . . . . . . . . . . . . . . . . . . . . . . . . 5
Foreign Currency . . . . . . . . . . . . . . . . . . . . . . . . 5
Government Obligations . . . . . . . . . . . . . . . . . . . . . 5
Holder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Independent Public Accountants . . . . . . . . . . . . . . . . . 6
Indexed Security . . . . . . . . . . . . . . . . . . . . . . . . 6
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Interest Payment Date . . . . . . . . . . . . . . . . . . . . . 6
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<PAGE> 4
Judgment Currency . . . . . . . . . . . . . . . . . . . . . . . 6
Legal Holidays . . . . . . . . . . . . . . . . . . . . . . . . . 6
Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
New York Banking Day . . . . . . . . . . . . . . . . . . . . . . 6
Office" or "Agency . . . . . . . . . . . . . . . . . . . . . . . 6
Officers' Certificate . . . . . . . . . . . . . . . . . . . . . 7
Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . 7
Original Issue Discount Security . . . . . . . . . . . . . . . . 7
Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Place of Payment . . . . . . . . . . . . . . . . . . . . . . . . 9
Predecessor Security . . . . . . . . . . . . . . . . . . . . . . 9
Redemption Date . . . . . . . . . . . . . . . . . . . . . . . . 9
Redemption Price . . . . . . . . . . . . . . . . . . . . . . . . 9
Registered Security . . . . . . . . . . . . . . . . . . . . . . 9
Regular Record Date . . . . . . . . . . . . . . . . . . . . . . 9
Required Currency . . . . . . . . . . . . . . . . . . . . . . . 9
Responsible Officer . . . . . . . . . . . . . . . . . . . . . . 9
Security" or "Securities . . . . . . . . . . . . . . . . . . . . 9
Security Register" and "Security Registrar . . . . . . . . . . . 9
Special Record Date . . . . . . . . . . . . . . . . . . . . . . 10
Stated Maturity . . . . . . . . . . . . . . . . . . . . . . . . 10
Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Trust Indenture Act . . . . . . . . . . . . . . . . . . . . . . 10
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
United States . . . . . . . . . . . . . . . . . . . . . . . . . 10
United States Alien . . . . . . . . . . . . . . . . . . . . . . 10
U.S. Depository" or "Depository . . . . . . . . . . . . . . . . 10
Vice President . . . . . . . . . . . . . . . . . . . . . . . . . 11
Voting Stock . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 1.2. Compliance Certificates and Opinions. . . . . . 11
Section 1.3. Form of Documents Delivered to Trustee. . . . . 12
Section 1.4. Acts of Holders. . . . . . . . . . . . . . . . 12
Section 1.5. Notices, etc. to Trustee and Company. . . . . . 14
Section 1.6. Notice to Holders of Securities; Waiver. . . . 15
Section 1.7. Language of Notices. . . . . . . . . . . . . . 16
Section 1.8. Conflict with Trust Indenture Act. . . . . . . 16
Section 1.9. Effect of Headings and Table of Contents. . . . 16
Section 1.10. Successors and Assigns. . . . . . . . . . . . . 16
Section 1.11. Separability Clause. . . . . . . . . . . . . . 16
Section 1.12. Benefits of Indenture. . . . . . . . . . . . . 16
Section 1.13. Governing Law. . . . . . . . . . . . . . . . . 17
Section 1.14. Legal Holidays. . . . . . . . . . . . . . . . . 17
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Section 1.15. Counterparts. . . . . . . . . . . . . . . . . . . 17
Section 1.16. Judgment Currency. . . . . . . . . . . . . . . . 17
Section 1.17. No Security Interest Created. . . . . . . . . . . 18
ARTICLE 2
SECURITIES FORMS
Section 2.1. Forms Generally . . . . . . . . . . . . . . . . . 18
Section 2.2. Form of Trustee's Certificate of
Authentication. . . . . . . . . . . . . . . . . . 19
Section 2.3. Securities in Global Form . . . . . . . . . . . . 19
ARTICLE 3
THE SECURITIES
Section 3.1. Amount Unlimited; Issuable in Series. . . . . . . 20
Section 3.2. Currency; Denominations . . . . . . . . . . . . . 24
Section 3.3. Execution, Authentication, Delivery and Dating. . 24
Section 3.4. Temporary Securities. . . . . . . . . . . . . . . 26
Section 3.5. Registration, Transfer and Exchange . . . . . . . 27
Section 3.6. Mutilated, Destroyed, Lost and Stolen
Securities. . . . . . . . . . . . . . . . . . . . 31
Section 3.7. Payment of Interest and Certain Additional
Amounts; Rights to Interest and Certain
Additional
Amounts Preserved . . . . . . . . . . . . . . . . 32
Section 3.8. Persons Deemed Owners. . . . . . . . . . . . . . 33
Section 3.9. Cancellation. . . . . . . . . . . . . . . . . . . 34
Section 3.10. Computation of Interest. . . . . . . . . . . . . 34
ARTICLE 4
SATISFACTION AND DISCHARGE OF INDENTURE
Section 4.1. Satisfaction and Discharge. . . . . . . . . . . . 35
Section 4.2. Defeasance and Covenant Defeasance. . . . . . . . 36
Section 4.3. Application of Trust Money. . . . . . . . . . . . 40
ARTICLE 5
REMEDIES
Section 5.1. Events of Default . . . . . . . . . . . . . . . . 41
Section 5.2. Acceleration of Maturity; Rescission and
Annulment . . . . . . . . . . . . . . . . . . . . 43
Section 5.3. Collection of Indebtedness and Suits for
Enforcement by Trustee . . . . . . . . . . . . . 44
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Section 5.4. Trustee May File Proofs of Claim ............... 45
Section 5.5. Trustee May Enforce Claims without
Possession of Securities or Coupons ............ 46
Section 5.6. Application of Money Collected ................. 46
Section 5.7. Limitations on Suits ........................... 46
Section 5.8. Unconditional Right of Holders to Receive
Principal and any Premium, Interest and
Additional Amounts ............................. 47
Section 5.9. Restoration of Rights and Remedies ............. 48
Section 5.10. Rights and Remedies Cumulative ................. 48
Section 5.11. Delay or Omission Not Waiver ................... 48
Section 5.12. Control by Holders of Securities ............... 48
Section 5.13. Waiver of Past Defaults ........................ 49
Section 5.14. Waiver of Usury, Stay or Extension Laws ........ 49
Section 5.15. Undertaking for Costs .......................... 49
ARTICLE 6
THE TRUSTEE
Section 6.1. Certain Rights of Trustee ...................... 50
Section 6.2. Notice of Defaults ............................. 52
Section 6.3. Not Responsible for Recitals or Issuance
of Securities .................................. 52
Section 6.4. May Hold Securities ............................ 52
Section 6.5. Money Held in Trust ............................ 53
Section 6.6. Compensation and Reimbursemen .................. 53
Section 6.7. Corporate Trustee Required; Eligibility ........ 54
Section 6.8. Resignation and Removal; Appointment
of Successor ................................... 54
Section 6.9. Acceptance of Appointment by Successor ......... 56
Section 6.10. Merger, Conversion, Consolidation or
Succession to Business ......................... 57
Section 6.11. Appointment of Authenticating Agent ............ 57
ARTICLE 7
HOLDERS LISTS AND REPORTS BY TRUSTEE AND COMPANY
Section 7.1. Company to Furnish Trustee Names and
Addresses of Holders ........................... 59
Section 7.2. Preservation of Information;
Communications to Holders ...................... 60
Section 7.3. Reports by Trustee ............................. 60
Section 7.4. Reports by Company ............................. 60
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ARTICLE 8
CONSOLIDATION, MERGER AND SALES
Section 8.1. Company May Consolidate, Etc., Only on
Certain Terms . . . . . . . . . . . . . . . . . . 61
Section 8.2. Successor Person Substituted for Company. . . . . 62
ARTICLE 9
SUPPLEMENTAL INDENTURES
Section 9.1. Supplemental Indentures without Consent
of Holders. . . . . . . . . . . . . . . . . . . . 62
Section 9.2. Supplemental Indentures with Consent of
Holders . . . . . . . . . . . . . . . . . . . . . 64
Section 9.3. Execution of Supplemental Indentures. . . . . . . 65
Section 9.4. Effect of Supplemental Indentures . . . . . . . . 65
Section 9.5. Reference in Securities to Supplemental
Indentures. . . . . . . . . . . . . . . . . . . . 66
Section 9.6. Conformity with Trust Indenture Act . . . . . . . 66
Section 9.7. Notice of Supplemental Indenture. . . . . . . . . 66
ARTICLE 10
COVENANTS
Section 10.1. Payment of Principal, any Premium,
Interest and Additional Amounts . . . . . . . . . 66
Section 10.2. Maintenance of Office or Agency . . . . . . . . . 66
Section 10.3. Money for Securities Payments to Be Held
in Trust . . . . . . . . . . . . . . . . . . . . 68
Section 10.4. Additional Amounts. . . . . . . . . . . . . . . . 69
Section 10.5. . . . . . . . . . . . . . . . . . . . . . . . . 70
Section 10.6. . . . . . . . . . . . . . . . . . . . . . . . . 70
Section 10.7. Corporate Existence. . . . . . . . . . . . . . . 70
Section 10.8. Waiver of Certain Covenants. . . . . . . . . . . 71
Section 10.9. Company Statement as to Compliance; Notice
of Certain Defaults . . . . . . . . . . . . . . . 71
ARTICLE 11
REDEMPTION OF SECURITIES
Section 11.1. Applicability of Article. . . . . . . . . . . . . 72
Section 11.2. Election to Redeem; Notice to Trustee . . . . . . 72
Section 11.3. Selection by Trustee of Securities to
be Redeemed . . . . . . . . . . . . . . . . . . . 72
Section 11.4. Notice of Redemption. . . . . . . . . . . . . . . 73
Section 11.5. Deposit of Redemption Price . . . . . . . . . . . 74
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Section 11.6. Securities Payable on Redemption Date . . . . . . 75
Section 11.7. Securities Redeemed in Part . . . . . . . . . . . 76
ARTICLE 12
SINKING FUNDS
Section 12.1. Applicability of Article. . . . . . . . . . . . . 76
Section 12.2. Satisfaction of Sinking Fund Payments
with Securities . . . . . . . . . . . . . . . . . 76
Section 12.3. Redemption of Securities for Sinking Fund . . . . 77
ARTICLE 13
REPAYMENT AT THE OPTION OF HOLDERS
Section 13.1. Applicability of Article. . . . . . . . . . . . . 78
ARTICLE 14
SECURITIES IN FOREIGN CURRENCIES
Section 14.1. Applicability of Article. . . . . . . . . . . . . 78
ARTICLE 15
MEETINGS OF HOLDERS OF SECURITIES
Section 15.1. Purposes for Which Meetings May Be Called . . . . 79
Section 15.2. Call, Notice and Place of Meetings. . . . . . . . 79
Section 15.3. Persons Entitled to Vote at Meetings. . . . . . . 79
Section 15.4. Quorum; Action. . . . . . . . . . . . . . . . . . 80
Section 15.5. Determination of Voting Rights; Conduct
and Adjournment of Meetings . . . . . . . . . . . 80
Section 15.6. Counting Votes and Recording Action of
Meetings . . . . . . . . . . . . . . . . . . . . 81
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<PAGE> 9
INDENTURE, dated as of , 1997 (the "Indenture"), between
HOMESIDE LENDING, INC., a corporation duly organized and existing under the laws
of the State of Delaware (hereinafter called the "Company"), having its
principal executive office located at 7301 Baymeadows Way, Jacksonville, Florida
32256, and , a banking corporation duly organized and existing under the
laws of (hereinafter called the "Trustee"), having its Corporate Trust
Office located at , New York, New York .
RECITALS
The Company has duly authorized the execution and delivery of this
Indenture to provide for the issuance from time to time of its senior unsecured
debentures, notes or other evidences of indebtedness (hereinafter called the
"Securities"), unlimited as to principal amount, to bear such rates of interest,
to mature at such time or times, to be issued in one or more series and to have
such other provisions as shall be fixed as hereinafter provided.
The Company has duly authorized the execution and delivery of this
Indenture. All things necessary to make this Indenture a valid agreement of the
Company, in accordance with its terms, have been done.
This Indenture is subject to the provisions of the Trust Indenture Act
of 1939, as amended, and the rules and regulations of the Securities and
Exchange Commission promulgated thereunder that are required to be part of this
Indenture and, to the extent applicable, shall be governed by such provisions.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the
Securities by the Holders (as herein defined) thereof, it is mutually covenanted
and agreed, for the equal and proportionate benefit of all Holders of the
Securities or of any series thereof and any Coupons (as herein defined) as
follows:
1
<PAGE> 10
ARTICLE 1
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
Section 1.1. Definitions.
Except as otherwise expressly provided in or pursuant to this Indenture
or unless the context otherwise requires, for all purposes of this Indenture:
(1) the terms defined in this Article have the meanings
assigned to them in this Article, and include the plural as well as the
singular;
(2) all other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, have the
meanings assigned to them therein;
(3) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted
accounting principles in the United States of America and, except as
otherwise herein expressly provided, the terms "generally accepted
accounting principles" or "GAAP" with respect to any computation
required or permitted hereunder shall mean such accounting principles
as are generally accepted in the United States of America at the date
or time of such computation;
(4) the words "herein", "hereof", "hereto" and "hereunder" and
other words of similar import refer to this Indenture as a whole and
not to any particular Article, Section or other subdivision; and
(5) the word "or" is always used inclusively (for example, the
phrase "A or B" means "A or B or both", not "either A or B but not
both").
Certain terms used principally in certain Articles hereof are defined
in those Articles.
"Act", when used with respect to any Holders, has the meaning specified
in Section 1.4.
"Additional Amounts" means any additional amounts which are required
hereby or by any Security, under circumstances specified herein or therein, to
be paid by the Company in respect of certain taxes, assessments or other
governmental charges imposed on Holders specified therein and which are owing to
such Holders.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified 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 the meanings correlative to
the foregoing.
2
<PAGE> 11
"Authenticating Agent" means any Person authorized by the Trustee
pursuant to Section 6.11 to act on behalf of the Trustee to authenticate
Securities of one or more series.
"Authorized Newspaper" means a newspaper, in an official language of
the place of publication or in the English language, customarily published on
each day that is a Business Day in the place of publication, whether or not
published on days that are Legal Holidays in the place of publication, and of
general circulation in each place in connection with which the term is used or
in the financial community of each such place. Where successive publications are
required to be made in Authorized Newspapers, the successive publications may be
made in the same or in different newspapers in the same city meeting the
foregoing requirements and in each case on any day that is a Business Day in the
place of publication.
"Authorized Officer" means, when used with respect to the Company, the
Chairman of the Board of Directors, a Vice Chairman, the President, any Vice
President, the Treasurer, an Assistant Treasurer, the Secretary or an Assistant
Secretary, of the Company.
"Bearer Security" means any Security in the form established pursuant
to Section 2.1 which is payable to bearer.
"Board of Directors" means the board of directors of the Company or any
committee of that board duly authorized to act generally or in any particular
respect for the Company hereunder.
"Board Resolution" means a copy of one or more resolutions, certified
by the Secretary or an Assistant Secretary of the Company to have been duly
adopted by the Board of Directors and to be in full force and effect on the date
of such certification, delivered to the Trustee.
"Business Day," with respect to any Place of Payment or other location,
means, unless otherwise specified with respect to any Securities pursuant to
Section 3.1, any day other than a Saturday, Sunday or other day on which banking
institutions in such Place of Payment or other location are authorized or
obligated by law, regulation or executive order to close.
"Commission" means the Securities and Exchange Commission, as from time
to time constituted, created under the Securities Exchange Act of 1934, as
amended, or, if at any time after the execution of this Indenture such
Commission is not existing and performing the duties now assigned to it under
the Trust Indenture Act, then the body performing such duties at such time.
"Common Stock" includes any capital stock of any class of the Company
which has no preference in respect of dividends or of amounts payable in the
event of any voluntary or involuntary liquidation, dissolution or winding up of
the Company and which is not subject to redemption by the Company.
3
<PAGE> 12
"Company" means the Person named as the "Company" in the first
paragraph of this instrument until a successor Person shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Company" shall mean such successor Person, and any other obligor upon the
Securities.
"Company Request" and "Company Order" mean, respectively, a written
request or order, as the case may be, signed in the name of the Company by the
Chairman of the Board of Directors, a Vice Chairman, the President or a Vice
President, and by the Treasurer, an Assistant Treasurer, the Secretary or an
Assistant Secretary, of the Company, and delivered to the Trustee.
"Conversion Event" means the cessation of use of (i) a Foreign Currency
other than the ECU both by the government of the country or the confederation
which issued such Foreign Currency and for the settlement of transactions by a
central bank or other public institutions of or within the international banking
community, (ii) the ECU both within the European Monetary System and for the
settlement of transactions by public institutions of or within the European
Union or (iii) any currency unit or composite currency other than the ECU for
the purposes for which it was established unless otherwise specified with
respect to any Securities pursuant to Section 301, all payments of principal of
and premium, if any, and interest on any Debt Security that are payable in a
Foreign Currency that ceases to be used by the government or confederation of
issuance shall be made in U.S. dollars.
"Corporate Trust Office" means the principal corporate trust office of
the Trustee at which at any particular time its corporate trust business shall
be administered, which office at the date of original execution of this
Indenture is located at , New York, New York .
"Corporation" includes corporations and limited liability companies
and, except for purposes of Article 8, associations, companies and business
trusts.
"Coupon" means any interest coupon appertaining to a Bearer Security.
"Currency", with respect to any payment, deposit or other transfer in
respect of the principal of or any premium or interest on or any Additional
Amounts with respect to any Security, means Dollars or the Foreign Currency, as
the case may be, in which such payment, deposit or other transfer is required to
be made by or pursuant to the terms hereof or such Security and, with respect to
any other payment, deposit or transfer pursuant to or contemplated by the terms
hereof or such Security, means Dollars.
"CUSIP number" means the alphanumeric designation assigned to a
Security by Standard & Poor's Corporation, CUSIP Service Bureau.
"Defaulted Interest" has the meaning specified in Section 3.7.
"Dollars" or "$" means a dollar or other equivalent unit of legal
tender for payment of public or private debts in the United States of America.
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"ECU" means the European Currency Units as defined and revised from
time to time by the Council of the European Community.
"European Monetary System" means the European Monetary System
established by the Resolution of December 5, 1978 of the Council of the European
Community.
"European Union" means the European Community, the European Coal and
Steel Community and the European Atomic Energy Community.
"Event of Default" has the meaning specified in Section 5.1.
"Foreign Currency" means any currency, currency unit or composite
currency, including, without limitation, the ECU, issued by the government of
one or more countries other than the United States of America or by any
recognized confederation or association of such governments.
"Government Obligations" means securities which are (i) direct
obligations of the United States of America or the government or governments in
the confederation which issued the Foreign Currency in which the principal of or
any premium or interest on such Security or any Additional Amounts in respect
thereof shall be payable, in each case where the payment or payments thereunder
are supported by the full faith and credit of such government or governments or
(ii) obligations of a Person controlled or supervised by and acting as an agency
or instrumentality of the United States of America or such other government or
governments, in each case where the timely payment or payments thereunder are
unconditionally guaranteed as a full faith and credit obligation by the United
States of America or such other government or governments, and which, in the
case of (i) or (ii), are not callable or redeemable at the option of the issuer
or issuers thereof, and shall also include a depository receipt issued by a bank
or trust company as custodian with respect to any such Government Obligation or
a specific payment of interest on or principal of or other amount with respect
to any such Government Obligation held by such custodian for the account of the
holder of a depository receipt, provided that (except as required by law) such
custodian is not authorized to make any deduction from the amount payable to the
holder of such depository receipt from any amount received by the custodian in
respect of the Government Obligation or the specific payment of interest on or
principal of or other amount with respect to the Government Obligation evidenced
by such depository receipt.
"Holder", in the case of any Registered Security, means the Person in
whose name such Security is registered in the Security Register and, in the case
of any Bearer Security, means the bearer thereof and, in the case of any Coupon,
means the bearer thereof.
"Indebtedness", means, with respect to any Person, without duplication,
(a) any liability of such Person (1) for borrowed money, or under any
reimbursement obligation relating to a letter of credit, or (2) evidenced by a
bond, note, debenture or similar instrument, or (3) for payment obligations
arising under any conditional sale or other title retention arrangement
(including a purchase money obligation) given in connection with the acquisition
of any businesses, properties or assets of any kind, or (4) for the payment of
money relating to a capitalized lease obligation;
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(b) any liability of others of a type described in the preceding clause (a) that
such Person has guaranteed or that is otherwise its legal liability; and (c) any
amendment, supplement, modification, deferral, renewal, extension or refunding
of any liability of the types referred to in clauses (a) and (b) above.
"Indenture" means this instrument as it may from time to time be
supplemented or amended by one or more indentures supplemental hereto entered
into pursuant to the applicable provisions hereof and, with respect to any
Security, by the terms and provisions of such Security and any Coupon
appertaining thereto established pursuant to Section 3.1 (as such terms and
provisions may be amended pursuant to the applicable provisions hereof).
"Independent Public Accountants" means accountants or a firm of
accountants that, with respect to the Company and any other obligor under the
Securities or the Coupons, are independent public accountants within the meaning
of the Securities Act of 1933, as amended, and the rules and regulations
promulgated by the Commission thereunder, who may be the independent public
accountants regularly retained by the Company or who may be other independent
public accountants. Such accountants or firm shall be entitled to rely upon any
Opinion of Counsel as to the interpretation of any legal matters relating to
this Indenture or certificates required to be provided hereunder.
"Indexed Security" means a Security the terms of which provide that the
principal amount thereof payable at Stated Maturity may be more or less than the
principal face amount thereof at original issuance.
"Interest", with respect to any Original Issue Discount Security which
by its terms bears interest only after Maturity, means interest payable after
Maturity and, when used with respect to a Security which provides for the
payment of Additional Amounts pursuant to Section 10.4, includes such Additional
Amounts.
"Interest Payment Date", with respect to any Security, means the Stated
Maturity of an installment of interest on such Security.
"Judgment Currency" has the meaning specified in Section 1.16.
"Legal Holidays" has the meaning specified in Section 1.14.
"Maturity", with respect to any Security, means the date on which the
principal of such Security or an installment of principal becomes due and
payable as provided in or pursuant to this Indenture, whether at the Stated
Maturity or by declaration of acceleration, notice of redemption or repurchase,
notice of option to elect repayment or otherwise, and includes the Redemption
Date.
"New York Banking Day" has the meaning specified in Section 1.16.
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"Office" or "Agency", with respect to any Securities, means an office
or agency of the Company maintained or designated in a Place of Payment for such
Securities pursuant to Section 10.2 or any other office or agency of the Company
maintained or designated for such Securities pursuant to Section 10.2 or, to the
extent designated or required by Section 10.2 in lieu of such office or agency,
the Corporate Trust Office of the Trustee.
"Officers' Certificate" means a certificate signed by the Chairman of
the Board, a Vice Chairman, the President or a Vice President, and by the
Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary of
the Company, that complies with the requirements of Section 314(e) of the Trust
Indenture Act and is delivered to the Trustee.
"Opinion of Counsel" means a written opinion of counsel, who may be an
employee of or counsel for the Company or other counsel who shall be reasonably
acceptable to the Trustee, that, if required by the Trust Indenture Act,
complies with the requirements of Section 314(e) of the Trust Indenture Act.
"Original Issue Discount Security" means a Security issued pursuant to
this Indenture which provides for declaration of an amount less than the
principal face amount thereof to be due and payable upon acceleration pursuant
to Section 5.2.
"Outstanding", when used with respect to any Securities, means, as of
the date of determination, all such Securities theretofore authenticated and
delivered under this Indenture, except:
(a) any such Security theretofore cancelled by the
Trustee or the Security Registrar or delivered to the
Trustee or the Security Registrar for cancellation;
(b) any such Security for whose payment at the Maturity
thereof money in the necessary amount has been
theretofore deposited pursuant hereto (other than
pursuant to Section 4.2) with the Trustee or any
Paying Agent (other than the Company) in trust or set
aside and segregated in trust by the Company (if the
Company shall act as its own Paying Agent) for the
Holders of such Securities and any Coupons
appertaining thereto, provided that, if such
Securities are to be redeemed, notice of such
redemption has been duly given pursuant to this
Indenture or provision therefor satisfactory to the
Trustee has been made;
(c) any such Security with respect to which the Company
has effected defeasance pursuant to the terms hereof,
except to the extent provided in Section 4.2;
(d) any such Security which has been paid pursuant to
Section 3.6 or in exchange for or in lieu of which
other Securities have been authenticated
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and delivered pursuant to this Indenture, unless
there shall have been presented to the Trustee proof
satisfactory to it that such Security is held by a
bona fide purchaser in whose hands such Security is a
valid obligation of the Company; and
(e) any such Security converted or exchanged as
contemplated by this Indenture into Common Stock or
other securities, if the terms of such Security
provide for such conversion or exchange pursuant to
Section 3.1;
provided, however, that in determining whether the Holders of the requisite
principal amount of Outstanding Securities have given any request, demand,
authorization, direction, notice, consent or waiver hereunder or are present at
a meeting of Holders of Securities for quorum purposes, (i) the principal amount
of an Original Issue Discount Security that may be counted in making such
determination and that shall be deemed to be Outstanding for such purposes shall
be equal to the amount of the principal thereof that pursuant to the terms of
such Original Issue Discount Security would be declared (or shall have been
declared to be) due and payable upon a declaration of acceleration thereof
pursuant to Section 5.2 at the time of such determination, and (ii) the
principal amount of any Indexed Security that may be counted in making such
determination and that shall be deemed Outstanding for such purposes shall be
equal to the principal face amount of such Indexed Security at original
issuance, unless otherwise provided in or pursuant to this Indenture, and (iii)
the principal amount of a Security denominated in a Foreign Currency shall be
the Dollar equivalent, determined on the date of original issuance of such
Security, of the principal amount (or, in the case of an Original Issue Discount
Security, the Dollar equivalent on the date of original issuance of such
Security of the amount determined as provided in (i) above) of such Security,
and (iv) Securities owned by the Company or any other obligor upon the
Securities or any Affiliate of the Company or such other obligor, shall be
disregarded and deemed not to be Outstanding, except that, in determining
whether the Trustee shall be protected in making any such determination or
relying upon any such request, demand, authorization, direction, notice, consent
or waiver, only Securities which a Responsible Officer of the Trustee actually
knows to be so owned shall be so disregarded. Securities so owned which shall
have been pledged in good faith may be regarded as Outstanding if the pledgee
establishes to the satisfaction of the Trustee (A) the pledgee's right so to act
with respect to such Securities and (B) that the pledgee is not the Company or
any other obligor upon the Securities or any Coupons appertaining thereto or an
Affiliate of the Company or such other obligor.
"Paying Agent" means any Person authorized by the Company to pay the
principal of, or any premium or interest on, or any Additional Amounts with
respect to, any Security or any Coupon on behalf of the Company.
"Person" means any individual, Corporation, partnership, joint venture,
joint-stock company, trust, unincorporated organization or government or any
agency or political subdivision thereof.
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"Place of Payment", with respect to any Security, means the place or
places where the principal of, or any premium or interest on, or any Additional
Amounts with respect to such Security are payable as provided in or pursuant to
this Indenture or such Security.
"Predecessor Security" of any particular Security means every previous
Security evidencing all or a portion of the same Indebtedness as that evidenced
by such particular Security; and, for the purposes of this definition, any
Security authenticated and delivered under Section 3.6 in exchange for or in
lieu of a lost, destroyed, mutilated or stolen Security or any Security to which
a mutilated, destroyed, lost or stolen Coupon appertains shall be deemed to
evidence the same Indebtedness as the lost, destroyed, mutilated or stolen
Security or the Security to which a mutilated, destroyed, lost or stolen Coupon
appertains.
"Redemption Date", with respect to any Security or portion thereof to
be redeemed, means the date fixed for such redemption by or pursuant to this
Indenture or such Security.
"Redemption Price", with respect to any Security or portion thereof to
be redeemed, means the price at which it is to be redeemed as determined by or
pursuant to this Indenture or such Security.
"Registered Security" means any Security established pursuant to
Section 2.1 which is registered in a Security Register.
"Regular Record Date" for the interest payable on any Registered
Security on any Interest Payment Date therefor means the date, if any, specified
in or pursuant to this Indenture or such Security as the "Regular Record Date".
"Required Currency" has the meaning specified in Section 1.16.
"Responsible Officer" means any vice president, any assistant vice
president, the secretary, any assistant secretary, the treasurer, any assistant
treasurer, or any trust officer or any other officer of the Trustee customarily
performing functions similar to those performed by any of the above designated
officers and also means, with respect to a particular corporate trust matter,
any other officer to whom such matter is referred because of his or her
knowledge of and familiarity with the particular subject.
"Security" or "Securities" means any note or notes, bond or bonds,
debenture or debentures, or any other evidences of Indebtedness, as the case may
be, authenticated and delivered under this Indenture; provided, however, that,
if at any time there is more than one Person acting as Trustee under this
Indenture, "Securities", with respect to any such Person, shall mean Securities
authenticated and delivered under this Indenture, exclusive, however, of
Securities of any series as to which such Person is not Trustee.
"Security Register" and "Security Registrar" have the respective
meanings specified in Section 3.5.
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"Special Record Date" for the payment of any Defaulted Interest on any
Registered Security means a date fixed by the Company pursuant to Section 3.7.
"Stated Maturity", with respect to any Security or any installment of
principal thereof or interest thereon or any Additional Amounts with respect
thereto, means the date established by or pursuant to this Indenture or such
Security as the fixed date on which the principal of such Security or such
installment of principal or interest is, or such Additional Amounts are, due and
payable.
"Subsidiary" means any Corporation of which at the time of
determination the Company and/or one or more Subsidiaries owns or controls
directly or indirectly more than 50% of the voting power of the shares of its
Voting Stock.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as
amended, and any reference herein to the Trust Indenture Act or a particular
provision thereof shall mean such Act or provision, as the case may be, as
amended or replaced from time to time or as supplemented from time to time by
rules or regulations adopted by the Commission under or in furtherance of the
purposes of such Act or provision, as the case may be.
"Trustee" means the Person named as the "Trustee" in the first
paragraph of this instrument until a successor Trustee shall have become such
with respect to one or more series of Securities pursuant to the applicable
provisions of this Indenture, and thereafter "Trustee" shall mean each Person
who is then a Trustee hereunder; provided, however, that if at any time there is
more than one such Person, "Trustee" shall mean each such Person and as used
with respect to the Securities of any series shall mean the Trustee with respect
to the Securities of such series.
"United States", except as otherwise provided in or pursuant to this
Indenture or any Security, means the United States of America (including the
states thereof and the District of Columbia), its territories and possessions
and other areas subject to its jurisdiction.
"United States Alien", except as otherwise provided in or pursuant to
this Indenture or any Security, means any Person who, for United States Federal
income tax purposes, is a foreign corporation, a non-resident alien individual,
a non-resident alien fiduciary of a foreign estate or trust, or a foreign
partnership one or more of the members of which is, for United States Federal
income tax purposes, a foreign corporation, a non-resident alien individual or a
non-resident alien fiduciary of a foreign estate or trust.
"U.S. Depository" or "Depository" means, with respect to any Security
issuable or issued in the form of one or more global Securities, the Person
designated as U.S. Depository or Depository by the Company in or pursuant to
this Indenture, which Person must be, to the extent required by applicable law
or regulation, a clearing agency registered under the Securities Exchange Act of
1934, as amended, and, if so provided with respect to any Security, any
successor to such Person. If at any time there is more than one such Person,
"U.S. Depository"
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or "Depository" shall mean, with respect to any Securities, the qualifying
entity which has been appointed with respect to such Securities.
"Vice President", when used with respect to the Company or the Trustee,
means any vice president, whether or not designated by a number or a word or
words added before or after the title "Vice President".
"Voting Stock" means stock of a Corporation of the class or one of the
classes having general voting power under ordinary circumstances to elect at
least a majority of the board of directors, managers or trustees of such
Corporation (irrespective of whether or not at the time stock of any other class
or classes has or might have voting power by reason of the happening of any
contingency).
Section 1.2. Compliance Certificates and Opinions.
Except as otherwise expressly provided in this Indenture, upon any
application or request by the Company to the Trustee to take any action under
any provision of this Indenture, the Company shall furnish to the Trustee an
Officers' Certificate stating that all conditions precedent, if any, provided
for in this Indenture relating to the proposed action have been complied with
and an Opinion of Counsel stating that, in the opinion of such counsel, all such
conditions precedent, if any, have been complied with, except that in the case
of any such application or request as to which the furnishing of such documents
or any of them is specifically required by any provision of this Indenture
relating to such particular application or request, no additional certificate or
opinion need be furnished.
Every certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture shall include:
(1) a statement that each individual signing such certificate
or opinion has read such condition or covenant and the definitions
herein relating thereto;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(3) a statement that, in the opinion of each such individual,
he has made such examination or investigation as is necessary to enable
him to express an informed opinion as to whether or not such condition
or covenant has been complied with; and
(4) a statement as to whether, in the opinion of each such
individual, such condition or covenant has been complied with.
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Section 1.3. Form of Documents Delivered to Trustee.
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be based,
insofar as it relates to legal matters, upon an Opinion of Counsel, provided
that such officer, after reasonable inquiry, has no reason to believe and does
not believe that the Opinion of Counsel with respect to the matters upon which
his certificate or opinion is based is erroneous. Any such Opinion of Counsel
may be based, insofar as it relates to factual matters, upon a certificate or
opinion of, or representations by, an officer or officers of the Company stating
that the information with respect to such factual matters is in the possession
of the Company, provided that such counsel, after reasonable inquiry, has no
reason to believe and does not believe that the certificate or opinion or
representations with respect to such matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture or any Security, they may, but need not, be
consolidated and form one instrument.
Section 1.4. Acts of Holders.
(1) Any request, demand, authorization, direction, notice, consent,
waiver or other action provided by or pursuant to this Indenture to be given or
taken by Holders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Holders in person or by an agent duly
appointed in writing. If, but only if, Securities of a series are issuable as
Bearer Securities, any request, demand, authorization, direction, notice,
consent, waiver or other action provided in or pursuant to this Indenture to be
given or taken by Holders of Securities of such series may, alternatively, be
embodied in and evidenced by the record of Holders of Securities of such series
voting in favor thereof, either in person or by proxies duly appointed in
writing, at any meeting of Holders of Securities of such series duly called and
held in accordance with the provisions of Article 15, or a combination of such
instruments and any such record. Except as herein otherwise expressly provided,
such action shall become effective when such instrument or instruments or record
or both are delivered to the Trustee and, where it is hereby expressly required,
to the Company. Such instrument or instruments and any such record (and the
action embodied therein and evidenced thereby) are herein sometimes referred to
as the "Act" of the Holders signing such instrument or instruments or so voting
at any such meeting. Proof of execution of any such instrument or of a writing
appointing any such agent, or of the holding by any Person of a Security, shall
be sufficient for any purpose of this Indenture and (subject to Section 315 of
the Trust Indenture Act) conclusive in favor of the Trustee and the
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Company and any agent of the Trustee or the Company, if made in the manner
provided in this Section. The record of any meeting of Holders of Securities
shall be proved in the manner provided in Section 15.6.
Without limiting the generality of this Section 1.4, unless otherwise
provided in or pursuant to this Indenture, a Holder, including a U.S. Depository
that is a Holder of a global Security, may make, give or take, by a proxy or
proxies duly appointed in writing, any request, demand, authorization,
direction, notice, consent, waiver or other Act provided in or pursuant to this
Indenture to be made, given or taken by Holders, and a U.S. Depository that is a
Holder of a global Security may provide its proxy or proxies to the beneficial
owners of interests in any such global Security through such U.S. Depository's
standing instructions and customary practices.
The Company shall fix a record date for the purpose of determining the
Persons who are beneficial owners of interest in any permanent global Security
held by a U.S. Depository entitled under the procedures of such U.S. Depository
to make, give or take, by a proxy or proxies duly appointed in writing, any
request, demand, authorization, direction, notice, consent, waiver or other Act
provided in or pursuant to this Indenture to be made, given or taken by Holders.
If such a record date is fixed, the Holders on such record date or their duly
appointed proxy or proxies, and only such Persons, shall be entitled to make,
give or take such request, demand, authorization, direction, notice, consent,
waiver or other Act, whether or not such Holders remain Holders after such
record date. No such request, demand, authorization, direction, notice, consent,
waiver or other Act shall be valid or effective if made, given or taken more
than 90 days after such record date.
(2) The fact and date of the execution by any Person of any such
instrument or writing referred to in this Section 1.4 may be proved in any
reasonable manner; and the Trustee may in any instance require further proof
with respect to any of the matters referred to in this Section.
(3) The ownership, principal amount and serial numbers of Registered
Securities held by any Person, and the date of the commencement and the date of
the termination of holding the same, shall be proved by the Security Register.
(4) The ownership, principal amount and serial numbers of Bearer
Securities held by any Person, and the date of the commencement and the date of
the termination of holding the same, may be proved by the production of such
Bearer Securities or by a certificate executed, as depositary, by any trust
company, bank, banker or other depositary reasonably acceptable to the Company,
wherever situated, if such certificate shall be deemed by the Company and the
Trustee to be satisfactory, showing that at the date therein mentioned such
Person had on deposit with such depositary, or exhibited to it, the Bearer
Securities therein described; or such facts may be proved by the certificate or
affidavit of the Person holding such Bearer Securities, if such certificate or
affidavit is deemed by the Trustee to be satisfactory. The Trustee and the
Company may assume that such ownership of any Bearer Security continues until
(i) another certificate or affidavit bearing a later date issued in respect of
the same Bearer Security is produced, or (ii) such
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Bearer Security is produced to the Trustee by some other Person, or (iii) such
Bearer Security is surrendered in exchange for a Registered Security, or (iv)
such Bearer Security is no longer Outstanding. The ownership, principal amount
and serial numbers of Bearer Securities held by the Person so executing such
instrument or writing and the date of the commencement and the date of the
termination of holding the same may also be proved in any other manner which the
Company and the Trustee deem sufficient.
(5) If the Company shall solicit from the Holders of any Registered
Securities any request, demand, authorization, direction, notice, consent,
waiver or other Act, the Company may at its option (but is not obligated to), by
Board Resolution, fix in advance a record date for the determination of Holders
of Registered Securities entitled to give such request, demand, authorization,
direction, notice, consent, waiver or other Act. If such a record date is fixed,
such request, demand, authorization, direction, notice, consent, waiver or other
Act may be given before or after such record date, but only the Holders of
Registered Securities of record at the close of business on such record date
shall be deemed to be Holders for the purpose of determining whether Holders of
the requisite proportion of Outstanding Securities have authorized or agreed or
consented to such request, demand, authorization, direction, notice, consent,
waiver or other Act, and for that purpose the Outstanding Securities shall be
computed as of such record date; provided that no such authorization, agreement
or consent by the Holders of Registered Securities shall be deemed effective
unless it shall become effective pursuant to the provisions of this Indenture
not later than six months after the record date.
(6) Any request, demand, authorization, direction, notice, consent,
waiver or other Act by the Holder of any Security shall bind every future Holder
of the same Security and the Holder of every Security issued upon the
registration of transfer thereof or in exchange therefor or in lieu thereof in
respect of anything done or suffered to be done by the Trustee, any Security
Registrar, any Paying Agent or the Company in reliance thereon, whether or not
notation of such Act is made upon such Security.
Section 1.5. Notices, etc. to Trustee and Company.
Any request, demand, authorization, direction, notice, consent, waiver
or other Act of Holders or other document provided or permitted by this
Indenture to be made upon, given or furnished to, or filed with,
(1) the Trustee by any Holder or the Company shall be
sufficient for every purpose hereunder if made, given, furnished or
filed in writing to or with the Trustee at its Corporate Trust Office,
or
(2) the Company by the Trustee or any Holder shall be
sufficient for every purpose hereunder (unless otherwise herein
expressly provided) if in writing and mailed, first-class postage
prepaid, to the Company addressed to the attention of its Treasurer,
with a copy to the attention of its General Counsel, at the address of
its principal office
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specified in the first paragraph of this instrument or at any other
address previously furnished in writing to the Trustee by the Company.
Section 1.6. Notice to Holders of Securities; Waiver.
Except as otherwise expressly provided in or pursuant to this
Indenture, where this Indenture provides for notice to Holders of Securities of
any event,
(1) such notice shall be sufficiently given to Holders of
Registered Securities if in writing and mailed, first-class postage
prepaid, to each Holder of a Registered Security affected by such
event, at his address as it appears in the Security Register, not later
than the latest date, and not earlier than the earliest date,
prescribed for the giving of such notice; and
(2) such notice shall be sufficiently given to Holders of
Bearer Securities, if any, if published in an Authorized Newspaper in
The City of New York and, if such Securities are then listed on any
stock exchange outside the United States, in an Authorized Newspaper in
such city as the Company shall advise the Trustee that such stock
exchange so requires, on a Business Day at least twice, the first such
publication to be not earlier than the earliest date and the second
such publication not later than the latest date prescribed for the
giving of such notice.
In any case where notice to Holders of Registered Securities is given
by mail, neither the failure to mail such notice, nor any defect in any notice
so mailed, to any particular Holder of a Registered Security shall affect the
sufficiency of such notice with respect to other Holders of Registered
Securities or the sufficiency of any notice to Holders of Bearer Securities
given as provided herein. Any notice which is mailed in the manner herein
provided shall be conclusively presumed to have been duly given or provided. In
case by reason of the suspension of regular mail service or by reason of any
other cause it shall be impracticable to give such notice by mail, then such
notification as shall be made with the approval of the Trustee shall constitute
a sufficient notification for every purpose hereunder.
In case by reason of the suspension of publication of any Authorized
Newspaper or Authorized Newspapers or by reason of any other cause it shall be
impracticable to publish any notice to Holders of Bearer Securities as provided
above, then such notification to Holders of Bearer Securities as shall be given
with the approval of the Trustee shall constitute sufficient notice to such
Holders for every purpose hereunder. Neither failure to give notice by
publication to Holders of Bearer Securities as provided above, nor any defect in
any notice so published, shall affect the sufficiency of any notice mailed to
Holders of Registered Securities as provided above.
Where this Indenture provides for notice in any manner, such notice may
be waived in writing by the Person entitled to receive such notice, either
before or after the event, and such waiver shall be the equivalent of such
notice. Waivers of notice by Holders of Securities shall
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<PAGE> 24
be filed with the Trustee, but such filing shall not be a condition precedent to
the validity of any action taken in reliance upon such waiver.
Section 1.7. Language of Notices.
Any request, demand, authorization, direction, notice, consent,
election or waiver required or permitted under this Indenture shall be in the
English language, except that, if the Company so elects, any published notice
may be in an official language of the country of publication.
Section 1.8. Conflict with Trust Indenture Act.
If any provision hereof limits, qualifies or conflicts with any duties
under any required provision of the Trust Indenture Act imposed hereon by
Section 318(c) thereof, such required provision shall control.
Section 1.9. Effect of Headings and Table of Contents.
The Article and Section headings herein and the Table of Contents are
for convenience only and shall not affect the construction hereof.
Section 1.10. Successors and Assigns.
All covenants and agreements in this Indenture by the Company shall
bind its successors and assigns, whether so expressed or not.
Section 1.11. Separability Clause.
In case any provision in this Indenture, any Security or any Coupon
shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
Section 1.12. Benefits of Indenture.
Nothing in this Indenture, any Security or any Coupon, express or
implied, shall give to any Person, other than the parties hereto, any Security
Registrar, any Paying Agent, any Authenticating Agent and their successors
hereunder and the Holders of Securities or Coupons, any benefit or any legal or
equitable right, remedy or claim under this Indenture.
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Section 1.13. Governing Law.
This Indenture, the Securities and any Coupons shall be governed by and
construed in accordance with the laws of the State of New York applicable to
agreements made or instruments entered into and, in each case, performed in said
state.
Section 1.14. Legal Holidays.
Unless otherwise specified in or pursuant to this Indenture or any
Securities, in any case where any Interest Payment Date, Stated Maturity or
Maturity of any Security, or the last date on which a Holder has the right to
convert or exchange Securities of a series that are convertible or exchangeable,
shall be a Legal Holiday at any Place of Payment, then (notwithstanding any
other provision of this Indenture, any Security or any Coupon other than a
provision in any Security or Coupon that specifically states that such provision
shall apply in lieu hereof) payment need not be made at such Place of Payment on
such date, and such Securities need not be converted or exchanged on such date
but such payment may be made, and such Securities may be converted or exchanged,
on the next succeeding day that is a Business Day at such Place of Payment with
the same force and effect as if made on the Interest Payment Date or at the
Stated Maturity or Maturity or on such last day for conversion or exchange, and
no interest shall accrue on the amount payable on such date or at such time for
the period from and after such Interest Payment Date, Stated Maturity, Maturity
or last day for conversion or exchange, as the case may be, to such next
succeeding Business Day.
Section 1.15. Counterparts.
This Indenture may be executed in several counterparts, each of which
shall be an original and all of which shall constitute but one and the same
instrument.
Section 1.16. Judgment Currency.
The Company agrees, to the fullest extent that it may effectively do so
under applicable law, that (a) if for the purpose of obtaining judgment in any
court it is necessary to convert the sum due in respect of the principal of, or
premium or interest, if any, or Additional Amounts on the Securities of any
series (the "Required Currency") into a currency in which a judgment will be
rendered (the "Judgment Currency"), the rate of exchange used shall be the rate
at which in accordance with normal banking procedures the Trustee could purchase
in The City of New York the requisite amount of the Required Currency with the
Judgment Currency on the New York Banking Day preceding the day on which a final
unappealable judgment is given and (b) its obligations under this Indenture to
make payments in the Required Currency (i) shall not be discharged or satisfied
by any tender, or any recovery pursuant to any judgment (whether or not
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entered in accordance with clause (a)), in any currency other than the Required
Currency, except to the extent that such tender or recovery shall result in the
actual receipt, by the payee, of the full amount of the Required Currency
expressed to be payable in respect of such payments, (ii) shall be enforceable
as an alternative or additional cause of action for the purpose of recovering in
the Required Currency the amount, if any, by which such actual receipt shall
fall short of the full amount of the Required Currency so expressed to be
payable and (iii) shall not be affected by judgment being obtained for any other
sum due under this Indenture. For purposes of the foregoing, "New York Banking
Day" means any day except a Saturday, Sunday or a legal holiday in The City of
New York or a day on which banking institutions in The City of New York are
authorized or obligated by law, regulation or executive order to be closed.
Section 1.17. No Security Interest Created.
Subject to the provisions of Section 10.5, nothing in this Indenture or
in any Securities, express or implied, shall be construed to constitute a
security interest under the Uniform Commercial Code or similar legislation, as
now or hereafter enacted and in effect in any jurisdiction where property of the
Company or its Subsidiaries is or may be located.
ARTICLE 2
SECURITIES FORMS
Section 2.1. Forms Generally.
Each Registered Security, Bearer Security, Coupon and temporary or
permanent global Security issued pursuant to this Indenture shall be in the form
established by or pursuant to a Board Resolution or in one or more indentures
supplemental hereto, shall have such appropriate insertions, omissions,
substitutions and other variations as are required or permitted by or pursuant
to this Indenture or any indenture supplemental hereto and may have such
letters, numbers or other marks of identification and such legends or
endorsements placed thereon as may, consistently herewith, be determined by the
officers executing such Security or Coupon as evidenced by their execution of
such Security or Coupon.
Unless otherwise provided in or pursuant to this Indenture or any
Securities, the Securities shall be issuable in registered form without Coupons
and shall not be issuable upon the exercise of warrants.
Definitive Securities and definitive Coupons shall be printed,
lithographed or engraved or produced by any combination of these methods on a
steel engraved border or steel engraved borders or may be produced in any other
manner, all as determined by the officers of the
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Company executing such Securities or Coupons, as evidenced by their execution of
such Securities or Coupons.
Section 2.2. Form of Trustee's Certificate of Authentication.
Subject to Section 6.11, the Trustee's certificate of authentication
shall be in substantially the following form:
This is one of the Securities of the series designated therein
referred to in the within-mentioned Indenture.
[NAME OF TRUSTEE],
as Trustee
By___________________________
Authorized Officer
Section 2.3. Securities in Global Form.
Unless otherwise provided in or pursuant to this Indenture or any
Securities, the Securities shall not be issuable in temporary or permanent
global form. If Securities of a series shall be issuable in global form, any
such Security may provide that it or any number of such Securities shall
represent the aggregate amount of all Outstanding Securities of such series (or
such lesser amount as is permitted by the terms thereof) from time to time
endorsed thereon and may also provide that the aggregate amount of Outstanding
Securities represented thereby may from time to time be increased or reduced to
reflect exchanges. Any endorsement of any Security in global form to reflect the
amount, or any increase or decrease in the amount, or changes in the rights of
Holders, of Outstanding Securities represented thereby shall be made in such
manner and by such Person or Persons as shall be specified therein or in the
Company Order to be delivered pursuant to Section 3.3 or 3.4 with respect
thereto. Subject to the provisions of Section 3.3 and, if applicable, Section
3.4, the Trustee shall deliver and redeliver, in each case at the Company's
expense, any Security in permanent global form in the manner and upon
instructions given by the Person or Persons specified therein or in the
applicable Company Order. If a Company Order pursuant to Section 3.3 or 3.4 has
been, or simultaneously is, delivered, any instructions by the Company with
respect to a Security in global form shall be in writing but need not be
accompanied by or contained in an Officers' Certificate and need not be
accompanied by an Opinion of Counsel.
Notwithstanding the provisions of Section 3.7, unless otherwise
specified in or pursuant to this Indenture or any Securities, payment of
principal of, any premium and interest on, and any Additional Amounts in respect
of, any Security in temporary or permanent global form shall be made to the
Person or Persons specified therein.
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Notwithstanding the provisions of Section 3.8 and except as provided in
the preceding paragraph, the Company, the Trustee and any agent of the Company
or the Trustee shall treat as the Holder of such principal amount of Outstanding
Securities represented by a global Security (i) in the case of a global Security
in registered form, the Holder of such global Security in registered form, or
(ii) in the case of a global Security in bearer form, the Person or Persons
specified pursuant to Section 3.1.
ARTICLE 3
THE SECURITIES
Section 3.1. Amount Unlimited; Issuable in Series.
The aggregate principal amount of Securities which may be authenticated
and delivered under this Indenture is unlimited. The Securities may be issued in
one or more series.
With respect to any Securities to be authenticated and delivered
hereunder, there shall be established in or pursuant to a Board Resolution and
set forth in an Officers' Certificate, or established in one or more indentures
supplemental hereto,
(1) the title of such Securities and the series in which such
Securities shall be included;
(2) any limit upon the aggregate principal amount of the
Securities of such title or the Securities of such series which may be
authenticated and delivered under this Indenture (except for Securities
authenticated and delivered upon registration of transfer of, or in
exchange for, or in lieu of, other Securities of such series pursuant
to Section 3.4, 3.5, 3.6, 9.5 or 11.7, upon repayment in part of any
Registered Security of such series pursuant to Article 13, upon
surrender in part of any Registered Security for conversion into Common
Stock or exchange for other securities pursuant to its terms, or
pursuant to or as contemplated by the terms of such Securities);
(3) if such Securities are to be issuable as Registered
Securities, as Bearer Securities or alternatively as Bearer Securities
and Registered Securities, and whether the Bearer Securities are to be
issuable with Coupons, without Coupons or both, and any restrictions
applicable to the offer, sale or delivery of the Bearer Securities and
the terms, if any, upon which Bearer Securities may be exchanged for
Registered Securities and vice versa;
(4) if any of such Securities are to be issuable in global
form, when any of such Securities are to be issuable in global form and
(i) whether such Securities are to be issued in temporary or permanent
global form or both, (ii) whether beneficial owners of interests in any
such global Security may exchange such interests for Securities of the
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same series and of like tenor and of any authorized form and
denomination, and the circumstances under which any such exchanges may
occur, if other than in the manner specified in Section 3.5, and (iii)
the name of the Depository or the U.S. Depository, as the case may be,
with respect to any such global Security;
(5) if any of such Securities are to be issuable as Bearer
Securities or in global form, the date as of which any such Bearer
Security or global Security shall be dated (if other than the date of
original issuance of the first of such Securities to be issued);
(6) if any of such Securities are to be issuable as Bearer
Securities, whether interest in respect of any portion of a temporary
Bearer Security in global form payable in respect of an Interest
Payment Date therefor prior to the exchange, if any, of such temporary
Bearer Security for definitive Securities shall be paid to any clearing
organization with respect to the portion of such temporary Bearer
Security held for its account and, in such event, the terms and
conditions (including any certification requirements) upon which any
such interest payment received by a clearing organization will be
credited to the Persons entitled to interest payable on such Interest
Payment Date;
(7) the date or dates, or the method or methods, if any, by
which such date or dates shall be determined, on which the principal of
such Securities is payable;
(8) the rate or rates at which such Securities shall bear
interest, if any, or the method or methods, if any, by which such rate
or rates are to be determined, the date or dates, if any, from which
such interest shall accrue or the method or methods, if any, by which
such date or dates are to be determined, the Interest Payment Dates, if
any, on which such interest shall be payable and the Regular Record
Date, if any, for the interest payable on Registered Securities on any
Interest Payment Date, whether and under what circumstances Additional
Amounts on such Securities or any of them shall be payable, the notice,
if any, to Holders regarding the determination of interest on a
floating rate Security and the manner of giving such notice, and the
basis upon which interest shall be calculated if other than that of a
360-day year of twelve 30-day months;
(9) if in addition to or other than the Borough of Manhattan,
The City of New York, the place or places where the principal of, any
premium and interest on or any Additional Amounts with respect to such
Securities shall be payable, any of such Securities that are Registered
Securities may be surrendered for registration of transfer or exchange,
any of such Securities may be surrendered for conversion or exchange
and notices or demands to or upon the Company in respect of such
Securities and this Indenture may be served, the extent to which, or
the manner in which, any interest payment or Additional Amounts on a
global Security on an Interest Payment Date, will be paid and the
manner in which any principal of or premium, if any, on any global
Security will be paid;
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(10) whether any of such Securities are to be redeemable at
the option of the Company and, if so, the date or dates on which, the
period or periods within which, the price or prices at which and the
other terms and conditions upon which such Securities may be redeemed,
in whole or in part, at the option of the Company;
(11) whether the Company is obligated to redeem or purchase
any of such Securities pursuant to any sinking fund or analogous
provision or at the option of any Holder thereof and, if so, the date
or dates on which, the period or periods within which, the price or
prices at which and the other terms and conditions upon which such
Securities shall be redeemed or purchased, in whole or in part,
pursuant to such obligation, and any provisions for the remarketing of
such Securities so redeemed or purchased;
(12) the denominations in which any of such Securities that
are Registered Securities shall be issuable if other than denominations
of $1,000 and any integral multiple thereof, and the denominations in
which any of such Securities that are Bearer Securities shall be
issuable if other than the denomination of $5,000;
(13) whether the Securities of the series will be convertible
into shares of Common Stock and/or exchangeable for other securities,
and if so, the terms and conditions upon which such Securities will be
so convertible or exchangeable, and any deletions from or modifications
or additions to this Indenture to permit or to facilitate the issuance
of such convertible or exchangeable Securities or the administration
thereof;
(14) if other than the principal amount thereof, the portion
of the principal amount of any of such Securities that shall be payable
upon declaration of acceleration of the Maturity thereof pursuant to
Section 5.2 or the method by which such portion is to be determined;
(15) if other than Dollars, the Foreign Currency in which
payment of the principal of, any premium or interest on or any
Additional Amounts with respect to any of such Securities shall be
payable;
(16) if the principal of, any premium or interest on or any
Additional Amounts with respect to any of such Securities are to be
payable, at the election of the Company or a Holder thereof or
otherwise, in Dollars or in a Foreign Currency other than that in which
such Securities are stated to be payable, the date or dates on which,
the period or periods within which, and the other terms and conditions
upon which, such election may be made, and the time and manner of
determining the exchange rate between the Currency in which such
Securities are stated to be payable and the Currency in which such
Securities or any of them are to be paid pursuant to such election, and
any deletions from or modifications of or additions to the terms of
this Indenture to provide for or to facilitate the issuance of
Securities denominated or payable, at the election of the Company or a
Holder thereof or otherwise, in a Foreign Currency;
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(17) whether the amount of payments of principal of, any premium or
interest on or any Additional Amounts with respect to such Securities may
be determined with reference to an index, formula or other method or
methods (which index, formula or method or methods may be based, without
limitation, on one or more Currencies, commodities, equity securities,
equity indices or other indices), and, if so, the terms and conditions upon
which and the manner in which such amounts shall be determined and paid or
payable;
(18) any deletions from, modifications of or additions to the Events of
Default or covenants of the Company with respect to any of such Securities,
whether or not such Events of Default or covenants are consistent with the
Events of Default or covenants set forth herein;
(19) whether either or both of Section 4.2(2) relating to defeasance or
Section 4.2(3) relating to covenant defeasance shall not be applicable to
the Securities of such series, or any covenants in addition to those
specified in Section 4.2(3) relating to the Securities of such series which
shall be subject to covenant of defeasance, and any deletions from, or
modifications or additions to, the provisions of Article 4 in respect of
the Securities of such series;
(20) whether any of such Securities are to be issuable upon the
exercise of warrants, and the time, manner and place for such Securities to
be authenticated and delivered;
(21) if any of such Securities are to be issuable in global form and
are to be issuable in definitive form (whether upon original issue or upon
exchange of a temporary Security) only upon receipt of certain certificates
or other documents or satisfaction of other conditions, then the form and
terms of such certificates, documents or conditions;
(22) if there is more than one Trustee, the identity of the Trustee
and, if not the Trustee, the identity of each Security Registrar, Paying
Agent or Authenticating Agent with respect to such Securities; and
(23) any other terms of such Securities and any other deletions from or
modifications or additions to this Indenture in respect of such Securities.
All Securities of any one series and all Coupons, if any, appertaining to
Bearer Securities of such series shall be substantially identical except as to
Currency of payments due thereunder, denomination and the rate of interest
thereon, or method of determining the rate of interest, if any, Maturity, and
the date from which interest, if any, shall accrue and except as may otherwise
be provided by the Company in or pursuant to the Board Resolution and set forth
in the Officers' Certificate or in any indenture or indentures supplemental
hereto pertaining to such series of Securities. The terms of the Securities of
any series may provide, without limitation, that the Securities shall be
authenticated and delivered by the Trustee on original issue from time to time
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upon written order of persons designated in the Officers' Certificate or
supplemental indenture and that such persons are authorized to determine,
consistent with such Officers' Certificate or any applicable supplemental
indenture, such terms and conditions of the Securities of such series as are
specified in such Officers' Certificate or supplemental indenture. All
Securities of any one series need not be issued at the same time and, unless
otherwise so provided, a series may be reopened for issuances of additional
Securities of such series or to establish additional terms of such series of
Securities.
If any of the terms of the Securities of any series shall be
established by action taken by or pursuant to a Board Resolution, the Board
Resolution shall be delivered to the Trustee at or prior to the delivery of the
Officers' Certificate setting forth the terms of such series.
Section 3.2. Currency; Denominations.
Unless otherwise provided in or pursuant to this Indenture, the
principal of, any premium and interest on and any Additional Amounts with
respect to the Securities shall be payable in Dollars. Unless otherwise provided
in or pursuant to this Indenture, Registered Securities denominated in Dollars
shall be issuable in registered form without Coupons in denominations of $1,000
and any integral multiple thereof, and the Bearer Securities denominated in
Dollars shall be issuable in the denomination of $5,000. Securities not
denominated in Dollars shall be issuable in such denominations as are
established with respect to such Securities in or pursuant to this Indenture.
Section 3.3. Execution, Authentication, Delivery and Dating.
Securities shall be executed on behalf of the Company by its Chairman
of the Board, a Vice Chairman, its President, its Treasurer or a Vice President
under its corporate seal reproduced thereon and attested by its Secretary or one
of its Assistant Secretaries. Coupons shall be executed on behalf of the Company
by the Treasurer or any Assistant Treasurer of the Company. The signature of any
of these officers on the Securities or any Coupons appertaining thereto may be
manual or facsimile.
Securities and any Coupons appertaining thereto bearing the manual or
facsimile signatures of individuals who were at any time the proper officers of
the Company shall bind the Company, notwithstanding that such individuals or any
of them have ceased to hold such offices prior to the authentication and
delivery of such Securities and Coupons or did not hold such offices at the date
of original issuance of such Securities or Coupons.
At any time and from time to time after the execution and delivery of
this Indenture, the Company may deliver Securities, together with any Coupons
appertaining thereto, executed by the Company, to the Trustee for authentication
and, provided that the Board Resolution and Officers' Certificate or
supplemental indenture or indentures with respect to such Securities
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referred to in Section 3.1 and a Company Order for the authentication and
delivery of such Securities have been delivered to the Trustee, the Trustee in
accordance with the Company Order and subject to the provisions hereof and of
such Securities shall authenticate and deliver such Securities. In
authenticating such Securities, and accepting the additional responsibilities
under this Indenture in relation to such Securities and any Coupons appertaining
thereto, the Trustee shall be entitled to receive, and (subject to Sections
315(a) through 315(d) of the Trust Indenture Act) shall be fully protected in
relying upon,
(1) an Opinion of Counsel to the effect that:
(a) the form or forms and terms of such Securities and
Coupons, if any, have been established in conformity with the
provisions of this Indenture;
(b) all conditions precedent to the authentication and
delivery of such Securities and Coupons, if any, appertaining thereto,
have been complied with and that such Securities and Coupons, when
completed by appropriate insertions, executed under the Company's
corporate seal and attested by duly authorized officers of the Company,
delivered by duly authorized officers of the Company to the Trustee for
authentication pursuant to this Indenture, and authenticated and
delivered by the Trustee and issued by the Company in the manner and
subject to any conditions specified in such Opinion of Counsel, will
constitute legally valid and binding obligations of the Company,
enforceable against the Company in accordance with their terms, except
as enforcement thereof may be subject to or limited by bankruptcy,
insolvency, reorganization, moratorium, arrangement, fraudulent
conveyance, fraudulent transfer or other similar laws relating to or
affecting creditors' rights generally, and subject to general
principles of equity (regardless of whether enforcement is sought in a
proceeding in equity or at law) and will entitle the Holders thereof to
the benefits of this Indenture; such Opinion of Counsel need express no
opinion as to the availability of equitable remedies; and
(c) all laws and requirements in respect of the execution
and delivery by the Company of such Securities and Coupons, if any,
have been complied with;
and, to the extent that this Indenture is required to be qualified under the
Trust Indenture Act in connection with the issuance of such Securities, to the
further effect that:
(d) this Indenture has been qualified under the Trust
Indenture Act; and
(2) an Officers' Certificate stating that all conditions precedent
to the execution, authentication and delivery of such Securities and Coupons, if
any, appertaining thereto, have been complied with and that, to the best
knowledge of the Persons executing such certificate, no event which is, or after
notice or lapse of time would become, an Event of Default with respect to any of
the Securities shall have occurred and be continuing.
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If all the Securities of any series are not to be issued at one time,
it shall not be necessary to deliver an Opinion of Counsel and an Officers'
Certificate at the time of issuance of each Security, but such opinion and
certificate, with appropriate modifications, shall be delivered at or before the
time of issuance of the first Security of such series. After any such first
delivery, any separate written request by an Authorized Officer of the Company
that the Trustee authenticate and deliver Securities of such series for original
issue will be deemed to be a certification by the Company that all conditions
precedent provided for in this Indenture relating to authentication and delivery
of such Securities continue to have been complied with.
The Trustee shall not be required to authenticate or to cause an
Authenticating Agent to authenticate any Securities if the issue of such
Securities pursuant to this Indenture will affect the Trustee's own rights,
duties or immunities under the Securities and this Indenture or otherwise in a
manner which is not reasonably acceptable to the Trustee or if the Trustee,
being advised by counsel, determines that such action may not lawfully be taken.
Each Registered Security shall be dated the date of its authentication.
Each Bearer Security and any Bearer Security in global form shall be dated as of
the date specified in or pursuant to this Indenture.
No Security or Coupon appertaining thereto shall be entitled to any
benefit under this Indenture or be valid or obligatory for any purpose, unless
there appears on such Security a certificate of authentication substantially in
the form provided for in Section 2.2 or 6.11 executed by or on behalf of the
Trustee or by the Authenticating Agent by the manual signature of one of its
authorized officers. Such certificate upon any Security shall be conclusive
evidence, and the only evidence, that such Security has been duly authenticated
and delivered hereunder. Except as permitted by Section 3.6 or 3.7, the Trustee
shall not authenticate and deliver any Bearer Security unless all Coupons
appertaining thereto then matured have been detached and cancelled.
Section 3.4. Temporary Securities.
Pending the preparation of definitive Securities, the Company may
execute and deliver to the Trustee and, upon Company Order, the Trustee shall
authenticate and deliver, in the manner provided in Section 3.3, temporary
Securities in lieu thereof which are printed, lithographed, typewritten,
mimeographed or otherwise produced, in any authorized denomination,
substantially of the tenor of the definitive Securities in lieu of which they
are issued, in registered form or, if authorized in or pursuant to this
Indenture, in bearer form with one or more Coupons or without Coupons and with
such appropriate insertions, omissions, substitutions and other variations as
the officers of the Company executing such Securities may determine, as
conclusively evidenced by their execution of such Securities. Such temporary
Securities may be in global form.
Except in the case of temporary Securities in global form, which shall
be exchanged in accordance with the provisions thereof, if temporary Securities
are issued, the Company shall
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cause definitive Securities to be prepared without unreasonable delay. After the
preparation of definitive Securities of the same series and containing terms and
provisions that are identical to those of any temporary Securities, such
temporary Securities shall be exchangeable for such definitive Securities upon
surrender of such temporary Securities at an Office or Agency for such
Securities, without charge to any Holder thereof. Upon surrender for
cancellation of any one or more temporary Securities (accompanied by any
unmatured Coupons appertaining thereto), the Company shall execute and the
Trustee shall authenticate and deliver in exchange therefor a like principal
amount of definitive Securities of authorized denominations of the same series
and containing identical terms and provisions; provided, however, that no
definitive Bearer Security, except as provided in or pursuant to this Indenture,
shall be delivered in exchange for a temporary Registered Security; and
provided, further, that a definitive Bearer Security shall be delivered in
exchange for a temporary Bearer Security only in compliance with the conditions
set forth in or pursuant to this Indenture. Unless otherwise provided in or
pursuant to this Indenture with respect to a temporary global Security, until so
exchanged the temporary Securities of any series shall in all respects be
entitled to the same benefits under this Indenture as definitive Securities of
such series.
Section 3.5. Registration, Transfer and Exchange.
With respect to the Registered Securities of each series, if any, the
Company shall cause to be kept a register (each such register being herein
sometimes referred to as the "Security Register") at an Office or Agency for
such series in which, subject to such reasonable regulations as it may
prescribe, the Company shall provide for the registration of the Registered
Securities of such series and of transfers of the Registered Securities of such
series. Such Office or Agency shall be the "Security Registrar" for that series
of Securities. Unless otherwise specified in or pursuant to this Indenture or
the Securities, the Trustee shall be the initial Security Registrar for each
series of Securities. The Company shall have the right to remove and replace
from time to time the Security Registrar for any series of Securities; provided
that no such removal or replacement shall be effective until a successor
Security Registrar with respect to such series of Securities shall have been
appointed by the Company and shall have accepted such appointment by the
Company. In the event that the Trustee shall not be or shall cease to be
Security Registrar with respect to a series of Securities, it shall have the
right to examine the Security Register for such series at all reasonable times.
There shall be only one Security Register for each series of Securities.
Upon surrender for registration of transfer of any Registered Security
of any series at any Office or Agency for such series, the Company shall
execute, and the Trustee shall authenticate and deliver, in the name of the
designated transferee or transferees, one or more new Registered Securities of
the same series denominated as authorized in or pursuant to this Indenture, of a
like aggregate principal amount bearing a number not contemporaneously
outstanding and containing identical terms and provisions.
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At the option of the Holder, Registered Securities of any series may be
exchanged for other Registered Securities of the same series containing
identical terms and provisions, in any authorized denominations, and of a like
aggregate principal amount, upon surrender of the Securities to be exchanged at
any Office or Agency for such series. Whenever any Registered Securities are so
surrendered for exchange, the Company shall execute, and the Trustee shall
authenticate and deliver, the Registered Securities which the Holder making the
exchange is entitled to receive.
If provided in or pursuant to this Indenture, with respect to
Securities of any series, at the option of the Holder, Bearer Securities of such
series may be exchanged for Registered Securities of such series containing
identical terms, denominated as authorized in or pursuant to this Indenture and
in the same aggregate principal amount, upon surrender of the Bearer Securities
to be exchanged at any Office or Agency for such series, with all unmatured
Coupons and all matured Coupons in default thereto appertaining. If the Holder
of a Bearer Security is unable to produce any such unmatured Coupon or Coupons
or matured Coupon or Coupons in default, such exchange may be effected if the
Bearer Securities are accompanied by payment in funds acceptable to the Company
and the Trustee in an amount equal to the face amount of such missing Coupon or
Coupons, or the surrender of such missing Coupon or Coupons may be waived by the
Company and the Trustee if there is furnished to them such security or indemnity
as they may require to save each of them and any Paying Agent harmless. If
thereafter the Holder of such Bearer Security shall surrender to any Paying
Agent any such missing Coupon in respect of which such a payment shall have been
made, such Holder shall be entitled to receive the amount of such payment;
provided, however, that, except as otherwise provided in Section 10.2, interest
represented by Coupons shall be payable only upon presentation and surrender of
those Coupons at an Office or Agency for such series located outside the United
States. Notwithstanding the foregoing, in case a Bearer Security of any series
is surrendered at any such Office or Agency for such series in exchange for a
Registered Security of such series and like tenor after the close of business at
such Office or Agency on (i) any Regular Record Date and before the opening of
business at such Office or Agency on the next succeeding Interest Payment Date,
or (ii) any Special Record Date and before the opening of business at such
Office or Agency on the related date for payment of Defaulted Interest, such
Bearer Security shall be surrendered without the Coupon relating to such
Interest Payment Date or proposed date of payment, as the case may be (or, if
such Coupon is so surrendered with such Bearer Security, such Coupon shall be
returned to the Person so surrendering the Bearer Security), and interest or
Defaulted Interest, as the case may be, shall not be payable on such Interest
Payment Date or proposed date for payment, as the case may be, in respect of the
Registered Security issued in exchange for such Bearer Security, but shall be
payable only to the Holder of such Coupon when due in accordance with the
provisions of this Indenture.
If provided in or pursuant to this Indenture with respect to Securities
of any series, at the option of the Holder, Registered Securities of such series
may be exchanged for Bearer Securities upon such terms and conditions as may be
provided in or pursuant to this Indenture with respect to such series.
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Whenever any Securities are surrendered for exchange as contemplated by
the immediately preceding two paragraphs, the Company shall execute, and the
Trustee shall authenticate and deliver, the Securities which the Holder making
the exchange is entitled to receive.
Notwithstanding the foregoing, except as otherwise provided in or
pursuant to this Indenture, any global Security shall be exchangeable for
definitive Securities only if (i) the Depository is at any time unwilling,
unable or ineligible to continue as depository and a successor depository is not
appointed by the Company within 90 days of the date the Company is so informed
in writing, (ii) the Company executes and delivers to the Trustee a Company
Order to the effect that such global Security shall be so exchangeable, or (iii)
an Event of Default has occurred and is continuing with respect to the
Securities. If the beneficial owners of interests in a global Security are
entitled to exchange such interests for definitive Securities as the result of
an event described in clause (i), (ii) or (iii) of the preceding sentence, then
without unnecessary delay but in any event not later than the earliest date on
which such interests may be so exchanged, the Company shall deliver to the
Trustee definitive Securities in such form and denominations as are required by
or pursuant to this Indenture, and of the same series, containing identical
terms and in aggregate principal amount equal to the principal amount of such
global Security, executed by the Company. On or after the earliest date on which
such interests may be so exchanged, such global Security shall be surrendered
from time to time by the U.S. Depository or such other Depository as shall be
specified in the Company Order with respect thereto, and in accordance with
instructions given to the Trustee and the U.S. Depository or such other
Depository, as the case may be (which instructions shall be in writing but need
not be contained in or accompanied by an Officers' Certificate or be accompanied
by an Opinion of Counsel), as shall be specified in the Company Order with
respect thereto to the Trustee, as the Company's agent for such purpose, to be
exchanged, in whole or in part, for definitive Securities as described above
without charge. The Trustee shall authenticate and make available for delivery,
in exchange for each portion of such surrendered global Security, a like
aggregate principal amount of definitive Securities of the same series of
authorized denominations and of like tenor as the portion of such global
Security to be exchanged, which (unless such Securities are not issuable both as
Bearer Securities and as Registered Securities, in which case the definitive
Securities exchanged for the global Security shall be issuable only in the form
in which the Securities are issuable, as provided in or pursuant to this
Indenture) shall be in the form of Bearer Securities or Registered Securities,
or any combination thereof, as shall be specified by the beneficial owner
thereof, but subject to the satisfaction of any certification or other
requirements to the issuance of Bearer Securities; provided, however, that no
such exchanges may occur during a period beginning at the opening of business 15
days before any selection of Securities of the same series to be redeemed and
ending on the relevant Redemption Date; and provided, further, that (unless
otherwise provided in or pursuant to this Indenture) no Bearer Security
delivered in exchange for a portion of a global Security shall be mailed or
otherwise delivered to any location in the United States. Promptly following any
such exchange in part, such global Security shall be returned by the Trustee to
such Depository or the U.S. Depository, as the case may be, or such other
Depository or U.S. Depository referred to above in accordance with the
instructions of the Company referred to above. If a Registered Security is
issued in exchange for any portion
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of a global Security after the close of business at the Office or Agency for
such Security where such exchange occurs on or after (i) any Regular Record Date
for such Security and before the opening of business at such Office or Agency on
the next succeeding Interest Payment Date, or (ii) any Special Record Date for
such Security and before the opening of business at such Office or Agency on the
related proposed date for payment of interest or Defaulted Interest, as the case
may be, interest shall not be payable on such Interest Payment Date or proposed
date for payment, as the case may be, in respect of such Registered Security,
but shall be payable on such Interest Payment Date or proposed date for payment,
as the case may be, only to the Person to whom interest in respect of such
portion of such global Security shall be payable in accordance with the
provisions of this Indenture.
All Securities issued upon any registration of transfer or exchange of
Securities shall be the valid obligations of the Company evidencing the same
debt and entitling the Holders thereof to the same benefits under this Indenture
as the Securities surrendered upon such registration of transfer or exchange.
Every Registered Security presented or surrendered for registration of
transfer or for exchange or redemption shall (if so required by the Company or
the Security Registrar for such Security) be duly endorsed, or be accompanied by
a written instrument of transfer in form satisfactory to the Company and the
Security Registrar for such Security duly executed by the Holder thereof or his
attorney duly authorized in writing.
No service charge shall be made for any registration of transfer or
exchange, or redemption of Securities, but the Company may require payment of a
sum sufficient to cover any tax or other governmental charge and any other
expenses (including fees and expenses of the Trustee) that may be imposed in
connection with any registration of transfer or exchange of Securities, other
than exchanges pursuant to Section 3.4, 9.5 or 11.7 not involving any transfer.
Except as otherwise provided in or pursuant to this Indenture, the
Company shall not be required (i) to issue, register the transfer of or exchange
any Securities during a period beginning at the opening of business 15 days
before the day of the selection for redemption of Securities of like tenor and
the same series under Section 11.3 and ending at the close of business on the
day of such selection, or (ii) to register the transfer of or exchange any
Registered Security so selected for redemption in whole or in part, except in
the case of any Security to be redeemed in part, the portion thereof not to be
redeemed, or (iii) to exchange any Bearer Security so selected for redemption
except, to the extent provided with respect to such Bearer Security, that such
Bearer Security may be exchanged for a Registered Security of like tenor and the
same series, provided that such Registered Security shall be immediately
surrendered for redemption with written instruction for payment consistent with
the provisions of this Indenture or (iv) to issue, register the transfer of or
exchange any Security which, in accordance with its terms, has been surrendered
for repayment at the option of the Holder, except the portion, if any, of such
Security not to be so repaid.
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Section 3.6. Mutilated, Destroyed, Lost and Stolen Securities.
If any mutilated Security or a Security with a mutilated Coupon
appertaining to it is surrendered to the Trustee, subject to the provisions of
this Section 3.6, the Company shall execute and the Trustee shall authenticate
and deliver in exchange therefor a new Security of the same series containing
identical terms and of like principal amount and bearing a number not
contemporaneously outstanding, with Coupons appertaining thereto corresponding
to the Coupons, if any, appertaining to the surrendered Security.
If there be delivered to the Company and to the Trustee (i) evidence to
their satisfaction of the destruction, loss or theft of any Security or Coupon,
and (ii) such security or indemnity as may be required by them to save each of
them and any agent of either of them harmless, then, in the absence of notice to
the Company or the Trustee that such Security or Coupon has been acquired by a
bona fide purchaser, the Company shall execute and, upon the Company's request
the Trustee shall authenticate and deliver, in exchange for or in lieu of any
such mutilated, destroyed, lost or stolen Security or in exchange for the
Security to which a destroyed, lost or stolen Coupon appertains with all
appurtenant Coupons not destroyed, lost or stolen, a new Security of the same
series containing identical terms and of like principal amount and bearing a
number not contemporaneously outstanding, with Coupons appertaining thereto
corresponding to the Coupons, if any, appertaining to such destroyed, lost or
stolen Security or to the Security to which such destroyed, lost or stolen
Coupon appertains.
Notwithstanding the foregoing provisions of this Section 3.6, in case
any mutilated, destroyed, lost or stolen Security or Coupon has become or is
about to become due and payable, the Company in its discretion may, instead of
issuing a new Security, pay such Security or Coupon; provided, however, that
payment of principal of, any premium or interest on or any Additional Amounts
with respect to any Bearer Securities shall, except as otherwise provided in
Section 10.2, be payable only at an Office or Agency for such Securities located
outside the United States and, unless otherwise provided in or pursuant to this
Indenture, any interest on Bearer Securities and any Additional Amounts with
respect to such interest shall be payable only upon presentation and surrender
of the Coupons appertaining thereto.
Upon the issuance of any new Security under this Section 3.6, the
Company may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) connected therewith.
Every new Security, with any Coupons appertaining thereto issued
pursuant to this Section 3.6 in lieu of any destroyed, lost or stolen Security,
or in exchange for a Security to which a destroyed, lost or stolen Coupon
appertains shall constitute a separate obligation of the Company, whether or not
the destroyed, lost or stolen Security and Coupons appertaining thereto or the
destroyed, lost or stolen Coupon shall be at any time enforceable by anyone, and
shall be entitled to all the benefits of this Indenture equally and
proportionately with any and all other Securities of such series and any
Coupons, if any, duly issued hereunder.
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The provisions of this Section 3.6, as amended or supplemented pursuant
to this Indenture with respect to particular Securities or generally, shall be
exclusive and shall preclude (to the extent lawful) all other rights and
remedies with respect to the replacement or payment of mutilated, destroyed,
lost or stolen Securities or Coupons.
Section 3.7. Payment of Interest and Certain Additional Amounts; Rights
to Interest and Certain Additional Amounts Preserved.
Unless otherwise provided in or pursuant to this Indenture, any
interest on and any Additional Amounts with respect to any Registered Security
which shall be payable, and are punctually paid or duly provided for, on any
Interest Payment Date shall be paid to the Person in whose name such Security
(or one or more Predecessor Securities) is registered as of the close of
business on the Regular Record Date for such interest.
Unless otherwise provided in or pursuant to this Indenture, any
interest on and any Additional Amounts with respect to any Registered Security
which shall be payable, but shall not be punctually paid or duly provided for,
on any Interest Payment Date for such Registered Security (herein called
"Defaulted Interest") shall forthwith cease to be payable to the Holder thereof
on the relevant Regular Record Date by virtue of having been such Holder; and
such Defaulted Interest may be paid by the Company, at its election in each
case, as provided in Clause (1) or (2) below:
(1) The Company may elect to make payment of any
Defaulted Interest to the Person in whose name such Registered Security
(or a Predecessor Security thereof) shall be registered at the close of
business on a Special Record Date for the payment of such Defaulted
Interest, which shall be fixed by the Company in the following manner.
The Company shall notify the Trustee in writing of the amount of
Defaulted Interest proposed to be paid on such Registered Security, the
Special Record Date therefor and the date of the proposed payment, and
at the same time the Company shall deposit with the Trustee an amount
of money equal to the aggregate amount proposed to be paid in respect
of such Defaulted Interest or shall make arrangements satisfactory to
the Trustee for such deposit on or prior to the date of the proposed
payment, such money when so deposited to be held in trust for the
benefit of the Person entitled to such Defaulted Interest as in this
Clause provided. The Special Record Date for the payment of such
Defaulted Interest shall be not more than 15 days and not less than 10
days prior to the date of the proposed payment and not less than 10
days after notification to the Trustee of the proposed payment. The
Trustee shall, in the name and at the expense of the Company, cause
notice of the proposed payment of such Defaulted Interest and the
Special Record Date therefor to be mailed, first-class postage prepaid,
to the Holder of such Registered Security (or a Predecessor Security
thereof) at his address as it appears in the Security Register not less
than 10 days prior to such Special Record Date. The Trustee may, in its
discretion, in the name and at the expense of the Company cause a
similar notice to be published at least once in an Authorized Newspaper
of general circulation in the
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Borough of Manhattan, The City of New York, but such publication shall
not be a condition precedent to the establishment of such Special
Record Date. Notice of the proposed payment of such Defaulted Interest
and the Special Record Date therefor having been mailed as aforesaid,
such Defaulted Interest shall be paid to the Person in whose name such
Registered Security (or a Predecessor Security thereof) shall be
registered at the close of business on such Special Record Date and
shall no longer be payable pursuant to the following clause (2).
(2) The Company may make payment of any Defaulted
Interest in any other lawful manner not inconsistent with the
requirements of any securities exchange on which such Security may be
listed, and upon such notice as may be required by such exchange, if,
after notice given by the Company to the Trustee of the proposed
payment pursuant to this Clause, such payment shall be deemed
practicable by the Trustee.
Unless otherwise provided in or pursuant to this Indenture or the
Securities of any particular series pursuant to the provisions of this
Indenture, at the option of the Company, interest on Registered Securities that
bear interest may be paid by mailing a check to the address of the Person
entitled thereto as such address shall appear in the Security Register or by
transfer to an account maintained by the payee with a bank located in the United
States.
Subject to the foregoing provisions of this Section and Section 3.5,
each Security delivered under this Indenture upon registration of transfer of or
in exchange for or in lieu of any other Security shall carry the rights to
interest accrued and unpaid, and to accrue, which were carried by such other
Security.
In the case of any Registered Security of any series that is
convertible into shares of Common Stock or exchangeable for other securities,
which Registered Security is converted or exchanged after any Regular Record
Date and on or prior to the next succeeding Interest Payment Date (other than
any Registered Security with respect to which the Stated Maturity is prior to
such Interest Payment Date), interest with respect to which the Stated Maturity
is on such Interest Payment Date shall be payable on such Interest Payment Date
notwithstanding such conversion or exchange, and such interest (whether or not
punctually paid or duly provided for) shall be paid to the Person in whose name
that Registered Security (or one or more predecessor Registered Securities) is
registered at the close of business on such Regular Record Date. Except as
otherwise expressly provided in the immediately preceding sentence, in the case
of any Registered Security which is converted or exchanged, interest with
respect to which the Stated Maturity is after the date of conversion or exchange
of such Registered Security shall not be payable.
Section 3.8. Persons Deemed Owners.
Prior to due presentment of a Registered Security for registration of
transfer, the Company, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name such Registered Security is registered in the
Security Register as the owner of such
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Registered Security for the purpose of receiving payment of principal of, any
premium and (subject to Sections 3.5 and 3.7) interest on and any Additional
Amounts with respect to such Registered Security and for all other purposes
whatsoever, whether or not any payment with respect to such Registered Security
shall be overdue, and none of the Company, the Trustee or any agent of the
Company or the Trustee shall be affected by notice to the contrary.
The Company, the Trustee and any agent of the Company or the Trustee
may treat the bearer of any Bearer Security or the bearer of any Coupon as the
absolute owner of such Security or Coupon for the purpose of receiving payment
thereof or on account thereof and for all other purposes whatsoever, whether or
not any payment with respect to such Security or Coupon shall be overdue, and
none of the Company, the Trustee or any agent of the Company or the Trustee
shall be affected by notice to the contrary.
No Holder of any beneficial interest in any global Security held on its
behalf by a Depository shall have any rights under this Indenture with respect
to such global Security, and such Depository may be treated by the Company, the
Trustee, and any agent of the Company or the Trustee as the owner of such global
Security for all purposes whatsoever. None of the Company, the Trustee, any
Paying Agent or the Security Registrar will have any responsibility or liability
for any aspect of the records relating to or payments made on account of
beneficial ownership interests of a global Security or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
Section 3.9. Cancellation.
All Securities and Coupons surrendered for payment, redemption,
registration of transfer, exchange or conversion or for credit against any
sinking fund payment shall, if surrendered to any Person other than the Trustee,
be delivered to the Trustee, and any such Securities and Coupons, as well as
Securities and Coupons surrendered directly to the Trustee for any such purpose,
shall be cancelled promptly by the Trustee. The Company may at any time deliver
to the Trustee for cancellation any Securities previously authenticated and
delivered hereunder which the Company may have acquired in any manner
whatsoever, and all Securities so delivered shall be cancelled promptly by the
Trustee. No Securities shall be authenticated in lieu of or in exchange for any
Securities cancelled as provided in this Section, except as expressly permitted
by or pursuant to this Indenture. All cancelled Securities and Coupons held by
the Trustee shall be destroyed by the Trustee, unless by a Company Order the
Company directs their return to it.
Section 3.10. Computation of Interest.
Except as otherwise provided in or pursuant to this Indenture or in any
Security, interest on the Securities shall be computed on the basis of a 360-day
year of twelve 30-day months.
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ARTICLE 4
SATISFACTION AND DISCHARGE OF INDENTURE
Section 4.1. Satisfaction and Discharge.
Upon the direction of the Company by a Company Order, this Indenture
shall cease to be of further effect with respect to any series of Securities
specified in such Company Order and any Coupons appertaining thereto, and the
Trustee, on receipt of a Company Order, at the expense of the Company, shall
execute proper instruments acknowledging satisfaction and discharge of this
Indenture as to such series, when
(1) either
(a) all Securities of such series theretofore
authenticated and delivered and all Coupons appertaining thereto (other
than (i) Coupons appertaining to Bearer Securities of such series
surrendered in exchange for Registered Securities of such series and
maturing after such exchange whose surrender is not required or has
been waived as provided in Section 3.5, (ii) Securities and Coupons of
such series which have been destroyed, lost or stolen and which have
been replaced or paid as provided in Section 3.6, (iii) Coupons
appertaining to Securities of such series called for redemption and
maturing after the relevant Redemption Date whose surrender has been
waived as provided in Section 11.7, and (iv) Securities and Coupons of
such series for whose payment money has theretofore been deposited in
trust or segregated and held in trust by the Company and thereafter
repaid to the Company or discharged from such trust, as provided in
Section 10.3) have been delivered to the Trustee for cancellation; or
(b) all Securities of such series and, in the case of (i)
or (ii) below, any Coupons appertaining thereto not theretofore
delivered to the Trustee for cancellation
(i) have become due and payable, or
(ii) will become due and payable at their Stated
Maturity within one year, or
(iii) if redeemable at the option of the Company,
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 Company,
and the Company, in the case of (i), (ii) or (iii) above, has deposited
or caused to be deposited with the Trustee as trust funds in trust for
such purpose, money in the Currency in which such Securities are
payable in an amount sufficient to pay and discharge the entire
indebtedness on such Securities and any Coupons appertaining
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thereto not theretofore delivered to the Trustee for cancellation,
including the principal of, any premium and interest on, and any
Additional Amounts with respect to such Securities and any Coupons
appertaining thereto, to the date of such deposit (in the case of
Securities which have become due and payable) or to the Maturity
thereof, as the case may be;
(2) the Company has paid or caused to be paid all other
sums payable hereunder by the Company with respect to the Outstanding
Securities of such series and any Coupons appertaining thereto; and
(3) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent herein provided for relating to the satisfaction and
discharge of this Indenture as to such series have been complied with.
In the event there are Securities of two or more series hereunder, the
Trustee shall be required to execute an instrument acknowledging satisfaction
and discharge of this Indenture only if requested to do so with respect to
Securities of such series as to which it is Trustee and if the other conditions
thereto are met.
Notwithstanding the satisfaction and discharge of this Indenture with
respect to any series of Securities, the obligations of the Company to the
Trustee under Section 6.6 and, if money shall have been deposited with the
Trustee pursuant to subclause (b) of clause (1) of this Section, the obligations
of the Company and the Trustee with respect to the Securities of such series
under Sections 3.5, 3.6, 4.3, 10.2 and 10.3, with respect to the payment of
Additional Amounts, if any, with respect to such Securities as contemplated by
Section 10.4 (but only to the extent that the Additional Amounts payable with
respect to such Securities exceed the amount deposited in respect of such
Additional Amounts pursuant to Section 4.1(1)(b)), and with respect to any
rights to convert or exchange such Securities into Common Stock or other
securities shall survive.
Section 4.2. Defeasance and Covenant Defeasance.
(1) Unless pursuant to Section 3.1, either or both of (i)
defeasance of the Securities of or within a series under clause (2) of this
Section 4.2 shall not be applicable with respect to the Securities of such
series or (ii) covenant defeasance of the Securities of or within a series under
clause (3) of this Section 4.2 shall not be applicable with respect to the
Securities of such series, then such provisions, together with the other
provisions of this Section 4.2 (with such modifications thereto as may be
specified pursuant to Section 3.1 with respect to any Securities), shall be
applicable to such Securities and any Coupons appertaining thereto, and the
Company may at its option by Board Resolution, at any time, with respect to such
Securities and any Coupons appertaining thereto, elect to have Section 4.2(2) or
Section 4.2(3) be applied to such Outstanding Securities and any Coupons
appertaining thereto upon compliance with the conditions set forth below in this
Section 4.2.
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(2) Upon the Company's exercise of the above option applicable to
this Section 4.2(2) with respect to any Securities of or within a series, the
Company shall be deemed to have been discharged from its obligations with
respect to such Outstanding Securities and any Coupons appertaining thereto on
the date the conditions set forth in clause (4) of this Section 4.2 are
satisfied (hereinafter, "defeasance"). For this purpose, such defeasance means
that the Company shall be deemed to have paid and discharged the entire
Indebtedness represented by such Outstanding Securities and any Coupons
appertaining thereto, which shall thereafter be deemed to be "Outstanding" only
for the purposes of clause (5) of this Section 4.2 and the other Sections of
this Indenture referred to in clauses (i) and (ii) below, and to have satisfied
all of its other obligations under such Securities and any Coupons appertaining
thereto and this Indenture insofar as such Securities and any Coupons
appertaining thereto are concerned (and the Trustee, at the expense of the
Company, shall execute proper instruments acknowledging the same), except for
the following which shall survive until otherwise terminated or discharged
hereunder: (i) the rights of Holders of such Outstanding Securities and any
Coupons appertaining thereto to receive, solely from the trust fund described in
clause (4) of this Section 4.2 and as more fully set forth in such clause,
payments in respect of the principal of (and premium, if any) and interest, if
any, on, and Additional Amounts, if any, with respect to, such Securities and
any Coupons appertaining thereto when such payments are due, and any rights of
such Holder to convert such Securities into Common Stock or exchange such
Securities for other securities, (ii) the obligations of the Company and the
Trustee with respect to such Securities under Sections 3.5, 3.6, 10.2 and 10.3
with respect to the payment of Additional Amounts, if any, on such Securities as
contemplated by Section 10.4 (but only to the extent that the Additional Amounts
payable with respect to such Securities exceed the amount deposited in respect
of such Additional Amounts pursuant to Section 4.2(4)(a) below), and with
respect to any rights to convert such Securities into Common Stock or exchange
such Securities for other securities, (iii) the rights, powers, trusts, duties
and immunities of the Trustee hereunder and (iv) this Section 4.2. The Company
may exercise its option under this Section 4.2(2) notwithstanding the prior
exercise of its option under clause (3) of this Section 4.2 with respect to such
Securities and any Coupons appertaining thereto.
(3) Upon the Company's exercise of the option to have this Section
4.2(3) apply with respect to any Securities of or within a series, the Company
shall be released from its obligations under Sections 10.5 and 10.6, and, to the
extent specified pursuant to Section 3.1(19), any other covenant applicable to
such Securities, with respect to such Outstanding Securities and any Coupons
appertaining thereto on and after the date the conditions set forth in clause
(4) of this Section 4.2 are satisfied (hereinafter, "covenant defeasance"), and
such Securities and any Coupons appertaining thereto shall thereafter be deemed
to be not "Outstanding" for the purposes of any direction, waiver, consent or
declaration or Act of Holders (and the consequences of any thereof) in
connection with any such covenant, but shall continue to be deemed "Outstanding"
for all other purposes hereunder. For this purpose, such covenant defeasance
means that, with respect to such Outstanding Securities and any Coupons
appertaining thereto, the Company may omit to comply with, and shall have no
liability in respect of, any term, condition or limitation set forth in any such
Section or such other covenant, whether directly or indirectly, by reason of any
reference elsewhere herein to any such Section or such other covenant or by
reason of reference
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in any such Section or such other covenant to any other provision herein or in
any other document and such omission to comply shall not constitute a default or
an Event of Default under Section 5.1(4) or 5.1(8) or otherwise, as the case may
be, but, except as specified above, the remainder of this Indenture and such
Securities and Coupons appertaining thereto shall be unaffected thereby.
(4) The following shall be the conditions to application of clause
(2) or (3) of this Section 4.2 to any Outstanding Securities of or within a
series and any Coupons appertaining thereto:
(a) The Company shall irrevocably have deposited or
caused to be deposited with the Trustee (or another trustee satisfying
the requirements of Section 6.7 who shall agree to comply with the
provisions of this Section 4.2 applicable to it) as trust funds in
trust for the purpose of making the following payments, specifically
pledged as security for, and dedicated solely to, the benefit of the
Holders of such Securities and any Coupons appertaining thereto, (1) an
amount in Dollars or in such Foreign Currency in which such Securities
and any Coupons appertaining thereto are then specified as payable at
Stated Maturity, or (2) Government Obligations applicable to such
Securities and Coupons appertaining thereto (determined on the basis of
the Currency in which such Securities and Coupons appertaining thereto
are then specified as payable at Stated Maturity) which through the
scheduled payment of principal and interest in respect thereof in
accordance with their terms will provide, not later than one day before
the due date of any payment of principal of (and premium, if any) and
interest, if any, on such Securities and any Coupons appertaining
thereto, money in an amount, or (3) a combination thereof, in any case,
in an amount, sufficient, without consideration of any reinvestment of
such principal and interest, in the opinion of a nationally recognized
firm of independent public accountants expressed in a written
certification thereof delivered to the Trustee, to pay and discharge,
and which shall be applied by the Trustee (or other qualifying trustee)
to pay and discharge, (y) the principal of (and premium, if any) and
interest, if any, on such Outstanding Securities and any Coupons
appertaining thereto at the Stated Maturity of such principal or
installment of principal or premium or interest and (z) any mandatory
sinking fund payments or analogous payments applicable to such
Outstanding Securities and any Coupons appertaining thereto on the days
on which such payments are due and payable in accordance with the terms
of this Indenture and of such Securities and any Coupons appertaining
thereto.
(b) Such defeasance or covenant defeasance shall not
result in a breach or violation of, or constitute a default under, this
Indenture or any other material agreement or instrument to which the
Company is a party or by which it is bound.
(c) No Event of Default or event which with notice or
lapse of time or both would become an Event of Default with respect to
such Securities and any Coupons appertaining thereto shall have
occurred and be continuing on the date of such deposit and, with
respect to defeasance only, at any time during the period ending on the
123rd
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day after the date of such deposit (it being understood that this
condition shall not be deemed satisfied until the expiration of such
period).
(d) In the case of an election under clause (2) of this
Section 4.2, the Company shall have delivered to the Trustee an Opinion
of Counsel stating that (i) the Company has received from the Internal
Revenue Service a letter ruling, or there has been published by the
Internal Revenue Service a Revenue Ruling, or (ii) since the date of
execution of this Indenture, there has been a change in the applicable
Federal income tax law, in either case to the effect that, and based
thereon such opinion shall confirm that, the Holders of such
Outstanding Securities and any Coupons appertaining thereto 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.
(e) In the case of an election under clause (3) of this
Section 4.2, the Company shall have delivered to the Trustee an Opinion
of Counsel to the effect that the Holders of such Outstanding
Securities and any Coupons appertaining thereto 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.
(f) The Company shall have delivered to the Trustee an
Opinion of Counsel to the effect that, after the 123rd day after the
date of deposit, all money and Government Obligations (or other
property as may be provided pursuant to Section 3.1) (including the
proceeds thereof) deposited or caused to be deposited with the Trustee
(or other qualifying trustee) pursuant to this clause (4) to be held in
trust will not be subject to any case or proceeding (whether voluntary
or involuntary) in respect of the Company under any Federal or State
bankruptcy, insolvency, reorganization or other similar law, or any
decree or order for relief in respect of the Company issued in
connection therewith.
(g) The Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that all
conditions precedent to the defeasance or covenant defeasance under
clause (2) or (3) of this Section 4.2 (as the case may be) have been
complied with.
(h) Notwithstanding any other provisions of this Section
4.2(4), such defeasance or covenant defeasance shall be effected in
compliance with any additional or substitute terms, conditions or
limitations which may be imposed on the Company in connection therewith
pursuant to Section 3.1.
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(5) Unless otherwise specified in or pursuant to this Indenture or
any Security, if, after a deposit referred to in Section 4.2(4)(a) has been
made, (a) the Holder of a Security in respect of which such deposit was made is
entitled to, and does, elect pursuant to Section 3.1 or the terms of such
Security to receive payment in a Currency other than that in which the deposit
pursuant to Section 4.2(4)(a) has been made in respect of such Security, or (b)
a Conversion Event occurs in respect of the Foreign Currency in which the
deposit pursuant to Section 4.2(4)(a) has been made, the indebtedness
represented by such Security and any Coupons appertaining thereto shall be
deemed to have been, and will be, fully discharged and satisfied through the
payment of the principal of (and premium, if any), and interest, if any, on, and
Additional Amounts, if any, with respect to, such Security as the same becomes
due out of the proceeds yielded by converting (from time to time as specified
below in the case of any such election) the amount or other property deposited
in respect of such Security into the Currency in which such Security becomes
payable as a result of such election or Conversion Event based on (x) in the
case of payments made pursuant to clause (a) above, the applicable market
exchange rate for such Currency in effect on the second Business Day prior to
each payment date, or (y) with respect to a Conversion Event, the applicable
market exchange rate for such Foreign Currency in effect (as nearly as feasible)
at the time of the Conversion Event.
The Company shall pay and indemnify the Trustee (or other qualifying
trustee, collectively for purposes of this Section 4.2(5) and Section 4.3, the
"Trustee") against any tax, fee or other charge, imposed on or assessed against
the Government Obligations deposited pursuant to this Section 4.2 or the
principal or interest received in respect thereof other than any such tax, fee
or other charge which by law is for the account of the Holders of such
Outstanding Securities and any Coupons appertaining thereto.
Anything in this Section 4.2 to the contrary notwithstanding, the
Trustee shall deliver or pay to the Company from time to time upon Company
Request any money or Government Obligations (or other property and any proceeds
therefrom) held by it as provided in clause (4) of this Section 4.2 which, in
the opinion of a nationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the Trustee, are in
excess of the amount thereof which would then be required to be deposited to
effect a defeasance or covenant defeasance, as applicable, in accordance with
this Section 4.2.
Section 4.3. Application of Trust Money.
Subject to the provisions of the last paragraph of Section 10.3, all
money and Government Obligations (or other property as may be provided pursuant
to Section 3.1) (including the proceeds thereof) deposited with the Trustee
pursuant to Section 4.1 or 4.2 in respect of any Outstanding Securities of any
series and any Coupons appertaining thereto shall be held in trust and applied
by the Trustee, in accordance with the provisions of such Securities and any
Coupons appertaining thereto and this Indenture, to the payment, either directly
or through any Paying Agent (including the Company acting as its own Paying
Agent) as the Trustee may determine, to the Holders of such Securities and any
Coupons appertaining thereto of all sums due and to
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become due thereon in respect of principal (and premium, if any) and interest
and Additional Amounts, if any; but such money and Government Obligations need
not be segregated from other funds except to the extent required by law.
ARTICLE 5
REMEDIES
Section 5.1. Events of Default.
"Event of Default", wherever used herein with respect to Securities of
any series, means any one of the following events (whatever the reason for such
Event of Default and whether it shall be voluntary or involuntary or be effected
by operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body),
unless such event is specifically deleted or modified in or pursuant to the
supplemental indenture, Board Resolution or Officers' Certificate establishing
the terms of such Series pursuant to this Indenture:
(1) default in the payment of any interest on any Security of such
series, or any Additional Amounts payable with respect thereto, when such
interest becomes or such Additional Amounts become due and payable, and
continuance of such default for a period of 30 days; or
(2) default in the payment of the principal of or any premium on
any Security of such series, or any Additional Amounts payable with respect
thereto, when such principal or premium becomes or such Additional Amounts
become due and payable at their Maturity; or
(3) default in the deposit of any sinking fund payment when and as
due by the terms of a Security of such series; or
(4) default in the performance, or breach, of any covenant or
warranty of the Company in this Indenture or the Securities (other than a
covenant or warranty a default in the performance or the breach of which is
elsewhere in this Section specifically dealt with or which has been expressly
included in this Indenture solely for the benefit of a series of Securities
other than such series), and continuance of such default or breach for a period
of 60 days after there has been given, by registered or certified mail, to the
Company by the Trustee or to the Company and the Trustee by the Holders of at
least 25% in principal amount of the Outstanding Securities of such series, a
written notice specifying such default or breach and requiring it to be remedied
and stating that such notice is a "Notice of Default" hereunder; or
(5) if any event of default as defined in any mortgage, indenture
or instrument under which there may be issued, or by which there may be secured
or evidenced, any Debt of the Company or any Subsidiary, whether such Debt now
exists or shall hereafter be created, shall
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happen and shall result in such Debt in principal amount in excess of
[$__,000,000] becoming or being declared due and payable prior to the date on
which it would otherwise become due and payable, and such acceleration shall not
be rescinded or annulled within a period of 10 days after there shall have been
given, by registered or certified mail, to the Company or any Subsidiary by the
Trustee or to the Company or any Subsidiary and the Trustee by the Holders of at
least 25% in principal amount of the Outstanding Securities of such series, a
written notice specifying such event of default and requiring the Company or any
Subsidiary to cause such acceleration to be rescinded or annulled or to cause
such Debt to be discharged and stating that such notice is a "Notice of Default"
hereunder; or
(6) the Company or any Subsidiary shall fail within 60 days to
pay, bond or otherwise discharge any uninsured judgment or court order for the
payment of money in excess of [$__,000,000], which is not stayed on appeal or is
not otherwise being appropriately contested in good faith; or
(7) the entry by a court having competent jurisdiction of:
(a) a decree or order for relief in respect of the
Company or any Subsidiary in an involuntary proceeding under any
applicable bankruptcy, insolvency, reorganization or other similar law
and such decree or order shall remain unstayed and in effect for a
period of 60 consecutive days; or
(b) a decree or order adjudging the Company or any
Subsidiary to be insolvent, or approving a petition seeking
reorganization, arrangement, adjustment or composition of the Company
or any Subsidiary and such decree or order shall remain unstayed and in
effect for a period of 60 consecutive days; or
(c) a final and non-appealable order appointing a
custodian, receiver, liquidator, assignee, trustee or other similar
official of the Company or any Subsidiary or of any substantial part of
the property of the Company or any Subsidiary, or ordering the winding
up or liquidation of the affairs of the Company or any Subsidiary; or
(8) the commencement by the Company or any Subsidiary of a
voluntary proceeding under any applicable bankruptcy, insolvency, reorganization
or other similar law or of a voluntary proceeding seeking to be adjudicated
insolvent or the consent by the Company or any Subsidiary to the entry of a
decree or order for relief in an involuntary proceeding under any applicable
bankruptcy, insolvency, reorganization or other similar law or to the
commencement of any insolvency proceedings against it, or the filing by the
Company or any Subsidiary of a petition or answer or consent seeking
reorganization, arrangement, adjustment or composition of the Company or any
Subsidiary or relief under any applicable law, or the consent by the Company or
any Subsidiary to the filing of such petition or to the appointment of or taking
possession by a custodian, receiver, liquidator, assignee, trustee or similar
official of the Company or any Subsidiary or any substantial part of the
property of the Company or any Subsidiary or the making
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by the Company or any Subsidiary of an assignment for the benefit of creditors,
or the taking of corporate action by the Company or any Subsidiary in
furtherance of any such action; or
(9) any other Event of Default provided in or pursuant to this
Indenture with respect to Securities of such series.
Section 5.2. Acceleration of Maturity; Rescission and Annulment.
If an Event of Default with respect to Securities of any series at the
time Outstanding (other than an Event of Default specified in clause (7) or (8)
of Section 5.1) occurs and is continuing, then the Trustee or the Holders of not
less than 25% in principal amount of the Outstanding Securities of such series
may declare the principal of all the Securities of such series, or such lesser
amount as may be provided for in the Securities of such series, to be due and
payable immediately, by a notice in writing to the Company (and to the Trustee
if given by the Holders), and upon any such declaration such principal or such
lesser amount shall become immediately due and payable.
If an Event of Default specified in clause (7) or (8) of Section 5.1
occurs, all unpaid principal of and accrued interest on the Outstanding
Securities of that series (or such lesser amount as may be provided for in the
Securities of such series) 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 any Security of that series.
At any time after a declaration of acceleration with respect to the
Securities of any series has been made and before a judgment or decree for
payment of the money due has been obtained by the Trustee as hereinafter in this
Article provided, the Holders of not less than a majority in principal amount of
the Outstanding Securities of such series, by written notice to the Company and
the Trustee, may rescind and annul such declaration and its consequences if
(1) the Company has paid or deposited with the Trustee a sum of
money sufficient to pay
(a) all overdue installments of any interest on and
Additional Amounts with respect to all Securities of such series and
any Coupon appertaining thereto,
(b) the principal of and any premium on any Securities of
such series which have become due otherwise than by such declaration of
acceleration and interest thereon and any Additional Amounts with
respect thereto at the rate or rates borne by or provided for in such
Securities,
(c) to the extent that payment of such interest or
Additional Amounts is lawful, interest upon overdue installments of any
interest and Additional Amounts at the rate or rates borne by or
provided for in such Securities, and
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(d) all sums paid or advanced by the Trustee hereunder
and the reasonable compensation, expenses, disbursements and advances
of the Trustee, its agents and counsel and all other amounts due the
Trustee under Section 6.6; and
(2) all Events of Default with respect to Securities of such
series, other than the non-payment of the principal of, any premium and interest
on, and any Additional Amounts with respect to Securities of such series which
shall have become due solely by such declaration of acceleration, shall have
been cured or waived as provided in Section 5.13.
No such rescission shall affect any subsequent default or impair any right
consequent thereon.
Section 5.3. Collection of Indebtedness and Suits for Enforcement by
Trustee.
The Company covenants that if
(1) default is made in the payment of any installment of interest
on or any Additional Amounts with respect to any Security or any Coupon
appertaining thereto when such interest or Additional Amounts shall have become
due and payable and such default continues for a period of 30 days, or
(2) default is made in the payment of the principal of or any
premium on any Security or any Additional Amounts with respect thereto at their
Maturity,
the Company shall, upon demand of the Trustee, pay to the Trustee, for the
benefit of the Holders of such Securities and any Coupons appertaining thereto,
the whole amount of money then due and payable with respect to such Securities
and any Coupons appertaining thereto, with interest upon the overdue principal,
any premium and, to the extent that payment of such interest shall be legally
enforceable, upon any overdue installments of interest and Additional Amounts at
the rate or rates borne by or provided for in such Securities, and, in addition
thereto, such further amount of money as shall be sufficient to cover the costs
and expenses of collection, including the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel and all other
amounts due to the Trustee under Section 6.6.
If the Company fails to pay the money it is required to pay the Trustee
pursuant to the preceding paragraph forthwith upon the demand of the Trustee,
the Trustee, in its own name and as trustee of an express trust, may institute a
judicial proceeding for the collection of the money so due and unpaid, and may
prosecute such proceeding to judgment or final decree, and may enforce the same
against the Company or any other obligor upon such Securities and any Coupons
appertaining thereto and collect the monies adjudged or decreed to be payable in
the manner provided by law out of the property of the Company or any other
obligor upon such Securities and any Coupons appertaining thereto, wherever
situated.
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If an Event of Default with respect to Securities of any series occurs
and is continuing, the Trustee may in its discretion proceed to protect and
enforce its rights and the rights of the Holders of Securities of such series
and any Coupons appertaining thereto by such appropriate judicial proceedings as
the Trustee shall deem most effectual to protect and enforce any such rights,
whether for the specific enforcement of any covenant or agreement in this
Indenture or such Securities or in aid of the exercise of any power granted
herein or therein, or to enforce any other proper remedy.
Section 5.4. Trustee May File Proofs of Claim.
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Company or any other obligor upon the
Securities of any series or the property of the Company or such other obligor or
their creditors, the Trustee (irrespective of whether the principal of the
Securities shall then be due and payable as therein expressed or by declaration
or otherwise and irrespective of whether the Trustee shall have made any demand
on the Company for the payment of any overdue principal, premium, interest or
Additional Amounts) shall be entitled and empowered, by intervention in such
proceeding or otherwise,
(1) to file and prove a claim for the whole amount, or
such lesser amount as may be provided for in the Securities of any
applicable series, of the principal and any premium, interest and
Additional Amounts owing and unpaid in respect of the Securities and
any Coupons appertaining thereto and to file such other papers or
documents as may be necessary or advisable in order to have the claims
of the Trustee (including any claim for the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents or
counsel) and of the Holders of Securities or any Coupons appertaining
thereto allowed in such judicial proceeding, and
(2) to collect and receive any monies or other property
payable or deliverable on any such claims and to distribute the same;
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or
other similar official in any such judicial proceeding is hereby authorized by
each Holder of Securities or any Coupons to make such payments to the Trustee
and, in the event that the Trustee shall consent to the making of such payments
directly to the Holders of Securities or any Coupons, to pay to the Trustee any
amount due to it for the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel and any other amounts due the
Trustee under Section 6.6.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder of a Security
or any Coupon any plan of reorganization, arrangement, adjustment or composition
affecting the Securities or Coupons or the
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rights of any Holder thereof, or to authorize the Trustee to vote in respect of
the claim of any Holder of a Security or any Coupon in any such proceeding.
Section 5.5. Trustee May Enforce Claims without Possession of
Securities or Coupons.
All rights of action and claims under this Indenture or any of the
Securities or Coupons may be prosecuted and enforced by the Trustee without the
possession of any of the Securities or Coupons or the production thereof in any
proceeding relating thereto, and any such proceeding instituted by the Trustee
shall be brought in its own name as trustee of an express trust, and any
recovery or judgment, after provision for the payment of the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel, shall be for the ratable benefit of each and every Holder of the
Securities or Coupons in respect of which such judgment has been recovered.
Section 5.6. Application of Money Collected.
Any money collected by the Trustee pursuant to this Article shall be
applied in the following order, at the date or dates fixed by the Trustee and,
in case of the distribution of such money on account of principal, or any
premium, interest or Additional Amounts, upon presentation of the Securities or
Coupons, or both, as the case may be, and the notation thereon of the payment if
only partially paid and upon surrender thereof if fully paid:
FIRST: To the payment of all amounts due the Trustee and any
predecessor Trustee under Section 6.6;
SECOND: To the payment of the amounts then due and unpaid upon
the Securities and any Coupons for principal and any premium, interest
and Additional Amounts in respect of which or for the benefit of which
such money has been collected, ratably, without preference or priority
of any kind, according to the aggregate amounts due and payable on such
Securities and Coupons for principal and any premium, interest and
Additional Amounts, respectively;
THIRD: The balance, if any, to the Person or Persons entitled
thereto.
Section 5.7. Limitations on Suits.
No Holder of any Security of any series or any Coupons appertaining
thereto shall have any right to institute any proceeding, judicial or otherwise,
with respect to this Indenture, or for the appointment of a receiver or trustee,
or for any other remedy hereunder, unless
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(1) such Holder has previously given written notice to
the Trustee of a continuing Event of Default with respect to the
Securities of such series;
(2) the Holders of not less than 25% in principal amount
of the Outstanding Securities of such series shall have made written
request to the Trustee to institute proceedings in respect of such
Event of Default in its own name as Trustee hereunder;
(3) such Holder or Holders have offered to the Trustee
such indemnity as is reasonably satisfactory to it against the costs,
expenses and liabilities to be incurred in compliance with such
request;
(4) the Trustee for 60 days after its receipt of such
notice, request and offer of indemnity has failed to institute any such
proceeding; and
(5) no direction inconsistent with such written request
has been given to the Trustee during such 60-day period by the Holders
of a majority in principal amount of the Outstanding Securities of such
series;
it being understood and intended that no one or more of such Holders shall have
any right in any manner whatever by virtue of, or by availing of, any provision
of this Indenture or any Security to affect, disturb or prejudice the rights of
any other such Holders or Holders of Securities of any other series, or to
obtain or to seek to obtain priority or preference over any other Holders or to
enforce any right under this Indenture, except in the manner herein provided and
for the equal and ratable benefit of all such Holders.
Section 5.8. Unconditional Right of Holders to Receive Principal and
any Premium, Interest and Additional Amounts.
Notwithstanding any other provision in this Indenture, the Holder of
any Security or Coupon shall have the right, which is absolute and
unconditional, to receive payment of the principal of, any premium and (subject
to Sections 3.5 and 3.7) interest on, and any Additional Amounts with respect to
such Security or payment of such Coupon, as the case may be, on the respective
Stated Maturity or Maturities therefor specified in such Security or Coupon (or,
in the case of redemption, on the Redemption Date or, in the case of repayment
at the option of such Holder if provided in or pursuant to this Indenture, on
the date such repayment is due) and to institute suit for the enforcement of any
such payment, and such right shall not be impaired without the consent of such
Holder.
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Section 5.9. Restoration of Rights and Remedies.
If the Trustee or any Holder of a Security or a Coupon has instituted
any proceeding to enforce any right or remedy under this Indenture and such
proceeding has been discontinued or abandoned for any reason, or has been
determined adversely to the Trustee or to such Holder, then and in every such
case the Company, the Trustee and each such Holder shall, subject to any
determination in such proceeding, be restored severally and respectively to
their former positions hereunder, and thereafter all rights and remedies of the
Trustee and each such Holder shall continue as though no such proceeding had
been instituted.
Section 5.10. Rights and Remedies Cumulative.
Except as otherwise provided with respect to the replacement or payment
of mutilated, destroyed, lost or stolen Securities or Coupons in the last
paragraph of Section 3.6, no right or remedy herein conferred upon or reserved
to the Trustee or to each and every Holder of a Security or a Coupon is intended
to be exclusive of any other right or remedy, and every right and remedy, to the
extent permitted by law, shall be cumulative and in addition to every other
right and remedy given hereunder or now or hereafter existing at law or in
equity or otherwise. The assertion or employment of any right or remedy
hereunder, or otherwise, shall not, to the extent permitted by law, prevent the
concurrent assertion or employment of any other appropriate right or remedy.
Section 5.11. Delay or Omission Not Waiver.
No delay or omission of the Trustee or of any Holder of any Security or
Coupon to exercise any right or remedy accruing upon any Event of Default shall
impair any such right or remedy or constitute a waiver of any such Event of
Default or an acquiescence therein. Every right and remedy given by this Article
or by law to the Trustee or to any Holder of a Security or a Coupon may be
exercised from time to time, and as often as may be deemed expedient, by the
Trustee or by such Holder, as the case may be.
Section 5.12. Control by Holders of Securities.
The Holders of a majority in principal amount of the Outstanding
Securities of any series shall have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee or
exercising any trust or power conferred on the Trustee with respect to the
Securities of such series and any Coupons appertaining thereto, provided that
(1) such direction shall not be in conflict with any rule
of law or with this Indenture or with the Securities of such series,
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(2) the Trustee may take any other action deemed proper
by the Trustee which is not inconsistent with such direction, and
(3) such direction is not unduly prejudicial to the
rights of the other Holders of Securities of such series not joining in
such action.
Section 5.13. Waiver of Past Defaults.
The Holders of not less than a majority in principal amount of the
Outstanding Securities of any series on behalf of the Holders of all the
Securities of such series and any Coupons appertaining thereto may waive any
past default hereunder with respect to such series and its consequences, except
a default
(1) in the payment of the principal of, any premium or
interest on, or any Additional Amounts with respect to, any Security of
such series or any Coupons appertaining thereto, or
(2) in respect of a covenant or provision hereof which
under Article 9 cannot be modified or amended without the consent of
the Holder of each Outstanding Security of such series affected.
Upon any such waiver, such default shall cease to exist, and any Event
of Default arising therefrom shall be deemed to have been cured, for every
purpose of this Indenture; but no such waiver shall extend to any subsequent or
other default or impair any right consequent thereon.
Section 5.14. Waiver of Usury, Stay or Extension Laws.
The Company covenants that (to the extent that it may lawfully do so)
it will not at any time insist upon, or plead, or in any manner whatsoever claim
or take the benefit or advantage of, any usury, stay or extension law wherever
enacted, now or at any time hereafter in force, which may affect the covenants
or the performance of this Indenture; and the Company expressly waives (to the
extent that it may lawfully do so) all benefit or advantage of any such law and
covenants that it will not hinder, delay or impede the execution of any power
herein granted to the Trustee, but will suffer and permit the execution of every
such power as though no such law had been enacted.
Section 5.15. Undertaking for Costs
All parties to this Indenture agree, and each Holder of any Security by
his acceptance thereof shall be deemed to have agreed, that any court may in its
discretion require, in any suit for the enforcement of any right or remedy under
this Indenture, or in any suit against the Trustee for any action taken or
omitted by it as Trustee, the filing by any party litigant in such suit of
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undertaking to pay the costs of such suit, and that such court may in its
discretion assess reasonable costs, including reasonable attorneys' fees,
against any party litigant in such suit having due regard to the merits and good
faith of the claims or defenses made by such party litigant; but the provisions
of this Section 5.15 shall not apply to any suit instituted by the Trustee, to
any suit instituted by any Holder, or group of Holders, holding in the aggregate
more than 10% in principal amount of Outstanding Securities of any series, or to
any suit instituted by any Holder for the enforcement of the payment of the
principal of (or premium, if any) or interest, if any, on or Additional Amounts,
if any, with respect to any Security on or after the respective Stated
Maturities expressed in such Security (or, in the case of redemption, on or
after the Redemption Date, and, in the case of repayment, on or after the date
for repayment) or for the enforcement of the right, if any, to convert or
exchange any Security into Common Stock or other securities in accordance with
its terms.
ARTICLE 6
THE TRUSTEE
Section 6.1. Certain Rights of Trustee.
Subject to Sections 315(a) through 315(d) of the Trust Indenture Act:
(1) the Trustee may conclusively rely and shall be fully
protected in acting or refraining from acting upon any resolution,
certificate, statement, instrument, opinion, report, notice, request,
direction, consent, order, bond, debenture, note, coupon or other paper
or document reasonably believed by it to be genuine and to have been
signed or presented by the proper party or parties;
(2) any request or direction of the Company mentioned
herein shall be sufficiently evidenced by a Company Request or a
Company Order (in each case, other than delivery of any Security,
together with any Coupons appertaining thereto, to the Trustee for
authentication and delivery pursuant to Section 3.3 which shall be
sufficiently evidenced as provided therein) and any resolution of the
Board of Directors may be sufficiently evidenced by a Board Resolution;
(3) whenever in the administration of this Indenture the
Trustee shall deem it desirable that a matter be proved or established
prior to taking, suffering or omitting any action hereunder, the
Trustee (unless other evidence shall be herein specifically prescribed)
may, in the absence of bad faith on its part, rely upon an Officers'
Certificate;
(4) the Trustee may consult with counsel and the written
advice of such counsel or any Opinion of Counsel shall be full and
complete authorization and protection
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in respect of any action taken, suffered or omitted by it hereunder in
good faith and in reliance thereon;
(5) the Trustee shall be under no obligation to exercise
any of the rights or powers vested in it by or pursuant to this
Indenture at the request or direction of any of the Holders of
Securities of any series or any Coupons appertaining thereto pursuant
to this Indenture, unless such Holders shall have offered to the
Trustee such security or indemnity as is reasonably satisfactory to it
against the costs, expenses and liabilities which might be incurred by
it in compliance with such request or direction;
(6) the Trustee shall not be bound to make any
investigation into the facts or matters stated in any resolution,
certificate, statement, instrument, opinion, report, notice, request,
direction, consent, order, bond, debenture, coupon or other paper or
document, but the Trustee, in its discretion, may but shall not be
obligated to make such further inquiry or investigation into such facts
or matters as it may see fit, and, if the Trustee shall determine to
make such further inquiry or investigation, it shall be entitled to
examine, during business hours and upon reasonable notice, the books,
records and premises of the Company, personally or by agent or
attorney; and
(7) the Trustee may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or by or
through agents or attorneys and the Trustee shall not be responsible
for any misconduct or negligence on the part of any agent or attorney
appointed with due care by it hereunder.
(8) the Trustee shall not be liable for any action taken
or error of judgment made in good faith by a Responsible Officer or
Responsible Officers of the Trustee, unless it shall be proved that the
Trustee was negligent, acted in bad faith or engaged in willful
misconduct;
(9) the Authenticating Agent, Paying Agent, and Security
Registrar shall have the same protections as the Trustee set forth
hereunder; and
(10) the Trustee shall not be liable with respect to any
action taken, suffered or omitted to be taken by it in good faith in
accordance with an Act of the Holders hereunder, and, to the extent not
so provided herein, with respect to any act requiring the Trustee to
exercise its own discretion, relating to the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred upon the Trustee, under this
Indenture or any Securities, unless it shall be proved that, in
connection with any such action taken, suffered or omitted or any such
act, the Trustee was negligent, acted in bad faith or engaged in
willful misconduct.
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Section 6.2. Notice of Defaults.
Within 90 days after the occurrence of any default hereunder with
respect to the Securities of any series, the Trustee shall transmit by mail to
all Holders of Securities of such series entitled to receive reports pursuant to
Section 7.3(3), notice of such default hereunder actually known to a Responsible
Officer of the Trustee, unless such default shall have been cured or waived;
provided, however, that, except in the case of a default in the payment of the
principal of (or premium, if any), or interest, if any, on, or Additional
Amounts or any sinking fund or purchase fund installment with respect to, any
Security of such series, the Trustee shall be protected in withholding such
notice if and so long as the board of directors, the executive committee or a
trust committee of directors and/or Responsible Officers of the Trustee in good
faith determine that the withholding of such notice is in the best interest of
the Holders of Securities and Coupons of such series; and provided, further,
that in the case of any default of the character specified in Section 5.1(5)
with respect to Securities of such series, no such notice to Holders shall be
given until at least 30 days after the occurrence thereof. For the purpose of
this Section, the term "default" means any event which is, or after notice or
lapse of time or both would become, an Event of Default with respect to
Securities of such series.
Section 6.3. Not Responsible for Recitals or Issuance of Securities.
The recitals contained herein and in the Securities, except the
Trustee's certificate of authentication, and in any Coupons shall be taken as
the statements of the Company and neither the Trustee nor any Authenticating
Agent assumes any responsibility for their correctness. The Trustee makes no
representations as to the validity or sufficiency of this Indenture or of the
Securities or the Coupons, except that the Trustee represents that it is duly
authorized to execute and deliver this Indenture, authenticate the Securities
and perform its obligations hereunder and that the statements made by it in a
Statement of Eligibility on Form T-1 supplied to the Company are true and
accurate, subject to the qualifications set forth therein. Neither the Trustee
nor any Authenticating Agent shall be accountable for the use or application by
the Company of the Securities or the proceeds thereof.
Section 6.4. May Hold Securities.
The Trustee, any Authenticating Agent, any Paying Agent, any Security
Registrar or any other Person that may be an agent of the Trustee or the
Company, in its individual or any other capacity, may become the owner or
pledgee of Securities or Coupons and, subject to Sections 310(b) and 311 of the
Trust Indenture Act, may otherwise deal with the Company with the same rights it
would have if it were not the Trustee, Authenticating Agent, Paying Agent,
Security Registrar or such other Person.
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Section 6.5. Money Held in Trust.
Except as provided in Section 4.3 and Section 10.3, money held by the
Trustee in trust hereunder need not be segregated from other funds except to the
extent required by law and shall be held uninvested. The Trustee shall be under
no liability for interest on any money received by it hereunder except as
otherwise agreed to in writing with the Company.
Section 6.6. Compensation and Reimbursement.
The Company agrees:
(1) to pay to the Trustee from time to time reasonable
compensation for all services rendered by the Trustee hereunder (which
compensation shall not be limited by any provision of law in regard to
the compensation of a trustee of an express trust);
(2) except as otherwise expressly provided herein, to
reimburse the Trustee upon its request for all reasonable expenses,
disbursements and advances incurred or made by the Trustee in
accordance with any provision of this Indenture or arising out of or in
connection with the acceptance or administration of the trust or trusts
hereunder (including the reasonable compensation and the expenses and
disbursements of its agents and counsel), except any such expense,
disbursement or advance as may be attributable to the Trustee's
negligence or bad faith; and
(3) to indemnify the Trustee and its agents, officers,
directors and employees for, and to hold them harmless against, any
loss, liability or expense incurred without negligence or bad faith on
their part, arising out of or in connection with the acceptance or
administration of the trust or trusts hereunder, including the costs
and expenses of defending themselves against any claim or liability in
connection with the exercise or performance of any of their powers or
duties hereunder, except to the extent that any such loss, liability or
expense was due to the Trustee's negligence or bad faith.
As security for the performance of the obligations of the Company under
this Section, the Trustee shall have a lien prior to the Securities of any
series upon all property and funds held or collected by the Trustee as such,
except funds held in trust for the payment of principal of, and premium or
interest on or any Additional Amounts with respect to Securities or any Coupons
appertaining thereto.
To the extent permitted by law, any compensation or expense incurred by
the Trustee after a default specified in or pursuant to Section 5.1 is intended
to constitute an expense of administration under any then applicable bankruptcy
or insolvency law. "Trustee" for purposes of this Section 6.6 shall include any
predecessor Trustee but the negligence or bad faith of any Trustee shall not
affect the rights of any other Trustee under this Section 6.6.
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The provisions of this Section 6.6 shall survive the satisfaction and
discharge of this Indenture or the earlier resignation or removal of the Trustee
and shall apply with equal force and effect to the Trustee in its capacity as
Authenticating Agent, Paying Agent or Security Registrar.
Section 6.7. Corporate Trustee Required; Eligibility.
There shall at all times be a Trustee hereunder that is a Corporation
organized and doing business under the laws of the United States of America, any
state thereof or the District of Columbia, that is eligible under Section
310(a)(1) of the Trust Indenture Act to act as trustee under an indenture
qualified under the Trust Indenture Act and that has a combined capital and
surplus (computed in accordance with Section 310(a)(2) of the Trust Indenture
Act) of at least $50,000,000, and that is subject to supervision or examination
by Federal or state authority. If at any time the Trustee shall cease to be
eligible in accordance with the provisions of this Section, it shall resign
immediately in the manner and with the effect hereinafter specified in this
Article.
Section 6.8. Resignation and Removal; Appointment of Successor.
(1) No resignation or removal of the Trustee and no appointment of
a successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee pursuant to Section 6.9.
(2) The Trustee may resign at any time with respect to the
Securities of one or more series by giving written notice thereof to the
Company. If the instrument of acceptance by a successor Trustee required by
Section 6.9 shall not have been delivered to the Trustee within 30 days after
the giving of such notice of resignation, the resigning Trustee may petition any
court of competent jurisdiction for the appointment of a successor Trustee with
respect to such series.
(3) The Trustee may be removed at any time with respect to the
Securities of any series by Act of the Holders of a majority in principal amount
of the Outstanding Securities of such series, delivered to the Trustee and the
Company.
(4) If at any time:
(a) the Trustee shall fail to comply with the obligations
imposed upon it under Section 310(b) of the Trust Indenture Act with
respect to Securities of any series after written request therefor by
the Company or any Holder of a Security of such series who has been a
bona fide Holder of a Security of such series for at least six months,
or
(b) the Trustee shall cease to be eligible under Section
6.7 and shall fail to resign after written request therefor by the
Company or any such Holder, or
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(c) the Trustee shall become incapable of acting or shall be
adjudged a bankrupt or insolvent or a receiver of the Trustee or of its
property shall be appointed or any public officer shall take charge or
control of the Trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation,
then, in any such case, (i) the Company, by or pursuant to a Board Resolution,
may remove the Trustee with respect to all Securities or the Securities of such
series, or (ii) subject to Section 315(e) of the Trust Indenture Act, any Holder
of a Security who has been a bona fide Holder of a Security of such series for
at least six months may, on behalf of himself and all others similarly situated,
petition any court of competent jurisdiction for the removal of the Trustee with
respect to all Securities of such series and the appointment of a successor
Trustee or Trustees.
(5) If the Trustee shall resign, be removed or become incapable of
acting, or if a vacancy shall occur in the office of Trustee for any cause, with
respect to the Securities of one or more series, the Company, by or pursuant to
a Board Resolution, shall promptly appoint a successor Trustee or Trustees with
respect to the Securities of such series (it being understood that any such
successor Trustee may be appointed with respect to the Securities of one or more
or all of such series and that at any time there shall be only one Trustee with
respect to the Securities of any particular series) and shall comply with the
applicable requirements of Section 6.9. If, within one year after such
resignation, removal or incapacity, or the occurrence of such vacancy, a
successor Trustee with respect to the Securities of any series shall be
appointed by Act of the Holders of a majority in principal amount of the
Outstanding Securities of such series delivered to the Company and the retiring
Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance
of such appointment in accordance with the applicable requirements of Section
6.9, become the successor Trustee with respect to the Securities of such series
and to that extent supersede the successor Trustee appointed by the Company. If
no successor Trustee with respect to the Securities of any series shall have
been so appointed by the Company or the Holders of Securities and accepted
appointment in the manner required by Section 6.9, any Holder of a Security who
has been a bona fide Holder of a Security of such series for at least six months
may, on behalf of himself and all others similarly situated, petition any court
of competent jurisdiction for the appointment of a successor Trustee with
respect to the Securities of such series.
(6) The Company shall give notice of each resignation and each removal
of the Trustee with respect to the Securities of any series and each appointment
of a successor Trustee with respect to the Securities of any series by mailing
written notice of such event by first-class mail, postage prepaid, to the
Holders of Registered Securities, if any, of such series as their names and
addresses appear in the Security Register and, if Securities of such series are
issued as Bearer Securities, by publishing notice of such event once in an
Authorized Newspaper in each Place of Payment located outside the United States.
Each notice shall include the name of the successor Trustee with respect to the
Securities of such series and the address of its Corporate Trust Office.
(7) In no event shall any retiring Trustee be liable for the acts or
omissions of any successor Trustee hereunder.
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Section 6.9. Acceptance of Appointment by Successor.
(1) Upon the appointment hereunder of any successor Trustee with
respect to all Securities, such successor Trustee so appointed shall execute,
acknowledge and deliver to the Company and the retiring Trustee an instrument
accepting such appointment, and thereupon the resignation or removal of the
retiring Trustee shall become effective and such successor Trustee, without any
further act, deed or conveyance, shall become vested with all the rights,
powers, trusts and duties hereunder of the retiring Trustee; but, on the request
of the Company or such successor Trustee, such retiring Trustee, upon payment of
its charges, shall execute and deliver an instrument transferring to such
successor Trustee all the rights, powers and trusts of the retiring Trustee and,
subject to Section 10.3, shall duly assign, transfer and deliver to such
successor Trustee all property and money held by such retiring Trustee
hereunder, subject nevertheless to its claim, if any, provided for in Section
6.6.
(2) Upon the appointment hereunder of any successor Trustee with
respect to the Securities of one or more (but not all) series, the Company, the
retiring Trustee and such successor Trustee shall execute and deliver an
indenture supplemental hereto wherein each successor Trustee shall accept such
appointment and which (1) shall contain such provisions as shall be necessary or
desirable to transfer and confirm to, and to vest in, such successor Trustee all
the rights, powers, trusts and duties of the retiring Trustee with respect to
the Securities of that or those series to which the appointment of such
successor Trustee relates, (2) if the retiring Trustee is not retiring with
respect to all Securities, shall contain such provisions as shall be deemed
necessary or desirable to confirm that all the rights, powers, trusts and duties
of the retiring Trustee with respect to the Securities of that or those series
as to which the retiring Trustee is not retiring shall continue to be vested in
the retiring Trustee, and (3) shall add to or change any of the provisions of
this Indenture as shall be necessary to provide for or facilitate the
administration of the trusts hereunder by more than one Trustee, it being
understood that nothing herein or in such supplemental indenture shall
constitute such Trustees co-trustees of the same trust, that each such Trustee
shall be trustee of a trust or trusts hereunder separate and apart from any
trust or trusts hereunder administered by any other such Trustee and that no
Trustee shall be responsible for any notice given to, or received by, or any act
or failure to act on the part of any other Trustee hereunder, and, upon the
execution and delivery of such supplemental indenture, the resignation or
removal of the retiring Trustee shall become effective to the extent provided
therein, such retiring Trustee shall have no further responsibility for the
exercise of rights and powers or for the performance of the duties and
obligations vested in the Trustee under this Indenture with respect to the
Securities of that or those series to which the appointment of such successor
Trustee relates other than as hereinafter expressly set forth, and such
successor Trustee, without any further act, deed or conveyance, shall become
vested with all the rights, powers, trusts and duties of the retiring Trustee
with respect to the Securities of that or those series to which the appointment
of such successor Trustee relates; but, on request of the Company or such
successor Trustee, such retiring Trustee, upon payment of its charges with
respect to the Securities of that or those series to which the appointment of
such successor Trustee relates and subject to Section 10.3 shall duly assign,
transfer and deliver to such successor Trustee, to the
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extent contemplated by such supplemental indenture, the property and money held
by such retiring Trustee hereunder with respect to the Securities of that or
those series to which the appointment of such successor Trustee relates, subject
to its claim, if any, provided for in Section 6.6.
(3) Upon request of any Person appointed hereunder as a successor
Trustee, the Company shall execute any and all instruments for more fully and
certainly vesting in and confirming to such successor Trustee all such rights,
powers and trusts referred to in paragraph (1) or (2) of this Section , as the
case may be.
(4) No Person shall accept its appointment hereunder as a successor
Trustee unless at the time of such acceptance such successor Person shall be
qualified and eligible under this Article.
Section 6.10. Merger, Conversion, Consolidation or Succession to
Business.
Any Corporation into which the Trustee may be merged or converted or
with which it may be consolidated, or any Corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
Corporation succeeding to all or substantially all of the corporate trust
business of the Trustee, shall be the successor of the Trustee hereunder,
without the execution or filing of any paper or any further act on the part of
any of the parties hereto. In case any Securities shall have been authenticated
but not delivered by the Trustee then in office, any successor by merger,
conversion or consolidation to such authenticating Trustee may adopt such
authentication and deliver the Securities so authenticated with the same effect
as if such successor Trustee had itself authenticated such Securities.
Section 6.11. Appointment of Authenticating Agent.
The Trustee may appoint one or more Authenticating Agents acceptable to
the Company with respect to one or more series of Securities which shall be
authorized to act on behalf of the Trustee to authenticate Securities of that or
those series issued upon original issue, exchange, registration of transfer,
partial redemption or partial repayment or pursuant to Section 3.6, and
Securities so authenticated shall be entitled to the benefits of this Indenture
and shall be valid and obligatory for all purposes as if authenticated by the
Trustee hereunder. Wherever reference is made in this Indenture to the
authentication and delivery of Securities by the Trustee or the Trustee's
certificate of authentication, such reference shall be deemed to include
authentication and delivery on behalf of the Trustee by an Authenticating Agent
and a certificate of authentication executed on behalf of the Trustee by an
Authenticating Agent.
Each Authenticating Agent must be acceptable to the Company and, except
as provided in or pursuant to this Indenture, shall at all times be a
corporation that would be permitted by the Trust Indenture Act to act as trustee
under an indenture qualified under the Trust Indenture Act, is authorized under
applicable law and by its charter to act as an Authenticating Agent and has
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a combined capital and surplus (computed in accordance with Section 310(a)(2) of
the Trust Indenture Act) of at least $50,000,000. If at any time an
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section , it shall resign immediately in the manner and with
the effect specified in this Section .
Any Corporation into which an Authenticating Agent may be merged or
converted or with which it may be consolidated, or any Corporation resulting
from any merger, conversion or consolidation to which such Authenticating Agent
shall be a party, or any Corporation succeeding to all or substantially all of
the corporate agency or corporate trust business of an Authenticating Agent,
shall be the successor of such Authenticating Agent hereunder, provided such
Corporation shall be otherwise eligible under this Section , without the
execution or filing of any paper or any further act on the part of the Trustee
or the Authenticating Agent.
An Authenticating Agent may resign at any time by giving written notice
thereof to the Trustee and the Company. The Trustee may at any time terminate
the agency of an Authenticating Agent by giving written notice thereof to such
Authenticating Agent and the Company. Upon receiving such a notice of
resignation or upon such a termination, or in case at any time such
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section , the Trustee may appoint a successor Authenticating
Agent which shall be acceptable to the Company and shall (i) mail written notice
of such appointment by first-class mail, postage prepaid, to all Holders of
Registered Securities, if any, of the series with respect to which such
Authenticating Agent shall serve, as their names and addresses appear in the
Security Register, and (ii) if Securities of the series are issued as Bearer
Securities, publish notice of such appointment at least once in an Authorized
Newspaper in the place where such successor Authenticating Agent has its
principal office if such office is located outside the United States. Any
successor Authenticating Agent, upon acceptance of its appointment hereunder,
shall become vested with all the rights, powers and duties of its predecessor
hereunder, with like effect as if originally named as an Authenticating Agent.
No successor Authenticating Agent shall be appointed unless eligible under the
provisions of this Section .
The Company agrees to pay each Authenticating Agent from time to time
reasonable compensation for its services under this Section . If the Trustee
makes such payments, it shall be entitled to be reimbursed for such payments,
subject to the provisions of Section 6.6.
The provisions of Sections 3.8, 6.3 and 6.4 shall be applicable to each
Authenticating Agent.
If an Authenticating Agent is appointed with respect to one or more
series of Securities pursuant to this Section , the Securities of such series
may have endorsed thereon, in addition to or in lieu of the Trustee's
certificate of authentication, an alternate certificate of authentication in
substantially the following form:
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This is one of the Securities of the series designated herein referred
to in the within-mentioned Indenture.
[NAME OF TRUSTEE],
as Trustee
By__________________________________________
as Authenticating Agent
By__________________________________________
Authorized Officer
If all of the Securities of any series may not be originally issued at
one time, and if the Trustee does not have an office capable of authenticating
Securities upon original issuance located in a Place of Payment where the
Company wishes to have Securities of such series authenticated upon original
issuance, the Trustee, if so requested in writing (which writing need not be
accompanied by or contained in an Officers' Certificate by the Company), shall
appoint in accordance with this Section an Authenticating Agent having an office
in a Place of Payment designated by the Company with respect to such series of
Securities.
ARTICLE 7
HOLDERS LISTS AND REPORTS BY TRUSTEE AND COMPANY
Section 7.1. Company to Furnish Trustee Names and Addresses of Holders.
In accordance with Section 312(a) of the Trust Indenture Act, the
Company shall furnish or cause to be furnished to the Trustee
(1) semi-annually with respect to Securities of each series not
later than May 15 and November 15 of the year or upon such other dates
as are set forth in or pursuant to the Board Resolution or indenture
supplemental hereto authorizing such series, a list, in each case in
such form as the Trustee may reasonably require, of the names and
addresses of Holders as of the applicable date, and
(2) at such other times as the Trustee may request in writing,
within 30 days after the receipt by the Company of any such request, a
list of similar form and content as of a date not more than 15 days
prior to the time such list is furnished,
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provided, however, that so long as the Trustee is the Security Registrar no such
list shall be required to be furnished.
Section 7.2. Preservation of Information; Communications to Holders.
The Trustee shall comply with the obligations imposed upon it pursuant
to Section 312 of the Trust Indenture Act.
Every Holder of Securities or Coupons, by receiving and holding the
same, agrees with the Company and the Trustee that neither the Company, the
Trustee, any Paying Agent or any Security Registrar shall be held accountable by
reason of the disclosure of any such information as to the names and addresses
of the Holders of Securities in accordance with Section 312(c) of the Trust
Indenture Act, regardless of the source from which such information was derived,
and that the Trustee shall not be held accountable by reason of mailing any
material pursuant to a request made under Section 312(b) of the Trust Indenture
Act.
Section 7.3. Reports by Trustee.
(1) Within 60 days after September 15 of each year commencing with the
first September 15 following the first issuance of Securities pursuant to
Section 3.1, if required by Section 313(a) of the Trust Indenture Act, the
Trustee shall transmit, pursuant to Section 313(c) of the Trust Indenture Act, a
brief report dated as of such September 15 with respect to any of the events
specified in said Section 313(a) which may have occurred since the later of the
immediately preceding September 15 and the date of this Indenture.
(2) The Trustee shall transmit the reports required by Section 313(a)
of the Trust Indenture Act at the times specified therein.
(3) Reports pursuant to this Section shall be transmitted in the manner
and to the Persons required by Sections 313(c) and 313(d) of the Trust Indenture
Act.
Section 7.4. Reports by Company.
The Company, pursuant to Section 314(a) of the Trust Indenture Act,
shall:
(1) file with the Trustee, within 15 days after the Company is required
to file the same with the Commission, copies of the annual reports and of the
information, documents and other reports (or copies of such portions of any of
the foregoing as the Commission may from time to time by rules and regulations
prescribe) which the Company may be required to file with the Commission
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934,
as amended; or, if the Company is not required to file information, documents or
reports pursuant
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to either of said Sections , then it shall file with the Trustee and the
Commission, in accordance with rules and regulations prescribed from time to
time by the Commission, such of the supplementary and periodic information,
documents and reports which may be required pursuant to Section 13 of the
Securities Exchange Act of 1934, as amended, in respect of a security listed and
registered on a national securities exchange as may be prescribed from time to
time in such rules and regulations;
(2) file with the Trustee and the Commission, in accordance with rules
and regulations prescribed from time to time by the Commission, such additional
information, documents and reports with respect to compliance by the Company,
with the conditions and covenants of this Indenture as may be required from time
to time by such rules and regulations; and
(3) transmit within 30 days after the filing thereof with the Trustee,
in the manner and to the extent provided in Section 313(c) of the Trust
Indenture Act, such summaries of any information, documents and reports required
to be filed by the Company pursuant to paragraphs (1) and (2) of this Section as
may be required by rules and regulations prescribed from time to time by the
Commission.
ARTICLE 8
CONSOLIDATION, MERGER AND SALES
Section 8.1. Company May Consolidate, Etc., Only on Certain Terms.
The Company shall not consolidate with or merge into any other Person
(whether or not affiliated with the Company), or convey, transfer or lease its
properties and assets as an entirety or substantially as an entirety to any
other Person (whether or not affiliated with the Company), and the Company shall
not permit any other Person (whether or not affiliated with the Company) to
consolidate with or merge into the Company or convey, transfer or lease its
properties and assets as an entirety or substantially as an entirety to the
Company; unless:
(1) in case the Company shall consolidate with or merge into another
Person or convey, transfer or lease its properties and assets as an entirety or
substantially as an entirety to any Person, the Person formed by such
consolidation or into which the Company is merged or the Person which acquires
by conveyance or transfer, or which leases, the properties and assets of the
Company as an entirety or substantially as an entirety shall be a Corporation
organized and existing under the laws of the United States of America, any state
thereof or the District of Columbia and shall expressly assume, by an indenture
(or indentures, if at such time there is more than one Trustee) supplemental
hereto, executed by the successor Person and delivered to the Trustee the due
and punctual payment of the principal of, any premium and interest on and any
Additional Amounts with respect to all the Securities and the performance of
every obligation in this Indenture and the Outstanding Securities on the part of
the Company to be performed or
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observed and shall provide for conversion or exchange rights in accordance with
the provisions of the Securities of any series that are convertible or
exchangeable into Common Stock or other securities;
(2) immediately after giving effect to such transaction and treating
any indebtedness which becomes an obligation of the Company or a Subsidiary as a
result of such transaction as having been incurred by the Company or such
Subsidiary at the time of such transaction, no Event of Default or event which,
after notice or lapse of time, or both, would become an Event of Default, shall
have occurred and be continuing; and
(3) either the Company or the successor Person shall have delivered to
the Trustee an Officers' Certificate and an Opinion of Counsel, each stating
that such consolidation, merger, conveyance, transfer or lease and, if a
supplemental indenture is required in connection with such transaction, such
supplemental indenture comply with this Article and that all conditions
precedent herein provided for relating to such transaction have been complied
with.
Section 8.2. Successor Person Substituted for Company.
Upon any consolidation by the Company with or merger of the Company
into any other Person or any conveyance, transfer or lease of the properties and
assets of the Company substantially as an entirety to any Person in accordance
with Section 8.1, the successor Person formed by such consolidation or into
which the Company is merged or to which such conveyance, transfer or lease is
made shall succeed to, and be substituted for, and may exercise every right and
power of, the Company under this Indenture with the same effect as if such
successor Person had been named as the Company herein; and thereafter, except in
the case of a lease, the predecessor Person shall be released from all
obligations and covenants under this Indenture, the Securities and the Coupons.
ARTICLE 9
SUPPLEMENTAL INDENTURES
Section 9.1. Supplemental Indentures without Consent of Holders.
Without the consent of any Holders of Securities or Coupons, the
Company (when authorized by or pursuant to a Board Resolution) and the Trustee,
at any time and from time to time, may enter into one or more indentures
supplemental hereto, for any of the following purposes:
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(1) to evidence the succession of another Person to the Company, and
the assumption by any such successor of the covenants of the Company contained
herein and in the Securities; or
(2) to add to the covenants of the Company for the benefit of the
Holders of all or any series of Securities (as shall be specified in such
supplemental indenture or indentures) or to surrender any right or power herein
conferred upon the Company; or
(3) to add to or change any of the provisions of this Indenture to
provide that Bearer Securities may be registrable as to principal, to change or
eliminate any restrictions on the payment of principal of, any premium or
interest on or any Additional Amounts with respect to Securities, to permit
Bearer Securities to be issued in exchange for Registered Securities, to permit
Bearer Securities to be exchanged for Bearer Securities of other authorized
denominations or to permit or facilitate the issuance of Securities in
uncertificated form, provided any such action shall not adversely affect the
interests of the Holders of Outstanding Securities of any series or any Coupons
appertaining thereto in any material respect; or
(4) to establish the form or terms of Securities of any series and any
Coupons appertaining thereto as permitted by Sections 3.1 and 3.1; or
(5) to evidence and provide for the acceptance of appointment hereunder
by a successor Trustee with respect to the Securities of one or more series and
to add to or change any of the provisions of this Indenture as shall be
necessary to provide for or facilitate the administration of the trusts
hereunder by more than one Trustee, pursuant to the requirements of Section 6.9;
or
(6) to cure any ambiguity or to correct or supplement any provision
herein which may be defective or inconsistent with any other provision herein,
or to make any other provisions with respect to matters or questions arising
under this Indenture which shall not adversely affect the interests of the
Holders of Securities of any series then Outstanding or any Coupons appertaining
thereto in any material respect; or
(7) to add to, delete from or revise the conditions, limitations and
restrictions on the authorized amount, terms or purposes of issue,
authentication and delivery of Securities, as herein set forth; or
(8) to add any additional Events of Default with respect to all or any
series of Securities (as shall be specified in such supplemental indenture); or
(9) to supplement any of the provisions of this Indenture to such
extent as shall be necessary to permit or facilitate the defeasance and
discharge of any series of Securities pursuant to Article 4, provided that any
such action shall not adversely affect the interests of any Holder of an
Outstanding Security of such series and any Coupons appertaining thereto or any
other Outstanding Security or Coupon in any material respect; or
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(10) to secure the Securities pursuant to Section 10.5, 10.6 or
otherwise; or
(11) to make provisions with respect to conversion or exchange rights
of Holders of Securities of any series; or
(12) to amend or supplement any provision contained herein or in any
supplemental indenture, provided that no such amendment or supplement shall
materially adversely affect the interests of the Holders of any Securities then
Outstanding.
Section 9.2. Supplemental Indentures with Consent of Holders.
With the consent of the Holders of not less than a majority in
principal amount of the Outstanding Securities of each series affected by such
supplemental indenture, by Act of said Holders delivered to the Company and the
Trustee, the Company (when authorized by or pursuant to a Company's Board
Resolution) and the Trustee may enter into an indenture or indentures
supplemental hereto for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of this Indenture or of
modifying in any manner the rights of the Holders of Securities of such series
under this Indenture or of the Securities of such series; provided, however,
that no such supplemental indenture, without the consent of the Holder of each
Outstanding Security affected thereby, shall
(1) change the Stated Maturity of the principal of, or any premium or
installment of interest on or any Additional Amounts with respect to, any
Security, or reduce the principal amount thereof or the rate (or modify the
calculation of such rate) of interest thereon or any Additional Amounts with
respect thereto, or any premium payable upon the redemption thereof or
otherwise, or change the obligation of the Company to pay Additional Amounts
pursuant to Section 10.4 (except as contemplated by Section 8.1(1) and permitted
by Section 9.1(1)), or reduce the amount of the principal of an Original Issue
Discount Security that would be due and payable upon a declaration of
acceleration of the Maturity thereof pursuant to Section 5.2 or the amount
thereof provable in bankruptcy pursuant to Section 5.4, change the redemption
provisions or adversely affect the right of repayment at the option of any
Holder as contemplated by Article 13, or change the Place of Payment, Currency
in which the principal of, any premium or interest on, or any Additional Amounts
with respect to any Security is payable, or impair the right to institute suit
for the enforcement of any such payment on or after the Stated Maturity thereof
(or, in the case of redemption, on or after the Redemption Date or, in the case
of repayment at the option of the Holder, on or after the date for repayment),
or
(2) reduce the percentage in principal amount of the Outstanding
Securities of any series, the consent of whose Holders is required for any such
supplemental indenture, or the consent of whose Holders is required for any
waiver (of compliance with certain provisions of this Indenture or certain
defaults hereunder and their consequences) provided for in this Indenture, or
reduce the requirements of Section 15.4 for quorum or voting, or
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(3) modify any of the provisions of this Section , Section 5.13 or
Section 10.8, except to increase any such percentage or to provide that certain
other provisions of this Indenture cannot be modified or waived without the
consent of the Holder of each Outstanding Security affected thereby, or
(4) make any change that adversely affects the right to convert or
exchange any Security into or for Common Stock or other securities in accordance
with its terms.
A supplemental indenture which changes or eliminates any covenant or
other provision of this Indenture which shall have been included expressly and
solely for the benefit of one or more particular series of Securities, or which
modifies the rights of the Holders of Securities of such series with respect to
such covenant or other provision, shall be deemed not to affect the rights under
this Indenture of the Holders of Securities of any other series.
It shall not be necessary for any Act of Holders of Securities under
this Section to approve the particular form of any proposed supplemental
indenture, but it shall be sufficient if such Act shall approve the substance
thereof.
Section 9.3. Execution of Supplemental Indentures.
As a condition to executing, or accepting the additional trusts created
by, any supplemental indenture permitted by this Article or the modifications
thereby of the trust created by this Indenture, the Trustee shall be entitled to
receive, and (subject to Section 315 of the Trust Indenture Act) shall be fully
protected in relying upon, an Opinion of Counsel stating that the execution of
such supplemental indenture is authorized or permitted by this Indenture and an
Officers' Certificate stating that all conditions precedent to the execution of
such supplemental indenture have been fulfilled. The Trustee may, but shall not
be obligated to, enter into any such supplemental indenture which affects the
Trustee's own rights, duties or immunities under this Indenture or otherwise.
Section 9.4. Effect of Supplemental Indentures.
Upon the execution of any supplemental indenture under this Article,
this Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form a part of this Indenture for all purposes; and every Holder
of a Security theretofore or thereafter authenticated and delivered hereunder
and of any Coupon appertaining thereto shall be bound thereby.
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Section 9.5. Reference in Securities to Supplemental Indentures.
Securities of any series authenticated and delivered after the
execution of any supplemental indenture pursuant to this Article may, and shall
if required by the Trustee, bear a notation in form approved by the Trustee as
to any matter provided for in such supplemental indenture. If the Company shall
so determine, new Securities of any series so modified as to conform, in the
opinion of the Trustee and the Company, to any such supplemental indenture may
be prepared and executed by the Company and authenticated and delivered by the
Trustee in exchange for Outstanding Securities of such series.
Section 9.6. Conformity with Trust Indenture Act.
Every supplemental indenture executed pursuant to this Article shall
conform to the requirements of the Trust Indenture Act as then in effect.
Section 9.7. Notice of Supplemental Indenture.
Promptly after the execution by the Company and the Trustee of any
supplemental indenture pursuant to Section 9.2, the Company shall transmit to
the Holders of Outstanding Securities of any series affected thereby a notice
setting forth the substance of such supplemental indenture.
ARTICLE 10
COVENANTS
Section 10.1. Payment of Principal, any Premium, Interest and
Additional Amounts.
The Company covenants and agrees for the benefit of the Holders of the
Securities of each series that it will duly and punctually pay the principal of,
any premium and interest on and any Additional Amounts with respect to the
Securities of such series in accordance with the terms thereof, any Coupons
appertaining thereto and this Indenture. Any interest due on any Bearer Security
on or before the Maturity thereof, and any Additional Amounts payable with
respect to such interest, shall be payable only upon presentation and surrender
of the Coupons appertaining thereto for such interest as they severally mature.
Section 10.2. Maintenance of Office or Agency.
The Company shall maintain in each Place of Payment for any series of
Securities an Office or Agency where Securities of such series (but not Bearer
Securities, except as otherwise
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provided below, unless such Place of Payment is located outside the United
States) may be presented or surrendered for payment, where Securities of such
series may be surrendered for registration of transfer or exchange, where
Securities of such series that are convertible or exchangeable may be
surrendered for conversion or exchange, and where notices and demands to or upon
the Company in respect of the Securities of such series relating thereto and
this Indenture may be served. If Securities of a series are issuable as Bearer
Securities, the Company shall maintain, subject to any laws or regulations
applicable thereto, an Office or Agency in a Place of Payment for such series
which is located outside the United States where Securities of such series and
any Coupons appertaining thereto may be presented and surrendered for payment;
provided, however, that if the Securities of such series are listed on The Stock
Exchange of the United Kingdom and the Republic of Ireland or the Luxembourg
Stock Exchange or any other stock exchange located outside the United States and
such stock exchange shall so require, the Company shall maintain a Paying Agent
in London, Luxembourg or any other required city located outside the United
States, as the case may be, so long as the Securities of such series are listed
on such exchange. The Company will give prompt written notice to the Trustee of
the location, and any change in the location, of such Office or Agency. If at
any time the Company shall fail to maintain any such required Office or Agency
or shall fail to furnish the Trustee with the address thereof, such
presentations, surrenders, notices and demands may be made or served at the
Corporate Trust Office of the Trustee, except that Bearer Securities of such
series and any Coupons appertaining thereto may be presented and surrendered for
payment at the place specified for the purpose with respect to such Securities
as provided in or pursuant to this Indenture, and the Company hereby appoints
the Trustee as its agent to receive all such presentations, surrenders, notices
and demands.
Except as otherwise provided in or pursuant to this Indenture, no
payment of principal, premium, interest or Additional Amounts with respect to
Bearer Securities shall be made at any Office or Agency in the United States or
by check mailed to any address in the United States or by transfer to an account
maintained with a bank located in the United States; provided, however, if
amounts owing with respect to any Bearer Securities shall be payable in Dollars,
payment of principal of, any premium or interest on and any Additional Amounts
with respect to any such Security may be made at the Corporate Trust Office of
the Trustee or any Office or Agency designated by the Company in the Borough of
Manhattan, The City of New York, if (but only if) payment of the full amount of
such principal, premium, interest or Additional Amounts at all offices outside
the United States maintained for such purpose by the Company in accordance with
this Indenture is illegal or effectively precluded by exchange controls or other
similar restrictions.
The Company may also from time to time designate one or more other
Offices or Agencies where the Securities of one or more series may be presented
or surrendered for any or all such purposes and may from time to time rescind
such designations; provided, however, that no such designation or rescission
shall in any manner relieve the Company of its obligation to maintain an Office
or Agency in each Place of Payment for Securities of any series for such
purposes. The Company shall give prompt written notice to the Trustee of any
such designation or rescission and of any change in the location of any such
other Office or Agency. Unless otherwise provided in or pursuant to this
Indenture, the Company hereby designates as the Place
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of Payment for each series of Securities the Borough of Manhattan, The City of
New York, and initially appoints the Corporate Trust Office of the Trustee as
the Office or Agency of the Company in the Borough of Manhattan, The City of New
York for such purpose. The Company may subsequently appoint a different Office
or Agency in the Borough of Manhattan, The City of New York for the Securities
of any series.
Unless otherwise specified with respect to any Securities pursuant to
Section 3.1, if and so long as the Securities of any series (i) are denominated
in a Foreign Currency or (ii) may be payable in a Foreign Currency, or so long
as it is required under any other provision of this Indenture, then the Company
will maintain with respect to each such series of Securities, or as so required,
at least one exchange rate agent.
Section 10.3. Money for Securities Payments to Be Held in Trust.
If the Company shall at any time act as its own Paying Agent with
respect to any series of Securities, it shall, on or before each due date of the
principal of, any premium or interest on or Additional Amounts with respect to
any of the Securities of such series, segregate and hold in trust for the
benefit of the Persons entitled thereto a sum in the currency or currencies,
currency unit or units or composite currency or currencies in which the
Securities of such series are payable (except as otherwise specified pursuant to
Section 3.1 for the Securities of such series) sufficient to pay the principal
or any premium, interest or Additional Amounts so becoming due until such sums
shall be paid to such Persons or otherwise disposed of as herein provided, and
shall promptly notify the Trustee of its action or failure so to act.
Whenever the Company shall have one or more Paying Agents for any
series of Securities, it shall, on or prior to each due date of the principal
of, any premium or interest on or any Additional Amounts with respect to any
Securities of such series, deposit with any Paying Agent a sum (in the currency
or currencies, currency unit or units or composite currency or currencies
described in the preceding paragraph) sufficient to pay the principal or any
premium, interest or Additional Amounts so becoming due, such sum to be held in
trust for the benefit of the Persons entitled thereto, and (unless such Paying
Agent is the Trustee) the Company will promptly notify the Trustee of its action
or failure so to act.
The Company shall cause each Paying Agent for any series of Securities
other than the Trustee to execute and deliver to the Trustee an instrument in
which such Paying Agent shall agree with the Trustee, subject to the provisions
of this Section , that such Paying Agent shall:
(1) hold all sums held by it for the payment of the principal of, any
premium or interest on or any Additional Amounts with respect to Securities of
such series in trust for the benefit of the Persons entitled thereto until such
sums shall be paid to such Persons or otherwise disposed of as provided in or
pursuant to this Indenture;
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(2) give the Trustee notice of any default by the Company (or any other
obligor upon the Securities of such series) in the making of any payment of
principal, any premium or interest on or any Additional Amounts with respect to
the Securities of such series; and
(3) at any time during the continuance of any such default, upon the
written request of the Trustee, forthwith pay to the Trustee all sums so held in
trust by such Paying Agent.
The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held in
trust by the Company or such Paying Agent, such sums to be held by the Trustee
upon the same terms as those upon which such sums were held by the Company or
such Paying Agent; and, upon such payment by any Paying Agent to the Trustee,
such Paying Agent shall be released from all further liability with respect to
such sums.
Except as otherwise provided herein or pursuant hereto, any money
deposited with the Trustee or any Paying Agent, or then held by the Company, in
trust for the payment of the principal of, any premium or interest on or any
Additional Amounts with respect to any Security of any series or any Coupon
appertaining thereto and remaining unclaimed for two years after such principal
or any such premium or interest or any such Additional Amounts shall have become
due and payable shall be paid to the Company on Company Request, or (if then
held by the Company) shall be discharged from such trust; and the Holder of such
Security or any Coupon appertaining thereto shall thereafter, as an unsecured
general creditor, look only to the Company for payment thereof, and all
liability of the Trustee or such Paying Agent with respect to such trust money,
and all liability of the Company as trustee thereof, shall thereupon cease;
provided, however, that the Trustee or such Paying Agent, before being required
to make any such repayment, may at the expense of the Company cause to be
published once, in an Authorized Newspaper in each Place of Payment for such
series or to be mailed to Holders of Registered Securities of such series, or
both, notice that such money remains unclaimed and that, after a date specified
therein, which shall not be less than 30 days from the date of such publication
or mailing nor shall it be later than two years after such principal and any
premium or interest or Additional Amounts shall have become due and payable, any
unclaimed balance of such money then remaining will be repaid to the Company.
Section 10.4. Additional Amounts.
If any Securities of a series provide for the payment of Additional
Amounts, the Company agrees to pay to the Holder of any such Security or any
Coupon appertaining thereto Additional Amounts as provided in or pursuant to
this Indenture or such Securities. Whenever in this Indenture there is
mentioned, in any context, the payment of the principal of or any premium or
interest on, or in respect of, any Security of any series or any Coupon or the
net proceeds received on the sale or exchange of any Security of any series,
such mention shall be deemed to include mention of the payment of Additional
Amounts provided by the terms of such series established hereby or pursuant
hereto to the extent that, in such context, Additional
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Amounts are, were or would be payable in respect thereof pursuant to such terms,
and express mention of the payment of Additional Amounts (if applicable) in any
provision hereof shall not be construed as excluding the payment of Additional
Amounts in those provisions hereof where such express mention is not made.
Except as otherwise provided in or pursuant to this Indenture or the
Securities of the applicable series, if the Securities of a series provide for
the payment of Additional Amounts, at least 10 days prior to the first Interest
Payment Date with respect to such series of Securities (or if the Securities of
such series shall not bear interest prior to Maturity, the first day on which a
payment of principal is made), and at least 10 days prior to each date of
payment of principal or interest if there has been any change with respect to
the matters set forth in the below-mentioned Officers' Certificate, the Company
shall furnish to the Trustee and the principal Paying Agent or Paying Agents, if
other than the Trustee, an Officers' Certificate instructing the Trustee and
such Paying Agent or Paying Agents whether such payment of principal of and
premium, if any, or interest on the Securities of such series shall be made to
Holders of Securities of such series or the Coupons appertaining thereto who are
United States Aliens without withholding for or on account of any tax,
assessment or other governmental charge described in the Securities of such
series. If any such withholding shall be required, then such Officers'
Certificate shall specify by country the amount, if any, required to be withheld
on such payments to such Holders of Securities or Coupons, and the Company
agrees to pay to the Trustee or such Paying Agent the Additional Amounts
required by the terms of such Securities. The Company covenants to indemnify the
Trustee and any Paying Agent for, and to hold them harmless against, any loss,
liability or expense reasonably incurred without negligence or bad faith on
their part arising out of or in connection with actions taken or omitted by any
of them in reliance on any Officers' Certificate furnished pursuant to this
Section .
Section 10.5. [To come]
Section 10.6. [To come]
Section 10.7. Corporate Existence.
Subject to Article 8, the Company shall do or cause to be done all
things necessary to preserve and keep in full force and effect its corporate
existence and that of each Subsidiary and their respective rights (charter and
statutory) and franchises; provided, however, that the foregoing shall not
obligate the Company or any Subsidiary to preserve any such right or franchise
if the Company or any Subsidiary shall determine that the preservation thereof
is no longer desirable in the conduct of its business or the business of such
Subsidiary and that the loss thereof is not disadvantageous in any material
respect to any Holder.
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Section 10.8. Waiver of Certain Covenants.
The Company may omit in any particular instance to comply with any
term, provision or condition set forth in Section [s 10.5, 10.6 or] 10.7 with
respect to the Securities of any series if before the time for such compliance
the Holders of at least a majority in principal amount of the Outstanding
Securities of such series, by Act of such Holders, either shall waive such
compliance in such instance or generally shall have waived compliance with such
term, provision or condition, but no such waiver shall extend to or affect such
term, provision or condition except to the extent so expressly waived, and,
until such waiver shall become effective, the obligations of the Company and the
duties of the Trustee in respect of any such term, provision or condition shall
remain in full force and effect.
Section 10.9. Company Statement as to Compliance; Notice of Certain
Defaults.
(1) The Company shall deliver to the Trustee, within 120 days after the
end of each fiscal year, a written statement (which need not be contained in or
accompanied by an Officers' Certificate) signed by the principal executive
officer, the principal financial officer or the principal accounting officer of
the Company, stating that
(a) a review of the activities of the Company during such year
and of its performance under this Indenture has been made under his or
her supervision, and
(b) to the best of his or her knowledge, based on such review,
(a) the Company has complied with all the conditions and covenants
imposed on it under this Indenture throughout such year, or, if there
has been a default in the fulfillment of any such condition or
covenant, specifying each such default known to him or her and the
nature and status thereof, and (b) no event has occurred and is
continuing which is, or after notice or lapse of time or both would
become, an Event of Default, or, if such an event has occurred and is
continuing, specifying each such event known to him and the nature and
status thereof.
(2) The Company shall deliver to the Trustee, within five days after
the occurrence thereof, written notice of any Event of Default or any event
which after notice or lapse of time or both would become an Event of Default
pursuant to clause (4) of Section 5.1.
(3) The Trustee shall have no duty to monitor the Company's compliance
with the covenants contained in this Article 10 other than as specifically set
forth in this Section 10.9.
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ARTICLE 11
REDEMPTION OF SECURITIES
Section 11.1. Applicability of Article.
Redemption of Securities of any series at the option of the Company as
permitted or required by the terms of such Securities shall be made in
accordance with the terms of such Securities and (except as otherwise provided
herein or pursuant hereto) this Article.
Section 11.2. Election to Redeem; Notice to Trustee.
The election of the Company to redeem any Securities shall be evidenced
by or pursuant to a Board Resolution. In case of any redemption at the election
of the Company of (a) less than all of the Securities of any series or (b) all
of the Securities of any series, with the same issue date, interest rate or
formula, Stated Maturity and other terms, the Company shall, at least 60 days
prior to the Redemption Date fixed by the Company (unless a shorter notice shall
be satisfactory to the Trustee), notify the Trustee of such Redemption Date and
of the principal amount of Securities of such series to be redeemed.
Section 11.3. Selection by Trustee of Securities to be Redeemed.
If less than all of the Securities of any series with the same issue
date, interest rate or formula, Stated Maturity and other terms are to be
redeemed, the particular Securities to be redeemed shall be selected not more
than 60 days prior to the Redemption Date by the Trustee from the Outstanding
Securities of such series not previously called for redemption, by such method
as the Trustee shall deem fair and appropriate and which may provide for the
selection for redemption of portions of the principal amount of Registered
Securities of such series; provided, however, that no such partial redemption
shall reduce the portion of the principal amount of a Registered Security of
such series not redeemed to less than the minimum denomination for a Security of
such series established herein or pursuant hereto.
The Trustee shall promptly notify the Company and the Security
Registrar (if other than itself) in writing of the Securities selected for
redemption and, in the case of any Securities selected for partial redemption,
the principal amount thereof to be redeemed.
For all purposes of this Indenture, unless the context otherwise
requires, all provisions relating to the redemption of Securities shall relate,
in the case of any Securities redeemed or to
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be redeemed only in part, to the portion of the principal of such Securities
which has been or is to be redeemed.
Unless otherwise specified in or pursuant to this Indenture or the
Securities of any series, if any Security selected for partial redemption is
converted into Common Stock or exchanged for other securities in part before
termination of the conversion or exchange right with respect to the portion of
the Security so selected, the converted portion of such Security shall be deemed
(so far as may be) to be the portion selected for redemption. Securities which
have been converted or exchanged during a selection of Securities to be redeemed
shall be treated by the Trustee as Outstanding for the purpose of such
selection.
Section 11.4. Notice of Redemption.
Notice of redemption shall be given in the manner provided in Section
1.6, not less than 30 nor more than 60 days prior to the Redemption Date, unless
a shorter period is specified in the Securities to be redeemed, to the Holders
of Securities to be redeemed. Failure to give notice by mailing in the manner
herein provided to the Holder of any Registered Securities designated for
redemption as a whole or in part, or any defect in the notice to any such
Holder, shall not affect the validity of the proceedings for the redemption of
any other Securities or portion thereof.
Any notice that is mailed to the Holder of any Registered Securities in
the manner herein provided shall be conclusively presumed to have been duly
given, whether or not such Holder receives the notice.
All notices of redemption shall state:
(1) the Redemption Date,
(2) the Redemption Price,
(3) if less than all Outstanding Securities of any series are to be
redeemed, the identification (and, in the case of partial redemption, the
principal amount) of the particular Security or Securities to be redeemed,
(4) in case any Security is to be redeemed in part only, the notice
which relates to such Security shall state that on and after the Redemption
Date, upon surrender of such Security, the Holder of such Security will receive,
without charge, a new Security or Securities of authorized denominations for the
principal amount thereof remaining unredeemed,
(5) that, on the Redemption Date, the Redemption Price shall become due
and payable upon each such Security or portion thereof to be redeemed, and, if
applicable, that interest thereon shall cease to accrue on and after said date,
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(6) the place or places where such Securities, together (in the case of
Bearer Securities) with all Coupons appertaining thereto, if any, maturing after
the Redemption Date, are to be surrendered for payment of the Redemption Price
and any accrued interest and Additional Amounts pertaining thereto,
(7) that the redemption is for a sinking fund, if such is the case,
(8) that, unless otherwise specified in such notice, Bearer Securities
of any series, if any, surrendered for redemption must be accompanied by all
Coupons maturing subsequent to the date fixed for redemption or the amount of
any such missing Coupon or Coupons will be deducted from the Redemption Price,
unless security or indemnity satisfactory to the Company, the Trustee and any
Paying Agent is furnished,
(9) if Bearer Securities of any series are to be redeemed and no
Registered Securities of such series are to be redeemed, and if such Bearer
Securities may be exchanged for Registered Securities not subject to redemption
on the Redemption Date pursuant to Section 3.5 or otherwise, the last date, as
determined by the Company, on which such exchanges may be made,
(10) in the case of Securities of any series that are convertible into
Common Stock or exchangeable for other securities, the conversion or exchange
price or rate, the date or dates on which the right to convert or exchange the
principal of the Securities of such series to be redeemed will commence or
terminate and the place or places where such Securities may be surrendered for
conversion or exchange, and
(11) the CUSIP number or the Euroclear or the Cedel reference numbers
of such Securities, if any (or any other numbers used by a Depository to
identify such Securities).
A notice of redemption published as contemplated by Section 1.6 need
not identify particular Registered Securities to be redeemed.
Notice of redemption of Securities to be redeemed at the election of
the Company shall be given by the Company or, at the Company's request, by the
Trustee in the name and at the expense of the Company.
Section 11.5. Deposit of Redemption Price.
On or prior to any Redemption Date, the Company shall deposit, with
respect to the Securities of any series called for redemption pursuant to
Section 11.4, with the Trustee or with a Paying Agent (or, if the Company is
acting as its own Paying Agent, segregate and hold in trust as provided in
Section 10.3) an amount of money in the applicable Currency sufficient to pay
the Redemption Price of, and (except if the Redemption Date shall be an Interest
Payment Date, unless otherwise specified pursuant to Section 3.1 or in the
Securities of such series) any accrued
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interest on and Additional Amounts with respect thereto, all such Securities or
portions thereof which are to be redeemed on that date.
Section 11.6. Securities Payable on Redemption Date.
Notice of redemption having been given as aforesaid, the Securities so
to be redeemed shall, on the Redemption Date, become due and payable at the
Redemption Price therein specified, and from and after such date (unless the
Company shall default in the payment of the Redemption Price and accrued
interest) such Securities shall cease to bear interest and the Coupons for such
interest appertaining to any Bearer Securities so to be redeemed, except to the
extent provided below, shall be void. Upon surrender of any such Security for
redemption in accordance with said notice, together with all Coupons, if any,
appertaining thereto maturing after the Redemption Date, such Security shall be
paid by the Company at the Redemption Price, together with any accrued interest
and Additional Amounts to the Redemption Date; provided, however, that, except
as otherwise provided in or pursuant to this Indenture or the Bearer Securities
of such series, installments of interest on Bearer Securities whose Stated
Maturity is on or prior to the Redemption Date shall be payable only upon
presentation and surrender of Coupons for such interest (at an Office or Agency
located outside the United States except as otherwise provided in Section 10.2),
and provided, further, that, except as otherwise specified in or pursuant to
this Indenture or the Registered Securities of such series, installments of
interest on Registered Securities whose Stated Maturity is on or prior to the
Redemption Date shall be payable to the Holders of such Securities, or one or
more Predecessor Securities, registered as such at the close of business on the
Regular Record Dates therefor according to their terms and the provisions of
Section 3.7.
If any Bearer Security surrendered for redemption shall not be
accompanied by all appurtenant Coupons maturing after the Redemption Date, such
Security may be paid after deducting from the Redemption Price an amount equal
to the face amount of all such missing Coupons, or the surrender of such missing
Coupon or Coupons may be waived by the Company and the Trustee if there be
furnished to them such security or indemnity as they may require to save each of
them and any Paying Agent harmless. If thereafter the Holder of such Security
shall surrender to the Trustee or any Paying Agent any such missing Coupon in
respect of which a deduction shall have been made from the Redemption Price,
such Holder shall be entitled to receive the amount so deducted; provided,
however, that any interest or Additional Amounts represented by Coupons shall be
payable only upon presentation and surrender of those Coupons at an Office or
Agency for such Security located outside of the United States except as
otherwise provided in Section 10.2.
If any Security called for redemption shall not be so paid upon
surrender thereof for redemption, the principal and any premium, until paid,
shall bear interest from the Redemption Date at the rate prescribed therefor in
the Security.
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<PAGE> 84
Section 11.7. Securities Redeemed in Part.
Any Registered Security which is to be redeemed only in part shall be
surrendered at any Office or Agency for such Security (with, if the Company or
the Trustee so requires, due endorsement by, or a written instrument of transfer
in form satisfactory to the Company and the Trustee duly executed by, the Holder
thereof or his attorney duly authorized in writing) and the Company shall
execute and the Trustee shall authenticate and deliver to the Holder of such
Security without service charge, a new Registered Security or Securities of the
same series, containing identical terms and provisions, of any authorized
denomination as requested by such Holder in aggregate principal amount equal to
and in exchange for the unredeemed portion of the principal of the Security so
surrendered. If a Security in global form is so surrendered, the Company shall
execute, and the Trustee shall authenticate and deliver to the U.S. Depository
or other Depository for such Security in global form as shall be specified in
the Company Order with respect thereto to the Trustee, without service charge, a
new Security in global form in a denomination equal to and in exchange for the
unredeemed portion of the principal of the Security in global form so
surrendered.
ARTICLE 12
SINKING FUNDS
Section 12.1. Applicability of Article.
The provisions of this Article shall be applicable to any sinking fund
for the retirement of Securities of a series, except as otherwise permitted or
required in or pursuant to this Indenture or any Security of such series issued
pursuant to this Indenture.
The minimum amount of any sinking fund payment provided for by the
terms of Securities of any series is herein referred to as a "mandatory sinking
fund payment", and any payment in excess of such minimum amount provided for by
the terms of Securities of such series is herein referred to as an "optional
sinking fund payment". If provided for by the terms of Securities of any series,
the cash amount of any sinking fund payment may be subject to reduction as
provided in Section 12.2. Each sinking fund payment shall be applied to the
redemption of Securities of any series as provided for by the terms of
Securities of such series and this Indenture.
Section 12.2. Satisfaction of Sinking Fund Payments with Securities.
The Company may, in satisfaction of all or any part of any sinking fund
payment with respect to the Securities of any series to be made pursuant to the
terms of such Securities (1) deliver Outstanding Securities of such series
(other than any of such Securities previously called
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<PAGE> 85
for redemption or any of such Securities in respect of which cash shall have
been released to the Company), together in the case of any Bearer Securities of
such series with all unmatured Coupons appertaining thereto, and (2) apply as a
credit Securities of such series which have been redeemed either at the election
of the Company pursuant to the terms of such series of Securities or through the
application of permitted optional sinking fund payments pursuant to the terms of
such Securities, provided that such series of Securities have not been
previously so credited. Such Securities shall be received and credited for such
purpose by the Trustee at the Redemption Price specified in such Securities for
redemption through operation of the sinking fund and the amount of such sinking
fund payment shall be reduced accordingly. If, as a result of the delivery or
credit of Securities of any series in lieu of cash payments pursuant to this
Section 12.2, the principal amount of Securities of such series to be redeemed
in order to satisfy the remaining sinking fund payment shall be less than
$100,000, the Trustee need not call Securities of such series for redemption,
except upon Company Request, and such cash payment shall be held by the Trustee
or a Paying Agent and applied to the next succeeding sinking fund payment,
provided, however, that the Trustee or such Paying Agent shall at the request of
the Company from time to time pay over and deliver to the Company any cash
payment so being held by the Trustee or such Paying Agent upon delivery by the
Company to the Trustee of Securities of that series purchased by the Company
having an unpaid principal amount equal to the cash payment requested to be
released to the Company.
Section 12.3. Redemption of Securities for Sinking Fund.
Not less than 75 days prior to each sinking fund payment date for any
series of Securities, the Company shall deliver to the Trustee an Officers'
Certificate specifying the amount of the next ensuing mandatory sinking fund
payment for that series pursuant to the terms of that series, the portion
thereof, if any, which is to be satisfied by payment of cash and the portion
thereof, if any, which is to be satisfied by delivering and crediting of
Securities of that series pursuant to Section 12.2, and the optional amount, if
any, to be added in cash to the next ensuing mandatory sinking fund payment, and
will also deliver to the Trustee any Securities to be so credited and not
theretofore delivered. If such Officers' Certificate shall specify an optional
amount to be added in cash to the next ensuing mandatory sinking fund payment,
the Company shall thereupon be obligated to pay the amount therein specified.
Not less than 60 days before each such sinking fund payment date the Trustee
shall select the Securities to be redeemed upon such sinking fund payment date
in the manner specified in Section 11.3 and cause notice of the redemption
thereof to be given in the name of and at the expense of the Company in the
manner provided in Section 11.4. Such notice having been duly given, the
redemption of such Securities shall be made upon the terms and in the manner
stated in Sections 11.6 and 11.7.
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<PAGE> 86
ARTICLE 13
REPAYMENT AT THE OPTION OF HOLDERS
Section 13.1. Applicability of Article.
Securities of any series which are repayable at the option of the
Holders thereof before their Stated Maturity shall be repaid in accordance with
the terms of the Securities of such series. The repayment of any principal
amount of Securities pursuant to such option of the Holder to require repayment
of Securities before their Stated Maturity, for purposes of Section 3.9, shall
not operate as a payment, redemption or satisfaction of the Indebtedness
represented by such Securities unless and until the Company, at its option,
shall deliver or surrender the same to the Trustee with a directive that such
Securities be cancelled. Notwithstanding anything to the contrary contained in
this Section 13.1, in connection with any repayment of Securities, the Company
may arrange for the purchase of any Securities by an agreement with one or more
investment bankers or other purchasers to purchase such Securities by paying to
the Holders of such Securities on or before the close of business on the
repayment date an amount not less than the repayment price payable by the
Company on repayment of such Securities, and the obligation of the Company to
pay the repayment price of such Securities shall be satisfied and discharged to
the extent such payment is so paid by such purchasers.
ARTICLE 14
SECURITIES IN FOREIGN CURRENCIES
Section 14.1. Applicability of Article.
Whenever this Indenture provides for (i) any action by, or the
determination of any of the rights of, Holders of Securities of any series in
which not all of such Securities are denominated in the same Currency, or (ii)
any distribution to Holders of Securities, in the absence of any provision to
the contrary in the form of Security of any particular series or pursuant to
this Indenture or the Securities, any amount in respect of any Security
denominated in a Currency other than Dollars shall be treated for any such
action or distribution as that amount of Dollars that could be obtained for such
amount on such reasonable basis of exchange and as of the record date with
respect to Registered Securities of such series (if any) for such action,
determination of rights or distribution (or, if there shall be no applicable
record date, such other date reasonably proximate to the date of such action,
determination of rights or distribution) as the Company may specify in a written
notice to the Trustee.
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<PAGE> 87
ARTICLE 15
MEETINGS OF HOLDERS OF SECURITIES
Section 15.1. Purposes for Which Meetings May Be Called.
A meeting of Holders of Securities of any series may be called at any
time and from time to time pursuant to this Article to make, give or take any
request, demand, authorization, direction, notice, consent, waiver or other Act
provided by this Indenture to be made, given or taken by Holders of Securities
of such series.
Section 15.2. Call, Notice and Place of Meetings.
(1) The Trustee may at any time call a meeting of Holders of Securities
of any series for any purpose specified in Section 15.1, to be held at such time
and at such place in the Borough of Manhattan, The City of New York, or, if
Securities of such series have been issued in whole or in part as Bearer
Securities, in London or in such place outside the United States as the Trustee
shall determine. Notice of every meeting of Holders of Securities of any series,
setting forth the time and the place of such meeting and in general terms the
action proposed to be taken at such meeting, shall be given, in the manner
provided in Section 1.6, not less than 21 nor more than 180 days prior to the
date fixed for the meeting.
(2) In case at any time the Company (by or pursuant to a Board
Resolution) or the Holders of at least 10% in principal amount of the
Outstanding Securities of any series shall have requested the Trustee to call a
meeting of the Holders of Securities of such series for any purpose specified in
Section 15.1, by written request setting forth in reasonable detail the action
proposed to be taken at the meeting, and the Trustee shall not have mailed
notice of or made the first publication of the notice of such meeting within 21
days after receipt of such request (whichever shall be required pursuant to
Section 1.6) or shall not thereafter proceed to cause the meeting to be held as
provided herein, then the Company or the Holders of Securities of such series in
the amount above specified, as the case may be, may determine the time and the
place in the Borough of Manhattan, The City of New York, or, if Securities of
such series are to be issued as Bearer Securities, in London for such meeting
and may call such meeting for such purposes by giving notice thereof as provided
in clause (1) of this Section .
Section 15.3. Persons Entitled to Vote at Meetings.
To be entitled to vote at any meeting of Holders of Securities of any
series, a Person shall be (1) a Holder of one or more Outstanding Securities of
such series, or (2) a Person appointed by an instrument in writing as proxy for
a Holder or Holders of one or more Outstanding Securities of such series by such
Holder or Holders. The only Persons who shall be
79
<PAGE> 88
entitled to be present or to speak at any meeting of Holders of Securities of
any series shall be the Persons entitled to vote at such meeting and their
counsel, any representatives of the Trustee and its counsel and any
representatives of the Company and its counsel.
Section 15.4. Quorum; Action.
The Persons entitled to vote a majority in principal amount of the
Outstanding Securities of a series shall constitute a quorum for any meeting of
Holders of Securities of such series. In the absence of a quorum within 30
minutes after the time appointed for any such meeting, the meeting shall, if
convened at the request of Holders of Securities of such series, be dissolved.
In any other case the meeting may be adjourned for a period of not less than 10
days as determined by the chairman of the meeting prior to the adjournment of
such meeting. In the absence of a quorum at any reconvened meeting, such
reconvened meeting may be further adjourned for a period of not less than 10
days as determined by the chairman of the meeting prior to the adjournment of
such reconvened meeting. Notice of the reconvening of any adjourned meeting
shall be given as provided in Section 15.2(1), except that such notice need be
given only once not less than five days prior to the date on which the meeting
is scheduled to be reconvened. Notice of the reconvening of an adjourned meeting
shall state expressly the percentage, as provided above, of the principal amount
of the Outstanding Securities of such series which shall constitute a quorum.
Except as limited by the proviso to Section 9.2, any resolution
presented to a meeting or adjourned meeting duly reconvened at which a quorum is
present as aforesaid may be adopted only by the affirmative vote of the Holders
of a majority in principal amount of the Outstanding Securities of that series;
provided, however, that, except as limited by the proviso to Section 9.2, any
resolution with respect to any request, demand, authorization, direction,
notice, consent, waiver or other Act which this Indenture expressly provides may
be made, given or taken by the Holders of a specified percentage, which is less
than a majority, in principal amount of the Outstanding Securities of a series
may be adopted at a meeting or an adjourned meeting duly reconvened and at which
a quorum is present as aforesaid by the affirmative vote of the Holders of such
specified percentage in principal amount of the Outstanding Securities of such
series.
Any resolution passed or decision taken at any meeting of Holders of
Securities of any series duly held in accordance with this Section shall be
binding on all the Holders of Securities of such series and the Coupons
appertaining thereto, whether or not such Holders were present or represented at
the meeting.
Notwithstanding the foregoing provisions of this Section 15.4, if any
action is to be taken at a meeting of Holders of Securities of any series with
respect to any request, demand authorization, direction, notice, consent, waiver
or other action that this Indenture expressly provides may be made, given or
taken by the Holders of a specified percentage in principal amount of all
Outstanding Securities affected thereby, or of the holders of such series and
one or more additional series:
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<PAGE> 89
(i) there shall be no minimum quorum requirement for such meeting; and
(ii) the principal amount of the Outstanding Shares of such series that
vote in favor of such request, demand, authorization, direction, notice,
consent, waiver or other action shall be taken into account in determining
whether such request, demand, authorization, direction, notice, consent, waiver
or other action has been made, given or taken under this Indenture.
Section 15.5. Determination of Voting Rights; Conduct and Adjournment
of Meetings.
(1) Notwithstanding any other provisions of this Indenture, the Trustee
may make such reasonable regulations as it may deem advisable for any meeting of
Holders of Securities of such series in regard to proof of the holding of
Securities of such series and of the appointment of proxies and in regard to the
appointment and duties of inspectors of votes, the submission and examination of
proxies, certificates and other evidence of the right to vote, and such other
matters concerning the conduct of the meeting as it shall deem appropriate.
Except as otherwise permitted or required by any such regulations, the holding
of Securities shall be proved in the manner specified in Section 1.4 and the
appointment of any proxy shall be proved in the manner specified in Section 1.4
or by having the signature of the person executing the proxy witnessed or
guaranteed by any trust company, bank or banker authorized by Section 1.4 to
certify to the holding of Bearer Securities. Such regulations may provide that
written instruments appointing proxies, regular on their face, may be presumed
valid and genuine without the proof specified in Section 1.4 or other proof.
(2) The Trustee shall, by an instrument in writing, appoint a temporary
chairman of the meeting, unless the meeting shall have been called by the
Company or by Holders of Securities as provided in Section 15.2(2), in which
case the Company or the Holders of Securities of the series calling the meeting,
as the case may be, shall in like manner appoint a temporary chairman. A
permanent chairman and a permanent secretary of the meeting shall be elected by
vote of the Persons entitled to vote a majority in principal amount of the
Outstanding Securities of such series represented at the meeting.
(3) At any meeting, each Holder of a Security of such series or proxy
shall be entitled to one vote for each $1,000 principal amount of Securities of
such series held or represented by him; provided, however, that no vote shall be
cast or counted at any meeting in respect of any Security challenged as not
Outstanding and ruled by the chairman of the meeting to be not Outstanding. The
chairman of the meeting shall have no right to vote, except as a Holder of a
Security of such series or proxy.
(4) Any meeting of Holders of Securities of any series duly called
pursuant to Section 15.2 at which a quorum is present may be adjourned from time
to time by Persons entitled to vote a majority in principal amount of the
Outstanding Securities of such series represented at the meeting; and the
meeting may be held as so adjourned without further notice.
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<PAGE> 90
Section 15.6. Counting Votes and Recording Action of Meetings.
The vote upon any resolution submitted to any meeting of Holders of
Securities of any series shall be by written ballots on which shall be
subscribed the signatures of the Holders of Securities of such series or of
their representatives by proxy and the principal amounts and serial numbers of
the Outstanding Securities of such series held or represented by them. The
permanent chairman of the meeting shall appoint two inspectors of votes who
shall count all votes cast at the meeting for or against any resolution and who
shall make and file with the secretary of the meeting their verified written
reports in triplicate of all votes cast at the meeting. A record, at least in
triplicate, of the proceedings of each meeting of Holders of Securities of any
series shall be prepared by the secretary of the meeting and there shall be
attached to said record the original reports of the inspectors of votes on any
vote by ballot taken thereat and affidavits by one or more persons having
knowledge of the facts setting forth a copy of the notice of the meeting and
showing that said notice was given as provided in Section 15.2 and, if
applicable, Section 15.4. Each copy shall be signed and verified by the
affidavits of the permanent chairman and secretary of the meeting and one such
copy shall be delivered to the Company, and another to the Trustee to be
preserved by the Trustee, the latter to have attached thereto the ballots voted
at the meeting. Any record so signed and verified shall be conclusive evidence
of the matters therein stated.
* * * * *
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<PAGE> 91
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed, and their respective corporate seals to be hereunto affixed, all
as of the day and year first above written.
[SEAL] HOMESIDE LENDING, INC.
Attest:
By___________________________________________
Name:
Title:
[SEAL] ____________________________________________,
as Trustee
Attest:
By__________________________________________
Name:
Title:
83
<PAGE> 92
STATE OF FLORIDA )
: SS.:
COUNTY OF JACKSONVILLE )
On the _____ day of __________, 1997, before me personally came
______________________________________________________, to me known, who, being
by me duly sworn, did depose and say that he is a _____________________________
of HomeSide Lending, Inc., a __________ corporation, one of the persons
described in and who executed the foregoing instrument; that he knows the seal
of said Corporation; that the seal affixed to said instrument is such
Corporation's seal; that it was so affixed by authority of the Board of
Directors of said Corporation; and that he signed his name thereto by like
authority.
_________________________________
Notary Public
[NOTARIAL SEAL]
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<PAGE> 93
STATE OF NEW YORK )
: SS.:
COUNTY OF NEW YORK )
On the _____ day of __________, 1997, before me personally came
______________________________________________________, to me known, who, being
by me duly sworn, did depose and say that she is a ___________________________
of ______________________, a banking corporation organized and existing under
the laws of the State of New York, one of the persons described in and who
executed the foregoing instrument; that he knows the seal of said Corporation;
that the seal affixed to said instrument is such Corporation's seal; that it was
so affixed by authority of the Board of Directors of said Corporation; and that
he signed his name thereto by like authority.
______________________________
Notary Public
[NOTARIAL SEAL]
85
<PAGE> 1
EXHIBIT 12.1
HOMESIDE LENDING, INC.
COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
(Dollar amounts in thousands)
<TABLE>
The following table sets forth the ratio of earnings to fixed charges of
HomeSide Lending, Inc. for the period March 16, 1996 (start of operations) to
May 31, 1996. The ratio of earnings to fixed charges is computed by dividing
net fixed charges (interest expense on all debt plus the interest portion of
rent expense) into earnings before income taxes and fixed charges.
<CAPTION>
For the period For the period For the period For the period
March 15, 1996 three months ended three months ended March 15, 1996 to
to May 31, 1996 August 31, 1996 November 30, 1996 November 30, 1996
--------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Earnings before income taxes $13,478 $23,125 $27,738 $64,341
------- ------- ------- -------
Interest expense 12,582 17,584 16,140 46,416
Interest portion of rental expense 259 411 440 1,110
------- ------- ------- -------
Fixed charges 12,851 18,095 16,580 47,528
------- ------- ------- -------
Earnings before fixed charges 25,329 41,220 44,318 111,867
------- ------- ------- -------
Fixed Charges:
Interest expense 12,592 17,684 16,140 46,416
Interest portion of rental expense 259 411 440 1,110
------- ------- ------- -------
Fixed charges $12,851 $18,095 $16,580 $47,526
======= ======= ======= =======
Ratio of earnings to fixed charges 2.06 2.20 2.67 2.35
======= ======= ======= =======
</TABLE>
<PAGE> 1
EXHIBIT 12.2
BANCBOSTON MORTGAGE CORPORATION
COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
(DOLLAR AMOUNTS IN THOUSANDS)
The following table sets forth the ratio of earnings to fixed charges of
BancBoston Mortgage Corporation for the five fiscal years ended December 31,
1995, the quarter ended March 31, 1995 and the period January 1, 1996 to March
15, 1996. The ratio of earnings to fixed charges is computed by dividing net
fixed charges (interest expense on all debt plus the interest portion of rent
expense) into earnings before income taxes and fixed charges.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, FOR THE FOR THE PERIOD
-------------------------------------------------- QUARTER ENDED JANUARY 1, 1996
1991 1992 1993 1994 1995 MARCH 31, 1995 TO MARCH 15, 1996
------- -------- -------- ------- ------- -------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings before income taxes....... $30,545 $(11,663) $(48,641) $ 4,475 $96,760 $5,706 $(116,394)
------- -------- -------- ------- ------- ------ -----------------
Interest expense................... 27,686 38,855 44,199 33,952 27,128 6,079 10,089
Interest portion of rental
expense.......................... 1,207 1,081 1,204 1,203 1,296 388 310
------- -------- -------- ------- ------- ------ -----------------
Fixed charges...................... 28,893 39,936 45,403 35,155 28,424 6,467 10,399
------- -------- -------- ------- ------- ------ -----------------
Earnings before fixed charges...... 59,438 28,273 (3,238) 39,630 125,184 12,173 (105,995)
------- -------- -------- ------- ------- ------ -----------------
FIXED CHARGES:
Interest expense................... 27,686 38,855 44,199 33,952 27,128 6,079 10,089
Interest portion of rental
expense.......................... 1,207 1,081 1,204 1,203 1,296 388 310
------- -------- -------- ------- ------- ------ -----------------
Fixed charges...................... $28,893 $ 39,936 $ 45,403 $35,155 $28,424 $6,467 $ 10,399
------- -------- -------- ------- ------- ------ -----------------
Ratio of earnings to fixed
charges.......................... 2.06 0.71(a) (a) 1.13 4.40 1.88 (a)
======= ======== ======== ======= ======= ============== ================
</TABLE>
- ---------------
(a) As a result of the loss incurred in this period, the Company was unable to
fully cover the indicated fixed charges.
<PAGE> 1
EXHIBIT 12.3
BARNETT MORTGAGE COMPANY
COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
The preceding table set forth the ratio of earnings to fixed changes of
Barnett Mortgage Company for the five fiscal years ended December 31, 1995, and
the quarters ended March 31, 1996 and 1995. The ratio of earnings to fixed
charges is computed by dividing net fixed charges (interest expense on all debt
plus the interest portion of rent expense) into earnings before income taxes and
fixed charges.
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
JANUARY 1, 1995 JANUARY 1, 1995
1991 1992 1993 1994 1995 TO MARCH 31, 1995 TO MARCH 31, 1995
---- ---- ---- ---- ---- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings (loss) before income taxes... $ -- $883 $ 191 $(2,520) $(29,975) $(5,919) $(4,888)
---- ---- ------ ------- -------- ------- -------
Interest expense...................... 568 531 1,415 4,911 20,427 6,094 2,919
Interest portion of rental expense.... 219 273 422 569 1,461 272 190
---- ---- ------ ------- -------- ------- -------
Fixed charges......................... 767 804 1,837 5,480 21,888 6,366 3,109
---- ---- ------ ------- -------- ------- -------
Earnings (loss) before fixed
charges............................. 767 1,687 2,028 2,960 (8,087) 447 (1,779)
---- ---- ------ ------- -------- ------- -------
FIXED CHARGES:
Interest expense...................... 568 531 1,415 4,911 20,427 6,094 2,919
Interest portion of rental expense.... 219 273 422 569 1,461 272 190
---- ---- ------ ------- -------- ------- -------
Fixed charges......................... $787 $804 $1,837 $ 5,480 $ 21,888 $ 6,366 $ 3,109
---- ---- ------ ------- -------- ------- -------
Ratio of earnings to fixed charges.... 1.00 2.10 1.10 (a) (a) 0.07 (a)
==== ==== ====== ======= ======== ======= =======
<FN>
- ---------------
(a) As a result of the loss incurred in this period, the Company was unable to fully cover the indicated fixed charges.
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the use
of our report, dated March 8, 1996, on our audits of the consolidated financial
statements of Barnett Mortgage Company and subsidiaries (and to all references
to our firm) included in or made a part of this registration statement.
ARTHUR ANDERSEN LLP
Jacksonville, Florida
February 5, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1
(File No. 333- ) of our report, which includes an explanatory paragraph on
the adoption of Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes, and the changing of methods for accounting for purchased
mortgage servicing rights and accounting for mortgage servicing fee income,
dated 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, on our audits of the
consolidated financial statements of BancBoston Mortgage Corporation. We also
consent to the reference to our firm under the caption "Experts."
COOPERS & LYBRAND, L.L.P.
Jacksonville, Florida
February 5, 1997
<PAGE> 1
EXHIBIT 23.3
The Board of Directors
HomeSide Lending, Inc.:
The audits of the consolidated financial statements of BancPLUS Financial
Corporation and subsidiary referred to in our report dated March 17, 1995,
included the related financial statement schedule as of December 31, 1993 and
1994, included in the registration statement. This financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement schedule based on our audits. In
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statement taken as a whole, presents fairly in
all material respects the information set forth therein.
We consent to the use of our reports included herein and to the reference
to our firm under the heading "Experts" in the prospectus. Our report refers to
a change to the asset and liability method of accounting for income taxes.
KPMG Peat Marwick LLP
San Antonio, Texas
February 5, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION ENTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF HOMESIDE LENDING, INC. AS OF AND FOR THE
PERIOD ENDED NOVEMBER 30, 1996 APPEARING ON FORM S-1 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM S-1.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-20-1997
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0
0
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