<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 4, 1998
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
REGISTRATION STATEMENT ON
FORM S-3
AND
POST-EFFECTIVE AMENDMENT NO. 1
ON FORM S-3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
------------------------
<TABLE>
<S> <C> <C>
HOMESIDE LENDING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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: From time
to time after the Registration Statement becomes effective.
------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
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 other than securities offered only in connection with dividend or interest
reinvestment plans, 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>
<CAPTION>
================================================================================================================
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Debt Securities................................................... $500,000,000 $147,500
================================================================================================================
</TABLE>
(1) Such amount shall be increased if any Debt Securities are issued at an
original issue discount, by an amount such that the net proceeds to be
received by the Registrant shall be equal to the above amount to be
registered. Pursuant to Rule 429 under the Securities Act of 1933, the
Prospectus included in the Registration Statement is a combined prospectus
and also relates to the remaining unsold Debt Securities having an aggregate
offering price of $250,000,000 previously registered by the Registrant under
registration statement No. 333-21193 previously filed by the Registrant on
Form S-1 and declared effective on May 15, 1997. This Registration
Statement, which is a new registration statement, also constitutes
Post-Effective Amendment No. 1 to registration statement No. 333-21193, and
such Post-Effective Amendment No. 1 shall hereafter become effective
concurrently with the effectiveness of this Registration Statement and in
accordance with Section 8(c) of the Securities Act of 1933. This
Registration Statement and the registration statement amended hereby are
collectively referred to herein as the "Registration Statement."
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.
PROSPECTUS SUBJECT TO COMPLETION
DATED FEBRUARY 4, 1998
$750,000,000
HOMESIDE LENDING, INC.
MEDIUM-TERM NOTES
DUE NINE MONTHS OR MORE FROM DATE OF ISSUE
------------------------
HomeSide Lending, Inc. (the "Issuer" and, together with its consolidated
subsidiaries, "HomeSide") may offer from time to time up to $750,000,000
aggregate initial offering price of its Medium-Term Notes Due Nine Months or
More From Date of Issue (the "Notes"). 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. The Notes will not be
convertible into any other securities. The Notes will be issued in minimum
denominations of $1,000 and integral multiples thereof, unless otherwise
specified in the applicable Pricing Supplement. All Notes 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. As of November 30, 1997, the Issuer had total outstanding
indebtedness of $2,503.3 million, consisting of $20.7 million of secured
indebtedness and $750 million of the Notes, as well as $1,732.6 million of
unsecured indebtedness outstanding under the Issuer's bank credit facility.
Under certain circumstances, amounts outstanding under the bank credit facility
become secured obligations. See "Description of Certain Indebtedness -- Bank
Credit Agreement" and "Description of Notes -- General."
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"), 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 June 30 and December 31 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 14 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 OR ANY SUPPLEMENT HERETO. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
==================================================================================================================================
PRICE TO AGENTS' DISCOUNTS PROCEEDS TO
PUBLIC(1) AND COMMISSIONS(1)(2) ISSUER(1)(3)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note............................. 100% .125% - .750% 99.875% - 99.250%
- ----------------------------------------------------------------------------------------------------------------------------------
Total................................ $750,000,000 $937,500 - $5,625,000 $749,062,500 - $744,375,000
==================================================================================================================================
</TABLE>
(1) Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Chase Securities Inc., J.P. Morgan Securities Inc., NationsBanc Montgomery
Securities LLC, Salomon Brothers Inc and UBS Securities LLC (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 $1,750,500.
------------------------
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 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.
J.P. MORGAN & CO.
NATIONSBANC MONTGOMERY SECURITIES LLC
SALOMON SMITH BARNEY
UBS SECURITIES
------------------------
The date of this Prospectus is February , 1998.
<PAGE> 3
In connection with the offering of Notes purchased by one or more Agents as
principal on a fixed offering price basis, such Agent(s) may engage in
transactions that stabilize, maintain or otherwise affect the price of Notes.
Such transactions may include stabilizing and the purchase of Notes to cover
short positions of such Agent(s). For a description of these activities, see
"Plan of Distribution."
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.
------------------------
AVAILABLE INFORMATION
The Issuer has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-3 (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 or incorporated by reference 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 Issuer is subject to the
reporting requirements of Section 15(d) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and in accordance therewith files reports and
other information with the Commission. The Registration Statement and the
reports and other information filed by the Issuer with the Commission 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. 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 Notes are outstanding, the Issuer will
continue to file with the Commission and provide to the trustee and, upon
request, to the holders of the Notes, 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.
------------------------
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 "BBMC Acquisition"), which was accounted for as a purchase transaction. The
Parent acquired Barnett Mortgage Company ("BMC"), now known as HomeSide
Holdings, Inc. ("HHI"), on May 31, 1996 (the "BMC 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 BMC, except certain 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; unless otherwise specified, all references herein to 1997 refer to
the fiscal year ended February 28, 1997, and all references herein to 1998 refer
to the fiscal year ended February 28, 1998.
2
<PAGE> 4
On October 25, 1997, the Parent entered into an Agreement and Plan of
Merger (the "Merger Agreement") with National Australia Bank Limited ("NAB")
pursuant to which a wholly-owned subsidiary of NAB will be merged with and into
the Parent, with the Parent being the surviving corporation (the "Merger"). Each
share of the Parent's capital stock issued and outstanding at the effective time
of the Merger will be converted into the right to receive $27.825 in cash and
the Parent will become a direct or indirect wholly-owned subsidiary of NAB. The
transaction was approved by the Parent's stockholders at a special stockholders'
meeting held on January 16, 1998 and by the Federal Reserve Bank on January 30,
1998. The proposed Merger is expected to close in February 1998. The transaction
will be accounted for as a purchase. As a result, all assets and liabilities
will be recorded at their fair value on the closing date and the purchase price
in excess of the fair value of net assets acquired will be recorded as goodwill.
All combined or pro forma financial information for HomeSide for the period
March 16, 1996 to February 28, 1997 has been prepared using HomeSide information
for the period beginning March 16, 1996 and BMC information (excluding the net
income related to the assets retained by HHI) beginning April 1, 1996 to May 30,
1996. HomeSide's executive offices are located at 7301 Baymeadows Way,
Jacksonville, Florida 32256, telephone number (904) 281-3000.
INCORPORATION OF CERTAIN DOCUMENTS
BY REFERENCE
The following documents are incorporated by reference in this Prospectus:
(i) The Issuer's Quarterly Reports on Form 10-Q for the quarters ended May
31, 1997, August 31, 1997 and November 30, 1997; and
(ii) The Issuer's Current Report on Form 8-K dated October 30, 1997.
All documents filed by the Issuer pursuant to Sections 13(a) or 15(d) of
the Exchange Act subsequent to the date of this Prospectus or any Prospectus
Supplement and prior to the termination of the offering, shall be deemed to be
incorporated by reference in this Prospectus and such Prospectus Supplement and
to be a part hereof and thereof from the date of filing of such documents. Any
statement contained in this Prospectus or any Prospectus Supplement or in a
document incorporated or deemed to be incorporated by reference herein or in any
Prospectus Supplements shall be deemed to be modified or superseded for purposes
of this Prospectus and such Prospectus Supplement to the extent that a statement
contained herein or therein (or in any subsequently filed document that also is
or is deemed to be incorporated by reference herein or therein) modifies or
supersedes such statement. Any statement so modified or superseded, shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus or any Prospectus Supplement.
The Issuer will provide without charge to each person to whom a copy of
this Prospectus or any Prospectus Supplement has been delivered, upon the
written or oral request of such person, a copy of any or all of the documents
referred to above which have been or may be incorporated by reference herein or
therein (other than exhibits to such documents unless such exhibits are
specifically incorporated by reference in such documents). Requests for such
copies should be directed to HomeSide Lending, Inc., 7301 Baymeadows Way,
Jacksonville, Florida 32256 (telephone (904) 281-3000); Attn: Investor
Relations.
3
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, risk factors and financial statements, including the related notes,
appearing elsewhere or incorporated by reference in this Prospectus. To
understand all of the terms of the Notes, the holders and prospective investors
should read the complete Prospectus and the relevant Pricing Supplement, along
with the documents incorporated herein by reference and the Indenture and forms
of Notes filed as exhibits to the Registration Statement of which this
Prospectus forms a part. Copies of the Indenture and the forms of Notes are
available for inspection at the corporate trust office of the trustee or upon
request from the Issuer. See also "Additional Information."
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 BankBoston, N.A., formerly known as 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. HomeSide ranks as the 5th largest originator and 7th largest servicer
in the United States for calendar 1996 based on data published by National
Mortgage News. HomeSide's mortgage loan production, excluding bulk acquisitions,
was $20.9 billion for the period March 16, 1996 to February 28, 1997 and $16.0
billion for the nine months ended November 30, 1997. Its servicing portfolio was
$89.2 billion at February 28, 1997 and $97.8 billion at November 30, 1997.
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 February 28, 1997, represented 18.8% of HomeSide's loan
production, and for the nine months ended November 30, 1997, represented 23.1%
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. The Company's average cost per
employee is not higher than the average cost per employee of its competitors.
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.
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."
RECENT DEVELOPMENTS
On October 25, 1997, the Parent entered into an Agreement and Plan of
Merger (the "Merger Agreement") with National Australia Bank Limited ("NAB")
pursuant to which a wholly-owned subsidiary of NAB will be merged with and into
the Parent, with the Parent being the surviving corporation. Each share of the
Parent's capital stock issued and outstanding at the effective time of the
merger will be converted into the right to receive $27.825 in cash and the
Parent will become a direct or indirect wholly-owned subsidiary of
4
<PAGE> 6
NAB. The Merger was approved by the Parent's stockholders at a special
stockholders' meeting held on January 16, 1998 and by the Federal Reserve Bank
on January 30, 1998. The proposed Merger is expected to close early in February
1998. The transaction will be accounted for as a purchase. As a result, all
assets and liabilities will be recorded at their fair value on the closing date
and the purchase price in excess of the fair value of net assets acquired will
be recorded as goodwill.
THE NOTES
NOTES OFFERED................. The Notes are being offered from time to time
by the Issuer. The specific terms, including
the maturity date and interest payment dates,
of each Note issued will be set forth in the
applicable Pricing Supplement. See "Description
of Notes."
AMOUNT........................ The Notes are currently limited to up to
$1,500,000,000 aggregate initial offering
price, including the $750 million of Notes
issued and currently outstanding. The Indenture
does not limit the aggregate principal amount
of Notes that the Issuer may issue. See
"Description of Notes."
RANKING....................... The Notes will be unsecured and will rank pari
passu with all other unsecured and
unsubordinated indebtedness of the Issuer, but
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 November 30, 1997, the
Issuer had total outstanding indebtedness of
$2,503.3 million, consisting of $20.7 million
of secured indebtedness and $750 million of the
Notes, as well as $1,732.6 million of unsecured
indebtedness outstanding under the Issuer's
amended and restated bank credit agreement
dated January 31, 1997, as further amended as
of September 30, 1997 (the "Bank Credit
Agreement"). Under certain circumstances,
amounts outstanding under the Bank Credit
Agreement become secured obligations. See
"Description of Certain Indebtedness -- Bank
Credit Agreement" and "Description of Notes --
General."
REDEMPTION OR REPAYMENT....... The Notes will not be subject to any sinking
fund and will not be subject to redemption at
the option of the Issuer or repayment at the
option of the holders prior to the Stated
Maturity Date unless otherwise specified in the
applicable Pricing Supplement. See "Description
of Notes."
MERGER OR SALE................ The Indenture does not provide holders any
protection should there be a highly leveraged
transaction involving the Issuer. The Indenture
allows the Issuer to merge or consolidate with
another company, or sell all or substantially
all of its assets to another company. If these
events occur, the other company will be
required to assume the Issuer's
responsibilities on the Notes, and the Issuer
will be released from all liabilities and
obligations. See "Description of Notes --
Consolidation, Merger and Transfer of Assets."
USE OF PROCEEDS............... Except as otherwise specified in the applicable
Pricing Supplement, the net proceeds from the
sale of the Notes will be used to reduce
amounts outstanding under the Bank Credit
Agreement or to repay other outstanding
indebtedness and for working capital and
general corporate purposes, including the
purchase of servicing rights. See "Use of
Proceeds."
5
<PAGE> 7
DEFEASANCE.................... The Issuer may discharge the Notes at any time
by depositing sufficient funds with the trustee
under the Indenture to pay the obligations when
due. All amounts due to the holders on the
Notes would be paid by the Trustee from the
deposited funds. See "Description of Notes --
Discharge, Defeasance and Covenant Defeasance."
EVENTS OF DEFAULT; REMEDIES... If any of the following Events of Default
occurs under the Notes, the Indenture provides
the remedies set forth below:
Events of Default
- Principal not paid when due
- Sinking fund payment not made when due
- Failure to pay interest for 30 days
- Covenants not performed for 60 days
- Acceleration in excess of $25,000,000 in
principal amount of other debt not rescinded
in 10 days after notice
- Failure by the Issuer or any subsidiary to
pay within 60 days any uninsured judgment or
court order for the payment of money in
excess of $25,000,000
- Certain events in bankruptcy, insolvency or
reorganization of the Issuer or any
subsidiary
Remedies
The trustee under the Indenture or holders of
25% of the principal amount of Notes outstanding
may declare principal immediately payable,
subject to rescission by a majority in principal
amount of the holders, except that upon the
occurrence of certain events in bankruptcy,
insolvency or reorganization as described above,
principal shall become immediately due and
payable without any act by the trustee or any
holder. See "Description of Notes -- Events of
Default, Notice and Waiver."
RISK FACTORS
See "Risk Factors" starting on page 14 for a discussion of certain factors
which should be considered by prospective investors in evaluating an investment
in the securities offered hereby.
6
<PAGE> 8
HOMESIDE
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
The following table sets forth summary historical unaudited interim and
audited annual consolidated 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, November 30, 1996 and February 28, 1997, for the
period March 16, 1996 to February 28, 1997 and for the period March 16, 1996 to
November 30, 1996 and the nine months ended November 30, 1997. The unaudited
results of operations, in the opinion of management, contain all material
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation; such results of operations are not necessarily indicative of
results to be expected for the full year. As a result of the acquisition of BMC
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 periods commencing on or after 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 or incorporated by
reference herein.
<TABLE>
<CAPTION>
QUARTERLY INFORMATION
----------------------------------------------------------------------
FOR THE PERIOD FOR THE THREE FOR THE THREE FOR THE THREE FOR THE PERIOD
MARCH 16, 1996 MONTHS ENDED MONTHS ENDED MONTHS ENDED MARCH 16, 1996
TO MAY 31, 1996 AUGUST 31, 1996 NOVEMBER 30, 1996 FEBRUARY 28, 1997 TO FEBRUARY 28, 1997
--------------- --------------- ----------------- ----------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Mortgage servicing fees......... $ 41,485 $ 82,179 $ 90,492 $ 94,750 $ 308,906
Amortization of mortgage
servicing rights.............. (16,442) (39,753) (48,120) (49,379) (153,694)
------------ ----------- ----------- ----------- ------------
Net servicing revenue......... 25,043 42,426 42,372 45,371 155,212
Interest income................. 12,719 22,270 25,241 21,277 81,507
Interest expense................ (12,592) (17,684) (16,140) (20,417) (66,833)
------------ ----------- ----------- ----------- ------------
Net interest revenue.......... 127 4,586 9,101 860 14,674
Net mortgage origination
revenue....................... 10,810 16,273 16,521 22,469 66,073
Other income.................... 107 355 79 141 682
------------ ----------- ----------- ----------- ------------
Total revenues.......... 36,087 63,640 68,073 68,841 236,641
Expenses:
Salaries and employee
benefits...................... 11,480 21,177 20,650 19,669 72,976
Occupancy and equipment......... 1,846 3,084 3,337 3,503 11,770
Servicing losses on
investor-owned loans and
foreclosure related
expenses...................... 3,938 4,058 4,957 4,981 17,934
Other expenses.................. 5,345 12,196 11,391 11,834 40,766
------------ ----------- ----------- ----------- ------------
Total expenses.......... 22,609 40,515 40,335 39,987 143,446
Income before income taxes...... 13,478 23,125 27,738 28,854 93,195
Income tax expense.............. 5,526 9,481 11,373 10,898 37,278
------------ ----------- ----------- ----------- ------------
Net income(e)................... $ 7,952 $ 13,644 $ 16,365 $ 17,956 $ 55,917
============ =========== =========== =========== ============
SELECTED OPERATING DATA:
Volume of loan production....... $ 3,780,236 $ 5,492,199(b) $ 5,540,875 $ 6,064,225 $ 20,877,535(b)
Loan servicing portfolio
(at period end)............... 77,351,849 84,818,725 87,712,746 89,217,861 89,217,846
Loan servicing portfolio
(average outstanding during
the period)................... 43,670,497(a) 81,223,664 86,535,928 89,552,976 74,677,171(c)
Weighted average interest rate
for the servicing portfolio
(at period end)............... 7.86% 7.92% 7.91% 7.92% 7.92%
Weighted average servicing fee
for the servicing portfolio,
including ancillary income.... 0.456% 0.405% 0.418% 0.423% 0.432%
EBITDA(d)....................... $ 43,743 $ 83,720 $ 93,868 $ 100,564 $ 321,895
Cash flows (used in) provided
by:
Operating activities.......... (127,037) (210,540) 168,591 385,540 216,554
Investing activities.......... (363,156) (205,776) (106,784) (186,522) (862,238)
Financing activities.......... 748,607 185,893 (88,615) (147,510) 698,375
Ratio of EBITDA to total
interest expense.............. 3.47x 4.73x 5.82x 4.93x 4.82x
</TABLE>
7
<PAGE> 9
HOMESIDE
SUMMARY HISTORICAL FINANCIAL AND OPERATING INFORMATION (CONTINUED)
FOR THE PERIOD FROM MARCH 16, 1996 TO NOVEMBER 30, 1996 AND
FOR THE NINE MONTHS ENDED NOVEMBER 30, 1997
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE NINE
MARCH 16, 1996 TO MONTHS ENDED
NOVEMBER 30, 1996 NOVEMBER 30, 1997
-------------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Mortgage servicing fees.......................................... $ 214,156 $ 308,423
Amortization of mortgage servicing rights........................ (104,315) (159,322)
------------ -----------
Net servicing revenue........................................ 109,841 149,101
Interest income.................................................. 60,230 74,354
Interest expense................................................. (46,416) (61,222)
------------ -----------
Net interest revenue......................................... 13,814 13,132
Net mortgage origination revenue................................. 43,604 59,186
Other income..................................................... 541 1,257
------------ -----------
Total revenues.......................................... 167,800 222,676
Expenses:
Salaries and employee benefits................................... 53,307 58,474
Occupancy and equipment.......................................... 8,267 11,889
Servicing losses on investor-owned loans and foreclosure related
expenses....................................................... 12,953 15,680
Other expenses................................................... 28,932 29,084
------------ -----------
Total expenses.......................................... 103,459 115,127
Income before income taxes....................................... 64,341 107,549
Income tax expense............................................... 26,380 41,947
------------ -----------
Net income....................................................... $ 37,961 $ 65,602
============ ===========
Selected Operating Data:
Volume of loan production(b)..................................... $ 14,813,310 $16,021,030
Loan servicing portfolio (at period end)......................... 87,712,746 97,782,551
Loan servicing portfolio (average outstanding during the
period)........................................................ 70,476,696 93,824,039
Weighted average interest rate for the servicing portfolio (at
period end).................................................... 7.91% 7.87%
Weighted average servicing fee for the servicing portfolio,
including ancillary income..................................... 0.429% 0.444%
EBITDA(d)........................................................ $ 221,331 $ 331,949
Cash flows (used in) provided by:
Operating activities......................................... (168,986) (18,891)
Investing activities......................................... (675,716) (659,230)
Financing activities......................................... 845,885 642,020
Ratio of EBITDA to total interest expense........................ 4.77x 5.42x
</TABLE>
8
<PAGE> 10
<TABLE>
<CAPTION>
AT AT AT AT AT
MAY 31, AUGUST 31, NOVEMBER 30, FEBRUARY 28, NOVEMBER 30,
1996 1996 1996 1997 1997
----------- ----------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Mortgage loans held for sale...... $ 974,484 $ 1,290,841 $ 1,101,229 $ 805,274 $ 984,706
Mortgage servicing rights......... 1,216,106 1,409,226 1,321,639 1,596,838 1,733,469
Total assets...................... 2,640,669 2,909,346 2,833,601 2,717,321 3,493,065
Notes payable..................... 1,901,479 2,088,232 2,010,813 1,818,503 1,732,649
Long-term debt (e)................ 21,574 21,426 21,278 21,128 770,671
Total liabilities................. 2,101,703 2,356,705 2,276,265 2,105,277 2,830,131
Total stockholder's equity........ 538,966 552,641 557,336 612,044 662,934
</TABLE>
- ---------------
(a) Period information is for the period March 1, 1996 through May 31, 1996.
(b) Excludes bulk purchases of $4.1 billion for the three months ended August
31, 1996 and the period from March 16, 1996 to February 28, 1997 and $3.1
billion for the nine months ended November 30, 1997.
(c) Period information is for the period March 1, 1996 through February 28,
1997.
(d) EBITDA represents earnings before total other interest expense, taxes,
depreciation and amortization, including amortization of mortgage servicing
rights. Total other interest expense excludes interest expense to fund
mortgage loans held for sale of $11.2 million, $18.0 million, $18.5
million, $16.2 million, $63.9 million and $47.5 million for the period
March 16, 1996 to May 31, 1996, the three months ended August 31, 1996,
November 30, 1996 and February 28, 1997, the period March 16, 1996 to
February 28, 1997 and the nine months ended November 30, 1997,
respectively. Depreciation and amortization, excluding amortization of
mortgage servicing rights, was $1.2 million, $3.2 million, $1.9 million,
$1.9 million, $8.2 million and $6.8 million, respectively, for these
periods. In addition to EBITDA, other major elements of cash flows from
investing and financing activities are important in determining available
cash flow. Cash flows used in operating activities totaled $127.0 million
for the period March 16, 1996 to May 31, 1996, $210.5 million for the three
months ended August 31, 1996 and $18.9 million for the nine months ended
November 30, 1997. Cash flows provided by operating activities totaled
$168.6 million and $385.5 million for the three months ended November 30,
1996 and February 28, 1997, respectively. EBITDA includes substantially all
expenditures for operating expenses.
Cash flows used in investing activities were $363.2 million, $205.8
million, $106.8 million, $186.5 million, $862.2 million and $659.2 million
for the period March 16, 1996 to May 31, 1996, the three months ended
August 31, 1996, November 30, 1996 and February 28, 1996, the period March
16, 1996 to February 28, 1997 and the nine months ended November 30, 1997,
respectively. Significant adjustments to EBITDA from investing activities
include the value of originated mortgage servicing rights (OMSR), cash
purchases and proceeds from risk management contracts and the purchase of
mortgage servicing rights. Revenue from OMSR represents a future cash flow
stream and therefore should be excluded from the determination of the
current period's cash flow. OMSR totaled $3.4 million, $3.8 million, $2.0
million, $1.7 million, $10.9 million and $4.3 million for the period ended
March 16, 1996 to May 31, 1996, the three months ended August 31, 1996,
November 30, 1996 and February 28, 1997, the period March 16, 1996 to
February 28, 1997 and the nine months ended November 30, 1997,
respectively. During the period March 16, 1996 to February 28, 1997 and the
nine months ended November 30, 1997, cumulative gains and losses on risk
management contracts resulted in a $110.6 million net loss, which increased
the cost basis of mortgage servicing rights at February 28, 1997 and a
$108.9 million net gain, which decreased the cost basis of mortgage
servicing rights at November 30, 1997. $142.0 million in cash expenditures
and $67.1 in cash receipts was excluded from net income for the period
ended February 28, 1997 and November 30, 1997, respectively. The Issuer
also purchases mortgage servicing rights which totaled $77.6 million,
$162.8 million, $94.6 million, $140.7 million, $476.7 million and $404.9
million for the period March 16, 1996 to May 31, 1996, the three months
ended August 31, 1996, November 30, 1996 and February 28, 1997, the period
March 16, 1996 to February 28, 1997 and the nine months ended November 30,
1997, respectively. A portion of the available financing under the Bank
Credit Agreement
9
<PAGE> 11
- -------------------------------------------------------------------------------
is based upon the market value of mortgage servicing rights. Both OMSR and
purchases of mortgage servicing rights increase the available cash flow
under the Bank Credit Agreement.
The Bank Credit Agreement, and the issuance of medium-term notes, represent
the major source of financing for cash flows. Cash flows provided by
financing activities totaled $748.6 million, $185.9 million, $698.4 million
and $642.0 million for the period March 16, 1996 to May 31, 1996, the three
months ended August 31, 1996, the period March 16, 1996 to February 28,
1997 and the nine months ended November 30, 1997, respectively. Cash flows
used in financing activities were $88.6 million and $147.5 million for the
three months ended November 30, 1996 and February 28, 1997, respectively.
Unused line of credit (i.e., the difference between the total amount
outstanding under the Bank Credit Agreement and the total amount available
thereunder) totaled approximately $721.5 million at February 28, 1997 and
$767.4 million at November 30, 1997. During the nine months ended November
30, 1997, the Issuer issued a total of $750.0 million of medium-term notes
under the Registration Statement of which this Prospectus forms a part.
Management believes that the presentation of EBITDA facilitates 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. A
portion of the proceeds of the Parent's January 1997 public offering of
common stock was used to repay $70.0 million of such 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 and HHI to service its debt obligations. The notes, and
related interest expense, are not reflected in the financial statements of
HomeSide.
(f) Period information is for the period March 1, 1996 to November 30, 1996.
- -------------------------------------------------------------------------------
10
<PAGE> 12
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
elsewhere in this Prospectus and all such information is presented on a pro
forma basis, giving effect to the BMC Acquisition and the BBMC Acquisition by
the Parent. The unaudited pro forma consolidated financial information does not
purport to represent what HomeSide's results of operations would have been if
the BBMC Acquisition and the BMC 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 BMC and the
unaudited pro forma consolidated financial information for HomeSide and the
related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE
PERIOD
FOR THE YEAR MARCH 16,
ENDED 1996 TO
DECEMBER 31, FEBRUARY 28,
1995 1997
------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Mortgage servicing fees................................................ $ 296.4 $ 328.7
Gain on risk management contracts(a)................................... 108.7 --
Amortization of mortgage servicing rights.............................. (170.0) (163.0)
-------- --------
Net servicing revenue................................................ 235.1 165.7
Interest income........................................................ 66.9 88.1
Interest expense....................................................... (49.0) (69.3)
-------- --------
Net interest revenue................................................. 17.9 18.8
Net mortgage origination revenue....................................... 0.7 67.1
Other income........................................................... 0.7 0.7
-------- --------
Total revenues............................................... 254.4 252.3
Total expenses............................................... 142.7 156.2
-------- --------
Income before income taxes............................................. 111.7 96.1
Income tax expense..................................................... 45.7 38.6
-------- --------
Net income(d).......................................................... $ 66.0 $ 57.5
======== ========
SELECTED OPERATING DATA:
Volume of loans originated and acquired................................ $ 14,652 $ 20,878(b)
======== ========
Loan servicing portfolio (at period end)............................... 73,886 89,218
Loan servicing portfolio (average during the period)................... 68,873 74,677(c)
Weighted average interest rate for the servicing portfolio (at period
end)................................................................. 8.01% 7.92%
Weighted average servicing fee for the servicing portfolio (at period
end)................................................................. 0.351% 0.359%
</TABLE>
- ---------------
(a) The non-cash portion of gain on risk management contracts was $86.5 million
pro forma HomeSide for the BBMC Acquisition and the BMC Acquisition for the
year ended December 31, 1995. See Note 4 of HomeSide's February 28, 1997
consolidated financial statements.
(b) Excludes bulk purchases of $4.1 billion.
(c) Period information is for the period March 16, 1996 through February 28,
1997.
(d) On May 14, 1996, the Parent issued $200 million of 11.25% Notes due 2003. A
portion of the proceeds of the Parent's January 1997 public offering of
common stock was used to repay $70.0 million of such 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 notes, and related interest
expense, are not reflected in the financial statements of HomeSide.
11
<PAGE> 13
BBMC (ACQUIRED BY HOMESIDE, INC. ON MARCH 15, 1996 AND NOW KNOWN AS HOMESIDE
LENDING, INC.)
Summary Historical Consolidated Financial and Operating Information
The following table sets forth summary historical consolidated financial
and operating information for BBMC (formerly BancBoston Mortgage Corporation and
the Predecessor to the Issuer) 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 elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE THREE JANUARY 1,
YEARS ENDED DECEMBER 31, MONTHS ENDED 1996 TO MARCH
------------------------------------------------------------------- MARCH 31, 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 Bank of
Boston.................. 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
</TABLE>
- ---------------
(a) Period information is for the period January 1, 1996 to March 31, 1996 and
period end information is at March 31, 1996.
12
<PAGE> 14
BMC (ACQUIRED BY HOMESIDE, INC. ON MAY 31, 1996 AND NOW KNOWN AS HOMESIDE
HOLDINGS, INC.)
Summary Historical Consolidated Financial and Operating Information
The following table sets forth summary historical consolidated financial
and operating information for BMC (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 elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE
THREE FOR THE
YEARS ENDED DECEMBER 31, MONTHS ENDED PERIOD APRIL
------------------------------------------------------ JUNE 30, 1, 1996 TO
1991 1992 1993 1994(A) 1995(B) 1995 MAY 30, 1996
------- ------- -------- -------- -------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Mortgage origination revenue:
Mortgage origination fees...... $ -- $ -- $ 358 $ 3,276 $ 17,104 $ 3,469 $ 1,646
Gain (loss) on sales of loans,
net.......................... 3,184 8,187 5,688 692 (13,920) 995 (3,383)
------- ------- -------- -------- -------- -------- --------
Total mortgage origination
revenue................. 3,184 8,187 6,046 3,968 3,184 4,464 (1,737)
Interest income (expense):
Interest income................ 765 657 855 3,460 27,264 4,420 5,638
Interest expense, substantially
all to affiliates............ (568) (531) (1,415) (4,911) (20,427) (6,766) (3,480)
------- ------- -------- -------- -------- -------- --------
Net interest income
(expense)............... 197 126 (560) (1,451) 6,837 (2,346) 2,158
Mortgage servicing revenue:
Mortgage servicing income...... 10,143 13,427 20,560 27,130 83,502 22,439 15,709
Mortgage servicing income from
affiliates................... 6,986 16,143 18,326 20,017 25,057 6,407 5,464
Amortization of capitalized
mortgage servicing rights.... (2,453) (6,013) (11,547) (17,783) (48,282) (12,124) (8,456)
Gain on sales of servicing..... -- -- -- -- 9,096 -- --
------- ------- -------- -------- -------- -------- --------
Net mortgage servicing
revenue................. 14,676 23,557 27,339 29,364 69,373 16,722 12,717
Other income.................... 2,860 7,750 6,296 4,492 2,592 6,203 1,678
------- ------- -------- -------- -------- -------- --------
Total revenues............ 20,917 39,620 39,121 36,373 81,986 25,043 14,816
Expenses:
Salaries and benefits.......... 7,778 13,698 13,914 17,474 53,070 14,301 10,402
General and administrative..... 10,349 11,401 12,432 14,924 41,849 12,119 6,816
Affiliate profit sharing....... 1,699 12,471 10,774 3,534 6,242 -- --
Occupancy and equipment........ 1,091 1,167 1,810 2,702 5,960 2,424 1,569
Amortization of goodwill....... -- -- -- 259 4,840 1,673 928
------- ------- -------- -------- -------- -------- --------
Total expenses............ 20,917 38,737 38,930 38,893 111,961 30,517 19,715
------- ------- -------- -------- -------- -------- --------
Income (loss) before income
taxes.......................... $ 0 $ 883 $ 191 $ (2,520) $(29,975) $ (5,474) $ (4,899)
======= ======= ======== ======== ======== ======== ========
Net income (loss)............... $ (34) $ 17 $ 104 $ (2,058) $(20,386) $ (3,356) $ (3,985)
======= ======= ======== ======== ======== ======== ========
SELECTED OPERATING DATA (DOLLARS
IN MILLIONS):
Volume of loans originated and
acquired....................... $ 1,945 $ 3,507 $ 3,360 $ 3,410 $ 5,767 $ 1,330 $ 982
Loan servicing portfolio (at
period end).................... 10,034 11,524 13,085 18,411 33,411 33,070 (d)
Loan servicing portfolio
(average)...................... 9,639 10,779 12,305 15,748 30,669 32,839 33,057
Weighted average interest rate
(at period end)(c)............. -- -- 7.34% 7.44% 8.05% 7.98% (d)
Weighted average servicing fee
(average for period)(c)........ -- -- 0.259% 0.261% 0.299% 0.301% 0.346%
SELECTED BALANCE SHEET DATA (AT
PERIOD END):
Mortgage loans held for sale.... $ -- $ -- $ -- $183,914 $465,880 $331,184 (e)
Mortgage servicing rights....... 12,959 25,458 48,941 92,461 250,788 259,796 (e)
Total assets.................... 42,082 61,166 96,186 359,472 994,630 857,046 (e)
Notes payable................... 16,107 20,325 63,329 248,214 653,056 503,000 (e)
Total liabilities............... 22,676 38,541 69,930 274,570 762,802 612,311 (e)
Total stockholder's equity...... 19,406 22,625 26,257 84,902 231,828 244,735 (e)
<CAPTION>
FOR THE SIX
MONTHS ENDED FOR THE PERIOD
JUNE 30, JANUARY 1, 1996
1995 TO MAY 30, 1996
------------ ---------------
<S> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Mortgage origination revenue:
Mortgage origination fees...... $ 6,005 $ 7,288
Gain (loss) on sales of loans,
net.......................... 1,514 482
-------- ---------
Total mortgage origination
revenue................. 7,519 7,770
Interest income (expense):
Interest income................ 7,003 14,216
Interest expense, substantially
all to affiliates............ (9,685) (9,574)
-------- ---------
Net interest income
(expense)............... (2,682) 4,642
Mortgage servicing revenue:
Mortgage servicing income...... 35,723 38,833
Mortgage servicing income from
affiliates................... 12,503 13,626
Amortization of capitalized
mortgage servicing rights.... (20,475) (25,467)
Gain on sales of servicing..... -- --
-------- ---------
Net mortgage servicing
revenue................. 27,751 26,992
Other income.................... 7,054 1,740
-------- ---------
Total revenues............ 39,642 41,144
Expenses:
Salaries and benefits.......... 23,433 25,173
General and administrative..... 20,403 20,748
Affiliate profit sharing....... -- --
Occupancy and equipment........ 3,941 3,720
Amortization of goodwill....... 2,226 2,324
-------- ---------
Total expenses............ 50,003 51,965
-------- ---------
Income (loss) before income
taxes.......................... $(10,361) $ (10,821)
======== =========
Net income (loss)............... $ (7,484) $ (8,343)
======== =========
SELECTED OPERATING DATA (DOLLARS
IN MILLIONS):
Volume of loans originated and
acquired....................... $ 2,886 $ 2,538
Loan servicing portfolio (at
period end).................... 33,070 (d)
Loan servicing portfolio
(average)...................... 28,153 33,182
Weighted average interest rate
(at period end)(c)............. 7.98% (d)
Weighted average servicing fee
(average for period)(c)........ 0.299% 0.337%
SELECTED BALANCE SHEET DATA (AT
PERIOD END):
Mortgage loans held for sale.... $331,184 (e)
Mortgage servicing rights....... 259,796 (e)
Total assets.................... 857,046 (e)
Notes payable................... 503,000 (e)
Total liabilities............... 612,311 (e)
Total stockholder's equity...... 244,735 (e)
</TABLE>
- ---------------
(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 the Parent on May 31, 1996. BMC's servicing portfolio,
except for certain GNMA loans, is included in HomeSide's servicing portfolio
as of May 31, 1996.
(e) BMC was acquired by the Parent on May 31, 1996. All of BMC's assets and
liabilities, except for servicing rights with respect to certain GNMA loans,
are included in the consolidated balance sheet of HomeSide as of May 31,
1996.
13
<PAGE> 15
RISK FACTORS
In addition to the other information included or incorporated by reference
in this Prospectus, the following factors should be considered carefully before
investing in the securities offered hereby.
The Notes are not an appropriate investment for investors who are
unsophisticated with respect to transactions involving the applicable interest
rate or other indices or formulas. Prospective investors should carefully
consider, among other factors, the matters described below.
VOLATILITY OF INTEREST RATE INDICES; REDEMPTION FEATURES
An investment in Notes indexed, as to principal, premium, if any, and/or
interest, if any, to one or more interest rate 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; NO LISTING
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 trading market for
such Notes will develop after this offering or if one does develop, the
continued liquidity of such market, or as 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.
14
<PAGE> 16
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.
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 BMC Acquisition (as amended and
restated, and as further amended thereafter, the "Bank Credit Agreement"). As of
November 30, 1997, the Issuer had aggregate outstanding indebtedness of
approximately $2,503.3 million, and $767.4 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. See "Description of Certain
Indebtedness -- Bank Credit Agreement." The financial statements of the Issuer
do not reflect debt issued by the Parent. See Note 10 of Notes to Consolidated
Financial Statements of HomeSide and "Description of the Parent Notes."
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.
POTENTIAL NON-AVAILABILITY OF FUNDING SOURCES
In order to operate its business, HomeSide requires substantial financing.
To the extent that HomeSide is not successful in negotiating renewals of its
current 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 -- for the Period March 16, 1996 to February 28,
1997 -- Liquidity and Capital Resources," "Description of Certain
Indebtedness -- Bank Credit Agreement," "Description of the Parent Notes" and
"Description of Notes."
LIMITED OPERATING HISTORY AS AN INDEPENDENT COMPANY; RELATIONSHIP WITH BKB AND
BARNETT
Prior to the consummation of the BBMC Acquisition, BBMC was a wholly-owned
subsidiary of BKB, and prior to the BMC Acquisition, BMC 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 former subsidiaries of a national bank and a bank holding company,
BBMC and BMC, respectively, have benefitted from their ability to finance
certain acquisitions, their loan production and to a lesser extent, their
capital expenditure and working capital requirements, through borrowings from
their respective parents. Following the consummation of the BBMC Acquisition,
certain arrangements, including all borrowing arrangements, with BKB were
terminated or modified and, following the consummation of the BMC Acquisition,
such arrangements with Barnett were similarly terminated or modified.
Accordingly, HomeSide no longer relies on such entities and has a limited
history operating as an independent company, and there can be no assurances that
it will be able to successfully operate as an independent company. See "Certain
Relationships and Related Transactions."
15
<PAGE> 17
IMPACT OF CHANGES IN INTEREST RATES
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, mortgage banking companies
typically experience 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 was only 32% of total
originations in 1994, 25% in 1995 and 29% in 1996 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 -- for the Period March 16, 1996
to February 28, 1997 -- Liquidity and Capital Resources."
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.
RESULTS OF RISK MANAGEMENT ACTIVITIES
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. The results of
HomeSide's hedging program depends on a variety of factors, including the
relationship between mortgage rates and Treasury securities, the hedge
instruments used and other factors. 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 and its predecessor, BBMC, have not
experienced secondary market losses. See "Business -- HomeSide -- Servicing
Portfolio Hedging Program."
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
16
<PAGE> 18
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 be necessary as
loan origination volume increases. See "Business -- HomeSide -- Secondary
Marketing."
HomeSide is also affected by loan delinquencies and defaults on loans that
it services. Under certain types of servicing contracts, particularly contracts
to service loans that have been pooled or securitized, the servicer must 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. HomeSide's servicing
losses on investor-owned loans have historically primarily represented 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 17.5% and 15.6%,
respectively, of Homeside's servicing portfolio at November 30, 1997. HomeSide
originates and purchases servicing rights for mortgage loans nationwide and
actively monitors the geographic distribution of its servicing portfolio to
maintain a mix that it deems appropriate and makes adjustments as it deems
necessary. There can be no assurance that HomeSide's monitoring of and
adjustments to such geographic distribution will prevent any material adverse
impact on HomeSide's business, results of operations and financial condition in
the future.
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
17
<PAGE> 19
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 relationships with
mortgage brokers and correspondents, who are not obligated by contract or
otherwise to continue to do business with HomeSide.
REGULATION, POSSIBLE CHANGES AND RELATED LEGAL 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 BBMC Acquisition, BBMC 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 BMC Acquisition, BMC
was a wholly-owned subsidiary of a bank holding company. During the period that
BKB or
18
<PAGE> 20
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.
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. Defending such lawsuits in the future may be expensive and any
adverse judgments may make it more expensive or difficult for HomeSide to
conduct its business as currently conducted. See "Business -- HomeSide --
Litigation."
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.
CONCENTRATION OF CONTROL IN 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 of the Issuer. 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 "Prospectus
Summary -- Recent Developments", "Security Ownership of Certain Beneficial
Owners and Management" and "Certain Relationships and Related Transactions."
19
<PAGE> 21
HOMESIDE
The Issuer, the successor to BancBoston Mortgage Corporation, which was the
mortgage banking subsidiary of BankBoston, N.A., formerly known as The First
National Bank of Boston ("Bank of Boston"), was acquired by HomeSide, Inc. (the
"Parent") on March 15, 1996. The Issuer prior to its acquisition is sometimes
referred to herein as "BBMC". Barnett Mortgage Corporation ("BMC"), formerly the
mortgage banking subsidiary of Barnett Banks, Inc. ("Barnett"), was acquired by
the Parent on May 31, 1996. Upon the acquisition of BMC, now known as HomeSide
Holdings, Inc. ("HHI"), by the Parent, all of the assets and liabilities of BMC,
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. HomeSide's strategy emphasizes variable cost
mortgage origination and low cost servicing. HomeSide ranks as the 5th largest
originator and 7th largest servicer in the United States for 1996 based on data
published by National Mortgage News. HomeSide's loan production, excluding bulk
acquisitions, was $20.9 billion for the period March 16, 1996 to February 28,
1997 and $16.0 billion for the nine months ended November 30, 1997. The
servicing portfolio was $89.2 billion at February 28, 1997 and $97.8 billion at
November 30, 1997.
The table below sets forth the historical production and servicing
portfolio volumes for BBMC, BMC and HomeSide.
BBMC, BMC AND HOMESIDE COMBINED PRODUCTION AND SERVICING SUMMARY
<TABLE>
<CAPTION>
FOR THE
PERIOD FOR THE
MARCH 16, NINE MONTHS
YEARS ENDED AND AT DECEMBER 31, 1996 TO ENDED
----------------------------------------------- FEBRUARY 28, NOVEMBER 30,
1991 1992 1993 1994 1995 1996 1997 1997
------- ------- ------- ------- ------- ------ ------------ -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRODUCTION
BBMC.............. $ 4,437 $ 8,660 $11,371 $ 8,935 $ 8,885 $4,187(b)
BMC(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 $ 20,878 $16,021
======= ======= ======= ======= ======= ====== ======== =======
SERVICING
PORTFOLIO
BBMC.............. $20,601 $23,706 $27,999 $37,971 $41,555
BMC............... 10,034 11,524 13,085 18,411 33,411(d)
------- ------- ------- ------- -------
Combined
servicing
portfolio..... $30,635 $35,230 $41,084 $56,382 $74,966 $ 89,218 $97,783
======= ======= ======= ======= ======= ======== =======
</TABLE>
- ---------------
(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.
(d) Includes BMC's GNMA loans of approximately $1,080 million which were not
transferred to the Issuer. These GNMA loans were retained by HHI.
20
<PAGE> 22
The table below sets forth the servicing statistics for HomeSide at
February 28, 1997 and November 30, 1997 (dollars in millions):
HOMESIDE SERVICING STATISTICS
<TABLE>
<CAPTION>
FEBRUARY 28, 1997 NOVEMBER 30, 1997
----------------- -----------------
<S> <C> <C>
FHA/VA................................................ $34,113 $39,667
Conventional.......................................... 54,347 55,710
------- -------
Total serviced unpaid principal balance ("UPB")..... 88,460(a) 95,377(a)
ARM (adjustable rate mortgages)....................... 27%
Fixed................................................. 73%
Weighted average coupon............................... 7.92% 7.87%
Weighted average servicing fee, including ancillary
income (% of UPB)................................... 0.432% 0.444%
Weighted average maturity (months).................... 273 289
</TABLE>
- ---------------
(a) Excludes loans purchased not yet on servicing system.
21
<PAGE> 23
USE OF PROCEEDS
Except as may be otherwise stated in the applicable Pricing Supplement, the
Issuer intends to use the net proceeds from the sale of the securities offered
hereby to reduce amounts outstanding under the Bank Credit Agreement or to repay
other outstanding indebtedness and for working capital and general corporate
purposes, including the purchase of servicing rights. The loans under the Bank
Credit Agreement mature on February 14, 2000 and as of November 30, 1997 carry a
weighted average interest on amounts borrowed of 6.05% per annum. See
"Description of Certain Indebtedness -- Bank Credit Agreement."
22
<PAGE> 24
SELECTED CONSOLIDATED FINANCIAL INFORMATION
SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION OF HOMESIDE
The selected interim and annual consolidated financial and operating
information of HomeSide set forth below should be read in conjunction with, and
is qualified in its entirety by reference to, the Consolidated Financial
Statements and the notes thereto included elsewhere in or incorporated by
reference in this Prospectus. See also "Unaudited Pro Forma Consolidated
Financial Information" beginning on F-23 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The consolidated
operating results for the period March 16, 1996 to May 31, 1996 and each of the
three months ended August 31, 1996, November 30, 1996 and February 28, 1997 and
for the period March 16, 1996 to November 30, 1996 and the nine months ended
November 30, 1997 are unaudited but, in the opinion of management, contain all
material adjustments, consisting only of normal recurring adjustments, necessary
for a fair presentation; such results of operations are not necessarily
indicative of results to be expected for the full year. The consolidated
operating results for the period March 16, 1996 to February 28, 1997 and the
consolidated balance sheet data at February 28, 1997 are derived from, and are
qualified by reference to, the audited consolidated financial statements
included elsewhere in this Prospectus and should be read in conjunction with
those financial statements and notes thereto.
<TABLE>
<CAPTION>
QUARTERLY INFORMATION
----------------------------------------------------------------------
FOR THE PERIOD
MARCH 16, 1996 FOR THE THREE FOR THE THREE FOR THE THREE FOR THE PERIOD
TO MAY 31, MONTHS ENDED MONTHS ENDED MONTHS ENDED MARCH 16, 1996 TO
1996 AUGUST 31, 1996 NOVEMBER 30, 1996 FEBRUARY 28, 1997 FEBRUARY 28, 1997
-------------- --------------- ----------------- ----------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Mortgage servicing fees...... $ 41,485 $ 82,179 $ 90,492 $ 94,750 $ 308,906
Amortization of mortgage
servicing rights........... (16,442) (39,753) (48,120) (49,379) (153,694)
------------ ----------- ----------- ----------- ------------
Net servicing revenue...... 25,043 42,426 42,372 45,371 155,212
Interest income.............. 12,719 22,270 25,241 21,277 81,507
Interest expense............. (12,592) (17,684) (16,140) (20,417) (66,833)
------------ ----------- ----------- ----------- ------------
Net interest revenue....... 127 4,586 9,101 860 14,674
Net mortgage origination
revenue.................... 10,810 16,273 16,521 22,469 66,073
Other income................. 107 355 79 141 682
------------ ----------- ----------- ----------- ------------
Total revenues...... 36,087 63,640 68,073 68,841 236,641
Expenses:
Salaries and employee
benefits................... 11,480 21,177 20,650 19,669 72,976
Occupancy and equipment...... 1,846 3,084 3,337 3,503 11,770
Servicing losses on investor-
owned loans and foreclosure
related expenses........... 3,938 4,058 4,957 4,981 17,934
Other expenses............... 5,345 12,196 11,391 11,834 40,766
------------ ----------- ----------- ----------- ------------
Total expenses...... 22,609 40,515 40,335 39,987 143,446
Income before income taxes... 13,478 23,125 27,738 28,854 93,195
Income tax expense........... 5,526 9,481 11,373 10,898 37,278
------------ ----------- ----------- ----------- ------------
Net income(e)................ $ 7,952 $ 13,644 $ 16,365 $ 17,956 $ 55,917
============ =========== =========== =========== ============
SELECTED OPERATING DATA:
Volume of loan production.... $ 3,780,236 $ 5,492,199(b) $ 5,540,875 $ 6,064,225 $ 20,877,535(b)
Loan servicing portfolio (at
period end)................ 77,351,849 84,818,725(b) 87,712,746 89,217,846 89,217,846
Loan servicing portfolio
(average outstanding during
the period)................ 43,670,497(a) 81,223,664 86,535,928 89,552,976 74,677,171(c)
Weighted average interest
rate for the servicing
portfolio (at period
end)....................... 7.86% 7.92% 7.91% 7.92% 7.92%
Weighted average servicing
fee for the servicing
portfolio, including
ancillary income........... 0.456% 0.405% 0.418% 0.423% 0.432%
Ratio of earnings to fixed
charges.................... 2.05x(d) 2.28x(d) 2.67x(d) 2.38x(d) 2.36x(d)
</TABLE>
23
<PAGE> 25
HOMESIDE
SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION (CONTINUED)
FOR THE PERIOD FROM MARCH 16, 1996 TO NOVEMBER 30, 1996 AND
FOR THE NINE MONTHS ENDED NOVEMBER 30, 1997
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE NINE
MARCH 16, 1996 TO MONTHS ENDED
NOVEMBER 30, 1996 NOVEMBER 30, 1997
-------------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Mortgage servicing fees................................... $ 214,156 $ 308,423
Amortization of mortgage servicing rights................. (104,315) (159,322)
------------ -----------
Net servicing revenue................................... 109,841 149,101
Interest income........................................... 60,230 74,354
Interest expense.......................................... (46,416) (61,222)
------------ -----------
Net interest revenue.................................... 13,814 13,132
Net mortgage origination revenue.......................... 43,604 59,186
Other income.............................................. 541 1,257
------------ -----------
Total revenues.................................. 167,800 222,676
Expenses:
Salaries and employee benefits............................ 53,307 58,474
Occupancy and equipment................................... 8,267 11,889
Servicing losses on investor-owned loans and
foreclosure related expenses............................ 12,953 15,680
Other expenses............................................ 28,932 29,084
------------ -----------
Total expenses.................................. 103,459 115,127
Income before income taxes................................ 64,341 107,549
Income tax expense........................................ 26,380 41,947
------------ -----------
Net income................................................ $ 37,961 $ 65,602
============ ===========
SELECTED OPERATING DATA:
Volume of loan production(b).............................. $ 14,813,310 $16,021,030
Loan servicing portfolio (at period end).................. 87,712,746 97,782,551
Loan servicing portfolio (average outstanding during the
period)................................................. 70,476,696 93,824,039
Weighted average interest rate for the servicing portfolio
(at period end)......................................... 7.91% 7.87%
Weighted average servicing fee for the servicing
portfolio, including ancillary income................... 0.429% 0.444%
Ratio of earnings to fixed charges........................ 2.35x(d) 2.73x(d)
</TABLE>
(footnotes on following page)
24
<PAGE> 26
<TABLE>
<CAPTION>
AT AT
FEBRUARY 28, 1997 NOVEMBER 30, 1997
------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
SELECTED BALANCE SHEET DATA:
Mortgage loans held for sale...................................... $ 805,274 $ 984,706
Mortgage servicing rights......................................... 1,596,838 1,733,469
Total assets...................................................... 2,717,321 3,493,065
Notes payable..................................................... 1,818,503 1,732,649
Long-term debt(e)................................................. 21,128 770,671
Total liabilities................................................. 2,105,277 2,830,131
Total stockholder's equity........................................ 612,044 662,934
</TABLE>
- ---------------
(a) Period information is for March 1, 1996 through May 31, 1996.
(b) Excludes bulk purchases of $4.1 billion for the three months ended August
31, 1996 and the period from March 16, 1996 to February 28, 1997 and $3.1
billion for the nine months ended November 30, 1997.
(c) Period information is for March 1, 1996 through February 28, 1997.
(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. A portion of
the proceeds of the Parent's January 1997 public offering of common stock
was used to repay $70.0 million of such notes. All of the outstanding common
stock of HomeSide and HHI is pledged as security on the Parent 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) Period information is for March 1, 1996 to November 30, 1996.
25
<PAGE> 27
SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION OF BBMC
(THE PREDECESSOR, ACQUIRED BY HOMESIDE, INC. ON MARCH 15, 1996 AND NOW KNOWN AS
HOMESIDE LENDING, INC.)
The selected consolidated financial information of BBMC set forth below has
been derived from the financial statements of BBMC 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, BBMC's Consolidated Financial
Statements and the Notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- BBMC -- for the Periods January
1, 1996 to March 15, 1996 and January 1, 1995 to March 31, 1995 and for the Two
Years Ended December 31, 1995" included elsewhere in this Prospectus. See also
"Unaudited Pro Forma Consolidated Financial Information" beginning
on F-23.
<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 Bank of
Boston................... 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
</TABLE>
- ---------------
(a) On January 1, 1993, BBMC 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.
(b) On January 1, 1993, BBMC adopted SFAS No. 109, "Accounting for Income
Taxes," which principally affects accounting for deferred taxes. SFAS No.
109 requires that deferred taxes be recorded for differences between the tax
basis of assets and liabilities and their carrying amounts for financial
statement purposes. Previously, deferred taxes were provided for items
reported in the financial statements in periods which differed from the
periods such items were reported for income tax purposes.
(c) On January 1, 1994, BBMC 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."
(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.
26
<PAGE> 28
SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION OF BMC
(ACQUIRED BY HOMESIDE, INC. ON MAY 31, 1996 AND NOW KNOWN AS HOMESIDE HOLDINGS,
INC.)
The selected consolidated financial information of BMC set forth below has
been derived from the financial statements of BMC 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, BMC's Consolidated Financial
Statements and the Notes thereto and in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- BMC -- for the Two Years Ended December 31, 1995; for the Period
April 1, 1996 to May 30, 1996 and Three Months Ended June 30, 1995; and for the
Period January 1, 1996 to May 30, 1996 and the Six Months Ended June 30, 1995"
included elsewhere in this Prospectus. See also "Unaudited Pro Forma
Consolidated Financial Information" beginning on F-23.
<TABLE>
<CAPTION>
FOR THE PERIOD
YEARS ENDED DECEMBER 31, FOR THE THREE APRIL 1, 1996
-------------------------------------------------- MONTHS ENDED TO MAY 30,
1991 1992 1993 1994(A) 1995(B) JUNE 30, 1995 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)
Income tax provision (benefit)................ 34 359 87 (462) (9,589) (2,118) (914)
------- ------- -------- -------- -------- -------- --------
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)
======= ======= ======== ======== ======== ======== ========
<CAPTION>
FOR THE SIX FOR THE PERIOD
MONTHS ENDED JANUARY 1,
JUNE 30, 1996 TO MAY
1995 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)
Income tax provision (benefit)................ (2,877) (2,478)
-------- --------
Income (loss) before changes in accounting
principles.................................. -- --
Cumulative effect of changes in accounting
principles.................................. -- --
-------- --------
Net income (loss)............................. $ (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
Loan servicing portfolio (at period end)...... 10,034 11,524 13,085 18,411 33,411 33,070 (e)
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)(d)..................................... -- -- 7.34% 7.44% 8.05% 7.98% (e)
Weighted average servicing fee (average for
period)(d).................................. -- -- 0.259% 0.261% 0.299% 0.301% 0.346%
Ratio of earnings to fixed charges............ 1.00x 2.10x 1.10x --(f) --(f) --(f) --(f)
SELECTED BALANCE SHEET DATA (AT PERIOD END):
Mortgage loans held for sale.................. $ -- $ -- $ -- $183,914 $465,880 $ 331,184 (g)
Mortgage servicing rights..................... 12,959 25,458 48,941 92,461 250,788 259,796 (g)
Total assets.................................. 42,082 61,166 96,186 359,472 994,630 857,046 (g)
Notes payable................................. 16,107 20,325 63,329 248,214 653,056 503,000 (g)
Total liabilities............................. 22,676 38,541 69,930 274,570 762,802 612,311 (g)
Total stockholder's equity.................... 19,406 22,625 26,257 84,902 231,828 244,735 (g)
(footnotes on following page)
<CAPTION>
SELECTED OPERATING DATA (DOLLARS IN MILLIONS):
<S> <C> <C>
Volume of loans originated and acquired....... $ 2,886 $ 2,538
Loan servicing portfolio (at period end)...... 33,070 (e)
Loan servicing portfolio (average)............ 28,153 33,182
Weighted average interest rate (at period
end)(d)..................................... 7.98% (e)
Weighted average servicing fee (average for
period)(d).................................. 0.299% 0.337%
Ratio of earnings to fixed charges............ --(f) --(f)
SELECTED BALANCE SHEET DATA (AT PERIOD END):
Mortgage loans held for sale.................. $331,184 (g)
Mortgage servicing rights..................... 259,796 (g)
Total assets.................................. 857,046 (g)
Notes payable................................. 503,000 (g)
Total liabilities............................. 612,311 (g)
Total stockholder's equity.................... 244,735 (g)
(footnotes on following page)
</TABLE>
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<PAGE> 29
- ---------------
(a) Includes Loan America since its acquisition in October 1994.
(b) Includes BancPLUS Financial Corporation since its acquisition in February
1995.
(c) In 1992, BMC adopted two new accounting standards. Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes,"
changed BMC's accounting for income taxes to the asset/liability method from
the deferred method previously required by Accounting Principles Board
Opinion No. 11. BMC 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. BMC adopted both of these changes on a prospective basis effective
January 1, 1992. As permitted under SFAS No. 106, BMC 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) BMC was acquired by the Parent on May 31, 1996. BMC's servicing portfolio,
except for certain GNMA loans, 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) BMC was acquired by the Parent on May 31, 1996. All of BMC's assets and
liabilities, except for servicing rights with respect to certain GNMA loans,
are included in the consolidated balance sheet of HomeSide as of May 31,
1996.
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<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Selected
Consolidated Financial Information beginning on page 23 and the Consolidated
Financial Statements incorporated by reference or included elsewhere in this
Prospectus. Reference is also made to Management's Discussion and Analysis of
Financial Condition and Results of Operations appearing in the Issuer's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1997
incorporated herein by reference.
GENERAL
HomeSide Lending, Inc. (the "Issuer" and collectively, with its
consolidated subsidiaries, "HomeSide") 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 on March 15, 1996
acquired certain assets and liabilities of BancBoston Mortgage Corporation
("BBMC"), the mortgage banking business owned by BankBoston, N.A., formerly
known as The First National Bank of Boston ("Bank of Boston" or "BKB"). Bank of
Boston received cash and an ownership interest in the Parent. HomeSide began
operations on March 16, 1996. BBMC is now known as HomeSide Lending, Inc.
On May 31, 1996, Barnett Banks, Inc. ("Barnett") sold certain of its
mortgage banking operations ("BMC"), primarily its mortgage servicing portfolio,
mortgage servicing operations 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 HomeSide on F-11. All of the assets and liabilities of
BMC, except certain GNMA servicing rights, have been transferred to the Issuer.
HomeSide, in conjunction with the Parent, has adopted a February 28 fiscal
year end. The purchase method of accounting was used for the BBMC and BMC
acquisitions and, accordingly, assets acquired and liabilities assumed were
recorded at their estimated fair values at the date of acquisition.
As a result, HomeSide's operating results are not directly comparable to
BBMC 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 Bank of Boston and all of
BMC's production channels were retained by Barnett. See "The Acquisitions."
Accordingly, comparative financial statements for HomeSide as compared to BBMC
or BMC have not been presented. Instead, a comparison is presented herein of the
four quarters in the period March 16, 1996 to February 28, 1997, and in
addition, the nine months ended November 30, 1997 as compared to the period
March 16, 1996 to November 30, 1996. Results of operations prior to May 31, 1996
do not include the results of operations of BMC, which was acquired by the
Parent on May 31, 1996.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. This Prospectus contains
forward-looking statements which reflect HomeSide's current views with respect
to future events and financial performance. These forward-looking statements are
subject to certain risks and uncertainties, including, but not limited to, those
discussed under "Risk Factors," which could cause actual results to differ
materially from historical results or those anticipated. The words "believe,"
"expect," "anticipate," "intend," "estimate" and other expressions which
indicate future events and trends identify forward-looking statements, which
speak only as of their dates. HomeSide undertakes no obligation to publicly
update or revise any forward-looking statements whether as a result of new
information, future events or otherwise. In addition, readers should carefully
review any disclosure of risks and uncertainties contained in HomeSide's filings
with the Commission pursuant to the Exchange Act that are incorporated by
reference herein.
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<PAGE> 31
HOMESIDE -- FOR THE PERIOD MARCH 16, 1996 TO NOVEMBER 30, 1996
AND FOR THE NINE MONTHS ENDED NOVEMBER 30, 1997
HomeSide's net income increased 73% to $65.6 million for the nine months
ended November 30, 1997 from $38.0 million for the period from March 16, 1996 to
November 30, 1996. Total revenues for the nine months ended November 30, 1997
increased 33% to $222.7 million from $167.8 million for the period from March
16, 1996 to November 30, 1996. The increases in net income and revenues for the
nine months ended November 30, 1997 compared to the period from March 16, 1996
to November 30, 1996 were primarily attributable to the acquisition of BMC on
May 31, 1996 and increases of $39.3 million in net servicing revenue and $15.6
million in net mortgage origination revenue. The BMC servicing portfolio was
$33.1 billion at May 31, 1996 and its acquisition increased HomeSide's servicing
portfolio by 75% on that date, which was a major factor in the increase in net
servicing revenue. In addition, subsequent increases in the size of the
servicing portfolio contributed to the increased revenue. The servicing
portfolio increased to $97.8 billion at November 30, 1997 from $87.7 billion at
November 30, 1996, a 12% increase. As part of the BMC acquisition, Barnett
agreed to sell HomeSide the loans produced by the loan production networks
retained by Barnett, which contributed to the increase in net mortgage
origination revenue. Net interest revenue decreased, primarily due to a decrease
in the spread between average mortgage interest rates and average short-term
borrowing rates on mortgage loans held for sale and an increase in interest
expense, caused by increases in paid in full scheduled interest payments and a
higher funding of the mortgage servicing assets.
HOMESIDE -- FOR THE PERIOD MARCH 16, 1996 TO FEBRUARY 28, 1997
GENERAL
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 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. Included in costs of financing is the
benefit derived from holding custodial deposits. Custodial deposits are
comprised of amounts collected from borrowers and not yet remitted to investors,
taxing authorities and other third parties.
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 unpaid
principal balance 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)
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<PAGE> 32
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 information regarding loan production activities and the
servicing portfolio for HomeSide is presented to aid in understanding the
results of operations and financial condition of HomeSide for the period March
16, 1996 to May 31, 1996, each of the three months ended August 31, 1996,
November 30, 1996 and February 28, 1997 and the period from March 16, 1996 to
February 28, 1997.
Loan Production Activities
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE THREE FOR THE THREE FOR THE THREE FOR THE PERIOD
MARCH 16, 1996 MONTHS ENDED MONTHS ENDED MONTHS ENDED MARCH 16, 1996 TO
TO MAY 31, 1996 AUGUST 31, 1996 NOVEMBER 30, 1996 FEBRUARY 28, 1997 FEBRUARY 28, 1997
--------------- --------------- ----------------- ----------------- -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Correspondent (includes
volumes purchased from
BKB and Barnett)....... $ 1,893 $ 2,950 $ 3,249 $ 3,021 $11,113
Co-issue (a)............. 1,419 2,208 1,985 2,610 8,222
Broker................... 220 155 168 300 843
------- ------- ------- ------- -------
Total wholesale.......... 3,532 5,313 5,402 5,931 20,178
Direct................... 248 179 139 134 700
------- ------- ------- ------- -------
Total production......... 3,780 5,492 5,541 6,065 20,878
Bulk acquisitions........ -- 4,073 -- -- 4,073
------- ------- ------- ------- -------
Total production and
acquisitions........... $ 3,780 $ 9,565 $ 5,541 $ 6,065 $24,951
======= ======= ======= ======= =======
</TABLE>
- ---------------
(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.
Total loan production increased from $3.8 billion in the period from March
16, 1996 to May 31, 1996 to $5.5 billion in the second and third quarters and
$6.1 billion for the three months ended February 28, 1997. These increases were
due to the additional production resulting from the acquisition of BMC on May
31, 1996 and growth in HomeSide's existing wholesale channels. In addition,
HomeSide made bulk servicing acquisitions of $4.1 billion during the second
quarter of fiscal 1997.
Servicing Portfolio
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE THREE FOR THE THREE FOR THE THREE FOR THE PERIOD
MARCH 1, 1996 TO MONTHS ENDED MONTHS ENDED MONTHS ENDED MARCH 1, 1996 TO
MAY 31, 1996 AUGUST 31, 1996 NOVEMBER 30, 1996 FEBRUARY 28, 1997 FEBRUARY 28, 1997
---------------- --------------- ----------------- ----------------- -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Balance at
beginning of
period........... $ 41,844 $77,351 $84,819 $87,713 $41,844
Acquisition of
BMC.............. 33,082 -- -- -- 33,082
Other additions.... 4,102 9,842 5,244 6,064 25,252
-------- ------- ------- ------- -------
Total
additions... 37,184 9,842 5,244 6,064 58,334
-------- ------- ------- ------- -------
Scheduled
amortization..... 212 470 494 557 1,733
Prepayments........ 1,321 1,702 1,529 1,674 6,226
Foreclosures....... 130 137 106 141 514
Sales of
servicing........ 14 65 221 2,187(a) 2,487(a)
-------- ------- ------- ------- -------
Total
reductions.. 1,677 2,374 2,350 4,559 10,960
-------- ------- ------- ------- -------
Balance at end of
period........... $ 77,351 $84,819 $87,713 $89,218 $89,218
======== ======= ======= ======= =======
</TABLE>
- ---------------
(a) Includes $1.9 billion of servicing sold as part of the sale of Honolulu
Mortgage Company ("Honolulu Mortgage").
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<PAGE> 33
The number of loans being serviced at February 28, 1997 was 1,070,000,
compared to 1,068,000 as of November 30, 1996, 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 $18.0 million during the fourth quarter of
fiscal 1997, compared to net income of $16.4 million during the third quarter of
fiscal 1997, $13.6 million during the second quarter of fiscal 1997 and $7.9
million during the first quarter of fiscal 1997. Net income for the period March
16, 1996 to February 28, 1997 was $55.9 million.
Total revenues during fiscal 1997 increased from $36.1 million in the first
quarter to $63.6 million in the second quarter, $68.1 million in the third
quarter and $68.8 million in the fourth quarter. The primary reasons for the
increase of $0.7 million in total revenue in the fourth quarter as compared to
the third quarter of fiscal 1997 were an increase of $3.0 million in net
servicing revenue and an increase of $5.9 million in net mortgage origination
revenue, offset by a decrease of $8.2 million in net interest revenue. The
increase in net servicing revenue was due to an increase in the size of the
servicing portfolio, and the increase in net mortgage origination revenue was
accounted for by increased loan production. Net interest revenue decreased
because the average balances of mortgage loans held for sale and custodial
deposits declined from quarter to quarter.
The primary reason for the increase of $4.5 million in total revenue in the
third quarter as compared to the second quarter of fiscal 1997 was an increase
of $4.5 million in net interest revenue. Interest income increased in the third
quarter as compared with the second quarter of fiscal 1997 as the result of an
increase in the average balance of mortgage loans held for sale. Lower
short-term interest rates, improved pricing on borrowings under the Bank Credit
Agreement and higher custodial deposits lowered the interest expense for the
third quarter of fiscal 1997 compared to the second quarter.
The increase of $27.5 million in total revenues in the second quarter as
compared to the first quarter of fiscal 1997 was primarily a result of the
acquisition of BMC on May 31, 1996. Results of operations for BMC are included
from the date of acquisition and, therefore, are not included in HomeSide's
results for the first quarter of fiscal 1997. The BMC servicing portfolio was
$33.1 billion at May 31, 1996 and its acquisition increased HomeSide's servicing
portfolio by 75% on that date and also increased net servicing revenue from
$25.0 million in the first quarter of fiscal 1997 to $42.4 million in the second
quarter of fiscal 1997. Also as part of the BMC acquisition, Barnett agreed to
sell HomeSide the loans produced by the loan production networks retained by
Barnett. This additional production increased net mortgage origination revenue.
Net Servicing Revenue
Net servicing revenue increased from $25.0 million in the first quarter of
fiscal 1997 to $42.4 million in the second quarter, $42.4 million in the third
quarter and $45.4 million in the fourth quarter. Net servicing revenue for the
period from March 16, 1996 to February 28, 1997 was $155.2 million. Mortgage
servicing fees generally range from 0.25% to 0.50% per annum of the declining
principal balances of the loans. HomeSide's weighted average servicing fee,
excluding ancillary income, during each of the quarters of fiscal 1997 was as
follows: 0.367% during the first quarter, 0.363% during the second quarter,
0.359% during the third quarter and 0.359% during the fourth quarter. The
decrease in the weighted average servicing fee from the first quarter to the
second quarter of fiscal 1997 was due to the servicing rights acquired from BMC.
These servicing rights generally had lower servicing fees due to the lower
proportion of government loans in BMC's servicing portfolio, as compared to the
servicing portfolio acquired from BBMC and serviced by HomeSide during the first
quarter. Likewise, the second quarter bulk acquisition of servicing rights
(which was reflected in the weighted average servicing fee for the third
quarter) consisted of a relatively lower proportion of government servicing,
further reducing the weighted average servicing fee from the second quarter to
the third quarter. Mortgage servicing fees increased from $41.5 million in the
first quarter to $82.2 million in the second quarter, primarily as a result of
the BMC Acquisition. The increases in mortgage servicing fees from $82.2 million
in the second quarter to $90.5 million in the third quarter and $94.7 million in
the fourth quarter are the result of increases in the size of the servicing
portfolio. Amortization of mortgage servicing rights, which is recorded
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<PAGE> 34
over the estimated servicing period in proportion to estimated servicing
revenue, increased throughout the period March 16, 1997 to February 28, 1997 as
a result of a higher average servicing portfolio balance.
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 from March 16, 1996 to February 28, 1997, 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 is 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 as an adjustment to the
carrying value of the related mortgage servicing right asset being hedged.
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 each of 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 $121.6 million net loss. Of the $121.6 million net loss,
$11.0 million was amortized and recognized as a component of amortization of
mortgage servicing rights, resulting in a net deferred hedge loss of $110.6
million which is included in the basis of mortgage servicing rights at February
28, 1997. The increase in the estimated fair value of the mortgage servicing
rights approximated the net hedge loss. 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 February 28, 1997
was $45.2 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-7 for a description of
HomeSide's accounting policy for its risk management contracts. See Notes 14 and
15 of Notes to Consolidated Financial Statements on pages F-17 through F-20 for
additional fair value disclosures with respect to HomeSide's risk management
contracts.
Net Interest Revenue
Net interest revenue is driven by the level of interest rates, the
direction in which rates are moving and the spread between short and long-term
interest rates. These factors influence the size of the residential mortgage
origination market, HomeSide's production volumes and the interest rates
HomeSide earns on loans and pays to its lenders.
Loan refinancing levels are the biggest contributor to changes in the size
of the mortgage origination market. To reduce the cost of their home mortgages,
borrowers tend to refinance their loans during periods of declining interest
rates, increasing the size of the market and Homeside's production volumes.
Higher production volumes result in higher average balances of loans held for
sale and consequently higher levels of
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<PAGE> 35
interest income from interest earned on such loans prior to their sale. This
higher level of interest income due to increased volumes is partially offset by
the lower rates earned on the loans.
Overall borrowing costs also fluctuate with changes in interest rates.
Currently, the interest expense HomeSide pays to finance mortgage loans held for
sale and other net assets is generally calculated with reference to short-term
interest rates. In addition, because mortgage loans held for sale earn interest
based on longer term interest rates, the level of net interest revenue is also
influenced by the spread between long-term and short-term interest rates.
Net interest revenue during fiscal 1997 was $0.1 million during the first
quarter, $4.6 million during the second quarter, $9.1 million during the third
quarter and $0.9 million during the fourth quarter. Net interest revenue for the
period from March 16, 1996 to February 28, 1997 was $14.7 million. Interest
income and interest expense increased during the second quarter of fiscal 1997
as compared with the first quarter as a result of an increase in the average
balance of mortgage loans held for sale from $770.0 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 BMC on May 31, 1996, and the
subsequent transfer of assets to HomeSide, 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 income increased, while interest expense decreased, during the
third quarter of fiscal 1997 as compared with the second quarter of fiscal 1997.
The increase in interest income during the third quarter was the result of an
increase in the average balance of mortgage loans held for sale from $1.3
billion in the second quarter to $1.4 billion during the third quarter of fiscal
1997. Lower short-term interest rates and improved pricing on borrowings under
the Bank Credit Agreement contributed to the reduction in interest expense in
the third quarter of fiscal 1997 as compared with the second quarter of fiscal
1997. In addition, the average balance of custodial balances increased from $1.3
billion in the second fiscal quarter to $1.4 billion in the third fiscal quarter
of 1997. Interest expense is reduced by credits received for custodial deposits.
Interest income decreased, while interest expense increased, in the fourth
quarter of fiscal 1997 as compared with the third quarter of fiscal 1997. The
decrease in interest income during the fourth quarter was the result of a lower
average balance of mortgage loans held for sale during the fourth quarter
compared to the third quarter. During the fourth quarter, more mortgage loans
were sold under repurchase agreements than in previous quarters in fiscal 1997.
Repurchase agreements provide an alternative to the bank line of credit for
mortgage loans held for sale. Under these agreements, mortgage loans are sold
earlier and not held as long in the warehouse. These agreements have the effect
of increasing gains on sales of loans and reducing interest income. The increase
in interest expense in the fourth quarter of fiscal 1997 as compared with the
third quarter is the result of lower average balances for custodial deposits.
The benefit from custodial deposits reduces interest expense.
Interest expense for HomeSide does not include interest expense associated
with $200.0 million of 11.25% Parent Notes issued by the Parent in May 1996.
$70.0 million of these Parent Notes was repaid with proceeds from the Parent's
public offering of common stock. $130.0 million of Parent Notes remains
outstanding. Payment of principal and interest on these notes is dependent on
the cash flows generated by HomeSide and HHI. The Parent recorded interest
expense on the Parent Notes of $2.3 million during the first quarter, and $5.6
million for each of the second, third and fourth quarters of fiscal 1997.
Net Mortgage Origination Revenue
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
review loan documents for purchased loan production.
Net mortgage origination revenue increased during fiscal 1997 from $10.8
million during the first quarter to $16.3 million during the second quarter,
$16.5 million during the third quarter and $22.5 million during the
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<PAGE> 36
fourth quarter. Total net mortgage origination revenue for the period from March
16, 1996 to February 28, 1997 was $66.1 million. As noted above, loan
production, exclusive of bulk servicing acquisitions, increased during fiscal
1997 from $3.8 billion in the first quarter to $5.5 billion in the second
quarter, $5.5 billion in the third quarter and $6.1 billion in the fourth
quarter. The increase in loan production from the first to the second quarter of
fiscal 1997 is reflective of production from the preferred seller relationship
with Barnett established as part of the BMC acquisition. The increase in net
mortgage origination revenue from the third quarter to the fourth quarter
reflects a larger production volume and a higher level of repurchase agreements.
Repurchase agreements have the effect of increasing gains on sales of loans and
reducing interest income. HomeSide's primary origination activities during
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 increased from $11.5 million in the
first quarter of fiscal 1997 to $21.2 million in the second quarter of fiscal
1997, decreased to $20.6 million during the third quarter of fiscal 1997 and
decreased to $19.7 million during the fourth quarter of fiscal 1997. Salaries
and employee benefits for the period from March 16, 1996 to February 28, 1997
were $73.0 million. The increase in salaries and employee benefits from the
first quarter to the second quarter of fiscal 1997 was due to growth in the
number of employees as a result of the acquisition of the mortgage servicing
operations of BMC 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. The subsequent decreases were due to
the continuing integration of the BMC servicing operations and the corresponding
reduction in the number of employees. The average number of full time equivalent
employees fell from 1,879 during the second quarter to 1,708 during the third
quarter and 1,689 during the fourth quarter.
Occupancy and Equipment Expense
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 for the
period from March 16, 1996 to February 28, 1997 was $11.8 million. Occupancy and
equipment expense grew during fiscal 1997 from $1.9 million during the first
quarter to $3.1 million during the second quarter, $3.3 million during the third
quarter and $3.5 million during the fourth quarter. The increase in occupancy
and equipment expense was due to the premises and equipment acquired in the BMC
Acquisition and increases in information systems costs required to handle the
growing mortgage servicing portfolio.
Servicing Losses on Investor-Owned Loans and Foreclosure Related Expenses
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, non-recoverable
foreclosure costs, accrued interest for which payment has been denied and
estimates for potential losses based on HomeSide's experience as a servicer of
government loans.
During fiscal 1997 the servicing losses on investor-owned loans and
foreclosure related expenses increased from $3.9 million for the first quarter
to $4.1 million for the second quarter, $5.0 million for the third quarter and
$5.0 million for the fourth quarter. Servicing losses on investor-owned loans
and foreclosure related expenses for the period from March 16, 1996 to February
28, 1997 was $18.0 million. The increases are largely attributable to the
acquisition of the BMC servicing portfolio and the growth of the servicing
portfolio resulting from loan production.
Included in the balance of accounts payable and accrued liabilities of
February 28, 1997 is a reserve for estimated servicing losses on investor-owned
loans of $21.7 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
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mortgage servicing portfolio. HomeSide's historical loss experience on VA loans
generally has been consistent with industry experience.
Other Expenses
Other expenses consist mainly of professional fees, communications expense,
advertising and public relations, data processing expenses and certain loan
origination expenses. The level of other expenses fluctuates in part based upon
the level of HomeSide's mortgage servicing portfolio and loan production
volumes.
Other expenses during fiscal 1997 were $5.4 million for the first quarter,
$12.2 million for the second quarter, $11.4 million for the third quarter and
$11.8 million for the fourth quarter. Other expenses for the period from March
16, 1996 to February 28, 1997 were $40.8 million. The increase in other expense
from the first to the second quarter of fiscal 1997 was the result of the
acquisition of BMC.
Income Tax Expense
HomeSide's income tax expense was $5.5 million during the first quarter of
fiscal 1997, $9.5 million during the second quarter, $11.4 million during the
third quarter and $10.9 million during the fourth quarter. Income tax expense
was $37.3 million for the period from March 16, 1996 to February 28, 1997, all
of which was deferred. See Note 11 of Notes to Consolidated Financial
Statements. The increase in income tax expense was attributable to the increase
in net income. The effective income tax rate for fiscal 1997 was approximately
40%.
LIQUIDITY AND CAPITAL RESOURCES
Operations
Net cash provided by operations was $216.5 million for the period from
March 16, 1996 to February 28, 1997. The primary uses of cash in operations were
to fund loan originations and pay corporate expenses. These uses of cash were
offset by cash provided from servicing fee income, loan sales and principal
repayments. Cash flows from loan originations are dependent upon current
economic conditions and the level of long-term interest rates. Decreases in
long-term interest rates generally result in higher loan refinancing activity
which results in higher cash demands to meet increased loan production levels.
Cash needs in times of increased production are primarily met through borrowings
and loan sales.
Investing
Net cash used in investing activities was $862.2 million during the period
from March 16, 1996 to February 28, 1997. 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 from March 16, 1996 to February 28, 1997,
HomeSide also made payments of $133.4 million and $106.2 million to acquire
certain mortgage banking operations of BBMC and BMC, 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 from March 16, 1996 to February 28, 1997, HomeSide had
$698.4 million of net cash provided by financing activities. The primary sources
of cash from financing activities during the period were $393.4 million of
capital contributed from the Parent and net borrowings under the Issuer's Bank
Credit Agreement of $334.2 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.
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The Issuer entered into a three-year senior secured revolving credit
facility on March 15, 1996, which was re-issued as part of the Bank Credit
Agreement on May 31, 1996. On January 31, 1997, the Bank Credit Agreement was
amended and restated in connection with the issuance of the Parent's common
stock to the public, and the Bank Credit Agreement was amended again as of
September 30, 1997. Borrowings under the Bank Credit Agreement are subject to a
$2.5 billion limit which, at the request of the Issuer, may be increased to $3.0
billion. Under certain circumstances, borrowings under the Bank Credit Agreement
become secured. See "Description of Certain Indebtedness -- Bank Credit
Agreement." The commitment is comprised of a servicing related credit facility,
capped at $950 million, and a warehouse loan commitment. Borrowings under the
Bank Credit Agreement 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 under the Bank Credit Agreement 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 such credit facility in order to meet production demand. In periods
of reduced loan demand, proceeds from loan sales can be used to pay down
borrowings under the Bank Credit Agreement. In future periods, it is expected
that cash financing needs will primarily be met from drawings under the Bank
Credit Agreement and other 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 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.
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 February 28, 1997, HomeSide declared and paid dividends
of $17.0 million to the Parent. For more information, see Note 10 of Notes to
Consolidated Financial Statements of HomeSide.
During the period March 16, 1996 to February 28, 1997, net cash provided by
operations was $216.5 million, cash used in investing activities was $862.2
million and cash provided by financing activities was $698.4 million, resulting
in a net increase in cash of $52.7 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 and other
facilities which may be entered into from time to time, as well as from the
issuance of debt securities in the public markets. 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 portfolio of
mortgage servicing rights provides a potential source of funds to meet liquidity
requirements, especially in periods of rising interest rates when loan
origination volume slows. Future cash needs are highly dependent on future loan
production and servicing results, which are influenced by changes in long-term
interest rates.
New Accounting Standard
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" ("SFAS 125"). 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. HomeSide has adopted SFAS 125 and there has been no material
impact on the results of operations, financial condition, or liquidity of
HomeSide.
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BBMC-FOR THE PERIODS JANUARY 1, 1996 TO MARCH 15, 1996 AND JANUARY 1, 1995 TO
MARCH 31, 1995 AND FOR THE TWO YEARS ENDED DECEMBER 31, 1995
The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known
as HomeSide Lending, Inc.
GENERAL
Prior to March 15, 1996, BBMC was a wholly-owned subsidiary of Bank of
Boston, a subsidiary of BankBoston Corporation, formerly known as Bank of Boston
Corporation ("BKBC"). On March 15, 1996, BBMC was acquired by the Parent. The
interim financial statements of BBMC have been prepared for the period January
1, 1996 to March 15, 1996 to coincide with the closing of the BBMC 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, references to the first quarter 1996 pertain to the period
January 1, 1996 to March 15, 1996. BBMC reported earnings on a calendar year
basis.
BBMC operates as a full-service mortgage banking firm emphasizing wholesale
mortgage originations and low cost mortgage servicing. Servicing activities
represent BBMC's primary revenue source. BBMC also generates revenue, to a
lesser extent, from mortgage loan origination fees. BBMC incurs expenses for
amortization of mortgage servicing rights, interest on its line of credit and
general corporate activities.
On June 1, 1995, BBMC 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 BancBoston Mortgage Corporation on F-52 for
further discussion.
RESULTS OF OPERATIONS
Summary
BBMC reported net income of $58.8 million in 1995 and $5.4 million in 1994.
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. Prior to the effect
of such adjustment, BBMC had income of $58.8 million in 1995 and $2.0 million in
1994. See Note 2 of Notes to Consolidated Financial Statements for further
discussion of BBMC'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
BBMC's servicing portfolio. The lower interest rate environment resulted in a
gain related to BBMC's risk management activities in 1995 as compared to a loss
in 1994. See "-- Risk Management Activities." BBMC also benefited from a 9%
increase in the balance of 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 larger mortgage servicing volumes and higher
prepayment activity in 1995.
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 BBMC's
mortgage 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
affected BBMC's results of operations for the first quarter. BBMC 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 of $128.8 million on BBMC's risk management contracts
during the first quarter of 1996, a result of increasing interest rates in late
February and March 1996.
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Net Servicing Revenue
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 growth was
comprised of a $115.4 million increase 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 BBMC's average servicing portfolio during 1995. Average servicing
fees, excluding ancillary income, decreased slightly from 0.389% in 1994 to
0.383% in 1995.
At December 31, 1995, BBMC serviced approximately 510,000 loans, including
loans purchased not yet on BBMC's servicing system, with an unpaid principal
balance ("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 BBMC's
servicing portfolio was primarily generated by wholesale loan production, which
includes correspondent, co-issue and broker channels. BBMC also purchased
servicing rights in bulk from other mortgage servicing entities. Bulk purchases
totalled $5.5 billion and $0.7 billion in 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 as a component of mortgage servicing revenue. BBMC 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 BBMC's servicing portfolio size and average loan size. The higher
average loan size 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.
During the first quarter of 1996, BBMC had net servicing revenues of
$(97.1) million, as compared to servicing revenues of $24.2 million in the first
quarter of 1995. The net negative amount recorded as servicing revenue in 1996
was primarily due to losses on BBMC'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, BBMC 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, BBMC experienced losses on risk management contracts of
$128.8 million during the quarter. Changes in the value of BBMC'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 BBMC because servicing rights were recorded at the lower of
amortized cost or market value.
The decrease in net servicing revenue was partially offset by a reduction
in amortization of mortgage servicing rights from $23.1 million in the first
quarter of 1995 to $7.2 million in the first quarter of 1996. The reduction in
amortization was due to the increase in long-term interest rates noted above,
which had a favorable effect on the prepayment estimates used in calculating
BBMC's periodic amortization expense. Because mortgage servicing rights are
amortized over the expected period of service fee revenues, a reduction in
mortgage prepayment activity typically results in a longer estimated life of the
mortgage servicing asset and, accordingly, lower amortization expense.
Amortization charges are highly dependent upon the level of prepayments during
the period and changes in prepayment expectations, which are significantly
influenced by the direction and level of long-term interest rate movements.
Risk Management Activities
BBMC had 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
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influenced by declines in interest rates. When loans prepay faster than
anticipated, the cash flow BBMC would expect to receive from servicing such
loans was reduced. Because the value of the mortgage servicing rights is based
on the present value of the net 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, BBMC purchased risk management
contracts that increased in value when long-term interest rates declined, or
when prepayment speeds increased above a specified level. During 1994 and 1995,
BBMC 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 BBMC's risk management position
was 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. BBMC 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 BBMC's financial results because the value of
the associated service rights exceeded its book value. Due to a rising interest
rate environment, BBMC experienced a $6.7 million loss related to its risk
management contracts in 1994.
BBMC 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 BBMC in
March 1996, BBMC 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 BBMC'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 BBMC because servicing rights are recorded at the
lower of amortized cost or market value.
Net Interest Revenue/Expense
Net interest expense was $2.4 million in 1994 and $2.8 million in 1995.
Interest income decreased $7.3 million in 1995 as compared with 1994, 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 income on warehouse
loans was partially offset by a $2.1 million increase in interest earned on
mortgage loans held for investment. Interest expense decreased $6.8 million in
1995 as compared with 1994 as a result of a decline in the average rate paid on
BBMC's borrowings from 7.14% in 1994 to 6.89% in 1995.
Net interest expense decreased from $2.0 million in the first quarter of
1995 to $1.7 million in the first quarter of 1996. Interest income increased in
the first quarter of 1996 as compared with the first quarter of 1995 as a result
of an increase in the average balance of mortgage loans held for sale from
$124.6 million during the first quarter of 1995 to $535.6 million during the
first quarter of 1996. Increased loan production volumes, $4.2 billion in the
first quarter of 1996 compared to $1.2 billion in the first quarter of 1995,
created the increased average balance of mortgage loans held for sale. In
addition, an increase in long-term interest rates during February and March 1996
improved the yield on its mortgage loans held for sale. Interest expense
incurred on BBMC's credit facility with Bank of Boston increased in the first
quarter of 1996 as compared with the first quarter of 1995 as a result of the
increase in the average balance of BBMC's loans held for sale. In the first
quarter of 1996 as well as the first quarter of 1995, interest earned on loans
held for sale was less than interest expense on borrowings, thereby creating net
interest expense for BBMC; but the increase in long-term interest rates during
February and March 1996, without a corresponding increase in short-term rates on
BBMC's credit facility, resulted in a decrease in net interest expense in the
first quarter of 1996 as compared with the first quarter of 1995.
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Net Mortgage Origination Revenue
Net mortgage origination revenue decreased from $5.0 million in 1994 to
$3.4 million in 1995. Lower production volumes and gains on sales of mortgage
loans were the primary reasons for this decline.
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
increase in net origination revenue during the first quarter of 1996 was
partially due to the adoption of SFAS No. 122, "Accounting for Mortgage
Servicing Rights" as of January 1, 1996, which had the effect of increasing net
mortgage origination revenue by $3.1 million. In previous periods, the cost of
mortgage servicing rights for originated loans was included in the basis of the
related loan. SFAS 122 requires that the cost of an originated loan be allocated
between the loan sold and the servicing rights retained. Consequently, the cost
basis of loans originated in 1996 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 decreased from $10.9 million in 1994 to
$10.2 million in 1995. Gains on sales of servicing rights represent the excess
of proceeds from the sale over the cost basis of the assets. Gains tend to be
higher on sales of servicing rights with little or no cost basis, as was the
case for BBMC's sales in 1994. The servicing rights sold during 1994 consisted
primarily of retail originated loans and consequently had relatively low cost
basis. 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.
Gain on sales of servicing rights during the first quarter of 1995 was $4.3
million. There were no sales of servicing rights during the first quarter of
1996.
Salaries and Employee Benefits
Salaries and employee benefits increased from $40.4 million in 1994 to
$45.4 million in 1995, or 12.4%. Including capitalized direct loan origination
costs (principally salary and employee benefits), salaries and employee benefits
increased from $51.5 million to $56.5 million from 1994 to 1995, or 9.7%. The
increase included a $3.9 million increase in salaries and a $1.1 million
increase in benefits and were the result of a larger staff needed to support
BBMC's growing servicing portfolio. The increases in salaries and benefits were
partially offset by the outsourcing of certain default administration and tax
payment administration activities during 1995. BBMC 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.
Salaries and employee benefits decreased from $11.7 million in the first
quarter of 1995 to $10.3 million in the first quarter of 1996, or 12.1%. If
capitalized direct loan origination costs (principally salary and employee
benefits) were included, the salaries and employee benefits increased from $12.8
million in the first quarter of 1995 to $13.5 million in the first quarter of
1996, or 5.8%. 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 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 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.
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Servicing Losses on Investor-Owned Loans
Servicing losses on investor-owned loans primarily represent anticipated
losses attributable to servicing FHA and VA loans for investors. These amounts
include actual losses for final disposition of loans, accrued interest for which
payment has been denied and estimates for potential losses based on experience
as a servicer of government loans. Servicing losses on investor-owned loans
totaled $7.2 million and $10.0 million for 1994 and 1995, respectively,
primarily representing losses on VA loans. In 1994 and 1995, BBMC recorded
provisions in excess of actual foreclosure losses. Management believes that BBMC
had 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 two years ended December 31,
1995, see Note 4 of Notes to Consolidated Financial Statements of BancBoston
Mortgage Corporation.
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 BBMC. The increase in the VA marketing rate effectively represents a
potential increase in BBMC's exposure on properties conveyed to the VA. BBMC
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 increased from $0.3 million in 1994 to $1.1
million in 1995. Real estate owned expense is incurred from foreclosed
properties on which BBMC 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. As part of the BBMC Acquisition, BKB retained all real
estate owned.
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 Expenses
Other expenses increased from $19.3 million to $21.9 million, or 13.3%,
from 1994 to 1995. The increase in other expenses 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 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
also increased with the larger BBMC servicing volume. Software costs increased
as BBMC 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.
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 BBMC'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.
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Provision for (benefit from) Income Taxes
BBMC recorded a provision for income taxes of $2.5 million and $37.9
million for 1994 and 1995, respectively. The effective income tax rate was 39.2%
and 56.4% for 1995 and 1994, respectively. The difference between these rates
and the statutory federal tax rate was primarily due to state income taxes, net
of federal tax benefit. The changes in the provisions for, and benefit from,
income taxes were the result of variances in BBMC'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 BancBoston
Mortgage Corporation on F-45 and F-46.
BBMC'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 BBMC'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.
Accounting Changes
On January 1, 1994, BBMC changed its method of accounting for mortgage
servicing fees from the cash basis to the accrual basis. See Note 2 of Notes to
Consolidated Financial Statements of BancBoston Mortgage Corporation on F-38 for
further discussion of BBMC'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 BBMC in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Overview
BBMC's primary sources of cash were revenues earned from the servicing of
mortgage loans, sales of mortgage loans and servicing rights and borrowings
under BBMC's warehouse line of credit. BBMC's primary uses of cash were to fund
loan originations and purchases, purchase bulk servicing rights, repay its
warehouse line of credit and pay general corporate expenses. BBMC had a net
increase (decrease) in cash of ($4.8 million) and $0.3 million in 1995 and 1994,
respectively, and ($4.4 million) and $22.4 million in the first quarter of 1995
and the first quarter of 1996, respectively.
The net decrease in cash in 1995 compared with 1994 was primarily
attributable to the use of cash to meet growth in loan origination volume and
purchases of mortgage servicing rights, coupled with a reduction in proceeds on
sales of mortgage loans. Declining interest rates in 1995 increased loan
production across the industry. Cash inflows in 1995 were positively affected by
an increase in the proceeds from risk management contracts, which increased in
value as a result of the decline in interest rates.
Prior to the BBMC Acquisition, a line of credit with Bank of Boston 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 BBMC. Maximum borrowings
under the line of credit were $1.25 billion. The higher level of borrowings in
1995 was indicative of higher loan production and purchase volumes during that
year as compared to 1994.
Net cash provided by operating activities and investing activities
decreased in the first quarter of 1996 as compared with the first quarter of
1995, principally as a result of an increase in net cash used in the origination
and purchase of loans held for sale and in the purchase and origination of
mortgage servicing rights and the purchase of risk management contracts. These
increases were the result of higher loan production levels and an increasing
loan servicing portfolio. As a result of increased loan production and held for
sale balances in the first quarter of 1996 as compared to the first quarter of
1995, BBMC had net borrowings of $290.0 million on its line of credit with Bank
of Boston during the first quarter of 1996, as opposed to net repayments of
$130.5 million on the line of credit during the first quarter of 1995.
43
<PAGE> 45
Impact of Inflation
Inflation affects BBMC primarily through its effect on interest rates
because 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" and " -- Results of Risk Management Activities."
New Accounting Standard
In May 1995, FASB issued 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, 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. BBMC adopted this Statement
effective January 1, 1996.
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<PAGE> 46
BMC-FOR THE TWO YEARS ENDED DECEMBER 31, 1995; FOR THE PERIOD APRIL 1, 1996 TO
MAY 30, 1996 AND THREE MONTHS ENDED JUNE 30, 1995; AND FOR THE PERIOD JANUARY 1,
1996 TO MAY 30, 1996 AND THE SIX MONTHS ENDED JUNE 30, 1995
Acquired by HomeSide, Inc on May 31, 1996 and now known as HomeSide
Holdings, Inc.
GENERAL
Prior to May 31, 1996, BMC 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 BMC to
the Parent. At the closing of the BMC Acquisition, the Parent acquired BMC'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, which has since been sold.
BMC 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, an established wholesale mortgage banking company, gave BMC
entry into the wholesale origination business.
In February 1995, BMC acquired BancPlus Financial Corporation ("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. BMC's acquisition of BPFC also included Honolulu Mortgage,
with its $1.7 billion servicing portfolio.
Prior to BMC's acquisition of Loan America and BPFC, BMC originated
mortgage loans primarily through the retail banking offices of Barnett. Among
other things, the acquisitions were made as part of a strategy to: (i) increase
the volume of BMC's origination and servicing activities; (ii) obtain geographic
expansion and diversity; and (iii) acquire an expertise in managing retail and
wholesale origination activities outside of retail banking offices.
The BancPLUS and Loan America acquisitions were accounted for as purchases
and, accordingly, their results are only included in BMC'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 the Issuer.
In connection with the BMC Acquisition, BMC transferred all of its
servicing rights to the Issuer, except for the servicing of certain GNMA loans,
which it retained. HomeSide currently believes that BMC will not acquire any
additional servicing rights in the future. As a result of the acquisition of BMC
by the Parent, HHI ceased to originate loans as a separate company and results
of operations for periods subsequent to that date are included in the results of
operations of the Parent and HomeSide. 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
BMC'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
During 1994 and 1995, BMC experienced significant growth through its
acquisitions of BancPLUS and Loan America. BMC reported a net loss of $20.4
million in 1995 and a net loss of $2.1 million in 1994. 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. BMC 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. BMC 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.
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<PAGE> 47
Net Servicing Revenue
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 BMC's servicing portfolio during 1995. In addition,
the average servicing fee increased from 0.261% in 1994 to 0.299% in 1995.
At December 31, 1995, BMC 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 BMC's servicing portfolio was primarily
generated from the acquisition of BancPLUS.
The 1995 gain on the sales of servicing is a result of two servicing sales
totalling $1.2 billion of UPB. There were no servicing sale gains during 1994.
BMC'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 BMC.
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. 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. 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 0.301% at June 30, 1995 to
0.337% at May 30, 1996. At May 30, 1996, before the acquisition by the Parent,
BMC 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 BMC's servicing portfolio has been primarily generated from the
acquisition of BancPLUS.
Risk Management Activities
BMC 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
BMC'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 BMC 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 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 BMC evaluated the risks,
benefits and costs related to servicing hedges and in December 1995 commenced a
partial hedging program. While the market value of BMC's servicing portfolio
declined, such decline was not reflected in BMC'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, BMC 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. BMC 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, BMC
priced its loans based on interest rate levels prevalent in the secondary
market.
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<PAGE> 48
After the acquisition of those companies, BMC 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. BMC has employed sophisticated
modelling tools to provide information to hedge this latter interest rate risk.
BMC 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. BMC'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.
BMC 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 BMC's pipeline, and competitive
pricing pressures.
Net Interest Revenue/Expense
In 1995, BMC recorded net interest revenue of $6.8 million, an increase
from net interest expense of $1.5 million in 1994. BMC 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. BMC 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. The net interest revenue was
mainly derived from interest earned on warehouse loans originated by the
BancPLUS and Loan America branches, less interest expense incurred to fund such
loans. The interest expense for 1995 was incurred at a rate reduced by the
benefit for the escrow balances maintained in the Barnett banks for the
servicing portfolio. Prior to 1995, when the primary origination source was the
Barnett bank branches, BMC's net interest revenue was comprised of interest
income on a small portfolio of mortgage loans that BMC 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 BMC.
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<PAGE> 49
Net Mortgage Origination Revenue
BMC built a multi-channel production network as part of its strategy to
become a national participant in the mortgage banking business. Until the BMC
Acquisition, BMC 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 BMC 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, SIX MONTHS FOR THE PERIOD
--------------- ENDED JANUARY 1, 1996
1994 1995 JUNE 30, 1995 TO MAY 30, 1996
------ ------ ------------- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Barnett bank branch retail....... $2,559 $1,932 $ 1,053 $ 955
BancPLUS retail(a)............... -- 606 335 323
Loan America broker(a)........... 401 1,386 629 680
Honolulu Mortgage(a)............. -- 244 159 142
Correspondent.................... 450 1,599 710 438
------ ------ ------- -------
Total production............ $3,410 $5,767 $ 2,886 $ 2,538
====== ====== ======= =======
</TABLE>
- ---------------
(a) Since date of acquisition by BMC.
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 BMC collecting and recording
the origination fee income for loans originated through these channels.
Following the January 1, 1996 implementation of SFAS 122, net mortgage
origination revenue includes not only origination fees received from borrowers,
gains and losses from mortgage sales, but also capitalized OMSR. The
requirements of SFAS 122 are discussed in Note 1 to the Consolidated Financial
Statements of Barnett Mortgage Company on F-58. 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.
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 $17.5 million in 1994 to
$53.1 million in 1995. 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.
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<PAGE> 50
Salaries and employee benefits increased from $23.4 million during the
first six months of 1995 to $25.2 million during the period January 1, 1996 to
May 30, 1996. The salary and benefit increased was the result of an increase in
loan origination activity from the first six months of 1995 versus the period
January 1, 1996 to May 30, 1996. For the first six months of 1995, origination
volume was $2,250 million versus $2,538 million for the period January 1, 1996
to May 30, 1996.
Occupancy and Equipment Expense
Occupancy and equipment expense 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.
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
BMC's results of operations were included in Barnett's consolidated income
tax return. BMC's income tax provision and related asset or liability were
computed based on income tax rates as if BMC filed a separate income tax return.
Pursuant to a tax-sharing agreement with Barnett, BMC was reimbursed for the tax
effect of current operating losses utilized in the consolidated return.
In 1995, BMC 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. During
second quarter 1995, BMC 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. During the first six months of 1995, BMC 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 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 Barnett
Mortgage Company on F-62.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Prior to the BMC Acquisition, BMC'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 BMC's lines of credit. Prior to the BMC Acquisition, BMC's
primary uses of cash were to fund loan originations and purchases, repay its
lines of credit and pay general corporate expenses. BMC had a net increase of
cash of $11.1 million and $2.4 million in 1995 and 1994, respectively. BMC 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 $185.5 million in 1995 and $39.0
million in 1994. 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.
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
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<PAGE> 51
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 $182.3 million in 1995 and $83.3
million in 1994. 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 BMC's overall strategy to
increase its servicing portfolio and nationwide loan originations.
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 $378.9 million in 1995 and $124.8
million in 1994. 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 BMC'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 BMC. The net increase in the lines of credit
with Barnett was $211.7 million in 1995 and $65.0 million in 1994. 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 $59.8 million in 1994 $167.2 in 1995. These contributions were provided
primarily for the acquisitions of BancPLUS in 1995 and Loan America in 1994.
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.
Impact of Inflation
Inflation has affected BMC 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" and " -- 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 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. BMC adopted this Statement effective January 1, 1996. The actual effect
of implementing this Statement on BMC'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> 52
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 $3.9 trillion in
1996 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>
AVERAGE INTEREST RATES
PURPOSE OF MORTGAGE(B) ON ORIGINATIONS
----------------------------- ------------------------------
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 7.96 6.07
1996...................... 809 71 29 7.81 5.67
</TABLE>
- ---------------
(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.
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<PAGE> 53
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 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, generally 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 1996 the largest originator represented 6.4% of the market and the
largest servicer represented 4.6%, while the top 30 originators and servicers
represented 41.7% and 44.7% of their markets, respectively, based on data
published by Inside Mortgage Finance.
TOP 10 ORIGINATORS AND SERVICERS
(DOLLARS IN BILLIONS)
<TABLE>
<C> <S> <C> <C> <C> <C>
1996 ORIGINATIONS SERVICING PORTFOLIO AT DECEMBER 31, 1996
1 Norwest Mortgage, IA.................... $ 51.5 1 Norwest Mortgage, IA.................... $ 179.7
2 Countrywide Home Loans, CA.............. 38.8 2 Countrywide Home Loans, CA.............. 151.9
3 Chase Manhattan Mortgage Holdings, FL... 38.4 3 Chase Manhattan Mortgage Holdings, FL... 137.6
4 Fleet Mortgage Group, SC................ 22.5 4 Fleet Mortgage Group, SC................ 120.1
5 HomeSide Lending, FL.................... 19.7 5 GE Capital Mortgage Corp., NC........... 103.7
6 BankAmerica, CA......................... 15.8 6 NationsBanc & Affiliates, TX............ 96.4
7 NationsBanc & Affiliates, TX............ 12.1 7 HomeSide Lending, FL.................... 84.7
8 Standard Federal Bank, MI............... 10.4 8 Home Savings of America, CA............. 59.5
9 FT Mortgage Companies, TN............... 10.1 9 First Nationwide, MD.................... 58.4
10 Resource BancShares Mtg. Co. SC......... 10.0 10 Mellon Mortgage, TX..................... 58.1
</TABLE>
- ---------------
Source: National Mortgage News.
Mortgage bankers operate in a highly competitive market. The underwriting
guidelines and servicing requirements set by the participants in the secondary
markets are standardized. As a result, mortgage banking products (i.e., mortgage
loans and the servicing of those loans) have become difficult to differentiate.
Therefore, mortgage bankers compete primarily on the basis of price or service,
making effective cost management essential.
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<PAGE> 54
Mortgage bankers generally seek to develop cost efficiencies in one of two
ways: economies of scale or specialization. Large full-service national or
regional mortgage bankers have sought economies of scale through an emphasis on
wholesale originations, the introduction of automated processing systems and
expansion through acquisition. Smaller companies frequently identify and pursue
a particular expertise or customer base in an attempt to create a market niche.
RECENT TRENDS
The introduction of significant technological improvements to the mortgage
banking industry began in the mid 1980s. From the use of laptop computers for
originations to the electronic scanning of loan documents, technological
advances have allowed mortgage bankers to accommodate higher volumes of
business. This trend has continued, contributing to the consolidation in
mortgage banking. The automation of many functions in mortgage banking,
especially those related to servicing, has reduced costs significantly for
industry participants.
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 41.9% in 1996.
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<PAGE> 55
BUSINESS
HOMESIDE
HomeSide is one of the largest full-service residential mortgage banking
companies in the United States. HomeSide's strategy emphasizes variable cost
mortgage origination and low cost servicing. HomeSide's mortgage loan production
volume, excluding bulk purchases, was $20.9 billion for the period March 16,
1996 to February 28, 1997 and $16.0 billion for the nine months ended November
30, 1997 and its servicing portfolio was $89.2 billion at February 28, 1997 and
$97.8 billion at November 30, 1997. HomeSide ranks as the 5th largest originator
and 7th largest servicer in the United States for calendar 1996 based on data
published by National Mortgage News.
The residential mortgage market totaled over $3.9 trillion in 1996 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 1996 the largest originator represented 6.4% of the
market and the largest servicer represented 4.6%, while the top 30 originators
and servicers represented 41.7% and 44.7% 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 41.9% in 1996.
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
February 28, 1997 and for the nine months ended November 30, 1997, represented
18.8% and 23.1%, respectively, 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's average cost per employee is not higher than the
average cost per employee of its competitors.
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> 56
On October 25, 1997, the Parent entered into an Agreement and Plan of
Merger (the "Merger Agreement") with National Australia Bank Limited ("NAB")
pursuant to which a wholly-owned subsidiary of NAB will be merged with and into
the Parent, with the Parent being the surviving corporation (the "Merger"). Each
share of the Parent's capital stock issued and outstanding at the effective time
of the Merger will be converted into the right to receive $27.825 in cash and
the Parent will become a direct or indirect wholly-owned subsidiary of NAB. The
Merger was approved by the Parent's stockholders at a special stockholders'
meeting held on January 16, 1998 and by the Federal Reserve Bank on January 30,
1998. The proposed Merger is expected to close early in the first quarter of
calendar 1998.
PRODUCTION
HomeSide participates in several origination channels, with a focus on
wholesale originations. Since the BBMC Acquisition, wholesale channels
(correspondent, co-issue and broker) have represented more than 95% of
HomeSide's total production. Excluding the volumes purchased from BKB and
Barnett, no single source within the correspondent or broker channels accounted
for more than 3% of total production during the period March 16, 1996 to
February 28, 1997. HomeSide's other origination channels include telemarketing
and affinity programs. 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
FOR THE PERIOD THREE
MARCH 16, MONTHS FOR THE THREE FOR THE THREE FOR THE PERIOD FOR THE NINE
1996 ENDED MONTHS ENDED MONTHS ENDED MARCH 16, 1996 MONTHS ENDED
TO MAY 31, AUGUST 31, NOVEMBER 30, FEBRUARY 28, TO FEBRUARY 28, NOVEMBER 30,
1996 (b) 1996 1996 1997 1997 1997
-------------- ----------- ------------- ------------- ---------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Wholesale:
Correspondent (includes volumes
purchased from BKB and
Barnett)..................... $1,893 $2,950 $3,249 $3,021 $11,113 $10,334
Co-issue(a).................... 1,419 2,208 1,985 2,610 8,222 4,422
Broker......................... 220 155 168 300 843 1,015
------ ------ ------ ------ ------- -------
Total wholesale.............. 3,532 5,313 5,402 5,931 20,178 15,771
Direct........................... 248 179 139 134 700 250
------ ------ ------ ------ ------- -------
Total production............. 3,780 5,492 5,541 6,065 20,878 16,021
Bulk acquisitions(a)............. -- 4,073 -- 0 4,073 3,066
------ ------ ------ ------ ------- -------
Total production and
acquisitions............... $3,780 $9,565 $5,541 $6,065 $24,951 $19,087
====== ====== ====== ====== ======= =======
</TABLE>
- ---------------
(a) Represents the acquisition of servicing rights, not the underlying loans.
Amounts represent the unpaid principal balance of mortgage debt to which the
acquired servicing rights relate.
(b) The Parent acquired BMC, and transferred all the assets and liabilities of
BMC, except for certain servicing rights, to the Issuer, on May 31, 1996 and
therefore BMC's loan production is not included in these amounts. During the
three months ended May 31, 1996, BMC'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 73% of the total production in
the period March 16, 1996 to February 28, 1997 and 71% of total production
during the nine months ended November 30, 1997. 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 servicing portfolio
composition reflects its production markets. The largest segments of the
servicing portfolio by state at February 28, 1997 were Florida (18.7% of unpaid
principal balance), California (15.4%), Massachusetts
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<PAGE> 57
(8.4%), Texas (6.1%), and Maryland (4.6%). At November 30, 1997, the largest
segments of the servicing portfolio by state were Florida (17.5%), California
(15.6%), Massachusetts (7.2%), Texas (6.3%) and Maryland (4.6%).
The mortgage banking industry is generally subject to seasonal trends.
These trends reflect the general national pattern of sales and resales of homes,
although refinancings tend to be less seasonal and more closely related to
changes in interest rates. Sales and resales of homes typically peak during the
spring and summer seasons and decline to lower levels from mid-November through
February. In addition, delinquency rates typically rise in the winter months,
which results in higher servicing costs. However, late charge income has
historically been sufficient to offset such incremental expenses.
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.
WHOLESALE PRODUCTION
Correspondent Production
Through its correspondent program, HomeSide purchases loans from
approximately 838 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 1,000 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.
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<PAGE> 58
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 BBMC'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.
Under the terms of the BBMC and BMC 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
BBMC and BMC 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 BBMC'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
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<PAGE> 59
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 any flawed loans originated by them. See "Risk
Factors -- Loan Delinquencies and Defaults on Loans."
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 February 28, 1997, approximately 78%
of the mortgage loans originated by HomeSide were sold to GNMA (38%), Fannie Mae
(27%) or FHLMC (13%). During the nine months ended November 30, 1997,
approximately 86% of the mortgage loans originated by HomeSide were sold to GNMA
(37%), Fannie Mae (35%) or FHLMC (14%).
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 February 28, 1997 and
for the nine months ended November 30, 1997, 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
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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 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
MARCH 16, 1996 NINE MONTHS ENDED
TO FEBRUARY 28, 1997 NOVEMBER 30, 1997
-------------------- -----------------
<S> <C> <C>
Balance, beginning of period........ $ 41,844 $89,218
Total additions................... 58,334 19,087
Scheduled amortization.............. 1,733 1,598
Prepayments......................... 6,226 7,966
Foreclosures........................ 514 532
Servicing sales..................... 2,487 426
-------- -------
Total reductions.................. 10,960 10,522
-------- -------
Balance, end of period.............. $ 89,218 $97,783
======== =======
</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
including ancillary income was 0.432% for the fiscal year ended February 28,
1997 and 0.444% for the nine months ended November 30, 1997. 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 BMC 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
February 1997, Honolulu Mortgage sold substantially all its assets to an
unaffiliated third party.
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,
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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.
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 66.9% of outstanding UPB of
the total servicing portfolio of HomeSide at February 28, 1997, while the
largest volume by state is Florida with an 18.7% share of the total portfolio at
February 28, 1997. 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.
SERVICING PORTFOLIO BY STATE(a)
<TABLE>
<CAPTION>
AT FEBRUARY 28, 1997 AT NOVEMBER 30, 1997
------------------------ ------------------------
STATE UPB % OF UPB UPB % OF UPB
--------------------------------------- ----------- -------- ----------- --------
(DOLLARS IN (DOLLARS IN
MILLIONS) MILLIONS)
<S> <C> <C> <C> <C>
Florida................................ $16,559 18.7% $16,718 17.5%
California............................. 13,686 15.4 14,853 15.6
Massachusetts.......................... 7,383 8.4 6,897 7.2
Texas.................................. 5,434 6.1 5,973 6.3
Maryland............................... 4,079 4.6 4,365 4.6
Georgia................................ 3,427 3.9 3,663 3.8
Illinois............................... 2,913 3.3 3,507 3.7
Virginia............................... 3,218 3.6 3,369 3.5
Colorado............................... (c) (c) 2,881 3.0
New York............................... 2,517 2.9 2,856 3.0
Other(b)............................... 29,244 33.1 30,295 31.8
------- ----- ------- -----
Total.................................. $88,460 100.0% $95,377 100.0%
======= ===== ======= =====
</TABLE>
- ---------------
(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 3.0% of HomeSide's servicing portfolio.
(c) At February 28, 1997, the Colorado portion of the portfolio is included
under the caption "Other".
At February 28, 1997, HomeSide's servicing portfolio consisted of $29.4
billion of FHA/VA servicing and $59.0 billion of conventional servicing.
At November 30, 1997, HomeSide's servicing portfolio consisted of $39.7
billion of FHA/VA servicing and $55.7 billion of conventional servicing.
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SERVICING PORTFOLIO BY COUPON(a)
<TABLE>
<CAPTION>
AT FEBRUARY 28, 1997 AT NOVEMBER 30, 1997
------------------------------------- -------------------------------------
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%............... $ 983 1.1% 1.1% $ 820 0.9% 0.9%
6.0% to 6.9%................. 9,633 10.9 12.0 10,919 11.4 12.3
7.0% to 7.9%................. 37,542 42.4 54.4 40,299 42.3 54.6
8.0% to 8.9%................. 29,293 33.1 87.5 33,570 35.2 89.8
9.0% to 9.9%................. 7,274 8.2 95.7 6,700 7.0 96.8
10.0% to 10.9%............... 2,912 3.3 99.0 2,398 2.5 99.3
Over 11.0%................... 823 1.0 100.0 671 0.7 100.0
------- ----- ------- -----
Total.............. $88,460 100.0% $95,377 100.0%
======= ===== ======= =====
</TABLE>
- ---------------
(a) Servicing statistics are based on loans serviced by HomeSide and exclude
loans purchased not yet on servicing system.
LOAN SERVICING CREDIT ISSUES
HomeSide is affected by loan delinquencies and defaults on loans that it
services. Under certain types of servicing contracts, particularly contracts to
service loans that have been pooled or securitized, HomeSide must forward all or
part of the scheduled payments to the owner of the loan, even when loan payments
are delinquent. Also, to protect their liens on mortgaged properties, owners of
loans usually require a servicer to advance scheduled mortgage and hazard
insurance and tax payments even if sufficient escrow funds are not available.
HomeSide is generally reimbursed, subject to certain limitations with respect to
FHA/VA loans as described below, by the mortgage owner or from liquidation
proceeds for payments advanced that the servicer is unable to recover from the
mortgagor, although the timing of such reimbursement is typically uncertain. In
the interim, HomeSide absorbs the cost of funds advanced during the time the
advance is outstanding. Further, HomeSide bears the increased costs of
collection activities on delinquent and defaulted loans. 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. In addition,
delinquency rates typically rise in the winter months, which results in higher
servicing costs. However, late charge income has historically been sufficient to
offset such incremental expenses.
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 $17.9 million and $15.7 million for the
period March 16, 1996 to February 28, 1997, and the nine months ended November
30, 1997, respectively, primarily representing losses on VA loans. Because the
total principal amount of FHA loans is guaranteed, losses on such loans are
generally limited to expenses of collection. HomeSide experiences minimal losses
from FHA loans. In respect of VA loans, the VA guarantees the initial losses on
a loan. The guaranteed amount generally ranges from 20% to 35% of the original
principal balance. Before each foreclosure sale, the VA determines whether to
bid by comparing the estimated net sale proceeds to the outstanding principal
balance and the servicer's accumulated reimbursable costs and fees. If this
amount is a loss and exceeds the guaranteed amount, the VA typically issues a
no-bid and pays the servicer the guaranteed amount. Whenever a no-bid is issued,
the servicer absorbs the loss, if any, in excess of the sum of the guaranteed
principal and amounts recovered at the foreclosure sale. HomeSide's historical
delinquency and foreclosure rate experience on VA loans has generally been
consistent with that of the industry.
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.
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<PAGE> 63
Set forth below is HomeSide's delinquency and foreclosure experience.
SERVICING PORTFOLIO DELINQUENCIES
(PERCENT BY LOAN COUNT)
<TABLE>
<CAPTION>
TOTAL FORECLOSURES
30 DAYS 60 DAYS 90+ DAYS PAST DUE PENDING(B)
------- ------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
At May 31, 1996(a)...................... 2.97% 0.60% 0.35% 3.92% 0.66%
At August 31, 1996...................... 3.08% 0.64% 0.48% 4.20% 0.66%
At November 30, 1996.................... 3.50% 0.68% 0.58% 4.76% 0.64%
At February 28, 1997.................... 3.27% 0.69% 0.54% 4.50% 0.72%
At May 31, 1997......................... 2.89% 0.63% 0.46% 3.98% 0.68%
At August 31, 1997...................... 3.45% 0.73% 0.55% 4.73% 0.70%
At November 30, 1997.................... 4.12% 0.82% 0.69% 5.63% 0.73%
</TABLE>
- ---------------
(a) Excludes BMC portfolio acquired on May 31, 1996.
(b) Foreclosure inventory does not include bankruptcies.
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.
HomeSide's risk management policy is designed to minimize exposure to loss
in the value of the servicing portfolio caused by prepayments due to declines in
interest rates. The servicing portfolio is valued using market discount rates
and market consensus prepayment speeds, among other variables. The value is then
analyzed under various interest rate scenarios that help HomeSide estimate the
exposure to loss. This potential loss exposure determines the hedge profile,
which profile is monitored daily and may be adjusted to reflect significant
moves in key variables such as interest rate and yield curve changes and revised
prepayment speed assumptions. Results of the risk management program depend on a
variety of factors, including the hedge instruments typically used by HomeSide,
the relationship between mortgage rates and Treasury securities and certain
other factors. See "Risk Factors -- Impact of Changes in Interest Rates; Results
of Risk Management Activities" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- HomeSide -- for the Period
March 16, 1996 to February 28, 1997 -- 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.
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<PAGE> 64
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 a servicing site located in Jacksonville,
Florida, which at February 28, 1997 serviced approximately 681,115 loans with a
servicing staff of approximately 550, and a servicing site located in San
Antonio, Texas, which at February 28, 1997 serviced approximately 406,221 loans
with a servicing staff of approximately 280. BMC had servicing operations
located in Jacksonville, Florida and San Antonio, Texas. Prior to the sale of
substantially all the assets of Honolulu Mortgage in February, 1997 to an
unaffiliated third party, approximately 11,000 loans were serviced at Honolulu
Mortgage. These loans and the servicing rights were sold as part of the
February, 1997 sale. HomeSide plans to integrate the existing former BBMC
portfolio with the former BMC portfolio in stages based on the capacity and
capabilities of each of the respective servicing sites.
In addition to the physical consolidation of servicing operations, HomeSide
intends to pursue the conversion of the entire servicing platform to BMC'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. By the end
of 1998, HomeSide expects to service the entire portfolio on the proprietary
servicing software.
Several other measures are expected to be undertaken by HomeSide in order
to operate more efficiently. HomeSide has outsourced BMC's hazard insurance, tax
payments and default functions to specialized vendors, as was the historic
practice at BBMC. 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.
EMPLOYEES
As of February 28, 1997 and November 30, 1997, HomeSide had approximately
1,689 and 1,805 total employees, respectively, substantially all of whom were
full-time employees. HomeSide has no unionized employees and considers its
relationship with its employees generally to be satisfactory.
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, HomeSide leases
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
63
<PAGE> 65
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 BBMC Acquisition, BBMC 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 BMC Acquisition, BMC
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.
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."
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.
64
<PAGE> 66
BBMC -- HISTORICAL BUSINESS
BBMC, 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, BBMC 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, BBMC was ranked as the 9th
largest originator of residential mortgage loans (including co-issue volume) and
as the 16th largest servicer of residential mortgage loans, according to
National Mortgage News, and as the 5th largest wholesale originator of mortgage
loans (including co-issue volume) according to Wholesale Access. The following
discussion summarizes BBMC's operations up to the date it was acquired by the
Parent.
PRODUCTION
BBMC participated in several origination channels, with a focus on
wholesale originations. In 1995, wholesale channels (correspondent, co-issue and
broker) represented approximately 90% of BBMC's total production. No single
source within the correspondent or broker channels accounted for more than 2% of
total production in 1995. BBMC's other origination channels included
telemarketing, affinity programs and retail branches. BBMC 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 BBMC's
origination channels:
RESIDENTIAL LOAN PRODUCTION BY CHANNEL
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------ THREE MONTHS ENDED
1991 1992 1993 1994 1995 MARCH 31, 1996
------ ------ ------- ------- ------ -------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Wholesale:
Correspondent............... $2,096 $2,947 $ 4,955 $ 3,364 $3,778 $ 2,031
Co-issue(a)................. 1,200 2,955 2,860 4,285 3,901 1,597
Broker...................... 231 934 1,431 498 291 191
------ ------ ------- ------- ------ -------
Total wholesale.......... 3,527 6,836 9,246 8,147 7,970 3,819
Retail........................ 910 1,824 2,125 788 915 368
------ ------ ------- ------- ------ -------
Total production......... 4,437 8,660 11,371 8,935 8,885 4,187
Bulk acquisitions(a).......... 760 1,046 2,311 5,538 683 --
------ ------ ------- ------- ------ -------
Total production and
acquisitions........... $5,197 $9,706 $13,682 $14,473 $9,568 $ 4,187
====== ====== ======= ======= ====== =======
</TABLE>
- ---------------
(a) Represents the acquisition of servicing rights, not the underlying loans.
Amounts represent the UPB of mortgage debt to which the acquired servicing
rights relate.
BBMC competed nationwide by offering a wide variety of mortgage products
designed to respond to consumer needs and tailored to address market
competition. BBMC 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.
BBMC's national loan production operation resulted in geographically
diverse originations, enabling BBMC to diversify its risk across many markets in
the United States. BBMC 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%). BBMC'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%).
65
<PAGE> 67
SECONDARY MARKETING
BBMC customarily sold all loans that it originated while retaining the
servicing rights to such loans. BBMC 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 BBMC 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 BBMC 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, BBMC has not experienced secondary marketing losses.
LOAN SERVICING
BBMC derived its revenues predominantly from its servicing operations.
Since 1991, BBMC'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, BBMC 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, BBMC'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. BBMC's weighted average servicing fee was 0.386%
at December 31, 1995.
SERVICING PORTFOLIO COMPOSITION
BBMC originated and purchased servicing rights for mortgage loans
nationwide. The broad geographic distribution of BBMC's servicing portfolio
reflected the national scope of BBMC'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 BBMC 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.
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<PAGE> 68
The following tables set forth certain information regarding BBMC's
servicing portfolio:
SERVICING PORTFOLIO COMPOSITION(a)
<TABLE>
<CAPTION>
AT DECEMBER 31, AT
----------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
FHA/VA....................... $ 9,898 $10,751 $12,524 $15,695 $19,880 $ 20,680
Conventional................. 10,703 12,955 14,130 20,113 21,041 21,636
------- ------- ------- ------- ------- -------
Total serviced (UPB)....... $20,601 $23,706 $26,654 $35,808 $40,921 $ 42,316
======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(a) Servicing statistics are based on loans serviced by BBMC and exclude loans
purchased not yet on servicing system.
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%
======= ===== ======= =====
</TABLE>
- ---------------
(a) Servicing statistics are based on loans serviced by BBMC and exclude loans
purchased not yet on servicing system.
(b) No other state represents more than 3.0% of BBMC's servicing portfolio.
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<PAGE> 69
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%
======= ===== ======= =====
</TABLE>
- ---------------
(a) Statistics based on loans serviced by BBMC and exclude loans purchased not
yet on servicing system.
LOAN SERVICING CREDIT ISSUES
For BBMC, 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. BBMC'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 BBMC'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 BBMC .......................... 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 BBMC........................... 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 BBMC........................... 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 BBMC........................... 2.65 0.56 0.59 3.80 1.00
</TABLE>
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<PAGE> 70
BMC -- HISTORICAL BUSINESS
Prior to its acquisition by the Parent, BMC 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 BMC 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, BMC 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. BMC 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 BMC's operations up to the date it was acquired by the Parent.
Prior to 1994, BMC originated loans primarily on a retail basis through
bank branches in Florida and Georgia. In 1994, BMC grew its origination business
and servicing portfolio substantially, primarily through two acquisitions. BMC
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 BMC's first entry into the wholesale origination
business.
In February 1995, BMC 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. BMC'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 BMC Acquisition, the Parent acquired BMC'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 BMC Acquisition, BPFC was merged into BancPLUS, which in
turn was merged, together with LoanAmerica, into the Issuer. Also concurrently
with the BMC Acquisition, all of BMC's servicing portfolio was transferred to
the Issuer, except for certain portions of BMC's GNMA loans, which HHI retained.
In the future, it is expected that BMC will neither originate nor service any
loans, except for the GNMA loans retained by it on May 31, 1996. As part of the
BMC 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 BMC Acquisition, BMC 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
BMC's total production and retail represented the balance.
Subsequent to the BMC 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.
69
<PAGE> 71
Like BBMC, BMC 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 BMC 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
====== ====== ====== ====== ====== ======
</TABLE>
- ---------------
(a) Since date of acquisitions by BMC.
BMC's loan production operation, historically limited to the Florida and
Georgia markets, became national in scope primarily through BMC's acquisitions
of Loan America and BancPLUS. Historically, the mortgage origination leader in
Florida with a market share in excess of 11%, BMC 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, BMC 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 such acquisitions, BMC 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 BMC 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 BMC'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 BBMC, BMC's strategy had been to build its mortgage servicing
portfolio to benefit from economies of scale and productivity improvements. The
BMC 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.
70
<PAGE> 72
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
======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(a) Includes $13.9 billion of servicing from BancPLUS which includes $1.7
billion of servicing from Honolulu Mortgage in 1995 and $4.0 billion of
servicing from LoanAmerica acquisition in 1994.
SERVICING PORTFOLIO COMPOSITION
Historically, BMC was primarily a servicer of conventional loans,
consisting of Fannie Mae and FLHMC product. The acquisition of BMC's servicing
portfolio reduced the percentage of HomeSide's government loans in the combined
servicing portfolios. Based on the combined servicing portfolios of BBMC and
BMC, 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
AT DECEMBER 31, 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>
71
<PAGE> 73
The following table sets forth information regarding the geographic
distribution of BMC's servicing portfolio at March 31, 1996. Because of
Barnett's market presence in Florida, that state comprised approximately 38.8%
share of BMC'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 BMC'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>
72
<PAGE> 74
LOAN SERVICING CREDIT ISSUES
The table below sets forth a comparison of BMC'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
BMC..................................... 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
BMC..................................... 2.95 0.59 0.39 3.93 0.66
</TABLE>
Under the terms of the BMC Acquisition, if BMC 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."
73
<PAGE> 75
THE ACQUISITIONS
THE BBMC ACQUISITION
On March 15, 1996 the Parent acquired from Bank of Boston all of the
outstanding stock of BBMC. Certain assets and liabilities of BBMC were retained
by Bank of Boston, including BBMC'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 BBMC. Also in connection with the BBMC
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 BBMC 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 BMC Acquisition,
the Parent paid an additional $5.0 million in cash to Bank of Boston.
Simultaneously with the closing of the BBMC 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 BBMC 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 BBMC Acquisition pursuant
to an agreement dated March 14, 1996. Immediately following consummation of the
BBMC 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 BBMC Acquisition, BBMC 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 BMC 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 BBMC 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 BMC ACQUISITION
On May 31, 1996, the Parent acquired from Barnett all of the outstanding
stock of BMC. Certain assets and liabilities of BMC were retained by Barnett,
including those assets of BMC 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 BMC, the Parent paid Barnett
approximately $228.2 million in cash. In connection with the BMC 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
74
<PAGE> 76
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.
Upon consummation of the BMC Acquisition, BMC and its subsidiaries
terminated their former line of credit with Barnett. In connection with the BMC
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 BMC Acquisition, the Parent contributed all of the
stock of the Issuer 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 BBMC Acquisition and (ii) the BMC Acquisition as of
the respective dates of acquisition:
<TABLE>
<CAPTION>
BBMC
ACQUISITION
BBMC BMC AND
ACQUISITION ACQUISITION BMC
(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 BBMC................................... $ 225.9 $ -- $ 225.9
Acquisition of BMC.................................... -- 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
======== ====== ========
</TABLE>
- ---------------
(a) Represents the net effect of purchasing loans held for sale previously
attributable to participations of an affiliate of Bank of Boston of $507.3
million and excluding net assets retained by Bank of Boston of $215.2
million.
75
<PAGE> 77
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 -- 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 Executive 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)
Debra F. Watkins............ 39 Senior Vice President, Cash Management and Marketing
Operations (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)**
Thomas J. Hollister......... 43 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)**
</TABLE>
- ---------------
* Also serves as a member of the Compensation Committee of the Parent.
** Also serves as a member of the Audit Committee of the Parent.
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
76
<PAGE> 78
Mortgage Bankers Association of America. Mr. Pickett also serves as a Director
of Fannie Mae and of Baptist Medical Center, Jacksonville, Florida.
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 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 Executive Vice President and Director of
Capital Markets of the Issuer since September, 1997. He previously served as
Senior Vice President and Director of Capital Markets of the Issuer from 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
77
<PAGE> 79
Bank of Boston. Ms. Mackey previously served as Senior Audit Manager at KPMG
Peat Marwick from 1985 to 1992.
DEBRA F. WATKINS has served as Senior Vice President, Cash Management and
Marketing Operations of the Issuer since October, 1993. From July, 1987 to
October, 1993, Ms. Watkins served in various management positions in Secondary
Marketing and Production Operations at the Issuer. Ms. Watkins currently serves
as Chairperson of the GNMA Liaison Committee of the Mortgage Bankers Association
of America.
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, 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.
THOMAS J. HOLLISTER has served as a Director of the Parent since October 2,
1997. Mr. Hollister joined BankBoston in 1979 and has served in various
management positions since that time. He currently serves as the Executive Vice
Present of Consumer and Small Business Banking.
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.
78
<PAGE> 80
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.
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 five 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 HomeSide and its subsidiaries for the fiscal year ended February
28, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
ANNUAL COMPENSATION ------------
SECURITIES
NAME AND PRINCIPAL FISCAL -------------------- UNDERLYING ALL OTHER
ISSUER POSITION YEAR SALARY BONUS OPTIONS(A) COMPENSATION(B)
- ----------------------------------------------- ------ -------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Joe K. Pickett................................. 1997 $312,000 $362,000 $242,862 $ 16,135
Chairman & Chief Executive Officer
Hugh R. Harris................................. 1997 300,000 350,000 242,862 7,842
President and Chief Operating Officer
Kevin D. Race.................................. 1997 250,000(c) 100,000 97,155 413,145(d)
Executive Vice President and Chief Financial
Officer
Mark F. Johnson................................ 1997 200,000 150,000 97,155 6,714
Executive Vice President -- Secondary
Marketing and Production
William Glasgow, Jr............................ 1997 200,000 150,000 97,155 6,522
Executive Vice President
Charles D. Gilmer.............................. 1997 175,000 150,000 97,155 6,172
Senior Vice President and Treasurer
</TABLE>
- ---------------
(a) Involves Common Stock of Parent. Reflects a 17 for 1 stock split of Parent's
Common Stock effected immediately prior to the Parent's January 1997 initial
public offering.
(b) Includes amounts received for (1) matching contributions under the Issuer's
savings plan of $6,000 with respect to each of Messrs. Pickett, Harris,
Johnson and Glasgow and $2,692 with respect to Mr. Gilmer; and (2) the
dollar value of life insurance premiums paid by the Issuer with respect to:
Mr. Pickett $10,135; Mr. Harris $1,842; Mr. Race $74; Mr. Johnson $714; Mr.
Glasgow $522 and Mr. Gilmer $3,480.
(c) The salary of Mr. Race is per annum. Mr. Race has been employed by HomeSide
since October 1996.
(d) Includes a bonus of $375,000 received by Mr. Race as an inducement to join
the Issuer and $38,071 in relocation expenses.
79
<PAGE> 81
OPTION GRANTS FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1997
The following table provides information on option grants with respect to
Parent Common Stock for the fiscal year ended February 28, 1997 to the named
executive officers. Pursuant to applicable regulations of the Commission, the
following table also sets forth the hypothetical value which might have been
realized with respect to such options based on assumed rates of stock
appreciation of 5% and 10% compounded annually from date of grant to the end of
the option terms:
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE AT
----------------------------------------------- ASSUMED
NUMBER OF ANNUAL RATES
SECURITIES % OF TOTAL OF STOCK PRICE
UNDERLYING OPTIONS APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OPTION TERM(B)
GRANTED EMPLOYEES PRICE EXPIRATION ----------------------
NAME (#)(A) IN 1996 ($/SH)(A) DATE 5% 10%
- --------------------------------- ---------- ----------- --------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Joe K. Pickett................... 80,954(c) 18.11% $10.294 5/31/06 $523,772 $1,328,455
161,908(d) 18.11% $10.294 11/30/05 $984,401 $2,461,002
Hugh R. Harris................... 80,954(c) 18.11% $10.294 5/31/06 $523,772 $1,328,455
161,908(d) 18.11% $10.294 11/30/05 $984,401 $2,461,002
Kevin D. Race.................... 32,385(c) 7.24% $10.294 10/08/06 $209,531 $ 531,438
64,770(d) 7.24% $10.294 4/08/06 $393,802 $ 984,504
Charles D. Gilmer................ 32,385(c) 7.24% $10.294 5/31/06 $209,531 $ 531,438
64,770(d) 7.24% $10.294 11/30/05 $393,802 $ 984,504
Mark F. Johnson.................. 32,385(c) 7.24% $10.294 5/31/06 $209,531 $ 531,438
64,770(d) 7.24% $10.294 11/30/05 $393,802 $ 984,504
William Glasgow, Jr.............. 32,385(c) 7.24% $10.294 5/31/06 $209,531 $ 531,438
64,770(d) 7.24% $10.294 11/30/05 $393,802 $ 984,504
</TABLE>
- ---------------
(a) Reflects a 17 for 1 stock split of the Parent's Common Stock effected
immediately prior to its January 1997 initial public offering.
(b) These values are based on assumed rates of appreciation only. Actual gains,
if any, on shares acquired on option exercises are dependent on the future
performance of the Parent's Common Stock.
(c) Non-qualified timed-based options granted pursuant to the Parent's 1996
Employee Stock Option Plan. Options vest annually in arrears in five equal
installments of 20% per year, with the first 20% vesting on April 9, 1997.
(d) Non-qualified, performance-based options granted pursuant to the Parent's
1996 Time Accelerated Restricted Stock Option Plan. These options vest no
later than nine years from the date of grant unless accelerated based on the
achievement of certain performance criteria. The options became exercisable
as to 20% of the shares covered thereby on April 9, 1997.
80
<PAGE> 82
AGGREGATED OPTION EXERCISES AND OPTION VALUES
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1997
The following table provides information on option exercises during the
fiscal year ended February 28, 1997 with respect to the Parent Common Stock and
on the values of the named executive officers' unexercised options at February
28, 1997:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED OPTIONS AT YEAR-END(#)(A) OPTIONS AT YEAR-END
ON VALUE ---------------------------- -------------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE(B)
- ------------------------- ---------- --------- ------------ -------------- ------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Joe K. Pickett........... 0 $ 0 0 242,862 $0 $ 1,901,852
Hugh R. Harris........... 0 0 0 242,862 0 1,901,852
Kevin D. Race............ 0 0 0 97,155 0 760,821
Charles D. Gilmer........ 0 0 0 97,155 0 760,821
Mark F. Johnson.......... 0 0 0 97,155 0 760,821
William Glasgow, Jr...... 0 0 0 97,155 0 760,821
</TABLE>
- ---------------
(a) The options became exercisable as to 20% of the shares covered thereby on
April 9, 1997.
(b) Value of unexercised in-the-money stock options represents the difference
between the exercise prices of the stock options and the closing price of
the Parent's Common Stock on The New York Stock Exchange on February 28,
1997.
See "Certain Relationships and Related Transactions -- Management
Ownership" for information regarding shares of Common Stock of the Parent sold
to members of management.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
Although, except as described below, 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 (a
"Trigger Event"). Such severance agreements terminate upon consummation of the
acquisition of the Parent by NAB, as discussed below. If such named executive
officer offers to remain in the employ of the Issuer for one year following any
Trigger Event, 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) twice 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 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. Each of the Severance
Agreements is for a term of one (1) year which is automatically renewed on April
1 of each year for additional one-year periods unless either the Issuer or the
executive has given notice not later than December 31st of the previous year to
the other not to extend the term of the Agreement. If a Trigger
81
<PAGE> 83
Event has occurred during the term of the Severance Agreement, however, the
Agreement continues for one (1) year following the closing of the Trigger Event.
Employment Agreements with NAB and the Issuer. In connection with the
proposed acquisition of the Parent by NAB, NAB and the Issuer have entered into
employment agreements (the "Employment Agreements") with Joe K. Pickett, the
Issuer's Chairman and Chief Executive Officer, Hugh R. Harris, the Issuer's
President and Chief Operating Officer; Kevin D. Race, the Issuer's Vice
President, Treasurer and Chief Financial Officer; Mark F. Johnson, the Issuer's
Vice President, Loan Production; and William Glasgow, Jr., the Issuer's Vice
President, Loan Administration and six other officers of the Issuer (the
"Executives"). Each Employment Agreement will become effective upon consummation
of the Merger and provides for a three-year term of employment commencing upon
the consummation of the Merger. Pursuant to the Employment Agreements, Mr.
Pickett will serve as Chairman and Chief Executive Officer of the Issuer. Mr.
Harris will serve as President and Chief Operating Officer of the Issuer and Mr.
Race will serve as Executive Vice President and Chief Financial Officer of the
Issuer. The Employment Agreements for Messrs. Johnson and Glasgow provide that
each such Executive will serve as an Executive Vice President of the Issuer.
Pursuant to their respective Employment Agreements, Messrs. Pickett,
Harris, Race, Johnson and Glasgow each (i) will receive an annual base salary of
$450,000, $410,000, $300,000, $230,000 and $230,000, respectively, (ii) will
receive a guaranteed annual bonus of $800,000, $800,000, $337,500, $362,500 and
$362,500, respectively, payable on each of the first and second anniversaries of
the effective time of the Merger, (iii) will be eligible to participate in the
Issuer's annual bonus plan ("ABP"), (iv) will be eligible to participate in
NAB's Executive Share Option Plan and will receive an initial grant of options
to purchase 50,000, 45,000, 35,000, 30,000, and 30,000 NAB ordinary shares,
respectively, and (v) will be eligible to participate in a long-term incentive
plan (funded by NAB with a cash pool not in excess of $15,000,000), the first
award under such plan (the "Anniversary Award") to be payable in a lump sum cash
payment within 30 days following the third anniversary of the effective time of
the Merger (the "Anniversary Date"), provided that the Executive is employed by
the Issuer on the Anniversary Date. The Employment Agreements provide that NAB
shall cause the entire long-term incentive plan cash pool to be distributed to
eligible Issuer executives. The Employment Agreements for the six other officers
provide for annual base salaries aggregating $1,120,000, and guaranteed annual
bonuses aggregating $712,500; and such officers will receive in the aggregate
initial grants of options to purchase 150,000 NAB ordinary shares and will be
eligible to participate in the Issuer's annual bonus plan and in the long-term
incentive plan referred to in clause (v) above. The Employment Agreements also
provide that each Executive will be (i) entitled to participate in employee
benefit plans as may be in effect for senior executives of the Issuer from time
to time, (ii) entitled to paid vacation in accordance with the vacation policy
applicable to the Issuer's senior executives, (iii) reimbursed by the Issuer for
reasonable business expenses and (iv) entitled to receive the same perquisites
that such Executive received immediately prior to the Effective Time. The
Employment Agreements further provide that each Executive will be eligible to
participate in a nonqualified deferred compensation plan to which such Executive
may elect to defer any amount of such Executive's cash compensation.
Each Employment Agreement may be terminated by the applicable Executive for
"good reason" and by the Issuer for "cause," as such terms are defined in the
Employment Agreements, or by voluntary resignation of the Executive, upon ninety
(90) days' written notice provided the Executive waives any amounts payable
under the Employment Agreement and provided further that Executive's obligations
under the Confidentiality and Noncompetition Agreement (described below) to
which such Executive is a party remain unaffected by such resignation. In the
event that the Issuer terminates the Executive's employment for any reason other
than cause or disability or the Executive terminates his employment for good
reason, the Issuer is obligated to (A) pay to the Executive his Anniversary
Award pursuant to the long-term incentive plan if he is terminated prior to the
third anniversary of the Merger and (B)(i) pay to the Executive for the
twenty-four (24) month period (the eighteen (18) month period, in the case of
each Executive other than Messrs. Pickett and Harris) following the Executive's
termination (the "Continuation Period"), an amount equal to his average monthly
base salary for the two year period (or portion thereof) immediately preceding
the date of termination, plus (ii) at the end of the Continuation Period, an
amount equal to two times (1.5 times, in the case of each
82
<PAGE> 84
Executive other than Messrs. Pickett and Harris) the average of (x) the
Executive's target bonus under the ABP for the year in which termination occurs
and (y) the annual bonus under the ABP for the year immediately preceding the
year in which termination occurs, (iii) the pro rata portion of the guaranteed
annual bonus, if any, for the year of termination and (iv) the pro rata portion
of the Executive's ABP award for the year of termination, and (C) provide the
Executive during the Continuation Period with continued coverage under the
Issuer's health, life and disability insurance plans, provided that Executive
continues to contribute the employee share of the cost applicable to such
coverages. The amounts under clauses (B)(i) and (ii) and the coverage under
clause (C) in the immediately preceding sentence will be payable or provided, as
the case may be, only so long as the Executive complies with his obligations
under the Confidentiality and Noncompetition Agreement (described below) to
which such Executive is a party.
In the event an Executive's employment is terminated by reason of death or
disability, the Issuer shall pay such Executive (or his designated beneficiary
or estate, as the case may be) the pro-rated portion of (i) the guaranteed
annual bonus, if any, for the year of termination of employment, (ii) any ABP
award such Executive would have received for the year of termination of
employment, and (iii) any applicable award payable under the long-term incentive
plan (which is the Anniversary Award in the event of termination of employment
on or before the third anniversary of the Merger).
Each Employment Agreement provides that the Executive waives any and all
rights to benefits payable under any prior severance agreement to which the
Executive and the Issuer are parties and agrees that such severance agreement
shall be void and of no further effect and shall be superseded in its entirety
by the Employment Agreement.
Confidentiality and Non-Competition Agreements with NAB and the
Issuer. Each Executive has entered into a Confidentiality and Non-Competition
Agreement (the "Confidentiality and Noncompetition Agreements") with the Issuer
and NAB under which each Executive has agreed to hold in a fiduciary capacity
for the benefit of the Issuer all secret or confidential information, knowledge
or data relating to the Issuer or any of its affiliated companies and their
respective businesses that was obtained during the Executive's employment with
the Issuer and not to divulge any such information without the prior written
consent of the Issuer, or as otherwise required by law or legal process
(provided that the Issuer has been given notice of and opportunity to challenge
or limit the scope of disclosure purportedly so required). Each Confidentiality
and Noncompetition Agreement also provides that during the term of the
Executive's employment and for the Applicable Period (as defined below)
thereafter, the Executive shall not, directly or indirectly, own, manage,
operate, control, be employed by, advise or in any manner participate or engage
in any mortgage origination, mortgage lending or mortgage servicing business
within the United States that competes directly or indirectly with any business
in which the Issuer or any of its affiliates is engaged at the time of the
Executive's termination or thereafter. Furthermore, each Confidentiality and
Noncompetition Agreement provides that during the Applicable Period (as defined
below) the Executive will not directly or indirectly solicit for employment by
other than the Issuer any person who is at such time or was during specified
periods prior to the Executive's termination of employment employed by the
Issuer or its affiliates, or solicit or accept business from certain customers
of the Issuer or its affiliates or customer prospects of the Issuer or its
affiliates. For purposes of the Confidentiality and Noncompetition Agreements,
the "Applicable Period" is the period during which the Executive is employed by
the Issuer pursuant to the Employment Agreement plus a period equal to (i) 24
months thereafter in the event the Executive is terminated for Cause (as defined
in the Employment Agreement) or voluntarily terminates his Employment Agreement
without Good Reason (as defined in the Employment Agreement) or (ii) in the
event of any other termination not described in clause (i) above, the shorter of
the period equal to the remaining time left in the current term of the
Employment Agreement and the period Executive receives payments under the
termination provisions of the Employment Agreement. The Confidentiality and
Noncompetition Agreements will only become effective upon the consummation of
the Merger. In consideration of entering into the Confidentiality and
Noncompetition Agreement, Messrs. Pickett, Harris, Race, Johnson and Glasgow
will receive a one time cash payment in the amount of $1,500,000, $1,500,000,
$1,000,000, $400,000 and $400,000, respectively, immediately following and
conditioned upon, the consummation of the Merger. The Confidentiality and
Noncompetition Agreements entered into by the six other officers provide for
cash payments aggregating $1,520,000.
83
<PAGE> 85
Acceleration of Options. The Board of Directors of the Issuer, with the
consent of NAB, has authorized the acceleration of vesting and exercisability,
immediately prior to the consummation of the Merger, of certain outstanding
options to purchase Parent Common Stock (each, an "Option") pursuant to the
Issuer's stock option plans. Pursuant to the Merger Agreement, immediately prior
to the Effective Time, each Option which is outstanding and exercisable (and has
not been exercised) will be terminated and each holder thereof will be entitled
to receive an amount in cash equal to (A) the product of (i) the excess of (x)
$27.825 over (y) the per share exercise price applicable to such Option by (ii)
the number of such shares of Parent Common Stock subject to such accelerated
option, less (B) any amounts required to be withheld under applicable law. The
following sets forth for the executive officers and directors of the Issuer
listed, the amounts each such individual is entitled to receive with respect to
accelerated Options pursuant to the Merger Agreement: Joe K. Pickett --
$2,380,595; Hugh R. Harris -- $2,380,595; Kevin D. Race -- $1,018,261; Mark F.
Johnson -- $981,636; and William Glasgow, Jr. -- $981,636. In addition, such
individuals will receive the following amounts with respect to previously vested
options pursuant to the Merger Agreement: Joe K. Pickett -- $851,533; Hugh R.
Harris -- $851,533; Kevin D. Race -- $340,645; Mark F. Johnson -- $340,645; and
William Glasgow, Jr. -- $340,645. Other officers and employees of the Issuer
will receive, in the aggregate, $7,553,317 with respect to Options pursuant to
the Merger Agreement, of which $5,644,174 represents amounts paid with respect
to accelerated options.
BBMC 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 BBMC and its subsidiaries for BBMC's fiscal year ended December
31, 1995. None of the Issuer's named executive officers received any
compensation from BMC 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
BBMC POSITION YEAR SALARY(A) BONUS(A) AWARDS OPTIONS PAYOUT(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
</TABLE>
- ---------------
(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 BBMC 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:
84
<PAGE> 86
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 $259,000
Hugh R. Harris................................... 4,135 191,244
Charles D. Gilmer................................ 0 0
Mark F. Johnson.................................. 1,784 82,510
William Glasgow, Jr. ............................ 1,700 78,625
</TABLE>
In connection with the BBMC Acquisition, vesting on all of the restricted
stock owned by BBMC employees, including the restricted stock listed above,
was accelerated and all prior forfeiture and transferability restrictions
thereon were removed.
(c) Represents the dollar value of vested shares of performance restricted stock
calculated by multiplying the closing price of BKBC common stock on each
vesting date by the number of shares that vested on that date.
(d) Includes matching employer contributions and credits under the Bank of
Boston thrift-incentive plan and the Bank of Boston deferred compensation
plan for the named executive officers.
OPTION GRANTS IN 1995
The following table provides information on option grants with respect to
BKBC common stock in fiscal 1995 to the named executive officers. Pursuant to
applicable regulations of the Commission, the following table also sets forth
the hypothetical value which might have been realized with respect to such
options based on assumed rates of stock appreciation of 5% and 10% compounded
annually from date of grant to March 15, 1996, the end of the option terms:
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE AT
------------------------------------------------ ASSUMED
NUMBER OF ANNUAL RATES
SECURITIES % OF TOTAL OF STOCK PRICE
UNDERLYING OPTIONS APPRECIATION
OPTIONS GRANTED TO EXERCISE FOR OPTION TERM
GRANTED EMPLOYEES PRICE EXPIRATION --------------------
NAME (#)(A) IN 1995 ($/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
</TABLE>
- ---------------
(a) All options were exercised prior to March 15, 1996.
AGGREGATED OPTION EXERCISES IN 1995
AND DECEMBER 31, 1995 OPTION VALUES
The following table provides information on option exercises during 1995
with respect to BKBC common stock and on the values of the named executive
officers' unexercised options at December 31, 1995:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED OPTIONS AT YEAR-END(#) OPTIONS AT YEAR-END
ON VALUE ----------------------------- -----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Joe K. Pickett..................... 0 $ 0 32,100 4,800 $ 687,575 $84,600
Hugh R. Harris..................... 0 0 10,200 3,000 202,275 52,875
Charles D. Gilmer.................. 0 0 0 0 0 0
Mark F. Johnson.................... 0 0 5,200 2,000 108,250 32,250
William Glasgow, Jr................ 4,000 32,750 0 2,000 0 32,250
</TABLE>
In connection with the BBMC 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.
85
<PAGE> 87
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>
PRIOR YEARS OF SERVICE ESTIMATED ANNUAL
NAME AS OF 12/31/95 RETIREMENT 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.
86
<PAGE> 88
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 December 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>
BankBoston, N.A.............................. 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............................... 126,797(a) *
Hugh R. Harris............................... 121,435(a) *
Kevin D. Race................................ 48,586(b) *
William Glasgow.............................. 63,955(b) *
Mark F. Johnson.............................. 68,051(b) *
Thomas M. Hagerty............................ 25,194(c) *
David V. Harkins............................. 39,661(d) *
All Directors and Executive Officers as a
Group (18 persons)......................... 593,568(e) 1.36%
</TABLE>
- ---------------
*Less than 1%.
(a) Includes 48,573 shares currently exercisable under the Parent's stock option
plan.
(b) Includes 19,431 shares currently exercisable under the Parent's stock option
plan.
(c) Does not include 8,570,856 shares owned by THL, as to which Mr. Hagerty
disclaims beneficial ownership.
(d) Does not include 8,556,389 shares owned by THL, as to which Mr. Harkins
disclaims beneficial ownership.
(e) Does not include the shares held by THL, MDP, Bank of Boston and Siesta,
with which certain directors are affiliated; includes 202,073 shares
currently exercisable under the Parent's stock option plan.
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
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employee stock option plans. See "Management -- Executive Compensation," "The
Acquisitions" and "Certain Relationships and Related Transactions."
In addition to those shares of capital stock set forth in the preceding
table, 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. 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> 90
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 BMC 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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HomeSide does not pay any fee or monies (other than certain reimbursement
obligations) to BKBC or Barnett for its marketing and other rights under the
BKBC Marketing Agreement or Barnett Marketing Agreement.
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. For the period March 16,
1996 through February 28, 1997 and for the nine months ended November 30, 1997,
HomeSide paid to BKB Banks approximately $2.5 million and $4.6 million,
respectively, under such Transitional Services Agreements.
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 pays Barnett a monthly fee based on rates established under a fee
schedule for the different services provided to HomeSide. For the period March
16, 1996 through February 28, 1997 and for the nine months ended November 30,
1997, HomeSide paid to Barnett approximately $0.9 million and $0.1 million,
respectively, under such Transitional Services Agreement.
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 has been extended to June 30,
1997 with respect to some services.
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 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
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<PAGE> 92
such loans. The BKB Banks receive the most favorable pricing offered by HomeSide
to correspondent lenders. For the period March 16, 1996 through February 28,
1997 and for the nine months ended November 30, 1997, HomeSide paid
approximately $4.7 million and $3.8 million, respectively, to the BKB Banks
under the BKB Correspondent Loan Purchase and Sale Agreement. Under certain
conditions, the BKB Banks must indemnify HomeSide or repurchase mortgage loans
from HomeSide. The agreement provides certain underwriting, appraisal, mortgage
insurance and escrow requirements.
The term of the 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 purchase price for the servicing rights is based upon a percentage
(which varies depending on the type of loan) of the principal balance of the
loan, as may be adjusted based on an independent third party's revaluation. For
the period March 16, 1996 through February 28, 1997 and for the nine months
ended November 30, 1997, HomeSide paid approximately $1.3 million and $1.3
million, respectively, to the BKB Banks under this PMSR Flow Agreement. 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. For the period
March 16, 1996 through February 28, 1997 and for the nine months ended November
30, 1997, the BKB Banks paid approximately $5.3 million and $3.0 million,
respectively, to HomeSide under the BKBC Servicing Agreement.
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
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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.
The Issuer may, from time to time, without the consent of the holders of
the Notes, provide for the issuance of Notes or other 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 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. For the period March 16, 1996 through February
28, 1997 and for the nine months ended November 30, 1997, HomeSide paid
approximately $27.6 million and $34.6 million, respectively, to Barnett under
the Barnett Correspondent Agreement. 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 purchase price for the servicing
rights is based upon a percentage (which varies depending on the type of loan)
of the principal balance of the loan, as may be adjusted based on an independent
third party's revaluation. For the period March 16, 1996 through February 28,
1997 and for the nine months ended November 30, 1997, HomeSide paid
approximately $8.2 million and $8.0 million, respectively, to Barnett under this
PMSR Flow Agreement. 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.
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The servicing fees paid by the Barnett Banks to HomeSide are market-based
fees consistent with those charged by HomeSide to other mortgagees. For the
period March 16, 1996 through February 28, 1997 and for the nine months ended
November 30, 1997, Barnett paid approximately $23.6 million and $23.4 million,
respectively, to HomeSide under the Barnett Servicing Agreement.
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 BBMC
Acquisition or the BMC Acquisition. No additional consideration was paid or
received by HomeSide in connection with the execution and delivery thereof.
Termination of Certain Barnett Agreements
The Issuer and Parent are engaged in discussions with Barnett and certain
of its affiliates regarding a proposed new agreement (the "Transition
Agreement") pursuant to which the parties would (i) amend the Barnett Operating
Agreement such that Barnett would no longer be required to sell its new mortgage
loan production to the Issuer; and (ii) terminate the Barnett Marketing
Agreement, as well as most provisions of the Barnett Correspondent Loan Purchase
Agreement, the Barnett PMSR Flow Agreement and the delegated Underwriting
Agreement. The Transition Agreement is expected to provide for (i) payment by
Barnett of a lump sum to the Issuer, (ii) negotiation of a separate agreement
regarding the assignment to the Issuer of certain fixed assets, leases, vendor
contracts, broker business relationships, employees, pipe line loans and certain
other assets of Barnett's national wholesale mortgage division known as "Loan
America", (iii) negotiation of a separate agreement under which the Issuer would
have the option to purchase from Barnett or its affiliates certain bulk
servicing, (iv) certain changes in the servicing fees payable to the Issuer
under the Barnett Servicing Agreement and (v) the restructuring of the marketing
rights of Barnett and the Issuer regarding customers serviced by the Issuer.
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
BBMC Acquisition and the BMC Acquisition, an annual management fee of $250,000,
$83,334, $333,333 and $333,333, respectively. Such management 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 the
Parent. 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); Ms. Watkins
($45,000). The management purchasers are party to a Management Stockholders'
Agreement that contains various restrictions on transfer. Management holders
also have
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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 CERTAIN INDEBTEDNESS
BANK CREDIT AGREEMENT
The Issuer 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, at the request of the Issuer may be increased to $3.0 billion)
to be used to provide funds for the Issuer'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
(which, at the request of the Issuer may be increased to $3.0 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 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,
(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 to repurchase certain loans which are to
be prepaid, and (vi) advances made by the Issuer 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.
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 may prepay (without
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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.
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 Parent 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.
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The Issuer is also required to maintain compliance with certain financial
covenants, including:
(a) Maintaining a Consolidated Tangible Net Worth (as defined in the
Bank Credit Agreement) equal to the sum of (i) an amount equal to 80% of
Consolidated Tangible Net Worth (as defined in the Bank Credit Agreement)
as of February 28, 1997 plus (ii) an amount equal to the excess of (A) the
aggregate amount of net proceeds received during the period from February
28, 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 50% 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 28, 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 28, 1997 through such date (to the extent such Restricted
Payments were not deducted in determining such Consolidated Tangible Net
Worth).
(b) Not permitting the ratio of Consolidated Total Liabilities (as
defined in the Bank Credit Agreement) to 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 (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 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.
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DESCRIPTION OF THE PARENT NOTES
The Parent has outstanding $130,000,000 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
completed its initial public offering in January 1997. The Parent used a portion
of these proceeds to redeem $70.0 million principal amount of the Parent Notes,
together with the applicable premium and interest accrued thereon.
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
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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 NOTES
The Notes will be issued under an indenture (the "Indenture"), between the
Issuer and The Bank of New York , as trustee (the "Trustee"), a copy of which is
filed as an exhibit to the Registration Statement of which this Prospectus forms
a part. The terms of the Notes 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 Notes are subject to all such terms, and the holders of
Notes 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
Notes are not complete and are qualified in their entirety by reference to the
provisions of the Indenture and the Notes, including the definitions of
capitalized terms used herein without definition. Unless otherwise indicated
capitalized terms have the meaning given them in the Indenture or the Notes. 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 Notes 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 Notes 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 November 30, 1997, the Issuer had an aggregate of $2,503.3
million of total indebtedness outstanding, consisting of $20.7 million of
secured indebtedness and $750 million of the Notes, as well as $1,732.6 million
of unsecured indebtedness outstanding under the Bank Credit Agreement.
Borrowings under the Bank Credit Agreement become secured obligations upon the
occurrence of certain events. See "Description of Certain Indebtedness -- Bank
Credit Agreement -- Security."
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 Notes 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 Notes. The Bank Credit Agreement and the Parent
Notes Indenture contain certain covenants restricting the Issuer's ability to
incur indebtedness, but subject to certain conditions, including compliance with
certain financial tests specified therein, do not limit the ability of the
Issuer to issue Notes. See "Description of Certain Indebtedness -- Bank Credit
Agreement" and "Description of the Parent Notes."
The Notes are currently limited to up to $1,500,000,000 aggregate initial
offering price, including the $750 million of Notes issued and currently
outstanding. 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 Notes offered hereby. 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).
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 or executive order to close in
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The City of New York; provided, however, 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.
DENOMINATIONS, INTEREST, REGISTRATION AND TRANSFER
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. References herein to "United States dollars," "U.S. dollars" or "$" are
to the lawful currency of the United States of America (the "United States").
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 will be $1,000 and integral multiples
thereof, unless otherwise specified in the applicable Pricing Supplement
(Section 3.2).
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.
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 delivery 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 principal corporate trust office
of the Trustee located at 101 Barclay Street, Floor 21 West, New York, New York
10286. 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 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
(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 Note ("Defaulted Interest") will forthwith cease
to be payable to the holder of such Note on the applicable regular record date
and may either be paid to the Person in whose name such Note 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 Note 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).
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 principal corporate trust office of the Trustee located at 101 Barclay
Street, Floor 21 West, New York, New York 10286 (Section 3.5). Every Note
surrendered for 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 Notes, 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). The Issuer
may
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at any time rescind the designation of the Trustee or any successor as 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 the Notes. The Issuer may at any time designate
additional transfer agents with respect to the Notes (Section 10.2).
Neither the Issuer nor the Trustee shall be required to (i) issue, register
the transfer of or exchange Notes during a period beginning at the opening of
business 15 days before the mailing of notice of redemption of any such Notes 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
Note, or portion thereof, called for redemption, except the unredeemed portion
of any Note being redeemed in part; or (iii) issue, register the transfer of or
exchange any Note that has been surrendered for repayment at the option of the
holder, except the portion, if any, of such Note not to be so repaid (Section
3.5).
No Note shall be entitled to any benefit under the Indenture or be valid or
obligatory for any purpose unless there appears on such Note 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
signatories, and such certificate upon any Note shall be conclusive evidence,
and the only evidence, that such Note has been duly authenticated and delivered
under the Indenture and is entitled to the benefits of the Indenture (Section
3.3).
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. The Issuer's ability to redeem the
Notes at the option of the holders at any time is subject to the availability to
the Issuer of funding sources at such time, including its existing credit
facilities or any refinancing or extension thereof. Among the factors affecting
the Issuer's ability to refinance its credit facilities and the Notes are
financial market conditions and the value and performance of the Issuer prior to
such time of refinancing. See "Risk Factors -- Potential Non-Availability of
Funding Sources." 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 principal corporate
trust office of the Trustee located at 101 Barclay Street, Floor 21 West, New
York, New York 10286, not more than 60 nor less than 30 calendar days prior to
the date
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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 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 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 June 30 and December 31 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.
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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 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 or (viii) the Treasury Rate. 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, The Bank
of New York 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 United States dollar 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 Markets
Limited (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.
"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 caption "Commercial Paper -- Nonfinancial" (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 a
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non-financial entity 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:
<TABLE>
<C> <C> <S>
D X 360
Money Market Yield = -------------- X 100
360 - (D X M)
</TABLE>
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 Dow Jones Markets Limited (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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"Principal Financial Center" will generally be the capital city of the
country of the specified Index Currency, except that with respect to United
States dollars, Deutsche marks, Dutch guilders, Italian lire, Swiss francs, and
ECUs, the "Principal Financial Center" shall be The City of New York, Frankfurt,
Amsterdam, Milan, Zurich and Luxembourg, respectively.
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
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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.
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 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
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 the Depository to a nominee of the Depository or 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 90 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).
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
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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.
The Depository and Cede & Co. will take any action permitted to be
taken by a holder of Notes only at the direction of one or more
Participants to whose accounts interests in the Global Securities are
credited and only in respect of such portion of the aggregate principal
amount of Notes as to which such Participant or Participants has or have
given such direction.
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 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
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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.
Neither the Issuer, the Trustee nor the Agents will have any responsibility
or obligation to Participants, or the persons for whom they act as nominees,
with respect to the accuracy of the records of the Depository, its nominee or
any Participant with respect to any ownership interest in the Notes, or payments
to, or the providing of notice to Participants or Beneficial Owners.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Notes will be made by the Agents, and, so long as the
Notes trade in the Depository's Same-Day Funds Settlement System, secondary
market trading activity in the Notes will settle, in immediately available
funds. All payments of principal and interest will be made by the Issuer in
immediately available funds.
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 Notes, and the
performance of the Issuer's obligations under the Indenture and the Notes; (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).
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EVENTS OF DEFAULT, NOTICE AND WAIVER
Each of the following events will constitute an Event of Default with
respect to the Notes (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 Note, when such interest becomes 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 Note, when such principal or
premium becomes 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 Note; (iv) default in
the performance, or breach, of any covenant or warranty of the Issuer contained
in the Indenture for the benefit of the Notes, 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 $25,000,000 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 $25,000,000, which is not stayed on appeal or is
not otherwise being appropriately contested in good faith; and (vii) certain
events in bankruptcy, insolvency or reorganization of the Issuer or any
Subsidiary (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
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 Notes (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 Notes by written notice as provided in the Indenture may declare the
principal amount of all outstanding Notes 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 Notes
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 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 Notes (a "default"), the Trustee shall
transmit, in the manner set forth in the Indenture, notice of such default to
the holders of the Notes 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, any sinking fund or purchase fund
installment with respect to, any Note, 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 Notes; 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).
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If an Event of Default occurs and is continuing with respect to the Notes,
the Trustee may in its discretion proceed to protect and enforce its rights and
the rights of the holders of Notes 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 Notes, 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 Notes 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 Notes (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 10.7).
MODIFICATION AND WAIVER
Modification and amendments of the Indenture affecting the Notes 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 Notes;
provided, however, that no such modification or amendment may, without the
consent of the holder of each outstanding Note affected thereby, (i) change the
Stated Maturity (except as otherwise permitted in the Indenture in connection
with Notes for which the Stated Maturity is extendible) of the principal of, or
any premium or installment of interest on, any Note, (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 Notes for
which the interest rate may be reset) on, or any premium payable upon the
redemption of, any Note, (iii) or reduce the amount of the principal of a
Discount Note 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 Note or adversely affect the right of
repayment at the option of any holder of any Note, (v) change the place of
payment or the coin or currency in which the principal of, any premium or
interest on any Note is payable, (vi) impair the right to institute suit for the
enforcement of any payment on or after the Stated Maturity of any Note (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 Notes, the
consent of whose holders is required in order to take certain actions, (viii)
reduce the requirements for quorum or voting by holders of Notes 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 Notes 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 Note affected thereby, or (x) modify any of
the above provisions (Section 9.2).
The holders of at least a majority in aggregate principal amount of the
Notes may, on behalf of the holders of all Notes, waive compliance by the Issuer
with certain restrictive provisions of the Indenture (Section 10.6). The holders
of not less than a majority in aggregate principal amount of the outstanding
Notes may, on behalf of the holders of all Notes, waive any past default and its
consequences under the Indenture with respect to the Notes, except a default (a)
in the payment of principal of (or premium, if any) or any interest on the
Notes, 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 Note (Section
5.13).
The Indenture also contains provisions permitting the Issuer and the
Trustee, without the consent of any holders of the Notes, 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
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such successor of the obligations and covenants of the Issuer contained in the
Indenture and in the Notes; (ii) to add to the covenants of the Issuer, for the
benefit of the holders of all the Notes (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 effective as to the Notes only when there is
no Note outstanding 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,
including the Notes, 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
the Notes 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
statute 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 Notes have given any request, demand,
authorization, direction, notice, consent or waiver thereunder or whether a
quorum is present at a meeting of holders of the Notes, (i) the principal amount
of a Discount Note 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 an Indexed Note that shall be deemed outstanding shall be
the principal face amount of such Indexed Note at original issuance, unless
otherwise provided with respect to such Indexed Note pursuant to Section 3.1 of
the Indenture, and (iii) Notes owned by the Issuer or any other obligor upon the
Notes 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
Notes (Section 15.1). A meeting may be called at any time by the Trustee, and
also, upon request, by the Issuer or the holders of at least 10% in principal
amount of the Outstanding Notes, 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 Note 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 Notes;
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 Notes 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 Notes. Any
resolution passed or decision taken at any meeting of holders of Notes duly held
in accordance with the Indenture will be binding on all holders of Notes. 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 Notes; 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 Notes, the Persons
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holding or representing such specified percentage in principal amount of the
Outstanding Notes will constitute a quorum (Section 15.4).
Notwithstanding the foregoing provisions, if any action is to be taken at a
meeting of holders of Notes 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 the Notes 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 Notes 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 Notes 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 in an amount sufficient to pay the entire
indebtedness on such Notes with respect to principal (and premium, if any) and
interest to the date of such deposit (if such Notes have become due and payable)
or to the Maturity thereof, as the case may be (Section 4.1).
The Indenture provides that, with respect to the Notes, the Issuer may
elect either (a) to defease and be discharged from any and all obligations with
respect to the Notes (except for, among other things, other obligations to
register the transfer or exchange of the Notes, to replace temporary or
mutilated, destroyed, lost or stolen Notes, to maintain an office or agency with
respect to the Notes and to hold moneys for payment in trust) ("defeasance") or
(b) to be released from its obligations with respect to the Notes under the
covenants described under "Consolidation, Merger and Transfer of Assets" above,
and any omission to comply with such obligations shall not constitute a default
or an Event of Default with respect to the Notes ("covenant defeasance").
Defeasance or covenant defeasance, as the case may be, shall be conditioned upon
the irrevocable deposit by the Issuer with the Trustee, in trust, of an amount
in U.S. dollars or Government Obligations (as defined below), or both,
applicable to the Notes 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 the
Notes 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 Notes 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 Notes 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).
"Government Obligations" means, with respect to the Notes, securities which
are (i) direct obligations of the United States of America 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, in each case where the timely payment or payments
thereunder are unconditionally guaranteed as a
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full faith and credit obligation by the United States of America, 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).
In the event the Issuer effects covenant defeasance with respect to any
Notes and such Notes are declared due and payable because of the occurrence of
any Event of Default or with respect to any other covenant as to which there has
been covenant defeasance, the amount of Government Obligations on deposit with
the Trustee will be sufficient to pay amounts due on such Notes at the time of
the Stated Maturity but may not be sufficient to pay amounts due on such Notes
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.
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 Notes 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 (other than a partnership that is not
treated as a United States person under any applicable Treasury regulations), or
other entity created or organized in or under the laws of the United States or
any political subdivision thereof, or a trust if a court within the United
States is able to exercise primary supervision of the administration of the
trust and one or more United States persons have the authority to control all
substantial decisions of the trust, or an estate which is subject to United
States income taxation regardless of its source of income. In addition, certain
trusts treated as United States persons before August 20, 1996 may elect to
continue to be so treated to the extent provided in regulations.
GOVERNING LAW
The Indenture and the Notes 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. The Trustee also acts as
trustee under the indenture relating to the Parent Notes.
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UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following general summary represents the opinion of Hutchins, Wheeler &
Dittmar, A Professional Corporation as to the material United States Federal
income tax consequences expected to apply to the purchase, ownership and
dispositions of the Notes under currently applicable law.
The following summary of the material 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. 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 (other than a partnership
that is not treated as a United States person under any applicable Treasury
regulations), or other entity created or organized in or under the laws of the
United States or of any political subdivision thereof, (iii) an estate that is
described in Section 7701(a)(30)(D) of the Internal Revenue Code of 1986, as
amended (the "Code"), or a trust if a court within the United States is able to
exercise primary supervision of the administration of the trust and one or more
United States persons have the authority to control all substantial decisions of
the trust, 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. In
addition, certain trusts treated as United States persons before August 20, 1996
may elect to continue to be so treated to the extent provided in regulations. 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
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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.
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
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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 (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
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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.
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. 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
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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-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.
Treasury regulations under Code section 171 were recently finalized ("Bond
Premium Amortization Regulations") which generally provide that amortizable bond
premium is amortized over the term of a Note by offsetting the qualified stated
interest allocable to an accrual period with the amortizable bond premium
allocable to such period using a specified constant yield method. To the extent
that the amortizable bond premium allocated to an accrual period exceeds the
qualified stated interest allocable to such period, the excess is deductible
under Code section 171 to the extent such excess does not exceed the difference
between (i) prior interest inclusions over (ii) prior amortizable bond premium
deductions on the bond ("Bond
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Premium Amortization Limit"), with the excess over the Bond Premium Amortization
Limit carried forward to the next accrual period and treated as amortizable bond
premium allocable to that period. Special rules are provided in the Bond Premium
Amortization Regulations for determining and amortizing bond premium on Notes
that are subject to certain contingencies, and for determining and amortizing
bond premium on Floating Rate Notes or Indexed Notes that qualify as "variable
rate debt instruments" or "inflation-indexed debt instruments" under applicable
Treasury regulations. The Bond Premium Amortization Regulations are effective
for Notes acquired on or after March 2, 1998. However, if a holder makes the
election to amortize bond premium for the taxable year containing March 2, 1998,
or any subsequent taxable year, the Treasury regulations would apply to debt
instruments held on or after the first day of the taxable year in which the
election is made.
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 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.
The Taxpayer Relief Act of 1997 (the "Act") reduces the maximum rates on
long-term capital gains recognized on capital assets held by individuals
taxpayers for more than eighteen months as of the date of disposition (and would
further reduce the maximum rates on such gains in the year 2001 and thereafter
for certain individual taxpayers who meet specified conditions). The capital
gains rate for capital assets held by individual taxpayers for more than twelve
months but less than eighteen months was not changed by the Act ("mid-term
rate"). The Act does not change the capital gain rates for corporations.
Prospective investors should consult their own tax advisors concerning these tax
law changes.
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.
125
<PAGE> 127
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.
NEW WITHHOLDING REGULATIONS
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations") which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New Regulations
attempt to unify certification requirements and modify reliance standards. The
New Regulations will generally be effective for payments made after December 31,
1998, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
126
<PAGE> 128
PLAN OF DISTRIBUTION
The Notes are being offered on a continuous basis for sale by the Issuer to
or through Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch & Co."), Chase Securities Inc., J.P. Morgan
Securities Inc., NationsBanc Montgomery Securities LLC, Salomon Brothers Inc and
UBS Securities LLC (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 or cancel 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 City of New York on the date of settlement. See
"Description of Notes -- General" and "-- Same Day Settlement and Payment."
Upon issuance, the Notes will not have an established trading market.
Unless otherwise specified in the applicable Pricing Supplement, 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.
In connection with an offering of Notes purchased by one or more Agents as
principal on a fixed offering price basis, such Agent(s) will be permitted to
engage in certain transactions that stabilize the price of Notes. Such
transactions may consist of bids or purchases for the purpose of pegging, fixing
or maintaining the price of Notes. If the Agent creates or the Agents create, as
the case may be, a short position in Notes, i.e., if it sells or they sell Notes
in an aggregate principal amount exceeding that set forth in the applicable
Pricing Supplement, such Agent(s) may reduce that short position by purchasing
Notes in the open market. In general, purchases of Notes for the purpose of
stabilization or to reduce a short position could cause the price of Notes to be
higher than it might be in the absence of such purchases.
Neither the Issuer nor any of the Agents makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Notes. In addition, neither the
Issuer nor any of the Agents makes any representation that the Agents will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
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
127
<PAGE> 129
contribution with respect to, certain liabilities (including liabilities under
the Securities Act). The Issuer has agreed to reimburse the Agents for certain
other expenses.
The Agents and their affiliates 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 ongoing lending services and subservicing for, certain
mortgage loans originated by the Issuer. An affiliate of Salomon Brothers 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. 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, Morgan Guaranty Trust Company
of New York and Union Bank of Switzerland, affiliates of NationsBanc Montgomery
Securities LLC, J.P. Morgan Securities Inc. and UBS Securities LLC,
respectively, are lenders under the Bank Credit Agreement.
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. Hutchins, Wheeler & Dittmar, A Professional
Corporation, will rely as to certain matters of New York law upon the opinion of
Brown & Wood LLP. Hutchins, Wheeler & Dittmar, A Professional Corporation, and
Brown & Wood LLP will rely as to certain matters of Florida law upon the opinion
of Robert J. Jacobs, Executive Vice President and Secretary of the Issuer.
EXPERTS
The consolidated balance sheet of HomeSide Lending, Inc. and subsidiaries
as of February 28, 1997 and the related consolidated statements of income,
changes in stockholder's equity, and cash flows for the period from March 16,
1996 to February 28, 1997, included in this Prospectus, 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 balance sheet of BancBoston Mortgage Corporation, as of
March 15, 1996 and the related consolidated statements of operations and
retained earnings and cash flows for the period from January 1, 1996 to March
15, 1996, included in this Prospectus, 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 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 the years then ended, 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 the years
then ended, 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.
128
<PAGE> 130
The consolidated statement of financial condition of BancPLUS Financial
Corporation and subsidiary as of December 31, 1994 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year 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.
129
<PAGE> 131
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 132
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
HOMESIDE LENDING, INC. AND SUBSIDIARIES (THE SUCCESSOR)
Report of Independent Certified Public Accountants......................................... F-2
Consolidated Balance Sheet at February 28, 1997............................................ F-3
Consolidated Statement of Income for the Period from March 16, 1996 to February 28, 1997... F-4
Consolidated Statement of Changes in Stockholder's Equity for the Period from March 16,
1996 to February 28, 1997................................................................ F-5
Consolidated Statement of Cash Flows for the Period from March 16, 1996 to February 28,
1997..................................................................................... F-6
Notes to Consolidated Financial Statements................................................. F-7
HOMESIDE LENDING, INC. AND SUBSIDIARIES (THE SUCCESSOR)
Unaudited Pro Forma Consolidated Financial Information..................................... F-23
Unaudited Pro Forma Consolidated Income Statement for the Period from March 16, 1996 to
February 28, 1997........................................................................ F-24
Unaudited Pro Forma Consolidated Income Statement for the Year Ended December 31, 1995..... F-26
BANCBOSTON MORTGAGE CORPORATION (THE PREDECESSOR, ACQUIRED BY HOMESIDE, INC. ON MARCH 15,
1996 AND NOW KNOWN AS HOMESIDE LENDING, INC.)
Report of Independent Certified Public Accountants......................................... F-32
Report of Independent Accountants.......................................................... F-33
Consolidated Balance Sheets at December 31, 1994, 1995 and March 15, 1996.................. F-34
Consolidated Statements of Operations and Retained Earnings for the Years Ended December
31, 1994 and 1995 and for the period from January 1, 1996 to March 15, 1996.............. F-35
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994 and 1995 and
for the period from January 1, 1996 to March 15, 1996.................................... F-36
Notes to Consolidated Financial Statements................................................. F-38
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-53
Consolidated Balance Sheets at December 31, 1994 and 1995.................................. F-54
Consolidated Statements of Operations for the Years Ended December 31, 1994 and 1995....... F-55
Consolidated Statements of Stockholder's Equity for the Years Ended December 31, 1994 and
1995..................................................................................... F-56
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994 and 1995....... F-57
Notes to Consolidated Financial Statements................................................. F-58
BARNETT MORTGAGE COMPANY (ACQUIRED BY HOMESIDE, INC. ON MAY 31, 1996 AND NOW KNOWN AS
HOMESIDE HOLDINGS, INC.)
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 1995, the
Period from January 1, 1996 to May 30, 1996 and for the Period from April 1, 1996 to May
30, 1996 (unaudited)..................................................................... F-70
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1995 and for the
Period from January 1, 1996 to May 30, 1996 (unaudited).................................. F-71
Notes to Consolidated Financial Statements (unaudited)..................................... F-72
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY (ACQUIRED BY BARNETT MORTGAGE COMPANY ON
FEBRUARY 28, 1995)
Independent Auditors' Report............................................................... F-73
Consolidated Statement of Financial Condition at December 31, 1994......................... F-74
Consolidated Statement of Income for the Year Ended December 31, 1994...................... F-75
Consolidated Statement of Stockholders' Equity for the Year Ended December 31, 1994........ F-76
Consolidated Statement of Cash Flows for the Year Ended December 31, 1994.................. F-77
Notes to Consolidated Financial Statements................................................. F-78
</TABLE>
F-1
<PAGE> 133
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
HomeSide Lending, Inc.:
We have audited the accompanying consolidated balance sheet of HomeSide
Lending, Inc., (a Florida corporation and a wholly-owned subsidiary of HomeSide
Holdings, Inc. -- See Note 1) and subsidiaries as of February 28, 1997, and the
related consolidated statements of income, changes in stockholder's equity and
cash flows for the period from March 16, 1996 to February 28, 1997. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 audit provides 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 HomeSide
Lending, Inc. and subsidiaries as of February 28, 1997 and the consolidated
results of their operations and their cash flows for the period from March 16,
1996 to February 28, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Jacksonville, Florida
April 18, 1997
F-2
<PAGE> 134
HOMESIDE LENDING, INC. AND SUBSIDIARIES
(THE SUCCESSOR)
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FEBRUARY 28, 1997
------------------
<S> <C>
ASSETS
Cash and cash equivalents................................................ $ 52,691
Mortgage loans held for sale, net........................................ 805,274
Mortgage servicing rights, net........................................... 1,596,838
Accounts receivable, net................................................. 157,518
Premises and equipment, net.............................................. 29,515
Other assets............................................................. 75,485
----------
Total Assets............................................................. $2,717,321
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Notes payable............................................................ $1,818,503
Accounts payable and accrued liabilities................................. 123,231
Deferred income taxes.................................................... 142,415
Long-term debt........................................................... 21,128
----------
Total Liabilities........................................................ 2,105,277
----------
Commitments and Contingencies
Stockholder's Equity:
Common stock, $1.00 par value, 100 shares authorized, issued and
outstanding, all pledged as second priority collateral on the
long-term debt of the Parent....................................... --
Additional paid-in capital.......................................... 573,092
Retained earnings................................................... 38,952
----------
Total Stockholder's Equity............................................... 612,044
----------
Total Liabilities and Stockholder's Equity............................... $2,717,321
==========
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F-3
<PAGE> 135
HOMESIDE LENDING, INC. AND SUBSIDIARIES
(THE SUCCESSOR)
CONSOLIDATED STATEMENT OF INCOME
(Dollars in Thousands)
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
MARCH 16, 1996 TO
FEBRUARY 28, 1997
-----------------
<S> <C>
REVENUES:
Mortgage servicing fees..................................................... $ 308,906
Amortization of mortgage servicing rights................................... (153,694)
---------
Net servicing revenue.................................................. 155,212
Interest income............................................................. 81,507
Interest expense............................................................ (66,833)
---------
Net interest revenue................................................... 14,674
Net mortgage origination revenue............................................ 66,073
Other income................................................................ 682
---------
Total revenues......................................................... 236,641
EXPENSES:
Salaries and employee benefits.............................................. 72,976
Occupancy and equipment..................................................... 11,770
Servicing losses on investor-owned loans and foreclosure-related expenses... 17,934
Other expenses.............................................................. 40,766
---------
Total expenses......................................................... 143,446
Income before income taxes.................................................. 93,195
Income tax expense.......................................................... 37,278
---------
Net income.................................................................. $ 55,917
=========
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F-4
<PAGE> 136
HOMESIDE LENDING, INC. AND SUBSIDIARIES
(THE SUCCESSOR)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE PERIOD FROM MARCH 16, 1996 TO FEBRUARY 28, 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL
NUMBER COMMON PAID-IN RETAINED
OF SHARES STOCK CAPITAL EARNINGS TOTAL
--------- --- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, March 16, 1996........................ -- $-- $ -- $ -- $ --
Issuance of common stock.................. 100
Contribution associated with BancBoston
Mortgage Corporation acquisition, net... -- -- 290,000 -- 290,000
Contribution associated with Barnett
Mortgage Company acquisition, net....... -- -- 244,294 -- 244,294
Additional capital contributions.......... -- -- 38,798 -- 38,798
Net income................................ 55,917 55,917
Dividends declared and paid to parent..... -- -- -- (16,965) (16,965)
--- --- --------- -------- --------
Balance, February 28, 1997..................... 100 $-- $ 573,092 $ 38,952 $612,044
=== === ========= ======== ========
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F-5
<PAGE> 137
HOMESIDE LENDING, INC. AND SUBSIDIARIES
(THE SUCCESSOR)
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
MARCH 16, 1996
TO
FEBRUARY 28,
1997
----------------
<S> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income............................................................. $ 55,917
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of mortgage servicing rights............................ 153,694
Depreciation and amortization........................................ 8,173
Servicing losses on investor-owned loans............................. 13,683
Deferred income tax expense.......................................... 37,278
Capitalized servicing rights......................................... (21,015)
Mortgage loans originated and purchased for sale..................... (12,504,567)
Proceeds and principal repayments of mortgage loans held for sale.... 12,572,217
Change in accounts receivable........................................ (63,378)
Change in other assets and accounts payable and accrued
liabilities......................................................... (35,448)
------------
Net cash provided by operating activities.............................. 216,554
------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of premises and equipment..................................... (4,929)
Acquisition of mortgage servicing rights............................... (475,729)
Purchases of risk management contracts, net............................ (141,944)
Acquisition of BancBoston Mortgage Corporation, net of cash acquired... (133,392)
Acquisition of Barnett Mortgage Company, net of cash acquired.......... (106,244)
------------
Net cash used in investing activities.................................. (862,238)
============
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Net borrowings from banks and short-term lines of credit............... 334,170
Payment of debt issue costs............................................ (11,681)
Repayment of long-term debt............................................ (567)
Capital contributions from the Parent.................................. 393,418
Dividends paid to the Parent........................................... (16,965)
------------
Net cash provided by financing activities.............................. 698,375
------------
Net increase in cash and cash equivalents.............................. 52,691
Cash and cash equivalents at beginning of period....................... --
------------
Cash and cash equivalents at end of period............................. $ 52,691
============
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F-6
<PAGE> 138
HOMESIDE LENDING, INC. AND SUBSIDIARIES
(THE SUCCESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997
1. BASIS OF PRESENTATION
HomeSide Lending, Inc. ("HomeSide", the "Successor" or the "Company") is
primarily engaged in the mortgage banking business and as such originates,
purchases, sells and services mortgage loans throughout the United States. The
accompanying consolidated financial statements of HomeSide include the accounts
of HomeSide and its subsidiaries after elimination of all material intercompany
balances and transactions. Amounts for acquired companies have been included
from the date of acquisition.
HomeSide is a wholly-owned subsidiary of HomeSide Holdings, Inc. ("HHI")
which is a wholly-owned subsidiary of HomeSide, Inc. (the "Parent") (see Note
2). The Parent has no operations and its only significant assets are its
investments in HHI, HomeSide and certain capitalized debt issuance costs. The
Parent has $130 million in outstanding long-term debt. All of the stock of HHI
and 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 necessary to
service the Parent's debt.
The accompanying consolidated financial statements of HomeSide have been
prepared for the period from March 16, 1996 to February 28, 1997 to coincide
with the commencement of operations of the Parent as discussed in Note 2. The
carrying amounts of assets and liabilities in the accompanying financial
statements reflect the effects of the purchase accounting adjustments made in
connection with the acquisition of BancBoston Mortgage Corporation ("BBMC" or
the "Predecessor") and Barnett Mortgage Company ("BMC").
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 owned by Bank of
Boston, BBMC. Bank of Boston received cash and an ownership interest in the
Parent. The BBMC transaction closed on March 15, 1996 and the Parent began
operations on March 16, 1996 through its primary operating subsidiary, HomeSide.
On May 31, 1996, Barnett Banks, Inc. ("Barnett") sold certain of its
mortgage banking operations, primarily its mortgage servicing portfolio,
mortgage servicing operations, proprietary mortgage banking software systems,
and the common stock of BMC to the Parent. Barnett received cash and an
ownership interest in the Parent.
The accompanying financial statements reflect the effects of the
acquisitions of BBMC and BMC. For more information on these acquisitions, see
Note 4. From May 31, 1996 until the January 1997 public offering of the 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. See
"Risk Factors" in the accompanying Prospectus Supplement for a discussion of
certain risks affecting HomeSide's operations.
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-7
<PAGE> 139
HOMESIDE LENDING, INC. AND SUBSIDIARIES
(THE SUCCESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Risk management of mortgage loan originations
HomeSide utilizes a risk management program to protect and manage the value
of its mortgage loans held for sale and mortgage commitment pipeline. As a
result, the Company is party to various derivative financial instruments to
reduce its exposure to interest rate risk. These financial instruments primarily
include mandatory forward delivery commitments, put and call option contracts
and treasury futures contracts. The Company uses these financial instruments for
the purposes of managing its resale pricing and interest rate risks. These
financial instruments are designated as hedges to the extent they demonstrate a
high degree of correlation with the underlying hedged items. Accordingly,
hedging gains and losses related to this risk management program are deferred
and recognized as a component of the gain or loss on sale of the underlying
mortgage loans or mortgage-backed securities. Such gains and losses are included
in net mortgage origination revenue. Hedge losses are recognized currently if
the deferral of such losses would result in mortgage loans held for sale and the
pipeline being valued in excess of their estimated net realizable value.
Premiums paid for purchased put and call option contracts are included in
other assets and amortized over the options' contract periods as a component of
net mortgage origination revenue. Unamortized premiums are recognized as a
component of the gain or loss on sale of mortgage loans at the earlier of the
expiration of the underlying contract or when exercise of the contract is
considered unlikely.
Risk management of mortgage servicing rights
Mortgage servicing rights permit HomeSide to receive a portion of the
interest coupon and fees collected from the mortgagor for performing specified
servicing activities. The mortgage notes underlying the mortgage servicing
rights permit the borrower to prepay the loan. As a result, the value of the
related mortgage servicing rights tends to diminish in periods of declining
interest rates and increase in value in periods of rising rates. This tendency
subjects HomeSide to substantial interest rate risk and directly affects the
volatility of reported earnings as mortgage servicing rights are carried at the
lower of amortized cost or fair value. It is HomeSide's policy to mitigate and
hedge this risk through its risk management 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 the value of mortgage servicing rights.
Historically, option contracts on U.S. Treasury bond futures have been
purchased by HomeSide to manage interest rate risk. When purchased, the option
contracts are designated to a specific strata of mortgage servicing rights. The
option contracts are marked-to-market with changes in market value included as
adjustments to the basis of the mortgage servicing rights being hedged. Deferred
hedge gains and losses are amortized and evaluated for impairment in the same
manner as the related mortgage servicing rights. Correlation between the changes
in value of the option contracts and changes in the value of HomeSide's mortgage
servicing rights is assessed on a quarterly basis to ensure that a high
correlation is maintained over the term of the hedging program.
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. Deferred hedge gains and losses on risk management hedging
instruments are included in the cost of the mortgage loans for the purpose of
determining the lower of aggregate cost or fair value.
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.
F-8
<PAGE> 140
HOMESIDE LENDING, INC. AND SUBSIDIARIES
(THE SUCCESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 in 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 anticipated to be fully collectible.
Mortgage servicing rights
From the period of inception through December 31, 1996, mortgage servicing
rights were capitalized and accounted for in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage
Servicing Rights." The total cost of loans originated or acquired is allocated
between mortgage servicing rights and the mortgage loans (without the servicing
rights) based on relative fair values. The value of servicing rights acquired
through bulk transactions is capitalized at cost.
Effective January 1, 1997, HomeSide adopted SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
SFAS No. 125 supersedes SFAS No. 122 and is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 31, 1996. SFAS No. 125 is based on a financial-components approach
which focuses on control. Under the approach required by this Standard, after a
transfer of financial assets (for example, the sale of mortgage loans), an
entity recognizes 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. The capitalization,
amortization and impairment principles of SFAS No. 125 are substantially
consistent with the principles previously defined by SFAS No. 122, insofar as
they relate to the mortgage banking activities of HomeSide. Accordingly, the
impact of adopting SFAS No. 125 was not material to HomeSide's financial
statements.
Mortgage servicing rights are amortized in proportion to and over the
period of estimated net servicing revenue. They are evaluated for impairment by
comparing the carrying amount of the servicing rights to their fair value. Fair
value is estimated using market prices of similar mortgage servicing assets and
discounted future net cash flows considering market prepayment estimates,
historical prepayment rates, portfolio characteristics, interest rates and other
economic factors. For purposes of measuring impairment, the mortgage servicing
rights are stratified by the predominant risk characteristics of the underlying
loans which include product type and interest rates of the mortgage notes.
Impairment is recognized through a valuation reserve for each impaired stratum
and is included in amortization of mortgage servicing rights. The valuation
reserves are adjusted for future increases or decreases in the value of the
mortgage servicing rights. The components of HomeSide's mortgage servicing
rights are included in Note 5.
Prior to January 1, 1997, mortgage servicing rights included excess
mortgage servicing rights, which represent the present value of servicing fee
income in excess of a normal servicing fee rate. Until the adoption of SFAS No.
125 on January 1, 1997, when loans were sold, the estimated excess servicing was
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 were evaluated for impairment based on
current estimates of future discounted cash flows. Such writedowns were included
in amortization of mortgage servicing rights. Upon the adoption of SFAS No. 125,
previously recognized excess mortgage servicing rights were combined with and
accounted for as mortgage servicing rights.
F-9
<PAGE> 141
HOMESIDE LENDING, INC. AND SUBSIDIARIES
(THE SUCCESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accounts receivable
Accounts receivable includes advances, consisting primarily of payments for
property taxes, insurance premiums and principal and interest remitted to
investors before they are collected from mortgagors, made in connection with
loan servicing activities. Accounts receivable also includes loans purchased
from mortgage-backed securities serviced by HomeSide for others and mortgage
claims filed primarily with the FHA and the VA.
Premises and equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are amortized over the lesser
of the estimated life of the improvement or the term of the lease.
Long-lived assets are evaluated regularly for other-than-temporary
impairment. If circumstances suggest that their value may be impaired and the
write-down would be material, an assessment of recoverability is performed prior
to any write-down of the asset. Impairment, if any, is recognized through a
valuation allowance with a corresponding change recorded in the statement of
income.
Goodwill
Net assets acquired in purchase transactions (Note 4) 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 15 years. Goodwill is reviewed
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.
Goodwill related to the BMC acquisition is subject to changes until final
estimates are received on the value of certain assumed liabilities and final
settlement with Barnett.
Mortgage servicing fees
Mortgage servicing fees represent servicing and other fees earned for
servicing mortgage loans owned by investors. Servicing fees are generally
calculated on the outstanding principal balances of the loans serviced and are
recognized as income on an accrual basis.
HomeSide's mortgage servicing portfolio totaled $89.2 billion at February
28, 1997. Related custodial deposits are segregated in trust accounts,
principally held with depository institutions, and are not included in the
accompanying financial statements.
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 and fees associated with the origination and acquisition of
mortgage loans. Loan origination fees and certain direct costs are deferred and
amortized until the related mortgage loans are sold.
Servicing losses on investor-owned loans and foreclosure related expenses
HomeSide records losses attributable to servicing FHA and VA loans for
investors. These amounts include actual losses for final disposition of loans,
foreclosure related expenses, accrued interest for which
F-10
<PAGE> 142
HOMESIDE LENDING, INC. AND SUBSIDIARIES
(THE SUCCESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 accounts payable and accrued liabilities.
Income taxes
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.
Statement of Cash Flows
For purposes of reporting on the statement of cash flows, cash and cash
equivalents include cash and due from banks and interest-bearing deposits with
an original maturity of three months or less.
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 (the "BBMC Acquisition"), 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, Inc. made cash payments of $139.5 million and issued $86.8
million of common stock of HomeSide, Inc. to Bank of Boston in consideration for
certain assets, net of assumed liabilities, and the stock of BBMC. Also in
connection with the BBMC Acquisition, the Investors purchased approximately 55%
of the then outstanding common stock of HomeSide, Inc. for $107.2 million in
cash. Simultaneously, Bank of Boston paid approximately $1.0 million in cash for
all the shares of HomeSide, Inc.'s class C non-voting common Stock. In
consideration of services rendered to HomeSide, Inc. with respect to the BBMC
Acquisition, class B non-voting stock valued at $1.0 million was issued to Smith
Barney Inc. Management purchased common stock for $4.1 million in cash, $1.9
million of which was financed by loans from HomeSide, Inc. All of these amounts
were contributed as capital to HomeSide. In addition, during the first quarter
of fiscal 1997, HomeSide, Inc. issued long-term debt and contributed $89.9
million of the cash proceeds to HomeSide as capital. On May 31, 1996, HomeSide,
Inc. paid an additional $5.0 million to Bank of Boston in connection with the
closing of the BMC acquisition.
The transaction was accounted for under the purchase method of accounting.
The assets and liabilities of BBMC were recorded at their estimated fair values
at March 16, 1996, which totaled $1.5 billion and $1.2 billion, respectively.
The total purchase price paid for BBMC, including transaction costs and
interest, was $247 million. The excess of fair value of net assets acquired over
the purchase price was $56.0 million and was allocated as a reduction to
mortgage servicing rights.
F-11
<PAGE> 143
HOMESIDE LENDING, INC. AND SUBSIDIARIES
(THE SUCCESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 (the "BMC
Acquisition"). BMC was subsequently renamed HomeSide Holdings, Inc. ("HHI") and
is the parent company of HomeSide. HHI transferred all of the assets and
liabilities of HHI, with the exception of certain portions of GNMA servicing
rights, to HomeSide. Certain assets and liabilities of BMC were retained by
Barnett, including those assets of BMC associated with the loan origination or
production activities.
HomeSide, Inc. made cash payments of $228.0 million 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
shares of common stock of the Parent for an aggregate purchase price of $118.0
million. Also in connection with the BMC Acquisition, Bank of Boston and the
Investors paid approximately $42.3 million in cash for additional shares of
HomeSide, Inc. This amount was contributed as capital to HomeSide. HomeSide,
Inc. also contributed an additional $84.0 million from the proceeds of its
issuance of long-term debt to HomeSide as capital. 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 estimated fair values at
May 31, 1996, which totaled $764.8 million and $521.4 million, respectively. The
total purchase price paid for BMC, including transaction costs and interest, was
$235.0 million. The excess of the purchase price over the fair value of net
assets acquired was $8.4 million and was allocated to goodwill and is being
amortized on a straight-line basis over 15 years.
Unaudited pro forma statements of income for the year ended December 31,
1995 (the fiscal year end of BBMC and BMC), assuming BBMC and BMC had been
acquired as of January 1, 1995, and the period from March 16, 1996 to February
28, 1997, assuming BMC had been acquired as of March 16, 1996, are as follows
(in millions):
<TABLE>
<CAPTION>
PRO FORMA FOR
THE YEAR ENDED PRO FORMA FOR THE PERIOD
DECEMBER 31, FROM MARCH 16, 1996 TO
1995 FEBRUARY 28, 1997
---------------- ------------------------
<S> <C> <C>
Net servicing revenue.............. $235.1 $165.7
Net interest revenue............... 17.9 18.8
Net mortgage origination revenue... 0.7 67.1
Other income....................... 0.7 0.7
------ ------
Total revenue................. 254.4 252.3
Expenses........................... 142.7 156.2
------ ------
Income before income taxes......... 111.7 96.1
Income tax expense................. 45.7 38.6
------ ------
Net income.................... $ 66.0 $ 57.5
====== ======
</TABLE>
The purchase accounting adjustments in the above pro forma statements of
income are based on the actual purchase price and the amount of assets and
liabilities actually acquired. In addition, gains on sales of mortgage servicing
rights are not included in the pro forma results for the year ended December 31,
1995. No adjustments have been made for restructuring costs that might have been
incurred or for cost efficiencies that might have been realized during the
periods presented. 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.
F-12
<PAGE> 144
HOMESIDE LENDING, INC. AND SUBSIDIARIES
(THE SUCCESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. MORTGAGE SERVICING RIGHTS
The components of mortgage servicing rights are as follows (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 28, 1997
--------------------
<S> <C>
Additions including BBMC and BMC acquisitions........... $1,665,640
Sales of servicing...................................... (25,745)
Deferred hedge loss, net................................ 110,637
Amortization............................................ (153,694)
----------
Ending balance.......................................... $1,596,838
==========
</TABLE>
Net deferred hedge loss of $110.6 million consists of a $133.3 million gain
and a $254.9 million loss, less $11.0 million of amortization recognized as a
component of amortization of mortgage servicing rights.
6. PREMISES AND EQUIPMENT
Premises and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 28, 1997
--------------------
<S> <C>
Land.................................................... $ 3,451
Building................................................ 10,986
Furniture and equipment................................. 15,739
Leasehold improvements.................................. 3,808
----------
33,984
Accumulated depreciation and amortization............... (4,469)
----------
Ending balance.......................................... $ 29,515
==========
</TABLE>
7. 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 (in thousands):
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM MARCH 16, 1996
TO FEBRUARY 28, 1997
--------------------
<S> <C>
Beginning balance, assumed from BBMC.................... $ 11,100
Provision for servicing losses on investor-owned 13,683
loans.................................................
Charge-offs............................................. (10,295)
Recoveries.............................................. 60
Additions from acquisition of BMC....................... 7,102
--------
Ending balance.......................................... $ 21,650
========
</TABLE>
8. NOTES PAYABLE
Notes payable consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED AVERAGE INTEREST RATE
AT ----------------------------------------
FEBRUARY 28, 1997 AT FEBRUARY 28, 1997 DURING THE PERIOD
----------------- -------------------- -----------------
<S> <C> <C> <C>
Bank line of credit...... $ 1,778,496 5.65% 5.83%
Short-term credit
facilities............. 40,007 8.25% 8.25%
-----------
$ 1,818,503
===========
</TABLE>
F-13
<PAGE> 145
HOMESIDE LENDING, INC. AND SUBSIDIARIES
(THE SUCCESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
HomeSide borrows funds on a demand basis from an independent syndicate of
banks under a $2.5 billion line of credit. Under certain circumstances set forth
in the bank line of credit agreement, borrowings under such line of credit
become collateralized by substantially all of HomeSide's mortgage loans held for
sale and certain portions of mortgage servicing rights and accounts receivable
and the servicing rights retained by HHI. The bank line of credit is used to
provide funds for HomeSide's business of originating, acquiring and servicing
mortgage loans. The bank line of credit includes both a warehouse credit
facility, which is limited to 98% of the fair value of eligible mortgage loans
held for sale and a servicing-secured credit facility, which is capped at $950.0
million. At February 28, 1997, $943.1 million outstanding is due on February 14,
2000, at which time the bank line of credit will terminate. The bank line of
credit agreement contains covenants that impose limitations and restrictions on
HomeSide, including the maintenance of certain net worth and ratio requirements.
The amount of the unused bank line of credit was $721.5 million as of February
28, 1997.
During the period from March 16, 1996 to February 28, 1997, the maximum and
average outstanding balances under the bank line of credit were $2.4 billion and
$2.1 billion, respectively.
On January 15, 1997, HomeSide entered into a short-term credit facility
with a bank in a maximum aggregate principal amount of $85.0 million. On March
14, 1997, HomeSide entered into another short-term credit facility in a maximum
aggregate principal amount of $100.0 million. These facilities each expire on
the earlier of May 31, 1997, or the consummation of the initial sale of
medium-term debt securities. On February 5, 1997, the Company filed a
registration statement for the issuance of debt securities, including
medium-term notes.
Drawings under the bank 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.
Drawings under the short-term facilities 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 announced from time to time plus
0.5%.
9. LONG-TERM DEBT
HomeSide assumed a mortgage note payable that is due in 2017 and bears
interest at a contractual rate of 9.50%. HomeSide's main office building is
pledged as collateral. Principal payments due on the mortgage note payable are
as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------------------------------------------
<S> <C>
1998........................................................ $ 232
1999........................................................ 256
2000........................................................ 281
2001........................................................ 309
2002........................................................ 340
Thereafter.................................................. 12,169
Unamortized purchase accounting premium..................... 7,541
--------
$ 21,128
========
</TABLE>
10. LONG-TERM DEBT OF PARENT
On May 14, 1996, the Parent issued $200.0 million 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. 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 the
F-14
<PAGE> 146
HOMESIDE LENDING, INC. AND SUBSIDIARIES
(THE SUCCESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Parent, including the maintenance of certain net worth and ratio requirements.
In addition, the Notes are secured by a second priority pledge of the common
stock of the Parent and the common stock of HHI and its subsidiary, HomeSide.
The Parent is in compliance with all net worth and ratio requirements contained
in the indenture relating to the Notes.
The Notes were initially issued as part of a private placement offering.
The Parent filed a Form S-4 with the Securities and Exchange Commission to
register notes, with terms identical to the Notes, under the Securities Act of
1933 (such registered notes also referred to as the "Notes"). The registration
statement was declared effective during October 1996 and an exchange of the
initially issued Notes for the registered Notes was completed on December 9,
1996.
The Notes are obligations of the Parent and are not included in the
consolidated financial statements of HomeSide. The ultimate repayment of
principal and interest on the notes is dependent on the cash flows of HomeSide
and HHI. During the period from March 16, 1996 to February 28, 1997, HomeSide
funded $13.9 million 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
were used to repay $70.0 million of the Notes at a premium of $7.9 million. The
remaining $38.8 million of net proceeds were contributed to HomeSide and used to
repay amounts outstanding under the bank line of credit.
During the period from March 16, 1996 to February 28, 1997, HomeSide paid
$17.0 million in dividends to the Parent to enable the Parent to service the
debt and pay certain debt issuance costs. Total remaining debt service
requirements, including principal and interest, of the Parent which must be
funded by dividends received from HomeSide and HHI are as follows (in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------------------------------------------------------
<S> <C>
1998.................................................................... $ 14,625
1999.................................................................... 14,625
2000.................................................................... 14,625
2001.................................................................... 14,625
2002.................................................................... 14,625
Thereafter.............................................................. 147,575
---------
$ 220,700
=========
</TABLE>
11. INCOME TAXES
HomeSide files a consolidated federal income tax return with its Parent.
All companies included in the consolidated federal income tax return are jointly
and severally liable for any tax assessments based on such consolidated return.
F-15
<PAGE> 147
HOMESIDE LENDING, INC. AND SUBSIDIARIES
(THE SUCCESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Components of the provision for income taxes were as follows (in
thousands):
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 16, 1996 TO
FEBRUARY 28, 1997
-----------------
<S> <C>
Current:
Federal.............................................. $ --
State................................................ --
-------
--
-------
Deferred:
Federal.............................................. 30,872
State................................................ 6,406
-------
$37,278
=======
</TABLE>
The following is a reconciliation of the statutory federal income tax rate
to the effective income tax rate as reflected in the consolidated statement of
income:
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 16, 1996 TO
FEBRUARY 28, 1997
-----------------
<S> <C>
Statutory federal income tax rate...................... 35.0%
State income and franchise taxes, net of federal tax
effect............................................... 5.0
----
Effective income tax rate.............................. 40.0%
====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below (in thousands).
<TABLE>
<CAPTION>
FEBRUARY 28, 1997
-----------------
<S> <C>
Deferred tax assets:
Operating and capital loss carryforwards.......... $ 40,891
Loss reserves..................................... 17,563
Other............................................. 12,087
---------
Total gross deferred tax assets.............. 70,541
---------
Deferred tax liabilities:
Mortgage servicing fees........................... 207,278
Other............................................. 5,678
---------
Total gross deferred tax liabilities......... 212,956
---------
Net deferred tax liability................... $ 142,415
=========
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which these temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. No valuation allowance
was recorded as of February 28, 1997.
The Parent had a consolidated tax net operating loss and capital loss
carryforwards at February 28, 1997. These carryovers expire in the years 2002
and 2012.
F-16
<PAGE> 148
HOMESIDE LENDING, INC. AND SUBSIDIARIES
(THE SUCCESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. LEASE COMMITMENTS
HomeSide leases office facilities and equipment under noncancelable leases
that include renewal options and escalation clauses which extend to 2001. Rental
expense for office facilities and equipment leases was $3.9 million for the
period from March 16, 1996 to February 28, 1997. HomeSide's minimum future lease
commitments are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
---------------------------------------------------------------
<S> <C>
1998......................................................... $ 2,015
1999......................................................... 1,508
2000......................................................... 423
2001......................................................... 74
2002......................................................... 22
Thereafter................................................... --
-------
Total................................................... $ 4,042
=======
</TABLE>
13. 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 $2.3 billion and $1.7 billion, respectively.
HomeSide paid $60.1 million of interest during the period from March 16
1996 to February 28, 1997.
14. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made as of a specific point in time based on the
characteristics of the financial instruments and the relevant market
information. Where available, quoted market prices are used. In other cases,
fair values are based on estimates using other valuation techniques, such as
discounting estimated future cash flows using a rate commensurate with the risks
involved or other acceptable methods. These techniques involve uncertainties and
are significantly affected by the assumptions used and the judgments made
regarding risk characteristics of various financial instruments, prepayments,
discount rates, estimates of future cash flows, future suspected loss experience
and other factors. Changes in assumptions could significantly affect these
estimates. Derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in an immediate
sale of the instrument. Also, because of differences in methodologies and
assumptions used to estimate fair value, HomeSide's fair values should not be
compared to those of other companies.
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 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, HomeSide's normal business practice.
F-17
<PAGE> 149
HOMESIDE LENDING, INC. AND SUBSIDIARIES
(THE SUCCESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accounts receivable
Carrying amounts are considered to approximate fair value.
Risk management contracts
Fair values are estimated based on actual market quotes or option models.
Notes payable
The carrying amount of the notes payable reported in the balance sheet
approximates its fair value due to the short-term nature of the borrowings under
the credit agreements.
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-18
<PAGE> 150
HOMESIDE LENDING, INC. AND SUBSIDIARIES
(THE SUCCESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value
The fair values of HomeSide's financial instruments as of February 28, 1997
are as follows (in thousands):
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
---------- ----------
<S> <C> <C>
Assets
Cash and cash equivalents....................... $ 52,691 $ 52,691
Mortgage loans held for sale.................... 805,274 806,432
Accounts receivable............................. 157,518 157,518
Risk management contracts for mortgage servicing
rights........................................ 45,212 45,212
Liabilities
Notes payable to banks.......................... 1,818,503 1,818,503
Long-term debt.................................. 21,128 21,128
Accounts payable and accrued liabilities........ 123,231 123,231
Off-balance sheet(1)
Commitments to originate mortgage loans......... -- (2,805)
Mandatory forward contracts to sell mortgages... -- 3,588
Mandatory forward contracts to sell U.S.
treasuries.................................... 7
Option contracts on mortgage-backed
securities.................................... -- 1,741
Option contracts on U.S. treasury bond
futures....................................... (147)
</TABLE>
- ---------------
(1) Parenthesis denote a liability
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, mortgage
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 February 28, 1997. Subsequent changes in market interest
rates and prepayment assumptions could significantly change the fair value.
15. RISK MANAGEMENT OF MORTGAGE SERVICING RIGHTS
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 February 28, 1997 is as follows:
<TABLE>
<S> <C>
Notional amount of U.S. Treasury bond future options........... $3.6 billion
Fair value of outstanding options.............................. $45.2 million
</TABLE>
The carrying value of risk management contracts included in other assets at
February 28, 1997 was also $45.2 million.
Cash requirements for HomeSide's option contracts are limited to the
initial premium paid. The amount of contracts purchased depends on factors such
as interest rates, interest rate volatility and growth in the mortgage servicing
portfolio. HomeSide is subject to market risk to the extent that interest rates
fluctuate;
F-19
<PAGE> 151
HOMESIDE LENDING, INC. AND SUBSIDIARIES
(THE SUCCESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, because the option contracts are traded on a
national exchange, which guarantees counterparty performance.
16. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
As discussed in Note 3, HomeSide purchases financial instruments and enters
into financial agreements with off-balance sheet risk in the normal course of
business and as part of its risk management programs. 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.
Options and forward contracts
The notional amount of the options and forward contracts used in HomeSide's
risk management programs 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 HomeSide.
HomeSide is exposed to credit loss in the event of nonperformance by the
counterparties to the various instruments. HomeSide controls credit and market
risk associated with interest rate products by establishing and monitoring
limits with counterparties as to the types and degree of risks that may be
undertaken. HomeSide's exposure to credit risk in the event of default by the
counterparties for the options is $45.2 million which was due at February 28,
1997.
HomeSide'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 HomeSide or and independent clearing agent.
The amount of credit risk as of February 28, 1997, if all counterparties failed
completely and if the margins, if any, retained by HomeSide or an independent
clearing were to become unavailable, was approximately $3.6 million for
mandatory forward commitments of mortgage-backed securities.
The following is a summary of HomeSide's notional amounts and fair values
of interest rate products as of February 28, 1997 (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 28, 1997
-------------------------
ESTIMATED
NOTIONAL FAIR
AMOUNT VALUE(1)
---------- ----------
<S> <C> <C>
Purchased commitments to sell mortgaged loans:
Mandatory forward contracts.......................... $1,445,345 $ 3,588
Option contracts on mortgage-backed securities....... 755,000 1,741
Option contracts on U.S. treasury bond futures....... 140,000 (147)
Risk management contracts on mortgage servicing rights:
Purchased............................................ $3,572,300 $ 45,212
---------- --------
</TABLE>
F-20
<PAGE> 152
HOMESIDE LENDING, INC. AND SUBSIDIARIES
(THE SUCCESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- ---------------
(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.
Commitments to originate and purchase mortgage loans
HomeSide regularly enters into commitments to originate and purchase
mortgage loans at a future date subject to compliance with stated conditions.
Commitments to originate and purchase mortgage loans have off-balance sheet risk
to the extent HomeSide does not have matching commitments to sell loans, which
exposes HomeSide to lower of cost or market valuation adjustments in a rising
interest rate environment. Additionally, the extension of a commitment, which is
subject to HomeSide'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 and purchase mortgage
loans do not necessarily reflect future cash requirements because some of the
commitments are expected to expire without being drawn upon. Commitments to
originate mortgage loans totaled $2.7 billion at February 28, 1997.
Mortgage loans sold with recourse
HomeSide sells mortgage loans with recourse to various investors and
retains the servicing rights and responsibility for credit losses 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 $14.2 million at February 28, 1997.
For five years following the May 31, 1996 acquisition of BMC, Barnett is
obligated to repurchase or reimburse HomeSide for any credit losses related to
$101.0 million of loans serviced with recourse.
Servicing commitment to investors
HomeSide 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
HomeSide 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 purchase mortgage
servicing rights correspond to mortgage loans having an aggregate loan principal
balance of approximately $20.2 billion at February 28, 1997.
Geographical concentration of credit risk
HomeSide is engaged in business nationwide and has no material
concentration of credit risk in any geographic region.
17. OTHER RELATED PARTY TRANSACTIONS
HomeSide entered into agreements with Bank of Boston and Barnett for
certain corporate support services. For the period from March 16, 1996 to
February 28, 1997, HomeSide paid Bank of Boston and Barnett approximately $0.8
million and $0.2 million, respectively, for these services.
HomeSide purchases mortgage loans eligible for sale from Bank of Boston and
Barnett. For the period from March 16, 1996 to February 28, 1997, HomeSide paid
approximately $4.7 million and $27.6 million,
F-21
<PAGE> 153
HOMESIDE LENDING, INC. AND SUBSIDIARIES
(THE SUCCESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respectively, to Bank of Boston and Barnett for the purchase of mortgage
servicing rights. HomeSide purchases the mortgage servicing rights to the
mortgage loans Bank of Boston and Barnett hold in their portfolios. For the
period from March 16, 1996 to February 28, 1997 HomeSide purchased mortgage
servicing rights from Bank of Boston and Barnett totaling approximately $1.3
million and $8.2 million, respectively. The Bank of Boston and Barnett purchases
represent 2.8% and 16.0%, respectively, of the Company's total production for
the period from May 31, 1996 to February 28, 1997.
HomeSide services residential mortgage loans held in portfolio by Bank of
Boston and Barnett. The servicing fees paid by Bank of Boston and Barnett to
HomeSide are market-based fees consistent with the fees charged by HomeSide to
other investors. For the period March 16, 1996 to February 28, 1997, Bank of
Boston and Barnett paid $5.3 million and $23.6 million in servicing fees,
respectively.
HomeSide performs servicing obligations on behalf of HHI with respect to
certain GNMA loans with an unpaid principal balance of approximately $1.0
billion as of February 28, 1997. 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
mortgage servicing rights. The allocation of income and expense to HHI did not
have a material impact on HomeSide's results of operations.
18. EMPLOYEE BENEFITS
HomeSide offers a 401(k) defined contribution benefit plan to which
employees may contribute a portion of their compensation. Substantially all
employees are eligible for participation in the plan. The Company matches 100%
of amounts contributed up to 4% of an employee's compensation. Further, the
Company may contribute additional amounts at its discretion. Total expense
related to the benefit plan was approximately $4.0 million.
19. 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 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.
20. DISCLOSURE OF INFORMATION ABOUT STOCKHOLDER'S EQUITY AND CAPITAL STRUCTURE
HomeSide's capital structure consists of 100 shares of authorized and
issued, $1.00 par value common stock. HomeSide is wholly-owned by HHI, a
wholly-owned subsidiary of the Parent. The common stock of HomeSide is pledged
as security for the Parent Notes discussed in Note 10 of Notes to Consolidated
Financial Statements, subject to a first priority pledge in favor of the lenders
under the bank line of credit.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 129, "Disclosure of Information about
Capital Structure." This Statement establishes standards for the disclosure of
descriptive information about securities, the liquidation preference of
preferred stock, and redeemable stock. This Statement is effective for
HomeSide's fiscal year ending February 28, 1998. The adoption of this Statement
is not expected to have a material effect on HomeSide's financial position or
results of operations.
F-22
<PAGE> 154
HOMESIDE LENDING, INC. AND SUBSIDIARIES
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 BBMC Acquisition and the BMC Acquisition as though
such transactions occurred on January 1, 1995. Results of operations for the
period March 16, 1996 to February 28, 1997 include the period March 16, 1996 to
February 28, 1997 for HomeSide and the period April 1, 1996 to May 30, 1996 for
BMC. Results of operations for the year ended December 31, 1995 include the
results of BBMC and BMC for the twelve months ended December 31, 1995. The
unaudited pro forma consolidated financial information does not purport to
represent the results that actually would have occurred if the acquisition of
BBMC or the acquisition of BMC 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-23
<PAGE> 155
HOMESIDE LENDING, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
FOR THE PERIOD MARCH 16, 1996 TO FEBRUARY 28, 1997(A)
(IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA
HOMESIDE BMC BMC ACQUISITION HOMESIDE AND
HISTORICAL(a) HISTORICAL(a) ADJUSTMENTS(b) BMC
------------- ------------- --------------- ------------
<S> <C> <C> <C> <C>
Revenues:
Mortgage servicing fees................... $ 308.9 $20.6 $ (0.8)(c) $328.7
Amortization of mortgage servicing
rights................................. (153.7) (8.3) (1.0)(d) (163.0)
------- ----- ------- ------
Net servicing revenue............. 155.2 12.3 (1.8) 165.7
Interest income........................... 81.5 4.9 1.7(e) 88.1
Interest expense.......................... (66.8) (3.5) 0.9(e) (69.4)
------- ----- ------- ------
Net interest revenue.............. 14.7 1.4 2.6 18.7
Net mortgage origination revenue.......... 66.0 5.0 (4.0)(f) 67.0
Other income.............................. 0.7 0.7 (0.7)(g) 0.7
------- ----- ------- ------
Total revenue..................... 236.6 19.4 (3.9) 252.1
Expenses:
Salaries and employee benefits............ 73.0 10.4 (5.5)(h) 77.9
Occupancy and equipment................... 11.7 1.6 (1.2)(i) 12.1
Servicing losses on investor-owned loans
and foreclosure related expenses....... 17.9 -- -- 17.9
Other expenses............................ 40.8 12.2 (4.7)(j) 48.3
------- ----- ------- ------
Total expenses.................... 143.4 24.2 (11.4) 156.2
Income before income taxes.................. 93.2 (4.8) 7.5 95.9
Income tax expense.......................... 37.3 (0.9) 2.2(k) 38.6
------- ----- ------- ------
Net income.................................. $ 55.9 $(3.9) $ 5.3 $ 57.3
======= ===== ======= ======
</TABLE>
- ---------------
(a) Reflects HomeSide's historical consolidated financial statements for the
period March 16, 1996 to February 28, 1997 and BMC's historical
consolidated financial statements for the period April 1, 1996 to May 30,
1996. 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 BMC Acquisition as if such
acquisition occurred on March 16, 1996. The adjustments reflect the
application of purchase accounting to the BMC Acquisition and, as a result,
the assets and liabilities have been adjusted to reflect the allocation of
the purchase price.
(c) In connection with the BMC Acquisition, all of the assets and liabilities
of BMC 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.
(d) Amortization was increased by $1.5 million to reflect the allocation of the
BMC purchase price to mortgage servicing rights and reduced $0.5 million to
reflect amortization on mortgage servicing rights retained by HHI.
(e) In 1996, BMC 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.
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 BMC.
F-24
<PAGE> 156
Pro forma interest expense is comprised of the following components:
<TABLE>
<S> <C>
Warehouse interest expense......................................... $ (62.6)
Interest credit on escrow deposits................................. 57.4
Other interest expense
Servicing-related interest expense............................... (42.2)
Other interest expense........................................... (22.0)
-------
Total interest expense................................... $ (69.4)
=======
</TABLE>
(f) Origination revenue of $4.0 million generated by the loan production units
retained by Barnett was eliminated.
(g) Barnett retained mortgage loans held for investment. The interest earned on
these loans of $0.7 million has been eliminated.
(h) 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.
(i) 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.
(j) Expenses have been reduced for mortgage loan production units retained by
Barnett and certain mortgage servicing obligations retained by BMC. Other
expenses have been adjusted to reflect amortization of debt issuance costs.
<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)
=====
</TABLE>
(k) Adjusts income tax expense for HomeSide's effective income tax rate.
- ---------------
Note: Numbers may not total or agree to financial statements due to rounding.
F-25
<PAGE> 157
HOMESIDE LENDING, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HOMESIDE HOMESIDE FOR
BBMC BBMC FOR THE BBMC BMC BMC THE BBMC AND BMC
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)
======= ====== ======= ======= ====== =======
</TABLE>
- ---------------
(a) Reflects BBMC's and BMC'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 BMC,
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 BBMC Acquisition, including related financing. The adjustments
reflect the application of purchase accounting to the BBMC 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 BMC Acquisition. The
adjustments reflect the application of purchase accounting to the BMC
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 BBMC purchase price to servicing rights.
(e) In 1995, BBMC 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
F-26
<PAGE> 158
mortgage loans held for investment. The interest earned on these loans of $7.9
million has been eliminated.
(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 BBMC 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)
======
</TABLE>
(g) Mortgage origination revenue of $2.9 million generated by the branches
retained by Bank of Boston was eliminated.
(h) Mortgage servicing rights were adjusted to fair value as part of the
purchase accounting adjustments. Therefore no gain on sales would have been
recognized since the proceeds received on the sales would have been equal
to the cost basis of the mortgage servicing rights.
(i) The salaries and employee benefits incurred at the retail branches and the
loan processing center retained by Bank of Boston of $5.8 million have been
eliminated. The personnel associated with these positions were retained by
Bank of Boston.
(j) Occupancy expenses for the retail branches and the loan processing center
retained by Bank of Boston of $6.4 million have been eliminated. The assets
and operations associated with these functions were retained by Bank of
Boston.
(k) Reflects amortization of debt issuance costs of $3.6 million and
elimination of goodwill amortization of $0.3 million.
(l) Adjusts income tax expense for the BBMC Acquisition to HomeSide's expected
effective rate.
(m) BancPLUS was acquired by BMC 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 BMC. Also, servicing fee income was increased to
reflect the new agreement on servicing fee rates paid on Barnett's mortgage
loan portfolio.
F-27
<PAGE> 159
In connection with the BMC Acquisition, all of the assets and liabilities
of BMC 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>
<S> <C>
Period BancPLUS not owned by BMC................................ $ 9.9
Servicing fee income............................................ 10.0
Servicing income on servicing retained by BMC................... (5.1)
-----
Net increase in mortgage servicing revenues................ $14.8
=====
</TABLE>
(n) At BMC, 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 BMC. After the BMC
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 BMC. Amortization was also increased to reflect the
allocation of the BMC purchase price to mortgage servicing rights.
Amortization was decreased to reflect amortization on mortgage servicing
rights retained by BMC.
<TABLE>
<S> <C>
Amortization for BancPLUS during period not owned by BMC........ $(2.9)
Increased amortization.......................................... (5.9)
Amortization on mortgage servicing rights retained by BMC....... 2.8
-----
Net increase in amortization of mortgage servicing
rights................................................... $(6.0)
=====
</TABLE>
(p) In 1995, BMC sold loans held for sale as participations to an affiliate of
Barnett. This funding source will be replaced with the Bank Credit
Agreement. Consequently, interest income was increased to adjust for
interest income passed to the participations. Income for the period January
1, 1995 through February 28, 1995 was added to reflect the period BancPLUS
was not owned by BMC. Barnett is retaining mortgage loans held for
investment. The interest earned on these loans has been eliminated.
<TABLE>
<S> <C>
Interest income on participations................................... $ 9.6
Period BancPLUS not owned by BMC.................................... 1.4
Elimination of interest income on mortgage loans held for
investment........................................................ 1.1
------
Net increase in warehouse interest income...................... $ 9.9
======
</TABLE>
(q) Reflects the Bank Credit Agreement and the initial HomeSide capital
structure as well as interest expense incurred to fund the mortgage
servicing rights retained by BMC.
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 BMC Acquisition,
these deposits were held at Barnett and earned a higher benefit than would
have been earned had they been held by an independent party. Reduction of
$0.6 million is based on the benefit that would have been received from an
independent party.
<TABLE>
<S> <C>
New Bank Credit Agreement and capital structure................ $ (1.6)
Interest expense to fund mortgage servicing rights retained by
BMC........................................................... 0.9
Period BancPLUS not owned by BMC............................... (1.9)
Reduced benefit from escrow deposits........................... (0.6)
------
$ (3.2)
======
</TABLE>
F-28
<PAGE> 160
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)
======
</TABLE>
(r) Origination revenue of $3.0 million generated by the loan production units
retained by Barnett was eliminated.
(s) Mortgage servicing rights were adjusted to fair value as part of the
purchase accounting adjustments. Because the proceeds received on the sales
would have been equal to the adjusted carrying value of the mortgage
servicing rights, no gain on sales would have been recognized.
(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 BMC. Salaries and employee benefits for mortgage loan production units
retained by Barnett were eliminated.
<TABLE>
<S> <C>
Period BancPLUS not owned by BMC............................... $ 5.6
Decrease in salaries and employee benefits for loan production
units retained by Barnett..................................... (27.1)
------
Net decrease in salaries and employee benefits................. $(21.5)
======
</TABLE>
(v) Occupancy and equipment expenses of $4.2 million for loan production units
retained by Barnett have been eliminated.
(w) Expenses have been reduced for mortgage loan production units retained by
Barnett and certain mortgage servicing obligations retained by BMC. 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>
<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 BMC............................................... (1.4)
Period BancPLUS not owned by BMC -- 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)
======
</TABLE>
(x) Adjusts income tax expense for the BMC 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 BBMC and BMC
during that period. Effective January 1, 1996, BBMC and BMC 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.
F-29
<PAGE> 161
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 BBMC and pro forma BMC, 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 BBMC and pro forma BMC,
respectively, due to the interest rate environment during 1995. As a result
of the above adjustments, pro forma HomeSide for the BBMC Acquisition net
income would have been $27.8 million and pro forma HomeSide for the BBMC
and BMC Acquisitions net income would have been $28.1 million for the year
ended December 31, 1995.
- ---------------
Note: Numbers may not total or agree to financial statements due to rounding.
F-30
<PAGE> 162
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-31
<PAGE> 163
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
BancBoston Mortgage Corporation:
We have audited the accompanying consolidated balance sheet of BancBoston
Mortgage Corporation and subsidiaries (see Note 1) as of March 15, 1996, and the
related consolidated statements of operations, retained earnings and cash flows
for the period from January 1, 1996 to March 15, 1996. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 audit provides 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 BancBoston Mortgage
Corporation and subsidiaries as of March 15, 1996 and the results of their
operations and their cash flows for the period from January 1, 1996 to March 15,
1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Jacksonville, Florida
March 14, 1997
F-32
<PAGE> 164
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
the years 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 the years then ended, in
conformity with generally accepted accounting principles.
As discussed in Note 2, BancBoston Mortgage Corporation 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-33
<PAGE> 165
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc. -- Note 1)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------- AT MARCH 15,
1994 1995 1996
---------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Cash.................................................. $ 5,653 $ 830 $ 23,216
Mortgage loans
Held for sale, net.................................. 271,215 388,436 628,504
Held for investment................................. 28,589 33,183 65,068
Purchased mortgage servicing rights, net.............. 415,815 533,891 522,469
Excess mortgage servicing receivable, net............. 15,333 17,447 20,393
Accounts receivable................................... 66,390 82,473 65,599
Accounts receivable from Bank of Boston and
affiliates.......................................... 373 343 --
Pool loan purchases................................... 77,477 65,272 56,261
Mortgage claims receivable, net....................... 48,835 45,422 17,563
Accrued income tax receivable......................... -- -- 40,867
Deferred tax asset.................................... 31,012 40,724 36,390
Real estate acquired.................................. 924 2,627 2,797
Premises and equipment, net........................... 25,279 25,386 25,071
Other assets.......................................... 19,992 18,269 16,159
---------- ---------- ----------
Total Assets................................ $1,006,887 $1,254,303 $1,520,357
========== ========== ==========
LIABILITIES & STOCKHOLDER'S EQUITY
Note payable to Bank of Boston........................ $ 779,021 $ 966,000 $1,256,000
Accounts payable and accrued liabilities.............. 81,269 51,683 137,837
Accrued income taxes.................................. 4,825 36,213 --
Long-term debt........................................ 14,007 13,816 13,790
---------- ---------- ----------
Total liabilities........................... 879,122 1,067,712 1,407,627
---------- ---------- ----------
Commitments and Contingencies (Notes 9, 11, 12, 13, 15
and 16)
Stockholder's Equity:
Common stock, $1 par value per share: 10,000 shares
authorized; 100 shares issued and outstanding.... -- -- --
Additional paid-in capital.......................... 156,666 156,666 156,666
Retained earnings (accumulated deficit)............. (28,901) 29,925 (43,936)
---------- ---------- ----------
Total stockholder's equity.................. 127,765 186,591 112,730
---------- ---------- ----------
Total Liabilities and Stockholder's
Equity.................................... $1,006,887 $1,254,303 $1,520,357
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE> 166
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc. -- Note 1)
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER FOR THE PERIOD
31, JANUARY 1, 1996
---------------------- THROUGH
1994 1995 MARCH 15, 1996
-------- --------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Mortgage servicing fees............................. $140,491 $ 173,038 $ 38,977
Gain (loss) on risk management contracts............ (6,702) 108,702 (128,795)
Amortization of mortgage servicing rights........... (66,801) (108,013) (7,245)
-------- --------- ----------
Net servicing revenues........................... 66,988 173,727 (97,063)
-------- --------- ----------
Interest income..................................... 31,585 24,324 8,423
Interest expense.................................... (33,952) (27,128) (10,089)
-------- --------- ----------
Net interest revenue (expense)................... (2,367) (2,804) (1,666)
-------- --------- ----------
Net mortgage origination revenue.................... 4,983 3,417 7,638
Gain on sales of servicing rights................... 10,862 10,230 --
Other income........................................ 147 511 253
-------- --------- ----------
Total Revenues.............................. 80,613 185,081 (90,838)
-------- --------- ----------
Expenses:
Salaries and employee benefits...................... 40,370 45,381 10,287
Occupancy and equipment............................. 9,012 10,009 2,041
Servicing losses on investor-owned loans............ 7,177 9,981 5,560
Real estate acquired................................ 253 1,054 291
Other expenses...................................... 19,326 21,896 7,377
-------- --------- ----------
Total Expenses.............................. 76,138 88,321 25,556
-------- --------- ----------
Income (loss) before income taxes and cumulative
effect of change in accounting principle............ 4,475 96,760 (116,394)
Income tax expense (benefit) before cumulative
effect of change in accounting principle:
Current............................................. 4,773 47,646 (46,867)
Deferred............................................ (2,248) (9,712) 4,334
-------- --------- ----------
Total Income Tax Expense (Benefit).......... 2,525 37,934 (42,533)
-------- --------- ----------
Income (loss) before cumulative effect of change in
accounting principle................................ 1,950 58,826 (73,861)
Cumulative effect on prior years of change in
accounting for mortgage servicing fee income, net of
tax................................................. 3,455 -- --
-------- --------- ----------
Net Income (Loss)........................... 5,405 58,826 (73,861)
Retained Earnings (Accumulated Deficit), January 1.... (34,306) (28,901) 29,925
-------- --------- ----------
Retained Earnings (Accumulated Deficit), end of
period.............................................. $(28,901) $ 29,925 $ (43,936)
======== ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE> 167
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc. -- Note 1)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
YEARS ENDED DECEMBER 31, JANUARY 1, 1996
-------------------------- THROUGH
1994 1995 MARCH 15, 1996
----------- ----------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows provided by (used in) operating
activities:
Net income (loss).................................. $ 5,405 $ 58,826 $ (73,861)
Adjustments to reconcile net income (loss) to cash
provided by (used in) operations:
Cumulative effect of change in accounting for
mortgage servicing fees, net of tax........... (3,455) -- --
Amortization.................................... 67,207 108,404 7,327
Depreciation.................................... 2,621 3,133 719
Servicing losses on investor-owned loans........ 7,177 9,981 5,560
Deferred tax (benefit) expense.................. (2,248) (9,712) 4,334
Gain on sale of mortgage servicing rights....... (10,862) (10,230) --
(Gain) loss on risk management contracts........ 6,702 (108,702) 128,795
Write down of real estate acquired.............. 1,066 1,699 1,067
Capitalized excess mortgage servicing
receivable.................................... (3,653) (7,513) (3,967)
Mortgage loans originated and purchased for
sale.......................................... (4,673,100) (4,816,964) (2,027,741)
Proceeds and principal repayments of mortgage
loans held for sale........................... 5,005,969 4,694,909 1,787,673
Change in accounts receivable................... (7,482) (16,053) 17,217
Change in pool loan purchases................... 9,002 12,205 9,011
Change in mortgage claims receivable............ 4,574 (5,383) 25,863
Change in accrued income taxes.................. (1,231) 31,388 (77,080)
Change in other assets and accounts payable and
accrued liabilities........................... (13,051) (11,899) 82,622
----------- ----------- -----------
Net cash provided by (used in) operating
activities.................................... 394,641 (65,911) (112,461)
----------- ----------- -----------
Cash flows provided by (used in) investing
activities:
Principal payments on (net origination) of mortgage
loans
held for investment............................. 11,216 12,966 (31,885)
Purchase of premises and equipment................. (5,355) (3,141) (404)
Acquisition of Bell Mortgage....................... -- (891) --
Purchase of mortgage servicing rights.............. (164,047) (193,013) (60,171)
Proceeds from (amounts paid for) risk management
contracts, net.................................. (9,641) 27,120 (63,426)
Proceeds from real estate acquired................. 2,773 2,610 759
Proceeds from sales of mortgage servicing rights... 10,862 28,649 --
----------- ----------- -----------
Net cash used in investing activities........... (154,192) (125,700) (155,127)
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE> 168
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc. -- Note 1)
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 1, 1996
YEARS ENDED DECEMBER 31, THROUGH
1994 1995 MARCH 15, 1996
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows provided by (used in) financing
activities:
Borrowings from Bank of Boston..................... 3,988,224 3,669,085 1,692,500
Repayments to Bank of Boston....................... (4,228,214) (3,482,106) (1,402,500)
Repayment of long-term debt........................ (173) (191) (26)
----------- ----------- -----------
Net cash provided by (used in) financing
activities.................................... (240,163) 186,788 289,974
----------- ----------- -----------
Net increase (decrease) in cash...................... 286 (4,823) 22,386
Cash at January 1.................................. 5,367 5,653 830
----------- ----------- -----------
Cash at end of period.............................. $ 5,653 $ 830 $ 23,216
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest........................................ $ 32,819 $ 27,498 $ 9,211
=========== =========== ===========
Income taxes.................................... $ 7,864 $ 16,258 $ 30,213
=========== =========== ===========
Supplemental schedule of non-cash investing
activities:
BBMC purchased bulk mortgage servicing rights
during the years 1994 and 1995. In conjunction
with purchases, accounts payable were assumed... $ 60,188 $ 23,022 $ --
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE> 169
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc. -- Note 1)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
BancBoston Mortgage Corporation ("BBMC") was a wholly-owned subsidiary of
The First National Bank of Boston ("Bank of Boston"), which was 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 received cash and an equity
interest in the new company HomeSide, Inc. The Investors acquired majority
interest in HomeSide Inc.. The transaction closed March 15, 1996. Upon
completion of the transaction, BBMC was renamed HomeSide Lending, Inc. BBMC is
the predecessor company to both HomeSide Inc. and HomeSide Lending, Inc.
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 HomeSide, Inc.
Barnett received cash and an ownership interest in HomeSide, Inc. The
transaction closed May 31, 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. These
financial statements have been prepared using the carrying values of BBMC and do
not reflect the purchase of BBMC as discussed in Note 1.
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.
Specifically, management adjusts the amount of amortization recorded based on
the effect of anticipated changes in prepayment speeds.
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 15, 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).
F-38
<PAGE> 170
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc. -- Note 1)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Unamortized premiums
are included in other assets on the balance sheet. At March 15, 1996, BBMC had
call options to purchase mortgage-backed securities with a total face amount of
$653.0 million. The unamortized premiums associated with these options were $2.6
million at March 15, 1996. 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 March
15, 1996, the current market value of these option contracts included in
mortgage servicing rights was $20.2 million. Unrealized gains (losses) at
December 31, 1994, 1995 and March 15, 1996, included in the consolidated
statements of operations were ($2.9) million, $86.5 million and ($56.6) million,
respectively.
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.
On January 1, 1996, BBMC adopted Statement of Financial Accounting
Standards (SFAS) No. 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 BBMC'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, BBMC capitalized $3.1 million of OMSR,
which had the effect of increasing net mortgage origination revenue by $3.1
million 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. Since SFAS No. 122
prohibits retroactive
F-39
<PAGE> 171
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc. -- Note 1)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
application, historical accounting results have not been restated and,
accordingly, the accounting results for the previous years ended are not
directly comparable with the period January 1, 1996 through March 15, 1996.
SFAS No. 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, BBMC'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. BBMC did
not record any impairment charges related to its mortgage servicing right
portfolio for the period January 1, 1996 through March 15, 1996.
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.
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.
F-40
<PAGE> 172
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc. -- Note 1)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other assets
Other assets consist primarily of a prepaid pension asset ($9.8 million at
March 15, 1996), 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.
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."
Note 10 includes additional information with respect to the adoption of this
statement. Under SFAS No. 109, 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.
Accounting Changes
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.
F-41
<PAGE> 173
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc. -- Note 1)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PURCHASED MORTGAGE SERVICING RIGHTS AND EXCESS MORTGAGE SERVICING RECEIVABLE
PMSR consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- MARCH 15,
1994 1995 1996
------------ ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C>
PMSR........................................... $ 732,775 $ 954,931 $ 951,817
Accumulated amortization....................... (316,960) (421,040) (429,348)
---------- ----------- ---------
Balance........................................ $ 415,815 $ 533,891 $ 522,469
========== =========== =========
</TABLE>
EMSR consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH
----------------------------- 15,
1994 1995 1996
------------ ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
EMSR............................................ $ 60,419 $ 66,465 $ 70,432
Accumulated amortization........................ (45,086) (49,018) (50,039)
---------- ---------- --------
Balance......................................... $ 15,333 $ 17,447 $ 20,393
========== ========== ========
</TABLE>
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>
DECEMBER 31, MARCH
----------------------------- 15,
1994 1995 1996
------------ ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at January 1............................ $ (4,700) $ (6,650) $ (9,400)
Servicing losses on investor-owned loans........ (7,177) (9,981) (5,560)
Charge-offs..................................... 5,304 7,473 2,725
Recoveries...................................... (77) (242) --
-------- -------- --------
Ending Balance.................................. $ (6,650) $ (9,400) $(12,235)
======== ======== ========
</TABLE>
5. MORTGAGE SERVICING PORTFOLIO
BBMC's residential mortgage servicing portfolio totaled $37.9 billion,
$41.5 billion and $44.2 billion at December 31, 1994 and 1995 and March 15,
1996, respectively, and included mortgage-backed securities of $24.0 billion,
$28.5 billion and $29.1 billion at December 31, 1994 and 1995 and March 15,
1996, respectively. In addition, BBMC's commercial loan servicing portfolio
totaled $1.0 billion, $0.9 billion, and $0.2 billion at December 31, 1994 and
1995 and March 15, 1996, 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 $25
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.
F-42
<PAGE> 174
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc. -- Note 1)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH
----------------------------- 15,
1994 1995 1996
------------ ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
Land............................................ $ 4,086 $ 4,086 $ 4,086
Building........................................ 14,251 14,477 14,476
Furniture and equipment......................... 24,300 26,870 25,967
Leasehold improvements.......................... 752 824 877
-------- -------- --------
43,389 46,257 45,406
Accumulated depreciation and amortization....... (18,110) (20,871) (20,335)
-------- -------- --------
Balance......................................... $ 25,279 $ 25,386 $ 25,071
======== ======== ========
</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 and March 15, 1996, the interest rate was 8.5%, 6.8%
and 7.7%, respectively, less the benefit received from balances held at Bank of
Boston. Interest expense, net of this benefit, was $24.6 million, $20.5 million
and $6.7 million for the years ended December 31, 1994 and 1995 and for the
period January 1, 1996 to March 15, 1996, respectively.
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 as of March 15, 1996 are as
follows:
<TABLE>
<CAPTION>
MARCH 15, 1996
--------------
(IN THOUSANDS)
<S> <C>
1997......................................... $ 230
1998......................................... 234
1999......................................... 258
2000......................................... 283
2001......................................... 312
Thereafter................................... 12,473
--------
Total Due.......................... $ 13,790
========
</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 ($1.1) million
and $0.5 million for the years ended December 31, 1994, and 1995, respectively,
and $0.3 million for the period January 1, 1996 to March 15, 1996.
F-43
<PAGE> 175
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc. -- Note 1)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 and March 15, 1996, approximately $0.8 million, $0.7 million and $0.7
million, respectively, were included in accrued expenses and other liabilities
for these plans. For the years ended December 31, 1994, and 1995 and for the
period January 1, 1996 to March 15, 1996, expense related to these plans was
$0.2 million, $0.2 million and $0.1 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 $0.8 million, $0.2 million and $0.1 million for the
years ended December 31, 1994, and 1995 and for the period January 1, 1996 to
March 15, 1996, respectively. BBMC employees are eligible to participate in the
thrift incentive plan until October 1, 1996 at which time BBMC participant
accounts will become part of a similar plan offered by the new company.
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 and
$0.5 million, and $0.8 million for the years ended December 31, 1994 and 1995
and for the period January 1, 1996 to March 15, 1996, respectively. After March
15, 1996 retiree benefits associated with current retirees will be assumed by
Bank of Boston.
The components of post-retirement benefits expense for the two years ended
December 31, 1994 and 1995 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
Service cost (benefits earned during the period).................. $ 63 $ 53
Interest cost on projected benefit obligation..................... 282 264
Amortization:
Unrecognized net asset.......................................... 250 250
Unamortized gain................................................ (11) (53)
---- ----
Net post-retirement benefit cost.................................. $584 $514
==== ====
</TABLE>
F-44
<PAGE> 176
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc. -- Note 1)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BBMC's unfunded accumulated post-retirement benefit obligation for the two
years ended December 31, 1994 and 1995 was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
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>
DECEMBER 31,
-------------------------------
1994 1995
------------- -------------
<S> <C> <C>
Rate of increase in future compensation levels...... 4.50% 4.50%
Weighted average discount rate...................... 8.25% 7.25%
Medical inflation rate.............................. 11% declining 8% declining
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 5.9%, and 5.8% in the accumulated post-retirement benefit
obligation and 4.9%, and 4.9% in annual post-retirement benefit expense for the
years ended December 31, 1994 and 1995, respectively.
These retirement plans are assessed annually, therefore there was no
actuarial valuation at March 15, 1996. Post retirement benefit expense for the
period January 1, 1996 to March 15, 1996 was $.01 million.
10. INCOME TAXES
The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- MARCH 15,
1994 1995 1996
------------ ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C>
PMSR................................................ $ 27,223 $ 34,008 $ 28,167
EMSR................................................ 9,303 8,957 8,881
Reserve for estimated servicing losses on
investor-owned loans.............................. 2,529 3,657 4,759
Other............................................... (2,385) (1,301) (1,303)
Valuation reserve................................... (5,658) (4,597) (4,114)
---------- ---------- --------
Net deferred tax assets, net of reserve............. $ 31,012 $ 40,724 $ 36,390
========== ========== ========
</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-45
<PAGE> 177
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc. -- Note 1)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the provision for (benefit from) income taxes are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH
--------------------------- 15,
1994 1995 1996
------------ ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current tax provision (benefit)............................. $ 4,773 $ 47,646 $(46,867)
Deferred tax:
(Benefit) expense on income............................... (2,587) (8,651) 4,817
Change in valuation reserve............................... 339 (1,061) (483)
-------- -------- --------
Net deferred tax (benefit) expense.......................... (2,248) (9,712) 4,334
Income tax provision (benefit) before cumulative effect of
change in accounting principle............................ 2,525 37,934 (42,533)
Change in accounting for mortgage servicing fee............. 1,860 -- --
-------- -------- --------
Total income tax provision (benefit)........................ $ 4,385 $ 37,394 $(42,533)
======== ======== ========
</TABLE>
The following table reconciles the expected federal tax provision (benefit)
on income (loss) before cumulative effect of change in accounting principle,
based on the federal statutory tax rate of 35%, to the actual tax provision
(benefit) before cumulative effect of change in accounting principle:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 15,
1994 1995 1996
------ ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Expected tax provision (benefit) applicable to income
(loss) before cumulative effect of change in accounting
principle............................................... $1,567 $33,866 $(40,738)
Effect of:
State income taxes, net of federal tax benefits......... 381 3,774 743
Other................................................... 577 294 (2,538)
------ ------- --------
Actual tax provision (benefit) before cumulative effect of
change in accounting principles......................... $2,525 $37,934 $(42,533)
====== ======= ========
</TABLE>
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 for the
year ended December 31, 1994, $3.9 million for the year ended December 31, 1995
and $1.8 million for the period January 1, 1996 to March 15, 1996. BBMC's
minimum future lease commitments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 MARCH 15, 1996
----------------- --------------
(IN THOUSANDS)
<S> <C> <C>
1996.......................................... $ 1,996 $1,837
1997.......................................... 622 1,910
1998.......................................... 280 1,764
1999.......................................... 52 1,079
2000.......................................... -- 107
Thereafter.................................... -- 21
------- ------
Total............................... $ 2,950 $6,718
======= ======
</TABLE>
F-46
<PAGE> 178
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc. -- Note 1)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
$20.2 million which was due at March 15, 1996.
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 March 15, 1996, if all counterparties failed completely and if the
margins, if any, retained by BBMC or an independent clearing were to become
unavailable, was approximately $16.1 million for mandatory forward commitments
of mortgage-backed securities.
F-47
<PAGE> 179
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc. -- Note 1)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of BBMC's notional amounts and fair values of
interest rate products as of December 31, 1994 and 1995 and March 15, 1996.
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1995 MARCH 15, 1996
-------------------- ---------------------- --------------------
ESTIMATED ESTIMATED ESTIMATED
NOTIONAL FAIR NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUE(1) AMOUNT VALUE(1) AMOUNT VALUE(1)
-------- --------- ---------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Purchased commitments to sell
mortgage loans:
Mandatory forward contracts.... $286,430 $ 4,413 $1,169,559 $ (9,798) $941,087 $16,099
Options on mortgage-backed
securities.................. 87,000 172 315,000 -- 653,000 7,607
Risk management contracts:
Purchased...................... 371,000 2,157 3,107,500 118,753 781,000 17,990
Sold........................... -- -- 295,000 (33,833) -- --
</TABLE>
- ---------------
(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.
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, $885.6 million at December 31, 1995 and
$956.4 million at March 15, 1996.
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, $6.8 million at December 31, 1995 and $7.0 million at March
15, 1996.
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-48
<PAGE> 180
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc. -- Note 1)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purchase mortgage servicing rights correspond to mortgage loans having an
aggregate loan principal balance of approximately $2.7 billion at December 31,
1995 and $0.9 billion at March 15, 1996.
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, $2.0 billion and $2.0 billion
at December 31, 1994 and 1995 and March 15, 1996, respectively. Related
servicing fees are included in mortgage servicing fees and were $8.4 million and
$7.6 million for the years ended December 31, 1994 and 1995, respectively, and
$1.2 million for the period January 1, 1996 to March 15, 1996.
BBMC reimburses Bank of Boston and its affiliates for certain occupancy and
supplies costs. Total costs reimbursed were $0.7 million for the years ended
December 31, 1994 and 1995, respectively, and $0.2 million for the period
January 1, 1996 to March 15, 1996.
BBMC services real estate acquired by the Bank of Boston and its
affiliates. Related expenses are reimbursed and were $2.1 million and $1.7
million for the years ended December 31, 1994 and 1995, respectively, and $1.7
million for the period January 1, 1996 to March 15, 1996.
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 for the years ended December 31, 1994 and 1995, respectively, and
$0.7 billion for the period January 1, 1996 to March 15, 1996.
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 $0.4 billion, and $0.5 billion for the
years ended December 31, 1994 and 1995, respectively, and $0.6 billion for the
period January 1, 1996 to March 15, 1996. Included in mortgage loans held for
sale are loans which will be sold to Bank of Boston and its affiliates totaling
$94.5 million and $18.1 million at December 31, 1994 and 1995, respectively, and
$64.1 million at March 15, 1996.
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
F-49
<PAGE> 181
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc. -- Note 1)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
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.
F-50
<PAGE> 182
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc. -- Note 1)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
The estimated fair values of BBMC's financial instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1995 MARCH 15, 1996
------------------- ------------------- -----------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- -------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash.............................. $ 5,653 $ 5,653 $ 830 $ 830 $ 23,216 $ 23,216
Mortgages held for sale........... 271,215 272,535 388,436 395,984 628,504 633,993
Mortgages held for investment..... 28,589 26,988 33,183 35,003 65,068 65,068
Accounts receivable............... 66,763 66,763 82,816 82,816 65,599 65,599
Pool loan purchases............... 77,477 77,477 65,272 65,272 56,261 56,261
Mortgage claims receivable........ 48,835 48,835 45,422 45,422 17,563 17,563
Excess mortgage servicing
receivable...................... 15,333 20,700 17,447 19,117 20,393 23,100
Risk management contracts,
classified
as PMSR, and other assets(2).... 3,727 2,157 84,520 84,920 20,169 20,169
LIABILITIES
Note payable to Bank of Boston.... 779,021 779,021 966,000 966,000 1,256,000 1,256,000
Long-term debt.................... 14,007 13,853 13,816 16,211 13,790 21,695
OFF-BALANCE SHEET(1)
Commitments to originate mortgage
loans........................... (1,455) 1,094 27,250
Mandatory forward contracts to
sell mortgages(2)............... 4,413 (9,798) 16,099
Options on mortgage-backed
securities(2)................... 172 -- 7,607
Risk management contracts......... (6,998) -- --
</TABLE>
- ---------------
(1) Parentheses denote a liability
(2) See Note 12 for additional disclosures on notional amounts
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.
F-51
<PAGE> 183
BANCBOSTON MORTGAGE CORPORATION
(The Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now known as
HomeSide Lending, Inc. -- Note 1)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and, therefore, cannot be determined with
precision. Changes in any of these assumptions used in calculating fair value
would also significantly affect the estimates. Further, the fair value estimates
were calculated as of December 31, 1994 and 1995 and March 15, 1996. 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
consolidated financial statements. Proforma financial results would not have
been materially different as a result of this acquisition.
F-52
<PAGE> 184
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
the years 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 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 the years then ended, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Jacksonville, Florida
March 8, 1996
F-53
<PAGE> 185
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-54
<PAGE> 186
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, 1994 AND 1995
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
MORTGAGE ORIGINATION REVENUE:
Mortgage origination fees................................... $ 3,276,304 $ 17,103,976
Gain (loss) on sales of loans, net.......................... 691,969 (13,920,382)
------------ ------------
Total mortgage origination revenue.................. 3,968,273 3,183,594
------------ ------------
INTEREST INCOME (EXPENSE):
Interest income............................................. 3,459,860 27,264,470
Interest expense, substantially all to affiliates........... (4,911,433) (20,427,661)
------------ ------------
Net interest income (expense)....................... (1,451,573) 6,836,809
------------ ------------
MORTGAGE SERVICING REVENUE:
Mortgage servicing income................................... 27,130,545 83,502,311
Mortgage servicing income from affiliates................... 20,016,790 25,057,174
Amortization of capitalized mortgage servicing rights....... (17,783,184) (48,282,193)
Gain on sales of servicing.................................. 0 9,096,134
------------ ------------
Net mortgage servicing revenue...................... 29,364,151 69,373,426
------------ ------------
OTHER INCOME.................................................. 4,491,999 2,592,125
------------ ------------
Total revenues...................................... 36,372,850 81,985,954
------------ ------------
EXPENSES:
Salaries and benefits....................................... 17,473,917 53,070,150
General and administrative.................................. 14,923,734 41,849,355
Affiliate profit sharing.................................... 3,533,551 6,242,191
Occupancy and equipment..................................... 2,702,169 5,959,537
Amortization of goodwill.................................... 259,275 4,839,536
------------ ------------
Total expenses...................................... 38,892,646 111,960,769
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES............................. (2,519,796) (29,974,815)
INCOME TAX PROVISION (BENEFIT)................................ (461,411) (9,588,509)
------------ ------------
NET INCOME (LOSS)............................................. $ (2,058,385) $(20,386,306)
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-55
<PAGE> 187
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, 1994 AND 1995
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS
COMMON PAID-IN (ACCUMULATED
STOCK CAPITAL DEFICIT) TOTAL
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
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-56
<PAGE> 188
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, 1994 AND 1995
(NOTE 7)
<TABLE>
<CAPTION>
1994 1995
------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ (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................................................. 15,288,479 45,816,361
Amortization of excess servicing fees.................... 2,494,705 2,465,832
Amortization of goodwill................................. 259,275 4,839,536
Depreciation and amortization of property and
equipment.............................................. 1,776,267 3,191,009
Capitalization of excess servicing fees.................. (1,258,180) (7,081,112)
Origination of loans held for sale....................... (508,150,116) (3,318,208,729)
Sales of mortgage loans held for sale.................... 456,864,511 3,106,918,971
Proceeds from sales of mortgage servicing rights......... 0 10,437,502
Gain on sales of servicing rights........................ 0 (9,096,134)
Deferred income tax provision (benefit).................. 91,933 (1,250,725)
Changes in assets and liabilities:
Accounts receivable, net............................... 2,067,746 (8,164,924)
Other assets........................................... 1,254,075 (11,285,808)
Accounts payable and accrued liabilities............... (7,700,318) 9,488,879
Other, net............................................. 45,104 6,807,216
------------- ---------------
Total adjustments................................... (36,966,519) (165,122,126)
------------- ---------------
Net cash used in operating activities............... (39,024,904) (185,508,432)
------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchased mortgage servicing rights......................... (22,487,973) (21,563,279)
Net increase in loans held for investment................... (1,593,575) (3,152,365)
Net increase (decrease) in real estate owned................ (166,405) 1,751,036
Purchases of property and equipment, net of retirements..... (220,543) (556,054)
Business acquisitions, net of cash acquired................. (58,824,244) (158,747,064)
------------- ---------------
Net cash used in investing activities............... (83,292,740) (182,267,726)
------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in notes payable............................... 64,990,122 211,666,829
Capital contributions....................................... 59,765,851 167,196,540
------------- ---------------
Net cash provided by financing activities........... 124,755,973 378,863,369
------------- ---------------
NET INCREASE IN CASH.......................................... 2,438,329 11,087,211
CASH AT BEGINNING OF YEAR..................................... 1,462,243 3,900,572
------------- ---------------
CASH AT END OF YEAR........................................... $ 3,900,572 $ 14,987,783
============= ===============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-57
<PAGE> 189
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-58
<PAGE> 190
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-59
<PAGE> 191
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-60
<PAGE> 192
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-61
<PAGE> 193
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, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
--------- -----------
<S> <C> <C>
Current:
Federal.......................................... $(514,431) $(7,504,840)
State............................................ (38,913) (832,944)
--------- -----------
(553,344) (8,337,784)
--------- -----------
Deferred:
Federal.......................................... 87,016 (1,080,141)
State............................................ 4,917 (170,584)
--------- -----------
91,933 (1,250,725)
--------- -----------
Provision (benefit) for income taxes............... $(461,411) $(9,588,509)
========= ===========
</TABLE>
F-62
<PAGE> 194
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>
1994 1995
----------- ------------
<S> <C> <C>
Income (loss) before taxes............................... $(2,519,796) $(29,974,815)
=========== ============
Tax provision (benefit) at the statutory rate............ $ (881,929) $(10,491,185)
Increase (decrease) in taxes:
State income tax, net of federal benefit............... (22,098) (539,470)
Goodwill............................................... 90,746 1,693,838
Other.................................................. 351,870 (251,692)
----------- ------------
Total income tax provision (benefit)........... $ (461,411) $ (9,588,509)
=========== ============
Effective tax rate....................................... (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 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-63
<PAGE> 195
BARNETT MORTGAGE COMPANY
(Acquired by HomeSide, Inc. on May 31, 1996 and now known as HomeSide Holdings,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$2,365,000, and $523,000 in 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 $2,171,000, and
$1,972,000 in fees for these services for the years ended December 31, 1994 and
1995, respectively.
The Company recorded certain expenses related to transactions with the
Parent and the Affiliate Banks as follows:
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
Management fees........................................... $ 721,141 $ 2,914,794
Affiliate revenue sharing................................. 3,533,551 6,242,191
Rent expense.............................................. 1,292,498 1,316,448
Interest expense.......................................... 3,281,503 17,588,548
Information processing support............................ 1,953,244 3,505,484
Internal audit fees....................................... 358,800 421,392
------------ ------------
$ 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
$938,287, and $115,476 to the Company for the net cost of building facilities in
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-64
<PAGE> 196
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 $235,000, and $1,669,000 from mortgage loans to
real estate acquired by foreclosure in 1994 and 1995, respectively. These
transactions have been excluded from the accompanying consolidated statements of
cash flows.
For the years ended December 31, 1994 and 1995, income taxes of $396,431
and $2,852,641, respectively, were paid to the Parent. Interest paid during the
same years was $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.
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
F-65
<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 -- (CONTINUED)
$809,000, in 1995, but did not incur any significant losses in 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-66
<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)
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-67
<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)
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-68
<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)
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-69
<PAGE> 201
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-70
<PAGE> 202
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-71
<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
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-72
<PAGE> 204
INDEPENDENT AUDITORS' REPORT
Board of Directors
BancPLUS Financial Corporation:
We have audited the accompanying consolidated statement of financial
condition of BancPLUS Financial Corporation and subsidiary as of December 31,
1994 and the related consolidated statement of income, stockholders' equity, and
cash flows for the year 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 audit. 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 20% and total revenues constituting 14% of the related
1994 consolidated totals. 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 audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 audit provides a reasonable basis for our opinion.
In our opinion, based on our audit 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, 1994, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
San Antonio, Texas
March 17, 1995
F-73
<PAGE> 205
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 1994
(IN THOUSANDS OF DOLLARS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
1994
--------
<S> <C>
ASSETS
Cash and cash equivalents......................................................... $ 7,901
Mortgage loans held for sale, at lower of cost or market (note 6)................. 120,871
Accounts receivable and accrued interest, net of allowance for uncollectible
amounts of $2,621............................................................... 29,836
Mortgage loan administration contracts, net of accumulated amortization of
$116,167 (note 3)............................................................... 117,716
Real estate acquired through foreclosure.......................................... 1,694
Properties and equipment, net (note 4)............................................ 10,435
Prepaid expenses and other assets................................................. 5,640
--------
Total assets............................................................ $294,093
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable (note 5).......................................................... 237,586
Accounts payable and accrued expenses........................................... 23,490
Reserves for losses............................................................. 11,400
--------
Total liabilities....................................................... 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
Preferred stock, par value $.01 per share ($10,000 liquidation
preference) -- 100,000,000 shares authorized; 1,460,125 shares issued and
outstanding in 1994.......................................................... 15
Additional paid-in capital...................................................... 20,173
Retained earnings (accumulated deficit)......................................... 1,428
--------
Total stockholders' equity.............................................. 21,617
--------
Total liabilities and stockholders' equity.............................. $294,093
========
</TABLE>
See accompanying notes to consolidated financial statement.
F-74
<PAGE> 206
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1994
-------
<S> <C>
INCOME
Loan administration.............................................................. $62,253
Loan origination................................................................. 16,184
Gain on sale of mortgage loan administration contracts........................... 24,348
Interest income, net of interest expense of $15,959.............................. (2,019)
Other............................................................................ 1,190
-------
Total income............................................................. 101,956
-------
EXPENSES
Personnel........................................................................ 42,798
Occupancy and equipment.......................................................... 6,924
Provision for foreclosure costs.................................................. 3,050
Amortization of mortgage loan administration contracts........................... 25,175
Other general and administrative................................................. 15,797
-------
Total expenses........................................................... 93,744
-------
Income before income taxes and extraordinary item........................ 8,212
Income taxes (note 9).............................................................. 3,107
-------
Income before extraordinary item......................................... 5,105
Extraordinary loss resulting from extinguishment of debt, net of income tax benefit
of $548 (note 5)................................................................. (1,064)
-------
Net income............................................................... $ 4,041
=======
</TABLE>
See accompanying notes to consolidated financial statement.
F-75
<PAGE> 207
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 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, 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 statement.
F-76
<PAGE> 208
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1994
-----------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................................... $ 4,041
-----------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation............................................................... 1,958
Amortization............................................................... 25,199
Provision for foreclosure costs............................................ 3,050
Capitalized excess servicing fees.......................................... (330)
Non-cash interest expense.................................................. 1,497
Gain on sales of servicing................................................. (24,348)
Proceeds from sales of servicing........................................... 32,065
Extraordinary loss resulting from extinguishment of debt................... 1,064
Deferred tax benefit....................................................... (270)
Changes in operating assets and liabilities:
Increase in accounts receivable and other assets......................... (4,713)
Loans originated or acquired for sale.................................... (1,703,896)
Proceeds from sales of loans............................................. 1,991,424
Net decrease in warehouse debt........................................... (269,085)
Decrease in accounts payable and accrued expenses........................ (9,647)
-----------
Total adjustments to net income....................................... 43,968
-----------
Net cash provided by operating activities............................. 48,009
-----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of mortgage loan administration contracts........................... (38,198)
Real estate acquired through foreclosure...................................... (1,648)
Proceeds from sales of foreclosed real estate................................. 1,259
Purchases of properties and equipment......................................... (1,796)
-----------
Net cash used in investing activities................................. (40,383)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable................................................... 400,936
Principal payments on notes payable........................................... (402,630)
Loan fees paid................................................................ (2,127)
-----------
Net cash used in financing activities................................. (3,821)
-----------
Net increase in cash and cash equivalents............................. 3,805
CASH AND CASH EQUIVALENTS
Beginning of year............................................................. 4,096
-----------
End of year................................................................... $ 7,901
===========
</TABLE>
See accompanying notes to consolidated financial statement.
F-77
<PAGE> 209
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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-78
<PAGE> 210
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-79
<PAGE> 211
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 $25,980,000 for the year ended
December 31, 1994.
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-80
<PAGE> 212
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, 1994
(in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
IN YEARS 1994
----------- -------
<S> <C> <C>
Building and improvements...................................... 5 - 30 $ 7,186
Data processing equipment...................................... 3 - 7 4,109
Furniture, fixtures, and equipment............................. 5 - 7 4,042
------- -------
15,337
Less accumulated depreciation.................................. (4,902)
-------
Properties and equipment, net........................ $10,435
=======
</TABLE>
(5) NOTES PAYABLE
Notes payable consisted of the following at December 31, 1994 (in
thousands):
<TABLE>
<CAPTION>
1994
--------
<S> <C>
Committed operating lines of credit:
Mortgage loans credit facility........................................ $ 88,239
Receivables credit facility........................................... 3,800
Pool advance credit facility.......................................... 198
--------
Total committed operating lines of credit.......................... 92,237
Uncommitted operating lines of credit:
Mortgage loans and mortgage backed securities credit facility......... 24,764
Term debt............................................................. 76,368
Subordinated notes.................................................... 40,880
Mortgage on corporate headquarters.................................... 3,337
--------
Total notes payable........................................... $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 $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
F-81
<PAGE> 213
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 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 $14,733,000 during the year ended
December 31, 1994.
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.
(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
F-82
<PAGE> 214
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $4,628,000 for the year ended December 31, 1994. 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.
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.
F-83
<PAGE> 215
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(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
F-84
<PAGE> 216
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $680,000 for the year ended
December 31, 1994.
(9) INCOME TAXES
The components of income taxes for the year ended December 31, 1994 were as
follows (in thousands):
<TABLE>
<CAPTION>
1994
------
<S> <C>
Current expense..................................................... $3,377
Deferred benefit.................................................... (270)
------
Total.......................................................... $3,107
======
</TABLE>
The expected income taxes for the year ended December 31, 1994 differ from
the recorded amounts as follows (in thousands):
<TABLE>
<CAPTION>
1994
------
<S> <C>
Income before income taxes, extraordinary item, and cumulative effect of
a change in accounting principle...................................... $8,212
======
Income tax at 34% statutory rate........................................ 2,792
Increase in tax resulting from:
State and local income taxes.......................................... 248
Other, net............................................................ 67
------
Income tax expense............................................ $3,107
======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1994 are presented below (in thousands):
<TABLE>
<CAPTION>
1994
------
<S> <C>
Deferred tax assets:
Accruals not currently deductible for income tax purposes................. $1,005
Valuation allowances...................................................... 4,771
Excess of tax over book basis for organization costs...................... 700
Properties and equipment, principally due to differences in
depreciation........................................................... 88
Deferred installment sale income.......................................... 304
Other..................................................................... 150
------
Total deferred tax assets......................................... 7,018
------
Deferred tax liabilities:
Excess of book over tax basis for mortgage loan administration
contracts.............................................................. 5,136
Accounts receivable, principally due to allowance for uncollectible
accounts............................................................... 533
Other..................................................................... 186
------
Total deferred tax liabilities.................................... 5,855
------
Net deferred tax asset............................................ $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.
F-85
<PAGE> 217
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $1,470,000 during the year
ended December 31, 1994.
(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 181,041
shares during 1994 of which 41,755 and 47,454 were issued 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
F-86
<PAGE> 218
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
(Acquired by Barnett Mortgage Company on February 28, 1995)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-87
<PAGE> 219
================================================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS OR THE APPLICABLE PRICING SUPPLEMENT IN CONNECTION WITH THE OFFER
MADE BY THIS PROSPECTUS AND THE APPLICABLE PRICING SUPPLEMENT 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
OR THE APPLICABLE PRICING SUPPLEMENT NOR ANY SALE MADE HEREUNDER OR THEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN
ANY CHANGE IN THE AFFAIRS OF THE ISSUER SINCE THE DATE HEREOF OR THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS
PROSPECTUS AND THE APPLICABLE PRICING SUPPLEMENT 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 OR SOLICITATION 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
Available Information................... 2
Incorporation of Certain Documents by
Reference............................. 3
Prospectus Summary...................... 4
Risk Factors............................ 14
HomeSide................................ 20
Use of Proceeds......................... 22
Selected Consolidated Financial
Information........................... 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 29
Industry Overview....................... 52
Business................................ 55
The Acquisitions........................ 74
Management.............................. 76
Security Ownership of Certain Beneficial
Owners and Management................. 87
Certain Relationships and Related
Transactions.......................... 89
Description of Certain Indebtedness..... 94
Description of the Parent Notes......... 97
Description of Notes.................... 99
United States Federal Income Tax
Considerations........................ 120
Plan of Distribution.................... 127
Legal Matters........................... 128
Experts................................. 128
Index to Financial Statements........... F-1
</TABLE>
================================================================================
================================================================================
$750,000,000
[HOMESIDE LENDING LOGO]
MEDIUM-TERM NOTES
DUE NINE MONTHS OR MORE
FROM DATE OF ISSUE
----------------
PROSPECTUS
----------------
MERRILL LYNCH & CO.
CHASE SECURITIES INC.
J.P. MORGAN & CO.
NATIONSBANC MONTGOMERY
SECURITIES LLC
SALOMON SMITH BARNEY
UBS SECURITIES
FEBRUARY , 1998
================================================================================
<PAGE> 220
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. 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>
Aggregate registration fee under Securities Act................ $ 450,531
Legal fees..................................................... 752,500
Accounting fees................................................ 200,000
Printing and engraving......................................... 250,000
Miscellaneous.................................................. 96,969
----------
Total..................................................... $1,750,000
==========
</TABLE>
- ---------------
All amounts except the Registration fee are estimated.
ITEM 15. 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 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
II-1
<PAGE> 221
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 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits. Unless otherwise indicated, all Exhibits have been previously
filed or are incorporated by reference to the Parent's Registration Statement on
Form S-4, No. 333-06737.
1.1* Form of Distribution Agreement, as amended.
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(a)*** Opinion of Hutchins, Wheeler & Dittmar, A Professional
Corporation, regarding legality of the securities being
registered.
5.1(b)*** Opinion of Robert J. Jacobs, Esq., regarding certain matters
relating to Florida law.
II-2
<PAGE> 222
<TABLE>
<S> <C>
5.1(c)*** Opinion of Brown & Wood LLP, regarding certain matters relating
to New York law.
8.1 Opinion of Hutchins, Wheeler & Dittmar, A Professional
Corporation, regarding certain tax matters.
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.
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.
</TABLE>
II-3
<PAGE> 223
<TABLE>
<S> <C>
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 January 31, 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 January 31, 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 January 31, 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 January 31, 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 January 31, 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 January 31, 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 January 31, 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
January 31, 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
January 31, 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
January 31, 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.
</TABLE>
II-4
<PAGE> 224
<TABLE>
<S> <C>
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.
10.48 First Amendment dated February 28, 1997 to Loan and Security Agreement dated
January 15, 1997 between HomeSide Lending, Inc. and The Chase Manhattan Bank
10.49 Second Amendment dated March 31, 1997 to Loan and Security Agreement dated
January 15, 1997 between HomeSide Lending, Inc. and The Chase Manhattan Bank.
10.50 Loan and Security Agreement dated March 14, 1997 between HomeSide Lending,
Inc. and Merrill Lynch Mortgage Capital Inc.
10.51 First Amendment dated March 31, 1997 to Loan and Security Agreement dated
March 14, 1997 between HomeSide Lending, Inc. and Merrill Lynch Mortgage
Capital Inc.
10.52 Third Amendment dated April 11, 1997 to Loan and Security Agreement dated
January 15, 1997 between HomeSide Lending, Inc. and The Chase Manhattan Bank.
10.53 Second Amendment dated April 14, 1997 to Loan and Security Agreement dated
March 14, 1997 between HomeSide Lending, Inc. and Merrill Lynch Mortgage
Capital Inc.
10.54 Fourth Amendment dated April 29, 1997 to Loan and Security Agreement dated
January 15, 1997 between HomeSide Lending, Inc. and The Chase Manhattan Bank.
10.55 Third Amendment dated April 29, 1997 to Loan and Security Agreement dated
March 14, 1997 between HomeSide Lending, Inc. and Merrill Lynch Mortgage
Capital Inc.
10.56** Amendment dated as of September 30, 1997 to the Credit Agreement dated as of
January 31, 1997.
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.
</TABLE>
II-5
<PAGE> 225
<TABLE>
<S> <C>
23.1* Consent of Arthur Andersen LLP
23.2* Consent of Arthur Andersen LLP
23.3* Consent of Arthur Andersen LLP
23.4* Consent of Coopers & Lybrand L.L.P.
23.5* Consent of KPMG Peat Marwick LLP
23.6(a) Consent of Hutchins, Wheeler & Dittmar, A Professional Corporation (included
in Exhibit 5.1(a))
23.6(b) Consent of Robert J. Jacobs, Esq. (included in Exhibit 5.1(b))
23.6(c) Consent of Brown & Wood LLP (included in Exhibit 5.1(c))
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 The
Bank of New York.
27.1 Financial Data Schedule
</TABLE>
- ---------------
+ Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment to the Securities and Exchange Commission.
* Filed herewith.
** Incorporated by reference to the Parent's Quarterly Report on Form 10-Q for
the quarter ended November 30, 1997.
*** To be filed by amendment.
(b) Financial Statement Schedules.
Schedule II -- Valuation and Qualifying Accounts and Reserves For the year
ended December 31, 1995 For Barnett Mortgage Company (at page S-1).
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 15 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 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-6
<PAGE> 226
(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. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
20 percent change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
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.
provided however, that paragraphs (c)(l)(i) and (c)(1)(ii) do not apply if the
registration statement is on Form S-3, Form S-8 or Form F-3, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the Commission by the
registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference 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.
(4) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing
of the registrant's annual report pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 that is incorporated by reference in
the registration statement 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.
II-7
<PAGE> 227
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS POST-EFFECTIVE
AMENDMENT NO. 1 TO REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF JACKSONVILLE, STATE OF
FLORIDA, ON THE 4TH DAY OF FEBRUARY, 1998.
HOMESIDE LENDING, INC.
By: /s/ Joe K. Pickett
----------------------------------
JOE K. PICKETT
CHAIRMAN AND CHIEF EXECUTIVE
OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 1 to 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 4, 1998
- ---------------------------------------- Executive Officer and Director
JOE K. PICKETT (Principal Executive Officer)
/s/ Hugh R. Harris President, Chief Operating Officer February 4, 1998
- ---------------------------------------- and Director
HUGH R. HARRIS
/s/ Kevin D. Race Executive Vice President and Chief February 4, 1998
- ---------------------------------------- Financial Officer (Principal
KEVIN D. RACE Financial and Accounting
Officer)
/s/ Robert J. Jacobs Executive Vice President, February 4, 1998
- ---------------------------------------- Secretary, General Counsel and
ROBERT J. JACOBS Director
</TABLE>
II-8
<PAGE> 228
BARNETT MORTGAGE COMPANY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(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 -- -- -- -- --
</TABLE>
S-1
<PAGE> 229
BANCPLUS FINANCIAL CORPORATION AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEAR 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
</TABLE>
- ---------------
(a) Represents losses incurred on dispositions of foreclosure claims and VA
buydowns.
S-2
<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
HOMESIDE LENDING, INC.
(a Florida corporation)
$1,000,000,000
Medium-Term Notes due Nine Months or More from Date of Issue
DISTRIBUTION AGREEMENT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Dated: May 15, 1997, and amended as of February , 1998
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
DISTRIBUTION AGREEMENT..................................................................................... 1
SECTION 1. APPOINTMENT AS AGENT.............................................................. 3
(a) APPOINTMENT....................................................................... 3
(b) SALE OF NOTES..................................................................... 3
(c) PURCHASE AS PRINCIPAL............................................................. 3
(d) SOLICITATIONS AS AGENT............................................................ 3
(e) RELIANCE.......................................................................... 4
SECTION 2. REPRESENTATIONS AND WARRANTIES.................................................... 4
(a) REPRESENTATIONS AND WARRANTIES BY THE COMPANY..................................... 4
(i) COMPLIANCE WITH REGISTRATION REQUIREMENTS.................................... 4
(ii) INDEPENDENT ACCOUNTANTS..................................................... 5
(iii) INCORPORATED DOCUMENTS...................................................... 5
(iv) FINANCIAL STATEMENTS........................................................ 5
(v) NO MATERIAL ADVERSE CHANGE IN BUSINESS....................................... 6
(vi) GOOD STANDING OF THE COMPANY................................................ 6
(vii) GOOD STANDING OF SUBSIDIARIES.............................................. 6
(viii) CAPITALIZATION............................................................ 7
(ix) AUTHORIZATION ETC. OF THIS AGREEMENT, THE INDENTURE AND
THE NOTES................................................................ 7
(x) DESCRIPTIONS OF THE INDENTURE AND THE NOTES.................................. 8
(xi) ABSENCE OF DEFAULTS AND CONFLICTS........................................... 8
(xii) ABSENCE OF LABOR DISPUTE................................................... 8
(xiii) ABSENCE OF PROCEEDINGS.................................................... 9
(xiv) ACCURACY OF EXHIBITS....................................................... 9
(xv) NO STABILIZATION OR MANIPULATION............................................ 9
(xvi) ABSENCE OF FURTHER REQUIREMENTS............................................ 9
(xvii) POSSESSION OF LICENSES AND PERMITS........................................ 9
(xviii) TITLE TO PROPERTY........................................................ 10
(xix) INVESTMENT COMPANY ACT..................................................... 10
(xx) ENVIRONMENTAL LAWS.......................................................... 10
(xxi) COMMODITY EXCHANGE ACT..................................................... 11
(xxii) RATINGS................................................................... 11
(xxiii) REGISTRATION RIGHTS...................................................... 11
(xxiv) INTERNAL ACCOUNTING CONTROLS.............................................. 11
(xxv) POSSESSION OF INTELLECTUAL PROPERTY....................................... 11
(b) ADDITIONAL CERTIFICATION.......................................................... 11
SECTION 3. PURCHASE AS PRINCIPAL; SOLICITATIONS AS AGENT..................................... 12
(a) PURCHASE AS PRINCIPAL............................................................. 12
(b) SOLICITATIONS AS AGENT............................................................ 13
(c) ADMINISTRATIVE PROCEDURES......................................................... 13
SECTION 4. COVENANTS OF THE COMPANY.......................................................... 14
(a) COMPLIANCE WITH SECURITIES REGULATIONS AND COMMISSION
REQUESTS.......................................................................... 14
(b) FILING OF AMENDMENTS.............................................................. 14
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
(c) DELIVERY OF REGISTRATION STATEMENTS............................................... 14
(d) DELIVERY OF PROSPECTUSES.......................................................... 15
(e) CONTINUED COMPLIANCE WITH SECURITIES LAWS......................................... 15
(f) BLUE SKY QUALIFICATIONS........................................................... 15
(g) PREPARATION OF PRICING SUPPLEMENTS................................................ 16
(h) REVISIONS OF PROSPECTUS - MATERIAL CHANGES........................................ 16
(i) PROSPECTUS REVISIONS - PERIODIC FINANCIAL INFORMATION............................. 16
(j) PROSPECTUS REVISIONS - AUDITED FINANCIAL INFORMATION.............................. 16
(k) RULE 158.......................................................................... 17
(l) 1940 ACT.......................................................................... 17
(m) USE OF PROCEEDS................................................................... 17
(n) RESTRICTION ON OFFERS AND SALES OF NOTES.......................................... 17
(o) SUSPENSION OF CERTAIN OBLIGATIONS................................................. 17
(p) REPORTING REQUIREMENTS............................................................ 17
SECTION 5. CONDITIONS OF AGENTS' OBLIGATIONS................................................. 18
(a) EFFECTIVENESS OF REGISTRATION STATEMENT........................................... 18
(b) OPINION OF COUNSEL FOR COMPANY.................................................... 18
(c) OPINION OF GENERAL COUNSEL FOR COMPANY............................................ 18
(d) OPINION OF COUNSEL FOR AGENTS..................................................... 19
(e) OFFICERS' CERTIFICATE............................................................. 19
(f) ACCOUNTANTS' COMFORT LETTERS...................................................... 19
(g) ADDITIONAL DOCUMENTS.............................................................. 19
(h) TERMINATION OF AGREEMENT.......................................................... 20
SECTION 6. DELIVERY OF AND PAYMENT FOR NOTES SOLD THROUGH AN AGENT AS
AGENT............................................................................. 20
SECTION 7. ADDITIONAL COVENANTS OF THE COMPANY............................................... 20
(a) REAFFIRMATION OF REPRESENTATIONS AND WARRANTIES................................... 20
(b) SUBSEQUENT DELIVERY OF CERTIFICATES............................................... 20
(c) SUBSEQUENT DELIVERY OF LEGAL OPINIONS ............................................ 21
(d) SUBSEQUENT DELIVERY OF COMFORT LETTERS............................................ 21
SECTION 8. INDEMNIFICATION................................................................... 22
(a) INDEMNIFICATION OF THE AGENTS..................................................... 22
(b) INDEMNIFICATION OF COMPANY, DIRECTORS AND OFFICERS................................ 23
(c) ACTIONS AGAINST PARTIES; NOTIFICATION............................................. 23
(d) SETTLEMENT WITHOUT CONSENT IF FAILURE TO REIMBURSE................................ 24
SECTION 9. CONTRIBUTION...................................................................... 24
SECTION 10. PAYMENT OF EXPENSES............................................................... 25
(a) EXPENSES.......................................................................... 25
(b) TERMINATION OF AGREEMENT.......................................................... 26
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
SECTION 11. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE
DELIVERY.......................................................................... 27
SECTION 12. TERMINATION....................................................................... 27
(a) TERMINATION OF THIS AGREEMENT..................................................... 27
(b) TERMINATION OF AGREEMENT TO PURCHASE NOTES AS PRINCIPAL .......................... 27
(c) GENERAL........................................................................... 28
SECTION 13. NOTICES........................................................................... 28
SECTION 14. PARTIES........................................................................... 29
SECTION 15. GOVERNING LAW; FORUM.............................................................. 29
SECTION 16. EFFECT OF HEADINGS................................................................ 30
SECTION 17. COUNTERPARTS...................................................................... 30
SCHEDULES
Schedule A - Compensation Schedule........................................................Sch A-1
EXHIBITS
Exhibit A - Pricing Terms.................................................................Exh A-1
Exhibit B-1 - Form of Opinion of Company's Counsel......................................Exh B-1-1
Exhibit B-2 - Form of Opinion of Company's General Counsel..............................Exh B-2-1
</TABLE>
iii
<PAGE> 5
HOMESIDE LENDING, INC.
MEDIUM-TERM NOTES
DUE NINE MONTHS OR MORE FROM DATE OF ISSUE
DISTRIBUTION AGREEMENT
May 15, 1997, and amended as of February , 1998
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
CHASE SECURITIES INC.
J.P. MORGAN SECURITIES INC.
NATIONSBANC MONTGOMERY SECURITIES LLC
SALOMON BROTHERS INC
UBS SECURITIES LLC
as Agents
c/o Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
250 Vesey Street
New York, New York 10281-1209
Ladies and Gentlemen:
HomeSide Lending, Inc., a Florida corporation (the "Company"), confirms
its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"), Chase Securities Inc. ("Chase"), J.P. Morgan
Securities Inc. ("J.P. Morgan"), NationsBanc Montgomery Securities LLC
("NationsBanc"), Salomon Brothers Inc ("Salomon") and UBS Securities LLC
("UBS")(each an "Agent," and collectively, the "Agents") with respect to the
issue and sale by the Company of its Medium-Term Notes Due Nine Months or More
From Date of Issue (the "Notes"). The Notes are to be issued pursuant to an
Indenture, dated as of May 15, 1997, as amended or modified from time to time
(the "Indenture"), between the Company and The Bank of New York, as trustee (the
"Trustee"). As of the date of the initial execution and delivery of this
Agreement, the Company has authorized the issuance and sale of up to
U.S.$1,000,000,000 aggregate initial offering price of Notes to or through the
Agents pursuant to the terms of this Agreement. It is understood, however, that
the Company may from time to time authorize the issuance of additional Notes and
that such additional Notes may be sold to or through the Agents pursuant to the
terms of this Agreement, all as though the issuance of such Notes were
authorized as of the date hereof.
This Agreement provides both for the sale of Notes by the Company to
one or more Agents as principal for resale to investors and other purchasers and
for the sale of Notes by the
1
<PAGE> 6
Company directly to investors (as may from time to time be agreed to by the
Company and the applicable Agent), in which case the applicable Agent will act
as an agent of the Company in soliciting offers for the purchase of Notes.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-21193) and
pre-effective amendments nos. 1, 2, 3, 4 and 5 thereto and post-effective
amendment no. 1 thereto on Form S-3 for the registration of debt securities,
including the Notes, under the Securities Act of 1933, as amended (the "1933
Act"), and the offering thereof from time to time in accordance with Rule 415 of
the rules and regulations of the Commission under the 1933 Act (the "1933 Act
Regulations"), and the Company has filed such additional post-effective
amendments thereto as may be required prior to any acceptance by the Company of
an offer for the purchase of Notes and each such post-effective amendment has
been declared effective by the Commission. Such registration statement (as so
amended, if applicable) has been declared effective by the Commission and the
Indenture has been duly qualified under the Trust Indenture Act of 1939, as
amended (the "1939 Act"). To the extent required or permitted under the 1933 Act
and the 1933 Act Regulations, promptly after execution and delivery of this
Agreement and from time to time thereafter, the Company will either (i) prepare
and file a prospectus in accordance with the provisions of Rule 430A ("Rule
430A") of the rules and regulations of the Commission under the 1933 Act (the
"1933 Act Regulations") and/or paragraph (b) of Rule 424 ("Rule 424(b)") of the
1933 Act Regulations or (ii) if the Company has elected to rely upon Rule 434
("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a "Term
Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). The
information included in such prospectus or in such Term Sheet, as the case may
be, that was omitted from such registration statement at the time it became
effective but that is deemed to be part of such registration statement at the
time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred
to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is
referred to as "Rule 434 Information." Such registration statement, including
the exhibits thereto and schedules thereto at the time it became effective and
including the Rule 430A Information and the Rule 434 Information, as applicable,
and as amended by each post-effective amendment thereto, if any, is herein
called the "Registration Statement." Any registration statement filed pursuant
to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule
462(b) Registration Statement," and after such filing the term "Registration
Statement" shall include the Rule 462(b) Registration Statement. The final
prospectus and all applicable amendments or supplements thereto (including the
final prospectus supplement, pricing supplement and Rule 430A Information or
Rule 434 Information, relating to the offering of Notes, if any), in the form
first furnished to the applicable Agent(s), are collectively referred to herein
as the "Prospectus"; provided, however, that all references to the "Registration
Statement" and the "Prospectus" shall also be deemed to include all documents
incorporated therein by reference pursuant to the Securities Exchange Act of
1934, as amended (the "1934 Act"), prior to any acceptance by the Company of an
offer for the purchase of Notes. A "preliminary prospectus" shall be deemed to
refer to any prospectus used before the registration statement became effective
and any prospectus furnished by the Company after the registration statement
became effective and before any acceptance by the Company of an offer for the
purchase of Notes which omitted the relevant Rule 430A Information or Rule 434
Information. For purposes of this Agreement, all references to the Registration
Statement, Prospectus or preliminary prospectus or to any amendment or
supplement thereto shall be deemed to include any copy filed
2
<PAGE> 7
with the Commission pursuant to its Electronic Data Gathering, Analysis and
Retrieval system ("EDGAR").
All references in this Agreement to financial statements and schedules
and other information which is "disclosed", "contained", "included", or "stated"
(or other references of like import) in the Registration Statement, Prospectus
or preliminary prospectus shall be deemed to include all such financial
statements and schedules and other information which is incorporated by
reference in the Registration Statement, Prospectus or preliminary prospectus,
as the case may be; and all references in this Agreement to amendments or
supplements to the Registration Statement, prospectus or preliminary prospectus
shall be deemed to include the filing of any document under the 1934 Act which
is incorporated by reference in the Registration Statement, Prospectus or
preliminary prospectus, as the case may be.
SECTION 1. APPOINTMENT AS AGENT.
(a) APPOINTMENT. (i) Subject to the terms and conditions stated herein
and subject to the reservation by the Company of the right to sell Notes
directly on its own behalf, the Company hereby authorizes each Agent to act as
its agent to solicit offers for the purchase of all or part of the Notes from
the Company.
(ii) Notwithstanding anything to the contrary contained herein, the
Company, upon prior notice to the Agents, may authorize any other person,
partnership or corporation (an "Additional Agent") to act as its agent to
solicit offers for the purchase of all or part of the Notes and/or accept offers
to purchase Notes from any such Additional Agent, provided, however, that any
such Additional Agent shall have entered into an agreement with the Company upon
the same terms and conditions as set forth in this Agreement.
(b) SALE OF NOTES. The Company shall not sell or approve the
solicitation of offers for the purchase of Notes in excess of the amount which
shall be authorized by the Company from time to time or in excess of the
aggregate initial offering price of Notes registered pursuant to the
Registration Statement. The Agents shall have no responsibility for maintaining
records with respect to the aggregate initial offering price of Notes sold, or
of otherwise monitoring the availability of Notes for sale, under the
Registration Statement.
(c) PURCHASES AS PRINCIPAL. The Agents shall not have any obligation to
purchase Notes from the Company as principal. However, absent an agreement
between an Agent and the Company that such Agent shall be acting solely as an
agent for the Company, such Agent shall be deemed to be acting as principal in
connection with any offering of Notes by the Company through such Agent.
Accordingly, the Agents, individually or in a syndicate, may agree from time to
time to purchase Notes from the Company as principal for resale to investors and
other purchasers determined by such Agents. Any purchase of Notes from the
Company by an Agent as principal shall be made in accordance with Section 3(a)
hereof.
(d) SOLICITATIONS AS AGENT. If agreed upon between an Agent and the
Company, such Agent, acting solely as an agent for the Company and not as
principal, will solicit offers for the
3
<PAGE> 8
purchase of Notes. Such Agent will communicate to the Company, orally, each
offer for the purchase of Notes solicited by it on an agency basis other than
those offers rejected by such Agent. Such Agent shall have the right, in its
discretion reasonably exercised, to reject any offer for the purchase of Notes,
in whole or in part, and any such rejection shall not be deemed a breach of its
agreement contained herein. The Company may accept or reject any offer for the
purchase of Notes, in whole or in part. Such Agent shall make reasonable efforts
to assist the Company in obtaining performance by each purchaser whose offer for
the purchase of Notes has been solicited by it on an agency basis and accepted
by the Company. Such Agent shall not have any liability to the Company in the
event that any such purchase is not consummated for any reason. If the Company
shall default on its obligation to deliver Notes to a purchaser whose offer has
been solicited by such Agent on an agency basis and accepted by the Company, the
Company shall (i) hold such Agent harmless against any loss, claim or damage
arising from or as a result of such default by the Company and (ii) pay to such
Agent any commission to which it would otherwise be entitled absent such
default.
(e) RELIANCE. The Company and the Agents agree that any Notes purchased
from the Company by one or more Agents as principal shall be purchased, and any
Notes the placement of which an Agent arranges as an agent of the Company shall
be placed by such Agent, in reliance on the representations, warranties,
covenants and agreements of the Company contained herein and on the terms and
conditions and in the manner provided herein.
SECTION 2. REPRESENTATIONS AND WARRANTIES.
(a) REPRESENTATION AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to each Agent as of the date hereof, as of the date of
each acceptance by the Company of an offer for the purchase of Notes (whether to
such Agent as principal or through such Agent as agent), as of the date of each
delivery of Notes (whether to such Agent as principal or through such Agent as
agent) (the date of each such delivery to such Agent as principal is referred to
herein as a "Settlement Date"), and as of any time that the Registration
Statement or the Prospectus shall be amended or supplemented (each of the times
referenced above is referred to herein as a "Representation Date"), as follows:
(i) COMPLIANCE WITH REGISTRATION REQUIREMENTS. The Company
meets the requirements for use of Form S-3 under the 1933 Act. Each of
the Registration Statement and any Rule 462(b) Registration Statement
has become effective under the 1933 Act and no stop order suspending
the effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or, to
the knowledge of the Company, are contemplated by the Commission, and
any request on the part of the Commission for additional information
has been complied with. The Indenture has been duly qualified under the
1939 Act.
At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments thereto
(including the filing of the Company's most recent Annual Report on
Form 10-K with the Commission) became effective and at each
Representation Date, the Registration Statement, the Rule 462(b)
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Registration Statement and any amendments and supplements thereto
complied and will comply in all material respects with the requirements
of the 1933 Act and the 1933 Act Regulations and the 1939 Act and the
rules and regulations of the Commission under the 1939 Act (the "1939
Act Regulations"), and did not and will not contain an untrue statement
of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading. Neither the Prospectus nor any amendments or supplements
thereto, at the time the Prospectus or any such amendment or supplement
was issued and at each Representation Date, included or will include an
untrue statement of a material fact or omitted or will omit to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
If Rule 434 is used, the Company will comply with the requirements of
Rule 434 and the Prospectus shall not be "materially different", as
such term is used in Rule 434, from the prospectus included in the
Registration Statement at the time it became effective. The
representations and warranties in this subsection shall not apply to
statements in or omissions from the Registration Statement or
Prospectus made in reliance upon and in conformity with information
furnished to the Company in writing by any Agent(s) expressly for use
in the Registration Statement or Prospectus.
Each preliminary prospectus and the prospectus filed as part
of the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the 1933 Act,
complied when so filed in all material respects with the 1933 Act
Regulations and each preliminary prospectus and the Prospectus
delivered to the Agents for use in connection with this offering was
identical to the electronically transmitted copies thereof filed with
the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(ii) INCORPORATED DOCUMENTS. The documents incorporated
or deemed to be incorporated by reference in the Prospectus, at the
time they were or hereafter are filed with the Commission, complied and
will comply in all material respects with the requirements of the 1934
Act and the rules and regulations of the Commission under the 1934 Act
(the "1934 Act Regulations") and, when read together with the other
information in the Prospectus, at the date hereof, at the date of the
Prospectus and at each Representation Date, did not and will not
include an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
(iii) INDEPENDENT ACCOUNTANTS. The accountants, Arthur
Andersen LLP, Coopers & Lybrand L.L.P. and KPMG Peat Marwick LLP, each
of whom certified certain financial statements and supporting schedules
thereto included in the Registration Statement and the Prospectus, are
independent public accountants as required by the 1933 Act and the 1933
Act Regulations.
(iv) FINANCIAL STATEMENTS. The financial statements
included in the Registration Statement and the Prospectus, together
with the related schedules and notes, present fairly (a) the financial
position of (1) the Company and its consolidated
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subsidiaries, (2) BancBoston Mortgage Corporation and its consolidated
subsidiaries, (3) HomeSide Holdings, Inc. (formerly known as Barnett
Mortgage Company) and its consolidated subsidiaries and (4) BancPLUS
Financial Corporation and its consolidated subsidiaries, in each case
at the dates indicated and (b) the results of operations, stockholders'
equity and cash flows of (1) the Company and its consolidated
subsidiaries, (2) BancBoston Mortgage Corporation and its consolidated
subsidiaries, (3) HomeSide Holdings, Inc. and its consolidated
subsidiaries and (4) BancPLUS Financial Corporation and its
consolidated subsidiaries, in each case for the periods specified; said
financial statements have been prepared in conformity with generally
accepted accounting principles ("GAAP") applied on a consistent basis
throughout the periods involved. The supporting schedules included in
the Registration Statement present fairly in accordance with GAAP the
information required to be stated therein. The selected financial data
and the summary financial information included in the Registration
Statement and the Prospectus present fairly the information shown
therein and have been compiled on a basis consistent with that of the
audited financial statements included in the Registration Statement and
the Prospectus. The pro forma financial statements and the related
notes thereto and other pro forma financial information included in the
Registration Statement and the Prospectus present fairly the
information shown therein, have been prepared in accordance with the
Commission's rules and guidelines with respect to pro forma financial
statements and have been properly compiled on the bases described
therein, and the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate to give
effect to the transactions and circumstances referred to therein.
(v) NO MATERIAL ADVERSE CHANGE IN BUSINESS. Since the
respective dates as of which information is given in the Registration
Statement and the Prospectus, except as otherwise stated therein or
contemplated thereby, (A) there has been no material adverse change in
the condition, financial or otherwise, or in the earnings, business
affairs or business prospects of the Company and its subsidiaries
considered as one enterprise, whether or not arising in the ordinary
course of business (a "Material Adverse Effect"), (B) there have been
no transactions entered into by the Company or any of its subsidiaries,
other than those in the ordinary course of business, which are material
with respect to the Company and its subsidiaries considered as one
enterprise, and (C) there has been no dividend or distribution of any
kind declared, paid or made by the Company on any class of its capital
stock.
(vi) GOOD STANDING OF THE COMPANY. The Company has been
duly organized and is validly existing as a corporation in good
standing under the laws of the State of Florida and has corporate power
and authority to own, lease and operate its properties and to conduct
its business as described in the Prospectus, to enter into and perform
its obligations under this Agreement and to consummate the transactions
contemplated in the Prospectus; the Company is duly qualified as a
foreign corporation to transact business and is in good standing in
each jurisdiction in which such qualification is required, whether by
reason of the ownership or leasing of property or the conduct of
business, except where the failure to so qualify or be in good standing
would not result in a Material Adverse Effect.
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(vii) GOOD STANDING OF SUBSIDIARIES. Each subsidiary
(either direct or indirect) of the Company has been duly organized and
is validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, has corporate power and
authority to own, lease and operate its properties and conduct its
business as described in the Prospectus and is duly qualified as a
foreign corporation to transact business and is in good standing in
each jurisdiction in which such qualification is required, whether by
reason of the ownership or leasing of property or the conduct of
business, except where the failure so to qualify or to be in good
standing would not result in a Material Adverse Effect; except as
stated in the Registration Statement and the Prospectus, all of the
issued and outstanding shares of capital stock of each subsidiary of
the Company has been duly authorized and validly issued, is fully paid
and non-assessable and is owned by the Company, directly or through
subsidiaries, free and clear of any security interest, mortgage,
pledge, lien, encumbrance, claim or equity; and none of the outstanding
shares of capital stock of any such subsidiary was issued in violation
of preemptive or other similar rights of any securityholder of such
subsidiary. The only subsidiaries of the Company are (a) the
subsidiaries listed on Exhibit 21 to the Registration Statement and (b)
certain other subsidiaries which, considered in the aggregate as a
single subsidiary, do not constitute a "significant subsidiary" as
defined in Rule 1-02 of Regulation S-X.
(viii) CAPITALIZATION. If applicable, the authorized, issued
and outstanding capital stock of the Company is as set forth in the
Prospectus as of the date specified therein under the caption
"Capitalization" (except for subsequent issuances, if any, pursuant to
this Agreement, pursuant to reservations, agreements or employee
benefit plans referred to in the Prospectus). The shares of issued and
outstanding capital stock of the Company have been duly authorized and
validly issued and are fully paid and non-assessable; none of the
outstanding shares of capital stock of the Company was issued in
violation of the preemptive or other similar rights of any
securityholder of the Company.
(ix) AUTHORIZATION, ETC. OF THIS AGREEMENT, THE
INDENTURE AND THE NOTES. This Agreement has been duly authorized,
executed and delivered by the Company; the Indenture has been duly
authorized, executed and delivered by the Company and will be a valid
and legally binding agreement of the Company, enforceable against the
Company in accordance with its terms, except as enforcement thereof may
be limited by (1) bankruptcy, insolvency, reorganization, moratorium
or other similar laws affecting the enforcement of creditors' rights
generally, (2) general equitable principles (regardless of whether
enforcement is considered in a proceeding in equity or at law), (3)
requirements that a claim with respect to any debt securities issued
under the Indenture that are payable in a foreign or composite currency
(or a foreign or composite currency judgment in respect of such claim)
be converted into U.S. dollars at a rate of exchange prevailing on a
date determined pursuant to applicable law or (4) governmental
authority to limit, delay or prohibit the making of payments outside
the United States; the Notes have been duly authorized by the Company
for offer, sale, issuance and delivery pursuant to this Agreement and,
when issued, authenticated and delivered in the manner provided for in
the Indenture and delivered against payment of the consideration
therefor, will constitute valid and legally binding obligations of the
Company, enforceable against the Company in accordance with their
terms, except as enforcement thereof may be limited by (1) bank-
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ruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights generally, (2) general
equitable principles (regardless of whether enforcement is considered
in a proceeding in equity or at law), (3) requirements that a claim
with respect to any Notes payable in a foreign or composite currency
(or a foreign or composite currency judgment in respect of such claim)
be converted into U.S. dollars at a rate or exchange prevailing on a
date determined pursuant to applicable law or (4) governmental
authority to limit, delay or prohibit the making of payments outside
the United States; the Notes will be substantially in a form previously
certified to the Agents and contemplated by the Indenture; and each
holder of Notes will be entitled to the benefits of the Indenture.
(x) DESCRIPTIONS OF THE INDENTURE AND THE NOTES. The
Indenture and the Notes conform and will conform in all material
respects to the statements relating thereto contained in the Prospectus
and are substantially in the form filed or incorporated by reference,
as the case may be, as an exhibit to the Registration Statement.
(xi) ABSENCE OF DEFAULTS AND CONFLICTS. Neither the
Company nor any of its subsidiaries is in violation of the provisions
of its charter or by-laws or in default in the performance or
observance of any obligation, agreement, covenant or condition
contained in any contract, indenture, mortgage, deed of trust, loan or
credit agreement, note, lease or other agreement or instrument to which
the Company or any of its subsidiaries is a party or by which it or any
of them may be bound or to which any of the property or assets of the
Company or any of its subsidiaries is subject (collectively,
"Agreements and Instruments"), except for such defaults that would not
result in a Material Adverse Effect; and the execution, delivery and
performance of this Agreement, the Indenture, the Notes and any other
agreement or instrument entered into or issued or to be entered into or
issued by the Company in connection with the transactions contemplated
by the Prospectus, the consummation of the transactions contemplated in
the Prospectus (including the issuance and sale of the Notes and the
use of proceeds therefrom as described in the Prospectus under the
caption "Use of Proceeds") and the compliance by the Company with its
obligations hereunder and under the Indenture, the Notes and such other
agreements or instruments have been duly authorized by all necessary
corporate action and do not and will not, whether with or without the
giving of notice or the passage of time or both, conflict with or
constitute a breach of, or default or Repayment Event (as defined
below) under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or any
of its subsidiaries pursuant to, the Agreements and Instruments (except
for such conflicts, breaches or defaults or liens, charges or
encumbrances that would not result in a Material Adverse Effect), nor
will such action result in any violation of the provisions of the
charter or by-laws of the Company or any of its subsidiaries or any
applicable law, statute, rule, regulation, judgment, order, writ or
decree of any government, government instrumentality or court, domestic
or foreign, having jurisdiction over the Company or any of its
subsidiaries or any of their assets, properties or operations. As used
herein, a "Repayment Event" means any event or condition which gives
the holder of any note, debenture or other evidence of indebtedness (or
any person acting on such holder's behalf) the right
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to require the repurchase, redemption or repayment of all or a portion
of such indebtedness by the Company or any of its subsidiaries.
(xii) ABSENCE OF LABOR DISPUTES. No labor dispute with
the employees of the Company or any of its subsidiaries exists or, to
the knowledge of the Company, is imminent, which, in either case, may
reasonably be expected to result in a Material Adverse Effect.
(xiii) ABSENCE OF PROCEEDINGS. There is no action, suit,
proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, domestic or foreign, now pending, or to
the knowledge of the Company threatened, against or affecting the
Company or any of its subsidiaries which is required to be disclosed in
the Registration Statement and the Prospectus (other than as stated
therein), or which might reasonably be expected to result in a Material
Adverse Effect, or which might reasonably be expected to materially and
adversely affect the assets, properties or operations thereof, the
performance by the Company of its obligations under this Agreement, the
Indenture and the Notes or the consummation of the transactions
contemplated in the Prospectus; and the aggregate of all pending legal
or governmental proceedings to which the Company or any of its
subsidiaries is a party or of which any of their respective assets,
properties or operations is the subject which are not described in the
Registration Statement and the Prospectus, including ordinary routine
litigation incidental to the business, could not reasonably be expected
to result in a Material Adverse Effect.
(xiv) ACCURACY OF EXHIBITS. There are no contracts or
documents which are required to be described in the Registration
Statement, the Prospectus or the documents incorporated by reference
therein or to be filed as exhibits thereto which have not been so
described and filed as required.
(xv) NO STABILIZATION OR MANIPULATION. Neither the Company nor
any of its subsidiaries has taken or will take, directly or indirectly,
any action designed to, or that might be reasonably expected to, cause
or result in stabilization or manipulation of the price of any security
of the Company to facilitate the sale or resale of the Notes.
(xvi) ABSENCE OF FURTHER REQUIREMENTS. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or
agency or quasi-governmental agency (including the Federal Home Loan
Mortgage Corporation ("FHLMC"), Fannie Mae (formerly known as the
Federal National Mortgage Association), the Government National
Mortgage Association ("GNMA"), the Federal Housing Administration
("FHA") and the Veterans Administration ("VA")) is necessary or
required for the performance by the Company of its obligations
hereunder, in connection with the offering, issuance or sale of the
Notes hereunder or the consummation of the transactions contemplated by
this Agreement, except such as have been already obtained or as may be
required under the 1933 Act or the 1933 Act Regulations or the
securities or "blue sky" laws of the various states.
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(xvii) POSSESSION OF LICENSES AND PERMITS. The Company and
its subsidiaries possess such permits, licenses, approvals, consents
and other authorizations (collectively, "Governmental Licenses") issued
by the appropriate federal, state, local or foreign regulatory or
quasi-governmental agencies or bodies (including FHLMC, Fannie Mae,
GNMA, FHA and VA) necessary to conduct the business now operated by
them, except where the failure so to possess such Governmental Licenses
would not, singly or in the aggregate, have a Material Adverse Effect;
the Company and its subsidiaries are in compliance with the terms and
conditions of all such Governmental Licenses, except where the failure
so to comply would not, singly or in the aggregate, have a Material
Adverse Effect; all of the Governmental Licenses are valid and in full
force and effect, except when the invalidity of such Governmental
Licenses or the failure of such Governmental Licenses to be in full
force and effect would not have a Material Adverse Effect; and neither
the Company nor any of its subsidiaries has received any notice of
proceedings relating to the revocation or modification of any such
Governmental Licenses which, singly or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, would result in a
Material Adverse Effect.
(xviii) TITLE TO PROPERTY. The Company and its subsidiaries
have good and marketable title to all properties and assets described
in the Prospectus as owned by the Company and its subsidiaries, free
and clear of all mortgages, pledges, liens, security interests, claims,
restrictions or encumbrances of any kind, except (A) as otherwise
stated in the Registration Statement and the Prospectus or (B) those
which do not, singly or in the aggregate, materially affect the value
of such property or asset and do not interfere with the use made and
proposed to be made of such property or asset by the Company or any of
its subsidiaries; and all of the leases and subleases material to the
business of the Company and its subsidiaries considered as one
enterprise, and under which the Company or any of its subsidiaries
holds properties or assets described in the Prospectus, are in full
force and effect, and neither the Company nor any of its subsidiaries
has any notice of any material claim of any sort that has been asserted
by anyone adverse to the rights of the Company or any of its
subsidiaries under any of such leases or subleases, or affecting or
questioning the rights of the Company or such subsidiary to the
continued possession of the leased or subleased premises under any such
lease or sublease.
(xix) INVESTMENT COMPANY ACT. The Company is not, and
upon the issuance and sale of the Notes as herein contemplated and the
application of the net proceeds therefrom as described in the
Prospectus will not be, an "investment company" or an entity
"controlled" by an "investment company" as such terms are defined in
the Investment Company Act of 1940, as amended (the "1940 Act").
(xx) ENVIRONMENTAL LAWS. Except as otherwise stated in
the Registration Statement and the Prospectus and except as would not,
singly or in the aggregate, result in a Material Adverse Effect, (A)
neither the Company nor any of its subsidiaries is in violation of any
federal, state, local or foreign statute, law, rule, regulation,
ordinance, code, policy or rule of common law or any judicial or
administrative interpretation thereof including any judicial or
administrative order, consent, decree or judgment, relating to
pollution or protection of human health, the environment (including,
without limitation,
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ambient air, surface water, groundwater, land surface or subsurface
strata) or wildlife, including, without limitation, laws and
regulations relating to the release or threatened release of chemicals,
pollutants, contaminants, wastes, toxic substances, hazardous
substances, petroleum or petroleum products (collectively, "Hazardous
Materials") or to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of Hazardous
Materials (collectively, "Environmental Laws"), (B) the Company and its
subsidiaries have all permits, authorizations and approvals required
under any applicable Environmental Laws and are each in compliance with
their requirements, (C) there are no pending or threatened
administrative, regulatory or judicial actions, suits, demands, demand
letters, claims, liens, notices of noncompliance or violation,
investigation or proceedings relating to any Environmental Law against
the Company or any of its subsidiaries and (D) there are no events or
circumstances that might reasonably be expected to form the basis of an
order for clean-up or remediation, or an action, suit or proceeding by
any private party or governmental body or agency, against or affecting
the Company or any of its subsidiaries relating to Hazardous Materials
or any Environmental Laws.
(xxi) COMMODITY EXCHANGE ACT. The Notes, upon issuance,
will be excluded or exempted under, or beyond the purview of, the
Commodity Exchange Act, as amended (the "Commodity Exchange Act"), and
the rules and regulations of the Commodity Futures Trading Commission
under the Commodity Exchange Act (the "Commodity Exchange Act
Regulations").
(xxii) RATINGS. The Medium-Term Note Program under which
the Notes are issued (the "Program"), as well as the Notes, are rated
Baa2 by Moody's Investors Service, Inc. and BBB by Standard & Poor's
Ratings Service, or such other rating as to which the Company shall
have most recently notified the Agents pursuant to Section 4(a) hereof.
(xxiii) REGISTRATION RIGHTS. There are no persons with
registration rights or other similar rights to have any securities
registered pursuant to the Registration Statement or otherwise
registered by the Company under the 1933 Act.
(xxiv) INTERNAL ACCOUNTING CONTROLS. The Company and its
subsidiaries each maintain a system of internal accounting controls
sufficient to provide reasonable assurance that (A) transactions are
executed in accordance with management's general and specific
authorization, (B) transactions are recorded as necessary to permit
preparation of financial statements in conformity with GAAP and to
maintain accountability for assets, (C) access to assets is permitted
only in accordance with management's general and specific
authorization, and (D) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences. The
Company and its subsidiaries have not made, and, to the knowledge of
the Company, no employee or agent of the Company or any of its
subsidiaries has made, any payment of the Company's or any of its
subsidiaries' funds or received or retained any funds in violation of
any applicable law, regulation or rule or that would be required to be
disclosed in the Prospectus.
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(xxv) POSSESSION OF INTELLECTUAL PROPERTY. The Company
and its subsidiaries own or possess, or can acquire on reasonable
terms, adequate patents, patent rights, licenses, inventions,
copyrights, know-how (including trade secrets and other unpatented
and/or unpatentable proprietary or confidential information, software,
systems or procedures), trademarks, service marks, trade names or other
intellectual property (collectively, "Intellectual Property") necessary
to carry on the business now operated by them, and neither the Company
nor any of its subsidiaries has received any notice or is otherwise
aware of any infringement of or conflict with asserted rights of others
with respect to any Intellectual Property or of any facts or
circumstances which would render any Intellectual Property invalid or
inadequate to protect the interest of the Company or any of its
subsidiaries therein, and which infringement or conflict (if the
subject of any unfavorable decision, ruling or finding) or invalidity
or inadequacy, singly or in the aggregate, would result in a Material
Adverse Effect.
(b) ADDITIONAL CERTIFICATION. Any certificate signed by any officer of
the Company or any of its subsidiaries and delivered to one or more Agents or to
counsel for the Agents in connection with an offering of Notes to one or more
Agents as principal or through an Agent as agent shall be deemed a
representation and warranty by the Company to such Agent or Agents as to the
matters covered thereby on the date of such certificate and, unless subsequently
amended or supplemented, at each Representation Date subsequent thereto.
SECTION 3. PURCHASES AS PRINCIPAL; SOLICITATIONS AS AGENT.
(a) PURCHASES AS PRINCIPAL. Purchases of Notes from the Company by the
Agents, individually or in a syndicate, as principal shall be made in accordance
with terms agreed upon between such Agent or Agents and the Company (which
terms, unless otherwise agreed, shall, to the extent applicable, include those
terms specified in Exhibit A hereto and shall be agreed upon orally, with
written confirmation prepared by such Agent or Agents and mailed to the
Company). An Agent's commitment to purchase Notes as principal shall be deemed
to have been made on the basis of the representations and warranties of the
Company herein contained and shall be subject to the terms and conditions herein
set forth. Unless the context otherwise requires, references herein to "this
Agreement" shall include the applicable agreement of one or more Agents to
purchase Notes from the Company as principal. Each purchase of Notes, unless
otherwise agreed, shall be at a discount from the principal amount of each such
Note equivalent to the applicable commission set forth in Schedule A hereto. The
Agents may engage the services of any broker or dealer in connection with the
resale of the Notes purchased by them as principal and may allow all or any
portion of the discount received from the Company in connection with such
purchases to such brokers or dealers. At the time of each purchase of Notes from
the Company by one or more Agents as principal, such Agent or Agents shall
specify the requirements for the officers' certificate, opinion of counsel and
comfort letter pursuant to Sections 7(b), 7(c) and 7(d) hereof.
If the Company and two or more Agents enter into an agreement pursuant
to which such Agents agree to purchase Notes from the Company as principal and
one or more of such Agents shall fail at the relevant Settlement Date to
purchase the Notes which it or they are obligated to purchase (the "Defaulted
Notes"), then the nondefaulting Agents shall have the right, within 24
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hours thereafter, to make arrangements for one of them or one or more other
Agents or underwriters to purchase all, but not less than all, of the Defaulted
Notes in such amounts as may be agreed upon and upon the terms herein set forth;
provided, however, that if such arrangements shall not have been completed
within such 24-hour period, then:
(A) if the aggregate principal amount of Defaulted Notes does
not exceed 10% of the aggregate principal amount of Notes to be so
purchased by all of such Agents on such Settlement Date, the
nondefaulting Agents shall be obligated, severally and not jointly, to
purchase the full amount thereof in the proportions that their
respective initial underwriting obligations bear to the underwriting
obligations of all nondefaulting Agents; or
(B) if the aggregate principal amount of Defaulted Notes
exceeds 10% of the aggregate principal amount of Notes to be so
purchased by all of such Agents on such Settlement Date, such agreement
shall terminate without liability on the part of any nondefaulting
Agent.
No action taken pursuant to this paragraph shall relieve any defaulting Agent
from liability in respect of its default. In the event of any such default which
does not result in a termination of such agreement, either the nondefaulting
Agents or the Company shall have the right to postpone the relevant Settlement
Date for a period not exceeding seven days in order to effect any required
changes in the Registration Statement or the Prospectus or in any other
documents or arrangements.
(b) SOLICITATIONS AS AGENT. On the basis of the representations and
warranties herein contained, but subject to the terms and conditions herein set
forth, when agreed by the Company and an Agent, such Agent, as an agent of the
Company, will use its reasonable efforts to solicit offers for the purchase of
Notes upon the terms set forth in the Prospectus. The Agents are not authorized
to appoint sub-agents with respect to Notes sold through them as agent. All
Notes sold through an Agent as agent will be sold at 100% of their principal
amount unless otherwise agreed upon between the Company and such Agent.
The Company reserves the right, in its sole discretion, to suspend
solicitation of offers for the purchase of Notes through an Agent, as an agent
of the Company, commencing at any time for any period of time or permanently. As
soon as practicable after receipt of instructions from the Company, such Agent
will suspend solicitation of offers for the purchase of Notes from the Company
until such time as the Company has advised such Agent that such solicitation may
be resumed.
The Company agrees to pay each Agent a commission, in the form of a
discount, equal to the applicable percentage of the principal amount of each
Note sold by the Company as a result of a solicitation made by such Agent, as an
agent of the Company, as set forth in Schedule A hereto.
(c) ADMINISTRATIVE PROCEDURES. The purchase price, interest rate or
formula, maturity date and other terms of the Notes specified in Exhibit A
hereto (as applicable) shall be agreed
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upon between the Company and the applicable Agent(s) and specified in a pricing
supplement to the Prospectus (each, a "Pricing Supplement") to be prepared by
the Company in connection with each sale of Notes. Except as otherwise specified
in the applicable Pricing Supplement, the Notes will be issued in denominations
of U.S. $1,000 or any larger amount that is an integral multiple of U.S. $1,000.
Administrative procedures with respect to the issuance and sale of the Notes
(the "Procedures") shall be agreed upon from time to time among the Company, the
Agents and the Trustee. The Agents and the Company agree to perform, and the
Company agrees to cause the Trustee to agree to perform, their respective duties
and obligations specifically provided to be performed by them in the Procedures.
SECTION 4. COVENANTS OF THE COMPANY.
The Company covenants and agrees with each Agent as follows:
(a) COMPLIANCE WITH SECURITIES REGULATIONS AND COMMISSION REQUESTS. The
Company, subject to Section 4(b), will comply with the requirements of Rule 430A
or Rule 434, as applicable, and will notify the Agents immediately, and confirm
the notice in writing, (i) when any post-effective amendment to the Registration
Statement shall become effective, or any supplement to the Prospectus or any
amended Prospectus shall have been filed, (ii) of the receipt of any comments
from the Commission, (iii) of any request by the Commission for any amendment to
the Registration Statement or any amendment or supplement to the Prospectus or
for additional information, (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or of any order
preventing or suspending the use of any preliminary prospectus, or of the
suspension of the qualification of the Notes for offering or sale in any
jurisdiction, or of the initiation or threatening of any proceedings for any of
such purposes, or (v) any change in the rating assigned by any nationally
recognized statistical rating organization to the Program or any debt securities
(including the Notes) of the Company, or the public announcement by any
nationally recognized statistical rating organization that it has under
surveillance or review, with possible negative implications, its rating of the
Program or any such debt securities, or the withdrawal by any nationally
recognized statistical rating organization of its rating of the Program or any
such debt securities. The Company will promptly effect the filings necessary
pursuant to Rule 424(b) and will take such steps as it deems necessary to
ascertain promptly whether the form of Prospectus transmitted for filing under
Rule 424(b) was received for filing by the Commission and, in the event that it
was not, it will promptly file such Prospectus. The Company will make every
reasonable effort to prevent the issuance of any stop order and, if any stop
order is issued, to obtain the lifting thereof at the earliest possible moment.
(b) FILING OF AMENDMENTS. The Company will give the Agents advance
notice of its intention to file or prepare any additional registration statement
with respect to the registration of additional Notes, any amendment to the
Registration Statement (including any filing under Rule 462(b)) or any amendment
or supplement to the prospectus included in the Registration Statement at the
time it became effective or to the Prospectus (other than an amendment or
supplement thereto providing solely for the determination of the variable terms
of the Notes or relating solely to the offering of securities other than the
Notes), whether pursuant to the 1933 Act, the 1934 Act or otherwise, will
furnish to the Agents copies of any such document a
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reasonable amount of time prior to such proposed filing or use, as the case may
be, and will not file any such document to which the Agents or counsel for the
Agents shall reasonably object.
(c) DELIVERY OF REGISTRATION STATEMENTS. The Company has furnished or
will deliver to each Agent and counsel for the Agents, without charge, signed
and conformed copies of the Registration Statement as originally filed and of
each amendment thereto (including exhibits filed therewith or incorporated by
reference therein and documents incorporated or deemed to be incorporated by
reference therein) and signed and conformed copies of all consents and
certificates of experts. The Registration Statement and each amendment thereto
furnished to the Agents will be identical to the electronically transmitted
copies thereof filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T.
(d) DELIVERY OF PROSPECTUSES. The Company will deliver to each Agent,
without charge, as many copies of each preliminary prospectus as such Agent may
reasonably request, and the Company hereby consents to the use of such copies
for purposes permitted by the 1933 Act. The Company will furnish to each Agent,
without charge, during the period when the Prospectus is required to be
delivered under the 1933 Act or the 1934 Act, such number of copies of the
Prospectus (as amended or supplemented) as such Agent may reasonably request.
The Prospectus and any amendments or supplements thereto furnished to the Agents
will be identical to the electronically transmitted copies thereof filed with
the Commission pursuant to EDGAR, except to the extent permitted by Regulation
S-T.
(e) CONTINUED COMPLIANCE WITH SECURITIES LAWS. The Company will comply
with the 1933 Act and the 1933 Act Regulations so as to permit the completion of
the distribution of the Notes as contemplated in this Agreement and in the
Prospectus. If at any time when a Prospectus is required by the 1933 Act to be
delivered in connection with sales of the Notes any event shall occur or
condition shall exist as a result of which it is necessary, in the opinion of
counsel for the Agents or for the Company, to amend the Registration Statement
or amend or supplement the Prospectus in order that the Prospectus will not
include any untrue statements of a material fact or omit to state a material
fact necessary in order to make the statements therein not misleading in the
light of the circumstances existing at the time it is delivered to a purchaser,
or if it shall be necessary, in the opinion of such counsel, at any such time to
amend the Registration Statement or amend or supplement the Prospectus in order
to comply with the requirements of the 1933 Act or the 1933 Act Regulations, the
Company will promptly prepare and file with the Commission, subject to Section
4(b), such amendment or supplement as may be necessary to correct such statement
or omission or to make the Registration Statement or the Prospectus comply with
such requirements, and the Company will furnish to the Agents such number of
copies of such amendment or supplement as the Agents may reasonably request.
(f) BLUE SKY QUALIFICATIONS. The Company will use its best efforts, in
cooperation with the Agents, to qualify the Notes for offering and sale under
the applicable securities laws of such states and other jurisdictions (domestic
or foreign) as the Agents may designate and to maintain such qualifications in
effect for as long as may be required for the distribution of the Notes;
provided, however, that the Company shall not be obligated to file any general
consent to service of process or to qualify as a foreign corporation or as a
dealer in securities in any jurisdiction in which it is not so qualified or to
subject itself to taxation in respect of doing
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business in any jurisdiction in which it is not otherwise so subject. In each
jurisdiction in which the Notes have been so qualified, the Company will file
such statements and reports as may be required by the laws of such jurisdiction
to continue such qualification in effect for as long as may be required for the
distribution of the Notes.
(g) PREPARATION OF PRICING SUPPLEMENTS. The Company will prepare, with
respect to any Notes to be sold to or through one or more Agents pursuant to
this Agreement, a Pricing Supplement with respect to such Notes in a form
previously approved by the Agents. The Company will deliver such Pricing
Supplement no later than 11:00 a.m., New York City time, on the business day
following the date of the Company's acceptance of the offer for the purchase of
such Notes and will file such Pricing Supplement pursuant to Rule 424(b)(3)
under the 1933 Act not later than the close of business of the Commission on the
fifth business day after the date on which such Pricing Supplement is first
used.
(h) REVISIONS OF PROSPECTUS -- MATERIAL CHANGES. Except as otherwise
provided in subsection (o) of this Section 4, if at any time during the term of
this Agreement any event shall occur or condition shall exist as a result of
which it is necessary, in the opinion of counsel for the Agents or counsel for
the Company, to amend the Registration Statement in order that the Registration
Statement will not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading or to amend or supplement the Prospectus in
order that the Prospectus will not include an untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
therein not misleading in the light of the circumstances existing at the time
the Prospectus is delivered to a purchaser, or if it shall be necessary, in the
opinion of either such counsel, to amend the Registration Statement or amend or
supplement the Prospectus in order to comply with the requirements of the 1933
Act or the 1933 Act Regulations, the Company shall give immediate notice,
confirmed in writing, to the Agents to cease the solicitation of offers for the
purchase of Notes in their capacity as agents and to cease sales of any Notes
they may then own as principal, and the Company will promptly prepare and file
with the Commission, subject to Section 4(b) hereof, such amendment or
supplement as may be necessary to correct such statement or omission or to make
the Registration Statement and Prospectus comply with such requirements, and the
Company will furnish to the Agents, without charge, such number of copies of
such amendment or supplement as the Agents may reasonably request. In addition,
the Company will comply with the 1933 Act, the 1933 Act Regulations, the 1934
Act and the 1934 Act Regulations so as to permit the completion of the
distribution of each offering of Notes.
(i) PROSPECTUS REVISIONS -- PERIODIC FINANCIAL INFORMATION. Except as
otherwise provided in subsection (o) of this Section 4, on or prior to the date
on which there shall be released to the general public interim financial
statement information related to the Company with respect to each of the first
three quarters of any fiscal year or preliminary financial statement information
with respect to any fiscal year, the Company shall furnish such information to
the Agents, confirmed in writing, and shall cause the Prospectus to be amended
or supplemented to include financial information with respect thereto and
corresponding information for the comparable period of the preceding fiscal
year, as well as such other information and explanations as shall be necessary
for an understanding thereof or as shall be required by the 1933 Act or the 1933
Act Regulations.
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(j) PROSPECTUS REVISIONS -- AUDITED FINANCIAL INFORMATION. Except as
otherwise provided in subsection (o) of this Section 4, on or prior to the date
on which there shall be released to the general public financial information
included in or derived from the audited consolidated financial statements of the
Company for the preceding fiscal year, the Company shall furnish such
information to the Agents, confirmed in writing, and shall cause the Prospectus
to be amended or supplemented to include such audited consolidated financial
statements and the report or reports, and consent or consents to such inclusion,
of the independent accountants with respect thereto, as well as such other
information and explanations as shall be necessary for an understanding of such
consolidated financial statements or as shall be required by the 1933 Act or the
1933 Act Regulations.
(k) RULE 158. The Company will timely file such reports pursuant to the
1934 Act as are necessary in order to make generally available to its
securityholders as soon as practicable an earnings statement for the purposes
of, and to provide the benefits contemplated by, the last paragraph of Section
11(a) of the 1933 Act and Rule 158 of the 1933 Act Regulations.
(l) 1940 ACT. The Company will not be or become an "investment company"
or an entity "controlled" by an "investment company" as such terms are defined
in the 1940 Act.
(m) USE OF PROCEEDS. The Company will use the net proceeds received by
it from the issuance and sale of the Notes in the manner specified in the
Prospectus under the caption "Use of Proceeds."
(n) RESTRICTION ON OFFERS AND SALES OF NOTES. Unless otherwise agreed
upon between one or more Agents acting as principal and the Company, between the
date of the agreement by such Agent(s) to purchase the related Notes from the
Company and the Settlement Date with respect thereto, the Company will not,
without the prior written consent of such Agent(s), issue, sell, offer or
contract to sell, grant any option for the sale of, or otherwise dispose of, any
debt securities of the Company (other than the Notes that are to be sold
pursuant to such agreement or commercial paper in the ordinary course of
business).
(o) SUSPENSION OF CERTAIN OBLIGATIONS. The Company shall not be
required to comply with the provisions of subsections (h), (i) or (j) of this
Section 4 during any period from the time (i) the Agents shall have suspended
solicitation of offers for the purchase of Notes in their capacity as agents
pursuant to a request from the Company and (ii) no Agent shall then hold any
Notes purchased from the Company as principal, as the case may be, until the
time the Company shall determine that solicitation of offers for the purchase of
Notes should be resumed or an Agent shall subsequently purchase Notes from the
Company as principal.
(p) REPORTING REQUIREMENTS. The Company, during the period when the
Prospectus is required to be delivered under the 1933 Act or the 1934 Act, will
file, and provide to the Agents a reasonable amount of time prior to such
filing, all documents required to be filed with the Commission pursuant to the
1934 Act within the time periods prescribed by the 1934 Act and the rules and
regulations of the Commission thereunder.
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SECTION 5. CONDITIONS OF AGENTS' OBLIGATIONS.
The obligations of one or more Agents to purchase Notes from the
Company as principal and to solicit offers for the purchase of Notes as an agent
of the Company, and the obligations of any purchasers of Notes sold through an
Agent as an agent of the Company, will be subject to the accuracy of the
representations and warranties on the part of the Company herein contained or
contained in any certificate of an officer of the Company or any of its
subsidiaries delivered pursuant to the provisions hereof, to the performance and
observance by the Company of its covenants and other obligations hereunder, and
to the following additional conditions precedent:
(a) EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration
Statement, including any Rule 462(b) Registration Statement, has become
effective under the 1933 Act and no stop order suspending the effectiveness of
the Registration Statement shall have been issued under the 1933 Act or
proceedings therefor initiated or threatened by the Commission, and any request
on the part of the Commission for additional information shall have been
complied with to the reasonable satisfaction of counsel to the Agents. A
prospectus containing the Rule 430A Information shall have been filed with the
Commission in accordance with Rule 424(b) (or a post-effective amendment
providing such information shall have been filed and declared effective in
accordance with the requirements of Rule 430A) or, if the Company has elected to
rely upon Rule 434, a Term Sheet shall have been filed with the Commission in
accordance with Rule 424(b).
(b) OPINION OF COUNSEL FOR COMPANY. On the date hereof, the Agents
shall have received the favorable opinion, dated as of the date hereof, of
Hutchins, Wheeler & Dittmar, A Professional Corporation, counsel for the
Company, in form and substance satisfactory to counsel for the Agents, together
with signed or reproduced copies of such letter for each of the other Agents, to
the effect set forth in Exhibit B-1 hereto and to such further effect as counsel
to the Agents may reasonably request. Such opinion shall not state that it is to
be governed or qualified by, or that it is otherwise subject to, any treatise,
written policy or other documents relating to legal opinions, including, without
limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991).
Such counsel may state that, insofar as such opinion involves factual matters,
they have relied, to the extent they deem proper, upon certificates of officers
of the Company and its subsidiaries and certificates of public officials.
(c) OPINION OF GENERAL COUNSEL FOR COMPANY. On the date hereof, the
Agents shall have received the favorable opinion, dated as of date hereof, of
Robert J. Jacobs, Executive Vice President, Secretary and General Counsel for
the Company, in form and substance satisfactory to counsel for the Agents,
together with signed or reproduced copies of such letter for each of the other
Agents, to the effect set forth in Exhibit B-2 hereto and to such further effect
as counsel to the Agents may reasonably request. Such opinion shall not state
that it is to be governed or qualified by, or that it is otherwise subject to,
any treatise, written policy or other documents relating to legal opinions,
including, without limitation, the Legal Opinion Accord of the ABA
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Section of Business Law (1991). Such counsel may state that, insofar as such
opinion involves factual matters, he has relied, to the extent he deems proper,
upon certificates of officers of the Company and its subsidiaries and
certificates of public officials.
(d) OPINION OF COUNSEL FOR AGENTS. On the date hereof, the Agents shall
have received the favorable opinion, dated as of date hereof, of Brown & Wood
LLP, counsel for the Agents, together with signed or reproduced copies of such
letter for each of the other Agents. In giving such opinion such counsel may
rely, as to all matters governed by the laws of jurisdictions other than the law
of the State of New York, the federal law of the United States and the General
Corporation Law of the State of Delaware, upon the opinions of counsel
satisfactory to the Agents. Such counsel may also state that, insofar as such
opinion involves factual matters, they have relied, to the extent they deem
proper, upon certificates of officers of the Company and its subsidiaries and
certificates of public officials.
(e) OFFICERS' CERTIFICATE. On the date hereof, (A) the Prospectus, as
it may then be amended or supplemented, shall not contain any untrue statement
of a material fact or any omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading; (B) there shall not have been, since the
respective dates as of which information is given in the Prospectus, any
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business; (C) neither the Company nor any of its subsidiaries
shall have received any communication from any regulatory, governmental or
quasi-governmental authority or agency (including FHLMC, Fannie Mae, GNMA, FHA
and VA) which is material and adverse to the business prospects of the Company
or its subsidiaries; (D) no action, suit, proceeding at law or in equity shall
be pending or, to the knowledge of the Company, threatened, against the Company
or any of its subsidiaries before or by any government, governmental
instrumentality or court, domestic or foreign, that could result in any Material
Adverse Effect other than as set forth in the Prospectus; (E) the
representations and warranties in Section 2(a) hereof shall be true and correct
with the same force and effect as though expressly made at and as of the date
hereof; (F) the Company shall have complied with all agreements and satisfied
all conditions on its part to be performed or satisfied at or prior to the date
hereof; and (G) no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or are contemplated by the Commission; and the
Representatives shall have received a certificate of the Chief Executive Officer
and the Chief Financial Officer of the Company, dated as of the date hereof, to
such effect.
(f) ACCOUNTANTS' COMFORT LETTERS. At the time of the execution of this
Agreement, the Agents shall have received from each of Arthur Andersen LLP,
Coopers & Lybrand L.L.P. and KPMG Peat Marwick LLP, a letter dated the date
hereof, in form and substance satisfactory to the Agents, together with signed
or reproduced copies of such letter for each of the other Agents and to such
further effect as counsel to the Agents may reasonably request, and containing
statements and information of the type ordinarily included in accountants'
"comfort letters" to agents with respect to the financial statements and certain
financial information contained in the Registration Statement and the
Prospectus.
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(g) ADDITIONAL DOCUMENTS. On the date hereof, counsel for the Agents
shall have been furnished with such documents and opinions as they may require
for the purpose of enabling them to pass upon the issuance and sale of the Notes
as herein contemplated, or in order to evidence the accuracy of any of the
representations or warranties, or the fulfillment of any of the conditions,
herein contained; and all proceedings taken by the Company in connection with
the issuance and sale of the Notes as herein contemplated shall be satisfactory
in form and substance to the Agents and counsel for the Agents.
(h) TERMINATION OF AGREEMENT. If any condition specified in this
Section 5 shall not have been fulfilled when and as required to be fulfilled,
this Agreement may be terminated by the applicable Agent or Agents by notice to
the Company at any time and any such termination shall be without liability of
any party to any other party except as provided in Section 10 hereof and except
that Sections 8, 9, 11, 14 and 15 hereof shall survive any such termination and
remain in full force and effect.
SECTION 6. DELIVERY OF AND PAYMENT FOR NOTES SOLD THROUGH AN AGENT AS AGENT.
Delivery of Notes sold through an Agent as an agent of the Company
shall be made by the Company to such Agent for the account of any purchaser only
against payment therefor in immediately available funds. In the event that a
purchaser shall fail either to accept delivery of or to make payment for a Note
on the date fixed for settlement, such Agent shall promptly notify the Company
and deliver such Note to the Company and, if such Agent has theretofore paid the
Company for such Note, the Company will promptly return such funds to such
Agent. If such failure has occurred for any reason other than default by such
Agent in the performance of its obligations hereunder, the Company will
reimburse such Agent on an equitable basis for its loss of the use of the funds
for the period such funds were credited to the Company's account.
SECTION 7. ADDITIONAL COVENANTS OF THE COMPANY.
The Company further covenants and agrees with each Agent as follows:
(a) REAFFIRMATION OF REPRESENTATIONS AND WARRANTIES. Each acceptance by
the Company of an offer for the purchase of Notes (whether to one or more Agents
as principal or through an Agent as agent), and each delivery of Notes (whether
to one or more Agents as principal or through an Agent as agent), shall be
deemed to be an affirmation that the representations and warranties of the
Company herein contained and contained in any certificate theretofore delivered
to the Agents pursuant hereto are true and correct at the time of such
acceptance or sale, as the case may be, and an undertaking that such
representations and warranties will be true and correct at the time of delivery
to such Agent(s) or to the purchaser or its agent, as the case may be, of the
Notes relating to such acceptance or sale, as the case may be, as though made at
and as of each such time (it being understood that such representations and
warranties shall relate to the Registration Statement and Prospectus as amended
and supplemented to each such time).
(b) SUBSEQUENT DELIVERY OF CERTIFICATES. Each time that (i) the
Registration Statement or the Prospectus shall be amended or supplemented (other
than by an amendment or supplement
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providing solely for the determination of the variable terms of the Notes or
relating solely to the offering of securities other than the Notes), (ii) (if
required in connection with the purchase of Notes from the Company by one or
more Agents as principal) the Company sells Notes to one or more Agents as
principal or (iii) the Company sells Notes in a form not previously certified to
the Agents by the Company, the Company shall furnish or cause to be furnished to
the Agent(s), forthwith a certificate dated the date of filing with the
Commission or the date of effectiveness of such amendment or supplement, as
applicable, or the date of such sale, as the case may be, in form satisfactory
to the Agent(s) to the effect that the statements contained in the certificate
referred to in Section 5(e) hereof which were last furnished to the Agents are
true and correct at the time of the filing or effectiveness of such amendment or
supplement, as applicable, or the time of such sale, as the case may be, as
though made at and as of such time (except that such statements shall be deemed
to relate to the Registration Statement and the Prospectus as amended and
supplemented to such time) or, in lieu of such certificate, a certificate of the
same tenor as the certificate referred to in Section 5(e) hereof, modified as
necessary to relate to the Registration Statement and the Prospectus as amended
and supplemented to the time of delivery of such certificate (it being
understood that, in the case of clause (ii) above, any such certificate shall
also include a certification that there has been no material adverse change in
the condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company and its subsidiaries considered as one
enterprise since the date of the agreement by such Agent(s) to purchase Notes
from the Company as principal).
(c) SUBSEQUENT DELIVERY OF LEGAL OPINIONS. Each time that (i) the
Registration Statement or the Prospectus shall be amended or supplemented (other
than by an amendment or supplement providing solely for the determination of the
variable terms of the Notes or relating solely to the offering of securities
other than the Notes), (ii) (if required in connection with the purchase of
Notes from the Company by one or more Agents as principal) the Company sells
Notes to one or more Agents as principal or (iii) the Company sells Notes in a
form not previously certified to the Agents by the Company, the Company shall
furnish or cause to be furnished forthwith to the Agent(s) and to counsel to the
Agents (1) the written opinion of Hutchins, Wheeler & Dittmar, A Professional
Corporation, counsel to the Company, or other counsel satisfactory to the
Agent(s), and (2) the written opinion of Robert J. Jacobs, Executive Vice
President, Secretary and General Counsel for the Company, each dated the date of
filing with the Commission or the date of effectiveness of such amendment or
supplement, as applicable, or the date of such sale, as the case may be, in form
and substance satisfactory to the Agent(s), of the same tenor as the opinions
referred to in Sections 5(b) and 5(c) hereof, respectively, but modified, as
necessary, to relate to the Registration Statement and the Prospectus as amended
and supplemented to the time of delivery of such opinions or, in lieu of such
opinions, counsel last furnishing such opinions to the Agent(s) shall each
furnish the Agent(s) with a letter substantially to the effect that the Agent(s)
may rely on such counsel's last opinion to the same extent as though it was
dated the date of such letter authorizing reliance (except that statements in
such last opinion shall be deemed to relate to the Registration Statement and
the Prospectus as amended and supplemented to the time of delivery of such
letter authorizing reliance).
(d) SUBSEQUENT DELIVERY OF COMFORT LETTERS. Each time that (i) the
Registration Statement or the Prospectus shall be amended or supplemented to
include additional financial
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information (other than by an amendment or supplement relating solely to the
issuance and/or offering of securities other than the Notes) or (ii) (if
required in connection with the purchase of Notes from the Company by one or
more Agents as principal) the Company sells Notes to one or more Agents as
principal, the Company shall cause each of Arthur Andersen LLP, Coopers &
Lybrand L.L.P. and KPMG Peat Marwick LLP forthwith to furnish to the Agent(s) a
letter, dated the date of filing with the Commission or the date of
effectiveness of such amendment or supplement, as applicable, or the date of
such sale, as the case may be, in form satisfactory to the Agent(s), of the same
tenor as the letter referred to in Section 5(f) hereof but modified to relate to
the Registration Statement and Prospectus as amended and supplemented to the
date of such letter.
SECTION 8. INDEMNIFICATION.
(a) INDEMNIFICATION OF THE AGENTS. The Company agrees to indemnify and
hold harmless each Agent and each person, if any, who controls such Agent within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as
follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of an untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), including the Rule
430A Information and the Rule 434 Information, as applicable, or the
omission or alleged omission therefrom of a material fact required to
be stated therein or necessary to make the statements therein not
misleading, or arising out of an untrue statement or alleged untrue
statement of a material fact included in any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto), or the
omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened,
or of any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission, provided
that (subject to Section 8(d) hereof) any such settlement is effected
with the written consent of the Company; and
(iii) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by such Agent),
reasonably incurred in investigating, preparing or defending against
any litigation, or any investigation or proceeding by any governmental
agency or body, commenced or threatened, or any claim whatsoever based
upon any such untrue statement or omission, or any such alleged untrue
statement or omission, to the extent that any such expense is not paid
under subparagraph (i) or (ii) above;
PROVIDED, HOWEVER, that this indemnity does not apply to any loss, liability,
claim, damage or expense to the extent arising out of an untrue statement or
omission or alleged untrue statement or omission made in reliance upon and in
conformity with written information furnished to the
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Company by the Agents expressly for use in the Registration Statement (or any
amendment thereto), including the relevant Rule 430A Information and Rule 434
Information, or any preliminary prospectus or the Prospectus (or any amendment
or supplement thereto). The foregoing indemnity with respect to any untrue
statement contained in or any omission from a preliminary prospectus shall not
inure to the benefit of any Agent (or any person who controls such Agent within
the meaning of Section 15 of the 1933 Act) from whom the person asserting any
such loss, liability, claim, damage or expense purchased any of the Notes that
are the subject thereof if the Company shall sustain the burden of proving that
such person was not sent or given a copy of the Prospectus (or any amendment or
supplement thereto) at or prior to the written confirmation of the sale of such
Notes to such person and the untrue statement contained in or the omission from
such preliminary prospectus was corrected in the Prospectus (or any amendment or
supplement thereto), unless such failure resulted from noncompliance by the
Company with its obligations hereunder to furnish the Agents with copies of the
Prospectus (or any amendment or supplement thereto).
(b) INDEMNIFICATION OF COMPANY, DIRECTORS AND OFFICERS. Each Agent
severally agrees to indemnify and hold harmless the Company, its directors, each
of its officers who signed the Registration Statement and each person, if any,
who controls the Company within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act against any and all loss, liability, claim, damage
and expense described in the indemnity contained in Section 8(a) hereof, as
incurred, but only with respect to untrue statements or omissions, or alleged
untrue statements or omissions, made in the Registration Statement (or any
amendment thereto), including the relevant Rule 430A Information and Rule 434
Information, or any preliminary prospectus or the Prospectus (or any amendment
or supplement thereto) in reliance upon and in conformity with written
information furnished to the Company by such Agent expressly for use in the
Registration Statement (or any amendment thereto) or such preliminary prospectus
or the Prospectus (or any amendment or supplement thereto).
(c) ACTIONS AGAINST PARTIES; NOTIFICATION. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 8(a) hereof,
counsel to the indemnified parties shall be selected by the applicable Agent(s)
(PROVIDED, that in the case of an action involving two or more Agents that shall
have purchased Notes from the Company in a syndicate as principals, the Agent
that acted as managing underwriter shall make such selection) and, in the case
of parties indemnified pursuant to Section 8(b) hereof, counsel to the
indemnified parties shall be selected by the Company. An indemnifying party may
participate at its own expense in the defense of any such action; PROVIDED,
HOWEVER, that counsel to the indemnifying party shall not (except with the
consent of the indemnified party) also be counsel to the indemnified party. In
no event shall the indemnifying parties be liable for fees and expenses of more
than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances.
23
<PAGE> 28
No indemnifying party shall, without the prior written consent of the
indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any litigation, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, or any claim
whatsoever in respect of which indemnification or contribution could be sought
under this Section 8 or 9 hereof (whether or not the indemnified parties are
actual or potential parties thereto), unless such settlement, compromise or
consent (i) includes an unconditional release of each indemnified party from all
liability arising out of such litigation, investigation, proceeding or claim and
(ii) does not include a statement as to or an admission of fault, culpability or
a failure to act by or on behalf of any indemnified party.
(d) SETTLEMENT WITHOUT CONSENT IF FAILURE TO REIMBURSE. If at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 8(a)(ii) effected without its written consent if (i) such settlement is
entered into more than sixty (60) days after receipt by such indemnifying party
of the aforesaid request, (ii) such indemnifying party shall have received
notice of the terms of such settlement at least forty-five (45) days prior to
such settlement being entered into and (iii) such indemnifying party shall not
have reimbursed such indemnified party in accordance with such request prior to
the date of such settlement.
SECTION 9. CONTRIBUTION.
If the indemnification provided for in Section 8 hereof is for any
reason unavailable to or insufficient to hold harmless an indemnified party in
respect of any losses, liabilities, claims, damages or expenses referred to
therein, then each indemnifying party shall contribute to the aggregate amount
of such losses, liabilities, claims, damages and expenses incurred by such
indemnified party, as incurred, (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company, on the one hand, and the
applicable Agent(s), on the other hand, from the offering of the Notes that were
the subject of the claim for indemnification or (ii) if the allocation provided
by clause (i) is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company on the one hand and the
applicable Agent(s) on the other hand in connection with the statements or
omissions which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the
applicable Agent(s) on the other hand in connection with the offering of the
Notes that were the subject of the claim for indemnification shall be deemed to
be in the same respective proportions as the total net proceeds from the
offering of such Notes (before deducting expenses) received by the Company and
the total discount or commission received by each applicable Agent, as the case
may be, bears to the aggregate initial offering price of such Notes.
The relative fault of the Company, on the one hand, and the applicable
Agent(s), on the other hand, shall be determined by reference to, among other
things, whether any untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the applicable Agent(s) and the parties'
24
<PAGE> 29
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Company and the Agents agree that it would not be just and
equitable if contribution pursuant to this Section 9 were determined by pro rata
allocation (even if the applicable Agent(s) were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 9. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 9 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any applicable untrue or alleged
untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 9, no Agent shall be
required to contribute any amount in excess of the amount by which the total
discount or commission received by such Agent in connection with the offering of
the Notes that were the subject of the claim for indemnification exceeds the
amount of any damages which such Agent has otherwise been required to pay by
reason of any applicable untrue or alleged untrue statement or omission or
alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 9, each person, if any, who controls an
Agent within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934
Act shall have the same rights to contribution as such Agent, and each director
of the Company, each officer of the Company who signed the Registration
Statement, and each person, if any, who controls the Company within the meaning
of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same
rights to contribution as the Company. In addition, in connection with an
offering of Notes purchased from the Company by two or more Agents as principal,
the respective obligations of such Agents to contribute pursuant to this Section
9 are several in proportion to the aggregate principal amount of Notes that each
such Agent has agreed to purchase from the Company and not joint.
SECTION 10. PAYMENT OF EXPENSES.
(a) EXPENSES. The Company will pay all expenses incident to the
performance of its obligations under this Agreement, including:
(i) The preparation, printing, filing and delivery of the
Registration Statement (including financial statements and exhibits) as
originally filed and all amendments thereto and any preliminary
prospectus, the Prospectus and any amendments or supplements thereto
(including, without limitation, any Prospectus required to be delivered
pursuant to Section 4(3) of the 1933 Act);
25
<PAGE> 30
(ii) The preparation, printing and delivery of this Agreement
and the Indenture;
(iii) The preparation, issuance and delivery of the Notes,
including any fees and expenses relating to the eligibility and
issuance of Notes in book-entry form and the cost of obtaining CUSIP or
other identification numbers for the Notes;
(iv) The fees and disbursements of the Company's accountants,
counsel and other advisors or agents (including any calculation agent
or exchange rate agent) and of the Trustee and its counsel;
(v) The reasonable fees and disbursements of counsel for the
Agents incurred in connection with the establishment of the Program and
incurred from time to time in connection with the transactions
contemplated hereby, unless otherwise agreed to between the Company and
the applicable Agent(s) and/or Additional Agent(s) pursuant to a terms
agreement with respect to such transactions;
(vi) The qualification of the Notes under securities laws in
accordance with the provisions of Section 4(f) hereof, including filing
fees and the reasonable fees and disbursements of counsel for the
Agents in connection therewith and in connection with the preparation
of the Blue Sky Survey and any supplement thereto;
(vii) The printing and delivery to the Agents of copies of
each preliminary prospectus and any amendments or supplements thereto;
(viii) The preparation, printing and delivery to the Agents of
copies of the Blue Sky Survey and any supplement thereto;
(ix) The fees charged by nationally recognized statistical
rating organizations for the rating of the Program and the Notes;
(x) The fees and expenses incurred in connection with any
listing of Notes on a securities exchange;
(xi) The filing fees incident to, and the reasonable fees and
disbursements of counsel to the Agents in connection with, the review,
if any, by the National Association of Securities Dealers, Inc. (the
"NASD") of the terms of the sale of the Notes; and
(xii) Any advertising and other out-of-pocket expenses of the
Agents incurred with the approval of the Company.
(b) TERMINATION OF AGREEMENT. If this Agreement is terminated by the
Agents in accordance with the provisions of Section 5 or Section 12(b)(i)
hereof, the Company shall reimburse the Agents for all of their out-of-pocket
expenses, including the reasonable fees and disbursements of counsel for the
Agents and the costs and expenses incurred in connection with the updating and
delivery of any Prospectus that may be required under the 1933 Act or the 1934
Act.
26
<PAGE> 31
SECTION 11. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY.
All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company or any of its
subsidiaries submitted pursuant hereto or thereto shall remain operative and in
full force and effect, regardless of any investigation made by or on behalf of
the Agents or any controlling person of an Agent, or by or on behalf of the
Company, and shall survive each delivery of and payment for the Notes.
SECTION 12. TERMINATION.
(a) TERMINATION OF THIS AGREEMENT. This Agreement (excluding any
agreement by one or more Agents to purchase Notes from the Company as principal)
may be terminated for any reason, at any time by either the Company or an Agent,
as to itself, upon the giving of prior written notice of such termination to the
other party hereto.
(b) TERMINATION OF AGREEMENT TO PURCHASE NOTES AS PRINCIPAL. The
applicable Agent(s) may terminate any agreement by such Agent(s) to purchase
Notes from the Company as principal, immediately upon notice to the Company, at
any time prior to the Settlement Date relating thereto, if (i) there has been,
since the date of such agreement or since the respective dates as of which
information is given in the Prospectus, any material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company and its subsidiaries considered as one
enterprise, whether or not arising in the ordinary course of business, or (ii)
there has occurred any material adverse change in the financial markets in the
United States or, if such Notes are denominated and/or payable in, or indexed
to, one or more foreign or composite currencies, in the international financial
markets, or any outbreak of hostilities or escalation thereof or other calamity
or crisis or any change or development or event involving a prospective change
in national or international political, financial or economic conditions, in
each case the effect of which is such as to make it, in the judgment of such
Agent(s), impracticable to market such Notes or enforce contracts for the sale
of such Notes, or (iii) trading in any securities of the Company has been
suspended or limited by the Commission or a national securities exchange, or if
trading generally on the New York Stock Exchange or the American Stock Exchange
or in the Nasdaq National Market has been suspended or limited, or minimum or
maximum prices for trading have been fixed, or maximum ranges for prices have
been required, by either of said exchanges or by such system or by order of the
Commission, the NASD or any other governmental authority, or (iv) a banking
moratorium has been declared by either Federal or New York authorities or by the
relevant authorities in the country or countries of origin of any foreign or
composite currency in which such Notes are denominated and/or payable, or (v)
the rating assigned by any nationally recognized statistical rating organization
to the Program or any debt securities (including the Notes) of the Company as of
the date of such agreement shall have been lowered or withdrawn since that date
or if any such rating organization shall have publicly announced that it has
under surveillance or review its rating of the Program or any such debt
securities, or (vi) there shall have come to the attention of such Agent(s) any
facts that would cause such Agent(s) to believe that the Prospectus, at the time
it was required to be delivered to a purchaser of such Notes, included an untrue
statement of a material fact or
27
<PAGE> 32
omitted to state a material fact necessary in order to make the statements
therein, in the light of the circumstances existing at the time of such
delivery, not misleading.
(c) GENERAL. In the event of any such termination under paragraph (a)
or (b) of this Section, neither party will have any liability to the other party
hereto, except that (i) the Agents shall be entitled to any commissions earned
in accordance with the third paragraph of Section 3(b) hereof, (ii) if at the
time of termination (a) any Agent shall own any Notes purchased by it from the
Company as principal or (b) an offer to purchase any of the Notes has been
accepted by the Company but the time of delivery to the purchaser or his agent
of such Notes relating thereto has not occurred, the covenants set forth in
Sections 4 and 7 hereof shall remain in effect until such Notes are so resold or
delivered, as the case may be, and (iii) the covenant set forth in Sections 4(e)
and 4(k) hereof, the provisions of Section 10 hereof, the indemnity and
contribution agreements set forth in Sections 8 and 9 hereof, and the provisions
of Sections 11, 14 and 15 hereof shall remain in effect.
SECTION 13. NOTICES.
All notices and other communications hereunder shall be in writing and
shall be deemed to have been duly given if mailed or transmitted by any standard
form of telecommunication.
Notices to the Company shall be directed to it at:
7301 Baymeadows Way
Jacksonville, Florida 32256
Attention: President
Facsimile: 904 281-3745
with copies to:
7301 Baymeadows Way
Jacksonville, Florida 32256
Attention: Robert J. Jacobs
Facsimile: 904 281-3745
Notices to any Agent shall be directed to such Agent as follows:
If to Merrill Lynch, at:
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Merrill Lynch World Headquarters
North Tower
World Financial Center
250 Vesey Street
New York, New York 10281-1201
Attention: MTN Product Management
28
<PAGE> 33
Facsimile: 212 449-2234
If to Chase, at:
Chase Securities Inc.
270 Park Avenue
8th Floor
New York, New York 10017
Attention: Medium-Term Note Desk
Facsimile: 212 834-6081
If to J.P. Morgan, at:
J.P. Morgan Securities Inc.
60 Wall Street
New York, New York 10260
Attention:
Facsimile:
If to NationsBanc, at:
NationsBanc Montgomery Securities LLC
100 North Tryon Street
NC1-007-07-01
Charlotte, NC 28255
Attention: Medium-Term Note Desk
Facsimile: 704 388-9939
If to Salomon, at:
Salomon Brothers Inc
388 Greenwich Street
New York, New York 10013
Attention: Medium-Term Note Desk
Facsimile: 212 723-8812
If to UBS, at:
UBS Securities LLC
299 Park Avenue
New York, New York 10260
Attention:
Facsimile:
29
<PAGE> 34
SECTION 14. PARTIES.
This Agreement shall inure to the benefit of and be binding upon the
Agents and the Company and their respective successors. Nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any
person, firm or corporation, other than the parties hereto and their respective
successors and the controlling persons, officers and directors referred to in
Sections 8 and 9 hereof and their heirs and legal representatives, any legal or
equitable right, remedy or claim under or in respect of this Agreement or any
provision herein contained. This Agreement and all conditions and provisions
hereof are intended to be for the sole and exclusive benefit of the parties
hereto and their respective successors, and said controlling persons, officers
and directors and their heirs and legal representatives, and for the benefit of
no other person, firm or corporation. No purchaser of Notes shall be deemed to
be a successor by reason merely of such purchase.
SECTION 15. GOVERNING LAW; FORUM.
THIS AGREEMENT AND ALL THE RIGHTS AND OBLIGATIONS OF THE PARTIES SHALL
BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW
YORK. ANY SUIT, ACTION OR PROCEEDING BROUGHT BY THE COMPANY AGAINST ANY AGENT IN
CONNECTION WITH OR ARISING UNDER THIS AGREEMENT SHALL BE BROUGHT SOLELY IN THE
STATE OR FEDERAL COURT OF APPROPRIATE JURISDICTION LOCATED IN THE BOROUGH OF
MANHATTAN, THE CITY OF NEW YORK. SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY
TIME.
SECTION 16. EFFECT OF HEADINGS.
The Article and Section headings herein are for convenience only and
shall not affect the construction hereof.
SECTION 17. COUNTERPARTS.
This Agreement may be executed in one or more counterparts and, if
executed in more than one counterpart, the executed counterparts hereof shall
constitute a single instrument.
30
<PAGE> 35
If the foregoing is in accordance with the Agents' understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this Distribution Agreement, along with all counterparts, will become a binding
agreement among the Agents and the Company in accordance with its terms.
Very truly yours,
HOMESIDE LENDING, INC.
By:
-----------------------------
Name:
Title:
CONFIRMED AND ACCEPTED, as of the date first above written:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:
------------------------------------
Authorized Signatory
CHASE SECURITIES INC.
By:
------------------------------------
Authorized Signatory
J.P. MORGAN SECURITIES INC.
By:
------------------------------------
Authorized Signatory
NATIONSBANC MONTGOMERY SECURITIES LLC
By:
------------------------------------
Authorized Signatory
31
<PAGE> 36
UBS SECURITIES LLC
By:
------------------------------------
Authorized Signatory
SALOMON BROTHERS INC
By:
------------------------------------
Authorized Signatory
32
<PAGE> 37
SCHEDULE A
As compensation for the services of the Agents hereunder, the Company shall
pay the applicable Agent, on a discount basis, a commission for the sale of each
Note equal to the principal amount of such Note multiplied by the appropriate
percentage set forth below:
<TABLE>
<CAPTION>
PERCENT OF
MATURITY RANGES PRINCIPAL AMOUNT
<S> <C>
From 9 months to less than 1 year........................................... .125%
From 1 year to less than 18 months.......................................... .150
From 18 months to less than 2 years......................................... .200
From 2 years to less than 3 years........................................... .250
From 3 years to less than 4 years........................................... .350
From 4 years to less than 5 years........................................... .450
From 5 years to less than 6 years........................................... .500
From 6 years to less than 7 years........................................... .550
From 7 years to less than 10 years.......................................... .600
From 10 years to less than 15 years......................................... .625
From 15 years to less than 20 years......................................... .700
From 20 years to 30 years................................................... .750
Greater than 30 years ...................................................... 1
</TABLE>
- ----------
1 As agreed to by the Company and the applicable Agent at the time of sale.
Sch A-1
<PAGE> 38
EXHIBIT A
PRICING TERMS
Principal Amount: $_______
(or principal amount of foreign or composite currency)
Interest Rate or Formula:
If Fixed Rate Note,
Interest Rate:
Interest Payment Dates:
If Floating Rate Note,
Interest Rate Basis(es):
If LIBOR,
[ ] LIBOR Reuters Page:
[ ] LIBOR Telerate Page:
Designated LIBOR Currency:
If CMT Rate,
Designated CMT Telerate Page:
If Telerate Page 7052:
[ ] Weekly Average
[ ] Monthly Average
Designated CMT Maturity Index:
Index Maturity:
Spread and/or Spread Multiplier, if any:
Initial Interest Rate, if any:
Initial Interest Reset Date:
Interest Reset Dates:
Interest Payment Dates:
Maximum Interest Rate, if any:
Minimum Interest Rate, if any:
Fixed Rate Commencement Date, if any:
Fixed Interest Rate, if any:
Day Count Convention:
Calculation Agent:
Redemption Provisions:
Initial Redemption Date:
Initial Redemption Percentage:
Annual Redemption Percentage Reduction, if any:
Repayment Provisions:
Optional Repayment Date(s):
Original Issue Date:
Stated Maturity Date:
Specified Currency:
Exchange Rate Agent:
Exh A-1
<PAGE> 39
Authorized Denomination:
Purchase Price: ___%, plus accrued interest, if any, from ___________
Price to Public: ___%, plus accrued interest, if any, from __________
Issue Price:
Settlement Date and Time:
Additional/Other Terms:
Also, in connection with the purchase of Notes from the Company by one or more
Agents as principal, agreement as to whether the following will be required:
Officers' Certificate pursuant to Section 7(b) of the Distribution
Agreement. Legal Opinion pursuant to Section 7(c) of the Distribution
Agreement. Comfort Letters pursuant to Section 7(d) of the Distribution
Agreement.
Exh A-2
<PAGE> 40
EXHIBIT B-1
FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO SECTION 5(b)
1. The Company has the corporate power and authority to own,
lease and operate its properties and to conduct its business as
described in the Prospectus, and the Company has corporate power and
authority to issue the Notes and to enter into and perform its
obligations under the Distribution Agreement, the Indenture and the
Notes.
2. If applicable, the authorized, issued and outstanding
capital stock of the Company is as set forth in the Prospectus under
the caption "Capitalization" (except for subsequent issuances, if any,
pursuant to the Distribution Agreement); the shares of issued and
outstanding capital stock of the Company have been duly authorized and
validly issued and are fully paid and non-assessable; and none of the
outstanding shares of capital stock of the Company was issued in
violation of the preemptive or other similar rights of any
securityholder of the Company arising by operation of law, or under the
charter or by-laws of the Company, or under any agreement known to us
to which the Company is a party.
3. The Distribution Agreement has been duly authorized,
executed and delivered by the Company.
4. The Indenture has been duly authorized, executed and
delivered by the Company and (assuming due authorization, execution and
delivery thereof by the applicable Trustee) constitutes a valid and
legally binding agreement of the Company, enforceable against the
Company in accordance with its terms, except as the enforcement thereof
may be limited by (A) bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting the enforcement of
creditors' rights generally, (B) general equitable principles
(regardless of whether enforcement is considered in a proceeding in
equity or at law), (C) requirements that a claim with respect to any
debt securities issued under the Indenture that are payable in a
foreign or composite currency (or a foreign or composite currency
judgment in respect of such claim) be converted into U.S. dollars at a
rate of exchange prevailing on a date determined pursuant to applicable
law or (D) governmental authority to limit, delay or prohibit the
making of payments outside the United States.
5. The Indenture has been duly qualified under the 1939 Act.
6. The Notes have been duly authorized by the Company for
offer, sale, issuance and delivery pursuant to the Distribution
Agreement and, when issued, authenticated and delivered in the manner
provided for in the Indenture and delivered against payment of the
consideration therefor, will constitute valid and legally binding
obligations of the Company, enforceable against the Company in
accordance with their
Exh B-1-1
<PAGE> 41
terms, except as the enforcement thereof may be limited by (A)
bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting the enforcement of creditors' rights generally, (B)
general equitable principles (regardless of whether enforcement is
considered in a proceeding in equity or at law), (C) requirements that
a claim with respect to any Notes payable in a foreign or composite
currency (or a foreign or composite currency judgment in respect of
such claim) be converted into U.S. dollars at a rate of exchange
prevailing on a date determined pursuant to applicable law or (D)
governmental authority to limit, delay or prohibit the making of
payments outside the United States; and the Notes, in the forms
certified on the date hereof, are in the form contemplated by, and each
registered holder thereof is entitled to the benefits of, the
Indenture.
7. The Indenture and the Notes, in the forms certified on the
date hereof, conform in all material respects to the statements
relating thereto contained in the Prospectus and are in substantially
the form filed or incorporated by reference, as the case may be, as an
exhibit to the Registration Statement.
8. The Registration Statement, including any Rule 462(b)
Registration Statement, has been declared effective under the 1933 Act;
any required filing of the Prospectus pursuant to Rule 424(b) has been
made in the manner and within the time period required by Rule 424(b);
and, to the best of our knowledge, no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or
threatened by the Commission.
9. The Registration Statement, including any Rule 462(b)
Registration Statement and the relevant Rule 430A Information and Rule
434 Information, as applicable, the Prospectus, excluding the documents
incorporated by reference therein, and each amendment or supplement to
the Registration Statement and Prospectus as of their respective
effective or issue dates (other than the financial statements and
supporting schedules included therein or omitted therefrom and the
Trustee's Statement of Eligibility on Form T-1 (the "Form T-1"), as to
which we express no opinion) complied as to form in all material
respects with the requirements of the 1933 Act and the 1933 Act
Regulations.
10. The documents incorporated by reference in the Prospectus
(other than the financial statements and supporting schedules included
therein or omitted therefrom, as to which we express no opinion), when
they were filed with the Commission, complied as to form in all
material respects with the requirements of the 1934 Act and the 1934
Act Regulations.
11. If Rule 434 has been relied upon, the Prospectus was not
"materially different," as such term is used in Rule 434, from the
prospectus included in the Registration Statement at the time it became
effective.
12. To the best of our knowledge, there is not pending or
threatened any action, suit, proceeding, inquiry or investigation, to
which the Company or any of its
Exh B-1-2
<PAGE> 42
subsidiaries is a party, or to which the property of the Company or any
of its subsidiaries is subject, before or brought by any court or
governmental or quasi-governmental agency or body, domestic or foreign,
which might reasonably be expected to result in a Material Adverse
Effect, or which might reasonably be expected to materially and
adversely affect the properties or assets thereof or the consummation
of the transactions contemplated in the Distribution Agreement or the
performance by the Company of its obligations thereunder.
13. The information in the Prospectus under "Description of
Debt Securities," "Description of Notes," "Special Provisions Relating
to Foreign Currency Notes" and "Certain United States Federal Income
Tax Considerations," or any caption purporting to cover such matters,
the information in the Registration Statement under Item 14, to the
extent that such information constitutes matters of law, summaries of
legal matters, the Company's charter and bylaws or legal proceedings,
or legal conclusions, has been reviewed by us and is correct in all
material respects.
14. To the best of our knowledge, there are no statutes or
regulations that are required to be described in the Prospectus that
are not described as required.
15. All descriptions in the Registration Statement of
contracts and other documents to which the Company or its subsidiaries
are a party are accurate in all material respects; to the best of our
knowledge, there are no franchises, contracts, indentures, mortgages,
loan agreements, notes, leases or other instruments required to be
described or referred to in the Registration Statement or to be filed
as exhibits thereto other than those described or referred to therein
or filed or incorporated by reference as exhibits thereto, and the
descriptions thereof or references thereto are correct in all material
respects.
16. To the best of our knowledge, the Company is not in
violation of its charter or by-laws and no default by the Company
exists in the due performance or observance of any material obligation,
agreement, covenant or condition contained in any contract, indenture,
mortgage, loan agreement, note, lease or other agreement or instrument
that is described or referred to in the Registration Statement or the
Prospectus or filed or incorporated by reference as an exhibit to the
Registration Statement.
17. All necessary corporate action by the Company has been
taken in connection with, and no filing with, or authorization,
approval, consent, license, order, registration, qualification or
decree of, any court or governmental or quasi-governmental authority or
agency, domestic or foreign (other than under the 1933 Act and the 1933
Act Regulations, which have been obtained, or as may be required under
the securities or blue sky laws of the various states, as to which we
need express no opinion), is necessary or required for, the due
authorization, execution, delivery and performance by the Company of
its obligations under the Distribution Agreement, the Indenture or the
Notes or for the offering, issuance or sale of the Notes or the
consummation of the transactions contemplated in the Prospectus.
Exh B-1-3
<PAGE> 43
18. The execution, delivery and performance of the
Distribution Agreement, the Indenture and the Notes and any other
agreement or instrument entered into or issued or to be entered into or
issued by the Company in connection with the transactions contemplated
in the Prospectus, the consummation of the transactions contemplated in
the Prospectus (including the issuance and sale of the Notes and the
use of the proceeds therefrom as described in the Prospectus) and the
compliance by the Company with its obligations thereunder do not and
will not, whether with or without the giving of notice or lapse of time
or both, conflict with or constitute a breach of, or default or
Repayment Event (as defined in Section 1(a)(x) of the Distribution
Agreement) under or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company
pursuant to any contract, indenture, mortgage, deed of trust, loan or
credit agreement, note, lease or any other agreement or instrument,
known to us, to which the Company is a party or by which it may be
bound, or to which any of the property or assets of the Company is
subject (except for such conflicts, breaches or defaults or liens,
charges or encumbrances that would not have a Material Adverse Effect),
nor will such action result in any violation of the provisions of the
charter or by-laws of the Company or any applicable law, statute, rule,
regulation, judgment, order, writ or decree, known to us, of any
government, government instrumentality or court, domestic or foreign,
having jurisdiction over the Company or any of its respective
properties, assets or operations.
19. To the best of our knowledge, there are no persons with
registration rights or other similar rights to have any securities
registered pursuant to the Registration Statement or otherwise
registered by the Company under the 1933 Act except as disclosed in the
Prospectus.
20. The Company is not, and upon the issuance and sale of the
Notes and the application of the net proceeds therefrom as described in
the Prospectus will not be, an "investment company" within the meaning
of the 1940 Act.
21. The Notes, in the forms certified on the date hereof, will
be excluded or exempted under, or beyond the purview of, the Commodity
Exchange Act and the Commodity Exchange Act Regulations.
We have participated in the preparation of the Registration Statement
and the Prospectus and in conferences and telephone conversations with officers
and representatives of the Company, representatives of Arthur Andersen LLP,
Coopers & Lybrand L.L.P. and KPMG Peat Marwick LLP, the independent public
accountants for the Company and certain of its subsidiaries, your
representatives and representatives of your counsel, during which conferences
and conversations the contents of the Registration Statement and the Prospectus
and related matters were discussed. Except as set forth in paragraph 12 above,
we have not undertaken to verify independently the statements made and
information provided to us in the documents and conferences referred to above,
but nevertheless we hereby confirm to you that nothing has come to our attention
that would lead us to believe that the Registration Statement or any amendment
thereto, including the relevant Rule 430A Information and Rule 434 Information,
(if applicable), (except for financial statements and schedules and other
financial data included therein or omitted therefrom and for the Form T-1, as to
which we need make no statement), at the time such Registration Statement
Exh B-1-4
<PAGE> 44
or any such amendment became effective or at the date of any agreement of the
applicable Agent(s) to purchase Notes from the Company as principal, contained
an untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading or that the Prospectus or any amendment or supplement thereto (except
for financial statements and schedules and other financial data included therein
or omitted therefrom, as to which we need make no statement), at the time the
Prospectus was issued, at the time any such amended or supplemented prospectus
was issued or at the date hereof, included or includes any untrue statement of a
material fact or omitted or omits to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
Exh B-1-5
<PAGE> 45
Exhibit B-2
FORM OF OPINION OF COMPANY'S GENERAL COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(C)
1. The Company is a corporation duly incorporated, validly
existing and in corporate good standing under the laws of the State of
Florida.
2. The Company has the corporate power and authority to own,
lease and operate its properties and to conduct its business as
described in the Prospectus, and the Company has corporate power and
authority to issue the Notes and to enter into and perform its
obligations under the Distribution Agreement, the Indenture and the
Notes.
3. If applicable, the authorized, issued and outstanding
capital stock of the Company is as set forth in the Prospectus under
the caption "Capitalization" (except for subsequent issuances, if any,
pursuant to the Distribution Agreement); the shares of issued and
outstanding capital stock of the Company have been duly authorized and
validly issued and are fully paid and non-assessable; and none of the
outstanding shares of capital stock of the Company was issued in
violation of the preemptive or other similar rights of any
securityholder of the Company arising by operation of law, or under the
charter or by-laws of the Company, or under any agreement known to us
to which the Company is a party.
4. Each subsidiary of the Company is a corporation duly
incorporated, validly existing and in corporate good standing under the
laws of the jurisdiction of its incorporation, has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus. Each of the Company and its
subsidiaries is duly qualified as a foreign corporation to transact
business and is in good standing as a foreign corporation in each
jurisdiction in which such qualification is required, whether by reason
of the ownership or leasing of property or the conduct of business,
except where the failure so to qualify or to be in good standing would
not result in a Material Adverse Effect.
5. To the best of my knowledge, there is not pending or
threatened any action, suit, proceeding, inquiry or investigation, to
which the Company or any of its subsidiaries is a party, or to which
the property of the Company or any of its subsidiaries is subject,
before or brought by any court or governmental or quasi-governmental
agency or body, domestic or foreign, which might reasonably be expected
to result in a Material Adverse Effect, or which might reasonably be
expected to materially and adversely affect the properties or assets
thereof or the consummation of the transactions contemplated in the
Distribution Agreement, the Indenture or the Notes or the performance
by the Company of its obligations thereunder.
Exh B-2-1
<PAGE> 46
6. The information in the Prospectus under "Risk Factors --
Regulation, Possible Changes and Related Matters," "Business --
Properties," "Business -- Regulation," "Business -- Litigation" to the
extent that it constitutes matters of law, summaries of legal matters
or legal conclusions, has been reviewed by me and is correct in all
material respects.
7. To the best of my knowledge, none of the Company and or any
of its subsidiaries is in violation of its charter or by-laws and no
default by the Company or any of its subsidiaries exists in the due
performance or observance of any material obligation, agreement,
covenant or condition contained in any contract, indenture, mortgage,
loan agreement, note, lease or other agreement or instrument that is
described or referred to in the Registration Statement or the
Prospectus or filed or incorporated by reference as an exhibit to the
Registration Statement which would have a Material Adverse Effect.
8. All necessary corporate action by the Company has been
taken in connection with, and no filing with, or authorization,
approval, consent, license, order, registration, qualification or
decree of, any court or governmental or quasi-governmental authority or
agency, domestic or foreign (other than under the 1933 Act and the 1933
Act Regulations, or as may be required under the securities or blue sky
laws of the various states, as to which, in each case, I need express
no opinion) is necessary or required for, the due authorization,
execution and delivery of the Distribution Agreement, the Indenture or
the Notes or for the offering, issuance or sale of the Notes.
9. The execution, delivery and performance of the Distribution
Agreement, the Indenture and the Notes and the consummation of the
transactions contemplated herein, therein and in the Registration
Statement (including the issuance and sale of the Notes and the use of
the proceeds from the sale of the Notes as described in the Prospectus
under the caption "Use of Proceeds") and compliance by the Company with
its obligations under the Distribution Agreement, the Indenture and the
Notes do not and will not, whether with or without the giving of notice
or lapse of time or both, conflict with or constitute a breach of, or
default or Repayment Event (as defined in Section 1(a)(x) of the
Distribution Agreement) under or result in the creation or imposition
of any lien, charge or encumbrance upon any property or assets of the
Company or any of its subsidiaries pursuant to any contract, indenture,
mortgage, deed of trust, loan or credit agreement, note, lease or any
other agreement or instrument, known to me, to which the Company or any
of its subsidiaries is a party or by which any of them may be bound, or
to which any of the property or assets of the Company or any of its
subsidiaries is subject (except for such conflicts, breaches or
defaults or liens, charges or encumbrances that would not have a
Material Adverse Effect), nor will such action result in any violation
of the provisions of the charter or by-laws of the Company or any of
its subsidiaries, or any applicable law, statute, rule, regulation,
judgment, order, writ or decree, known to me (other than under the 1933
Act and the 1933 Act Regulations or under the securities or blue sky
laws of the various states, to which, in each case, I express no
opinion), of any government, government instrumentality or court,
domestic or foreign, having jurisdiction over the Company, any of its
subsidiaries or any of their respective properties, assets or
operations.
Exh B-2-2
<PAGE> 47
I have read the Registration Statement and the Prospectus. I did not
independently verify the accuracy or completeness of the statements made in the
Registration Statement and the Prospectus and I cannot and do not assume
responsibility for or pass on the accuracy and completeness of such statements,
except as set forth in paragraph 6 above and except insofar as such statements
relate to me. Subject to the foregoing, I hereby confirm to you that nothing has
come to my attention that would lead me to believe that the Registration
Statement or any amendment thereto, including the relevant Rule 430A Information
and Rule 434 Information (if applicable), (except for financial statements and
schedules and other financial data included therein or omitted therefrom, as to
which I need make no statement), at the time such Registration Statement or any
such amendment became effective, contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or that the Prospectus
or any amendment or supplement thereto (except for financial statements and
schedules and other financial data included therein or omitted therefrom, as to
which I need make no statement), at the time the Prospectus was issued, at the
time any such amended or supplemented prospectus was issued or at the date
hereof, included or includes any untrue statement of a material fact or omitted
or omits to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
Exh B-2-3
<PAGE> 1
Exhibit 4.2
[FACE OF NOTE]
UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY
TRUST COMPANY (THE "DEPOSITARY") (55 WATER STREET, NEW YORK, NEW YORK) TO THE
ISSUER HEREOF OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT,
AND ANY NOTE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME
AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY AND ANY PAYMENT
IS MADE TO CEDE & CO., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF,
CEDE & CO., HAS AN INTEREST HEREIN.
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN CERTIFICATED
FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A
NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR
ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A
SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY.
REGISTERED CUSIP No.: PRINCIPAL AMOUNT:
No. FXR-______ ___________ $___________
HOMESIDE LENDING, INC.
MEDIUM-TERM NOTE
(Fixed Rate)
<TABLE>
<CAPTION>
ORIGINAL ISSUE DATE: INTEREST RATE: % STATED MATURITY DATE:
<S> <C> <C>
INTEREST PAYMENT DATE(S) [ ] CHECK IF DISCOUNT NOTE
[ ] Issue Price: %
[ ] Other:
INITIAL REDEMPTION INITIAL REDEMPTION ANNUAL REDEMPTION
DATE: PERCENTAGE: % PERCENTAGE
REDUCTION: %
OPTIONAL REPAYMENT DATE(S)
AUTHORIZED DENOMINATION: ADDENDUM ATTACHED OTHER/ADDITIONAL
[ ] $1,000 and integral [ ] Yes PROVISIONS:
multiples thereof [ ] No
[ ] Other:
</TABLE>
<PAGE> 2
HOMESIDE LENDING, INC., a Florida corporation (the "Company," which
term includes any successor corporation under the Indenture hereinafter referred
to), for value received, hereby promises to pay to CEDE & CO., or registered
assigns, the principal sum of
, on the Stated Maturity Date specified above (or any
Redemption Date or Repayment Date, each as defined on the reverse hereof) (each
such Stated Maturity Date, Redemption Date or Repayment Date being hereinafter
referred to as the "Maturity Date" with respect to the principal repayable on
such date) and to pay interest thereon (and on any overdue principal, premium
and/or interest to the extent legally enforceable), at the Interest Rate per
annum specified above, until the principal hereof is paid or duly made available
for payment. The Company will pay interest in arrears on each Interest Payment
Date, if any, specified above (each, an "Interest Payment Date"), commencing
with the first Interest Payment Date next succeeding the Original Issue Date
specified above, and on the Maturity Date; PROVIDED, HOWEVER, that if the
Original Issue Date occurs between a Record Date (as defined below) and the next
succeeding Interest Payment Date, interest payments will commence on the second
Interest Payment Date next succeeding the Original Issue Date to the holder of
this Note on the Record Date with respect to such second Interest Payment Date.
Interest on this Note will be computed on the basis of a 360-day year of twelve
30-day months.
Interest on this Note will accrue from, and including, the immediately
preceding Interest Payment Date to which interest has been paid or duly provided
for (or from, and including, the Original Issue Date if no interest has been
paid or duly provided for) to, but excluding, the applicable Interest Payment
Date or the Maturity Date, as the case may be (each, an "Interest Period"). The
interest so payable, and punctually paid or duly provided for, on any Interest
Payment Date will, subject to certain exceptions described herein, be paid to
the person in whose name this Note (or one or more predecessor Notes) is
registered at the close of business on the fifteenth calendar day (whether or
not a Business Day, as defined below) immediately preceding such Interest
Payment Date (the "Record Date"); PROVIDED, HOWEVER, that interest payable on
the Maturity Date will be payable to the person to whom the principal hereof and
premium, if any, hereon shall be payable. Any such interest not so punctually
paid or duly provided for on any Interest Payment Date other than the Maturity
Date ("Defaulted Interest") shall forthwith cease to be payable to the holder on
the close of business on any Record Date, and shall be paid to the person in
whose name this Note 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 hereinafter referred to, notice whereof shall be given
to the holder of this Note by the Trustee not less than 10 calendar days prior
to such Special Record Date or may be paid at any time in any other lawful
manner not inconsistent with the requirements of any securities exchange on
which this Note may be listed, and upon such notice as may be required by such
exchange, all as more fully provided for in the Indenture.
2
<PAGE> 3
Payment of principal, premium, if any, and interest in respect of this
Note due on the Maturity Date will be made in immediately available funds upon
presentation and surrender of this Note (and, with respect to any applicable
repayment of this Note, upon delivery of a duly completed election form as
contemplated on the reverse hereof) at the corporate trust office of the Trustee
maintained for that purpose in the Borough of Manhattan, The City of New York,
currently located at 101 Barclay Street, Floor 21 West, New York, New York
10286, or at such other paying agency in the Borough of Manhattan, The City of
New York, as the Company may determine. Payment of interest due on any Interest
Payment Date other than the Maturity Date will be made by check mailed to the
address of the person entitled thereto as such address shall appear in the
Security Register maintained at the aforementioned office of the Trustee;
PROVIDED, HOWEVER, that a holder of U.S.$10,000,000 or more in aggregate
principal amount of Notes (whether having identical or different terms and
provisions) will be entitled to receive interest payments on such Interest
Payment 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 calendar 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.
If any Interest Payment Date or the Maturity Date falls on a day that
is not a Business Day, the required payment of principal, premium, if any,
and/or interest shall be made on the next succeeding Business Day with the same
force and effect as if made on the date such payment was due, and no interest
shall accrue with respect to such 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.
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.
The Company is obligated to make payment of principal, premium, if any,
and interest in respect of this Note in United States dollars (or in such other
coin or currency of the United States of America as at the time of such payment
is legal tender for the payment of such debts).
Reference is hereby made to the further provisions of this Note set
forth on the reverse hereof and, if so specified on the face hereof, in an
Addendum hereto, which further provisions shall have the same force and effect
as if set forth on the face hereof.
Notwithstanding the foregoing, if an Addendum is attached hereto or
"Other/Additional Provisions" apply to this Note as specified above, this Note
shall be subject to the terms set forth in such Addendum or such
"Other/Additional Provisions."
3
<PAGE> 4
Unless the Certificate of Authentication hereon has been executed by
the Trustee by manual signature, this Note shall not be entitled to any benefit
under the Indenture or be valid or obligatory for any purpose.
4
<PAGE> 5
IN WITNESS WHEREOF, HOMESIDE LENDING, INC. has caused this
Note to be duly executed by one of its duly authorized officers.
HOMESIDE LENDING, INC.
[SEAL]
By:________________________________
Title:
Dated:
Attest:
By:_________________________
Name:
Title:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION:
This is one of the Debt Securities of
the series designated therein referred
to in the within-mentioned Indenture.
THE BANK OF NEW YORK,
as Trustee
By____________________________
Authorized Signatory
5
<PAGE> 6
[REVERSE OF NOTE]
HOMESIDE LENDING, INC.
MEDIUM-TERM NOTE
(Fixed Rate)
This Note is one of a duly authorized series of Debt Securities (the
"Debt Securities") of the Company issued and to be issued under an Indenture,
dated as of May 15, 1997, as amended, modified or supplemented from time to time
(the "Indenture"), between the Company and The Bank of New York, as Trustee (the
"Trustee," which term includes any successor trustee under the Indenture), to
which Indenture and all indentures supplemental thereto reference is hereby made
for a statement of the respective rights, limitations of rights, duties and
immunities thereunder of the Company, the Trustee and the holders of the Debt
Securities, and of the terms upon which the Debt Securities are, and are to be,
authenticated and delivered. This Note is one of the series of Debt Securities
designated as "Medium-Term Notes Due Nine Months or More From Date of Issue"
(the "Notes"). All terms used but not defined in this Note or in an Addendum
hereto shall have the meanings assigned to such terms in the Indenture or on the
face hereof, as the case may be.
This Note is issuable only in registered form without coupons in
minimum denominations of U.S.$1,000 and integral multiples thereof or the
minimum Authorized Denomination specified on the face hereof.
This Note will not be subject to any sinking fund and, unless otherwise
specified on the face hereof in accordance with the provisions of the following
two paragraphs, will not be redeemable or repayable prior to the Stated Maturity
Date.
This Note will be subject to redemption at the option of the Company on
any date on or after the Initial Redemption Date, if any, specified on the face
hereof, in whole or from time to time in part in increments of U.S.$1,000 or the
minimum Authorized Denomination (provided that any remaining principal amount
hereof shall be at least U.S.$1,000 or such minimum Authorized Denomination), at
the Redemption Price (as defined below), together with unpaid interest accrued
thereon to the date fixed for redemption (each, a "Redemption Date"), on written
notice given no more than 60 nor less than 30 calendar days prior to the
Redemption Date and in accordance with the provisions of the Indenture. The
"Redemption Price" shall initially be the Initial Redemption Percentage
specified on the face hereof multiplied by the unpaid principal amount of this
Note to be redeemed. The Initial Redemption Percentage shall decline at each
anniversary of the Initial Redemption Date by the Annual Redemption Percentage
Reduction, if any, specified on the face hereof until the Redemption Price is
100% of unpaid principal amount to be redeemed. In the event of redemption of
this Note in part only, a new Note of
6
<PAGE> 7
like tenor for the unredeemed portion hereof and otherwise having the same terms
as this Note shall be issued in the name of the holder hereof upon the
presentation and surrender hereof.
This Note will be subject to repayment by the Company at the option of
the holder hereof on the Optional Repayment Date(s), if any, specified on the
face hereof, in whole or in part in increments of U.S.$1,000 or the minimum
Authorized Denomination (provided that any remaining principal amount hereof
shall be at least U.S.$1,000 or such minimum Authorized 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 fixed for repayment
(each, a "Repayment Date"). For this Note to be repaid, this Note must be
received, together with the form hereon entitled "Option to Elect Repayment"
duly completed, by the Trustee at its corporate trust office not more than 60
nor less than 30 calendar days prior to the Repayment Date. Exercise of such
repayment option by the holder hereof will be irrevocable. In the event of
repayment of this Note in part only, a new Note of like tenor for the unrepaid
portion hereof and otherwise having the same terms as this Note shall be issued
in the name of the holder hereof upon the presentation and surrender hereof.
If this Note is an Original Issue Discount Note as specified on the
face hereof, the amount payable to the holder of this Note in the event of
redemption, repayment or acceleration of maturity will be equal to the sum of
(1) the Issue Price specified on the face hereof (increased by any accruals of
the Discount, as defined below) and, in the event of any redemption of this Note
(if applicable), multiplied by the Initial Redemption Percentage (as adjusted by
the Annual Redemption Percentage Reduction, if applicable) and (2) any unpaid
interest on this Note accrued from the Original Issue Date to the Redemption
Date, Repayment Date or date of acceleration of maturity, as the case may be.
The difference between the Issue Price and 100% of the principal amount of this
Note is referred to herein as the "Discount."
For purposes of determining the amount of Discount that has accrued as
of any Redemption Date, Repayment Date or date of acceleration of maturity of
this Note, such Discount will be accrued so as to cause the yield on the Note to
be constant. 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
defined below), corresponds to the shortest period between Interest Payment
Dates (with ratable accruals within a compounding period) and an assumption that
the maturity of this Note will not be accelerated. If the period from the
Original Issue Date to the initial Interest Payment Date (the "Initial Period")
is shorter than the compounding period for this 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.
7
<PAGE> 8
If an Event of Default, as defined in the Indenture, shall occur and be
continuing, the principal of the Notes may be accelerated in the manner and with
the effect provided in the Indenture.
The Indenture contains provisions for defeasance of (i) the entire
indebtedness of the Notes or (ii) certain covenants and Events of Default with
respect to the Notes, in each case upon compliance with certain conditions set
forth therein, which provisions apply to the Notes.
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the holders of the Debt Securities at any time by the
Company and the Trustee with the consent of the holders of not less than a
majority of the aggregate principal amount of all Debt Securities at the time
outstanding and affected thereby. The Indenture also contains provisions
permitting the holders of not less than a majority of the aggregate principal
amount of the outstanding Debt Securities of any series, on behalf of the
holders of all such Debt Securities, to waive compliance by the Company with
certain provisions of the Indenture. Furthermore, provisions in the Indenture
permit the holders of not less than a majority of the aggregate principal amount
of the outstanding Debt Securities of any series, in certain instances, to
waive, on behalf of all of the holders of Debt Securities of such series,
certain past defaults under the Indenture and their consequences. Any such
consent or waiver by the holder of this Note shall be conclusive and binding
upon such holder and upon all future holders of this Note and other Notes issued
upon the registration of transfer hereof or in exchange heretofore or in lieu
hereof, whether or not notation of such consent or waiver is made upon this
Note.
No reference herein to the Indenture and no provision of this Note or
of the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay principal, premium, if any, and interest in
respect of this Note at the times, places and rate or formula, and in the coin
or currency, herein prescribed.
As provided in the Indenture and subject to certain limitations therein
and herein set forth, the transfer of this Note is registrable in the Security
Register of the Company upon surrender of this Note for registration of transfer
at the office or agency of the Company in any place where the principal hereof
and any premium or interest hereon are payable, duly endorsed by, or accompanied
by a written instrument of transfer in form satisfactory to the Company and the
Security Registrar duly executed by, the holder hereof or by his attorney duly
authorized in writing, and thereupon one or more new Notes, of authorized
denominations and for the same aggregate principal amount, will be issued to the
designated transferee or transferees.
8
<PAGE> 9
As provided in the Indenture and subject to certain limitations therein
and herein set forth, this Note is exchangeable for a like aggregate principal
amount of Notes of different authorized denominations but otherwise having the
same terms and conditions, as requested by the holder hereof surrendering the
same.
No service charge shall be made for any such registration of transfer
or exchange, but the Company may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Note for registration of transfer, the
Company, the Trustee and any agent of the Company or the Trustee may treat the
holder in whose name this Note is registered as the owner thereof for all
purposes, whether or not this Note be overdue, and neither the Company, the
Trustee nor any such agent shall be affected by notice to the contrary.
The Indenture and this Note shall be governed by and construed in
accordance with the laws of the State of New York applicable to agreements made
and to be performed entirely in such State.
9
<PAGE> 10
ABBREVIATIONS
The following abbreviations, when used in the inscription on the face
of this Note, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - ______ Custodian _____
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act_____________________
in common (State)
Additional abbreviations may also be used though not in the above list.
----------------------------------
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and transfer(s)
unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------
| |
|------------------------------|----------------------------------------------
- ------------------------------------------------------------------------------
(Please print or typewrite name and address including postal zip code of
assignee)
- ------------------------------------------------------------------------------
this Note and all rights thereunder hereby irrevocably constituting and
appointing
____________________________________________________________________ Attorney
to transfer this Note on the books of the Trustee, with full power of
substitution in the premises.
Dated:_____________________ _______________________________________
---------------------------------------
Notice: The signature(s) on this
Assignment must correspond with the
name(s) as written upon the face of
this Note in every particular,
without alteration or enlargement or
any change whatsoever.
10
<PAGE> 11
OPTION TO ELECT REPAYMENT
The undersigned hereby irrevocably request(s) and instruct(s) the
Company to repay this Note (or portion hereof specified below) pursuant to its
terms at a price equal to 100% of the principal amount to be repaid, together
with unpaid interest accrued hereon to the Repayment Date, to the undersigned,
at
- --------------------------------------------------------------------------------
(Please print or typewrite name and address of the undersigned)
For this Note to be repaid, the Trustee must receive at its corporate
trust office in the Borough of Manhattan, The City of New York, currently
located at 101 Barclay Street, Floor 21 West, New York, New York 10286, not more
than 60 nor less than 30 calendar days prior to the Repayment Date, this Note
with this "Option to Elect Repayment" form duly completed.
If less than the entire principal amount of this Note is to be repaid,
specify the portion hereof (which shall be increments of U.S.$1,000) which the
holder elects to have repaid and specify the denomination or denominations
(which shall be an Authorized Denomination) of the Notes to be issued to the
holder for the portion of this Note not being repaid (in the absence of any such
specification, one such Note will be issued for the portion not being repaid).
Principal Amount
to be Repaid: $
------------- ---------------------------------
Notice: The signature(s) on this
- ----------------------------- Option to Elect Repayment must
correspond with the name(s) as
Date: written upon the face of this
Note in every particular, without
alteration or enlargement or any
change whatsoever.
11
<PAGE> 1
Exhibit 4.3
[FACE OF NOTE]
UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY
TRUST COMPANY (THE "DEPOSITARY") (55 WATER STREET, NEW YORK, NEW YORK) TO THE
ISSUER HEREOF OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT,
AND ANY NOTE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME
AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY AND ANY PAYMENT
IS MADE TO CEDE & CO., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF,
CEDE & CO., HAS AN INTEREST HEREIN.(1)
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN CERTIFICATED
FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A
NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR
ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A
SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY.(2)
REGISTERED CUSIP No.: PRINCIPAL AMOUNT:
No. FLR-
--- ------------------ --------------------
HOMESIDE LENDING, INC.
MEDIUM-TERM NOTE
(Floating Rate)
INTEREST RATE BASIS ORIGINAL ISSUE DATE: STATED MATURITY DATE:
OR BASES:
IF LIBOR: IF CMT RATE:
[ ] LIBOR Reuters Designated CMT Telerate
Page: Page:
[ ] LIBOR Telerate IF Telerate Page 7052:
Page: [ ] Weekly Average
DESIGNATED LIBOR CURRENCY: [ ] Monthly Average
Designated CMT Maturity
Index:
INDEX MATURITY: INITIAL INTEREST RATE: % INTEREST PAYMENT DATE(S):
SPREAD (PLUS OR SPREAD MULTIPLIER: INITIAL INTEREST RESET
MINUS): DATE:
- --------
(1) This paragraph applies to global Notes only.
(2) This paragraph applies to global Notes only.
<PAGE> 2
MINIMUM INTEREST RATE: % MAXIMUM INTEREST RATE: % INTEREST RESET DATE(S):
INITIAL REDEMPTION INITIAL REDEMPTION ANNUAL REDEMPTION
DATE: PERCENTAGE: % PERCENTAGE REDUCTION: %
OPTIONAL REPAYMENT CALCULATION AGENT:
DATE(S):
INTEREST CATEGORY: DAY COUNT CONVENTION:
[ ] Regular Floating Rate Note [ ] 30/360 for the period
[ ] Floating Rate/Fixed Rate Note from to .
Fixed Rate Commencement Date: [ ] Actual/360 for the period
Fixed Interest Rate: % from to .
[ ] Inverse Floating Rate Note [ ] Actual/Actual for the period
Fixed Interest Rate: % from to .
Applicable Interest Rate Basis:
[ ] CHECK IF DISCOUNT NOTE
Issue Price %
AUTHORIZED DENOMINATION:
[ ] $1,000 and integral multiples
thereof
[ ] Other:
ADDENDUM ATTACHED
[ ] Yes
[ ] No
OTHER/ADDITIONAL PROVISIONS:
2
<PAGE> 3
HOMESIDE LENDING, INC., a Florida corporation (the "Company," which
term includes any successor corporation under the Indenture hereinafter referred
to), for value received, hereby promises to pay to CEDE & CO., or registered
assigns, the principal sum of
, on the Stated Maturity Date specified above (or any
Redemption Date or Repayment Date, each as defined on the reverse hereof) (each
such Stated Maturity Date, Redemption Date or Repayment Date being hereinafter
referred to as the "Maturity Date" with respect to the principal repayable on
such date) and to pay interest thereon (and on any overdue principal, premium
and/or interest to the extent legally enforceable) at a rate per annum equal to
the Initial Interest Rate specified above until the Initial Interest Reset Date
specified above and thereafter at a rate determined in accordance with the
provisions specified above and on the reverse hereof or in an Addendum hereto
with respect to one or more Interest Rate Bases specified above until the
principal hereof is paid or duly made available for payment. The Company will
pay interest in arrears on each Interest Payment Date, if any, specified above
(each, an "Interest Payment Date"), commencing with the first Interest Payment
Date next succeeding the Original Issue Date specified above, and on the
Maturity Date; PROVIDED, HOWEVER, that if the Original Issue Date occurs between
a Record Date (as defined below) and the next succeeding Interest Payment Date,
interest payments will commence on the second Interest Payment Date next
succeeding the Original Issue Date to the holder of this Note on the Record Date
with respect to such second Interest Payment Date.
Interest on this Note will accrue from, and including, the immediately
preceding Interest Payment Date to which interest has been paid or duly provided
for (or from, and including, the Original Issue Date if no interest has been
paid or duly provided for) to, but excluding, the applicable Interest Payment
Date or the Maturity Date, as the case may be (each, an "Interest Period"). The
interest so payable, and punctually paid or duly provided for, on any Interest
Payment Date will, subject to certain exceptions described herein, be paid to
the person in whose name this Note (or one or more predecessor Notes) is
registered at the close of business on the fifteenth calendar day (whether or
not a Business Day, as defined on the reverse hereof) immediately preceding such
Interest Payment Date (the "Record Date"); PROVIDED, HOWEVER, that interest
payable on the Maturity Date will be payable to the person to whom the principal
hereof and premium, if any, hereon shall be payable. Any such interest not so
punctually paid or duly provided for on any Interest Payment Date other than the
Maturity Date ("Defaulted Interest") shall forthwith cease to be payable to the
holder on the close of business on any Record Date, and shall be paid to the
person in whose name this Note 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 hereinafter referred to, notice
whereof shall be given to the holder of this Note by the Trustee not less than
10 calendar days prior to such Special Record Date or may be paid at any time in
any other lawful manner not inconsistent with the requirements of any securities
exchange on which this Note may be listed, and upon such notice as may be
required by such exchange, all as more fully provided for in the Indenture.
3
<PAGE> 4
Payment of principal, premium, if any, and interest in respect of this
Note due on the Maturity Date will be made in immediately available funds upon
presentation and surrender of this Note (and, with respect to any applicable
repayment of this Note, upon delivery of a duly completed election form as
contemplated on the reverse hereof) at the corporate trust office of the Trustee
maintained for that purpose in the Borough of Manhattan, The City of New York,
currently located at 101 Barclay Street, Floor 21 West, New York, New York
10286, or at such other paying agency in the Borough of Manhattan, The City of
New York, as the Company may determine. Payment of interest due on any Interest
Payment Date other than the Maturity Date will be made by check mailed to the
address of the person entitled thereto as such address shall appear in the
Security Register maintained at the aforementioned office of the Trustee;
PROVIDED, HOWEVER, that a holder of U.S.$10,000,000 or more in aggregate
principal amount of Notes (whether having identical or different terms and
provisions) will be entitled to receive interest payments on such Interest
Payment 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 calendar 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.
If any Interest Payment Date other than the Maturity Date would
otherwise be a day that is not a Business Day, such Interest Payment Date shall
be postponed to the next succeeding Business Day, except that if LIBOR is an
applicable Interest Rate Basis and such Business Day falls in the next
succeeding calendar month, such Interest Payment Date shall be the immediately
preceding Business Day. If the Maturity Date falls on a day that is not a
Business Day, the required payment of principal, premium, if any, and/or
interest shall be made on the next succeeding Business Day with the same force
and effect as if made on the date such payment was due, and no interest shall
accrue with respect to such payment for the period from and after the Maturity
Date to the date of such payment on the next succeeding Business Day.
The Company is obligated to make payment of principal, premium, if any,
and interest in respect of this Note in United States dollars.
Reference is hereby made to the further provisions of this Note set
forth on the reverse hereof and, if so specified on the face hereof, in an
Addendum hereto, which further provisions shall have the same force and effect
as if set forth on the face hereof.
Notwithstanding any provisions to the contrary contained herein, if the
face of this Note specifies that an Addendum is attached hereto or that
"Other/Additional Provisions" apply, this Note shall be subject to the terms set
forth in such Addendum or such "Other/Additional Provisions."
Unless the Certificate of Authentication hereon has been executed by
the Trustee by manual signature, this Note shall not be entitled to any benefit
under the Indenture or be valid or obligatory for any purpose.
4
<PAGE> 5
IN WITNESS WHEREOF, HOMESIDE LENDING, INC. has caused this
Note to be duly executed by one of its duly authorized officers.
HOMESIDE LENDING, INC.
[SEAL]
By________________________________
Title:
Attest:
By:__________________________
Name:
Title:
Dated:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION:
This is one of the Debt Securities of the series designated therein referred to
in the within-mentioned Indenture.
THE BANK OF NEW YORK,
as Trustee
By____________________________
Authorized Signatory
5
<PAGE> 6
[REVERSE OF NOTE]
HOMESIDE LENDING, INC.
MEDIUM-TERM NOTE
(Floating Rate)
This Note is one of a duly authorized series of Debt Securities (the
"Debt Securities") of the Company issued and to be issued under an Indenture,
dated as of May 15, 1997, as amended, modified or supplemented from time to time
(the "Indenture"), between the Company and The Bank of New York, as Trustee (the
"Trustee," which term includes any successor trustee under the Indenture), to
which Indenture and all indentures supplemental thereto reference is hereby made
for a statement of the respective rights, limitations of rights, duties and
immunities thereunder of the Company, the Trustee and the holders of the Debt
Securities, and of the terms upon which the Debt Securities are, and are to be,
authenticated and delivered. This Note is one of the series of Debt Securities
designated as "Medium-Term Notes Due Nine Months or More From Date of Issue"
(the "Notes"). All terms used but not defined in this Note or in an Addendum
hereto shall have the meanings assigned to such terms in the Indenture or on the
face hereof, as the case may be.
This Note is issuable only in registered form without coupons in
minimum denominations of U.S.$1,000 and integral multiples thereof or the
minimum Authorized Denomination specified on the face hereof.
This Note will not be subject to any sinking fund and, unless otherwise
specified on the face hereof in accordance with the provisions of the following
two paragraphs, will not be redeemable or repayable prior to the Stated Maturity
Date.
This Note will be subject to redemption at the option of the Company on
any date on or after the Initial Redemption Date, if any, specified on the face
hereof, in whole or from time to time in part in increments of U.S.$1,000 or the
minimum Authorized Denomination (provided that any remaining principal amount
hereof shall be at least U.S.$1,000 or such minimum Authorized Denomination), at
the Redemption Price (as defined below), together with unpaid interest accrued
thereon to the date fixed for redemption (each, a "Redemption Date"), on written
notice given no more than 60 nor less than 30 calendar days prior to the
Redemption Date and in accordance with the provisions of the Indenture. The
"Redemption Price" shall initially be the Initial Redemption Percentage
specified on the face hereof multiplied by the unpaid principal amount of this
Note to be redeemed. The Initial Redemption Percentage shall decline at each
anniversary of the Initial Redemption Date by the Annual Redemption Percentage
Reduction, if any, specified on the face hereof until the Redemption Price is
100% of unpaid principal amount to be redeemed. In the event of redemption of
this Note in part only, a new Note of like tenor for the unredeemed portion
hereof and otherwise having the same terms as this Note shall be issued in the
name of the holder hereof upon the presentation and surrender hereof.
6
<PAGE> 7
This Note will be subject to repayment by the Company at the option of
the holder hereof on the Optional Repayment Date(s), if any, specified on the
face hereof, in whole or in part in increments of U.S.$1,000 or the minimum
Authorized Denomination (provided that any remaining principal amount hereof
shall be at least U.S.$1,000 or such minimum Authorized 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 fixed for repayment
(each, a "Repayment Date"). For this Note to be repaid, this Note must be
received, together with the form hereon entitled "Option to Elect Repayment"
duly completed, by the Trustee at its corporate trust office not more than 60
nor less than 30 calendar days prior to the Repayment Date. Exercise of such
repayment option by the holder hereof will be irrevocable. In the event of
repayment of this Note in part only, a new Note of like tenor for the unrepaid
portion hereof and otherwise having the same terms as this Note shall be issued
in the name of the holder hereof upon the presentation and surrender hereof.
If the Interest Category of this Note is specified on the face hereof
as an Original Issue Discount Note, the amount payable to the holder of this
Note in the event of redemption, repayment or acceleration of maturity of this
Note will be equal to the sum of (1) the Issue Price specified on the face
hereof (increased by any accruals of the Discount, as defined below) and, in the
event of any redemption of this Note (if applicable), multiplied by the Initial
Redemption Percentage (as adjusted by the Annual Redemption Percentage
Reduction, if applicable) and (2) any unpaid interest on this Note accrued from
the Original Issue Date to the Redemption Date, Repayment Date or date of
acceleration of maturity, as the case may be. The difference between the Issue
Price and 100% of the principal amount of this Note is referred to herein as the
"Discount."
For purposes of determining the amount of Discount that has accrued as
of any Redemption Date, Repayment Date or date of acceleration of maturity of
this Note, such Discount will be accrued so as to cause an assumed yield on the
Note to be constant. The assumed constant yield will be calculated using a
30-day month, 360-day year convention, a compounding period that, except for the
Initial Period (as defined below), corresponds to the shortest period between
Interest Payment Dates (with ratable accruals within a compounding period), a
constant coupon rate equal to the initial interest rate applicable to this Note
and an assumption that the maturity of this Note will not be accelerated. If the
period from the Original Issue Date to the initial Interest Payment Date (the
"Initial Period") is shorter than the compounding period for this 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 interest rate borne by this Note will be determined as follows:
7
<PAGE> 8
(i) Unless the Interest Category of this Note is specified on
the face hereof as a "Floating Rate/Fixed Rate Note" or an "Inverse
Floating Rate Note" or as otherwise specified as Other/Additional
Provisions on the face hereof or in an Addendum hereto, this Note shall
be designated as a "Regular Floating Rate Note" and, except as set
forth below or specified on the face hereof or in an Addendum hereto,
shall bear interest at the rate determined by reference to the
applicable Interest Rate Basis or Bases (a) plus or minus the Spread,
if any, and/or (b) multiplied by the Spread Multiplier, if any, in each
case as specified on the face hereof. Commencing on the Initial
Interest Reset Date, the rate at which interest on this Note shall be
payable shall be reset as of each Interest Reset Date specified on the
face hereof; PROVIDED, HOWEVER, that the interest rate in effect for
the period, if any, from the Original Issue Date to the Initial
Interest Reset Date shall be the Initial Interest Rate.
(ii) If the Interest Category of this Note is specified on the
face hereof as a "Floating Rate/Fixed Rate Note," then, except as set
forth below or specified on the face hereof or in an Addendum hereto,
this Note shall bear interest at the rate determined by reference to
the applicable Interest Rate Basis or Bases (a) plus or minus the
Spread, if any, and/or (b) multiplied by the Spread Multiplier, if any.
Commencing on the Initial Interest Reset Date, the rate at which
interest on this 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 Original Issue Date to the
Initial Interest Reset Date shall be the Initial Interest Rate and
(z) the interest rate in effect for the period commencing on the Fixed
Rate Commencement Date specified on the face hereof to the Maturity
Date shall be the Fixed Interest Rate specified on the face hereof or,
if no such Fixed Interest Rate is specified, the interest rate in
effect hereon on the day immediately preceding the Fixed Rate
Commencement Date.
(iii) If the Interest Category of this Note is specified on
the face hereof as an "Inverse Floating Rate Note," then, except as set
forth below or specified on the face hereof or in an Addendum hereto,
this Note shall 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 Spread, if any, and/or (b) multiplied by the
Spread Multiplier, if any; PROVIDED, HOWEVER, that, unless otherwise
specified on the face hereof or in an Addendum hereto, the interest
rate hereon shall not be less than zero. Commencing on the Initial
Interest Reset Date, the rate at which interest on this 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 Original Issue Date to the Initial Interest Reset Date shall be the
Initial Interest Rate.
8
<PAGE> 9
Except as set forth above or specified on the face hereof or in an
Addendum hereto, 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 defined below) 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. If any Interest Reset Date would otherwise be a day
that is not a Business Day, such Interest Reset Date shall be postponed to the
next succeeding Business Day, except that if LIBOR is an applicable Interest
Rate Basis and such Business Day falls in the next succeeding calendar month,
such Interest Reset Date shall be the immediately preceding Business Day. In
addition, if the Treasury Rate is an applicable Interest Rate Basis and the
Interest Determination Date would otherwise fall on an Interest Reset Date, then
such Interest Reset Date will be postponed to the next succeeding Business Day.
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 if LIBOR is an applicable Interest
Rate Basis, such day is also a London Business Day (as defined below). "London
Business Day" means a day on which dealings in the Designated LIBOR Currency (as
hereinafter defined) are transacted in the London interbank market.
The interest rate applicable to each Interest Reset Period commencing
on the related Interest Reset Date will be determined by the Calculation Agent
as of the applicable Interest Determination Date and will be calculated by the
Calculation Agent on or prior to the Calculation Date (as defined below), except
with respect to the 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 shall 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 defined below);
and the "Interest Determination Date" with respect to LIBOR shall 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.
The "Interest Determination Date" with respect to the Treasury Rate shall be the
day in the week in which the applicable Interest Reset Date falls on which day
Treasury Bills (as defined below) 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
9
<PAGE> 10
Reset Date, the "Interest Determination Date" shall be such preceding Friday. If
the interest rate of this Note is determined with reference to two or more
Interest Rate Bases specified on the face hereof, the "Interest Determination
Date" pertaining to this Note shall be the most recent Business Day which is at
least two Business Days prior to the applicable Interest Reset Date on which
each Interest Rate Basis is determinable. Each Interest Rate Basis shall be
determined as of such date, and the applicable interest rate shall take effect
on the related Interest Reset Date.
Unless otherwise specified on the face hereof or in an Addendum hereto,
the rate with respect to each Interest Rate Basis will be determined in
accordance with the applicable provisions below.
CD RATE. If an Interest Rate Basis for this Note is specified on the
face hereof as the CD Rate, the CD Rate shall be determined as of the applicable
Interest Determination Date (a "CD Rate Interest Determination Date") as the
rate on such date for negotiable United States dollar certificates of deposit
having the Index Maturity specified on the face hereof 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 as published by the Federal Reserve Bank of New York in
its daily statistical release "Composite 3:30 P.M. Quotations for United States
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 specified on the
face hereof 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 selected by the
Calculation Agent for negotiable United States dollar certificates of deposit of
major United States money center banks for negotiable United States dollar
certificates of deposit with a remaining maturity closest to the Index Maturity
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. If an Interest Rate Basis for this Note is specified on the
face hereof as the CMT Rate, the CMT Rate shall be determined as of the
applicable Interest Determination Date (a "CMT Rate Interest Determination
Date") as the rate displayed on the Designated CMT Telerate Page (as defined
below) under the caption "...Treasury Constant Maturities...Federal Reserve
Board Release
10
<PAGE> 11
H.15...Mondays Approximately 3:45 P.M.," under the column for the Designated CMT
Maturity Index (as defined below) 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 on the face hereof, for the week or month, as applicable, ended
immediately preceding the week or 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 Date reported, according to their written records, by
three leading primary United States government securities dealers (each, a
"Reference Dealer") in The City of New York 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 U.S.$100 million. If three or four (and not
five) of such Reference Dealers are quoting as described above, then the CMT
Rate
11
<PAGE> 12
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 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
Markets Limited (or any successor service) on the page specified on the face
hereof (or any other page as may replace such page on such service (or any
successor service) for the purpose of displaying Treasury Constant Maturities as
reported in H.15(519) or, if no such page is specified on the face hereof, page
7052.
"Designated CMT Maturity Index" means the original period to maturity
of the United States Treasury securities (either 1, 2, 3, 5, 7, 10, 20 or 30
years) specified on the face hereof with respect to which the CMT Rate will be
calculated or, if no such maturity is specified on the face hereof, 2 years.
COMMERCIAL PAPER RATE. If an Interest Rate Basis for this Note is
specified on the face hereof as the Commercial Paper Rate, the Commercial Paper
Rate shall be determined as of the applicable Interest Determination Date (a
"Commercial Paper Rate Interest Determination Date") as the Money Market Yield
(as defined below) on such date of the rate for commercial paper having the
Index Maturity 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 such 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 as published in Composite
Quotations under the caption "Commercial Paper-Nonfinancial" (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 shall 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 selected by the Calculation Agent for commercial paper
having the Index Maturity placed for a non-financial entity 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.
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<PAGE> 13
"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. If an Interest Rate Basis for
this Note is specified on the face hereof as the Eleventh District Cost of Funds
Rate, the Eleventh District Cost of Funds Rate shall be determined as of the
applicable Interest Determination Date (an "Eleventh District Cost of Funds Rate
Interest Determination Date") as 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. If an Interest Rate Basis for this Note is
specified on the face hereof as the Federal Funds Rate, the Federal Funds Rate
shall be determined as of the applicable Interest Determination Date (a "Federal
Funds Rate Interest Determination Date") as 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
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 Interest
Determination Date shall 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
13
<PAGE> 14
arranged by three leading brokers of federal funds transactions in The City of
New York 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.
LIBOR. If an Interest Rate Basis for this Note is specified on the face
hereof as LIBOR, LIBOR shall be determined by the Calculation Agent as of the
applicable Interest Determination Date (a "LIBOR Interest Determination Date")
in accordance with the following provisions:
(i) if (a) "LIBOR Reuters" is specified on the face hereof, the
arithmetic mean of the offered rates (unless the Designated LIBOR Page (as
defined below) by its terms provides only for a single rate, in which case such
single rate will be used) for deposits in the Designated LIBOR Currency having
the Index Maturity, 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 defined below) as of 11:00 A.M., London time, on such
LIBOR Interest Determination Date, or (b) "LIBOR Telerate" is specified on the
face hereof, or if neither "LIBOR Reuters" nor "LIBOR Telerate" is specified on
the face hereof as the method for calculating LIBOR, the rate for deposits in
the Designated LIBOR Currency having the Index Maturity, 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 appear, or if no such rate appears, as applicable, LIBOR on such
LIBOR Interest Determination Date shall 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
shall request the principal London offices of each of four major reference banks
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, 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
such 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 in such Principal Financial Center selected by the
Calculation Agent for loans in the
14
<PAGE> 15
Designated LIBOR Currency to leading European banks, having the Index Maturity
and in a principal amount that is representative for a single transaction in
such 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 shall be LIBOR in effect on such LIBOR Interest Determination
Date.
"Designated LIBOR Currency" means the currency or composite currency
specified on the face hereof as to which LIBOR shall be calculated. If no such
currency or composite currency is specified on the face hereof, the Designated
LIBOR Currency shall be United States dollars.
"Designated LIBOR Page" means (a) if "LIBOR Reuters" is specified on
the face hereof, the display on the Reuter Monitor Money Rates Service (or any
successor service) on the page specified on the face hereof (or any other page
as may replace such page on such service (or any successor 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 on the face
hereof or neither "LIBOR Reuters" nor "LIBOR Telerate" is specified on the face
hereof as the method for calculating LIBOR, the display on the Dow Jones Markets
Limited (or any successor service) on the page specified on the face hereof (or
any other page as may replace such page on such service (or any successor
service)) for the purpose of displaying the London interbank rates of major
banks for the Designated LIBOR Currency.
"Principal Financial Center" means the capital city of the country
issuing the Specified Currency, except 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 and Zurich,
respectively.
PRIME RATE. If an Interest Rate Basis for this Note is specified on the
face hereto as the Prime Rate, the Prime Rate shall be determined as of the
applicable Interest Determination Date (a "Prime Rate Interest Determination
Date") as 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 defined below) 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, 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 in The City of New York selected by the Calculation
Agent. If fewer than four such quotations are so provided, 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 to obtain four
such prime rate quotations, provided such substitute banks or trust
15
<PAGE> 16
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 U.S.$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. If an Interest Rate Basis for this Note is specified on
the face hereof as the Treasury Rate, the Treasury Rate shall be determined as
of the applicable Interest Determination Date (a "Treasury Rate Interest
Determination Date") as 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, 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 are not reported as provided above by 3:00 P.M., New York
City time, on such Calculation Date, or if no such Auction is held, then the
Treasury Rate shall be calculated by the Calculation Agent and shall 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 selected by the Calculation Agent,
for the issue of Treasury Bills with a remaining maturity closest to the Index
Maturity; 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.
Notwithstanding the foregoing, the interest rate hereon shall not be
greater than the Maximum Interest Rate, if any, or less than the Minimum
Interest Rate, if any, in each case as specified on the face hereof. The
interest rate on this Note 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.
The "Calculation Date," if applicable, pertaining to any Interest
Determination Date shall be the earlier of (i) the tenth
16
<PAGE> 17
calendar day after such 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. At the request of the Holder hereof, the Calculation Agent
will provide to the Holder hereof the interest rate hereon 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.
Accrued interest hereon shall be an amount calculated by multiplying
the principal amount hereof by an accrued interest factor. Such accrued interest
factor shall be computed by adding the interest factor calculated for each day
in the applicable Interest Period. Unless otherwise specified as the Day Count
Convention on the face hereof, the interest factor for each such date shall be
computed by dividing the interest rate applicable to such day by 360 if the CD
Rate, the Commercial Paper Rate, the Eleventh District Cost of Funds Rate, the
Federal Funds Rate, LIBOR or the Prime Rate is an applicable Interest Rate Basis
or by the actual number of days in the year if the CMT Rate or the Treasury Rate
is an applicable Interest Rate Basis. Unless otherwise specified as the Day
Count Convention on the face hereof, the interest factor for this Note, if the
interest rate is calculated with reference to two or more Interest Rate Bases,
shall be calculated in each period in the same manner as if only the Applicable
Interest Rate Basis specified on the face hereof applied.
All percentages resulting from any calculation on this Note shall be
rounded to the nearest one hundred-thousandth of a percentage point, with five
one-millionths of a percentage point rounded upwards, and all amounts used in or
resulting from such calculation on this Note shall be rounded to the nearest
cent (with one-half cent being rounded upwards).
If an Event of Default, as defined in the Indenture, shall occur and be
continuing, the principal of the Notes may be accelerated in the manner and with
the effect provided in the Indenture.
The Indenture contains provisions for defeasance of (i) the entire
indebtedness of the Notes or (ii) certain covenants and Events of Default with
respect to the Notes, in each case upon compliance with certain conditions set
forth therein, which provisions apply to the Notes.
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the holders of the Debt Securities at any time by the
Company and the Trustee with the consent of the holders of not less than a
majority of the aggregate principal amount of all Debt Securities at the time
outstanding and affected thereby. The Indenture also contains provisions
permitting the holders of not less than a majority of the aggregate principal
amount of the outstanding Debt Securities of any series, on behalf of the
holders of all such Debt Securities, to waive compliance by the Company with
certain provisions of the Indenture.
17
<PAGE> 18
Furthermore, provisions in the Indenture permit the holders of not less than a
majority of the aggregate principal amount of the outstanding Debt Securities of
any series, in certain instances, to waive, on behalf of all of the holders of
Debt Securities of such series, certain past defaults under the Indenture and
their consequences. Any such consent or waiver by the holder of this Note shall
be conclusive and binding upon such holder and upon all future holders of this
Note and other Notes issued upon the registration of transfer hereof or in
exchange herefor or in lieu hereof, whether or not notation of such consent or
waiver is made upon this Note.
No reference herein to the Indenture and no provision of this Note or
of the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay principal, premium, if any, and interest in
respect of this Note at the times, places and rate or formula, and in the coin
or currency, herein prescribed.
As provided in the Indenture and subject to certain limitations therein
and herein set forth, the transfer of this Note is registrable in the Security
Register of the Company upon surrender of this Note for registration of transfer
at the office or agency of the Company in any place where the principal hereof
and any premium or interest hereon are payable, duly endorsed by, or accompanied
by a written instrument of transfer in form satisfactory to the Company and the
Security Registrar duly executed by, the holder hereof or by his attorney duly
authorized in writing, and thereupon one or more new Notes, of authorized
denominations and for the same aggregate principal amount, will be issued to the
designated transferee or transferees.
As provided in the Indenture and subject to certain limitations therein
and herein set forth, this Note is exchangeable for a like aggregate principal
amount of Notes of different authorized denominations but otherwise having the
same terms and conditions, as requested by the holder hereof surrendering the
same.
No service charge shall be made for any such registration of transfer
or exchange, but the Company may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Note for registration of transfer, the
Company, the Trustee and any agent of the Company or the Trustee may treat the
holder in whose name this Note is registered as the owner thereof for all
purposes, whether or not this Note be overdue, and neither the Company, the
Trustee nor any such agent shall be affected by notice to the contrary.
The Indenture and this Note shall be governed by and construed in
accordance with the laws of the State of New York applicable to agreements made
and to be performed entirely in such State.
18
<PAGE> 19
ABBREVIATIONS
The following abbreviations, when used in the inscription on the face
of this Note, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - ______ Custodian _____
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act_____________________
in common (State)
Additional abbreviations may also be used though not in the above list.
----------------------------------
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and transfer(s)
unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -------------------------------
| |
|------------------------------|----------------------------------------------
- ------------------------------------------------------------------------------
(Please print or typewrite name and address including postal zip code of
assignee)
- ------------------------------------------------------------------------------
this Note and all rights thereunder hereby irrevocably constituting and
appointing
____________________________________________________________________ Attorney
to transfer this Note on the books of the Trustee, with full power of
substitution in the premises.
Dated:_____________________ _______________________________________
---------------------------------------
Notice: The signature(s) on this
Assignment must correspond with the
name(s) as written upon the face of
this Note in every particular,
without alteration or enlargement or
any change whatsoever.
19
<PAGE> 20
OPTION TO ELECT REPAYMENT
The undersigned hereby irrevocably request(s) and instruct(s) the
Company to repay this Note (or portion hereof specified below) pursuant to its
terms at a price equal to 100% of the principal amount to be repaid, together
with unpaid interest accrued hereon to the Repayment Date, to the undersigned,
at
- --------------------------------------------------------------------------------
(Please print or typewrite name and address of the undersigned)
For this Note to be repaid, the Trustee must receive at its corporate
trust office in the Borough of Manhattan, The City of New York, currently
located at __________________________________________, not more than 60 nor less
than 30 calendar days prior to the Repayment Date, this Note with this "Option
to Elect Repayment" form duly completed.
If less than the entire principal amount of this Note is to be repaid,
specify the portion hereof (which shall be increments of U.S.$1,000) which the
holder elects to have repaid and specify the denomination or denominations
(which shall be an Authorized Denomination) of the Notes to be issued to the
holder for the portion of this Note not being repaid (in the absence of any such
specification, one such Note will be issued for the portion not being repaid).
Principal Amount
to be Repaid: $
------------- -------------------------------
Date: Notice: The signature(s) on
---------------------- this Option to Elect Repayment
must correspond with the
name(s) as written upon the
face of this Note in every
particular, without alteration
or enlargement or any change
whatsoever.
20
<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 April 18, 1997, on our audit of the consolidated financial
statements of HomeSide Lending, Inc. and subsidiaries (and to all references to
our Firm) included in or made part of this registration statement.
/s/ Arthur Andensen LLP
Jacksonville, Florida
February 4, 1998
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the use of our
report, dated March 14, 1997, on our audit of the consolidated financial
statements of BancBoston Mortgage Corporation (and to all references to our
Firm) included in or made a part of this registration statement.
/s/ Arthur Andersen LLP
Jacksonville, Florida
February 4, 1998
<PAGE> 1
Exhibit 23.3
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.
/s/ Arthur Andersen LLP
Jacksonville, Florida
February 4, 1998
<PAGE> 1
[COOPERS & LYBRAND LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in Post Effective Amendment No. 1 of this
registration statement on Form S-3 to Form S-1 (File No. 333-21193) 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."
/s/ Coopers & Lybrand, L.L.P.
Jacksonville, Florida
February 3, 1998
<PAGE> 1
Exhibit 23.5
ACCOUNTANTS' CONSENT
The audit 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, 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 audit. In
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
San Antonio, Texas
February 3, 1998
