UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 1-12979
HomeSide Lending, Inc.
(Exact name of registrant as specified in its charter)
Florida 59-2725415
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
7301 Baymeadows Way, Jacksonville, FL 32256
(Address of principal executive offices) (Zip Code)
(904) 281-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _x_ No __
Indicate the number of shares outstanding of each of the Company's classes of
common stock, as of the latest practicable date.
Title of each class Outstanding at December 28, 1999
------------------- --------------------------------
Common stock $1.00 par value 100 shares
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
PART I
ITEM 1. BUSINESS
General
HomeSide Lending, Inc. (the "Company") is one of the largest full service
residential mortgage banking companies in the United States. On February 10,
1998, National Australia Bank, Ltd. (the "National") acquired all outstanding
shares of the common stock of HomeSide International, Inc. (the "Parent") and
the Company adopted a fiscal year end of September 30 to conform to the fiscal
year of the National (see Note 2 of the Consolidated Financial Statements).
HomeSide's predecessor ("HomeSide Predecessor") was formed through the
acquisition of the mortgage banking operations of BankBoston, N.A. ("BBMC
Predecessor" to HomeSide Predecessor) on March 16, 1996 and subsequently
purchased the mortgage banking operations of Barnett Banks, Inc. Unless
otherwise designated, the term "HomeSide" refers to the Company for the periods
subsequent to February 10, 1998, to HomeSide Predecessor for the periods from
March 16, 1996 to February 10, 1998 and to BBMC Predecessor for periods prior to
March 16, 1998.
HomeSide's strategy emphasizes variable cost mortgage loan originations,
low cost mortgage servicing and effective risk management. Headquartered in
Jacksonville, Florida, HomeSide ranks as the 7th largest mortgage loan
originator and the 7th largest servicer in the United States at September 30,
1999 based on data published by Inside Mortgage Finance.
The residential mortgage market, which totaled approximately $4.7 trillion
at September 30, 1999, is the largest debt market in the world. 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. At September 30,
1999, the largest originator represented 7.6% of the market and the largest
servicer represented 6.4%, while the top 30 originators and servicers
represented 59.8% and 57.2% of their markets, respectively, based on data
published by Inside Mortgage Finance. 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 10 mortgage loan
servicers have increased their aggregate market share from 17% in 1990 to 40% as
of September 30, 1999.
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
with other production sources to acquire and service residential mortgage loans.
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 approximates the
average cost per employee of its major 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 its existing
relationships with Banc One Mortgage Corporation ("Bank One"), People's Bank,
and Cendant Mortgage Company ("Cendant").
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, 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.
Production
HomeSide participates in several origination channels, with a focus on
wholesale origination. Since the acquisition of BancBoston Mortgage Corporation
("BBMC"), wholesale channels (correspondent, co-issue, and broker) have
represented more than 90% of HomeSide's total production. Excluding the volumes
purchased from BankBoston, N.A., Barnett Bank, N.A. ("Barnett") and Banc One, no
single source within the correspondent or broker channels accounted for more
than 7% of total production since March 16, 1996. HomeSide's other origination
channels include telemarketing, direct mail campaigns and other advertising, and
mortgages related to affinity group and co-branding partnerships. 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 following table sets forth
production detail by HomeSide's origination channels. The periods presented
coincide with the commencement of operations of HomeSide and the acquisition of
HomeSide by the National (see Note 2 of the Consolidated Financial Statements):
Residential Loan Production by Channel
(dollars in millions) For the Period From For the Period From
October 1, 1998 to February 11, 1998 to
September 30, 1999 September 30, 1998
------------------ -------------------
Wholesale:
Correspondent $17,927 $11,309
Co-issue (a) 7,737 2,906
Broker 3,818 1,980
------------------- --------------------
Total wholesale 29,482 16,195
Direct 1,451 631
------------------- --------------------
Total production 30,933 16,826
Bulk acquisitions (b) 35,608 18,947
------------------- --------------------
Total production and acquisitions $66,541 $35,773
=================== ====================
(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) Represents the acquisition of servicing rights from another servicer.
Amounts represent the unpaid principal balance of mortgage debt to which
the acquired servicing rights relate.
HomeSide competes nationwide by offering a wide variety of mortgage
products designed to respond to consumer needs and tailored to address market
competition. HomeSide is primarily an originator of fixed rate 15- and 30-year
mortgage loans, which collectively represented 98% of the total production in
the fiscal year ended September 30, 1999, 98% of the total production in the
period from February 11, 1998 to September 30, 1998. HomeSide also offers other
products, such as ARMs, 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 on September 30, 1999 were California (11.8% of
unpaid principal balance), Florida (9.7%), Illinois (8.5%), Texas (5.6%), and
Michigan (5.0%). The largest segments of the servicing portfolio by state on
September 30, 1998 were California (14.1% of unpaid principal balance), Florida
(14.0%), Texas (6.9%), Massachusetts (5.5%) and Illinois (4.9%). The largest
segments of the servicing portfolio by state on February 10, 1998 were Florida
(17.2% of unpaid principal balance), California (15.3%), Massachusetts (7.0%),
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.
Sales and resales of homes typically peak during the spring and summer seasons
and decline to lower levels from mid-November through February. Refinancings
tend to be less seasonal and more closely related to changes in interest rates.
Historically, changes in the interest rate environment have mitigated the impact
of seasonality on HomeSide's results of operations. In addition, delinquency
rates typically rise in the winter months, which result 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 efficient originators of mortgage loans
nationwide. Its variable cost loan origination channels can be adjusted to
accommodate varying market sizes and allow HomeSide to remain competitive
through interest rate cycles. HomeSide also plans to continue to pursue bulk
acquisitions of mortgage servicing rights.
Wholesale Production
Correspondent Production
Through its correspondent program, HomeSide purchases loans from
approximately 850 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, 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 2,150 mortgage brokers nationwide. The broker controls
the process of application and loan processing. A pre-closing quality control
review is performed by HomeSide to verify the borrower's credit. All loans
originated through brokers are underwritten by HomeSide's approved contract
underwriters. Loans are funded by HomeSide and may be closed in either the
broker's name or HomeSide's name. Participants in this program prequalify on the
basis of creditworthiness, mortgage lending experience and reputation. Each
broker is subject to annual and ongoing reviews by HomeSide.
Direct Production
HomeSide's direct production includes soliciting loans via its website and
the use of telemarketing to solicit loans from several sources, including
refinancing 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 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.
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.
<PAGE>
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
Mortgage Guaranty Insurance Corp. and Republic Mortgage Insurance Company.
HomeSide grants delegated underwriting status to the remaining approximately 20%
of correspondents which enables the correspondents 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's underwriting process for its retail production operation is
fully automated. The automated underwriting technology uses third-party vendor
systems to analyze credit risk. 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 department. For its production compliance process, HomeSide
randomly selects a statistical sample of all closed loans monthly for review.
The sample generally comprises 3.5% - 4% of all loans closed each month. This
review includes reunderwriting of such loans, ordering second appraisals on 10%
of the sample, reverifying funds, employment and final applications and
reordering credit reports. In addition, a full underwriting review is conducted
on (i) all jumbo loans that become thirty days delinquent in the first four
payments and jumbo loans that go into foreclosure in the first thirty-six months
and (ii) all conventional loans that become sixty days delinquent in the first
six payments. 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 loan underwriting 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 5% 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 mortgage-backed security 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.
Secondary Marketing
HomeSide customarily sells all loans that it originates or purchases 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
GinnieMae ("GNMA") Mortgage Backed Securities. Conforming conventional mortgage
loans are generally pooled and exchanged under the purchase and guarantee
programs sponsored by Fannie Mae and FHLMC for Fannie Mae Mortgage Backed
Securities 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 on a servicing-released basis. For the fiscal year ended September 30,
1999, approximately 94% of the mortgage loans originated by HomeSide were sold
to Fannie Mae (49%), GNMA (28%), and FHLMC (17%). For the period from February
11, 1998 to September 30, 1998, approximately 92% of the mortgage loans
originated by HomeSide were sold to Fannie Mae (36%), GNMA (34%), and FHLMC
(22%). The remaining were sold to private investors.
The sale of mortgage loans may generate a gain or loss to HomeSide. Gains
or losses result primarily from two factors. First, HomeSide may purchase a loan
at a price that may be higher or lower than HomeSide would receive if it
immediately sold the loan in the secondary market. These pricing differences
occur principally as a result of competitive pricing conditions in the primary
loan origination market. Second, gains or losses may result from fluctuations in
interest rates that create changes in the market value of the loans or
commitments to purchase loans, from the time the interest rate commitment is
given to the mortgagor until the loan is sold to an investor.
HomeSide assesses the interest rate risk associated with outstanding
commitments that it has extended to fund loans and hedges the interest rate risk
of these commitments based upon a number of factors, including the remaining
term of the commitment, the interest rate at which the commitment was provided,
current interest rates and interest rate volatility. HomeSide constantly
monitors these factors and adjusts its hedging on a daily basis as needed.
HomeSide uses the Quantitative Risk Management system, a sophisticated hedging,
reporting and evaluation system, which has the ability to perform analyses under
various interest rate scenarios. HomeSide's interest rate risk is currently
hedged using a combination of forward sales of mortgage backed securities 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 of 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 fiscal year ended
September 30, 1999, the period from February 11, 1998 to September 30, 1998, and
the period from March 1, 1997 to February 10, 1998, 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. 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
the accuracy of information. In the event of a breach of these representations
and warranties, HomeSide typically corrects such problems, but, if the problems
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 rates decline, providing mortgagors
with refinancing opportunities.
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 0.467% for the fiscal year ended September 30,
1999 and 0.469% for the period from February 11, 1998 to September 30, 1998.
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.
HomeSide's servicing strategy is also to enhance the profitability of its
servicing activities 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 functions relating to
insurance, taxes and default management to third party vendors, 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.
<PAGE>
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. Nine states accounted for 57.0% of the outstanding unpaid
principal balance ("UPB") of HomeSide's total servicing portfolio, and the
largest volume by state is California with a 11.8% share of the total portfolio
on September 30, 1999. Nine states accounted for 59.9% of the outstanding unpaid
principal balance ("UPB") of HomeSide's total servicing portfolio on September
30, 1998, while the largest volume by state was California with a 14.1% share of
the total portfolio. Nine states accounted for 64.5% of the outstanding UPB of
HomeSide's total servicing portfolio on February 10, 1998, while the largest
volume by state was Florida with a 17.2% share of the total portfolio. HomeSide
actively monitors the geographic distribution of its servicing portfolio to
maintain a mix that it deems appropriate and makes adjustments as it considers
necessary.
The following table sets forth the geographic distribution of the
Company's servicing portfolio as of September 30, 1999, September 30, 1998 and
February 10, 1998:
Servicing Portfolio by State (a)
<TABLE>
<CAPTION>
At September 30, 1999 At September 30, 1998 At February 10, 1998
--------------------- --------------------- --------------------
(dollars in millions) UPB % of UPB UPB % of UPB UPB % of UPB
--- -------- --- -------- --- --------
<S> <C> <C> <C> <C> <C> <C>
California $ 16,334 11.8% $ 15,859 14.1% $ 14,858 15.3%
Florida 13,424 9.7 15,750 14.0 16,664 17.2
Illinois 11,740 8.5 5,544 4.9 3,729 3.8
Texas 7,825 5.6 7,772 6.9 6,096 6.3
Michigan 6,981 5.0 (b) (b) (b) (b)
Connecticut 6,737 4.9 (b) (b) (b) (b)
Massachusetts 6,295 4.5 6,190 5.5 6,792 7.0
Maryland 4,924 3.5 4,498 4.0 4,424 4.6
New York 4,809 3.5 3,144 2.8 2,939 3.0
Arizona 4,402 3.2 4,405 3.9 (b) (b)
Indiana 4,240 3.1 (b) (b) (b) (b)
Virginia 3,965 2.9 3,504 3.1 3,377 3.5
Colorado 3,954 2.8 3,716 3.3 (b) (b)
Georgia 3,936 2.8 3,676 3.3 3,720 3.8
Other (b) 39,182 28.2 38,351 34.2 34,327 35.5
-------------- ----------- -------------- ---------- --------------- ---------------
Total $138,748 100.0% $112,409 100.0% $ 96,926 100.0%
============== =========== ============== ========== =============== ===============
</TABLE>
(a) Servicing statistics are based on loans serviced by HomeSide and exclude
loans purchased but not yet on the servicing system.
(b) No other state represents more than 2.8% of HomeSide's servicing portfolio
at September 30, 1999 or 2.8% of HomeSide's servicing portfolio at
September 30, 1998.
Servicing Portfolio by Loan Type
At September 30, 1999, HomeSide's servicing portfolio consisted of $44.2
billion of FHA/VA servicing and $100.7 billion of conventional servicing. At
September 30, 1998, HomeSide's servicing portfolio consisted of $47.5 billion of
FHA/VA servicing and $67.4 billion of conventional servicing. At February 10,
1998, HomeSide's servicing portfolio consisted of $46.4 billion of FHA/VA
servicing and $52.5 billion of conventional servicing.
The weighted average interest rate of the loans in the Company's servicing
portfolio was 7.44% at September 30, 1999, 7.72% at September 30, 1998 and 7.85%
at February 10, 1998. HomeSide's servicing portfolio of loans was stratified by
interest rate as follows:
<PAGE>
<TABLE>
Servicing Portfolio by Interest Rate (a)
<CAPTION>
At September 30, 1999 At September 30, 1998 At February 10, 1998
--------------------- --------------------- --------------------
UPB UPB UPB
(dollars in Cumulative (dollars in Cumulative (dollars in Cumulative
millions) % of UPB % of UPB millions) % of UPB % of UPB millions) % of UPB % of UPB
----------- -------- -------- ----------- -------- ---------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Rate
Less than 6.0% $ 631 0.5% 0.5% $ 1,113 1.0% 1.0% $ 983 1.1% 1.1%
6.0% to 6.9% 32,353 23.3 23.8 13,491 12.0 13.0 9,633 10.9 12.0
7.0% to 7.9% 77,552 56.0 79.8 56,217 50.0 63.0 37,542 42.4 54.4
8.0% to 8.9% 22,258 16.0 95.8 33,012 29.4 92.4 29,293 33.1 87.5
9.0% to 9.9% 4,085 2.9 98.7 5,907 5.2 97.6 7,274 8.2 95.7
10.0% to 10.9% 1,435 1.0 99.7 2,081 1.8 99.4 2,912 3.3 99.0
Over 11.0% 434 0.3 100.0 588 0.6 100.0 823 1.0 100.0
----------- -------- ------------ -------- ----------- --------
Total $138,748 100.0% $112,409 100.0% $ 88,460 100.0%
=========== ======== =========== ======== =========== ========
</TABLE>
(a) Servicing statistics are based on loans serviced by HomeSide and exclude
loans purchased not yet on servicing system.
Loan Servicing Portfolio Delinquencies, Foreclosures and Losses
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 reimbursements 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 loans become delinquent until foreclosure,
when, if any proceeds are available, HomeSide may recover such amounts.
Delinquency rates typically rise in the winter months, which result in higher
servicing costs. However income from late payment fees collected have
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. 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.
For HomeSide, servicing losses on investor-owned loans and
foreclosure-related expenses, primarily representing losses on VA loans, totaled
$31.7 million for the fiscal year ended September 30, 1999, $21.2 million for
the period February 11, 1998 to September 30, 1998, and $22.0 million for the
HomeSide, Inc. Predecessor period from March 1, 1997 to February 10, 1998. The
decrease, on an annualized basis, for the fiscal year ended September 30, 1999
compared to the period from February 11, 1998 to September 30, 1998 was
primarily attributable to a decrease in loan charge-offs. The increase, on an
annualized basis, for the period from February 11, 1998 to September 30, 1998,
compared to the period from March 1, 1997 to February 10, 1998 was largely
attributable to the growth of the servicing portfolio and increased foreclosure
losses, which may continue at this level as the servicing portfolio ages.
Management believes that it has an adequate level of reserve for servicing
losses on investor-owned loans based on HomeSide's servicing volume, portfolio
composition, credit quality and historical loss rates, as well as estimated
future losses. Servicing losses are generally greatest during the three to six
year age of the loan.
<PAGE>
The following table sets forth HomeSide's delinquency and foreclosure
experience:
Servicing Portfolio Delinquencies
(Percent by Loan Count)
<TABLE>
<CAPTION>
HomeSide Predecessor
At September 30, 1999 At September 30, 1998 February 10, 1998
<S> <C> <C> <C>
Delinquent Mortgage Loans (at end of period)
30 Days 3.33% 3.72% 3.52%
60 Days 0.64 0.81 0.78
90 Days 0.53 0.65 0.72
------------------------ ------------------------ -------------------------
Total Delinquencies 4.50% 5.18% 5.02%
======================== ======================== =========================
Foreclosure Pending (at end of period) 0.61% 0.70% 0.74%
</TABLE>
Servicing Portfolio Hedging Program
The value of HomeSide's servicing portfolio is subject to volatility in
the event of unanticipated changes in prepayments. As interest rates increase,
prepayments by mortgagors decrease as fewer owners refinance, increasing
expected future cash flows from servicing revenue. Conversely, as interest rates
decrease, prepayments by mortgagors increase as homeowners seek to refinance
their mortgages, reducing expected future cash flows from servicing revenues on
those prepaid mortgages. Since the value of servicing rights is based on the net
present value of future cash flows, the value of the portfolio decreases in a
declining interest rate environment and increases in a rising rate environment.
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 sophisticated cash flow
valuation tools. Key assumptions involved in the valuation include servicing
costs and revenues, market discount rates, prepayment speeds and a number of
other variables. The value is then analyzed under various interest rate
scenarios that help HomeSide estimate its exposure to loss. This potential loss
exposure determines the hedge profile, which 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 "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Risk Management
Activities" for the fiscal year ended September 30, 1999, the period from
February 11, 1998 to September 30, 1998.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement standardizes the accounting for
derivative instruments and hedging activities by requiring that an entity
recognize those items as assets or liabilities in the statement of financial
position and measure them at fair value. If certain conditions are met, a
derivative instrument may be specifically designated as (a) a hedge of the
exposure to changes in the fair value of a recognized asset or liability, or of
an unrecognized firm commitment, (b) a hedge of the exposure to variability in
the cash flows of recognized assets, liability or forecasted transaction or (c)
a hedge of the foreign currency exposure of an unrecognized firm commitment, an
available-for-sale security, a forecasted transaction or a net investment in a
foreign operation. In June 1999, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133 - an Amendment of FASB Statement No. 133." This statement
deferred the effective date of FAS 133 to fiscal quarters of fiscal years
beginning after June 15, 2000. Management has not yet determined the impact of
these statements on the financial statements of HomeSide.
Servicing Technology
HomeSide's 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 technology providers.
HomeSide expects to achieve significant competitive advantages over time
through the use of its proprietary servicing software. At September 30, 1999,
HomeSide has substantially completed the conversion of its mortgage servicing
portfolio to its proprietary servicing software and services approximately 1.7
million loans on the system. This architecture will support HomeSide's portfolio
growth up to approximately twice the number of loans typically serviced on a
single system. The system will also permit continued development of workflow and
other client-server applications, contributing to increased productivity.
Regulation
As a United States subsidiary of a foreign bank, HomeSide is subject to
regulation, supervision and examination by the Federal Reserve Board. HomeSide's
mortgage banking business is also subject to the rules and regulations of the
U.S. Department of Housing and Urban Development ("HUD"), the Federal Housing
Administration ("FHA"), the Veterans Administration ("VA"), the Federal National
Mortgage Association ("Fannie Mae"), the Federal Home Loan Mortgage Corporation
("FHLMC" or "Freddie Mac"), the Government National Mortgage Association ("GNMA"
or "Ginnie Mae") and other regulatory agencies with respect to originating,
processing, underwriting, selling, securitizing and servicing mortgage loans. In
addition, there are other federal and state statutes and regulations affecting
such activities. These rules and regulations, among other things, impose
licensing obligations on HomeSide, prohibit discrimination and establish
underwriting guidelines which include provisions for inspections and appraisals,
require credit reports on prospective borrowers and set maximum loan amounts.
Moreover, lenders such as HomeSide are required annually to submit audited
financial statements to Fannie Mae, FHLMC, GNMA and HUD and to comply with each
regulatory entity's own financial requirements. HomeSide's business is also
subject to examination by Fannie Mae, FHLMC and GNMA and state regulatory
agencies at all times to assure compliance with applicable regulations, policies
and procedures.
Mortgage origination activities are subject to the provisions of various
federal and state statutes including, among others, the Equal Credit Opportunity
Act, the Federal Truth-in Lending Act, 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
it is now conducted.
During the period that BKB, Barnett or any of their subsidiaries held a
material ownership interest in HomeSide, HomeSide and its subsidiaries (i) were
under the jurisdiction, supervision, and examining authority of the Office of
the Comptroller of the Currency ("OCC"), and (ii) could only engage in
activities that were 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.
Competition
Mortgage bankers operate in a highly competitive and fragmented market. As
of September 30, 1999, the largest originator of loans represented 7.6% of the
market and the largest servicer represented 6.4%, while the top 30 originators
and servicers represented 60% and 57% of their markets, respectively, based on
data published by Inside Mortgage Finance.
<TABLE>
TOP 10 ORIGINATORS AND SERVICERS (dollars in billions)
<CAPTION>
9 Months - 1999 Originations Servicing Portfolio at September 30, 1999
<S> <C> <C> <C>
1 Chase Home Finance, NJ $79.8 1 Chase Home Finance, NJ $300.8
2 Norwest Mortgage, IA 69.0 2 Bank of America MTG. & affiliates, NC 285.2
3 Countrywide Credit Industries, CA 63.2 3 Norwest Mortgage, CA 274.3
4 Bank of America Mtg. & Affiliates, NC 50.8 4 Countrywide Credit Industries, CA 238.9
5 Washington Mutual, WA 31.3 5 Washington Mutual, WA 157.3
6 Fleet Mortgage Group, SC 29.8 6 GMAC Mortgage Corp., PA 147.5
7 HomeSide Lending, Inc., FL 23.3 7 HomeSide Lending, Inc., FL 145.6
8 ABN AMRO Mortgage Group, IL 23.1 8 FleetBoston Financial Corp., SC 142.8
9 Cendant Mortgage Services NJ 21.1 9 First Nationwide Mortgage, CA 95.3
10 Dime / North American Mortgage Co., CA 19.1 10 GE Capital Mortgage Services, Inc., NJ 88.0
Source: Inside Mortgage Finance.
</TABLE>
HomeSide competes with other mortgage bankers, financial institutions,
and other providers of financial services. The underwriting guidelines and
servicing requirements set by the participants in the secondary markets are
standardized. As a result, mortgage banking products (i.e., mortgage loans and
the servicing of those loans) have become difficult to differentiate. Therefore,
mortgage bankers compete primarily on the basis of price or service, making
effective cost management essential.
Mortgage bankers generally seek to develop cost efficiencies in one of two
ways: economies of scale or specialization. Large full-service national or
regional mortgage bankers have sought economies of scale through an emphasis on
wholesale originations, the introduction of automated processing systems and
expansion through acquisition. Smaller companies frequently identify and pursue
a particular expertise or customer base in an attempt to create a market niche.
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 automation of many
functions in mortgage banking, especially those related to servicing, has
reduced costs significantly for industry participants. Many mortgage bankers
that were not low cost, high volume producers or did not operate in a low cost
specialized field experienced earnings declines in the nineties, 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 have increased their aggregate
market share from 20.7% in 1990 to 49.6% as of September 30, 1998.
Employees
As of September 30, 1999, September 30, 1998,and February 10, 1998,
respectively, HomeSide had approximately 2,611 total employees, 2,356 total
employees and 1,891 total employees, substantially all of who were full-time
employees. HomeSide has no unionized employees and considers its relationship
with its employees generally to be satisfactory.
ITEM 2. PROPERTIES
HomeSide's corporate, administrative, and servicing headquarters are
located in Jacksonville, Florida, in facilities, which comprise approximately
146,939 square feet of owned space and approximately 397,161 square feet of
leased space. On December 4, 1998, HomeSide entered into a long-term lease
agreement for a 137,029 square foot building that was constructed in 1999
adjacent to its Jacksonville headquarters. The building is primarily used as a
servicing center. Included in the total is approximately 57,000 square feet of
warehouse space in Jacksonville, Florida for storing certain loan files, loan
servicing documents and other corporate records. In addition, HomeSide owns an
additional 190,000 square feet of space in San Antonio, Texas. HomeSide believes
that its present facilities are adequate for its operations.
ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
As a consequence of the acquisition by the National, there is no market
for the Registrant's common equity. HomeSide is an indirect wholly-owned
subsidiary of the National.
<PAGE>
PART II
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial and operating information of HomeSide set
forth below for the year ended September 30, 1999 and the period from February
11, 1998 to September 30, 1998 should be read in conjunction with, and is
qualified in its entirety by reference to, the Consolidated Financial Statements
and the notes thereto and in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" of HomeSide included
elsewhere in this document. The periods presented coincide with the acquisition
of HomeSide by the National (see Note 2 of the Consolidated Financial
Statements):
<TABLE>
<CAPTION>
(dollar amounts in thousands,
except share data) For the Fiscal For the Period From
Year Ended February 11, 1998 to
September 30, 1999 September 30, 1998
<S> <C> <C>
Selected Statement of Earnings Data:
Revenues:
Mortgage servicing fees $ 605,995 $ 312,678
Amortization of mortgage servicing rights (407,085) (189,881)
------------------- --------------------
Net servicing revenue 198,910 122,797
Interest income 181,173 99,749
Interest expense (121,697) (62,476)
------------------- --------------------
Net interest revenue 59,476 37,273
Net mortgage origination revenue 155,937 83,706
Other income 5,844 6,495
------------------- --------------------
Total revenues 420,167 250,271
Expenses:
Salaries and employee benefits 132,716 73,983
Occupancy and equipment 28,319 13,107
Servicing losses on investor-owned loans
and foreclosure-related expenses 31,749 21,202
Goodwill amortization 34,965 22,283
Other expenses 60,077 39,150
------------------- --------------------
Total expenses 287,826 169,725
Income before income taxes 132,341 80,546
Income tax expense 63,234 40,101
------------------- --------------------
Net income $ 69,107 $ 40,445
=================== ====================
Selected Balance Sheet Data at End of Period:
Mortgage loans held for sale $ 1,292,562 $ 2,048,989
Mortgage servicing rights 3,478,835 1,766,214
Total assets 6,363,652 5,720,161
Bank credit facility 1,505,401 2,749,000
Commercial paper 1,163,903 -
Long-term debt 1,184,384 1,185,926
Total liabilities 5,007,513 4,364,647
Total stockholders' equity 1,356,139 1,355,514
=================== ====================
Selected Operating Data:
Volume of loan production $ 30,933,088 $ 16,826,364
Loan servicing portfolio (at period end) 144,866,369 114,902,121
Loan servicing portfolio (average
outstanding during the period) 129,641,346 106,857,298
Weighted average interest rate of the
servicing portfolio (at period end) 7.44% 7.72%
Weighted average servicing fee of the
servicing portfolio, including ancillary 0.467% 0.469%
income (for the period)
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
HOMESIDE - FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999 AND
FOR THE PERIOD FROM FEBRUARY 11, 1998 TO SEPTEMBER 30, 1998
General
HomeSide Lending, Inc. (the "Company" or "HomeSide") is one of the largest full
service residential mortgage banking companies in the United States. HomeSide's
strategy emphasizes variable cost mortgage loan originations, low cost mortgage
servicing and effective risk management. Headquartered in Jacksonville, Florida,
HomeSide ranks as the 7th largest mortgage loan originator and the 7th largest
servicer in the United States at September 30, 1999 based on data published by
Inside Mortgage Finance.
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
Bank One, People's Bank and Cendant relationships.
HomeSide's predecessor ("HomeSide Predecessor") was formed through the
acquisition of the mortgage banking operations of BankBoston, N.A. ("BBMC
Predecessor" to HomeSide Predecessor) on March 16, 1996 and subsequently
purchased the mortgage banking operations of Barnett Banks, Inc. Unless
otherwise designated, the term "HomeSide" refers to the Company for the periods
subsequent to February 10, 1998 and to the HomeSide Predecessor for the periods
from March 16, 1996 to February 28, 1997 and March 1, 1997 to February 10, 1998.
On February 10, 1998, National Australia Bank, Ltd. (the "National") acquired
all outstanding shares of the common stock of HomeSide International, Inc. (the
"Parent"). As consideration, the National paid $27.825 per share for all of the
outstanding common stock and $17.7 million cash to retire all outstanding stock
options. The total purchase price was approximately $1.2 billion. The
transaction was accounted for as a purchase. As a result, all assets and
liabilities were recorded at their fair value on February 11, 1998, and the
purchase price in excess of the fair value of net assets acquired of $719.6
million was recorded as goodwill. Following the transaction described above, the
National owns 100% of the Parent's common stock and the Parent has become an
indirect wholly-owned subsidiary of the National. The Company also adopted a
fiscal year end of September 30 to conform to the fiscal year of the National.
The following periods presented coincide with the acquisition of HomeSide by the
National (see Note 2 of the Consolidated Financial Statements). HomeSide's
operating results are not directly comparable to its historical operating
results due, in part, to different balance sheet valuations (estimated fair
value as compared to historical cost).
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements. This report contains forward-looking
statements, which reflect the Company's current views with respect to future
events and financial performance. These forward-looking statements are subject
to certain risks and uncertainties, including those identified below, 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. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements whether as a result of new information, future events or otherwise.
The following factors could cause actual results to differ materially from
historical results or those anticipated: (1) the Company's ability to grow which
is dependent 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, (2) economic factors may negatively
affect the Company's profitability as the frequency of loan default tends to
increase in environments and (3) changes in interest rates may 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 the
Company's servicing portfolio. These risks and uncertainties are more fully
detailed in the Company's filings with the Securities and Exchange Commission.
Mortgage Banking
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) risk
management, a program designed to protect and manage the value of the Company's
mortgage loans held for sale and mortgage commitment pipeline and to protect the
economic performance of the servicing portfolio that could otherwise be
adversely affected by increased loan prepayments due to declines in interest
rates.
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 rate 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 sold. Mortgage bankers also
borrow on a longer term basis to finance their servicing assets and working
capital requirements. Revenues consist primarily of those related to servicing
and, to a lesser extent, fees and interest spreads from originations. The major
expenses of a mortgage banker include costs of financing, operating costs
related to origination and servicing and the amortization of mortgage servicing
rights.
Mortgage bankers typically seek to retain the rights to service the loans they
originate or acquire 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 generally based on the present value
of the servicing fee income stream, net of servicing costs, expected to be
received over the estimated life of the loans. The assets of a mortgage banking
company consist primarily of mortgage loans held for sale and the value of the
servicing rights.
Loan Production Activities
As a multi-channel loan production lender, HomeSide has one of the industry's
largest correspondent lending production operations, a full-service brokered
loan program and a national production center for consumer direct mortgage
lending. HomeSide also purchases servicing rights in bulk from time to time. By
focusing on production channels with a variable cost structure, HomeSide
minimizes the fixed costs associated with traditional mortgage branch offices.
Without the burden of high fixed cost loan origination networks, HomeSide is
positioned to weather a variety of interest rate environments. For the nine
months ended September 30, 1999, HomeSide was ranked the seventh largest
originator in the United States, according to Inside Mortgage Finance, with
approximately 2.2% market share of the estimated $1.1 trillion single-family
mortgage origination market.
The following information regarding loan production activities for HomeSide is
presented to aid in understanding the results of operations and financial
condition of HomeSide for the fiscal year ended September 30, 1999 and from the
period from February 11, 1998 to September 30, 1998 (in millions):
For the Fiscal For the Period From
Year Ended February 11, 1998 to
September 30, 1999 September 30, 1998
------------------------ ---------------------
Wholesale:
Correspondent $ 17,927 $ 11,309
Co-issue(a) 7,737 2,906
Broker 3,818 1,980
------------------------ ---------------------
Total wholesale 29,482 16,195
Direct 1,451 631
------------------------ ---------------------
Total production 30,933 16,826
Bulk acquisitions(b) 35,608 18,947
------------------------ ---------------------
Total production and
acquisitions $ 66,541 $ 35,773
======================== =====================
- -------------------------
(a) Represents the acquisition of servicing rights, which occurs concurrent
with the origination of the loan by a third party or on a flow basis.
Amounts represent the unpaid principal balance of mortgage debt to which
the acquired servicing rights relate.
(b) Represents the acquisition of servicing rights from another servicer.
Amounts represent the unpaid principal balance of mortgage debt to which
the acquired servicing rights relate.
Total loan production, excluding bulk acquisitions, was $30.9 billion for the
fiscal year ended September 30, 1999 compared to $16.8 billion for the period
from February 11, 1998 to September 30, 1998, a 15% increase on an annualized
basis. HomeSide's wholesale lending channels, including correspondent, co-issue
and broker originations, were the primary contributors to production volume
increases on an annualized basis.
Correspondent lending volume was approximately equal to the prior year on an
annualized basis. Co-issue volume increased 66% on an annualized basis. A major
contributor to 1999 correspondent and co-issue volumes were the additions of
Bank One and People's Bank as Preferred Partners on June 5, 1998 and November
23, 1998, respectively. As Preferred Partners, Bank One and People's Bank will
sell a significant portion of the residential mortgage loans originated to
HomeSide over the next five years. Another contributor was the strategic
alliance formed on June 15, 1999 between HomeSide and Cendant, one of the
largest retail mortgage loan originators in the United States. Cendant agreed to
sell up to $7 billion of servicing assets annually to HomeSide for a five-year
period.
On May 29, 1998, HomeSide purchased the operations of NationsBank's subsidiary,
Loan America, a national broker network. This purchase is contributing to
HomeSide's expansion of its broker network, a production channel that is key to
HomeSide's variable cost origination strategy. The broker channel volume
increased 21% from the period from February 11, 1998 to September 30, 1998, on
an annualized basis.
Consumer direct lending volume increased 44%, on an annualized basis, from the
period from February 11, 1998 to September 30, 1998. HomeSide made significant
investments during the fiscal year ended 1999 in its consumer direct technology
platform. This advanced platform combines telephone and internet loan
origination capabilities. HomeSide also partnered with Intuit and Microsoft to
grow the direct lending channel by increasing internet business.
The interest rate environment has significantly affected the size of the
mortgage origination market, primarily refinances. When interest rates decline,
increasing numbers of mortgagees refinance their loans. As a result, the
mortgage origination market grows. During 1998 and 1999, periods of high
refinances, HomeSide strived to keep production at sustainable levels should the
market size return to 1997 and 1996 volumes. As an alternative, HomeSide
emphasized its acquisitions strategy to maintain and increase the servicing
portfolio size during these periods of relatively high portfolio runoff.
As part of this acquisition strategy, HomeSide completed bulk acquisitions
totaling $35.6 billion and $18.9 billion for the fiscal year ended September 30,
1999 and the period from February 11, 1998 to September 30, 1998, respectively.
These purchases were a continuation of HomeSide's targeted approach to grow the
servicing portfolio. Included in bulk acquisitions for the fiscal year ended
1999 is the March 4, 1999 purchase of First Chicago NBD Mortgage Company's $18.0
billion servicing portfolio. This acquisition is an expansion of HomeSide's
strategic alliance with Bank One. In addition, First Chicago has committed to
sell the servicing rights associated with its residential mortgage originations
to HomeSide on a flow basis. Also included in 1999 bulk acquisitions are $5.0
billion in mortgage loans purchased from People's Bank on November 23, 1998 and
$8.8 billion in mortgage loans purchased from Cendant during the fiscal year.
Included in bulk acquisitions for fiscal 1998 is the $16.6 billion servicing
portfolio from Bank One on June 5, 1998.
Servicing Portfolio
Management believes that HomeSide is one of the most efficient mortgage loan
servicers in the industry based on its servicing cost per loan and the number of
loans serviced per employee. The servicing operation makes extensive use of
state-of-the-art technology, process re-engineering and expense management. With
a portfolio size of $144.9 billion, HomeSide services the loans of approximately
1.7 million homeowners from across the United States and is committed to
protecting the value of this important asset by a sophisticated risk management
strategy. HomeSide anticipates its low cost of servicing loans will continue to
maximize the bottom-line impact of its growing servicing portfolio. HomeSide's
focus on efficient and low cost processes is pursued through the selective use
of automation as well as the strategic outsourcing of selected servicing
functions and effective control of delinquencies and foreclosures. At September
30, 1999, HomeSide was ranked the seventh largest servicer in the United States,
with approximately 3.1% market share of the $4.7 trillion single family
mortgages outstanding.
The following information on the dollar amounts of loans serviced is presented
to aid in understanding the results of operations and financial condition of
HomeSide for the year ended September 30, 1999 and the period from February 11,
1998 to September 30, 1998 (in millions):
<PAGE>
<TABLE>
<CAPTION>
For the Fiscal For the Period From
Year Ended February 11, 1998 to
September 30, 1999 September 30, 1998
------------------------- -------------------------
<S> <C> <C>
Balance at beginning of period $114,902 $ 98,906
Additions 66,541 35,773
Reductions:
Scheduled amortization 3,386 1,747
Prepayments 30,201 16,809
Foreclosures 1,296 848
Sales of servicing 1,694 373
------------------------- -------------------------
Total reductions 36,577 19,777
------------------------- -------------------------
Balance at end of period $144,866 $114,902
========================= =========================
</TABLE>
The number of loans serviced at September 30, 1999 was 1,656,986 compared to
1,394,286 at September 30, 1998. HomeSide's strategy is to build its mortgage
servicing portfolio by concentrating on variable cost loan origination
strategies, and as a result, benefit from improved economies of scale. A key to
efficiently servicing HomeSide's future portfolio growth is its proprietary
servicing software. This system allows HomeSide to double the number of loans
typically serviced on a single system. HomeSide had substantially converted its
loan servicing portfolio to its proprietary servicing software at September 30,
1998.
Results of Operations for the fiscal year ended September 30, 1999 compared to
the period from February 11, 1998 to September 30, 1998:
Summary
HomeSide's net income, excluding goodwill amortization from the acquisition of
HomeSide by the National, increased on an annualized basis to $104.1 million for
the year ended September 30, 1999 from $62.7 million for the period from
February 11, 1998 to September 30, 1998. Total revenues for the fiscal year
ended September 30, 1999 increased on an annualized basis to $420.2 million from
$250.3 million for the period from February 11, 1998 to September 30, 1998.
Annualized increases in net income and revenues for the fiscal year 1999
compared to the period from February 11, 1998 to September 30, 1998 were
primarily attributable to increases in loan production volumes and growth in the
servicing portfolio through strategic bulk acquisitions. Record low mortgage
rates and high mortgage pre-payment activity continued in the U.S. housing
market through the third quarter of fiscal 1999. Total expenses increased on an
annualized basis for the fiscal year ended September 30, 1999 from the period
February 11, 1998 to September 30, 1998 as a result of increases in production
volume, expenses associated with the growing mortgage servicing portfolio and
high loan pre-payment activity.
Net Servicing Revenue
Net servicing revenue was $198.9 million for the fiscal year ended September 30,
1999 compared to $122.8 million for the period from February 11, 1998 to
September 30, 1998. Net servicing revenue is comprised of mortgage servicing
fees, ancillary servicing revenue, and amortization of mortgage servicing rights
expense.
Mortgage servicing fees increased 21%, on an annualized basis to $606.0 million
for the fiscal year ended September 30, 1999 from $312.7 million for the period
from February 11, 1998 to September 30,1998, primarily as a result of strategic
acquisitions and growth of the servicing portfolio through loan production
channels. The servicing portfolio increased to $144.9 billion at September 30,
1999 compared to $114.9 billion at September 30, 1998, due to increased
production volume and bulk acquisitions, partially offset by loan prepayments
and scheduled amortization. HomeSide's weighted average interest rate of the
mortgage loans in the servicing portfolio was 7.44% at September 30, 1999 and
7.72% at September 30, 1998. The weighted average servicing fee, including
ancillary income, for the servicing portfolio was 0.467% for the fiscal year
ended September 30, 1999 and 0.469% for the period from February 11, 1998 to
September 30, 1998.
Amortization expense increased 34% on an annualized basis to $407.1 million for
the fiscal year ended September 30, 1999 from $189.9 million for the period from
February 11, 1998 to September 30, 1998 due to increased prepayment rates.
Prepayment rates were affected by the increased level of refinance activity
during fiscal 1999, which was driven by the relative level of mortgage interest
rates and activity in the home purchase market. 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. A decrease in mortgage interest
rates results in an increase in prepayment estimates used in calculating
periodic amortization expense. Because mortgage servicing rights are amortized
over the expected period of service fee revenues, an increase in mortgage
prepayment activity typically results in a shorter estimated life of the
mortgage servicing assets and, accordingly, higher amortization expense.
Net Interest Revenue
Net interest revenue is driven by the level of interest rates, the direction in
which rates are moving, the spread between short and long-term interest rates,
and the rates at which HomeSide is able to borrow. These factors influence the
size of the residential mortgage origination market, HomeSide's loan production
volumes and the interest rates HomeSide earns on loans and pays to its lenders.
Loan refinancing levels are the largest 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 origination market and HomeSide's loan
production volumes. Higher loan production volumes result in higher average
balances of loans held for sale and consequently higher levels of interest
income 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 totaled $59.5 million for the fiscal year ended September
30, 1999, approximately equal on an annualized basis to net interest income of
$37.3 million for the period from February 11, 1998 to September 30, 1998. Net
interest earned on mortgage loans held for sale increased as a result of
increased production, on an annualized basis, during the fiscal year ended
September 30, 1999. Credits earned on escrow deposits increased, on an
annualized basis, due to an increase in loan prepayments during the fiscal year
ended September 30, 1999. The principal balances of prepaid mortgage loans are
accumulated in escrow accounts before they are remitted to investors. These
increases were offset by increased interest expense on borrowings to fund the
growing mortgage servicing assets.
During the fiscal year 1999, HomeSide diversified funding sources by
establishing a $1.5 billion commercial paper program, increasing its medium-term
note shelf registration by $1.0 billion, and issuing $230 million in floating
rate notes. In June 1998, HomeSide established a line of credit with the
National with the borrowing rate of LIBOR. The line of credit agreement was
amended on June 22, 1999. Under the credit facility, HomeSide can borrow up to
$2.5 billion, subject to limits imposed by regulatory authorities. As of
September 30, 1999, Australian financial regulations limited the National's
ability to lend funds to HomeSide, a non-bank affiliate, to approximately $2.1
billion.
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 hedging of secondary marketing activities and fees charged to
review loan documents for purchased loan production.
Net mortgage origination revenue was $155.9 million for the fiscal year ended
September 30, 1999 compared to $83.7 million for the period from February 11,
1998 to September 30, 1998, a 16% increase on an annualized basis. This increase
is attributable to an annualized increase in HomeSide's loan production volumes
resulting from increases in refinancing levels and the origination market
through the third quarter of fiscal 1999.
Other Income
Other income for the fiscal year ended September 30, 1999 was $5.8 million
compared to $6.5 million for the period from February 11, 1998 to September 30,
1998. The decrease was primarily due to the prior year recognition of income in
relation to payments received for termination of the Preferred Seller
arrangement with NationsBank that resulted from the NationsBank acquisition of
Barnett.
Salaries and Employee Benefits
Salaries and employee benefits expense was $132.7 million for the fiscal year
ended September 30, 1999 compared to $74.0 million for the period from February
11, 1998 to September 30, 1998. The average number of full-time equivalent
employees increased to 2,627 for the fiscal year ended September 30, 1999 from
2,356 for the period from February 11, 1998 to September 30, 1998. The increases
on an annualized basis were due to growth in the number of employees to service
the growing mortgage servicing portfolio, increased prepayment activity and
increased production volume.
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
fiscal year ended September 30, 1999 was $28.3 million compared to $13.1 million
for the period from February 11, 1998 to September 30, 1998. The annualized
increase was mainly due to increased expenses incurred to enhance processing
systems and technology expenditures necessary to support targeted business
growth.
Servicing Losses on Investor-Owned Loans and Foreclosure-Related Expenses
Servicing losses on investor-owned loans 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 the fiscal year ended September 30, 1999, the servicing losses on
investor-owned loans and foreclosure-related expenses totaled $31.7 million
compared to $21.2 million for the period from February 11, 1998 to September 30,
1998. The decrease, on an annualized basis, was primarily attributable to a
decrease in loan charge-offs.
Included in accounts payable and accrued liabilities at September 30, 1999 and
September 30, 1998 is a reserve for estimated servicing losses on investor-owned
loans of $16.7 million and $21.7 million, respectively. The reserve has been
established for potential losses related to the mortgage servicing portfolio.
Increases to the reserve are charged to earnings as servicing losses on
investor-owned loans. The reserve is decreased for actual losses incurred
related to the mortgage servicing portfolio. HomeSide's historical loss
experience on VA loans generally has been consistent with industry experience.
The reserve was reduced in fiscal 1999 based on a reduction in charge-off and
delinquency trends and changes in HomeSide's portfolio characteristics.
Management believes that HomeSide has an adequate level of reserve based on
servicing volume, portfolio composition, credit quality and historical loss
rates, as well as estimated future losses. Servicing losses are generally
greatest during the three to six year age of the loan.
The following table sets forth HomeSide's delinquency and foreclosure
experience:
<TABLE>
Servicing Portfolio Delinquencies
(percent by loan count)
<CAPTION>
September 30, 1999 September 30, 1998
------------------ -------------------
<S> <C> <C>
Servicing Portfolio Delinquencies, excluding bankruptcies (at end of period)
30 days 3.33% 3.72%
60 days 0.64% 0.81%
90+ days 0.53% 0.65%
------------------ -------------------
Total past due 4.50% 5.18%
================== ===================
Foreclosures pending 0.61% 0.70%
================== ===================
September 30, 1999 September 30, 1998
------------------ -------------------
Weighted average portfolio age in months 44.1 46.1
</TABLE>
Other Expenses and Goodwill Amortization
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, excluding goodwill amortization of $35.0 million resulting from
the acquisition of HomeSide by the National, were $60.1 million during the
fiscal year ended September 30, 1999, compared to $39.2 million for the period
from February 11, 1998 to September 30, 1998, a 4% decrease on an annualized
basis. The annualized decrease was primarily due to lower consulting,
advertising, litigation and insurance expenses associated with a decrease in
production volumes and loan pre-payment activity during the fourth quarter of
fiscal 1999.
Income Tax Expense
HomeSide's income tax expense was $63.2 million for the fiscal year ended
September 30, 1999 and $40.1 million for the period from February 11, 1998 to
September 30, 1998. The effective income tax rate for the fiscal year ended
September 30, 1999 and for the period from February 11, 1998 to September 30,
1998 was approximately 48% and 50% respectively.
Risk Management Activities
HomeSide has a risk management program designed to protect the economic value of
its mortgage servicing portfolio from declines in value primarily due to
increases in estimated loan prepayment speeds, which are mainly 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 fiscal year ended September 30, 1999, HomeSide utilized options on
U.S. Treasury bond and note futures, U.S. Treasury bond and note futures,
options on Eurodollar futures, swaptions and interest rate swap cap structures
to protect a significant portion of the market value of its mortgage servicing
portfolio from a decline in value. The risk management contracts used by
HomeSide have characteristics such that they tend to increase in value as
interest rates decline. Conversely, these risk management contracts tend to
decline in value as interest rates rise. Accordingly, changes in value of these
risk management instruments will tend to move inversely with changes in value of
HomeSide's mortgage servicing rights.
These risk management instruments 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 risk management
instruments are marked-to-market with changes in market value deferred and
applied as an adjustment to the basis of the related mortgage servicing right
asset being hedged. As a result, any changes in market value that are deferred
are amortized and evaluated for impairment in the same manner as the related
mortgage servicing rights. The effectiveness of HomeSide's hedging activity can
be measured by the correlation between changes in the value of the risk
management instruments 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. If management's
ongoing assessment of correlation indicates that high correlation is not being
achieved, the Company will discontinue the application of hedge accounting and
recognize a gain or loss to the extent the hedge results have not been offset by
changes in value of the hedged asset during the hedge period. During the periods
presented, HomeSide has experienced a high measure of correlation between
changes in the value of mortgage servicing rights and the risk management
contracts.
During the fiscal year ended September 30, 1999, deferred losses on risk
management contracts resulted in net deferred hedge losses of $494.7 million
which were substantially offset by changes in the value of mortgage servicing
rights and included in the carrying value of mortgage servicing rights. Activity
in the deferred hedge account during the fiscal year ended September 30, 1999 is
as follows (in thousands):
Net deferred hedge gain at October 1, 1998 $ 389,572
Net deferred hedge losses (898,112)
Amortization 13,797
--------------------
Net deferred hedge loss at September 30, 1999 $(494,743)
====================
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 September 30, 1999 was ($290.4) million. This amount is
comprised of interest rate swaps, caps and swaptions with a fair value of
$(349.8) million, partially offset by options on U.S. Treasury bonds and options
on Eurodollar futures with a fair market value of $59.4 million. The premiums
paid on options along with amounts due to or from counterparties related to risk
management contracts are included in Other Assets and Other Liabilities in the
accompanying consolidated balance sheets. See "-- Liquidity and Capital
Resources" for further discussion of HomeSide's sources and uses of cash. See
Note 3 of Notes to Consolidated Financial Statements for a description of
HomeSide's accounting policy for its risk management contracts. See Notes 12 and
13 of Notes to Consolidated Financial Statements for additional fair value
disclosures with respect to HomeSide's risk management contracts.
Liquidity and Capital Resources
The Company's principal financing needs are the financing of loan origination
activities and the investment in mortgage servicing rights. To meet these needs,
the Company currently utilizes funding from an independent syndicate of banks
and from the National, commercial paper, medium-term notes and cash flow from
operations. In the past, the Company has also utilized short-term credit
facilities and public offerings of common stock. HomeSide continues to
investigate and pursue alternative and supplementary methods to finance its
growing operations through the public and private capital markets. These may
include methods designed to expand the Company's financial capacity and reduce
its cost of capital. In addition, to facilitate the sale and distribution of
certain mortgage products, HomeSide Mortgage Securities, Inc., a wholly-owned
subsidiary of HomeSide, may continue to issue mortgage backed securities.
Operations
Net cash provided by operations for the fiscal year ended September 30, 1999 was
$1,459.2 million. Net cash used in operations for the period from February 11,
1998 to September 30, 1998 was $408.0 million. 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. Higher cash demands to meet increased loan production levels are
primarily met through borrowings and loan sales.
Investing
Net cash used in investing activities was $1,374.1 million and $612.2 million
for the fiscal year ended September 30, 1999 and for the period from February
11, 1998 to September 30, 1998, respectively. For the fiscal year ended
September 30, 1999, cash was used for the purchase and origination of mortgage
servicing rights, the purchase of risk management contracts and the purchase of
premises and equipment. Uses of cash were partially offset by cash provided by
early pool buyout reimbursements. For the period from February 11, 1998 to
September 30, 1998, cash was used for the purchase and origination of mortgage
servicing rights, funding the early pool buyout program and the purchase of
premises and equipment. These uses of cash were offset by net proceeds from risk
management contracts. 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
Net cash provided by financing activities was $82.7 million for the fiscal year
ended September 30, 1999 and $1,023.1 million for the period from February 11,
1998 to September 30, 1998. The primary source of cash from financing activities
during the fiscal year ended September 30, 1999 was from the issuance of
commercial paper and short-term notes. Cash used in financing activities during
the period ended September 30, 1999 was for the re-payment of borrowings from
HomeSide's line of credit and dividends paid to the Parent. The primary source
of cash from financing activities during the period from February 11, 1998 to
September 30, 1998 was from the issuance of medium-term notes and net borrowings
from HomeSide's line of credit. Cash used in financing activities during the
period from February 11, 1998 to September 30, 1998 was used for the payment of
debt issue costs and dividends to the Parent.
During the fiscal year ended September 30, 1999, net cash provided by operations
was $1,459.2 million, net cash used in investing activities was $1,374.1 million
and net cash provided by financing activities was $82.7 million, resulting in a
net increase in cash of $167.9 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. Repurchase agreements also provide an alternative to
the bank line of credit for mortgages held for sale. Future cash needs are
highly dependent on future loan production and servicing results, which are
influenced by changes in long-term interest rates.
Year 2000
General. In common with many business users of computers around the world, the
Company has investigated to what extent the date change from 1999 to 2000 may
affect its business. The Company has established a program designed to minimize
the impact of the change to 2000 on the Company and its customers. The Board of
Directors has made the work associated with the change to 2000 a key priority
for management.
The Company uses and is dependent upon a significant number of computer software
programs and operating systems to conduct its business. Such programs and
systems include those developed and maintained by the Company, software and
systems purchased from outside vendors and software and systems used by the
Company's third party providers. The Company recognizes that the Year 2000 issue
is one of the most complex data processing problems faced by businesses
worldwide. As the Company approaches the century change, its primary objective
is to maintain "business as usual."
The Company began its information technology Year 2000 assessment and
remediation efforts in the third quarter of calendar year 1996 under the
sponsorship of its executive management. A formal, enterprise-wide program
commenced in January 1998. The Year 2000 issue has been identified as a top
priority. The Company's executive management and Board of Directors are provided
with frequent detailed updates. The Company has dedicated resources to assess,
repair and test programs, applications, equipment and facilities. The Company
has established a Year 2000 Program Office that is coordinating the preparations
for the change to 2000 with each business unit throughout the Company.
The Company's program involves an extensive review of its own operations and
scoping the work that needs to be completed to minimize any potential impact.
This includes reviewing the possible effects on the Company arising out of how
third parties manage their transition to 2000. The work demonstrates that there
are two possible key impacts:
Internal - the change to 2000 could cause interruptions, errors in
calculations or delays to the Company's critical business processes via
unexpected system or application malfunctioning.
External - the impact on the Company's own operations from third
parties, including customers, vendors, suppliers, regulators and
electronic distribution channels which may be impacted by the change to
2000. This includes any secondary or systemic impact that may arise
from the change to 2000 and the risk of disruption in the capital and
secondary mortgage markets on which the Company is dependent.
The Company's strategy for addressing Year 2000 focuses on four teams, which
together address all aspects of the Company's business. The Information
Technology team addresses all of the Mainframe, LAN and client server
applications. The End User Computing (or Business) team addresses the business
risks within each of the operating departments, including facilities' risk. This
area of the strategy involves the greatest concentration of embedded chips. The
Enterprise team addresses the corporate-wide risks posed by the Year 2000,
including business continuity planning to be implemented by individual business
units. Finally, the Year 2000 Program Office coordinates the Company's Year 2000
readiness efforts and is responsible for communications, vendor management,
project documentation and reporting. The Company's Year 2000 Program Office and
overall Year 2000 Program are managed by a Year 2000 Program Director whose
full-time resources and responsibilities are dedicated to this effort under the
sponsorship of the President and Chief Operating Officer and the Chief
Information Officer.
Throughout all phases of the Year 2000 Program the goal of the Year 2000 teams
is to complete all required work while minimizing disruption to the current
service delivery levels of the Company. Central management of the project is
executed using fully dedicated staff with high levels of subject matter
knowledge. In order to speed the assessment and remediation aspects of the
mainframe and client server IT projects, a factory philosophy was adopted using
Paragon Computer Professionals, Inc. as the primary outsourcer. Contractors were
used internally where subject matter expertise was not required.
State of Readiness. The Company's approach to preparing for the change to 2000
includes a standard set of methods and tools, customized as applicable to each
team, to coordinate and drive the project to completion. The approach consists
of six phases:
1. Assessment - Defining each system and process to determine if there are
date dependencies and how to resolve them. For business continuity
purposes, assessment includes identifying event and dependency risk.
2. Remediation - Implementing the steps identified in the assessment phase,
including code remediation and development of contingency plans.
3. Testing - Developing and implementing test plans to determine if remediated
code is correct and assurance testing of business continuity plans.
4. Implementation - Moving all approved changes from testing into production
and execution of contingency plans as may be required.
5. Check-Off - Formally acknowledging that each process has been implemented
and is functioning correctly.
6. Clean Management - Employing procedures and practices to prevent the
reintroduction of non-compliant applications, products and processes into
the operating environment, once Check-Off has been completed.
The Company's Information Technology and Business Teams' assessment of the
Company's systems and business processes for Year 2000 vulnerability included
substantially all hardware and software systems, embedded systems, buildings and
equipment, and business processes. The assessment also included a review of the
Company's dependencies on third parties, including vendors, suppliers and
customers.
The Company established in its Year 2000 Program certain key milestones and an
internal timetable for the change to 2000 in line with or ahead of its
regulator's suggested completion dates for core systems. These were:
o Assessment of substantially all systems and processes by July 31, 1998 -
Completed by target date;
o Remediation and internal testing of all mission critical applications by
December 31, 1998 - Completed by target date;
o End-to-end testing of all mission critical systems with material third
parties by March 31, 1999 - Substantially completed by July 31, 1999, now
complete;
o Remediation and testing of all non-mission critical systems by June 30,
1999 - Substantially completed by target date, now complete; and
o clean management of all systems through 1999 - implemented throughout the
Company.
All End-to-End testing, with material external parties and others, is complete.
As of March 31, 1999, HomeSide successfully completed the mandatory components
of the MBA Year 2000 Readiness Test, including Fannie Mae, Freddie Mac and
Ginnie Mae. Optional components of the MBA Year 2000 Readiness Test were
substantially completed by June 30, 1999.
The Company's two most critical business applications are its primary mortgage
servicing software systems: MSP (licensed from and supported by Alltel
Information Services, Inc.) and ALSS (a proprietary software system supported by
the Company). As to these two systems, assessment, remediation, testing,
implementation and check-off are complete, the systems have been returned to
production and clean management procedures are in place.
The Company's Year 2000 Program also addresses end-user computing issues
presented by the Year 2000 change. As to end-user computing issues (systems and
business processes other than information technology systems), assessment,
remediation, testing, implementation and check-off are now complete and clean
management procedures are in place.
Since September 30, of 1999, the emphasis of the Company's Year 2000 Program has
been on continued assurance testing, finalization, refinement and testing of
transition plans, monitoring of Year 2000 readiness efforts by the Company's
customers, vendors and other third parties with whom the Company has
relationships, and clean management of systems and processes. Clean management
of systems involves developing and implementing procedures and practices to
prevent the reintroduction of non-compliant applications, products and processes
into the operating environment once Check-Off has been completed. The Company
has developed and implemented a Clean Management Strategy on a Company-wide
basis.
The Company has relationships with vendors, customers and other third parties
that rely on software and systems that may not be ready for the change to 2000.
However, it is not possible in all cases to obtain complete, accurate and timely
information regarding the Year 2000 programs of third parties. Further, the
Company's ability to direct such third parties efforts or change relations with
such third parties is often limited. There can be no assurance that third
parties on which the Company relies will complete their Year 2000 programs on
time or that Year 2000 failures by such third parties will not have a material
adverse effect on the Company's results of operations.
The Company has been conducting ongoing reviews of the Year 2000 efforts of its
mission critical vendors, customers and service providers. The Company has
identified a number of mission critical third parties whose Year 2000 failure
may reasonably be expected to have a material adverse impact on the Company's
results of operations. Examples of such third parties include: the Company's
primary software licensor, Alltel Information Services, Inc.; the Company's sole
provider of insurance processing services; the Company's sole provider of tax
payment services; and the Company's sole provider of foreclosure services.
Catastrophic failure by any of these parties would have a material adverse
effect on the Company. The Company is targeting these mission critical third
parties for particular scrutiny regarding their preparations for the change to
2000. That process will continue across the date change and into the first
quarter of 2000.
The Company has been successful in negotiating Year 2000 amendments to its
contracts with several mission critical vendors. These amendments contain
representations and warranties by the vendors as to their state of readiness to
meet the Year 2000 challenge and indemnification and other remedies in favor of
the Company in the event the Company suffers a loss because the vendor does not
successfully manage the change to 2000.
Transition Planning. Transition planning is concerned with identifying and
preparing for specific issues and risks associated with the period of October 1,
1999 through March 31, 2000. The Company has developed a corporate-wide
Transition Strategy. The objective of the Company in transition planning is to
ensure a Company-wide capability to manage internal and externally generated
events as and when they might arise. Transition plans for the century rollover
and beyond were completed by September 30, 1999. The Company successfully
conducted a "dress rehearsal" to test its Transition capabilities over the
November 6, 1999 weekend.
As part of the Company's Transition planning and overall Year 2000 Program, the
Company has established a moratorium period using a scaled implementation plan
to restrict the introduction of minor, significant and major changes to systems
or business processes. The moratorium period will not impair the Company's
ability to conduct its core businesses and meet the needs of its customers. The
Company's Year 2000 Program will continue until the end of March 2000.
Activities planned for the first quarter of 2000 include:
o Monitoring and verification activities surrounding business information
systems;
o Implementation of maintenance programs associated with the system changes
made to manage the date change to 2000;
o Working with customers and suppliers regarding any impacts they may have
sustained as a result of the date change to 2000; and
o Completing a formal post-implementation review of the Year 2000 Program to
assess achievements and lessons learned.
Risks. The Company's risk management office is actively involved in the
Company's Year 2000 Program. The most reasonably likely worst case Year 2000
scenario, disregarding the Company's remediation efforts and contingency
planning, is: (i) a failure in its loan servicing software and/or systems, or
(ii) a failure by one of the Company's key third party providers. Either such
failure would result in material disruption in the Company's operations possibly
preventing it from discharging its contractual obligations to service mortgage
loans in an accurate and timely fashion. The consequences of such disruption
could include, among other things, revocation of the Company's status as an
FHA/VA approved lender/servicer or Ginnie Mae/Fannie Mae/Freddie Mac approved
seller/servicer, incorrect processing and/or reporting of payments to consumers
and investors, a material loss of revenue, and litigation with third parties
alleging losses related to servicing failure.
While working to ensure that the Company's primary objective of business as
usual before, during and through 2000 is achieved, there can be no guarantee
that its Year 2000 program will be successful in all respects or that the date
change for 1999 to 2000 will not materially affect the Company's business in
some form.
Contingency Planning. The Company's Year 2000 Program is based on the assumption
that 100% impact coverage is neither feasible nor practical. It is possible that
the Company or third parties on which the Company depends may have unplanned
system difficulties during the transition through 2000, or that third parties
may not successfully manage the change to 2000; therefore, an integral part of
the Company's Year 2000 Program is the development of contingency plans in
anticipation of systems or third party failure.
These contingency plans have been developed for individual applications, systems
and business processes. Individual departments within the Company, including
information technology, acting under the supervision and direction of the Year
2000 Program Enterprise team, have (a) identified applicable Year 2000 events
and threats, (b) considered the likelihood of occurrence, (c) determined the
severity of impact of such events and threats, and (d) created preventive and
continuity plans to address such events and threats. Although the contingency
plans vary by application, system and business process, each of the Company's
contingency plans include: identification of the Company's systems and third
party risks that the plan addresses; an analysis of strategies and available
resources to restore and continue operations; and a recovery and continuity
program that identifies participants, processes, and significant resources
required. Contingency plans include: identifying alternate providers and locking
them in contractually as applicable; securing redundant telecommunications
resources; stockpiling of critical supplies; developing manual procedures to
replace automated procedures; altering delivery schedules for certain reports
and services to avoid the rollover period. Alternate providers are not available
for those key third parties identified above as the Company's sole providers of
certain services. As to those providers, the Company has in each case reviewed
and approved the Year 2000 contingency plans adopted by those third parties. In
the event of a failure in those third parties' contingency plans, the Company is
prepared, as an additional contingency, to terminate its contract with any
non-compliant provider and take over the performance of those services in-house.
In that regard, it should be noted that the Company retains control of the data
essential to the provision of these services.
The Company's contingency plans have been reviewed and approved by the Company's
Program Office and executive management and, where possible, tested. Testing and
assurance testing of the Company's continuity plans was substantially completed
by September 30, 1999. Given the potential scope of Year 2000 events, it is
possible that despite considerable planning, the Company's business continuity
plans for the date change to 2000 may only assist in the reduction of the degree
of disruption rather than its avoidance.
Cost of Year 2000 Efforts. As described above, the Company has conducted a
thorough year 2000 program, covering all aspects of its business, to ensure that
it successfully manages the change to 2000. As previously disclosed, the Company
presently estimates these costs to total approximately $13.5 million.
Year 2000 costs are based on management's best estimates, which were derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. The
Company does not separately track the indirect costs incurred in its Year 2000
program.
Through September 30, 1999, the Company had expended approximately $10.4 million
of its total Year 2000 budget. Through December 15, 1999, the most recent date
for which information is available prior to this filing, the Company had
expended approximately $12.2 million of its total Year 2000 budget. The Company
has incurred significant expenditures in the fourth calendar quarter of 1999
associated with proactive communications to its customers. The Company has
allocated $1.7 million of its total Year 2000 budget to transition management
during the period of June 1, 1999 through January 31, 2000, a majority of which
has been expended through the date of this filing. The Company will continue to
incur significant expenditures associated with employee retention efforts,
continued assurance testing, clean management of systems and processes,
transition planning and maintenance of its Year 2000 Program Office through
March 31, 2000.
The Company expensed its remediation costs as they were incurred, with the
exception of new hardware and software purchases, which were capitalized. The
source of funds for Year 2000 remediation is operating income of the Company.
The percentage of the Company's information technology budget devoted to Year
2000 efforts in the quarter ended September 30, 1999, was approximately 7.0%.
The Company is unable to readily determine the cost of replacement of
non-compliant systems that are being replaced in the ordinary course of
business. No significant information technology projects have been deferred due
to Year 2000 efforts.
The Company's Year 2000 Program is complex and reliant upon coordination with
numerous third parties. Accordingly, the effort and costs in any given period
will depend upon progress. The Company's current Year 2000 budget of $13.5
million is based on the current status of the Year 2000 Program and is subject
to change. The budget of $13.5 million does not take into account any potential
losses the Company may suffer as a result of Year 2000 failures, or any claims
for loss or damage that may be asserted against the Company by third parties,
which may result if the Company or third parties do not successfully manage the
effect of the Year 2000 date change.
The foregoing disclosure, including the description of a worst case Year 2000
scenario, is furnished in response to and in compliance with the Statement of
the Commission Regarding Disclosure of Year 2000 Issues and Consequences by
Public Companies, Investment Advisers, Investment Companies, and Municipal
Securities Issuers, Securities Act Rel. No. 33-7448 (July 30, 1998).
Quantitative and Qualitative Market Risk
Interest rate risk is the most significant market risk affecting HomeSide.
Interest rate risk is the possibility that changes in interest rates will cause
unfavorable changes in net income or in the value of interest rate-sensitive
assets, liabilities and commitments. From a corporate perspective, the economics
of the Company's production and servicing lines-of-business can be leveraged, in
part, to mitigate the Company's exposure to interest rate risk. In addition and
as part of its risk management programs, the Company purchases financial
instruments and enters into financial agreements with off-balance sheet risk in
the normal course of business to manage its exposure to interest rate risk. The
Company uses financial instruments for the purpose of managing interest rate
risks to protect the value of its mortgage loans held for sale and mortgage
commitment pipeline. Additionally, risk management instruments are used by
HomeSide to manage interest rate risk associated with the value of its mortgage
servicing rights which have characteristics such that they tend to decrease in
value as interest rates decline and increase in value as interest rates rise.
Interest rate swaps are also used to effectively convert fixed-rate funding
sources to floating rate. The Company has no market risk sensitive instruments
held for trading purposes.
Management actively monitors and manages its exposure to interest rate risk.
Various valuation tools are employed to perform sensitivity analyses in order to
quantify the financial impact of changes in interest rates. These analyses are
performed for various interest rate scenarios to capture the expected economic
change in market value of rate-sensitive assets, liabilities and commitments.
Additionally, the analyses are performed to capture the expected accounting
impact on future earnings for a specified time frame.
Several modeling techniques are utilized including static shock, option adjusted
spread, option pricing, and discounted cash flow models. A number of key rate
sensitive assumptions are included in the modeling such as implied volatility,
prepayment rates, and yield requirements. Various analyses of the Company's
exposure to interest rate risk are reviewed on at least a monthly basis by the
Company's Asset/Liability Committee, which reports to the Board of Directors.
The sensitivity analyses described above were applied to the Company's
rate-sensitive assets, liabilities, commitments and the Company's on- and
off-balance sheet financial instruments at September 30, 1999. The sensitivity
analyses reflect that a sudden and sustained 50 basis point increase in rates
would result in a positive variance to net income of $6.0 million over a
simulated 12-month period. A sudden and sustained 50 basis point decrease in
rates would result in a negative variance to net income of $11.5 million over a
simulated 12-month period. Under neither rate scenario would net income be
affected by impairment of rate-sensitive assets. The sensitivity analyses is
based on planned product volumes and margins, which are regularly updated to
reflect the Company's latest views on the business and interest rate
environments.
For additional information, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Risk Management Activities",
Note 12, "Disclosures About Fair Value of Financial Instruments" and Note 13,
"Risk Management and Off-Balance Sheet Financial Instruments" in the Notes to
Consolidated Financial Statements in the Company's Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
HomeSide Lending, Inc.
We have audited the accompanying consolidated balance sheets of HomeSide
Lending, Inc. and subsidiaries as of September 30, 1999 and September 30, 1998,
and the related consolidated statements of income, changes in stockholder's
equity, and cash flows for the fiscal year ended September 30, 1999 and the
period from February 11, 1998 to September 30, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of HomeSide Lending,
Inc. and subsidiaries as of September 30, 1999 and September 30, 1998, and the
results of their operations and their cash flows for the fiscal year ended
September 30, 1999 and the period from February 11, 1998 to September 30, 1998
in conformity with generally accepted accounting principles.
KPMG LLP
Jacksonville, Florida
October 19, 1999
<PAGE>
<TABLE>
<CAPTION>
HOMESIDE LENDING, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Share Data)
September 30, 1999 September 30, 1998
------------------------- -----------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 202,859 $ 35,008
Mortgage loans held for sale, net 1,292,562 2,048,989
Mortgage servicing rights, net 3,478,835 1,766,214
Early pool buyout advances 335,059 759,579
Accounts receivable, net 255,759 272,005
Premises and equipment, net 67,900 45,657
Goodwill, net 648,087 677,049
Other assets 82,591 115,660
----------------------- ------------------------
Total Assets $6,363,652 $5,720,161
======================= ========================
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued liabilities $ 666,736 $ 236,940
Notes Payable 2,899,304 2,749,000
Long-term debt 1,184,384 1,185,926
Deferred income taxes, net 257,089 192,781
----------------------- ------------------------
Total Liabilities $5,007,513 $4,364,647
----------------------- ------------------------
Commitments and Contingencies
Stockholder's Equity:
Common stock:
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 1,323,071 1,322,387
Retained earnings 33,068 33,127
----------------------- ------------------------
Total Stockholder's Equity 1,356,139 1,355,514
----------------------- ------------------------
Total Liabilities and Stockholder's Equity $6,363,652 $5,720,161
======================= ========================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
HOMESIDE LENDING, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
For the Fiscal For the Period From
Year Ended February 11, 1998 to
September 30, 1999 September 30, 1998
<S> <C> <C>
REVENUES:
Mortgage servicing fees $ 605,995 $ 312,678
Amortization of mortgage servicing rights (407,085) (189,881)
------------------------ ------------------------
Net servicing revenue 198,910 122,797
Interest income 181,173 99,749
Interest expense (121,697) (62,476)
------------------------ ------------------------
Net interest revenue 59,476 37,273
Net mortgage origination revenue 155,937 83,706
Other income 5,844 6,495
------------------------ ------------------------
Total Revenues 420,167 250,271
EXPENSES:
Salaries and employee benefits 132,716 73,983
Occupancy and equipment 28,319 13,107
Servicing losses on investor-owned loans
and foreclosure-related expenses 31,749 21,202
Goodwill amortization 34,965 22,283
Other expenses 60,077 39,150
------------------------ ------------------------
Total Expenses 287,826 169,725
Income before income taxes 132,341 80,546
Income tax expense 63,234 40,101
------------------------ ------------------------
Net Income $ 69,107 $ 40,445
======================== ========================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
HOMESIDE LENDING, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(dollars in thousands, except share data)
Additional
Numbers Common Paid-in Retained
of Shares Stock Capital Earnings Total
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, February 11, 1998 100 $ -- $1,322,387 $ -- $1,322,387
Net Income
40,445 40,445
Dividends declared and paid to Parent (7,318) (7,318)
---------------------------------------------------------------------------
Balance, September 30, 1998 100 $ -- $1,322,387 $ 33,127 $1,355,514
Net income 69,107 69,107
Dividends declared and paid to Parent (69,166) (69,166)
Additional paid-in capital associated with
acquisition by the National 684 684
---------------------------------------------------------------------------
Balance, September 30, 1999 100 $ -- $1,323,071 $ 33,068 $1,356,139
===========================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
HOMESIDE LENDING, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
For the Fiscal For the Period from
Year Ended February 11, 1998 to
September 30, 1999 September 30, 1998
----------------------- -----------------------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income $ 69,107 $ 40,445
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Amortization of mortgage servicing rights 407,085 189,881
Depreciation and amortization 44,416 24,595
Servicing losses on investor-owned loans 5,523 10,314
Change in deferred income tax liability 63,234 7,908
Mortgage loans originated and purchased for sale (22,146,930) (12,697,763)
Proceeds and principal repayments of mortgage loans held
for sale 22,903,357 12,008,178
Change in accounts receivable 5,473 (11,694)
Change in other assets and accounts payable and accrued
liabilities 107,973 20,172
----------------------- -----------------------
Net cash provided by (used in) operating activities 1,459,238 (407,964)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of premises and equipment, net (30,561) (20,067)
Acquisition of mortgage servicing rights (1,221,594) (392,862)
Net (purchases of) proceeds from risk management contracts (546,421) 387,276
Early pool buyout reimbursements (advances) 424,520 (385,580)
Acquisition of Banc One Mortgage Corp., net of repayments - (201,000)
----------------------- -----------------------
Net cash used in investing activities (1,374,056) (612,233)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Net (repayments to) borrowings from banks (1,240,498) 624,044
Issuance of commercial paper, net of repayments 1,163,903 -
Issuance of notes payable 230,000 410,000
Payment of debt issue costs (701) (3,262)
Repayment of long-term debt (869) (372)
Dividends paid to the Parent (69,166) (7,318)
----------------------- -----------------------
Net cash provided by financing activities 82,669 1,023,092
Net increase in cash and cash equivalents 167,851 2,895
Cash and cash equivalents at beginning of period 35,008 32,113
----------------------- -----------------------
Cash and cash equivalents at end of period $ 202,859 $ 35,008
======================= =======================
Supplemental disclosure of cash flow information:
Interest paid $ 118,450 $ 56,094
Income taxes paid $ 14,654 $ 28,835
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
HOMESIDE LENDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
HomeSide Lending, Inc. ("HomeSide" 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.
As discussed in Note 2, on February 10, 1998, National Australia Bank, Ltd. (the
"National") acquired all outstanding shares of the common stock of HomeSide
International, Inc. (the "Parent") and the Company adopted a fiscal year end of
September 30 to conform to the fiscal year of the National. HomeSide's
predecessor ("HomeSide Predecessor") commenced operations and was formed through
the acquisition of the mortgage banking operations of the former BankBoston,
N.A. ("BBMC Predecessor" to HomeSide Predecessor) on March 16, 1996. HomeSide
Predecessor subsequently purchased the mortgage banking operations of Barnett
Banks, Inc. Unless otherwise designated, the term "HomeSide" refers to the
Company for the periods subsequent to February 10, 1998, to HomeSide Predecessor
for the periods from March 16, 1996 to February 28, 1997 and March 1, 1997 to
February 10, 1998, and to BBMC Predecessor for periods prior to March 16, 1996.
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 of acquired companies have been
included from the date of acquisition. Certain reclassifications have been made
to the financial statements for the period from February 11, 1998 to September
30, 1998, to conform to the presentation for the year ended September 30, 1999.
HomeSide is a wholly-owned subsidiary of HomeSide Holdings, Inc., which is a
wholly-owned subsidiary of HomeSide International, Inc. (the "Parent")(see Note
2). The Parent has no operations and its only significant assets are its
investments in HomeSide Holdings, Inc., HomeSide and certain capitalized debt
issue costs. The Parent has $130 million in outstanding long-term debt. All of
the stock of HomeSide Holdings, Inc. and HomeSide is pledged as collateral on
the debt of the Parent. The Parent is dependent upon dividends from HomeSide
Holdings, Inc. and HomeSide for the cash flow necessary to service the Parent's
debt.
The accompanying financial statements of HomeSide Lending, Inc. have been
prepared for the year ended September 30, 1999 and for the period from February
10, 1998 to September 30, 1998 to coincide with the acquisition of HomeSide by
the National and the subsequent adoption of a September 30 fiscal year end.
2. ORGANIZATION
On December 11, 1995, HomeSide 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 ("BankBoston") for the purpose of acquiring certain
assets and liabilities of the mortgage banking business owned by BankBoston.
BankBoston received cash and an ownership interest in HomeSide . The transaction
closed on March 15, 1996 and HomeSide began operations on March 16, 1996. In
March 1999, Fleet Financial Group, Inc. and BankBoston, N.A. entered into an
agreement and plan of merger providing for the merger of BankBoston, N.A. with
and into Fleet Financial Group, Inc.
On May 31, 1996, Barnett Banks, Inc. ("Barnett") sold certain of its mortgage
banking operations, primarily its servicing portfolio, mortgage servicing
operations and proprietary mortgage banking software systems, to HomeSide .
Barnett received cash and an ownership interest in HomeSide . The accompanying
financial statements reflect the effects of both of these acquisitions. For more
information on these acquisitions, see Note 4. From May 31, 1996 until the 1997
public offering of common stock, the Investors as a group, BankBoston and
Barnett each owned approximately one-third of HomeSide . Following the public
offering, the Investors as a group, BankBoston and Barnett owned in the
aggregate approximately 79% of the outstanding common stock.
On January 9, 1998, NationsBank Corporation, now BankAmerica Corporation,
acquired all the outstanding common stock of Barnett Banks, Inc.
On February 10, 1998, National Australia Bank, Ltd. (the "National") acquired
all outstanding shares of the common stock of the Parent. As consideration, the
National paid $27.825 per share for all of the outstanding common stock and paid
$17.7 million cash to retire all outstanding stock options. The total purchase
price was approximately $1.2 billion. The National paid for the purchase with
borrowed and available funds. The transaction was accounted for as a purchase.
As a result, all assets and liabilities were recorded at their fair value on
February 11, 1998, and the purchase price in excess of the fair value of net
assets acquired of $719.6 million was recorded as goodwill. Following the
transaction described above, the National now owns 100% of the Parent's common
stock and the Parent has become an indirect wholly-owned subsidiary of the
National. HomeSide also adopted a fiscal year end of September 30 to conform to
the fiscal year of the National.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
The preparation of financial statements and notes thereto in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and the disclosed amount of contingent liabilities. On an
ongoing basis, management reviews its estimates, including those related to risk
management, litigation, contracts, credit losses, and mortgage servicing rights.
Although the Company has internal control systems in place to ensure that
estimates can be reliably measured, actual results may differ from those
estimates. It is not anticipated that such differences would be material.
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, treasury forwards, and put and call
option contracts on mortgage-backed securities. 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 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 period as a component of
mortgage origination revenue. Unamortized premiums are recognized as a component
of mortgage origination revenue 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. It also directly affects the volatility of
reported earnings because 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 the value of these hedge instruments will tend to move
inversely with changes in value of HomeSide's mortgage servicing rights.
Options on U.S. Treasury bond and note futures, U.S. Treasury bond and note
futures, Eurodollar futures, and interest rate swaps, caps and swaptions are
used by HomeSide to manage interest rate risk. When purchased, the risk
management instruments are designated to a specific strata of mortgage servicing
rights. The risk management instrument contracts are marked-to-market and
changes in market value are included as adjustments to the basis of the related
mortgage servicing right asset 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 changes in the risk management
contracts and changes in the value of HomeSide's mortgage servicing rights is
assessed on a quarterly basis to ensure that high correlation is maintained over
the term of the hedging program. If management's ongoing assessment of
correlation indicates that high correlation is not being achieved, the Company
will discontinue the application of hedge accounting and recognize a gain or
loss to the extent the hedge results have not been offset by changes in value of
the hedged asset during the hedge period.
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 hedge instruments are
included in the cost of the mortgage loans held for sale for the purpose of
determining the lower of aggregate cost or fair value. Mortgage loans are
typically sold within three months.
Mortgage loans held for investment are included in other assets and 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 non-accrual status when any portion of the principal or
interest is ninety days past due or earlier when concern exists as to the
ultimate collectibility of principal or interest. When loans are placed on
nonaccrual status, the related interest receivable is reversed against interest
income of the current period. Interest payments received on nonaccrual loans are
applied as a reduction of the principal balance when concern exists as to the
ultimate collection of principal; otherwise, such payments are recognized as
interest income. Loans are removed from nonaccrual status when principal and
interest become current and they are anticipated to be fully collectible.
Mortgage servicing rights
Mortgage servicing rights are the rights to receive a portion of the interest
coupon and fees collected from the mortgagor for performing specified servicing
activities. The total cost of loans originated or acquired is allocated between
the mortgage servicing rights and the mortgage loans, without the servicing
rights, based on relative fair values. The value of servicing rights acquired
through bulk acquisitions is capitalized at cost.
Mortgage servicing rights are amortized in proportion to and over the period of
the 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 based on the market prices of similar mortgage servicing
assets and on 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
which include product types of the underlying loans and interest rates of
mortgage notes . Impairment, if any, is recognized through a valuation reserve
for each impaired stratum and is included in amortization of mortgage servicing
rights.
Cash
Cash and cash equivalents include cash and due from banks, interest-bearing
deposits and margin deposits with an original maturity of three months or less.
Margin deposits associated with the risk management program for mortgage
servicing rights and interest rate swaps for debt instruments are maintained
with brokers in accordance with the requirements of International Swap Deal
Agreements. At September 30, 1999, margin deposits amounted to approximately
$179.5 million.
Accounts receivable
Accounts receivable includes advances, consisting primarily of payments for
property taxes and insurance premiums, accrued servicing fees, as well as
principal and interest remitted to investors before they are collected from
mortgagors, made in connection with loan servicing activities. Accounts
receivable also includes loans purchased from mortgage-backed securities
serviced by HomeSide for others and mortgage claims filed primarily with the FHA
and the VA.
Early pool buyout advances
Early pool buyout advances consist of delinquent government loans in process of
foreclosure that have been purchased from pools. The program reduces the
unreimbursed interest expense that HomeSide incurs. The funding of the purchases
of these delinquent loans for the early pool buyout program is recorded as
interest expense. Interest income earned from the guarantor agency during the
foreclosure process is accrued to match the funding expense incurred. Scheduled
interest payments made to the investor before the loans were purchased from the
pool are recorded as early pool buyout advances with a reserve for advances
which will not ultimately be collected.
On November 30, 1998, HomeSide formed a wholly-owned subsidiary, HomeSide
Funding, Inc. ("HomeSide Funding"), whose sole purpose is to acquire delinquent
loans from HomeSide's servicing portfolio that are insured by the Federal
Housing Administration or guaranteed by the Department of Veterans Affairs. The
purchases are funded through sales to a trust.
In December 1998, HomeSide Lending entered into a Pooling and Servicing
Agreement with Banc One Trust Company, N.A., as Trustee, and HomeSide Funding,
as Transferor, pursuant to which approximately $487 million of delinquent
mortgage loans were sold to HomeSide Funding during the fiscal year ended
September 30, 1999. Subsequently, these loans were sold to the HomeSide Mortgage
Loan Buyout Trust 1998-A. At September 30, 1999, HomeSide held a residual
interest in loans sold to HomeSide Funding in the amount of $10.3 million, which
approximated fair value.
Premises and equipment
Premises and equipment are carried at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which range up to thirty years. Leasehold
improvements are amortized over the shorter 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 charge recorded in the statement of income.
The Company capitalizes certain software development and implementation costs in
accordance with SOP 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." Development and implementation costs
are expensed until the Company has determined that the software will result in
probable future economic benefits and management has committed to funding the
project. Thereafter, all direct external implementation costs and purchase
software costs are capitalized and amortized using the straight-line method over
the remaining estimated useful lives, not exceeding five years.
Goodwill
Goodwill, representing the excess of the purchase consideration over the fair
value of the identifiable net assets acquired on the date of acquisition, is
recognized as an asset. Goodwill is amortized from the date of acquisition by
systematic charges on a straight-line basis against income over the period in
which the benefits are expected to arise, but not exceeding 20 years.
Accumulated goodwill amortization at September 30, 1999 and 1998 was $58.8
million and $22.8 million, respectively. The carrying value of goodwill is
reviewed at least annually. If the carrying value of goodwill exceeds the value
of the expected future benefits, the difference is charged against income.
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 over the period of service.
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 from depository institutions for
custodial balances placed with such institutions.
Net mortgage origination revenue
Mortgage origination revenue includes gains and losses from sales of mortgage
loans and fees associated with the origination and purchase of mortgage loans.
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 payment is
uncollectible 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 (see Note 7).
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.
New accounting standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement standardizes the accounting for
derivative instruments and hedging activities by requiring that an entity
recognize those items as assets or liabilities in the statement of financial
position and measure them at fair value. If certain conditions are met, a
derivative instrument may be specifically designated as (a) a hedge of the
exposure to changes in the fair value of a recognized asset or liability, or of
an unrecognized firm commitment, (b) a hedge of the exposure to variability in
the cash flows of recognized assets, liability or forecasted transaction or (c)
a hedge of the foreign currency exposure of an unrecognized firm commitment, an
available-for-sale security, a forecasted transaction or a net investment in a
foreign operation. In June 1999, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133 - an Amendment of FASB Statement No. 133." This statement
deferred the effective date of FAS 133 to fiscal quarters of fiscal years
beginning after June 15, 2000. Management has not yet determined the impact of
these statements on the financial statements of HomeSide.
In October 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 134, "Accounting for Mortgage-Backed
Securities Retained after Securitization of Mortgage Loans Held for Sale by a
Mortgage Banking Enterprise." ("SFAS 134") This statement further amends
Statement No. 65 to require that after the securitization of mortgage loans held
for sale, an entity engaged in mortgage banking activities classify the
resulting mortgage-backed securities or other retained interests based on its
ability and intent to sell or hold those investments. This statement was
effective for the first fiscal quarter beginning after December 15, 1998.
Management has determined that no adjustment or reclassification should be made
to the financial statements of HomeSide pursuant to SFAS 134.
4. ACQUISITIONS AND STRATEGIC ALLIANCES
Strategic Alliance with Cendant Mortgage Corporation
On June 15, 1999, HomeSide announced that it had formed a strategic alliance
with Cendant Mortgage Corporation. Cendant Mortgage has agreed to sell up to
$7.0 billion in mortgage servicing rights on a flow basis annually to HomeSide
over a 5 year period. For the year ended September 30, 1999, HomeSide has
purchased and will service $8.8 billion of Cendant Mortgage's portfolio,
representing approximately 78,000 loans. Cendant Mortgage is one of the largest
retail originators in the United States.
Strategic Alliance with First Chicago NBD Mortgage Company
On March 4, 1999, HomeSide agreed to purchase or sub-service the servicing
portfolio of First Chicago NBD Mortgage Company ("First Chicago"). This
transaction represents a modification and an expansion of HomeSide's strategic
alliance with Banc One Mortgage Corporation ("Banc One"). This resulted in (i)
an increase in HomeSide's servicing portfolio of approximately $18 billion; (ii)
a change in Banc One's residential mortgage loan delivery method to HomeSide
from a whole loan basis to a servicing rights-only flow basis; and (iii) a
commitment from First Chicago to sell the servicing rights associated with its
residential mortgage production to HomeSide on a flow basis.
Acquisition of Banc One Mortgage Corporation
On April 1, 1998, HomeSide entered into an agreement with Banc One Mortgage
Corporation to acquire the mortgage servicing assets of Banc One. HomeSide and
Banc One have also entered into a Preferred Partner agreement, whereby Banc One
will sell a significant portion of its residential mortgage loan production to
HomeSide over the next five years on a whole loan basis. The total purchase
consideration for the mortgage servicing assets was $201.0 million cash. The
mortgage servicing rights acquired relate to mortgage servicing loans of $16.6
billion. The transaction closed on June 5, 1998 and was accounted for as a
purchase. The excess of the aggregate purchase price over the fair value of net
assets acquired is being amortized on a straight-line basis over 20 years.
The unaudited condensed pro forma statement of income for the period from
February 11, 1998 to September 30, 1998 and the HomeSide, Inc. Predecessor
period from March 1, 1997 to February 10, 1998, assuming Banc One had been
acquired as of the beginning of the period is as follows (in millions):
<TABLE>
<CAPTION>
Pro Forma for the Period From Pro Forma for the Period
February 11, 1998 to September From March 1, 1997 to
30, 1998 February 10, 1998
-------------------------------- ----------------------------
<S> <C> <C>
Net servicing revenue $129.5 $202.6
Net interest revenue 29.5 1.2
Net mortgage origination revenue 81.1 90.1
Other income 11.0 1.7
-------------------------------- ----------------------------
Total revenues 251.1 295.6
Expenses (174.7) (162.1)
-------------------------------- ----------------------------
Income before income taxes 76.4 133.5
Income tax expense (38.7) (52.1)
-------------------------------- ----------------------------
Net income $ 37.7 $ 81.4
================================ ============================
</TABLE>
The purchase accounting adjustments in the above pro forma statement of
operations are based on the actual purchase price and the amount of assets and
liabilities actually acquired. No adjustments have been made for restructuring
costs that might have been incurred or for cost efficiencies that might have
been realized during the period presented. Accordingly, these pro forma results
are not indicative of future results.
Strategic Alliance with People's Bank
On November 23, 1998, HomeSide agreed to purchase or sub-service approximately
$5 billion in mortgage servicing from People's Bank, the largest mortgage lender
in Connecticut. People's Bank also became a Preferred Partner, committing to
sell a significant portion of the residential mortgage loans it originates to
HomeSide for five years.
Acquisition of Loan America
On April 6, 1998, HomeSide signed an agreement with NationsBank Corporation
("NationsBank") whereby NationsBank agreed to sell HomeSide a national wholesale
mortgage loan network which was formerly owned by Barnett Banks, Inc. The
transaction closed on May 29, 1998. The excess of the aggregate purchase price
over the fair value of net assets acquired is being amortized on a straight-line
basis over 20 years.
5. MORTGAGE SERVICING RIGHTS
An analysis of mortgage servicing rights is as follows:
(in thousands)
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998
---------------------- ----------------------
<S> <C> <C>
Beginning balance $1,766,214 $1,766,357
Additions 1,221,594 593,862
Sales of servicing - (9,967)
Net deferred hedge loss (gain), net of amortization 898,112 (394,157)
Amortization (407,085) (189,881)
---------------------- ----------------------
Ending balance $3,478,835 $1,766,214
====================== ======================
</TABLE>
6. PREMISES AND EQUIPMENT
Premises and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998
------------------------ ----------------------
<S> <C> <C>
Land $ 3,451 $ 3,451
Buildings and building improvements 9,932 9,932
Furniture and equipment 38,611 27,643
Software 17,019 1,684
Leasehold improvements 10,375 6,234
------------------------ ----------------------
79,388 48,944
Accumulated depreciation and amortization (11,488) (3,287)
------------------------ ----------------------
Ending balance $67,900 $45,657
======================== ======================
</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 Fiscal For the Period February
Year Ended 11, 1998 to September
September 30, 1999 30, 1998
------------------------ -------------------------
<S> <C> <C>
Beginning $21,650 $21,650
Provision for servicing losses on investor-owned loans 5,523 10,314
Charge-offs (11,040) (10,341)
Recoveries 517 27
======================== =========================
Ending balance $16,650 $21,650
======================== =========================
</TABLE>
8. NOTES PAYABLE
Notes payable consist of the following (in thousands):
<TABLE>
<CAPTION>
Weighted Average Interest Rate
------------------- ----------------------
Total Outstanding At Period End During the Period
----------------------- ------------------- ----------------------
<S> <C> <C> <C>
Floating Rate Notes $ 230,000 5.67% 5.67%
Commercial Paper 1,163,903 5.57% 5.12%
National Australia Bank Unsecured Facility 1,505,401 5.46% 5.22%
-----------------------
Total, September 30, 1999 $2,899,304 5.52% 5.20%
=======================
Bank line of credit $ 995,000 5.88% 5.96%
National Australia Bank Unsecured Facility 1,754,000 5.66% 5.67%
-----------------------
Total, September 30, 1998 $2,749,000 6.00% 6.04%
=======================
</TABLE>
On August 16, 1999, HomeSide issued $230.0 million in floating rate notes (the
"Floating Rate Notes") due August 16, 2000. Interest is payable quarterly in
arrears on November 16, February 16, May 16, and August 16. The Floating Rate
Notes are unsecured obligations of HomeSide and rank equally with all other
unsecured and unsubordinated indebtedness of HomeSide. The per annum interest
rate on the Floating Rate Notes is equal to the three-month LIBOR, reset
quarterly, plus twenty basis points, or 0.20%.
On October 21, 1998, HomeSide Lending, Inc. established a $1.5 billion
commercial paper program. The program is supported by the Company's bank line of
credit and outstanding commercial paper reduces available borrowings under the
bank line of credit. At September 30, 1999, a total of $1.2 billion of
commercial paper was outstanding. The weighted average interest rate on
commercial paper outstanding during the year ended September 30, 1999 was 5.12%.
On June 23, 1998, HomeSide entered into an agreement for an unsecured revolving
credit facility with the National. The agreement was amended on June 22, 1999.
Under the credit facility, HomeSide can borrow up to $2.5 billion, subject to
limits imposed by regulatory authorities. As of September 30, 1999, Australian
financial regulations limited the National's ability to lend funds to HomeSide,
a non-bank affiliate, to approximately $2.1 billion. Borrowings under the credit
facility may be overnight or for periods of 7, 30, 60 or 90 days. For overnight
borrowings, the interest rate is determined by HomeSide and the National at the
time of the borrowing. For LIBOR - based borrowings, the interest rate is
charged at the corresponding LIBOR rate. At September 30, 1999 and September 30,
1998, the amount outstanding under this credit facility totaled $1.5 billion and
$1.8 billion, respectively. The weighted average interest rate on outstanding
borrowings under this credit facility during the year ended September 30, 1999
and the period from February 11, 1998 to September 30, 1998 were 5.22% and
5.67%, respectively.
HomeSide borrows funds on a demand basis from an independent syndicate of banks
under a $2.0 billion credit facility which, at the request of HomeSide, may be
increased to $3.0 billion. The 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-related facility, which is capped at $760.0
million. Borrowings 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) various rates based on federal fund rates. On February 14, 2000, the
line of credit will terminate. The credit agreement contains covenants that
impose limitations and restrictions on HomeSide, including requirements to
maintain certain net worth and ratio requirements. Under certain circumstances
set forth in the credit agreement, borrowings under the agreement become
collateralized by HomeSide's assets. HomeSide is in compliance with all
requirements included in the credit agreement. At September 30, 1999, the
primary use of the credit facility was to provide liquidity back-up for
HomeSide's $1.5 billion commercial paper program and there was no balance
outstanding under the credit line. At September 30, 1998, the amount outstanding
under the credit line, all of which was under the warehouse credit facility, was
$1.0 billion. HomeSide entered into a replacement agreement for a $2.0 billion
credit facility on October 18, 1999. See Note 19.)
9. LONG-TERM DEBT
Long-term debt, including the fair value adjustments resulting from the merger
with the National, consists of the following (in thousands):
September 30, 1999 September 30, 1998
----------------------- ----------------------
Medium-term notes $ 1,160,955 $ 1,161,629
Mortgage note payable 23,429 24,297
----------------------- ----------------------
Total $ 1,184,384 $ 1,185,926
======================= ======================
Medium-term notes
On August 31, 1999 HomeSide Lending registered an additional $1.0 billion in
medium-term notes under a registration statement on Form S-3 (Registration
Number 333-84179) filed with the Securities and Exchange Commission. This
effectively raised the medium-term note shelf registration to $2.568 billion. As
of September 30, 1999 and 1998, outstanding medium-term notes issued by HomeSide
Lending under this shelf registration statement were as follows (in thousands):
Issue Date Outstanding Balance Coupon Rate Maturity Date
- -------------------- ------------------- ---------- ------------------
May 20, 1997 $ 250,000 6.875% May 15, 2000
June 30, 1997 200,000 6.875% June 30, 2002
June 30, 1997 40,000 6.820% July 2, 2001
July 1, 1997 15,000 6.860% July 2, 2001
July 31, 1997 200,000 6.750% August 1, 2004
September 15, 1997 45,000 6.770% September 17, 2001
March 19, 1998 60,000 5.6875% March 20, 2000
April 23, 1998 125,000 5.7875% April, 24, 2001
May 22, 1998 225,000 6.200% May 15, 2003
-------------------
Total $1,160,000
===================
As of September 30, 1999, $850.0 million of the outstanding, fixed rate
medium-term notes had been effectively converted by interest rate swap
agreements to floating-rate notes. The weighted average borrowing rates on
medium-term borrowings issued for the year ended September 30, 1999 and the
period from February 11, 1998 to September 30, 1998 including the effect of the
interest rate swap agreements, were 6.47% and 6.00%, respectively. Net proceeds
from the issuances were primarily used to reduce the amounts outstanding under
the bank credit agreement including to fund the acquisition of the servicing
rights associated with Bank One's $16.6 billion portfolio.
The balance of the medium-term notes at September 30, 1999, including the fair
value adjustment resulting from the merger with the National, was $1.2 billion,
which included $0.3 billion due within one year.
11.25% Notes of Parent
On May 14, 1996, the Parent issued $200.0 million of 11.25% notes (the "Parent
Notes") maturing on May 15, 2003, and paying interest semiannually in arrears on
May 15 and November 15 of each year. The Parent Notes are redeemable at the
option of the Parent, in whole or in part, at any time on or after May 15, 2001,
at certain fixed redemption prices. The indenture contains covenants that impose
limitations and restrictions, including requirements to maintain certain net
worth and ratio requirements. In addition, the Parent Notes are secured by a
second priority pledge of the common stock of the Company. The Parent is in
compliance with all net worth and ratio requirements included in the indenture
relating to the Parent Notes. The Parent used a portion of the proceeds from its
February 5, 1997 offering of common stock to pre-pay $70.0 million of the Parent
Notes at a premium of $7.9 million. The amount outstanding at September 30, 1999
and 1998 was $130.0 million. The balances of the Parent Notes at September 30,
1999 and 1998, including the fair value adjustment resulting from the merger
with the National, were $146.9 million and $151.9 million, respectively.
Mortgage note payable
In connection with the acquisition of BancBoston Mortgage Corporation, HomeSide
assumed a mortgage note payable that is due in 2017 and bears interest at a
stated rate of 9.5%. HomeSide's main office building is pledged as collateral
for the mortgage note payable. The balance of the mortgage payable at September
30, 1999, including the fair value adjustments resulting from the merger with
the National, was $23.4 million.
Principal payments due on long-term debt at September 30, 1999 are as follows
(in thousands):
Fiscal Year
2000 $ 310,299
2001 225,329
2002 200,362
2003 355,398
2004 70,437
Thereafter 11,089
Unamortized purchase accounting premium 11,470
---------------
Total $ 1,184,384
===============
10. INCOME TAXES
The Company files a consolidated federal income tax return. All companies
included in the consolidated federal income tax return are jointly and severally
liable for any tax assessments based on such consolidated return.
Components of the provision for income taxes were as follows (in thousands):
For the Fiscal For the Period From
Year Ended September 30, February 11, 1998 to
1999 September 30, 1998
-------------------------- -----------------------
Current:
Federal $ - $ 29,399
State - 2,794
-------------------------- -----------------------
- 32,193
Deferred:
Federal 56,228 4,459
State 7,006 3,449
-------------------------- -----------------------
63,234 7,908
-------------------------- -----------------------
Total $ 63,234 $ 40,101
========================== =======================
The following is a reconciliation of the statutory federal income tax rate to
the effective income tax rate as reflected in the consolidated statements of
income.
For The Fiscal For The Period From
Year Ended February 11, 1998 to
September 30, 1999 September 30, 1998
----------------------- ----------------------
Statutory federal income tax rate 35.0% 35.0%
State income and franchise taxes,
net of federal tax effect 3.0% 4.0%
Goodwill 9.8% 10.8%
Other - -
----------------------- ----------------------
Effective income tax rate 47.8% 49.8%
======================= ======================
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>
September 30, 1999 September 30, 1998
---------------------- ----------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 128,468 $ 11,229
Alternative minimum tax credit carry forward 2,494
-
Loss reserves 42,106 19,535
Hedge activities - 73,899
Purchase Accounting Adjustment 37,404 32,630
Other assets
12,590 -
---------------------- ----------------------
Total gross deferred tax assets $ 223,062 $ 137,293
---------------------- ----------------------
Deferred tax liabilities:
Mortgage servicing fees $ 354,728 $ 313,856
Hedge activities 85,822 -
Other liabilities 39,601 16,218
---------------------- ----------------------
Total gross deferred tax liabilities 480,151 330,074
---------------------- ----------------------
Net deferred tax liability $ 257,089 $ 192,781
====================== ======================
</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 at September 30, 1999 or September 30, 1998. The Company has
consolidated tax net operating loss carryforwards at September 30, 1999. These
carryforwards expire in the years 2001 to 2019.
11. LEASE COMMITMENTS
HomeSide leases office facilities and equipment under noncancelable leases that
include renewal options and escalation clauses which extend into 2010. Rental
expense for leases of office facilities and equipment was $8.8 million and $4.0
million for the year ended September 30, 1999 and the period from February 11,
1998 to September 30, 1998, respectively. HomeSide's minimum future lease
commitments are as follows (in thousands):
Fiscal Year
2000 $ 7,017
2001 6,612
2002 6,360
2003 6,276
2004 4,861
Thereafter 21,703
--------------
Total $ 52,829
==============
12. 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 anticipated loss
experience and other factors. Changes in assumptions could significantly affect
these estimates. Independent market data may not be available to validate those
fair value estimates that are based on internal valuation techniques. Moreover,
such fair value estimates may not be indicative of the amounts that could be
realized in an immediate sale of the instrument. Also, because of differences in
methodologies and assumptions used to estimate fair value, the Company's fair
values should not be compared to those of other companies.
Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company. For certain assets and liabilities, the
information required is supplemented with additional information relevant to an
understanding of the fair value.
The methods and assumptions used to estimate the fair values of each class of
financial instruments are as follows:
Cash and cash equivalents
The carrying amount reported in the balance sheet approximates fair value.
Mortgage loans held for sale
Fair values are based on the estimated value at which the loans could be sold in
the secondary market. These loans are priced to be sold with servicing rights
retained, as this is the Company's normal business practice.
Accounts receivable, early pool buyout advances and accounts payable and
accrued liabilities
Carrying amounts are considered to approximate fair value.
Risk management contracts
Fair values are estimated based on actual market quotes, option models, or
discounted cash flow valuation models. The carrying amount relating to these
contracts is included in accounts payable and accrued liabilities as of
September 30, 1999, and in other assets as of September 30, 1998.
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 consistent with the Company's current borrowing rate as
adjusted for the effects of certain prepayment penalties.
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 and U.S. Treasury bond and note futures
The fair values of options are estimated based on actual market quotes.
Interest rate swaps
The fair values of interest rate swaps is based on discounted cash flow
valuation models and is periodically validated against dealer quotes.
Fair Value
The fair values of the Company's financial instruments are as follows (in
thousands):
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998
---------------------------------- ----------------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equival $ 202,859 $ 202,859 $ 35,008 $ 35,008
Mortgage loans held for sale 1,292,562 1,296,426 2,048,989 2,064,853
Accounts receivable 255,759 255,759 272,005 272,005
Early pool buyout advances 335,059 335,059 759,579 759,579
Risk management contracts for
mortgage servicing rights -- -- 120,211 120,211
LIABILITIES
Notes payable 2,899,304 2,899,304 2,749,000 2,749,000
Long-term debt 1,184,384 1,177,556 1,185,926 1,161,126
Accounts payable and accrued liabilities 376,272 376,272 236,940 236,940
Risk management contracts for
mortgage servicing rights 290,464 290,464 -- --
OFF-BALANCE SHEET(1)
Commitments to originate mortgage loans -- 2,939 -- 23,522
Mandatory forward contracts to sell mortgages -- (8,370) -- (45,557)
Mandatory forward contracts to sell U.S. treasuries -- -- -- (463)
Options on mortgage-backed securities 4,747 3,722 6,120 2,864
Options on U.S treasury bond futures 56 54 113 57
Interest rate swaps on debt instruments -- 6,827 -- 24,800
- ------------------------------------------------------
(1) Parenthesis denote a liability
</TABLE>
Fair value estimates are made as of a specific point in time, based on relevant
market data and information about the financial instrument. These estimates do
not reflect any premium or discount that could result from offering for sale the
Company's entire holding of a particular financial instrument. Because no active
market exists for some portion of the Company's financial instruments, fair
value estimates are based on judgments regarding future expected loss
experience, current economic conditions, current interest rates and prepayment
trends, risk characteristics of various financial instruments and other factors.
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 September 30, 1999 and September 30, 1998. Subsequent changes
in market interest rates and prepayment assumptions could significantly change
the fair value.
13. RISK MANAGEMENT AND OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
As discussed in Note 3, HomeSide utilizes risk management financial instruments
to manage interest rate risk related to the value of its mortgage servicing
rights. A summary of HomeSide 's position in risk management financial
instruments at September 30, 1999 and September 30, 1998 is included below.
The fair value of HomeSide's risk management contracts on Treasury and options
on Eurodollar futures is based on quoted market prices of the underlying
instruments at September 30, 1999 and September 30, 1998. The notional amounts
represent the par value of the underlying U.S. Treasury bonds or notes. However,
the notional amounts are not recognized in the balance sheet and should not be
considered as a measure of credit risk or future cash requirements.
The fair value of HomeSide's risk management contracts in Interest Rate Swaps,
Interest Rate Swaps with a Cap, and Options on Interest Rate Swaps (Swaptions)
is based on discounted cash flow valuation models and is periodically validated
against dealer quotes (see Footnote 12). The notional amounts represent only the
balances upon which future interest payments are based. Therefore, the notional
amounts are not recognized in the balance sheet and should not be considered as
a measure of credit risk or future cash requirements.
The amount of the risk management contracts maintained depends on a number of
factors including the size of the mortgage servicing portfolio, projected
convexity of the mortgage servicing rights, interest rates, and interest rate
volatility. HomeSide is subject to market risk to the extent that interest rates
fluctuate; however, the purpose of the risk management contracts is to hedge the
value of the mortgage servicing rights portfolio. HomeSide's risk management
financial instruments qualify as hedges, and gains or losses on the risk
management instruments correlate with movements in the value of the mortgage
servicing rights. Cap structures are included with certain interest rate swaps
to create the desired hedge profile and to limit the Company's losses in a
rising rate environment.
Cash requirements for HomeSide's swaps and swaption contracts are based on
interest rate movements over time, with cash receipts based on a predetermined
fixed rate and cash payments based on a floating rate. Cash requirements for
option contracts are limited to premiums paid. Cash requirements for futures
contracts, when held, are managed based on limits established by HomeSide's risk
management committee.
Risk Management of Mortgage Servicing Rights
The risk associated with these instruments is the exposure to current and
expected market movements in interest rates and the ability of the
counterparties to meet the terms of the contracts. The options, futures, and
swaption contracts generally require future performance on the part of the
counterparty upon exercise of the option contract by HomeSide. The swap
contracts require regular cash payments between HomeSide and the counterparties
for the term of the contract.
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 risk management option contracts on mortgage servicing
rights was $30.1 million at September 30, 1999 and $57.4 million at September
30, 1998.
The amount of credit risk associated with risk management interest rate swaps,
interest rate swaps with caps, and interest rate swaptions related to mortgage
servicing rights if all counterparties failed completely was approximately $0.1
million as of September 30, 1999. The amounts of credit risk associated with
interest rate swaps related to debt instruments as of September 30, 1999 and
September 30, 1998 were approximately $6.8 million and $24.8 million,
respectively.
The following is a summary of HomeSide 's notional amounts and fair values of
interest rate products (in thousands):
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998
-------------------------------- ------------------------------
Notional Notional
Amount Fair Value (1) Amount Fair Value (1)
------------- ---------------- ------------- -----------------
<S> <C> <C> <C> <C>
Purchased commitments to sell mortgage loans:
Mandatory forward contracts $1,942,890 $ (8,370) $3,281,196 $(45,557)
Options on mortgage-backed securities 640,000 3,722 1,845,000 2,864
Options on U.S. treasury bond futures 30,000 54 127,000 57
Risk management contracts on mortgage servicing rights:
Options on U.S. treasury bond futures 3,552,400 29,206 7,905,900 57,368
Futures contracts on U.S. treasury bonds/notes -- -- 5,545,500 62,843
Over the counter options on U.S. treasury
bond/notes 1,450,000 27,301 -- --
Options on Eurodollar futures 4,000,000 2,844 -- --
Interest rate swaps and
interest rate swaps with caps 16,150,000 (384,029) -- --
Interest rate swaptions 9,450,000 34,214 -- --
Interest rate swaps on debt instruments 950,000 6,827 950,000 24,800
</TABLE>
(1) Parentheses denote liability. 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.
Risk Management Related to the Acquisition and Sale of Mortgage Loans
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 through the origination and selling of mortgage loans 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.
HomeSide regularly enters into commitments to originate and purchase 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 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 mortgage loans do not necessarily
reflect future cash requirements since some of the commitments will not be drawn
upon before expiration. Commitments to originate mortgage loans totaled $1.7
billion and $4.1 billion at September 30, 1999 and September 30, 1998,
respectively.
HomeSide's exposure to credit risk in the event of default by the counterparty
for mandatory forward commitments to sell mortgage loans and related options is
the difference between the contract price and the current market price, offset
by any available margins retained by HomeSide or an independent clearing agent,
which totaled $0.1 million at September 30, 1999 and $0.4 million at September
30, 1998.
The amount of credit risk as of September 30, 1999 and September 30, 1998, if
all counterparties failed completely and if the margins, if any, retained by
HomeSide or an independent clearing agent were to become unavailable, was
approximately $30.3 million and $37.4 million, respectively, for all risk
management instruments related to mortgage servicing rights and the origination
and selling of mortgage loans.
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 $21.6 million and $15.0 million at September 30, 1999 and September
30, 1998, respectively.
Servicing commitment to investors
HomeSide is required to submit to certain investors, primarily Ginnie Mae,
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 $3.0 billion and $4.3 billion at September 30, 1999 and September
30, 1998, respectively.
Geographical concentration of credit risk
HomeSide is engaged in business nationwide and has no material concentration of
credit risk in any geographic region.
14. STOCKHOLDER'S EQUITY
On April 1, 1999 and October 1, 1998 the Company paid dividends to the Parent in
the amounts of $31.3 million and $37.8 million, respectively.
15. CONTINGENCIES
HomeSide, along with its subsidiaries, is a defendant in a number of legal
proceedings arising in the normal course of business. HomeSide, in management's
estimation, has recorded adequate reserves in the financial statements for
pending litigation. Management, after reviewing all actions and proceedings
pending against or involving HomeSide, considers that the aggregate liabilities
or loss, if any, resulting from the final outcome of these proceedings will not
have a material effect on the financial position, results of operations or
liquidity of HomeSide .
16. EMPLOYEE BENEFITS
HomeSide offers a 401(k) defined contribution benefit plan in 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 $5.2 million and $4.1 million for the fiscal year
ended September 30, 1999 and the period from February 11, 1998 to September 30,
1998, respectively.
17. QUARTERLY FINANCIAL DATA (Unaudited)
<PAGE>
<TABLE>
<CAPTION>
(in thousands) For the Three For the Three For the Three For the Three
Months Ended Months Ended Months Ended Months Ended
September 30, 1999 June 30, 1999 March 31, 1999 December 31, 1998
------------------ ------------------- ------------------- ---------------------
<S> <C> <C> <C> <C>
Revenue $ 99,369 $ 106,396 $ 107,624 $ 106,778
Expenses
63,952 74,363 73,857 75,654
Provision for income taxes
15,755 15,364 16,580 15,535
================== =================== =================== =====================
Net income $ 19,662 $ 16,669 $ 17,187 $ 15,589
================== =================== =================== =====================
</TABLE>
<TABLE>
<CAPTION>
(in thousands) For the Three For the Three For the Period From
Months Ended Months Ended February 11, 1998 to
September 30, 1998 June 30, 1998 March 31, 1998
---------------------- ---------------------- -----------------------
<S> <C> <C> <C>
Revenue $ 104,469 $ 99,650 $ 46,152
Expenses 31,750
71,249 66,726
Provision for income taxes
16,347 16,236 7,518
---------------------- ---------------------- -----------------------
Net income $ 16,873 $ 16,688 $ 6,884
====================== ====================== =======================
</TABLE>
18. OTHER RELATED PARTY TRANSACTIONS
On June 23, 1998, HomeSide entered into an agreement for an unsecured revolving
credit facility with the National. The agreement was amended on June 22, 1999.
Under the credit facility, HomeSide can borrow up to $2.5 billion, subject to
limits imposed by regulatory authorities. As of June 30, 1999, Australian
financial regulations limited the National's ability to lend funds to HomeSide,
a non-bank affiliate, to approximately $2.1 billion. Borrowings under the credit
facility may be overnight or for periods of 7, 30, 60 or 90 days. For overnight
borrowings, the interest rate is determined by HomeSide and the National at the
time of the borrowing. For LIBOR - based borrowings, the interest rate is
charged at the corresponding LIBOR rate. At September 30, 1999 and 1998, the
amount outstanding under this credit facility totaled $1.5 billion and $1.8
billion, respectively. The weighted average interest rate on outstanding
borrowings under this credit facility during the fiscal year ended September 30,
1999 and the period from February 11, 1998 to September 30, 1998 were 5.22% and
5.67%, respectively.
As a result of NationsBank Corporation's acquisition of Barnett Banks, Inc., the
Company agreed to release Barnett from a five year agreement to sell certain of
its mortgage loans to HomeSide. In consideration, the Company received $3.0
million cash in June 1998.
19. SUBSEQUENT EVENT
On October 18, 1999, HomeSide entered into a $2.0 billion revolving credit
facility with an independent syndicate of banks. This agreement replaces
HomeSide's previous bank credit facility. The primary purpose of this credit
facility is to provide liquidity back-up for HomeSide's $1.5 billion commercial
paper program.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA - HOMESIDE PREDECESSOR
The selected consolidated financial and operating information of HomeSide
Predecessor set forth below is for the periods from March 1, 1997 to February
10, 1998 and March 16, 1996 to February 28, 1997 and should be read in
conjunction with, and is qualified in its entirety by reference to, the
Consolidated Financial Statements and the Notes thereto and in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of HomeSide Predecessor included elsewhere in this document.
<TABLE>
<CAPTION>
For the Period From For the Period From
(in thousands, except share data) March 1, 1997 to March 16, 1996 to
February 10,1998 February 28,1997
Selected Income Statement:
<S> <C> <C>
Revenues:
Mortgage servicing fees $ 393,292 $ 308,906
Amortization of mortgage servicing rights (207,508) (153,694)
------------------------ -----------------------
Net servicing revenue 185,784 155,212
Interest income 97,050 81,507
Interest expense (81,770) (66,833)
------------------------ -----------------------
Net interest revenue 15,280 14,674
Net mortgage origination revenue 85,206 66,073
Other income 1,671 682
------------------------ -----------------------
Total revenues 287,941 236,641
Expenses:
Salaries and employee benefits 75,419 72,976
Occupancy and equipment 15,447 11,770
Servicing losses on investor-owned loans and
foreclosure-related expenses 21,974 17,934
Other expenses 38,231 40,766
------------------------ -----------------------
Total expenses 151,071 143,446
Income before provision for income taxes 136,870 93,195
Provision for income taxes 53,379 37,278
------------------------ -----------------------
Net income $ 83,491 $ 55,917
======================== =======================
Selected Balance Sheet Data at Period End:
Mortgage loans held for sale $ 1,292,403 $ 805,274
Mortgage servicing rights 1,766,357 1,596,838
Total assets 3,859,291 2,717,321
Bank credit facility 2,074,956 1,818,503
Long-term debt 770,466 21,128
Total liabilities 3,178,468 2,105,277
Total stockholder's equity 680,823 612,044
======================== =======================
Selected Operating Data:
Volume of loan production $ 20,529,530 $ 20,877,535
Loan servicing portfolio (at period end) 98,906,102 89,217,846
Loan servicing portfolio (average outstanding during
the period) 94,963,812 74,677,171
Weighted average interest rate of the servicing
portfolio (at period end) 7.85% 7.92%
Weighted average servicing fee of the servicing
portfolio, including ancillary income (during
the period) 0.438% 0.432%
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
HOMESIDE PREDECESSOR-- FOR THE PERIOD FROM MARCH 1, 1997 TO FEBRUARY 10, 1998
AND FOR THE PERIOD FROM MARCH 16, 1996 TO FEBRUARY 28, 1997
General
HomeSide Predecessor, a wholly-owned subsidiary of Homeside, Inc. ("the Parent")
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
("BankBoston"), and Barnett Banks, Inc. ("Barnett"). HomeSide Predecessor is a
wholly-owned subsidiary of HomeSide Holdings, Inc., which is a wholly-owned
subsidiary of the Parent. HomeSide Predecessor's strategy emphasizes variable
cost mortgage loan originations, low cost mortgage servicing and effective risk
management. Headquartered in Jacksonville, Florida, HomeSide Predecessor ranks
as the 5th largest mortgage loan originator and the 6th largest servicer in the
United States for the twelve months ended December 31, 1997 based on data
published by Inside Mortgage Finance.
HomeSide Predecessor 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 Predecessor intends to pursue
additional loan portfolio acquisitions and strategic origination relationships
similar to its existing agreement with BankBoston (see Note 4).
On February 10, 1998, National Australia Bank Limited (the "National") acquired
all outstanding shares of common stock of the Parent for $27.825 per share or
approximately $1.2 billion. Following this transaction, the National owns 100%
of the registrant's common stock and the Parent became an indirect, wholly-owned
subsidiary of the National.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements. This report contains forward-looking
statements, which reflect the Company's current views with respect to future
events and financial performance. These forward-looking statements are subject
to certain risks and uncertainties, including those identified below, 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. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements whether as a result of new information, future events or otherwise.
The following factors could cause actual results to differ materially from
historical results or those anticipated: (1) the Company's ability to grow which
is dependent 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, (2) economic factors may negatively
affect the Company's profitability as the frequency of loan default tends to
increase in such environments and (3) changes in interest rates may 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
the Company's servicing portfolio. These risks and uncertainties are more fully
detailed in the Company's filings with the Securities and Exchange Commission.
Mortgage Banking
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) risk
management, a program primarily designed to protect the economic performance of
the servicing portfolio that could otherwise be adversely affected by increased
loan prepayments due to declines in interest rates.
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 sold. Mortgage bankers also
borrow on a longer term basis to finance their servicing assets and working
capital requirements. Revenues consist primarily of those related to servicing
and, to a lesser extent, fees and interest spreads from originations. The major
expenses of a mortgage banker include costs of financing, operating costs
related to origination and servicing and the amortization of mortgage servicing
rights.
Mortgage bankers typically seek to retain the rights to service the loans they
originate or acquire 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 generally based on the present value
of the servicing fee income stream, net of servicing costs, expected to be
received over the estimated life of the loans. The assets of a mortgage banking
company consist primarily of mortgage loans held for sale and the value of the
servicing rights.
Loan Production Activities
As a multi-channel loan production lender, HomeSide Predecessor has one of the
industry's largest correspondent lending production operations, a full-service
brokered loan program and a national production center for consumer direct
mortgage lending. By focusing on production channels with a variable cost
structure, HomeSide Predecessor eliminates the fixed costs associated with
traditional mortgage branch offices. Without the burden of high fixed cost loan
origination networks, HomeSide Predecessor is positioned to weather a variety of
interest rate environments. The following information regarding loan production
activities for HomeSide Predecessor is presented to aid in understanding the
results of operations and financial condition of HomeSide Predecessor for the
period from March 1, 1997 to February 10, 1998 and for the period from March 16,
1996 to February 28, 1997 (in millions):
<PAGE>
For the Period From For the Period From
March 1, 1997 to March 16, 1996 to
February 10, 1998 February 28, 1997
----------------- -----------------
Correspondent $13,304 $11,113
Co-issue 5,584 8,222
Broker 1,305 843
--------------------- --------------------
Total wholesale 20,193 20,178
Consumer Direct 337 700
--------------------- --------------------
Total production 20,530 20,878
Bulk acquisitions 3,446 4,073
===================== ====================
Total production and acquisitions $23,976 $24,951
===================== ====================
Total loan production, excluding bulk acquisitions, was $20.5 billion for the
period from March 1, 1997 to February 10, 1998, relatively equal to the period
from March 16, 1996 to February 28, 1997. HomeSide Predecessor also purchased
bulk servicing acquisitions of $3.4 billion and $4.1 billion during the period
from March 1, 1997 to February 10, 1998 and the period from March 16, 1996 to
February 28, 1997, respectively.
HomeSide Predecessor continues to examine a number of ways to diversify and grow
revenue sources from its existing and new customer base. As part of this effort,
HomeSide Predecessor has announced an alliance with a subprime lender, which
allows HomeSide Predecessor to offer additional mortgage-related products to the
production network. HomeSide Predecessor then sells the loans, servicing
released, to its strategic partners. The subprime lending unit began operations
in January 1998.
Servicing Portfolio
Management believes that HomeSide Predecessor is one of the most efficient
mortgage loan servicers in the industry based on its servicing cost per loan and
the number of loans serviced per employee. The servicing operation makes
extensive use of state-of-the-art technology, process re-engineering and expense
management. With a portfolio size of $98.9 billion, HomeSide Predecessor
services the loans of approximately 1.2 million homeowners from across the
United States and is committed to protecting the value of this important asset
by a sophisticated risk management strategy. HomeSide Predecessor anticipates
its low cost of servicing loans will continue to maximize the bottom-line impact
of its growing servicing portfolio. HomeSide Predecessor's focus on efficient
and low cost processes is pursued through the selective use of automation as
well as the strategic outsourcing of selected servicing functions and effective
control of delinquencies and foreclosures.
The following information on the dollar amounts of loans serviced is presented
to aid in understanding the results of operations and financial condition of
HomeSide Predecessor for the period from March 1, 1997 to February 10, 1998 and
for the period from March 16, 1996 to February 28, 1997 (in millions):
<PAGE>
<TABLE>
For the Period From For the Period From
March 1, 1997 to March 16, 1996 to
February 10, 1998 February 28, 1997
----------------- -----------------
<S> <C> <C>
Balance at beginning of period $89,218 $41,844
Acquisition of Barnett Mortgage Company - 33,082
Other additions 23,976 25,252
------------------------- -------------------------
Total additions 23,976 58,334
------------------------- -------------------------
Scheduled amortization 2,035 1,733
Prepayments 11,176 6,226
Foreclosures 682 514
Sales of servicing 395 2,487(a)
------------------------- -------------------------
Total reductions 14,288 10,960
------------------------- -------------------------
Balance at end of period $98,906 $89,218
========================= =========================
</TABLE>
(a) Includes $1.9 billion of servicing sold as part of the sale of Honolulu
Mortgage Company.
The number of loans serviced at February 10, 1998 was 1,167,210, compared to
1,070,000 at February 28, 1997. HomeSide Predecessor's strategy is to build its
mortgage servicing portfolio by concentrating on variable cost loan origination
strategies, and as a result, benefit from improved economies of scale. A key to
HomeSide Predecessor's future growth is the proprietary servicing software
purchased from Barnett. This system will allow HomeSide Predecessor to double
the number of loans serviced on a single system. During the period from March 1,
1997 to February 10, 1998, HomeSide Predecessor transferred approximately
210,000 of the loans serviced to its proprietary servicing software. After the
transfer, over half the servicing portfolio is serviced on the proprietary
system. The transfer of the remaining portfolio is expected to occur by the end
of calendar 1998.
Results of Operations for the period from March 1, 1997 to February 10, 1998
compared to the period from March 16, 1996 to February 28, 1997
Summary
HomeSide Predecessor's net income increased 49% to $83.5 million for the period
from March 1, 1997 to February 10, 1998 from $55.9 million for the period from
March 16, 1996 to February 28, 1997. Total revenues for the period from March 1,
1997 to February 10, 1998 increased 22% to $287.9 million from $236.6 million
for the period from March 16, 1996 to February 28, 1997. The increases in net
income and revenues for the period from March 1, 1997 to February 10, 1998
compared to the period from March 16, 1996 to February 28, 1997 were primarily
attributable to the acquisition of Barnett Mortgage Company ("BMC") on May 31,
1996 and increases of $30.6 million in net servicing revenue, $19.1 million in
net mortgage origination revenue and $0.6 million in net interest revenue. The
BMC servicing portfolio was $33.1 billion at May 31, 1996. Its acquisition
increased HomeSide Predecessor's servicing portfolio by 75% on that date, and
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 $98.9 billion at
February 10, 1998 from $89.2 billion at February 28, 1997, an 11% increase. As
part of the BMC acquisition, Barnett agreed to sell HomeSide Predecessor the
loans produced by the loan production networks retained by Barnett, which
contributed to the increase in net mortgage origination revenue. Net interest
revenue increased primarily because of lower borrowing costs resulting from the
lower interest rate environment during the period ending February 10, 1998,
improved terms for the bank line of credit and the issuance of medium-term
notes. The Company's improved credit ratings lowered the cost of borrowing under
the bank line of credit and enabled HomeSide Predecessor to issue publicly
traded notes, which expanded borrowing capacity.
Net Servicing Revenue
Net servicing revenue was $185.8 million for the period from March 1, 1997 to
February 10, 1998 compared to $155.2 million for the period from March 16, 1996
to February 28, 1998. Net servicing revenue is comprised of mortgage servicing
fees, ancillary servicing revenue, and amortization of mortgage servicing rights
expense.
Mortgage servicing fees increased 27% to $393.3 million for the period from
March 1, 1997 to February 10, 1998 from $308.9 million for the period from March
16, 1996 to February 28,1997, primarily as a result of the BMC acquisition and
growth of the servicing portfolio through loan production channels and bulk
servicing acquisitions. The servicing portfolio increased to $98.9 billion at
February 10, 1997 compared to $89.2 billion at February 28, 1997. HomeSide
Predecessor's weighted average interest rate of the mortgage loans in the
servicing portfolio was 7.85% at February 10, 1998 and 7.92% at February 28,
1997. The weighted average servicing fee, including ancillary income, for the
servicing portfolio was 0.438% and 0.432% for the period from March 1, 1997 to
February 10, 1998 and the period from March 16, 1996 to February 28, 1997,
respectively. The increase in the weighted average servicing fee for the period
from March 1, 1997 to February 10, 1998 compared to the period from March 16,
1996 to February 28, 1997 was due to growth of ancillary revenues, including
late fees and other mortgage-related products.
Amortization expense increased to $207.5 million for the period March 1, 1997 to
February 10, 1998 from $153.7 million for the period from March 16, 1996 to
February 28, 1997 mainly as a result of a higher average balance of mortgage
servicing rights and a decrease of 86 basis points in average mortgage interest
rates from the period from March 16, 1996 to February 28, 1997 to the period
from March 1, 1997 to February 10, 1998. 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. A decrease in mortgage interest
rates results in an increase in prepayment estimates used in calculating
periodic amortization expense. Because mortgage servicing rights are amortized
over the expected period of service fee revenues, an increase in mortgage
prepayment activity typically results in a shorter estimated life of the
mortgage servicing assets and, accordingly, higher amortization expense.
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 Predecessor's loan production volumes and the interest rates
HomeSide Predecessor earns on loans and pays to its lenders.
Loan refinancing levels are the largest 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 origination market and HomeSide Predecessor's
loan production volumes. Higher loan production volumes resulted in higher
average balances of loans held for sale and consequently higher levels of
interest income 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 Predecessor 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 increased $0.6 million for the period from March 1, 1997 to
February 10, 1998 to $15.3 million from $14.7 million for the period from March
16, 1996 to February 28, 1997, primarily due to improved funding rates obtained
through improved credit ratings, the issue of medium-term notes and the adoption
of an early pool buyout program. During the period from March 1, 1997 to
February 10, 1998, HomeSide Predecessor issued $750.0 million of medium-term
notes to the public market at an average cost of 6.251% as of February 10, 1998.
The proceeds were used to pay down existing bank debt, increasing HomeSide
Predecessor's borrowing capacity. An immediate benefit of this increased
borrowing capacity was the initiation of an early pool buyout program, which
involves the purchase of delinquent government loans from pools early in the
foreclosure process, thereby reducing the unreimbursed interest expense that
HomeSide Predecessor incurs.
Interest income increased from the period from March 16, 1996 to February 28,
1997 to the period from March 1, 1997 to February 10, 1998, primarily as a
result of an increase of $246.6 million in the average balance of loans held for
sale. Interest expense increased from the period from March 16, 1996 to February
28, 1997 to the period from March 1, 1997 to February 10, 1998 as a result of
increased borrowings to fund growth of the servicing portfolio and loan
origination activity. These expenses were offset by an increase in credits
received on borrowings as a result of higher average balances of custodial
deposits.
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 hedging of secondary marketing activities and fees charged to
review loan documents for purchased loan production.
Net mortgage origination revenue was $85.2 million for the period from March 1,
1997 to February 10, 1998 compared to $66.1 million for the period from March
16, 1996 to February 28, 1997, a 29% increase. The increase in net mortgage
origination revenue during the period from March 1, 1997 to February 10, 1998 as
compared to the period from March 16, 1996 to February 28, 1997 is due in part
to an increase in loan production volumes resulting from the preferred seller
relationships with Barnett and BankBoston and HomeSide Predecessor's broker and
correspondent lending channels. The increase also reflects larger gains from
secondary marketing activities.
Salaries and Employee Benefits
Salaries and employee benefits expense was $75.4 million for the period from
March 1, 1997 to February 10, 1998 compared to $73.0 million for the period from
March 16, 1996 to February 28, 1997 due to growth in the number of employees as
a result of the purchase of the BMC mortgage servicing operations acquired on
May 31, 1996. The average number of full-time equivalent employees increased to
1,805 for the period from March 1, 1997 to February 10, 1998 from 1,593 for the
period from March 16, 1996 to February 28, 1997.
Occupancy and Equipment Expense
Occupancy and equipment expense primarily includes rental expense, repairs and
maintenance costs, certain computer software expenses and depreciation of
HomeSide Predecessor's premises and equipment. Occupancy and equipment expense
for the period from March 1, 1997 to February 10, 1998 was $15.4 million
compared to $11.8 million for the period from March 16, 1996 to February 28,
1997. The increase in expense was mainly due to increases in the costs of
information systems required to handle the growing mortgage servicing portfolio.
Servicing Losses on Investor-Owned Loans and Foreclosure-Related Expenses
Servicing losses on investor-owned loans 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 Predecessor's experience as a servicer of government
loans.
During the period from March 1, 1997 to February 10, 1998, the servicing losses
on investor-owned loans and foreclosure-related expenses totaled $22.0 million
compared to $17.9 million for the period from March 16, 1996 to February 28,
1997. The increase was largely attributable to the growth of the servicing
portfolio resulting from loan production and increased foreclosure losses.
Included in accounts payable and accrued liabilities at February 10, 1998 and
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 mortgage servicing
portfolio. HomeSide Predecessor's historical loss experience on VA loans
generally has been consistent with industry experience. Management believes that
HomeSide Predecessor has an adequate level of reserve based on servicing volume,
portfolio composition, credit quality and historical loss rates, as well as
estimated future losses. Servicing portfolio delinquencies increased from prior
year due to an increased delinquency trend throughout the industry.
The following table sets forth HomeSide Predecessor's delinquency and
foreclosure experience:
Servicing Portfolio Delinquencies
(percent by loan count)
<TABLE>
<CAPTION>
February 10, February 28,
1998 1997
---- ----
<S> <C> <C>
Servicing Portfolio Delinquencies, excluding bankruptcies (at end of period)
30 days 3.52% 3.27%
60 days 0.78% 0.69%
90+ days 0.72% 0.54%
------------------ -------------------
Total past due 5.02% 4.50%
================== ===================
Foreclosures pending 0.74% 0.72%
================== ===================
</TABLE>
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 Predecessor's mortgage servicing portfolio and loan
production volumes.
Other expenses during the period from March 1, 1997 to February 10, 1998 were
$38.2 million, compared to $40.8 million for the period from March 16, 1996 to
February 28, 1997. The decrease was primarily due to decreases in advertising
and certain loan origination expenses.
Income Tax Expense
HomeSide Predecessor's income tax expense was $53.4 million for the period from
March 1, 1997 to February 10, 1998 and $37.3 million for the period from March
16, 1996 to February 28, 1997. The increase was attributable to an increase in
net income. The effective income tax rate for the period from March 1, 1997 to
February 10, 1998 and the period from March 16, 1996 to February 28, 1997 was
approximately 39% and 40%, respectively.
Risk Management Activities
HomeSide Predecessor 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 Predecessor 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 1, 1997 to February 10, 1998, HomeSide Predecessor
utilized options on U.S. Treasury bond futures and 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 risk management contracts used by
HomeSide Predecessor have characteristics such that they tend to increase in
value as interest rates decline. Conversely, these risk management contracts
tend to decline in value as interest rates rise. Accordingly, changes in value
of these risk management instruments will tend to move inversely with changes in
value of HomeSide Predecessor's mortgage servicing rights.
These risk management instruments 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 risk management
instruments are marked-to-market with changes in market value deferred and
applied as an adjustment to the basis of the related mortgage servicing right
asset being hedged. As a result, any changes in market value that are deferred
are amortized and evaluated for impairment in the same manner as the related
mortgage servicing rights. The effectiveness of HomeSide Predecessor's hedging
activity can be measured by the correlation between changes in the value of the
risk management instruments and changes in the value of HomeSide Predecessor's
mortgage servicing rights. This correlation is assessed on a quarterly basis to
ensure that high correlation is maintained over the term of the hedging program.
During the periods presented, HomeSide Predecessor has experienced a high
measure of correlation between changes in the value of mortgage servicing rights
and the risk management contracts. However, in periods of rising interest rates,
the increase in value of mortgage servicing rights may outpace the decline in
value of the options included in the hedge position, because the loss on the
options is limited to the premium paid.
During the period from March 1, 1997 to February 10, 1998, deferred gains and
losses on risk management contracts resulted in net deferred hedge gains of
$142.7 million. As of February 10, 1998, net deferred hedge gains of $39.5
million are included in the carrying value of mortgage servicing rights.
Activity in the deferred hedge account during the period from March 1, 1997 to
February 10,1998 is as follows (in thousands):
Net deferred hedge loss at February 28, 1997 ( $ 110,637)
Amortization of net deferred hedge losses 7,423
Net deferred hedge gains 142,667
================
Net deferred hedge gain at February 10, 1998 $ 39,453
================
HomeSide Predecessor'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 10, 1998 was $43.9 million, which was
equal to their carrying amount because the risk management contracts are
marked-to-market at each reporting date. See "-- Liquidity and Capital
Resources" for further discussion of HomeSide Predecessor's sources and uses of
cash. See Note 3 of Notes to Consolidated Financial Statements for a description
of HomeSide Predecessor's accounting policy for its risk management contracts.
See Notes 13 and 14 of Notes to Consolidated Financial Statements for additional
fair value disclosures with respect to HomeSide Predecessor's risk management
contracts.
Liquidity and Capital Resources
The Company's principal financing needs are the financing of loan origination
activities and the investment in mortgage servicing rights. To meet these needs,
the Company currently utilizes funding from an independent syndicate of banks,
including a warehouse credit facility and a servicing-related facility,
medium-term notes and cash flow from operations. HomeSide Predecessor continues
to investigate and pursue alternative and supplementary methods to finance its
growing operations through the public and private capital markets. These may
include methods designed to expand the Company's financial capacity and reduce
its cost of capital. In addition, to facilitate the sale and distribution of
certain mortgage products, HomeSide Predecessor Mortgage Securities, Inc., a
wholly-owned subsidiary of HomeSide Predecessor, may continue to issue mortgage
backed securities.
Operations
Net cash used in operations for the period from March 1, 1997 to February 10,
1998 was $231.0 million. Net cash provided by operations for the period from
March 16, 1996 to February 28, 1997 was $216.6 million. 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. Higher cash demands to meet increased loan production levels are
primarily met through borrowings and loan sales.
Investing
Net cash used in investing activities was $773.7 million for the period from
March 1, 1997 to February 10, 1998 and $862.2 million for the period from March
16, 1996 to February 28, 1997. Cash used in investing activities was for the
purchase and origination of mortgage servicing rights. For the period from March
1, 1997 to February 10, 1998, cash was also used for funding the early pool
buyout program. During the period from March 1, 1997 to February 10, 1998, these
uses of cash were offset by net proceeds from risk management contracts, while
during the period from March 16, 1997 to February 28, 1997, cash was used to
purchase risk management contracts. Other assets increased $49.5 million to
$125.0 million at February 10, 1998 from $75.5 million at February 28, 1997
primarily as a result of an increase in HomeSide Predecessor's hedge assets.
Early pool buyout advances, a program initiated in fiscal 1998, totaled $374.1
million at February 10, 1998. During the period from March 16, 1996 to February
28, 1997, HomeSide Predecessor also made net 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 Predecessor's hedging needs. Except for the Banc
One acquisition (see Note 19), HomeSide Predecessor 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. HomeSide Predecessor will fund the
Banc One acquisition under existing borrowing capacity.
Financing
Net cash provided by financing activities was $984.1 million for the period from
March 1, 1997 to February 10, 1998 and $698.4 million for the period from March
16, 1996 to February 28, 1997. The primary source of cash from financing
activities during the period from March 1, 1997 to February 10, 1998 was $750.0
million from the issuance of medium-term notes and net borrowings of $256.5 from
HomeSide Predecessor's line of credit. The primary sources of cash from
financing activities during the period from March 16, 1996 to February 28, 1997
were net borrowings under HomeSide Predecessor's lines of credit of $334.2
million, $393.4 million from capital contributions from the Parent. Cash used in
financing activities during the period ended February 10, 1998 was used for the
payment of debt issue costs and dividends paid to the Parent totaling $14.7
million. Cash used in financing activities for the period ended February 28,
1997 was used for the payment of debt issue costs and dividends paid to the
Parent totaling $17.0 million..
During the period from March 1, 1997 to February 10, 1998, net cash used in
operations was $231.0 million, net cash used in investing activities was $773.7
million and net cash provided by financing activities was $984.1 million,
resulting in a net decrease in cash of $20.6 million. HomeSide Predecessor
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 Predecessor 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 Predecessor'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.
Repurchase agreements also provide an alternative to the bank line of credit for
mortgages held for sale. Future cash needs are highly dependent on future loan
production and servicing results, which are influenced by changes in long-term
interest rates.
Year 2000 Compliance
HomeSide Predecessor uses and is dependent upon a significant number of computer
software programs and operating systems to conduct its business. Such programs
and systems include those developed and maintained by HomeSide Predecessor,
software and systems purchased from outside vendors and software and systems
used by HomeSide Predecessor's third party providers. HomeSide Predecessor has
initiated a review and assessment of all hardware and software to determine
whether it will function properly in the Year 2000. It is anticipated that some
level of modification or replacement of hardware and software will be necessary
in order to make HomeSide Predecessor's systems "Year 2000 Compliant." HomeSide
Predecessor presently estimates these remediation costs to total approximately
$15.0 million. Remediation costs are expected to be expensed as incurred, with
the exception of new software purchases, which will be capitalized. The Company
has not incurred significant remediation costs prior to February 10, 1998. Year
2000 remediation costs are based on management's best estimates, which were
derived utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. In
addition, HomeSide Predecessor has relationships with vendors, customers and
other third parties that rely on software and systems that may not be Year 2000
compliant. With respect to such third parties, Year 2000 compliance matters will
not be within HomeSide Predecessor's direct control. There can be no assurance
that Year 2000 compliance failures by such third parties will not have a
material adverse effect on HomeSide Predecessor's results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholder of HomeSide Lending, Inc.
We have audited the accompanying consolidated balance sheets of HomeSide
Lending, Inc., (a Delaware corporation, see Note 1) and subsidiaries as of
February 10, 1998 and February 28, 1997, and the related consolidated statements
of income, changes in stockholder's equity and cash flows for the periods from
March 1, 1997 to February 10, 1998 and 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 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 HomeSide Lending,
Inc. and subsidiaries as of February 10, 1998 and February 28, 1997 and the
results of their operations and their cash flows for the periods from March 1,
1997 to February 10, 1998 and March 16, 1996 to February 28, 1997, in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Jacksonville, Florida
April 15, 1998
<PAGE>
<TABLE>
<CAPTION>
HOMESIDE PREDECESSOR and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Share Data)
February 10, 1998 February 28, 1997
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 32,113 $ 52,691
Mortgage loans held for sale, net 1,292,403 805,274
Mortgage servicing rights, net 1,766,357 1,596,838
Accounts receivable, net 227,294 157,518
Early pool buyout advances 374,097 --
Premises and equipment, net 41,982 29,515
Other assets 125,045 75,485
-------------------- ---------------------
Total Assets $3,859,291 $2,717,321
===================== =====================
LIABILITIES AND STOCKHOLDER'S EQUITY
Notes payable $2,074,956 $1,818,503
Accounts payable and accrued liabilities 135,803 123,231
Deferred income taxes 197,243 142,415
Long-term debt 770,466 21,128
--------------------- ---------------------
Total Liabilities 3,178,468 2,105,277
--------------------- ---------------------
Commitments and Contingencies
Stockholder's Equity:
Common stock:
Common stock, $1.00 par value, 100 shares authorized, issued and
Outstanding in 1998 and 1997, respectively, all pledged as second
priority Collateral on the long-term debt of the Parent - -
Additional paid-in capital 573,092 573,092
Retained earnings 107,731 38,952
--------------------- ---------------------
Total Stockholder's Equity 680,823 612,044
--------------------- ---------------------
Total Liabilities and Stockholder's Equity $3,859,291 $2,717,321
===================== =====================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
HOMESIDE PREDECESSOR and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Data)
For the Period from For the Period from
March 1, 1997 to March 16, 1996 to
February 10, 1998 February 28, 1997
----------------- -----------------
<S> <C> <C>
REVENUES:
Mortgage servicing fees $393,292 $308,906
Amortization of mortgage servicing rights (207,508) (153,694)
-------------------------- -----------------------
Net servicing revenue 185,784 155,212
Interest income 97,050 81,507
Interest expense (81,770) (66,833)
-------------------------- -----------------------
Net interest revenue 15,280 14,674
Net mortgage origination revenue 85,206 66,073
Other income 1,671 682
-------------------------- -----------------------
Total Revenues 287,941 236,641
EXPENSES:
Salaries and employee benefits 75,419 72,976
Occupancy and equipment 15,447 11,770
Servicing losses on investor-owned loans
and foreclosure-related expenses 21,974 17,934
Other expenses 38,231 40,766
-------------------------- -----------------------
Total Expenses 151,071 143,446
Income before income taxes 136,870 93,195
Income tax expense 53,379 37,278
-------------------------- --------------------------
Net Income $83,491 $55,917
========================== ==========================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
HOMESIDE PREDECESSOR and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(dollars in thousands, except share data)
Additional
Numbers Common Paid-in Retained
of Shares Stock Capital Earnings Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, March 15, 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
----------------------------------------------------------------------------
Net income -- -- -- 83,491 83,491
Dividends declared and paid to Parent -- -- -- (14,712) (14,712)
----------------------------------------------------------------------------
Balance, February 10, 1998 100 -- $ 573,092 $ 107,731 $ 680,823
============================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
HOMESIDE PREDECESSOR and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
For the Period from For the Period from
March 1, 1997 to March 16, 1996 to
February 10, 1998 February 28, 1997
------------------------ -----------------------
<S> <C> <C>
CASH FLOWS (USED IN) PROVIDED BY OPERATING ACTIVITIES:
Net income $83,491 $55,917
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Amortization of mortgage servicing rights 207,508 153,694
Depreciation and amortization 8,850 8,173
Servicing losses on investor-owned loans 12,346 13,683
Deferred income tax expense 56,352 37,278
Capitalized servicing rights -- (21,015)
Mortgage loans originated and purchased for sale (23,975,752) (12,504,567)
Proceeds and principal repayments of mortgage loans held for
sale 23,540,371 12,572,217
Change in accounts receivable (82,121) (63,378)
Change in other assets and accounts payable and accrued
liabilities (82,036) (35,448)
------------------------ -----------------------
Net cash (used in) provided by operating activities (230,991) 216,554
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of premises and equipment, net (17,252) (4,929)
Acquisition of mortgage servicing rights (519,694) (475,729)
Net proceeds from (purchases of) risk management contracts 137,393 (141,944)
Purchase of early pool buyout advances, net of repayments (374,097) --
Acquisition of BancBoston Mortgage Corp., net of cash acquired -- (133,392)
Acquisition of Barnett Mortgage Co., net of cash acquired -- (106,244)
------------------------ -----------------------
Net cash used in investing activities (773,650) (862,238)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Net borrowings from banks and short-term lines of credit 256,453 334,170
Issuance of notes payable 750,000 --
Payment of debt issue costs (7,017) (11,681)
Repayment of long-term debt (661) (567)
Capital contributions from the Parent -- 393,418
Dividends paid to the Parent (14,712) (16,965)
------------------------ -----------------------
Net cash provided by financing activities 984,063 698,375
Net (decrease) increase in cash and cash equivalents (20,578) 52,691
Cash and cash equivalents at beginning of period 52,691 --
------------------------ -----------------------
Cash and cash equivalents at end of period $32,113 $52,691
======================== =======================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
HOMESIDE PREDECESSOR AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
HomeSide Lending, Inc. ("HomeSide Predecessor" 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 Predecessor include the accounts
of HomeSide Predecessor and its subsidiaries, after elimination of all material
intercompany balances and transactions. Amounts of acquired companies have been
included from the date of acquisition.
HomeSide Predecessor is a wholly-owned subsidiary of HomeSide Holdings, Inc.,
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 HomeSide Holdings, Inc., HomeSide Predecessor and certain capitalized debt
issue costs. The Parent has $130 million in outstanding long-term debt. All of
the stock of HomeSide Holdings, Inc. and HomeSide Predecessor is pledged as
collateral on the debt of the Parent. The Parent is dependent upon dividends
from HomeSide Holdings, Inc. and HomeSide Predecessor for the cash flow
necessary to service the Parent's debt.
The accompanying financial statements of HomeSide Predecessor have been prepared
for the period March 1, 1997 to February 10, 1998 and for the period March 16,
1996 to February 28, 1997 to coincide with the commencement of operations of the
Parent and the merger as discussed in Note 2 below. The financial statements do
not reflect the effects of HomeSide Predecessor's acquisition by National
Australia Bank Limited ("the National"). HomeSide Predecessor will adopt a
fiscal year end of September 30 to conform to the fiscal year of the National.
2. ORGANIZATION
On December 11, 1995, HomeSide Predecessor 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 ("BankBoston") for the purpose of acquiring
certain assets and liabilities of the mortgage banking business owned by
BankBoston. BankBoston received cash and an ownership interest in HomeSide
Predecessor. The transaction closed on March 15, 1996 and HomeSide Predecessor
began operations on March 16, 1996.
On May 31, 1996, Barnett Banks, Inc. ("Barnett") sold certain of its mortgage
banking operations, primarily its servicing portfolio, mortgage servicing
operations and proprietary mortgage banking software systems, to HomeSide
Predecessor. Barnett received cash and an ownership interest in HomeSide
Predecessor. The accompanying financial statements reflect the effects of both
of these acquisitions. For more information on these acquisitions, see Note 4.
From May 31, 1996 until the 1997 public offering of common stock, the Investors
as a group, BankBoston and Barnett each owned approximately one-third of
HomeSide Predecessor. Following the public offering, the Investors as a group,
BankBoston and Barnett owned in the aggregate approximately 79% of the
outstanding common stock.
On January 9, 1998, NationsBank Corporation acquired all the outstanding common
stock of Barnett Banks, Inc. (see Note 15).
On February 10, 1998, the National acquired all outstanding shares of the common
stock of the Parent. As consideration, the National paid $27.825 per share for
all of the outstanding common stock and paid $17.7 million cash to retire all
outstanding stock options. The total purchase price was approximately $1.2
billion. The National paid for the purchase with borrowed and available funds.
The transaction was accounted for as a purchase. As a result, all assets and
liabilities were recorded at their fair value on February 11, 1998, and the
purchase price in excess of the fair value of net assets acquired of $713.6
million was recorded as goodwill. Following the transaction described above, the
National now owns 100% of the Parent's common stock and the Parent has become an
indirect wholly-owned subsidiary of the National.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Risk management of mortgage loan originations
HomeSide Predecessor 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 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 period as a component of
mortgage origination revenue. Unamortized premiums are recognized as a component
of the gain or loss on sale of 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 Predecessor 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 Predecessor to substantial interest rate risk. It
also directly affects the volatility of reported earnings because mortgage
servicing rights are carried at the lower of amortized cost or fair value. It is
HomeSide Predecessor's policy to mitigate and hedge this risk through its risk
management program.
The risk management instruments used by HomeSide Predecessor 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 hedge instruments
will tend to move inversely with changes in value of HomeSide Predecessor's
mortgage servicing rights.
Options on U.S. Treasury bond futures and U.S. Treasury bond futures have been
purchased by HomeSide Predecessor to manage interest rate risk. When purchased,
the options and futures contracts are designated to a specific strata of
mortgage servicing rights. The risk management instruments are marked-to-market
and changes in market value are included as adjustments to the basis of the
related mortgage servicing right asset 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 changes in the risk
management contracts and changes in value of HomeSide Predecessor's mortgage
servicing rights is assessed on a quarterly basis to ensure that 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 held for sale for the purpose of
determining the lower of aggregate cost or fair value.
Mortgage loans held for investment are included in other assets and 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 non-accrual status when any portion of the principal or
interest is ninety days past due or earlier when concern exists as to the
ultimate collectibility of principal or interest. When loans are placed on
nonaccrual status, the related interest receivable is reversed against interest
income of the current period. Interest payments received on nonaccrual loans are
applied as a reduction of the principal balance when concern exists as to the
ultimate collection of principal; otherwise, such payments are recognized as
interest income. Loans are removed from nonaccrual status when principal and
interest become current and they are anticipated to be fully collectible.
Mortgage servicing rights
The total cost of loans originated or acquired is allocated between the mortgage
servicing rights and the mortgage loans (without the servicing rights) based on
relative fair values. The value of servicing rights acquired through bulk
acquisitions is capitalized at cost.
Effective January 1, 1997, the Company 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 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. 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 Predecessor.
Accordingly, the impact of the adoption of SFAS No.125 was not material to the
Company's financial statements.
Mortgage servicing rights are amortized in proportion to and over the period of
the 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 based on the market prices of similar servicing assets and on
discounted anticipated 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
which include product types of the underlying loans and interest rates of
mortgage notes . Impairment is recognized through a valuation reserve for each
impaired stratum and is included in amortization of mortgage servicing rights.
An analysis of HomeSide Predecessor's mortgage servicing rights is 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 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 write-downs 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.
Accounts receivable
Accounts receivable includes advances, consisting primarily of payments for
property taxes and insurance premiums, as well as principal and interest
remitted to investors before they are collected from mortgagors, made in
connection with loan servicing activities. Accounts receivable also includes
loans purchased from mortgage-backed securities serviced by HomeSide Predecessor
for others and mortgage claims filed primarily with the FHA and the VA.
Early pool buyout advances
Early pool buyout advances consist of delinquent government loans in foreclosure
process that have been purchased from pools. The program reduces the
unreimbursed interest expense that HomeSide Predecessor incurs. The funding of
the purchases of these delinquent loans for the early pool buyout program is
recorded as interest expense. Interest income earned from the guarantor agency
during the foreclosure process is accrued to match the funding expense incurred.
Scheduled interest payments made to the investor before the loans were purchased
from the pool are recorded as early pool buyout advances with a reserve for
advances which will not ultimately be collected.
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
shorter of the estimated life of the improvement or the term of the lease.
Long-lived assets are evaluated regularly for the 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 charge recorded in the statement of
income.
Goodwill
Net assets acquired in purchase transactions are recorded at fair value at the
inception of the date of acquisition. Goodwill, representing the excess of the
purchase price over the fair value of the net assets purchased, is 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.
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 Predecessor's mortgage servicing portfolio totaled $98.9 billion at
February 10, 1998. 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 from depository institutions for
custodial balances placed with such institutions.
Net mortgage origination revenue
Mortgage origination revenue includes gains and losses from sales of mortgage
loans and fees associated with the origination and purchase of mortgage loans.
Servicing losses on investor-owned loans and foreclosure-related expenses
HomeSide Predecessor 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 payment is
uncollectible and estimates for potential losses based on HomeSide Predecessor'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 (see Note 7).
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 flow
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.
New accounting standards
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This statement establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements
with the same prominence as other financial statements. This statement is
effective for fiscal years beginning after December 15, 1997. Management expects
that the impact of this statement on the presentation of the financial
statements of HomeSide Predecessor will be immaterial.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. This statement is
effective for fiscal years beginning after December 15, 1997. Management expects
that the impact of this statement on the presentation of the financial
statements of HomeSide Predecessor will be immaterial.
4. ACQUISITIONS
Acquisition of BancBoston Mortgage Corporation
On March 15, 1996, HomeSide Predecessor acquired from BankBoston all of the
outstanding stock of BancBoston Mortgage Corporation ("BBMC"), which was
subsequently renamed HomeSide Lending, Inc. Certain assets and liabilities of
BBMC were retained by BankBoston, including BBMC's mortgage retail production
operations in New England.
HomeSide Predecessor made cash payments of $139.5 million in cash and issued
$86.8 million of common stock to BankBoston 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 Predecessor for $107.2 million in cash.
Simultaneously, BankBoston paid approximately $1.0 million in cash for all of
HomeSide Predecessor's class C non-voting common stock. In consideration of
services rendered to HomeSide Predecessor with respect to the BBMC Acquisition,
class B non-voting stock valued at $1.0 million was issued to an investment
bank. Management purchased common stock for $4.1 million in cash, $1.9 million
of which was financed by loans from HomeSide Predecessor. On May 31, 1996,
HomeSide Predecessor paid an additional $5.0 million to BankBoston in connection
with the closing of the Barnett Mortgage Company ("BMC") acquisition. The
transaction was accounted for under the purchase method of accounting. The
assets and liabilities of BBMC were recorded at their 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
$247.0 million. The excess of fair value of net assets acquired over cost was
$56.0 million and was allocated as a reduction mortgage servicing period rights.
Acquisition of Barnett Mortgage Company
On May 31, 1996, HomeSide Predecessor acquired from Barnett certain assets, net
of assumed liabilities, and the outstanding common stock of BMC (the "BMC
Acquisition"). Certain assets and liabilities of BMC were retained by Barnett,
including those assets of BMC and its subsidiaries (other than Honolulu Mortgage
Company, Inc.) associated with the loan origination or production activities.
HomeSide Predecessor 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 HomeSide Predecessor common stock for an aggregate purchase price of
$118.0 million. Also in connection with the BMC Acquisition, BankBoston and the
Investors paid approximately $42.3 million in cash for additional shares of
HomeSide Predecessor. The transaction was accounted for using the purchase
method of accounting and, accordingly, the results of operations of HomeSide
Predecessor include BMC from the date of acquisition. The assets and liabilities
of BMC were recorded by HomeSide Predecessor 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 interests,
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.
The unaudited condensed pro forma statement of income for the period from March
16, 1996 to February 28, 1997, assuming BMC had been acquired as of March 16,
1996 is as follows (in millions, except per share data):
Pro Forma for the Period
From March 16, 1996 to
February 28, 1997
Net servicing revenue $167.3
Net interest revenue (4.5)
Net mortgage origination revenue 67.1
Other income 0.7
------------------------------
Total revenue 230.6
Expenses (157.5)
------------------------------
Income before income taxes
and extraordinary loss 73.1
Income tax expense (29.5)
------------------------------
Income before extraordinary loss 43.6
Extraordinary loss (6.4)
------------------------------
Net income $ 37.2
==============================
The purchase accounting adjustments in the above pro forma statement of
operations are based on the actual purchase price and the amount of assets and
liabilities actually acquired. No adjustments have been made for restructuring
costs that might have been incurred or for cost efficiencies that might have
been realized during the period presented. Accordingly, these pro forma results
are not indicative of future results.
5. MORTGAGE SERVICING RIGHTS
An analysis of mortgage servicing rights is as follows (in thousands):
<TABLE>
<CAPTION>
February 10, 1998 February 28, 1997
<S> <C> <C>
Beginning balance $1,596,838 $ -
Additions, including BBMC and BMC acquisitions 416,822 1,665,640
Sales of servicing (342) (25,745)
Net deferred hedge (gain) loss, net of amortization (39,453) 110,637
Amortization (207,508) (153,694)
----------------------- ----------------------
Ending balance $1,766,357 $1,596,838
======================= ======================
</TABLE>
At February 10, 1998, the net deferred hedge gain of $39.5 million consists of
the net deferred loss for the period from March 16, 1996 to February 28, 1997 of
$110.6 million adjusted for gains of $195.2 million, losses of $52.5 million,
and amortization of $7.4 million. For the period from March 16, 1996 to February
28, 1997, the net deferred hedge loss of $ 110.6 million consists of gains of
$133.3 million and losses of $254.9 million, less $11.0 million of amortization.
6. PREMISES AND EQUIPMENT
Premises and equipment consist of the following (in thousands):
February 10, 1998 February 28, 1997
Land $ 3,451 $ 3,451
Buildings and building improvements 10,604 10,986
Furniture and equipment 22,464 15,739
Leasehold improvements 14,717 3,808
-------------------- -----------------
51,236 33,984
Accumulated depreciation and amortization (9,254) (4,469)
==================== =================
Ending balance $ 41,982 $ 29,515
==================== =================
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):
For the Period March For the Period From
1, 1997 to February March 16, 1996 to
10, 1998 February 28, 1997
----------------------- ----------------------
Beginning balance $ 21,650 $ 11,100
Provision for servicing losses on
investor-owned loans 12,346 13,683
Charge-offs (12,747) (10,295)
Recoveries 401 60
Additions from acquisition of BMC - 7,102
----------------------------------------------
Ending balance $ 21,650 $ 21,650
==============================================
8. NOTES PAYABLE
Notes payable consist of the following (in thousands):
<TABLE>
<CAPTION>
Weighted Average Interest Rate
Total Outstanding At Period End During the Period
<S> <C> <C> <C> <C> <C>
Bank line of credit, February 10, 1998 $ 2,074,956 6.00% 6.04%
======================
Bank line of credit, February 28, 1997 $ 1,778,496 5.65% 5.83%
Short-term credit facilities 40,007 8.25% 8.25%
----------------------
Total, February 28, 1997 $ 1,818,503
======================
</TABLE>
HomeSide Predecessor borrows funds on a demand basis from an independent
syndicate of banks under a $2.5 billion credit facility which, at the request of
HomeSide Predecessor, may be increased to $3.0 billion. The line of credit is
used to provide funds for HomeSide Predecessor's business of originating,
acquiring and servicing mortgage loans. The 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-related facility, which is capped
at $950.0 million. On February 14, 2000, the line of credit will terminate. The
credit agreement contains covenants that impose limitations and restrictions on
HomeSide Predecessor, including the maintenance of certain net worth and ratio
requirements. Under certain circumstances set forth in the credit agreement,
borrowings under the agreement become collateralized by substantially all of
HomeSide Predecessor's assets. HomeSide Predecessor is in compliance with all
requirements included in the credit agreement. At February 10, 1998 and February
28, 1997, $2.1 billion and $1.8 billion, respectively, was outstanding under the
credit line. Amounts outstanding at February 10, 1998 and February 28, 1997
under the bank line of credit are comprised of a warehouse credit facility of
$1.2 billion and $0.8 billion and a servicing-related credit facility of $0.9
billion and $0.9 billion, respectively. The amount of the unused bank line of
credit was $0.4 billion and $0.7 billion as of February 10, 1998 and February
28, 1997, respectively.
Borrowings under the bank line of credit bear interest at rates per annum, based
on, at HomeSide Predecessor'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) various rates based on federal fund rates.
On January 15, 1997, HomeSide Predecessor 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 Predecessor entered into another short-term credit
facility in an aggregate principal amount of $100.0 million. The facilities each
expired on May 1, 1997 and amounts borrowed under these lines were repaid.
9. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
February 10, 1998 February 28, 1997
----------------- -----------------
Medium-term notes $ 750,000 $ -
Mortgage note payable 20,466 21,128
----------------- ------------------
Total $ 770,466 $ 21,128
================= ==================
Medium-term notes
As of February 10, 1998, $650.0 million of the outstanding medium-term notes had
been effectively converted by interest rate swap agreements to floating-rate
notes. The weighted average borrowing rates on medium-term borrowings issued for
the period from March 1, 1997 to February 10, 1998, including the effect of the
interest rate swap agreements, was 6.251% . Net proceeds from the issuance were
primarily used to reduce the amounts outstanding under the bank credit
agreement. Amounts were subsequently reborrowed under the bank credit facility
to fund the early pool buyout program.
As of February 10, 1998, outstanding medium-term notes issued by HomeSide
Predecessor, under a $1.0 billion shelf registration statement were as follows
(in thousands):
Issue Date Outstanding Balance Stated Interest Rate Maturity Date
May 20, 1997 $250,000 6.890% May 15, 2000
June 30, 1997 200,000 6.883% June 30, 2002
June 30, 1997 40,000 6.820% July 2, 2001
July 1, 1997 15,000 6.860% July 2, 2001
July 31, 1997 200,000 6.818% August 1, 2004
September 15, 1997 45,000 6.770% September 17, 2001
-------------------
Total $750,000
===================
As of February 10, 1998, $250.0 million was available for future issuances under
the shelf registration. On March 6, 1998, HomeSide Lending, Inc. filed an
amendment increasing the shelf registration to $1.5 billion.
Mortgage note payable
HomeSide Predecessor assumed a mortgage note payable that is due in 2017 and
bears interest at a stated rate of 9.50%. HomeSide Predecessor's main office
building is pledged as collateral. A purchase accounting premium was recorded in
connection with HomeSide Predecessor assuming the mortgage note payable.
Principal payments due on long-term debt at February 10, 1998 are as follows (in
thousands):
Fiscal Year
1999 $ 256
2000 250,281
2001 100,309
2002 200,340
2003 373
Thereafter 211,724
Unamortized purchase accounting premium 7,183
-------------------------
Total $770,466
=========================
Long-term debt of Parent
On May 14, 1996, the Parent issued $200,000,000 of 11.25% notes ("Notes")
maturing on May 15, 2003 and paying interest semiannually in arrears on May 15
and November 15 of each year, commencing on November 15, 1996. The Notes are
redeemable at the option of the Parent, in whole or in part, at any time on or
after May 15, 2001, at certain redemption prices. The indenture contains
covenants that impose limitations and restrictions on the 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 HomeSide Lending,
Inc and principal and interest payments on the Notes are funded by dividends
received from HomeSide Predecessor. The Parent is in compliance with all net
worth and ratio requirements contained in the indenture relating to the notes.
The amount of Notes outstanding at February 10, 1998 is $130.0 million.
On February 5, 1997, the Parent issued 8,452,500 shares of common stock to the
public at $15 per share. A portion of the proceeds from the offering was used to
pre-pay $70.0 million of the Notes at a premium of $7.9 million. In connection
with the early repayment of the Notes, the Parent wrote off a portion of the
unamortized debt issuance costs related to the Notes and incurred a prepayment
penalty equal to one year's interest on the Notes retired . The loss amounted to
$6.4 million, net of tax, and was recorded as an extraordinary item. The
remaining proceeds were used to reduce amounts outstanding under the bank line
of credit.
During the period from March 1, 1997 through February 10, 1998, and the period
from March 16, 1996 through February 28, 1997, HomeSide Predecessor paid $14.7
million and $17.0 million, respectively, in dividends to the Parent to enable
the Parent to service the debt and pay certain debt issuance costs.
10. INCOME TAXES
The Company files a consolidated federal income tax return. All companies
included in the consolidated federal income tax return are jointly and severally
liable for any tax assessments based on such consolidated return.
Components of the provision for income taxes before the effect of the tax
benefit associated with the early extinguishment of debt were as follows (in
thousands):
For the Period From For the Period From
March 1, 1997 to March 16, 1996 to
February 10, 1998 February 28, 1997
-------------------------- -----------------------
Current:
Federal $ 2,856 $ -
State - -
-------------------------- -----------------------
$ 2,856 -
Deferred
Federal 42,462 30,872
State 8,061 6,406
-------------------------- -----------------------
$ 50,523 $ 37,278
-------------------------- -----------------------
Total $ 53,379 $ 37,278
========================== =======================
The following is a reconciliation of the statutory federal income tax rate to
the effective income tax rate as reflected in the consolidated statements of
income.
For The Period From For The Period From
March 1, 1997 to March 16, 1996 to
February 10, 1998 February 28, 1997
Statutory federal income tax rate 35.0% 35.0%
State income and franchise taxes,
net of federal tax effect 3.5% 4.0%
Other .5% 1.0%
----------------------- --------------------
Effective income tax rate 39.0% 40.0%
======================= ====================
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 10, 1998 February 28, 1997
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 23,114 $ 40,891
Alternative minimum tax credit carry forward 2,856 -
Loss reserves 25,404 17,563
Hedge activities 30,754 -
Other assets 4,879 12,087
---------------------- ----------------------
Total gross deferred tax assets $ 87,007 $ 70,541
====================== ======================
Deferred tax liabilities:
Mortgage servicing fees $267,871 $207,278
Other liabilities 16,379 5,678
---------------------- ----------------------
Total gross deferred tax liabilities 284,250 212,956
---------------------- ----------------------
Net deferred tax liability $197,243 $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 at February 10, 1998 or February 28, 1997.
The Company has consolidated tax net operating loss carryforwards at February
10, 1998. These carryforwards expire in the years 2002 to 2012.
11. LEASE COMMITMENTS
HomeSide Predecessor leases office facilities and equipment under noncancelable
leases that include renewal options and escalation clauses which extend into
2004. Rental expense for leases of office facilities and equipment was $4.5
million and $3.9 million for the period March 1, 1997 to February 10, 1998 and
for the period March 16, 1996 to February 28, 1997, respectively. HomeSide
Predecessor's minimum future lease commitments are as follows (in thousands):
Fiscal Year
1999 $ 2,124
2000 984
2001 800
2002 710
2003 625
Thereafter 700
---------------
Total $ 5,943
===============
12. SUPPLEMENTAL CASH FLOW INFORMATION
In connection with the acquisitions of BBMC and BMC, HomeSide Predecessor
recorded non-cash assets and assumed liabilities, including fair value
adjustments, of approximately $2.3 billion and $1.7 billion in 1998 and 1997,
respectively.
HomeSide Predecessor paid $58.8 million and $60.1million of interest during the
period from March 1, 1997 to February 10, 1998 and March 16, 1996 to February
28, 1997, respectively. HomeSide Predecessor paid taxes totaling $0.3 million
and received $51.7 million cash for reinstated loans from early pool buyout
advances for the period from March 1, 1997 to February 10, 1998.
13. 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 anticipated loss
experience and other factors. Changes in assumptions could significantly affect
these estimates. Derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized in
an immediate sale of the instrument. Also because of differences in
methodologies and assumptions used to estimate fair value, the Company's fair
values should not be compared to those of other companies.
Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company. For certain assets and liabilities, the
information required is supplemented with additional information relevant to an
understanding of the fair value.
The methods and assumptions used to estimate the fair values of each class of
financial instruments are as follows:
Cash and cash equivalents
The carrying amount reported in the balance sheet approximates fair value.
Mortgage loans held for sale
Fair values are based on the estimated value at which the loans could be sold in
the secondary market. These loans are priced to be sold with servicing rights
retained, as this is the Company's normal business practice.
Accounts receivable, early pool buyout advances and accounts payable
Carrying amounts are considered to approximate fair value. Accounts payable do
not include the effects of additional costs incurred and additional liabilities
assumed in connection with HomeSide Predecessor's acquisition by the National.
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 consistent with the Company's current borrowing rate as
adjusted for the effects of certain prepayment penalties.
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 and U.S. treasury bond futures
The fair values of options are estimated based on actual market quotes. In some
instances, quoted prices for the underlying loans or valuations determined by
option models are used.
Interest rate swaps
The fair values of interest rate swaps are estimated based on dealer quotes.
Fair Value
The fair values of the Company's financial instruments are as follows (in
thousands):
<TABLE>
<CAPTION>
February 10, 1998 February 28, 1997
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------- ---------------- ------------------ --------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 32,113 $ 32,113 $ 52,691 $ 52,691
Mortgage loans held for sale 1,292,403 1,296,685 805,274 806,432
Accounts receivable and early pool buyout
advances 601,391 601,391 157,518 157,518
Risk management contracts for
mortgage servicing rights 43,947 43,947 45,212 45,212
LIABILITIES
Notes payable 2,074,956 2,074,956 1,818,503 1,818,503
Long-term debt 770,466 799,893 21,128 21,128
Accounts payable and accrued liabilities 135,802 135,802 123,231 123,231
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)
OFF-BALANCE SHEET(1)
Commitments to originate mortgage loans -- (1,510) -- (2,805)
Mandatory forward contracts to sell
mortgages -- (3,621) -- 3,588
Mandatory forward contracts to sell U.S.
treasuries -- 65 -- 7
Options on mortgage-backed securities 3,543 5,890 2,025 1,741
Options on U.S treasury bond futures 743 604 321 (147)
Interest rate swaps -- 13,496 -- --
- ----------------------------------------------------
(1) Parenthesis denote a liability
</TABLE>
Fair value estimates are made as of a specific point in time, based on relevant
market data and information about the financial instrument. These estimates do
not reflect any premium or discount that could result from offering for sale the
Company's entire holding of a particular financial instrument. Because no active
market exists for some portion of the Company's financial instruments, fair
value estimates are based on judgments regarding future expected loss
experience, current economic conditions, current interest rates and prepayment
trends, risk characteristics of various financial instruments and other factors.
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 10, 1998 and February 28, 1997. Subsequent changes in
market interest rates and prepayment assumptions could significantly change the
fair value.
14. RISK MANAGEMENT AND OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
As discussed in Note 3, HomeSide Predecessor utilizes risk management financial
instruments to manage interest rate risk related to the value of its mortgage
servicing rights. A summary of HomeSide Predecessor's position in risk
management financial instruments at February 10, 1998 and February 28, 1997 is
included below.
The fair value of HomeSide Predecessor's risk management contracts is based on
quoted market prices of the underlying instruments at February 10, 1998 and
February 28, 1997. The notional amounts represent the par value of the
underlying U.S. Treasury bonds. However, the notional amounts are not recognized
in the balance sheet and should not be considered as a measure of credit risk or
future cash requirement.
The amount of the risk management contracts maintained depends on factors such
as interest rates, interest volatility and growth in the mortgage servicing
portfolio. HomeSide Predecessor is subject to market risk to the extent that
interest rates fluctuate; however, the purpose of the risk management contracts
is to hedge the value of the mortgage servicing rights portfolio. HomeSide
Predecessor's risk management financial instruments qualify as hedges, and gains
or losses on the risk management instruments correlate to movements in the value
of the mortgage servicing rights. Cash requirements for HomeSide Predecessor's
option contracts are limited to premiums paid. Cash requirements for futures
contracts are managed based on limits established by HomeSide Predecessor's risk
management committee. HomeSide Predecessor's credit risk on its risk management
contracts is limited because the contracts are traded on a national exchange
which guarantees counterparty performance.
As discussed in Note 3, HomeSide Predecessor 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 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
Predecessor'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
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
Predecessor.
HomeSide Predecessor is exposed to credit loss in the event of nonperformance by
the counterparties to the various instruments. HomeSide Predecessor 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 Predecessor's exposure to credit risk in the
event of default by the counterparties for the options is $57.0 million at
February 10, 1998.
HomeSide Predecessor'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 Predecessor or an independent
clearing agent, which totaled $30.2 million at February 10, 1998. The amount of
credit risk as of February 10, 1998, if all counterparties failed completely and
if the margins, if any, retained by HomeSide Predecessor or an independent
clearing were to become unavailable, was approximately $4.4 million for
mandatory forward commitments of mortgage-backed securities.
The following is a summary of HomeSide Predecessor's notional amounts and fair
values of interest rate products (in thousands):
<TABLE>
<CAPTION>
February 10, 1998 February 28, 1997
Notional Notional
Amount FairValue(1) Amount Fair Value (1)
------ ------------ ------ --------------
<S> <C> <C> <C> <C>
Purchased commitments to sell mortgage loans:
Mandatory forward contracts $2,847,668 ($3,556) $1,445,345 $3,588
Options on mortgage-backed
securities 835,000 5,890 755,000 1,741
Options on U.S. treasury
bond futures 145,000 604 140,000 (147)
Risk management contracts on mortgage servicing rights:
Options on U.S. treasury bond futures 4,440,100 50,487 3,572,300 45,212
Futures contracts on U.S. treasury
bonds 2,121,800 (6,540) -- --
</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.
Commitments to originate mortgage loans
HomeSide Predecessor regularly enters into commitments to originate and purchase
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 HomeSide Predecessor does not have matching commitments to sell loans,
which exposes HomeSide Predecessor 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 Predecessor'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 will not be drawn upon
before expiration. Commitments to originate mortgage loans totaled $3.2 billion
and $2.7 billion at February 10, 1998 and February 28, 1997, respectively.
Mortgage loans sold with recourse
HomeSide Predecessor 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 $16.7 million and $14.2 million at
February 10, 1998 and February 28, 1997, respectively.
For five years following the May 31, 1996 acquisition of BMC, Barnett is
obligated to repurchase or reimburse HomeSide Predecessor for any credit losses
related to $101.0 million of loans serviced with recourse.
Servicing commitment to investors
HomeSide Predecessor 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 Predecessor 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 $0.6 billion and $2.3 billion at February 10, 1998 and
February 28, 1997, respectively.
Geographical concentration of credit risk
HomeSide Predecessor is engaged in business nationwide and has no material
concentration of credit risk in any geographic region.
15. OTHER RELATED PARTY TRANSACTIONS
HomeSide Predecessor entered into an agreement with BankBoston and Barnett for
certain corporate support services. For the period March 1, 1997 through
February 10, 1998, HomeSide Predecessor paid BankBoston and Barnett
approximately $5.2 million and $0.5 million, respectively, for these services.
For the period March 16, 1996 to February 28, 1997, HomeSide Predecessor paid
BankBoston and Barnett approximately $2.5 million and $0.9 million,
respectively, for these services.
HomeSide Predecessor purchases mortgage loans eligible for sale from BankBoston
and Barnett. For the period March 1, 1997 through February 10, 1998, HomeSide
Predecessor paid approximately $5.3 million and $45.4 million, respectively, to
BankBoston and Barnett for the purchase of mortgage servicing rights. For the
period from March 1, 1996 through February 28, 1997, HomeSide Predecessor paid
approximately $4.7 million and $27.6 million, respectively, to BankBoston and
Barnett for the purchase of mortgage servicing rights. HomeSide Predecessor also
purchases the mortgage servicing rights to the mortgage loans BankBoston and
Barnett hold in their portfolios. For the period March 1, 1997 through February
10, 1998, HomeSide Predecessor purchased mortgage servicing rights for loans
retained by BankBoston and Barnett totaling approximately $1.6 million and $9.5
million, respectively. For the period from March 16, 1996 to February 28, 1997
HomeSide Predecessor purchased mortgage servicing rights for loans retained by
BankBoston and Barnett totaling approximately $1.3 million and $8.2 million,
respectively. The BankBoston and Barnett purchases represent 2.8% and 20.4%,
respectively, of the Company's total production for the period from March 1,
1997 to February 10, 1998. For the period of March 16, 1996 through February 28,
1997, the BankBoston and Barnett purchases represented 2.8% and 16.0 %,
respectively, of the Company's total production.
HomeSide Predecessor services residential mortgage loans held in portfolio by
BankBoston and Barnett. The servicing fees paid by BankBoston and Barnett to
HomeSide Predecessor are market-based fees consistent with the fees charged by
HomeSide Predecessor to other investors. For the period March 1, 1997 to
February 10, 1998, BankBoston and Barnett paid $3.8 million and $29.1 million in
servicing fees, respectively. For the period March 16, 1996 to February 28,
1997, BankBoston and Barnett paid $5.3 million and $ 23.6 million in servicing
fees, respectively.
As a result of NationsBank Corporation's acquisition of Barnett Banks, Inc., the
Company agreed to release Barnett from a five year agreement to sell certain of
its mortgage loans to HomeSide Predecessor. In consideration, the Company
received the right to purchase $5.0 billion in mortgage servicing rights, an
increase in the weighted average servicing fee for Barnett portfolio loans
currently serviced, and will receive $3.0 million cash in June 1998.
16. CONTINGENCIES
HomeSide Predecessor, along with its subsidiaries, is a defendant in a number of
legal proceedings arising in the normal course of business. HomeSide
Predecessor, 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 Predecessor,
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, results of operations or liquidity of HomeSide Predecessor.
17. EMPLOYEE BENEFITS
HomeSide Predecessor offers a 401(k) defined contribution benefit plan in 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 $3.0 million and $4.0 million for
the period from March 1, 1997 to February 10, 1998 and the period from March 16,
1996 to February 28, 1997, respectively.
18. QUARTERLY FINANCIAL DATA (Unaudited)
<TABLE>
<CAPTION>
For the Period From For the Three For the Three For the Three
December 1, 1997 to Months Ended Months Ended Months Ended
February 10, 1998 November 30, 1997 August 31, 1997 May 31, 1997
------------------------ ---------------------- --------------------- -------------------------
(in thousands, except share data)
<S> <C> <C> <C> <C>
Revenue $ 65,264 $ 75,619 $ 76,330 $ 70,727
Expenses 35,943 38,241 39,432 37,454
Provision for income taxes 11,433 14,577 14,391 12,978
------------------------ ---------------------- --------------------- -------------------------
Net income $ 17,888 $ 22,801 $ 22,507 $ 20,295
======================== ====================== ===================== =========================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the Three For the Three For the Three For the Period From
Months Ended Months Ended Months Ended March 16, 1996
February 28, 1997 November 30, 1996 August 31, 1996 to May 31, 1997
---------------------- ---------------------- --------------------- -------------------------
(in thousands, except share data)
data)
<S> <C> <C> <C> <C>
Revenue $ 68,841 $ 68,073 $ 63,640 $ 36,087
Expenses 39,987 40,335 40,515 22,609
Provision for income taxes 10,898 11,373 9,481 5,526
---------------------- ---------------------- --------------------- -------------------------
Net income $ 17,956 $ 16,365 $ 13,644 $ 7,952
====================== ====================== ===================== =========================
</TABLE>
19. SUBSEQUENT EVENTS
On April 1, 1998, HomeSide Predecessor entered into an agreement with Banc One
Mortgage Corporation ("Banc One") to acquire the mortgage servicing assets of
Banc One. HomeSide Predecessor and Banc One have also entered into a Preferred
Partner agreement, whereby Banc One will sell a significant portion of its
residential mortgage loans to HomeSide Predecessor over the next five years. The
total purchase consideration is $201.0 million cash. The mortgage servicing
rights acquired relate to mortgage servicing loans of approximately $18 billion.
The transaction is subject to regulatory approvals and is expected to close late
in the second calendar quarter of 1998.
On April 6, 1998, the Company signed an agreement with NationsBank Corporation
whereby NationsBank agreed to sell HomeSide Predecessor a national wholesale
mortgage loan network which was formerly owned by Barnett Banks, Inc.
Effective April 30, 1998, HomeSide, Inc., the Parent, amended its charter to
change its name to HomeSide International, Inc.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective April 1, 1998, Homeside dismissed its prior certifying accountants,
Arthur Andersen, L.L.P. and retained as its new certifying accountants, KPMG
LLP. Arthur Andersen's report on HomeSide's financial statements during the two
most recent fiscal years and all subsequent interim periods preceding the date
hereof contained no adverse opinion or a disclaimer of opinions, and was not
qualified as to uncertainty, audit scope or accounting principles. The decision
to change accountants was approved by Homeside, Inc. Predecessor's Board of
Directors.
During the last two fiscal years and the subsequent interim period to the date
hereof, there were no disagreements between Homeside and Arthur Andersen on any
matters of accounting principles or practices, financial statement disclosure,
or auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Arthur Andersen would have caused it to make a reference to the
subject matter of the disagreements in connection with its reports.
None of the "reportable events" described in Item 304(a)(1) of Regulation S-K
occurred with respect to HomeSide within the last two fiscal years and the
subsequent interim period to the date hereof.
Effective April 1, 1998, HomeSide engaged KPMG LLP as its principal accountants.
During the last two fiscal years and the subsequent interim period to the date
hereof, HomeSide did not consult KPMG regarding any of the matters or events set
forth in Item 304(a)(2) of Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
The following table sets forth the name, age and position with the Company of
each person who is an executive officer or director of the Company.
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Joe K. Pickett.................... 54 Chairman of the Board, Director
Hugh R. Harris.................... 48 Chief Executive Officer; Director
Kevin D. Race..................... 39 President and Chief Operating Officer; Director
W. Blake Wilson................... 33 Executive Vice President and Chief Financial Officer
Robert J. Jacobs.................. 47 Executive Vice President, Secretary and General Counsel; Director
Betty L. Francis.................. 53 Chief Credit Officer and Executive Vice President
Mark F. Johnson................... 45 Executive Vice President - Production
William Glasgow, Jr............... 50 Executive Vice President - Servicing
Daniel T. Scheuble................ 41 Executive Vice President - Technology
Ann R. Mackey..................... 42 Senior Vice President and Director of Finance and Treasury
Philip G. Laren... ................43 Senior Vice President and Director of Risk Management
</TABLE>
The directors and officers of the Company are elected each year by vote of the
shareholder and directors, respectively. 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
Company will be appointed annually by its Board of Directors.
Joe K. Pickett has served as Chairman of the Board and a Director of HomeSide
Lending since April 1990. Mr. Pickett also served as the Chief Executive Officer
of HomeSide Lending from April 1990 to April 1999. He has served as Chairman of
the Board and Chief Executive Officer of the Parent, HomeSide International,
Inc., since March 14, 1996. From October 1994 through October 1995, Mr. Pickett
served concurrently as President of the Mortgage Bankers Association of America.
Mr. Pickett also serves as a Director of Fannie Mae and of Baptist Medical
Center, Jacksonville, Florida.
Hugh R. Harris has served as Chief Executive Officer of HomeSide since April
1999 and as President and Chief Operating Officer and a Director of the Parent
since March 1996. Mr. Harris also served as President and Chief Operating
Officer of the Company from January 1993 to April 1999. From January 1988 to
January 1993, Mr. Harris served as Vice Chairman of HomeSide in charge of
production and secondary marketing. Mr. Harris serves as a Director of Freedom
Securities, Inc.
Kevin D. Race has served as President and Chief Operating Officer of HomeSide
and Vice President of the Parent since April of 1999. Prior to becoming
President and Chief Operating Officer Mr. Race served as Executive Vice
President and Chief Financial Officer of HomeSide 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
HomeSide since February 2, 1996. Mr. Jacobs has served as a Director of HomeSide
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 is a former
President of the Mortgage Bankers Association of Florida.
Betty L. Francis has served as Chief Credit Officer and as Executive Vice
President of HomeSide 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 HomeSide. 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 NSTAR, a gas and electric utility in Massachusetts.
Mark F. Johnson has served as Executive Vice President of Production of HomeSide
since April 1, 1992. From 1988 to 1992, Mr. Johnson served as Senior Vice
President and Director of Wholesale Lending for HomeSide. 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 HomeSide 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 currently serves as Global IT and Chief Information Officer
for HomeSide. Mr. Scheuble has also served as Executive Vice President for
Technology And Loan Processing since 1993 and of Consumer Direct Lending from
1996 to 1998. From 1990 to 1992, Mr. Scheuble served as a Senior Technology and
Operational Manager at Bank of Boston. Mr. Scheuble has also served as Executive
Vice President of HomeSide Lending since April 10, 1996.
W. Blake Wilson has served as Executive Vice President, Chief Financial Officer,
and Director of Capital Markets of the Company since April 1999. Mr. Wilson
served as Executive Vice President and Director of Capital Markets from
September 1997 to April 1999. He previously served as Senior Vice President and
Director of Capital Markets of the Company from June 1996. Before joining
HomeSide, 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.
Ann R. Mackey has served as Senior Vice President of the Company since July
1993. Ms. Mackey has also served as Director of Finance and Treasury since April
1999 and as Finance Director of HomeSide from July 1993 to April 1999. From
September 1992 to July 1993, Ms. Mackey served as a manager in International
Risk Management for Bank of Boston. Ms. Mackey previously served as Senior Audit
Manager at KPMG Peat Marwick from 1985 to 1992.
Philip G. Laren has served as Senior Vice President of HomeSide Lending since
April of 1997. He has served as director of Global Risk Management since July of
1998. From 1995 to 1997, he served as Senior Vice President of Portfolio
Management at Fleet Mortgage Company in Columbia SC. From 1992 until 1995, he
served as Vice President of Acquisitions at Fleet. Prior to joining Fleet, he
worked at Source One Mogtgage Services in Farmington Hills, Michigan.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by or paid to
the Company's Chief Executive Officer and the Company's four most highly
compensated executive officers other than the CEO for all services rendered in
all capacities to the Company and its subsidiaries for the fiscal year ended
September 30, 1999 and the period from February 11, 1998 to September 30, 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation Awards
-------------------
Annual Compensation Securities
Name and Principal Fiscal ------------------------- Underlying All Other
HomeSide Lending Position Year Salary Bonus Options Compensation
- --------------------------------------- --------- ------------ ------------ -------------------- --------------------------
<S> <C> <C> <C> <C> <C>
Joe K. Pickett ....................... 1999 $450,000 $500,000(c) 150,000(d) $ 816,000(j)
Chairman 1998(a) 291,000 500,000(c) 50,000(d) 4,781,171(f)(g)(h)
1998(b) 372,000 500,000 45,000 23,954
1997 312,000 362,000 242,862(e) 16,135(i)
- --------------------------------------- --------- ------------ ---------------- ---------------- -----------------------------
Hugh R. Harris....................... 1999 435,385 470,000(c) 100,000(d) 816,000(j)
CEO 1998(a) 266,000 470,000(c) 45,000(d) 4,748,128(f)(g)(h)
1998(b) 360,000 470,000 45,000 14,411
1997 300,000 350,000 242,862(e) 7,842(i)
- --------------------------------------- --------- ------------ ---------------- --------------- -- ---------------------------
Kevin D. Race ........................ 1999 321,154 300,000(c) 60,000(d) 353,500(j)
President &COO 1998(a) 194,000 300,000(c) 35,000(d) 2,374,906(f)(g)(h)
1998(b) 250,000 300,000 45,000 9,333
1997 250,000(j) 100,000 97,155(e) 419,145(i)(k)
- --------------------------------------- --------- ------------ ---------------- ---------------- - ---------------------------
Mark F. Johnson ...................... 1999 240,577 170,000(c) 40,000(d) 378,500(j)
Executive Vice President 1998(a) 150,000 200,000(c) 30,000(d) 1,738,281(f)(g)(h)
1998(b) 230,000 200,000 30,000 10,623
1997 200,000 150,000 97,155(e) 6,714(i)
- --------------------------------------- --------- ------------ ---------------- ---------------- - ---------------------------
William Glasgow, Jr. ............... 1999 240,577 170,000(c) 40,000(d) 378,500(j)
Executive Vice President 1998(a) 150,000 200,000(c) 30,000(d) 1,738,281(f)(g)(h)
1998(b) 230,000 200,000 30,000 14,299
1997 200,000 150,000 97,155(e) 6,522(i)
- --------------------------------------- --------- ------------ ---------------- ---------------- - ---------------------------
</TABLE>
(a) For the fiscal period from February 11, 1998 to September 30, 1998.
(b) For the fiscal period from March 1, 1997 to February 10, 1998.
(c) Bonus amounts relate to the annual bonus under employment agreements with
the National paid during the year ended September 30, 1999 and the period
from February 11, 1998 to September 30, 1998, respectively.
(d) Options to purchase common stock of National Australia Bank, Ltd., the
parent.
(e) Reflects a 17 for 1 stock split of the Company's Common Stock effected
immediately prior to the Company's January 1997 initial public offering.
(f) Includes amounts received for (1) matching contributions under the
Company's 401K plan of $6,400 with respect to each individual, (2) profit
sharing contributions of $9,600 with respect to each individual, and (3)
relocation expenses of $33,043 with respect to Mr. Pickett.
(g) In consideration of entering into the Confidentiality and Noncompetition
Agreements with the National, Messrs. Pickett, Harris, Race, Johnson and
Glasgow received 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 the Merger with the National.
(h) Executive officers received the following amounts 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 received 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.
(i) Includes amounts received for (1) matching contributions under the
Company's savings plan of $6,000 with respect to each of Messrs. Pickett,
Harris, Johnson Glasgow; and (2) the dollar value of life insurance
premiums paid by the Company of $10,135 with respect to Mr. Pickett, $1,842
with respect to Mr. Harris, $74 with respect to Mr. Race, $714 with respect
to Mr. Johnson, and $522 with respect to Mr. Glasgow.
(j) Includes amounts received for (1) matching contributions under the
Company's 401K plan of $6,400 with respect to each individual, (2) profit
sharing contributions of $9,600 with respect to each individual, and (3) an
annual bonus pursuant to their respective employment agreements (See
"Employment Contracts and Termination of Employment Arrangements") of
$800,000 with respect to Messrs. Pickett and Harris, $337,500 with respect
to Mr. Race, and $362,500 with respect to Messrs. Johnson and Glasgow.
(k) The salary of Mr. Race was per annum. Mr. Race has been employed by the
Company since October 1996. Includes a bonus of $375,000 received by Mr.
Race as an inducement to join the Company and $38,071 in relocation
expenses.
Option Grants for the Fiscal Year Ended September 30, 1999 and the
Period from February 11, 1998 to September 30, 1998
The following table provides information on option grants with respect
to common stock of the parent, National Australia Bank, Ltd., for the fiscal
year ended September 30, 1999 and the period from February 11, 1998 to September
30, 1998 to the named executive officers. Pursuant to applicable regulations of
the Securities and Exchange commission (the "Commission"), the following table
also sets forth the hypothetical value which might have been realized with
respect to such options based on assumed rates of stock appreciation of 5% and
10% compounded annually from date of grant to the end of the option terms:
<TABLE>
<CAPTION>
Individual
Grants
------------------------------------------------------------------
Number of % of Total Potential Realizable Value at
Securities Options Assumed Annual Rates of Stock
Underlying Granted to Price Appreciation for Option
Options Employees Exercise Term (d)
Fiscal Granted in the Price Expiration ----------------------
Name Year (#) period ($/Sh) Date 5% 10%
- --------------------- ------- ------------ ------------ ----------- ------------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Joe K. Pickett 1999 150,000 (a) 1% $18.43 03/19/04 $ 37,500 $772,500
1998 50,000 (b) (c) 11.81 02/26/03 160,233 332,211
- --------------------- ------- ------------ --- ------------ -- ----------- -- ------------------ -- --------- --
Hugh R. Harris 1999 100,000 (a) (c) 18.43 03/19/04 25,000 515,000
1998 45,000 (b) (c) 11.81 02/26/03 144,210 298,990
- --------------------- ------- ------------ --- ------------ -- ----------- -- ------------------ -- --------- -- ---------
Kevin D. Race 1999 60,000 (a) (c) 18.43 03/19/04 15,000 309,000
1998 35,000 (b) (c) 11.81 02/26/03 112,163 232,548
- --------------------- ------- ------------ --- ------------ -- ----------- -- ------------------ -- --------- -- ---------
Mark F. Johnson 1999 40,000 (a) (c) 18.43 03/19/04 10,000 206,000
1998 30,000 (b) (c) 11.81 02/26/03 96,140 199,327
- --------------------- ------- ------------ --- ------------ -- ----------- -- ------------------ -- --------- -- ---------
William Glasgow, Jr. 1999 40,000 (a) (c) 18.43 03/19/04 10,000 206,000
1998 30,000 (b) (c) 11.81 02/26/03 96,140 199,327
</TABLE>
(a) Options granted during the fiscal year ended September 30, 1999 pursuant to
National Australia Bank's Executive Share Option Plan. The options may be
exercised during the period from March 19, 2002 to March 19, 2004 only if
on any day during this period the total return to shareholders exceeds 65%
of the exercise price. The total return includes the value of dividends and
the share price growth over the relevant period.
(b) Options granted during the period from February 11, 1998 to September 30,
1998 pursuant to National Australia Bank's Executive Share Option Plan. The
options may be exercised during the period from February 26, 2001 to
February 26, 2003 only if on any day during this period the total return to
shareholders exceeds 65% of the exercise price. The total return includes
the value of dividends and the share price growth over the relevant period.
(c) Represents less than 1% of the total options granted to the National's
employees during the fiscal year ended September 30, 1998.
(d) 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 National's Common Stock and in accordance with the
Executive Share Option Plan. The market price of the National's common
stock was $14.64 and $12.10 at September 30, 1999 and September 30, 1998,
respectively.
Aggregated Option Exercises and Option Values
for the Fiscal Year Ended September 30, 1999 and the
Period from February 11, 1998 to September 30, 1998
The following table provides information on option exercises during the
fiscal year ended September 30, 1999 and the period from February 11, 1998 to
September 30, 1998 with respect to the Common Stock of the National and on the
values of the named executive officers' unexercised options at September 30,
1999 and September 30, 1998:
<TABLE>
<CAPTION>
Shares Number of Securities Value of Unexercised
Acquired Underlying Unexercised In-the-Money
Fiscal on Value Options at Year-End (#) Options at Year-End
Name Year Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ------------------------ --------- ---------- ---------- ------------- ------------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Joe K. Pickett.......... 1999 0 $0 0 150,000 $0 (b)
1998 0 0 0 50,000 0 $ 14,500 (a)
- ------------------------ --------- ---------- - ---------- -- ------------- -- ------------------- -- ---------- -- ----------------
Hugh R. Harris.......... 1999 0 0 0 100,000 0 (b)
1998 0 0 0 45,000 0 13,050 (a)
- ------------------------ --------- ---------- - ---------- -- ------------- -- ------------------- -- ---------- -- ----------------
Kevin D. Race.......... 1999 0 0 0 60,000 0 (b)
1998 0 0 0 35,000 0 10,150 (a)
- ------------------------ --------- ---------- - ---------- -- ------------- -- ------------------- -- ---------- -- ----------------
Mark F. Johnson......... 1999 0 0 0 40,000 0 (b)
1998 0 0 0 30,000 0 8,700 (a)
- ------------------------ --------- ---------- - ---------- -- ------------- -- ------------------- -- ---------- -- ----------------
William Glasgow, Jr. 1999 0 0 0 40,000 0 (b)
1998 0 0 0 30,000 0 8,700 (a)
- ------------------------ --------- ---------- - ---------- -- ------------- -- ------------------- -- ---------- -- ----------------
</TABLE>
(a) Value of unexercised in-the-money stock options represents the difference
between the exercise price of the stock options and the closing price of
the National's Common Stock on September 30, 1998.
(b) No options granted during the fiscal year ended September 30, 1999 were
in-the-money at September 30, 1999.
LONG-TERM INCENTIVE PLANS
On November 16, 1999, the Company adopted a Long-Term Incentive Plan (the "1999
LTIP") for the benefit of designated members of senior management and key
employees ("Participants"). The maximum aggregate amount of awards under the
1999 LTIP is $15,000,000. The Company's parent, National Australia Bank Limited,
is funding the 1999 LTIP. The Company adopted the 1999 LTIP in satisfaction of
commitments made by National Australia Bank in connection with its acquisition
of the Company in 1998. The 1999 LTIP is intended to advance the best interests
of the Company and its subsidiaries by providing annual and long-term incentives
to senior management and key employees who have substantial responsibility for
corporate management and growth. Specifically, the 1999 LTIP provides for
performance-based cash incentive awards to senior management and key employees
based on their individual contributions to the Company's achievement of specific
annual net income targets, thereby increasing the personal stake of Participants
in both the annual and long-term success and growth of the Company and
encouraging them to remain in the employ of the Company. The 1999 LTIP is the
only long-term incentive plan adopted by the Company.
The 1999 LTIP provides for awards to Participants based on a number of factors,
including the size of the accumulated pool on the termination date of the 1999
LTIP, the past and continued performance of the Participant, the achievement of
specific annual net income goals by the Company, and the discretion of the Plan
Committee (as defined in the 1999 LTIP).
The following table sets forth an estimate of long-term incentive compensation
earned by the Company's Chief Executive Officer and the Company's four most
highly compensated executive officers for the period from October 1, 1998 to
September 30, 1999. No long-term incentive compensation was paid to any
executive officer or other Participant during fiscal year 1999.
<TABLE>
<CAPTION>
LONG-TERM INCENTIVE PLANS
Estimated Future Payouts under non-stock
price-based plans (in thousands)
--------------- ---------- ----------------------
Number of
shares,
units or
other Performance or other period
Name of Officer (a) rights (b) until maturation or payout(c) Threshold (d) Target(e) Maximum (f)
------------------------------ ------------- ------------------------------ --------------- ---------- ----------------------
<S> <C> <C> <C> <C> <C>
Joe K. Pickett NA March 31, 2001 0 N/A $2,500
------------------------------ ------------- ------------------------------ --------------- ---------- ----------------------
Hugh R. Harris NA March 31, 2001 0 N/A 2,500
------------------------------ ------------- ------------------------------ --------------- ---------- ----------------------
Kevin D. Race NA March 31, 2001 0 N/A 1,750
------------------------------ ------------- ------------------------------ --------------- ---------- ----------------------
Mark F. Johnson NA March 31, 2001 0 N/A 1,000
------------------------------ ------------- ------------------------------ --------------- ---------- ----------------------
William Glasgow, Jr. NA March 31, 2001 0 N/A 1,000
------------------------------ ------------- ------------------------------ --------------- ---------- ----------------------
</TABLE>
(a) Joe K. Pickett served as Chief Executive Officer of the Company until April
1999, at which time Hugh R. Harris was named Chief Executive Officer of the
Company. Pursuant to Item 402(a)3 of Regulation S-K, disclosure is made as
to Mr. Harris (CEO as of the end of the last completed fiscal year) and the
Company's four most highly compensated officers other than the CEO, which
includes Mr. Pickett who also served as CEO during the period reported.
(b) The 1999 LTIP does not provide for a specified number of shares, units or
other rights on a per Participant basis. Rather, the Plan Committee has
full discretion to allocate incentive compensation awards among
Participants.
(c) The 1999 LTIP provides incentive compensation for performance over a 3-year
Plan Period (as defined in the 1999 LTIP), with awards payable at the end
of the Plan Period. The Plan Period commences March 31, 1998 and ends on
March 31, 2001, provided however in the event the total award pool has not
been earned by March 31, 2001, the Plan Period will extend to March 31,
2002. Payments to Participants will be made on or before May 15, 2001
(subject to extension in accordance with the provisions of the Plan),
provided the Participants satisfies the continued employment requirement of
the 1999 LTIP or the individual Participant's employment agreement, as
applicable. However, payments may be made to Participants prior to that
date under certain circumstances, including death, disability, retirement,
termination other than for cause, resignation and transfer, subject to
applicable provisions in the employment agreements of certain Participants.
(d) There is no minimum award payable under the 1999 LTIP. Rather, the Plan
Committee (or, in certain instances as set forth in the Plan, individual
members of the Plan Committee) has full discretion to award incentive
compensation or not.
(e) The 1999 LTIP does not provide for individual target goals or specified
incentive compensation payable to individual Participants for achieving any
target.
(f) The 1999 LTIP does not provide for a maximum incentive compensation award.
However, the table sets forth estimated maximum payouts to the named
executive officers.
Employment Contracts and Termination of Employment Arrangements
Certain of the Company's executive officers including each of the named
executive officers are party to employment agreements and/or non-competition
agreements with the Company. The Company is therefore contractually obligated to
continue to pay such salaries during the executive officer's term of employment
with the Company.
Employment Agreements with the National and the Company. In connection with the
acquisition of HomeSide by the National, the National and the Company entered
into employment agreements (the "Employment Agreement") with Joe K. Pickett,
Hugh R. Harris, Kevin D. Race, W. Blake Wilson, Mark F. Johnson, William
Glasgow, Jr., and five other officers of the Company (the "Executives"). Each
Employment Agreement became effective upon the consummation of the merger with
the National (the "Merger") and provides for a three-year term of employment
commencing upon the consummation of the Merger. Mr. Pickett serves as Chairman
of the Company. Mr. Harris serves as Chief Executive Officer of the Company. Mr.
Race serves as President and Chief Operating Officer of the Company. Mr. Wilson
serves as Executive Vice President and Chief Financial Officer. Mr. Johnson
serves as Executive Vice President, Loan Production for the Company. Mr. Glasgow
serves as Executive Vice President, Loan Servicing.
Pursuant to their respective Employment Agreements, Messrs. Pickett, Harris,
Race, Wilson, Johnson and Glasgow each (i) receives an annual base salary of
$450,000, $410,000, $300,000, $200,000, $230,000 and $230,000, respectively,
(ii) receives a guaranteed annual bonus of $800,000, $800,000, $337,500,
$200,000, $362,500 and $362,500 respectively, payable on each of the first and
second anniversaries of the Effective Time, February 10, 1998, of the Merger,
(iii) is eligible to participate in the Company's annual bonus plan ("ABP"),
(iv) is eligible to participate in the National's Executive Share Option Plan,
and received an initial grant of options to purchase 50,000, 45,000, 35,000,
30,000, 30,000, and 30,000 NAB ordinary shares, respectively, and (v) is
eligible to participate in a long-term incentive plan (funded by the National
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 Company on
the Anniversary Date. The Employment Agreements provide that the National shall
cause the entire long-term incentive plan cash pool to be distributed to
eligible Company executives. The Employment Agreements for the five other
officers provide for annual base salaries aggregating $920,000, and guaranteed
annual bonuses aggregating $512,500; and such officers will receive in the
aggregate initial grants of options to purchase 120,000 NAB ordinary shares and
will be eligible to participate in the Company'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
Company from time to time, (ii) entitled to paid vacation in accordance with the
vacation policy applicable to the Company's senior executives, (iii) reimbursed
by the Company for reasonable business expenses and (iv) entitled to receive the
same perquisites that such Executives 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 Company 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 Company terminates the Executive's employment for any reason
other than cause or disability or the Executive terminates his employment for
good reason, the Company 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 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 Executive's ABP award for the year of termination, and (C) provide the
Executive during the Continuation Period with continued coverage under the
Company'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 Company 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 Company 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 Agreemen.
Deferred Compensation Plan
The Company has adopted that certain NAB Group - USA Deferred Compensation
Plan, effective as of February 10, 1998 (the "Plan"), for the benefit of certain
employees of the Company's subsidiary, HomeSide Lending, Inc., all of whom
constitute a select group of management or highly compensated employees
("Participants"). Pursuant to the provisions of Section 2.16 of the Plan,
HomeSide Lending, Inc. was designated a Participating Employer.
The purpose of the Plan is to provide participants the opportunity to defer
receipt of salary, bonus, and other specified cash compensation. The Plan is
intended to benefit a "select group of management or highly compensated
employees" within the meaning of Sections 201, 301 and 401 of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and to be
therefore exempt from the requirements of Parts 2, 3 and 4 of Title I of ERISA.
Payments from the Plan are made to Participants upon termination,
disability, death, or upon approval of a withdrawal request based on financial
hardship. In addition, the Plan provides that, upon a Change in Control (as
defined in the Plan) of the Company, each Participant's account balance will be
valued as of the last date of the month in which the Change in Control occurs,
and shall be paid to each Participant in accordance with the payment provisions
of the Plan.
The Company has the right to withhold from any payment made under the Plan
(or any amount deferred into the Plan) any taxes required by law to be withheld
in respect of such payment (or deferral). The Company, together with other
Participating Employers (as defined in the Plan), bears the expenses of
administering the Plan.
The Deferred Compensation Committee (as that term is defined in the Plan)
may at any time modify, amend, or terminate the Plan, provided that such
modification, amendment, or termination shall not cancel, reduce, or otherwise
adversely affect the amount of benefits of any Participant accrued (and any form
of payment elected) as of the date of any such modification, amendment, or
termination, without the consent of the Participant.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Capital Stock of the Company
All of the outstanding common stock of HomeSide Lending, Inc., consisting
of 100 shares, is owned by the Parent.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 23, 1998, HomeSide entered into an agreement for an unsecured revolving
credit facility with the National. The agreement was amended on June 22, 1999.
Under the credit facility, HomeSide can borrow up to $2.5 billion, subject to
limits imposed by regulatory authorities. As of September 30, 1999, Australian
financial regulations limited the National's ability to lend funds to HomeSide,
a non-bank affiliate, to approximately $2.1 billion. Borrowings under the credit
facility may be overnight or for periods of 7, 30, 60 or 90 days. For overnight
borrowings, the interest rate is determined by HomeSide and the National at the
time of the borrowing. For LIBOR - based borrowings, the interest rate is
charged at the corresponding LIBOR rate. At September 30, 1999 and September 30,
1998, the amount outstanding under this credit facility totaled $1.5 billion and
$1.8 billion, respectively. The weighted average interest rate on outstanding
borrowings under this credit facility during the year ended September 30, 1999
and the period from February 11, 1998 to September 30, 1998 were 5.22% and
5.67%, respectively.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. Financial Statements: See Part II, Item 7 hereof.
2. Financial Statement Schedule and Auditors' Report
All schedules omitted are inapplicable or the information required is shown in
the Consolidated Financial Statements or notes thereto.
3. The following exhibits are submitted herewith:
Unless otherwise indicated, all Exhibits are incorporated by reference to the
Company's Registration Statement on Form S-1, No. 333-17685.
Number Description
3.1 Certificate of Incorporation of HomeSide Lending, Inc.
3.2 By-Laws of HomeSide Lending, Inc.
4.1 Form of Common Stock Certificate
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 (currently known as BankBoston, N.A.) 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 (currently known as BankBoston, N.A.) 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 (currently
known as BankBoston N.A.), 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 (currently known as BankBoston, N.A.),
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 (currently known as BankBoston, N.A.)
10.9(DELTA) 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 (currently known as BankBoston, N.A.),
Bank of Boston Connecticut, Rhode Island Hospital Trust National Bank and
Bank of Boston Florida, N.A.
10.10(DELTA) Mortgage Loan Servicing Agreement dated as of March 15, 1996
between BancBoston Mortgage Corporation (currently known asHomeSide
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.
10.11Stock Purchase Agreement dated as of March 4, 1996 between Grant America,
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
10.13Tax Indemnity Letter Agreement dated as of March 4, 1996 between Barnett
Mortgage Company (currently known as HomeSide Holdings, Inc.) and Barnett
Banks, Inc.
10.14Amended and Restated Shareholder Agreement dated as of May 31, 1996 among
HomeSide, Inc. and the shareholders thereof
10.15Amended and Restated Registration Rights Agreement dated as of May 31,
1996 between HomeSide, Inc. and certain shareholders thereof
10.16Marketing Agreement dated as of May 31, 1996 between HomeSide, Inc. and
Barnett Banks, Inc.
10.17Transitional Services Agreement dated as of may 31, 1996 between Barnett
Banks, Inc., Barnett Mortgage Company (currently known as HomeSide
Holdings, Inc.) and HomeSide, Inc.
10.18Operating Agreement dated as of May 31, 1996 between HomeSide Lending,
Inc. and Barnett Banks, Inc.
10.19(DELTA) Mortgage Loan Servicing Agreement dated as of April, 1996 between
HomeSide Lending, Inc. and Barnett Banks, Inc.
10.20(DELTA) PMSR Flow Agreement dated as of May 31, 1996 between HomeSide
Lending, Inc. and Barnett Banks, Inc.
10.21Correspondent Agreement dated May 16, 1996 between HomeSide Lending, Inc.
and Barnett Banks, Inc.
10.22Delegated 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 Lending, Inc. and The Chase Manhattan Bank, as
Administrative Agent for the Lenders parties to the Credit Agreement
10.25* Amended and Restated HomeSide Lending 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
10.27Registration 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 Lending 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 Lending
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
Lending, Inc. HomeSide Holdings, The Bank of New York, as Trustee, and The
Chase Manhattan 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
10.38Class B Non-Voting Common Stock Issuance Agreement dated as of March 14,
1996 between HomeSide, Inc. and Smith Barney Inc.
10.39Transitional Services Agreement dated as of March 15, 1996 between The
First National Bank of Boston (currently known as BankBoston, N.A.) and
BancBoston Mortgage Corporation (currently known as HomeSide Lending, Inc.)
10.40Transitional Services Agreement dated as of March 15, 1996 between The
First National Bank of Boston (currently known as BankBoston, N.A.) and
BancBoston Mortgage corporation (currently known as HomeSide Lending, Inc.)
10.41Management Agreement dated as of March 15, 1996 between BancBoston
Mortgage Corporation (currently known as HomeSide Lending, Inc.) and The
First National Bank of Boston (currently known as BankBoston, N.A.) 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 (currently known BankBoston, N.A.), Thomas H. Lee Equity Fund III,
L.P. and certain affiliates thereof, Madison Dearborn Capital Partners,
L.P. and certain employees of HomeSide Lending, Inc. and its subsidiaries
10.45Management 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.
10.57* Second Amendment dated as of December 31, 1997 to the Credit Agreement
dated as of January 31, 1997.
10.58* Employment Agreement and Confidentiality and Non-Competition Agreement,
each dated as of October 25, 1997, each between HomeSide Lending, Inc. and
Joe K. Pickett.
10.59* Employment Agreement and Confidentiality and Non-Competition Agreement,
each dated as of October 25, 1997, each between HomeSide Lending, Inc. and
Hugh R. Harris.
10.60* Employment Agreement and Confidentiality and Non-Competition Agreement,
each dated as of October 25, 1997, each between HomeSide Lending, Inc. and
Kevin D. Race.
10.61* Employment Agreement and Confidentiality and Non-Competition Agreement,
each dated as of October 25, 1997, each between HomeSide Lending, Inc. and
William Glasgow.
10.62* Employment Agreement and Confidentiality and Non-Competition Agreement,
each dated October 25, 1997, each between HomeSide Lending, Inc., and Mark
F. Johnson.
10.63 HomeSide Lending, Inc. Long Term Incentive Plan.
10.64 NAB Group - USA Deferred Compensation Plan, effective February 10, 1998.
10.65 Revolving Credit Agreement among HomeSide Lending, Inc., the Lenders
parties thereto, and The Chase Manhattan Bank as Administrative Agent
21.1* List of subsidiaries of HomeSide Lending, Inc.
23.6(a) Consent of Hutchins, Wheeler & Dittmar, A Professional Corporation
(included in Exhibit 5.1)
24.1 Powers of Attorney
26.0 Excerpts from 1997 and 1998 Annual Report to Stockholders
26.1 Item 15 of the Company's Registration Statement on form S-1, No. 333-17685
27.1 Financial Data Schedule
----------------
* Incorporated by reference to Exhibits of HomeSide Lending, Inc.'s (a
wholly-owned subsidiary of the Registrant Registration Statement on
Form S-1, Registration No. 333-21193 (DELTA) Portions of this Exhibit
have been omitted pursuant to an order by the Securities and Exchange
Commission granting
confidential treatment.
(b) Reports on form 8-K
HomeSide filed no reports on form 8-K during the three months ended
September 30, 1999.
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
HomeSide Lending, Inc.
(Registrant)
By: _____________________
Joe K. Pickett
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/_____________________ Chairman of the Board
Joe K. Pickett December 23, 1999
/s/_____________________ Chief Executive Officer and Director December 23, 1999
Hugh R. Harris
/s/_____________________ President, Chief Operating Officer, and Director December 23,1999
Kevin D. Race
/s/______________________ Executive Vice President and Chief Financial Officer December 23, 1999
W. Blake Wilson
_________________________ Executive Vice President and Secretary, General Counsel
Robert J. Jacobs
</TABLE>
HOMESIDE LENDING, INC.
LONG TERM INCENTIVE PLAN
PORTIONS OF THIS DOCUMENT INDICATED BY
"* * * * *"
HAVE BEEN REDACTED PURSUANT TO
A REQUEST FOR CONFIDENTIAL TREATMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
<PAGE>
HOMESIDE LENDING, INC.
LONG TERM INCENTIVE PLAN
THIS INDENTURE made as of the 16th day of November, 1999 by HOMESIDE
LENDING, INC., a corporation duly organized and existing under the laws of the
State of Florida (hereinafter called the "Plan Sponsor") and NATIONAL AUSTRALIA
BANK LIMITED, a company incorporated under the laws of Victoria, Australia
(hereinafter called the "Parent");
W I T N E S S E T H:
WHEREAS, the Plan Sponsor desires to encourage and retain certain key
employees to achieve performance targets specified in this plan in order to grow
the HomeSide business and increase shareholder value;
WHEREAS, the plan herein embodied is intended to be a plan described in
Section 301(a)(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA");
NOW, THEREFORE, the Plan Sponsor does hereby establish the HomeSide
Lending, Inc. Long Term Incentive Plan (the "Plan"), effective as October 1,
1999, to read as follows:
HOMESIDE LENDING, INC. LONG TERM INCENTIVE PLAN
Page
SECTION 1 DEFINITIONS................................................1
SECTION 2 ELIGIBILITY................................................4
SECTION 3 U.S. PEFORMANCE TARGETS....................................5
SECTION 4 HOMESIDE AUSTRALIA PROJECT.................................6
SECTION 5 PAYMENT OF AWARDS..........................................7
SECTION 6 ADMINISTRATION OF THE PLAN.................................9
SECTION 7 CLAIM REVIEW PROCEDURE....................................11
SECTION 8 LIMITATION OF ASSIGNMENT, PAYMENTS TO LEGALLY
INCOMPETENT DISTRIBUTEES AND UNCLAIMED PAYMENTS...........13
SECTION 9 LIMITATION OF RIGHTS......................................14
SECTION 10 AMENDMENT TO OR TERMINATION OF THE PLAN...................15
SECTION 11 MISCELLANEOUS.............................................16
<PAGE>
SECTION 1
DEFINITIONS
Wherever used herein, the masculine pronoun shall be deemed to include the
feminine, and the singular to include the plural, unless the context clearly
indicates otherwise and the following words and phrases shall, when used herein,
have the meanings set forth below:
1.1. "Australia Performance Targets" means those targets described in
Section 4.
1.2. "Award" means each Participant's individual allocation of the total
amount available for payment under the Plan upon satisfaction of performance
targets.
1.3. "Beneficiary" means the person or trust that a Participant designated
most recently in writing to the Plan Committee; provided, however, that if the
Participant has failed to make a designation, no person designated is alive, no
trust has been established, or no successor Beneficiary has been designated who
is alive, the term "Beneficiary" means (a) the Participant's spouse or (b) if no
spouse is alive, the Participant's surviving children, or (c) if no children are
alive, the Participant's parent or parents, or (d) if no parent is alive, the
legal representative of the deceased Participant's estate.
1.4. "Board of Directors" means the Board of Directors of the Plan Sponsor.
1.5. "Cause" shall mean only:
(i) the willful and continued failure (not resulting from disability)
by the individual to perform substantially the individual's duties with The
Plan Sponsor after a demand for substantial performance is delivered to the
individual by the board of directors of the Plan Sponsor or the board of
directors of Parent which specifically identifies the manner in which the
board of directors of Parent believes that the individual has not
substantially performed the individual's duties of employment
(ii) gross negligence or willful misconduct by the individual in the
execution of the individual's duties, which is materially injurious to the
Plan Sponsor;
(iii) conviction of the individual of, or a plea in a court of law by
the individual of no contest or guilty to, or written admission to, a
criminal charge which constitutes a felony;
(iv) use by the individual of alcohol or drugs or other controlled
substances which interferes with the performance of the individual's duties
or which compromises, or could compromise, the integrity and reputation of
the Plan Sponsor or Parent, their affiliates, their employees or their
products;
(v) willful breach by the individual of a material policy, program or
rule of the Plan Sponsor or the Parent.
No act, or failure to act, on the individual's part shall be
considered "willful" unless done, or omitted to be done, by the individual
in bad faith and without reasonable belief that such action or omission was
in, or not opposed to, the best interests of the Plan Sponsor or the
Parent. Any act, or failure to act, based upon authority given pursuant to
a resolution duly adopted by the Plan Sponsor or Parent or based upon
written advice of counsel for the Plan Sponsor or Parent shall be
conclusively presumed to be done, or omitted to be done, by the individual
in good faith and in the best interests of the Plan Sponsor.
1.6. "Code" means the Internal Revenue Code of 1986, as amended.
1.7. "Disability" means a disability such that in the sole opinion of
Parent (determined in good faith) renders the Participant incapable of properly
performing services under the individual's employment agreement with the Plan
Sponsor for the remainder of the Plan Period.
1.8. "Good Reason" shall exist upon the occurrence, without the
individual's express written consent, of any of the following events:
(i) the Plan Sponsor assigns to the individual full-time duties of a
substantially non executive or non managerial nature;
(ii) only where the individual has a written employment contract with
the Plan Sponsor, a material adverse change in the individual's position as
an executive officer of the Plan Sponsor including, without limitation, an
adverse change in the individual's position as a result of a significant
diminution in the individual's duties and responsibilities;
(iii) the Plan Sponsor materially reduces the salary or adversely (to
the individual) affects the method of calculation of bonuses of the
individual or materially reduces the individuals benefits and perquisites;
(iv) where a written employment agreement exists between the Plan
Sponsor and an individual, the Plan Sponsor defaults in performing any of
its material obligations contained in the individual's written employment
agreement; or
(v) where a written employment agreement exists between the Plan
Sponsor and an individual, the Plan Sponsor requires the individual to
relocate the individual's principal office beyond a radius of fifty miles
from the individual's office as at the date of this indenture.
"Good Reason" shall not exist until after the individual has given the
chairman of the Board of Directors written notice (the "Notice") of the
applicable event within 90 days of such event and such event is not
remedied within 30 days after receipt of the Notice specifically
delineating such claimed event and setting forth the individual's intention
to terminate employment if not remedied; provided, that if the specified
event cannot reasonably be remedied within such 30-day period and the Plan
Sponsor commences reasonable steps within such 30-day period to remedy such
event and diligently continues such steps thereafter until a remedy is
effected, such event shall not constitute "Good Reason" provided that such
event is remedied within 60 days after receipt of the Notice.
1.9. "Participant" means those executives designated in Section 2 who have
been determined by the Plan Committee to be a member of a "select group of
management and highly compensated employees," within the meaning of ERISA
Section 301(a)(3).
1.10. "Plan Committee" means a committee consisting of the Chairman of the
Board of Directors and Chief Executive Officer of the Plan Sponsor and the
Managing Director of National Australia Bank Limited.
1.11. "Plan Period" means the period beginning on March 31, 1998 and ending
on March 31, 2001. If the Total Award Pool has not been earned by March 31,
2001, the Plan Period will extend to March 31, 2002.
1.12. "Total Award Pool" means US$ 15 million, divided as specified in
Section 3.1 and 4.1.
1.13. "US Performance Targets" means those targets described in Section 3.
SECTION 2
ELIGIBILITY
2.1. Only the following designated executives will be Participants under
the Plan:
* * * * *
2.2. For certain purposes, the Participants will be designated as either in
Group 1, Group 2, or Group 3. The only persons entitled to know which group a
Participant is in are the Plan Committee and those persons designated by the
Plan Committee.
SECTION 3
U.S. PERFORMANCE TARGETS
3.1. The portion of the Total Award Pool which is based on U.S. Performance
Targets will be US$ ***** million, subject to Section 4.4.
3.2. The portion of the Total Award Pool that is based on U.S. Performance
Targets will accrue annually based on the following formula:
* * * * *
3.3. Construction.
* * * * *
3.4. The following table sets out the maximum cumulative accrual for each
year during the Plan Period based on U.S. Performance Targets:
* * * * *
SECTION 4
HOMESIDE AUSTRALIA PROJECT
4.1. The portion of the Total Award Pool which is based on the HomeSide
Australia Project will be US$ * * * * * million, to be payable after achievement
of performance targets and as soon as practicable after March 31, 2001, but not
later than May 15, 2001
(a) Individual Performance Targets and Accruals
* * * * *
4.2. The Plan Committee will determine whether the above performance
targets have been met. If the Plan Committee fails to unanimously agree as to
satisfaction of a performance target the matter will be referred to arbitration.
The accrual for each performance target will be pro-rated for performance that
falls between the above levels.
4.3. Variations to the operating plan which are imposed by Parent which are
materially adverse to the achievement of any of the performance targets of the
HomeSide Australia Project, will result in a reassessment of the performance
target by the Plan Committee. In circumstances where unanimous agreement cannot
be reached by the Plan Committee on a reassessed performance target, the accrual
based on Section 3 will increase by a maximum amount of US$ * * * * * million
(less any amount already accrued based on this Section 4). This accrual increase
will be applied on a pro rata basis to each year of the Plan Period and will
accrue and be payable based upon the achievement of US Performance Targets.
SECTION 5
PAYMENT OF AWARDS
5.1. Payment at end of Plan Period. Payment of a Participant's Award will
ordinarily be made on May 15, 2001 if the Participant is still employed by the
Plan Sponsor on March 31, 2001. To the extent that any portion of the Total
Award Pool has not been earned at March 31, 2001, the remainder of the Total
Award Pool will be paid by May 15, 2002 to those Participant's who are employed
by the Plan Sponsor on March 31, 2002. Each Participant's Award will be decided
by the Plan Committee in accordance with Section 6.4.
5.2. Payment on Death. In the event that a Participant terminates
employment with the Plan Sponsor prior to the end of the Plan Period because of
the Participant's death, payment of the Participant's Award will be made to the
Participant's Beneficiary or estate for work performed to the date of death. The
amount of the Award shall be determined by the Plan Committee in accordance with
Section 6.4.
5.3. Payment on Disability. In the event that a Participant terminates
employment with the Plan Sponsor prior to the end of the Plan Period because of
the Participant's Disability, payment of the Participant's Award will be made to
the Participant for work performed to the date of termination of employment due
to Disability. The amount of the Award shall be determined by the Plan Committee
in accordance with Section 6.4.
5.4. Payment on Retirement. In the event that a Participant terminates
employment with the Plan Sponsor prior to the end of the Plan Period because of
the Participant's retirement (determined in accordance with the Plan Sponsor's
then existing policies for determining the timing of an executive's retirement),
payment of the Participant's Award will be made to the Participant for work
performed to the date of retirement. The amount of the Award shall be determined
by the Plan Committee in accordance with Section 6.4.
5.5. Payment on Termination other than Termination for Cause. In the event
that a Participant's employment is terminated by the Plan Sponsor prior to the
end of the Plan Period for reasons other than Cause, full payment of the
Participant's Award shall be made and will be paid at the end of the Plan
Period. The amount of the Award shall be determined by the Plan Committee in
accordance with Section 6.4.
5.6. Payment on Resignation by Participant. In the event that a Participant
resigns his employment with the Plan Sponsor prior to the end of the Plan Period
for reasons which do not constitute Good Reason, the Participant shall not be
entitled to payment of the Participant's Award. In the event that a Participant
resigns his employment with the Plan Sponsor for reasons which constitute Good
Reason, full payment of the Participant's Award will be made and will be paid at
the end of the Plan Period. The amount of the Award shall be determined by the
Plan Committee in accordance with Section 6.4.
5.7. Transfers. In the event of transfer out of the Plan Sponsor to another
part of the National Australia Bank Group prior to the end of the Plan Period,
as a minimum, payment will be made to the individual for work performed to the
date of transfer, but the actual Award will be based on the circumstances of
each situation and will be determined by the Plan Committee in accordance with
Section 6.4. After the transfer the individual will cease to be entitled to
participate in the Plan.
5.8. Leave of Absence. In the event of that a Participant has a leave of
absence during the Plan Period, as a minimum, eligibility for Award payment will
cover work performed to the date of leave and after return from leave (assuming
the return from leave occurs during the Plan Period). The actual amount of
payment will be determined by the Plan Committee in accordance with Section 6.4.
SECTION 6
ADMINISTRATION OF THE PLAN
6.1. Operation of the Plan Committee. The members of the Plan Committee
shall be as described in Section 1.10.
6.2. Duties of the Plan Committee.
(a) The Plan Committee shall determine the making of all payments
under the terms of the Plan.
(b) The Plan Committee shall from time to time establish rules, not
contrary to the provisions of the Plan, for the administration of the Plan
and the transaction of its business. All elections and designations under
the Plan by a Participant or Beneficiary shall be made on forms prescribed
by the Plan Committee. The Plan Committee shall have discretionary
authority to construe the terms of the Plan and shall determine all
questions arising in the administration, interpretation and application of
the Plan, including, but not limited to, those concerning eligibility for
benefits and it shall not act so as to discriminate in favor of any person.
All determinations of the Plan Committee shall be conclusive and binding on
all Participants and Beneficiaries, subject to the provisions of the Plan
and subject to applicable law.
(c) The Plan Committee shall furnish Participants and Beneficiaries
with all disclosures now or hereafter required by ERISA or the Code. The
Plan Committee shall file, as required, the various reports and disclosures
concerning the Plan and its operations as required by ERISA and by the
Code, and shall be solely responsible for establishing and maintaining all
records of the Plan.
(d) The statement of specific duties for a Plan Committee in this
Section is not in derogation of any other duties which a Plan Committee has
under the provisions of the Plan or under applicable law.
6.3. Action by the Plan Sponsor. Any action to be taken by the Plan Sponsor
shall be taken by resolution or written direction duly adopted by the Board of
Directors or appropriate governing body, as the case may be; provided, however,
that by such resolution or written direction, the Board of Directors or
appropriate governing body, as the case may be, may delegate to any officer or
other appropriate person of the Plan Sponsor the authority to take any such
actions as may be specified in such resolution or written direction, other than
the power to amend, modify or terminate the Plan.
6.4. Determining Quantums of Payment. The Plan Committee shall make
determinations as to the amount of a Participant's payment as follows.
Determination of payment amounts for those Participants in Group 1 shall be made
solely by the Managing Director of Parent. Determination of payment amounts for
those Participants in Group 2 shall be made by the Chairman of the Board of
Directors and Chief Executive Officer of the Plan Sponsor and approved by the
Managing Director of Parent. Determination of payment amounts for those
Participants in Group 3 shall be made solely by the Chairman of the Board of
Directors and Chief Executive Officer of the Plan Sponsor. Determination of the
payment amounts for those Participants who are entitled to payment because of
events described in Section 5.2 to 5.7 will be determined at the time of the
event.
SECTION 7
CLAIM REVIEW PROCEDURE
7.1. In the event that a Participant or Beneficiary is denied a claim for
benefits under the Plan, the Plan Committee shall provide to such claimant
written notice of the denial which shall set forth:
(a) the specific reasons for the denial;
(b) specific references to the pertinent provisions of the Plan on
which the denial is based;
(c) a description of any additional material or information necessary for the
claimant to perfect the claim and an explanation of why such material or
information is necessary; and
(d) an explanation of the Plan's claim review procedure.
7.2. After receiving written notice of the denial of a claim, a claimant or
his representative may:
(a) request a full and fair review of such denial by written
application to the Plan Committee;
(b) review pertinent documents; and
(c) submit issues and comments in writing to the Plan Committee.
7.3. If the claimant wishes such a review of the decision denying his claim
to benefits under the Plan, he must submit such written application to the Plan
Committee within sixty (60) days after receiving written notice of the denial.
7.4. Upon receiving such written application for review, the Plan Committee
may schedule a hearing for purposes of reviewing the claimant's claim, which
hearing shall take place not more than thirty (30) days from the date on which
the Plan Committee received such written application for review.
7.5. At least ten (10) days prior to the scheduled hearing, the claimant
and his representative designated in writing by him, if any, shall receive
written notice of the date, time, and place of such scheduled hearing. The
claimant or his representative, if any, may request that the hearing be
rescheduled, for his convenience, on another reasonable date or at another
reasonable time or place.
7.6. All claimants requesting a review of the decision denying their claim
for benefits may employ counsel for purposes of the hearing.
7.7. No later than sixty (60) days following the receipt of the written
application for review, the Plan Committee shall submit its decision on the
review in writing to the claimant involved and to his representative, if any;
provided, however, a decision on the written application for review may be
extended, in the event special circumstances such as the need to hold a hearing
require an extension of time, to a day no later than one hundred twenty (120)
days after the date of receipt of the written application for review. The
decision shall include specific reasons for the decision and specific references
to the pertinent provisions of the Plan on which the decision is based.
SECTION 8
LIMITATION OF ASSIGNMENT, PAYMENTS TO LEGALLY
INCOMPETENT DISTRIBUTEES AND UNCLAIMED PAYMENTS
8.1. No benefit which shall be payable under the Plan to any person shall
be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance or charge, and any attempt to anticipate,
alienate, sell, transfer, assign, pledge, encumber or charge the same shall be
void; and no such benefit shall in any manner be liable for, or subject to, the
debts, contracts, liabilities, engagements or torts of any person, nor shall it
be subject to attachment or legal process for, or against, such person, and the
same shall not be recognized under the Plan, except to such extent as may be
required by law.
8.2. If any person who shall be entitled to any benefit under the Plan
shall become bankrupt or shall attempt to anticipate, alienate, sell, transfer,
assign, pledge, encumber or charge such benefit under the Plan, then the payment
of any such benefit in the event a Participant or Beneficiary is entitled to
payment shall, in the discretion of the Plan Committee, cease and terminate and
in that event the Plan Committee shall apply the same for the benefit of such
person, his spouse, children, other dependents or any of them in such manner and
in such proportion as the Plan Committee shall determine.
8.3. Whenever any benefit which shall be payable under the Plan is to be
paid to or for the benefit of any person who is then a minor or determined to be
incompetent by qualified medical advice, the Plan Committee need not require the
appointment of a guardian or custodian, but shall be authorized to cause the
same to be paid over to the person having custody of such minor or incompetent,
or to cause the same to be paid to such minor or incompetent without the
intervention of a guardian or custodian, or to cause the same to be paid to a
legal guardian or custodian of such minor or incompetent if one has been
appointed or to cause the same to be used for the benefit of such minor or
incompetent.
SECTION 9
LIMITATION OF RIGHTS
Participation in the Plan shall not give any Participant any right or claim
except to the extent that such right is specifically fixed under the terms of
the Plan. The adoption of the Plan shall not be construed to give any
Participant a right to be continued in the employ of the Plan Sponsor or as
interfering with the right of the Plan Sponsor to terminate the employment of
any Participant at any time.
SECTION 10
AMENDMENT TO OR TERMINATION OF THE PLAN
The Plan Sponsor reserves the right at any time to modify or amend or
terminate the Plan, with the prior written approval of the Plan Committee. No
such modifications or amendments shall have the effect of retroactively changing
or depriving Participants or Beneficiaries of rights already accrued under the
Plan.
SECTION 11
MISCELLANEOUS
11.1. All payments provided under the Plan shall be paid from the general
assets of the Plan Sponsor and no separate fund shall be established to secure
payment.
11.2. The Plan Sponsor shall withhold from any benefits payable under the
Plan all federal, state and local income taxes or other taxes required to be
withheld pursuant to applicable law.
11.3. To the extent not preempted by applicable federal law, the Plan shall
be governed by and construed in accordance with the laws of the State of
Florida.
11.4. Plan Participants will be required to sign a confidentiality
undertaking (see Appendix A) in relation to the operation of the Plan and their
participation therein. Failure to abide by the specific confidentiality
undertaking could result in termination of the Participant's employment.
11.5. In the event of the sale of Parent and/or the Plan Sponsor, the total
amount available under the Plan will be deemed fully earned and will be vested
upon the sale. Payment date will be at the time of settlement, but not later
than May 15, 2001.
11.6. In the event of the winding up of the Plan Sponsor related to its
performance or operations, Participants will be entitled to the amount of the
Award they have earned as of the time of winding up. In the event of the winding
up of the Plan Sponsor unrelated to its performance or operations vested amounts
and future annual pool accruals will be deemed fully earned and will be vested
upon winding up. Payment date in either case will be at the time of winding up,
but not later than May 15, 2001.
11.7. Plan Audit. All calculations and data which determine the Awards must
be reviewed and approved by an independent auditor prior to May 15th of each
year and prior to any payments being made under the Plan. The independent
auditor must, in reviewing the calculations and data, adhere to and make
determinations according to Generally Accepted Accounting Standards consistently
maintained and applied. The auditor must be external to and independent of the
Plan Sponsor and will be appointed by National Australia Bank Executive
Management. The manner and content of the audit will comply with instructions
set out in the appointment. The Participants are entitled to examine the
calculations and data reviewed by the independent auditor. If any party
disagrees with a determination of the auditor that matter may be referred to
arbitration. If no party states in writing its disagreement with a determination
of the independent auditor within 60 days of receiving the determination then
all parties are bound by the determination.
11.8. In the event that a regulatory or accounting change affects the
calculations under the Plan, any payment or vesting under the Plan shall be
based on the regulatory or accounting rules in effect on October 27, 1997.
11.9. Arbitration. Where there is a dispute that is referred to
arbitration, such dispute will be settled exclusively by arbitration in New
York, New York in accordance with the rules of the American Arbitration
Association then in effect. The arbitrator's award will be binding on the
parties. National Australia Bank and the Plan Sponsor will bear all costs of
arbitration equally. IN WITNESS WHEREOF, the Plan Sponsor and Parent have caused
this indenture to be executed as of the date first above written.
HOMESIDE LENDING, INC.
By: /s/ Hugh R. Harris
Title: Chief Executive Officer
ATTEST:
/s/ Joe K. Pickett
Title: Chairman
[CORPORATE SEAL]
EXECUTED on behalf of NATIONAL )
AUSTRALIA BANK LIMITED by its )
Attorney , Francis J Cicutto, )/s/ Francis J. Cicutto
under a Power of Attorney dated Francis J Cicutto
February 28, 1991 (who states that Office Held: Managing Director
he holds the office indicated under
his signature) in the presence of:
/s/ Joan Livingston
Signature of Witness
Joan Livingston
Name of Witness~
)
)
)/s/ Francis J. Cicutto
Francis J Cicutto
Office Held: Managing Director
<PAGE>
HOMESIDE LENDING, INC. Appendix A
LONG TERM INCENTIVE PLAN
Confidentiality Undertaking
[Name of Plan Participant]
Dear [ ]
Confidentiality Undertaking - HomeSide Long Term Incentive Plan
Introduction
As one of only a few select individuals within National Australia Bank Group,
you have been invited to participate in the HomeSide Long Term Incentive Plan
(the "Plan").
The conditions of participation in and mode of operation of the Plan are highly
confidential. You will not be entitled to participate in the Plan, nor to
receive any information concerning it, unless you have accepted the following
confidentiality undertaking, evidenced by you signing the attached copy of this
letter and returning it to The Group Manager Remuneration, National Australia
Bank. When you receive these materials, you will be free to decide whether or
not you want to participate. Signing this Confidentiality Undertaking does not
commit you to participate in the Plan.
Confidentiality Undertaking
By signing the attached copy of this letter you acknowledge:
o The conditions of participation in and mode of operation of the Plan
are highly confidential.
o Unauthorized disclosure of details of the Plan would be potentially
extremely damaging to HomeSide, Lending, Inc., National Australia Bank
and other plan participants.
o You will not discuss any matter concerning the Plan with anyone other
than:
o Chairman, CEO, COO or General Counsel of HomeSide Lending, Inc.
or anyone they may designate in writing.
o The Group Manager Remuneration, National Australia Bank.
o Your financial / tax / legal advisers. Please note that you are
required to advise these advisers of the confidential nature of
the Plan.
o Your spouse or partner.
o You will not copy any materials relating to the Plan except as described
herein, nor will you allow anyone else to read or copy such material except
as described herein.
o You will keep this agreement and the Plan materials in a safe and secure
place.
o In the event that you cease employment with HomeSide Lending, Inc., you
will return all material relating to the Plan to the CEO of HomeSide
Lending, Inc.
o Failure to abide by the above could result in exclusion from the Plan
and/or termination for Cause.
o You acknowledge that damages may not be an adequate remedy and that both
HomeSide Lending, Inc. and National Australia Bank may seek an injunction
to prevent or restrain a breach of this undertaking.
Yours Sincerely,
David Krasnostein
Group General Counsel
Group Legal
I understand and accept the obligations imposed upon me by this Confidentiality
Undertaking.
Name:
Signed:
Dated:
NAB GROUP - USA
DEFERRED COMPENSATION PLAN
(Effective February 10, 1998)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
ARTICLE I Establishment and Purpose 4
1.1 Establishment and Purpose.......................................................................4
-------------------------
ARTICLE II Definitions 4
2.1 Account Balance.................................................................................4
---------------
2.2 Beneficiary.....................................................................................4
-----------
2.3 Change in Control...............................................................................4
-----------------
2.4 Chief Executive Officer.........................................................................6
-----------------------
2.5 Code............................................................................................6
----
2.6 Compensation....................................................................................6
------------
2.7 Company.........................................................................................6
-------
2.8 Deferred Compensation Committee.................................................................7
-------------------------------
2.9 Disability......................................................................................7
----------
2.10 Employee.....................................................................................7
--------
2.11 Employer.....................................................................................7
--------
2.12 ERISA........................................................................................7
-----
2.13 Fiscal Year..................................................................................7
-----------
2.14 MNC Plan.....................................................................................7
--------
2.15 Participant..................................................................................7
-----------
2.16 Participating Employer.......................................................................7
----------------------
2.17 Plan.........................................................................................8
----
2.18 Plan Year....................................................................................8
---------
2.19 Spouse.......................................................................................8
------
ARTICLE III Eligibility and Participation 8
3.1 Eligibility and Participation...................................................................8
-----------------------------
3.2 Duration........................................................................................8
--------
3.3 Revocation of Future Participation..............................................................8
----------------------------------
3.4 Notification....................................................................................8
------------
3.5 Prior Plan......................................................................................8
----------
ARTICLE IV Compensation Reduction Agreements and Account Balances 9
4.1 Compensation Reduction Agreements...............................................................9
---------------------------------
4.2 Prohibition Against Compensation Reduction Agreement Modifications..............................9
------------------------------------------------------------------
4.3 Adjustments to Account Balances.................................................................9
-------------------------------
ARTICLE V Benefit Payments and Certain Withdrawals 11
5.1 Regular Benefit................................................................................11
---------------
5.2 Form of Payment................................................................................11
---------------
5.3 Disability Benefit.............................................................................11
------------------
5.4 Death Benefit..................................................................................11
-------------
5.5 Hardship Withdrawal............................................................................12
-------------------
5.6 Change in Control..............................................................................12
-----------------
5.7 Other Payment Events...........................................................................12
--------------------
ARTICLE VI Administration 12
6.1 Plan Administration............................................................................12
-------------------
6.2 Withholding....................................................................................12
-----------
6.3 Indemnification................................................................................12
---------------
6.4 Expenses.......................................................................................13
--------
6.5 Delegation of Authority........................................................................13
-----------------------
6.6 Binding Decisions or Actions...................................................................13
----------------------------
ARTICLE VII Amendment and Termination 13
7.1 Amendment and Termination......................................................................13
-------------------------
7.2 Constructive Receipt Termination...............................................................13
--------------------------------
ARTICLE VIII Funding 14
8.1 General Assets.................................................................................14
--------------
8.2 Rabbi Trust....................................................................................14
-----------
ARTICLE IX General Conditions 14
9.1 Anti-assignment Rule...........................................................................14
--------------------
9.2 No Legal or Equitable Rights or Interest.......................................................14
----------------------------------------
9.3 No Employment Contract.........................................................................14
----------------------
9.4 Headings.......................................................................................15
--------
9.5 Invalid or Unenforceable Provisions............................................................15
-----------------------------------
9.6 Governing Law..................................................................................15
-------------
</TABLE>
<PAGE>
NAB GROUP - USA
DEFERRED COMPENSATION PLAN
(Effective February 10, 1998)
ARTICLE I
Establishment and Purpose
1.1 Establishment and Purpose. Each of Michigan National Corporation, HomeSide,
Inc., and National Australia Bank Ltd. (New York Branch) hereby adopts the
NAB Group - USA Deferred Compensation Plan (the "Plan"), effective as of
February 10, 1998 (the "Effective Date"). The purpose of the Plan is to
provide each Participant in the Plan with an opportunity to defer receipt
of salary, bonus, and other specified cash compensation. The Plan is
intended to benefit a "select group of management or highly compensated
employees" within the meaning of Sections 201, 301 and 401 of ERISA, and to
be therefore exempt from the requirements of Parts 2, 3 and 4 of Title I of
ERISA.
ARTICLE II
Definitions
2.1 Account Balance. Account Balance means the value of each Participant's
deferred compensation account balance under the Plan. A Participant's
Account Balance shall be maintained in accordance with Section 4.3.
2.2 Beneficiary. Beneficiary means a natural person, estate, or trust
designated by a Participant in accordance with Section 4.1 to receive
benefits under and in accordance with provisions of the Plan. The
Participant's estate shall be the Beneficiary if:
(a) the Participant has not designated a natural person or trust as
Beneficiary, or
(b) the designated Beneficiary has predeceased the Participant.
2.3 Change in Control. Change in Control means the occurrence of any of the
following:
(a) individuals who, on the Effective Date, constitute the Board of
Directors of the Company (the "Incumbent Directors") cease for any
reason to constitute at least a majority of the Board of Directors of
the Company (the "Board"), provided that any person becoming a
director subsequent to the Effective Date, whose election or
nomination for election was approved by a vote of at least two-thirds
of the Incumbent Directors then on the Board shall be an Incumbent
Director; provided, however, that no individual initially elected or
nominated as a director of the Company as a result of an actual or
threatened election contest with respect to directors or as a result
of any other actual or threatened solicitation of proxies or consents
by or on behalf of any person other than the Board shall be deemed to
an Incumbent Director;
(b) any person (as such term is defined in Section 3(a)(9) of the
Securities Exchange Act of 1934 (the "Exchange Act") and as used in
Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a
beneficial owner (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing 25%
or more of the combined voting power of the Company's then outstanding
securities eligible to vote for the election of the Board (the
"Company Voting Securities"); provided, however, that the event
described in this paragraph (b) shall not be deemed to be a Change in
Control by virtue of any of the following acquisitions: (A) by the
Company or any subsidiary, (B) by any employee benefit plan (or
related trust) sponsored or maintained by the Company or any
subsidiary, (C) by any underwriter temporarily holding securities
pursuant to an offering of such securities, (D) pursuant to a
Non-Qualifying Transaction (as defined in paragraph (iii)), or (E) a
transaction (other than one described in (c) below) in which Company
Voting Securities are acquired from the Company, if a majority of the
Incumbent Directors approve a resolution providing expressly that the
acquisition pursuant to this clause (E) does not constitute a Change
in Control under this paragraph (b);
(c) the consummation of a merger, consolidation, statutory share
exchange or similar form of corporate transaction involving the
Company or any of its subsidiaries that requires the approval of the
Company's stockholders, whether for such transaction or the issuance
of securities in the transaction (a "Business Combination"), unless
immediately following such Business Combination: (A) more than 50% of
the total voting power of (x) the corporation resulting from such
Business Combination (the "Surviving Corporation"), or (y) if
applicable, the ultimate parent corporation that directly or
indirectly has beneficial ownership of 100% of the voting securities
eligible to elect directors of the Surviving Corporation (the "Parent
Corporation"), is represented by Company Voting Securities that were
outstanding immediately prior to such Business Combination (or, if
applicable, is represented by shares into which such Company Voting
Securities were converted pursuant to such Business Combination), and
such voting power among the holders thereof is in substantially the
same proportion as the voting power of such Company Voting Securities
among the holders thereof immediately prior to the Business
Combination, (B) no person (other than any employee benefit plan (or
related trust) sponsored or maintained by the Surviving Corporation or
the Parent Corporation), is or becomes the beneficial owner, directly
or indirectly, of 25% or more of the total voting power of the
outstanding voting securities eligible to elect directors of the
Parent Corporation (or, if there is no Parent Corporation, the
Surviving Corporation) and (C) at least a majority of the members of
the board of directors of the Parent Corporation (or, if there is no
Parent Corporation, the Surviving Corporation) following the
consummation of the Business Combination were Incumbent Directors at
the time of the Board's approval of the execution of the initial
agreement providing for such Business Combination (any Business
Combination which satisfies all of the criteria specified in (A), (B)
and (C) above shall be deemed to be a "Non-Qualifying Transaction");
(d) the stockholders of the Company approve a plan of complete
liquidation or dissolution of the Company or a sale of all or
substantially all of the Company's assets; or
(e) the consummation of any sale or disposition of the Company's
ownership interest (direct or indirect) in a Participating Employer
that results in the Company no longer maintaining at least a 50%
ownership interest (directly or indirectly) in such Participating
Employer.
Notwithstanding the foregoing, a Change in Control of the Company
shall not be deemed to occur solely because any person acquires
beneficial ownership of more than 25% of the Company Voting Securities
as a result of the acquisition of Company Voting Securities by the
Company which reduces the number of Company Voting Securities
outstanding; provided, that if after such acquisition by the Company
such person becomes the beneficial owner of additional Company Voting
Securities that increases the percentage of outstanding Company Voting
Securities beneficially owned by such person, a Change in Control of
the Company shall then occur.
2.4 Chief Executive Officer. Chief Executive Officer means the individual
holding the title of Chief Executive Officer, or if no such individual
holds such title, the individual who performs the functions usually
performed by a Chief Executive Officer of a widely-held publicly-traded
corporation.
2.5 Code. Code means the Internal Revenue Code of 1986, as amended from time to
time.
2.6 Compensation. Compensation means, for purposes of this Plan, base salary
(including any deferred salary approved by the Deferred Compensation
Committee as compensation for purposes of this Plan), bonus, and other cash
compensation.
2.7 Company. Company means National Australia Bank, Ltd., a company organized
under the laws of Australia.
2.8 Deferred Compensation Committee. Deferred Compensation Committee means a
committee composed of one employee from each Participating Employer, in
each case who shall be appointed by the Chief Executive Officer of each
Participating Employer, and who shall serve until the earlier of
termination of employment or appointment of a replacement by the then Chief
Executive Officer of such Participating Employer.
2.9 Disability. Disability means that a Participant has been determined to have
incurred total and permanent disability, as defined by the long-term
disability ("LTD") group plan in which the Participant participates as of
the date of total and permanent disability.
2.10 Employee. Employee means a full-time salaried employee of an Employer.
2.11 Employer. Employer means, with respect to any Employee (or former
Employee), the particular Participating Employer that employs (or formerly
employed) such Employee.
2.12 ERISA. ERISA means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
2.13 Fiscal Year. Fiscal Year means October 1 through September 30.
2.14 MNC Plan. MNC Plan means the Michigan National Corporation Supplemental
Deferred Compensation Plan, as amended through the Effective Date.
2.15 Participant. Participant means (i) an Employee who is a member of a select
group of management or highly compensated employees, who is selected to
participate in this Plan in accordance with Section 3.1, and who timely
elects to participate in this Plan in accordance with Article IV, and (ii)
any person that becomes a Participant pursuant to Section 3.5. A
Participant's continued participation in the Plan shall be governed by
Article III, including Section 3.2.
2.16 Participating Employer. Participating Employer means any entity with
operations in the United States that is more than 50% owned (directly or
indirectly) by the Company, and that adopts this Plan with the approval of
the Company. As of the Effective Date, Participating Employer shall include
Michigan National Corporation, HomeSide, Inc. and National Australia Bank
Ltd. (New York Branch) (and any subsidiaries designated by such entities as
a Participating Employer).
2.17 Plan. Plan means the NAB Group - USA Deferred Compensation Plan, as
documented herein and as may be amended thereafter.
2.18 Plan Year. Plan Year means January 1 through December 31.
2.19 Spouse. Spouse means the person married to the Participant at the date
benefits become payable under the Plan.
ARTICLE III
Eligibility and Participation
3.1 Eligibility and Participation. Each Employee who is a member of a select
group of management or highly compensated employees, determined in the sole
discretion of the Chief Executive Officer of such Employee's respective
Employer, shall be eligible to participate in this Plan. Selection for
participation in the Plan will be made by the Chief Executive Officer of
such Employee's respective Employer.
3.2 Duration. Once an Employee becomes a Participant, such Employee shall
continue to be a Participant so long as he or she is entitled to receive
benefits hereunder, notwithstanding any subsequent termination of
employment.
3.3 Revocation of Future Participation. Notwithstanding the provisions of
Section 3.2, the Chief Executive Officer of a Participant's respective
Employer may revoke such Participant's eligibility to make future deferrals
under this Plan. Such revocation will not affect in any manner a
Participant's Account Balance or other terms of this Plan.
3.4 Notification. Each Participant shall be notified by the Deferred
Compensation Committee, in writing, of his or her eligibility to
participate in this Plan.
3.5 Prior Plan. Notwithstanding the provisions of Section 3.1, all participants
in the MNC Plan as of the Effective Date shall automatically become
Participants in this Plan.
ARTICLE IV
Compensation Reduction Agreements and Account Balances
4.1 Compensation Reduction Agreements. Deferrals made under the Plan shall be
made in accordance with a written compensation reduction agreement provided
by the Deferred Compensation Committee for that purpose. Salary deferral
elections shall be made no later than December 1 preceding the Plan Year
for which the deferrals are made. Bonus deferral elections shall be made no
later than September 1 of the Fiscal Year to which such bonus relates.
Other cash compensation deferral elections shall be made prior to the time
such amounts have been earned. Notwithstanding the foregoing, (i) an
Employee who becomes a Participant during any Plan Year may make salary
deferral elections for such Plan Year within 30 days of becoming a
Participant, and (ii) a Participant wishing to defer a guaranteed bonus
must make a deferral election in respect of such guaranteed bonus within
three weeks of commencement of employment. A compensation reduction
agreement shall designate the amount to be deferred in whole percentages of
compensation and/or as a dollar amount. Salary deferrals shall be applied
on a pro rata basis to each pay period during the Plan Year. A compensation
reduction agreement shall specify the form of distribution for deferrals
made during the Plan Year to which the compensation reduction agreement
applies. In addition, a Participant shall be permitted to designate a
Beneficiary on a form prescribed for such purpose by the Deferred
Compensation Committee. To be effective, a compensation reduction agreement
and beneficiary designation form must be received and approved by the
Deferred Compensation Committee.
4.2 Prohibition Against Compensation Reduction Agreement Modifications. A
Participant shall make an irrevocable election as to the amount and form of
payment at the time of each deferral election; provided, however, that a
Participant shall be permitted to make a one-time irrevocable election
(regarding the form of payment) after age fifty-four (54) provided such
election is at least twelve (12) months prior to the Participant's date of
termination of employment. Except as provided in the preceding sentence, a
Participant may not modify a compensation reduction agreement during a Plan
Year, either by changing the amount of the compensation reduction or the
designated form of distribution for the compensation reduction. In
addition, a participant may not revoke a compensation reduction agreement
once approved by the Deferred Compensation Committee.
4.3 Adjustments to Account Balances.
(a) On and after the Effective Date, a Participant's Account Balance shall
be credited with amounts deferred pursuant to compensation reduction
agreements, and further credited or debited in an amount equal to the
hypothetical return on such Account Balance (from the date on which such
deferred compensation would otherwise have been distributed to such
Participant through the later of (i) the end of the month of such
Participant's termination of employment, and (ii) the end of the
installment period under Section 5.2, if applicable) assuming for such
purpose that such Account Balance had been actually invested during such
period in one or more of a number of investments, as provided in Section
4.3(b). Each Participant in the MNC Plan shall have such Participant's
account balance as of the Effective Date in the MNC Plan transferred into
this Plan, and such amounts shall be considered to be such Participant's
Account Balance as of the Effective Date.
(b) The Deferred Compensation Committee shall provide each Participant with
a list of available hypothetical investments which may be designated by
such Participant (as provided below) for purposes of determining the
adjustments to such Participant's Account Balance under Section 4.3(a).
Such investment options shall initially include the Merrill Lynch Corporate
Bond Index (high quality, 1-10 year term) plus 1%. and such other options
as set forth on Schedule A.
For all investment options other than the Merrill Lynch Corporate Bond
Index, the adjustment shall be based upon the return of the funds during
the applicable period. With respect to amounts hypothetically invested in
the Merrill Lynch Corporate Bond Index, such amounts shall be credited
quarterly based upon the index rate in effect at the beginning of each
calendar quarter. The Deferred Compensation Committee, in its sole
discretion, shall be permitted to add or remove hypothetical investment
options; provided, that in the event the Merrill Lynch Corporation Bond
Index hypothetical investment option is removed, the Deferred Compensation
Committee will provide a replacement hypothetical investment option based
upon the yield of United States Treasury securities with a constant
maturity of at least one year (the "Bond Index Substitute Investment"),
unless the Plan has been terminated in accordance with Article VII;
provided, further, that any such additions or removals of hypothetical
investment options shall not be effective with respect to any period prior
to the effective date of such change. For the avoidance of doubt, if a
Participant has elected that all or any portion of a Participant's Account
Balance (or future deferrals) are to be hypothetically invested in a
hypothetical investment option that is removed by the Deferred Compensation
Committee, such Participant shall be required to elect a different
hypothetical investment option with respect to such portion of such
Participant's Account Balance (or such future deferrals); and until such
time as such Participant has made a new election, the applicable portion of
such Participant's Account Balance (and future deferrals) shall be deemed
to be invested in the Merrill Lynch Corporate Bond Index (or Bond Index
Substitute Investment).
Each Participant may elect how such Participant's Account Balance is deemed
to be hypothetically invested; provided that such allocations shall be in
increments of five percent (5%). If a Participant fails to elect how
deferrals are deemed to be hypothetically invested, such deferrals shall be
deemed to be hypothetically invested in the Merrill Lynch Corporation Bond
Index (or, if such option has been removed, the replacement option based
upon the yield of United States Treasury securities with a constant
maturity of at least one year). Once in each calendar quarter, if a
Participant elects, the Account Balance may be reallocated among the
various hypothetical investment options; provided that such allocations
shall be in increments of five percent (5%). Similarly, once each calendar
quarter, each Participant may file an election to change the hypothetical
investment of future deferrals. In the event that a Participant is
currently receiving distributions of such Participant's Account Balance in
installments, the amount of each installment shall be reamortized annually
to reflect the return over the prior year of the investment option in which
such Account Balance is hypothetically invested. Notwithstanding anything
in this Section 4.3(b) to the contrary, each Participating Employer shall
have the sole and exclusive authority to invest any or all amounts
(deferred by those Participants who are (or were) employed by such
Employer) in any manner, regardless of any hypothetical investment election
by any Participant. A Participant's hypothetical investment election shall
be used solely for purposes of determining the deemed investment yield to
be credited or debited to such Participant's Account Balance.
ARTICLE V
Benefit Payments and Certain Withdrawals
5.1 Regular Benefit. Subject to the provisions of this Article V, each
Participant shall be entitled to a benefit in an amount equal to such
Participant's Account Balance as of the end of the month in which
termination of employment occurs, subject to adjustment in the event of
payment in installments under Section 5.2(b).
5.2 Form of Payment. A Participant may elect (as provided in Section 4.2) to
have such Participant's Account Balance distributed: (a) in a single lump
sum; or (b) in equal annual installment payments for a selected number of
years not to exceed twenty (20) years. If installments are elected, the
first installment shall be payable within 45 days of termination of
employment.
5.3 Disability Benefit. In the event of Disability, a Participant may elect to
commence immediate distribution of such Participant's Account Balance in
accordance with the form of payment previously elected.
5.4 Death Benefit. Notwithstanding a Participant's election as to form of
payment, upon the death of such Participant, such Participant's Beneficiary
shall be paid a single lump sum in an amount equal to the Participant's
Account Balance as of such Participant's date of death.
5.5 Hardship Withdrawal. Prior to termination of employment, a Participant may
request a payment under the Plan if the Participant experiences a financial
hardship. A "financial hardship" is an unanticipated emergency that is
caused by an event beyond the control of a Participant and that would
result in severe financial hardship to the Participant if early withdrawal
were not permitted, including, but not limited to, college tuition
payments. The Deferred Compensation Committee, in its sole discretion,
shall determine whether a Participant has experienced a financial hardship.
The amount of any payment on account of financial hardship is limited to
the amount of the severe financial need which cannot be met with other
resources of the Participant.
5.6 Change in Control. Notwithstanding anything in the Plan to the contrary, in
the event of a Change in Control, each Participant's Account Balance shall
be valued as of the last day of the month in which the Change in Control
occurs, and shall be paid to such Participant in a lump sum within seven
(7) days following such valuation date.
5.7 Other Payment Events. Notwithstanding anything in the Plan to the contrary,
each Participant shall receive payment of such Participant's Account
Balance at such time or times, if any, as may be specified in a Rabbi Trust
established pursuant to Section 8.2.
ARTICLE VI
Administration
6.1 Plan Administration. This Plan shall be administered by the Deferred
Compensation Committee, which shall have authority to make, amend,
interpret and enforce all appropriate rules and regulations for the
administration of this Plan and decide or resolve any and all questions
including interpretations of this Plan, as may arise in connection with the
Plan.
6.2 Withholding. Each Participant's respective Employer shall have the right to
withhold from any payment made under the Plan (or any amount deferred into
the Plan) any taxes required by law to be withheld in respect of such
payment (or deferral).
6.3 Indemnification. Each Employer shall indemnify and hold harmless each
employee, officer, or director of such Employer to whom is delegated
duties, responsibilities, and authority with respect to the Plan against
all claims, liabilities, fines and penalties, and all expenses reasonably
incurred by or imposed upon him (including but not limited to reasonable
attorney fees) which arise as a result of his actions or failure to act in
connection with the operation and administration of the Plan to the extent
lawfully allowable and to the extent that such claim, liability, fine,
penalty, or expense is not paid for by liability insurance purchased or
paid for by such Employer. Notwithstanding the foregoing, an Employer shall
not indemnify any person for any such amount incurred through any
settlement or compromise of any action unless such Employer consents in
writing to such settlement or compromise.
6.4 Expenses. The expenses of administering the Plan shall be paid equally by
the Participating Employers.
6.5 Delegation of Authority. In the administration of this Plan, the Deferred
Compensation Committee may, from time to time, employ agents and delegate
to them such administrative duties as it sees fit, and may from time to
time consult with legal counsel who may be legal counsel to a Participating
Employer.
6.6 Binding Decisions or Actions. The decision or action of the Deferred
Compensation Committee in respect of any question arising out of or in
connection with the administration, interpretation and application of the
Plan and the rules and regulations thereunder shall be final and conclusive
and binding upon all persons having any interest in the Plan.
ARTICLE VII
Amendment and Termination
7.1 Amendment and Termination. The Plan is intended to be permanent, but the
Deferred Compensation Committee may at any time modify, amend, or terminate
the Plan, provided that such modification, amendment or termination shall
not cancel, reduce, or otherwise adversely affect the amount of benefits of
any Participant accrued (and any form of payment elected) as of the date of
any such modification, amendment, or termination, without the consent of
the Participant; provided, the Deferred Compensation Committee shall be
permitted upon Plan termination to pay each Participant (without such
Participant's consent) a lump sum in the amount of such Participant's
Account Balance as of the date of such Plan termination.
7.2 Constructive Receipt Termination. Notwithstanding anything to the contrary
in the Plan, if any Participant receives a deficiency notice from the
United States Internal Revenue Service asserting constructive receipt of
amounts payable under the Plan, the Deferred Compensation Committee, in its
sole discretion, may terminate the Plan or such Participant's participation
in the Plan.
ARTICLE VIII
Funding
8.1 General Assets. All benefits in respect of a Participant under this Plan
shall be paid directly from the general funds of such Participant's
Employer (or former Employer), and no special or separate fund shall be
established and no other segregation of assets shall be made to assure
payment. No Participant, Spouse or Beneficiary shall have any right, title
or interest whatever in or to any investments which the Employer may make
to aid the Employer in meeting its obligation hereunder. Nothing contained
in this Plan, and no action taken pursuant to its provisions, shall create
or be construed to create a trust of any kind, or a fiduciary relationship,
between an Employer and any Employee, Spouse, or Beneficiary. To the extent
that any person acquires a right to receive payments from an Employer
hereunder, such rights are no greater than the right of an unsecured
creditor of such Employer.
8.2 Rabbi Trust. Any Employer may, at its sole discretion, establish a grantor
trust, commonly known as a Rabbi Trust, as a vehicle for accumulating the
assets needed to pay the promised benefit, but no Employer shall be under
any obligation to establish any such trust or any other funding vehicle.
ARTICLE IX
General Conditions
9.1 Anti-assignment Rule. No interest of any Participant, Spouse or Beneficiary
under this Plan and no benefit payable hereunder shall be assigned as
security for a loan, and any such purported assignment shall be null, void
and of no effect, nor shall any such interest or any such benefit be
subject in any manner, either voluntarily or involuntarily, to
anticipation, sale, transfer, assignment or encumbrance by or through any
Participant, Spouse or Beneficiary.
9.2 No Legal or Equitable Rights or Interest. No Employee and no other person
shall have any legal or equitable rights or interest in this Plan that are
not expressly granted in this Plan. Participation in this Plan does not
give any person any right to be retained in the service of any employer.
The right and power of any Employer to dismiss or discharge such Employer's
Employee is expressly reserved.
9.3 No Employment Contract. Nothing contained herein shall be construed to
constitute a contract of employment between an Employee and an Employer.
9.4 Headings. The headings of Sections are included solely for convenience of
reference, and if there is any conflict between such headings and the text
of this Plan, the text shall control.
9.5 Invalid or Unenforceable Provisions. If any provision of this Plan shall be
held invalid or unenforceable, such invalidity or unenforceability shall
not affect any other provisions hereof and the Plan shall be construed and
enforced as if such provisions, to the extent invalid or unenforceable, had
not been included.
9.6 Governing Law. The laws of the State of New York shall govern the
construction and administration of the Plan.
<PAGE>
IN WITNESS WHEREOF, the following Participating Employers have caused
this Plan to be adopted, effective as of February 10, 1998.
MICHIGAN NATIONAL CORPORATION
By: /s/ Douglas E. Ebert
Its: Chief Financial Officer
ATTEST:_____________________
HOMESIDE, INC.
By: /s/ Joe K. Pickett
Its: Chairman and Chief Executive Officer
ATTEST:_______________________
NATIONAL AUSTRALIA BANK LTD.
(NEW YORK BRANCH)
By: ___________________________
Its: __________________________
ATTEST:________________________
<PAGE>
Schedule A
Fidelity Contra
Fidelity Magellan
Janus
Fidelity Growth & Income
Independence One Equity Plus
Vanguard Index 500
Brandywine
PBHG Growth PBHG
Heartland
Dodge & Cox Balanced
T. Rowe Price International
Vanguard International
Fidelity Government Securities
Fidelity Investment Grade Bond
Independence One Fixed Income
Money Market Fund
PORTIONS OF THIS DOCUMENT INDICATED BY
"* * * * *"
HAVE BEEN REDACTED PURSUANT TO
A REQUEST FOR CONFIDENTIAL TREATMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
EXECUTION COPY
$2,000,000,000.00
REVOLVING CREDIT AGREEMENT
among
HOMESIDE LENDING, INC.
as Borrower,
The Several Lenders
from Time to Time Parties Hereto,
BANK OF AMERICA, N.A.,
DEUTSCHE BANK AG, NEW YORK BRANCH
and
MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
as Syndication Agents,
NATIONAL AUSTRALIA BANK LIMITED,
as Senior Managing Agent
and Co-Arranger,
and
THE CHASE MANHATTAN BANK,
as Administrative Agent
Dated as of October 18, 1999
CHASE SECURITIES, INC. as Lead Arranger and Book Manager
<PAGE>
TABLE OF CONTENTS
Page
SECTION 1. DEFINITIONS........................................................1
1.1 Defined Terms....................................................1
1.2 Other Definitional Provisions...................................14
SECTION 2. AMOUNT AND TERMS OF COMMITMENTS...................................15
2.1 Revolving Commitments...........................................15
2.2 Procedure for Revolving Loan Borrowing..........................15
2.3 Swingline Commitment............................................15
2.4 Procedure for Swingline Borrowing; Refunding of Swingline Loans.16
2.5 Facility Fees, etc. ............................................17
2.6 Termination or Reduction of Revolving Commitments...............17
2.7 Competitive Bid Procedure.......................................17
2.8 Optional Prepayments............................................19
2.9 Conversion and Continuation Options.............................20
2.10 Limitations on Eurodollar Tranches.............................20
2.11 Interest Rates; Payment Dates; Evidence of Debt................20
2.12 Computation of Interest and Fees...............................21
2.13 Inability to Determine Interest Rate...........................21
2.14 Pro Rata Treatment and Payments................................22
2.15 Requirements of Law............................................23
2.16 Taxes24
2.17 Indemnity......................................................25
2.18 Change of Lending Office.......................................26
2.19 Replacement of Lenders.........................................26
SECTION 3. REPRESENTATIONS AND WARRANTIES....................................26
3.1 Financial Condition.............................................26
3.2 No Change.......................................................27
3.3 Corporate Existence; Compliance with Law........................27
3.4 Corporate Power; Authorization; Enforceable Obligations.........27
3.5 No Legal Bar....................................................27
3.6 No Material Litigation..........................................28
3.7 No Default......................................................28
3.8 Ownership of Property; Liens....................................28
3.9 Intellectual Property...........................................28
3.10 Taxes28
3.11 Federal Regulations............................................28
3.12 ERISA28
3.13 Investment Company Act; Other Regulations......................29
3.14 Subsidiaries...................................................29
3.15 Purpose of Loans...............................................29
3.16 Environmental Matters..........................................29
3.17 Disclosure.....................................................30
3.18 Year 2000......................................................30
SECTION 4. CONDITIONS PRECEDENT..............................................30
4.1 Conditions to Initial Extension of Credit.......................30
4.2 Conditions to Each Extension of Credit..........................31
SECTION 5. AFFIRMATIVE COVENANTS.............................................31
5.1 Financial Statements............................................31
5.2 Certificates; Other Information.................................32
5.3 Payment of Obligations..........................................32
5.4 Maintenance of Existence; Compliance............................33
5.5 Maintenance of Property; Insurance; Risk Management.............33
5.6 Inspection of Property; Books and Records; Discussions..........33
5.7 Notices.........................................................33
5.8 Environmental Laws..............................................34
5.9 Maintenance of Agency Status....................................34
SECTION 6. NEGATIVE COVENANTS................................................34
6.1 Financial Condition Covenants...................................35
6.2 Indebtedness....................................................35
6.3 Liens 35
6.4 Fundamental Changes.............................................36
6.5 Limitation on Sale of Assets....................................37
6.6 Restricted Payments.............................................37
6.7 Limitation on Investments, Loans and Advances...................37
6.8 Transactions with Affiliates....................................37
6.9 Changes in Fiscal Periods.......................................38
6.10 Lines of Business..............................................38
SECTION 7. EVENTS OF DEFAULT.................................................38
SECTION 8. THE AGENTS........................................................40
8.1 Appointment.....................................................40
8.2 Delegation of Duties............................................40
8.3 Exculpatory Provisions..........................................40
8.4 Reliance by Administrative Agent................................40
8.5 Notice of Default...............................................41
8.6 Non-Reliance on Agents and Other Lenders........................41
8.7 Indemnification.................................................41
8.8 Agent in Its Individual Capacity................................42
8.9 Successor Administrative Agent..................................42
8.10 Other Agents...................................................42
SECTION 9. MISCELLANEOUS.....................................................42
9.1 Amendments and Waivers..........................................42
9.2 Notices.........................................................43
9.3 No Waiver; Cumulative Remedies..................................44
9.4 Survival of Representations and Warranties......................44
9.5 Payment of Expenses and Taxes...................................44
9.6 Successors and Assigns; Participations and Assignments..........45
9.7 Adjustments; Set-off............................................47
9.8 Counterparts....................................................47
9.9 Severability....................................................48
9.10 Integration....................................................48
9.11 GOVERNING LAW..................................................48
9.12 Submission To Jurisdiction; Waivers............................48
9.13 Acknowledgements...............................................48
9.14 Confidentiality................................................49
9.15 WAIVERS OF JURY TRIAL..........................................49
<PAGE>
- v -
<PAGE>
SCHEDULES:
1.1A Commitments
3.1 Certain Contingent Liabilities
3.4 Consents, etc.
3.6 Material Litigation
3.14 Subsidiaries
6.3(j) Existing Liens
6.8 Transactions with Affiliates
EXHIBITS:
A Form of Closing Certificate
B Form of Assignment and Acceptance
C-1 Form of Legal Opinion of Sullivan & Cromwell
C-2 Form of Legal Opinion of Robert Jacobs, Esq.
D-1 Form of Revolving Loan Note
D-2 Form of Competitive Loan Note
D-3 Form of Swingline Loan Note
E Form of Exemption Certificate
<PAGE>
509265-0409-02618-998GAET2-CRA
CREDIT AGREEMENT, dated as of October 18, 1999, among
HOMESIDE LENDING, INC., a Florida corporation (the
"Borrower"), the several banks and other financial institutions or entities from
time to time parties to this Agreement (the "Lenders"), BANK OF AMERICA, N.A.,
DEUTSCHE BANK AG, NEW YORK BRANCH and MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
as Syndication Agents (in such capacity, the "Syndication Agents"), NATIONAL
AUSTRALIA BANK LIMITED, as Senior Managing Agent and Co-Arranger, CHASE
SECURITIES, INC., as lead arranger and book manager (in such capacity, the
"Arranger"), and THE CHASE MANHATTAN BANK, as administrative agent (in such
capacity, the "Administrative Agent").
The parties hereto hereby agree as follows:
SECTION 1. DEFINITIONS
1.1 Defined Terms. As used in this Agreement, the terms listed in this
Section 1.1 shall have the respective meanings set forth in this Section 1.1.
"ABR": for any day, a rate per annum (rounded upwards, if necessary, to the
next 1/16 of 1%) equal to the greater of (a) the Prime Rate in effect on such
day and (b) the Federal Funds Effective Rate in effect on such day plus * * * *
* . For purposes hereof: "Prime Rate" shall mean the rate of interest per annum
publicly announced from time to time by the Reference Lender as its prime rate
in effect at its principal office in New York City (the Prime Rate not being
intended to be the lowest rate of interest charged by the Reference Lender in
connection with extensions of credit to debtors). Any change in the ABR due to a
change in the Prime Rate or the Federal Funds Effective Rate shall be effective
as of the opening of business on the effective day of such change in the Prime
Rate or the Federal Funds Effective Rate, respectively.
"ABR Loans": Loans the rate of interest applicable to which is based upon
the ABR.
"Accounts Receivable": that dollar amount shown as such on the balance
sheet of the Borrower as of the relevant Applicable Financial Test Date.
"Adjustment Date": as defined in the Pricing Grid.
"Administrative Agent": The Chase Manhattan Bank.
"Affiliate": as to any Person, any other Person that, directly or
indirectly, is in control of, is controlled by, or is under common control with,
such Person. For purposes of this definition, "control" of a Person means the
power, directly or indirectly, either to (a) vote 10% or more of the securities
having ordinary voting power for the election of directors (or persons
performing similar functions) of such Person or (b) direct or cause the
direction of the management and policies of such Person, whether by contract or
otherwise.
"Agency": FHLMC, FNMA or GNMA.
"Agents": the collective reference to the Syndication Agents and the
Administrative Agent.
<PAGE>
"Aggregate Exposure": with respect to any Lender at any time, an amount
equal to the amount of such Lender's Revolving Commitment then in effect or,
after the Revolving Termination Date or if the Revolving Commitments have
otherwise been terminated, the amount of such Lender's Revolving Extensions of
Credit then outstanding.
"Aggregate Exposure Percentage": with respect to any Lender at any time,
the ratio (expressed as a percentage) of such Lender's Aggregate Exposure at
such time to the Aggregate Exposure of all Lenders at such time.
"Agreement": this Credit Agreement, as amended, supplemented or otherwise
modified from time to time.
"Applicable Financial Test Date" : at any time, the last day of the most
recent fiscal quarter of the Borrower ended prior to such time.
"Applicable Margin": for Eurodollar Loans (other than Eurodollar
Competitive Loans), (a) prior to the Revolving Termination Date, * * * * * per
annum, and (b) on and after the Revolving Termination Date, * * * * * per annum,
provided that for each day on which the aggregate principal amount of all Loans
outstanding on such day exceeds 50% of the Total Revolving Commitments on such
day, the margin for Eurodollar Loans set forth in clause (a) shall be * * * * *
for such day.
"Approved Fund": with respect to any Lender that is a fund that invests in
commercial loans, any other fund that invests in commercial loans and is managed
or advised by the same investment advisor as such Lender or by an Affiliate of
such investment advisor.
"Approved Securities Offering" : a proposed offering of securities by the
Borrower or an Affiliate of the Borrower secured or otherwise supported in whole
or part by Mortgage Loans and/or Mortgage-Backed Securities, for which the
following statements are true, unless otherwise waived in writing by the
Required Lenders:
(a) the Borrower or such Affiliate, as applicable, has filed and made
effective a registration statements with the SEC covering the offering of the
proposed securities;
(b) the Borrower or such Affiliate, as applicable, has obtained all
permits, exemptions and licenses necessary to effect such offering;
(c) such offering has been priced and is the subject of a firm underwriting
commitment;
(d) such securities qualify as "mortgage-related securities" under Section
3(a)(41) of the Securities Exchange Act of 1934, as amended; and
(e) in the reasonably anticipated course of events, the Borrower or such
Affiliate, as applicable, is expected to obtain a rating in one of the two
highest categories available for securities of a like nature from the rating
agency rating such securities.
"Assignee": as defined in Section 9.6(c).
"Assignment and Acceptance": an Assignment and Acceptance, substantially in
the form of Exhibit B.
<PAGE>
"Assignor": as defined in Section 9.6(c).
"Available Revolving Commitment": as to any Revolving Lender at any time,
an amount equal to the excess, if any, of (a) such Lender's Revolving Commitment
then in effect over (b) such Lender's Revolving Extensions of Credit then
outstanding.
"Benefitted Lender": as defined in Section 9.7(a).
"Board": the Board of Governors of the Federal Reserve System of the United
States (or any successor).
"Borrower": as defined in the preamble hereto.
"Borrowing Date": any Business Day specified by the Borrower as a date on
which the Borrower requests the relevant Lenders to make Loans hereunder.
"Business": as defined in Section 3.16(b).
"Business Day": a day other than a Saturday, Sunday or other day on which
commercial banks in New York City are authorized or required by law to close,
provided, that with respect to notices and determinations in connection with,
and payments of principal and interest on, Eurodollar Loans, such day is also a
day for trading by and between banks in Dollar deposits in the interbank
eurodollar market.
"Capital Lease Obligations": as to any Person, the obligations of such
Person to pay rent or other amounts under any lease of (or other arrangement
conveying the right to use) real or personal property, or a combination thereof,
which obligations are required to be classified and accounted for as capital
leases on a balance sheet of such Person under GAAP and, for the purposes of
this Agreement, the amount of such obligations at any time shall be the
capitalized amount thereof at such time determined in accordance with GAAP.
"Capital Stock": any and all shares, interests, participations or other
equivalents (however designated) of capital stock of a corporation, any and all
equivalent ownership interests in a Person (other than a corporation) and any
and all warrants, rights or options to purchase any of the foregoing.
"Cash" : at any date the dollar amount of "Cash" of the Borrower set forth
in the balance sheet of the Borrower as of the most recent Applicable Financial
Test Date.
<PAGE>
"Cash Equivalents": (a) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition; (b)
certificates of deposit, time deposits, eurodollar time deposits or overnight
bank deposits having maturities of six months or less from the date of
acquisition issued by any Lender or by any commercial bank organized or licensed
under the laws of the United States or any state thereof having combined capital
and surplus of not less than $500,000,000; (c) commercial paper of an issuer
rated at least A-1 by Standard & Poor's Ratings Services ("S&P") or P-1 by
Moody's Investors Service, Inc. ("Moody's"), or carrying an equivalent rating by
a nationally recognized rating agency, if both of the two named rating agencies
cease publishing ratings of commercial paper issuers generally, and maturing
within six months from the date of acquisition; (d) repurchase obligations of
any Lender or of any commercial bank satisfying the requirements of clause (b)
of this definition, having a term of not more than 30 days, with respect to
securities issued or fully guaranteed or insured by the United States
government; (e) securities with maturities of one year or less from the date of
acquisition issued or fully guaranteed by any state, commonwealth or territory
of the United States, by any political subdivision or taxing authority of any
such state, commonwealth or territory or by any foreign government, the
securities of which state, commonwealth, territory, political subdivision,
taxing authority or foreign government (as the case may be) are rated at least A
by S&P or A by Moody's; (f) securities with maturities of six months or less
from the date of acquisition backed by standby letters of credit issued by any
Lender or any commercial bank satisfying the requirements of clause (b) of this
definition; or (g) shares of money market mutual or similar funds which invest
exclusively in assets satisfying the requirements of clauses (a) through (f) of
this definition.
"Closing Date": the date on which the conditions precedent set forth in
Section 4.1 shall have been satisfied, which date is October 18, 1999.
"Code": the Internal Revenue Code of 1986, as amended from time to time.
"Commitment": as to any Lender, the Revolving Commitment of such Lender.
"Commonly Controlled Entity": an entity, whether or not incorporated, that
is under common control with the Borrower within the meaning of Section 4001 of
ERISA or is part of a group that includes the Borrower and that is treated as a
single employer under Section 414 of the Code.
"Competitive Bid": an offer by a Lender to make a Competitive Loan in
accordance with Section 2.7.
"Competitive Bid Rate": with respect to any Competitive Bid, the margin
over the Eurodollar Rate or the Fixed Rate, as applicable, offered by the Lender
making such Competitive Bid.
"Competitive Bid Request": a request by the Borrower for Competitive Bids
in accordance with Section 2.7.
"Competitive Borrowing": any Eurodollar Competitive Borrowing or Fixed Rate
Competitive Borrowing in accordance with Section 2.7.
"Competitive Loan": a Loan made pursuant to Section 2.7.
"Confidential Information Memorandum": the Confidential Information
Memorandum dated September 1999 and furnished to the Lenders.
"Consolidated Intangibles": at any time, all amounts included in
Consolidated Net Worth of the Borrower at such time which, in accordance with
GAAP, would be classified as intangible assets on a consolidated balance sheet
of the Borrower and its Subsidiaries, including, without limitation, (a)
goodwill (other than negative goodwill), including any amounts (however
designated on the balance sheet) representing the cost of acquisitions in excess
of underlying net tangible assets, and (b) patents, trademarks, copyrights and
other intangibles.
"Consolidated Net Worth": at any time, all amounts which would, in
conformity with GAAP, be included under shareholders' equity on a consolidated
balance sheet of the Borrower and its Subsidiaries as at such time.
"Consolidated Tangible Net Worth" : at any date, an amount equal to (a)
Consolidated Net Worth at such date less (b) Consolidated Intangibles at such
date.
"Consolidated Total Debt": at any date, the aggregate principal amount of
all Indebtedness of the Borrower and its Subsidiaries at such date, determined
on a consolidated basis in accordance with GAAP.
"Contractual Obligation": as to any Person, any provision of any security
issued by such Person or of any agreement, instrument or other undertaking to
which such Person is a party or by which it or any of its property is bound.
"Default": any of the events specified in Section 7, whether or not any
requirement for the giving of notice, the lapse of time, or both, has been
satisfied.
"Disposition": with respect to any property, any sale, lease, sale and
leaseback, assignment, conveyance, transfer or other disposition thereof. The
terms "Dispose" and "Disposed of" shall have correlative meanings.
"Dollars" and "$": lawful currency of the United States.
"Early Pool Buyout Advances": that dollar amount shown as such on the
balance sheet of the Borrower as of the relevant Applicable Financial Test Date.
"Eligible Mortgage Assets": the dollar amount of Mortgage Loans Held for
Sale or Mortgage Loans Held for Investment, as the case may be, on the balance
sheet of the Borrower, but excluding, in any event: (a) Mortgage Loans and
Mortgage-Backed Securities which are subject to a Lien other than a Lien that is
permitted under Section 6.3 and that secures Indebtedness included in Total
Debt, (b) Mortgage Loans secured by properties which are not 1-4 family
residential properties, and (c) Mortgage Loans deemed to be unsaleable by the
Borrower.
"Environmental Laws": any and all foreign, Federal, state, local or
municipal laws, rules, orders, regulations, statutes, ordinances, codes,
decrees, requirements of any Governmental Authority or other Requirements of Law
(including common law) regulating, relating to or imposing liability or
standards of conduct concerning protection of human health or the environment,
as may now or at any time hereafter be in effect.
"ERISA": the Employee Retirement Income Security Act of 1974, as amended
from time to time.
"Eurocurrency Reserve Requirements": for any day as applied to a Eurodollar
Loan, the aggregate (without duplication) of the maximum rates (expressed as a
decimal fraction) of reserve requirements in effect on such day (including
basic, supplemental, marginal and emergency reserves under any regulations of
the Board or other Governmental Authority having jurisdiction with respect
thereto) dealing with reserve requirements prescribed for eurocurrency funding
(currently referred to as "Eurocurrency liabilities" in Regulation D of the
Board) maintained by a member bank of the Federal Reserve System.
<PAGE>
"Eurodollar Base Rate": with respect to each day during each Interest
Period pertaining to a Eurodollar Loan, the rate per annum determined on the
basis of the rate for deposits in Dollars for a period equal to such Interest
Period commencing on the first day of such Interest Period appearing on Page
3750 of the Dow Jones Markets screen as of 11:00 A.M., London time, two Business
Days prior to the beginning of such Interest Period. In the event that such rate
does not appear on Page 3750 of the Dow Jones Markets screen (or otherwise on
such screen), the "Eurodollar Base Rate" shall be determined by reference to
such other comparable publicly available service for displaying eurodollar rates
as may be selected by the Administrative Agent or, in the absence of such
availability, by reference to the rate at which the Reference Lender is offered
Dollar deposits at or about 11:00 A.M., New York City time, two Business Days
prior to the beginning of such Interest Period in the interbank eurodollar
market where its eurodollar and foreign currency and exchange operations are
then being conducted for delivery on the first day of such Interest Period for
the number of days comprised therein.
"Eurodollar Competitive Borrowing": any borrowing by the Borrower of
Eurodollar Competitive Loans pursuant to the terms of this Agreement.
"Eurodollar Competitive Loan": a Competitive Loan the rate of interest
applicable to which is based upon the Eurodollar Rate.
"Eurodollar Loan": a Loan the rate of interest applicable to which is based
upon the Eurodollar Rate.
"Eurodollar Rate": with respect to each day during each Interest Period
pertaining to a Eurodollar Loan, a rate per annum determined for such day in
accordance with the following formula (rounded upward to the nearest 1/100th of
1%): * * * * *
"Eurodollar Tranche": the collective reference to Eurodollar Loans the then
current Interest Periods with respect to all of which begin on the same date and
end on the same later date (whether or not such Loans shall originally have been
made on the same day).
"Event of Default": any of the events specified in Section 7, provided that
any requirement for the giving of notice, the lapse of time, or both, has been
satisfied.
"Existing Credit Agreement": the Credit Agreement dated as of January 31,
1997 among the Borrower, Honolulu Mortgage Company, Inc., the banks and
financial institutions from time to time parties thereto, the Balance Lenders
(as defined therein), The First National Bank of Boston as Collateral Agent,
NationsBank of Texas as Syndication Agent and The Chase Manhattan Bank as
Administrative Agent.
"Facility Fee Rate": * * * * * per annum.
<PAGE>
"Federal Funds Effective Rate": (i) for the first day of an ABR Loan or
Swingline Loan, the rate per annum which is the average of the rates on the
offered side of the Federal funds market quoted by three interbank Federal funds
brokers, selected by the Administrative Agent, at approximately the time the
Borrower requests such ABR Loan or Swingline Loan, for Dollar deposits in
immediately available funds, for a period and in an amount, comparable to the
principal amount of such ABR Loan or Swingline Loan, as the case may be, and
(ii) for each day of such ABR Loan or Swingline Loan thereafter, or for any
other amount hereunder which bears interest at the ABR, the rate per annum which
is the average of the rates on the offered side of the Federal funds market
quoted by three interbank Federal funds brokers, selected by the Administrative
Agent, at approximately 2:00 p.m. New York City time on such day for Dollar
deposits in immediately available funds, for a period and in an amount
comparable to the principal amount of such ABR Loan, Swingline Loan or other
amount, as the case may be; in the case of both clauses (i) and (ii), as
determined by the Administrative Agent and rounded upwards, if necessary, to the
nearest 1/100 of 1%.
"FHA": the Federal Housing Administration and any successor thereto.
"FHLMC": Freddie Mac and any successor thereto.
"Fixed Rate" : with respect to any Competitive Loan (other than a
Eurodollar Competitive Loan), the fixed rate of interest per annum specified by
the Lender making such Competitive Loan in its related Competitive Bid.
"Fixed Rate Competitive Borrowing": any borrowing by the Borrower of a
Fixed Rate Competitive Loans pursuant to the terms of this Agreement.
"Fixed Rate Competitive Loan": a Competitive Loan bearing interest at a
Fixed Rate.
"FNMA": Fannie Mae and any successor thereto.
"Funding Office": the office of the Administrative Agent specified in
Section 9.2 or such other office as may be specified from time to time by the
Administrative Agent as its funding office by written notice to the Borrower and
the Lenders.
"GAAP": generally accepted accounting principles in the United States as in
effect from time to time, except that for purposes of Section 6.1, GAAP shall be
determined on the basis of such principles in effect on the date hereof and
consistent with those used in the preparation of the audited financial
statements referred to in Section 3.1. In the event that any "Accounting Change"
(as defined below) shall occur and such change results in a change in the method
of calculation of financial covenants, standards or terms in this Agreement,
then the Borrower and the Administrative Agent agree to enter into negotiations
in order to amend such provisions of this Agreement so as to equitably reflect
such Accounting Changes with the desired result that the criteria for evaluating
the Borrower's financial condition shall be the same after such Accounting
Changes as if such Accounting Changes had not been made. Until such time as such
an amendment shall have been executed and delivered by the Borrower and the
Required Lenders, all financial covenants, standards and terms in this Agreement
shall continue to be calculated or construed as if such Accounting Changes had
not occurred. "Accounting Changes" refers to changes in accounting principles
required by the promulgation of any rule, regulation, pronouncement or opinion
by the Financial Accounting Standards Board of the American Institute of
Certified Public Accountants or, if applicable, the SEC.
"GNMA": the Government National Mortgage Association and any successor
thereto.
"Governmental Authority": any nation or government, any state or other
political subdivision thereof, any agency, authority, instrumentality,
regulatory body, court, central bank or other entity exercising executive,
legislative, judicial, taxing, regulatory or administrative functions of or
pertaining to government, any securities exchange and any self-regulatory
organization (including the National Association of Insurance Commissioners).
<PAGE>
"Hedging Agreement": any interest rate protection agreement, interest rate
option, interest rate cap or other interest rate hedge agreement entered into by
the Borrower or any of its Subsidiaries providing to the Borrower or any of its
Subsidiaries protection against changes in interest rates.
"Hedge Contract": in respect of any Mortgage Loans, Mortgage-Backed
Securities or servicing rights for Mortgage Loans, a contract to buy or sell an
instrument on the futures market, cash forward market, private investor
whole-loan market or options market, or an option or financial future purchased
over the counter for future delivery of such instrument, in respect of interest
rate risks associated with such Mortgage Loans, Mortgage-Backed Securities and
servicing rights.
"Hedge Termination Obligation": any termination amount or other amount
payable by the Borrower or any of its Subsidiaries upon the early termination,
by reason of the occurrence of a default or other termination event thereunder,
of any interest rate protection agreement, interest rate option, interest rate
cap or other interest rate hedge arrangement providing to the Borrower or any of
its Subsidiaries protection against changes in interest rates.
"HUD": The Department of Housing and Urban Development and any successor
thereto.
"Indebtedness": of any Person at any date, without duplication, (a) all
indebtedness of such Person for borrowed money, (b) all obligations of such
Person for the deferred purchase price of property or services (other than
current trade payables incurred in the ordinary course of such Person's
business), (c) all obligations of such Person evidenced by notes, bonds,
debentures or other similar instruments, (d) all indebtedness created or arising
under any conditional sale or other title retention agreement with respect to
property acquired by such Person (even though the rights and remedies of the
seller or lender under such agreement in the event of default are limited to
repossession or sale of such property), (e) all Capital Lease Obligations of
such Person, (f) all obligations of such Person, contingent or otherwise, as an
account party (or its equivalent) under acceptances, letters of credit, surety
bonds or similar arrangements, (g) the liquidation value of all preferred
Capital Stock of such Person redeemable at the option of the holders thereof or
containing mandatory redemption or other payment provisions that could require
any cash or asset payment or distribution prior to the date that is one year
after the Maturity Date, (h) all indebtedness of others assumed or guaranteed by
such Person or in respect of which such Person is secondarily or contingently
liable, (i) all obligations of the kind referred to in clauses (a) through (i)
above secured by (or for which the holder of such obligation has an existing
right, contingent or otherwise, to be secured by) any Lien on property
(including accounts and contract rights) owned by such Person, whether or not
such Person has assumed or become liable for the payment of such obligation, and
(j) for the purposes of Sections 5.7(b), 6.2 and 7(e) only, all obligations of
such Person in respect of Hedge Agreements. The Indebtedness of any Person shall
include the Indebtedness of any other entity (including any partnership in which
such Person is a general partner) to the extent such Person is liable therefor
as a result of such Person's ownership interest in such entity, except to the
extent the terms of such Indebtedness expressly provide that such Person is not
liable therefor.
"Insolvency": with respect to any Multiemployer Plan, the condition that
such Plan is insolvent within the meaning ---------- of Section 4245 of ERISA.
"Insolvent": pertaining to a condition of Insolvency.
<PAGE>
"Intellectual Property": the collective reference to all rights, priorities
and privileges relating to intellectual property, whether arising under United
States, multinational or foreign laws or otherwise, including copyrights,
copyright licenses, patents, patent licenses, trademarks, trademark licenses,
technology, know-how and processes, and all rights to sue at law or in equity
for any infringement or other impairment thereof, including the right to receive
all proceeds and damages therefrom.
"Interest Payment Date": (a) as to any ABR Loan, the last Business Day of
each March, June, September and December to occur while such Loan is outstanding
and the final maturity date of such Loan, (b) as to any Eurodollar Loan having
an Interest Period of three months or less, the last Business Day of such
Interest Period, (c) as to any Eurodollar Loan having an Interest Period longer
than three months, each Business Day that is three months, or a whole multiple
thereof, after the first Business Day of such Interest Period and the last
Business Day of such Interest Period, (d) as to any Swingline Loan, the date of
any repayment or prepayment made in respect thereof, and (e) with respect to any
Fixed Rate Competitive Loan, the last Business Day of the Interest Period
applicable to such Loan as specified and accepted in the applicable Competitive
Bid Request and, in the case of a Fixed Rate Borrowing with an Interest Period
of more than 90 days' duration (unless otherwise specified in the applicable
Competitive Bid Request), each Business Day prior to the last Business Day of
such Interest Period that occurs at intervals of 90 days' duration after the
first Business Day of such Interest Period, and any other dates that are
specified in the applicable Competitive Bid Request as Interest Payment Dates
with respect to such Borrowing.
"Interest Period": (a) as to any Eurodollar Loan, (i) initially, the period
commencing on the borrowing or conversion date, as the case may be, with respect
to such Eurodollar Loan and ending one, two, three or six months thereafter, as
selected by the Borrower in its notice of borrowing or notice of conversion, as
the case may be, given with respect thereto; and (ii) thereafter, each period
commencing on the last day of the next preceding Interest Period applicable to
such Eurodollar Loan and ending one, two, three or six months thereafter, as
selected by the Borrower by irrevocable notice to the Administrative Agent not
less than three Business Days prior to the last day of the then current Interest
Period with respect thereto; provided that, all of the foregoing provisions
relating to Interest Periods are subject to the following:
(A) if any Interest Period would otherwise end on a day that is not a
Business Day, such Interest Period shall be extended to the next succeeding
Business Day unless the result of such extension would be to carry such Interest
Period into another calendar month in which event such Interest Period shall end
on the immediately preceding Business Day;
(B) the Borrower may not select an Interest Period that would extend beyond
the Maturity Date;
(C) any Interest Period that begins on the last Business Day of a calendar
month (or on a day for which there is no numerically corresponding day in the
calendar month at the end of such Interest Period) shall end on the last
Business Day of a calendar month; and
(E) the Borrower shall select Interest Periods so as not to require a
payment or prepayment of any Eurodollar Loan during an Interest Period for such
Loan; and
<PAGE>
(b) with respect to any Fixed Rate Competitive Borrowing, the period (which
shall not be less than 7 days or more than 360 days) commencing on the date of
such borrowing and ending on the date specified in the applicable Competitive
Bid Request; provided that (i) if any Interest Period would otherwise end on a
day that is not a Business Day, such Interest Period shall extend to the next
succeeding Business Day and (ii) the Borrower may not select an Interest Period
that would extend beyond the Maturity Date.
"Lenders": as defined in the preamble hereto.
"Lien": any mortgage, pledge, hypothecation, assignment, deposit
arrangement, encumbrance, lien (statutory or other), charge or other security
interest or any preference, priority or other security agreement or preferential
arrangement of any kind or nature whatsoever (including any conditional sale or
other title retention agreement and any capital lease having substantially the
same economic effect as any of the foregoing).
"Loan": any loan made by any Lender pursuant to this Agreement.
"Loan Documents": this Agreement and the Notes.
"Material Adverse Effect": a material adverse effect on (a) the business,
property, operations or financial condition of the Borrower and its Subsidiaries
taken as a whole or (b) the validity or enforceability of this Agreement or any
of the other Loan Documents or the rights or remedies of the Administrative
Agent or the Lenders hereunder or thereunder.
"Materials of Environmental Concern": any gasoline or petroleum (including
crude oil or any fraction thereof) or petroleum products or any hazardous or
toxic substances, materials or wastes, defined or regulated as such in or under
any Environmental Law, including asbestos, polychlorinated biphenyls and
urea-formaldehyde insulation.
"Maturity Date": October 16, 2001.
"Mortgage-Backed Securities": (a) securities (including, without
limitation, participation certificates) guaranteed by GNMA that represent
interests in a pool of mortgages, deeds of trusts or other instruments creating
a Lien on property which is improved by a completed single dwelling (one-to-four
family units), (b) securities (including participation certificates) issued by
FNMA or FHLMC that represent interests in such a pool, (c) securities issued
under Approved Securities Offerings, and (d) senior tranches of privately-placed
securities representing undivided interests in or otherwise supported by such a
pool.
"Mortgage Loan": a residential real estate secured loan, including, without
limitation; (a) a promissory note and related deed of trust (or mortgage) and/or
security agreements, (b) all guaranties and insurance policies, including,
without limitation, all mortgage and title insurance policies and all fire and
extended coverage insurance policies with respect thereto, and (c) all right,
title and interest of the owner of such loan in the property covered by said
deed of trust (or mortgage).
"Mortgage Loans Held For Investment": that dollar amount shown as such on
the balance sheet of the Borrower as of the relevant Applicable Financial Test
Date.
"Mortgage Loans Held For Sale": that dollar amount shown as such on the
balance sheet of the Borrower as of the relevant Applicable Financial Test Date.
"Mortgage Servicing Rights": the dollar amount shown as "Mortgage Servicing
Rights" on the balance sheet of the Borrower as of the relevant Applicable
Financial Test Date.
<PAGE>
"Multiemployer Plan": a Plan that is a multiemployer plan as defined in
Section 4001(a)(3) of ERISA.
"Non-Excluded Taxes": as defined in Section 2.16(a).
"Non-U.S. Lender": as defined in Section 2.16(d).
"Notes": the collective reference to the promissory notes evidencing Loans.
"Obligations": the unpaid principal of and interest on (including interest
accruing after the maturity of the Loans and interest accruing after the filing
of any petition in bankruptcy, or the commencement of any insolvency,
reorganization or like proceeding, relating to the Borrower, whether or not a
claim for post-filing or post-petition interest is allowed in such proceeding)
the Loans and all other obligations and liabilities of the Borrower to the
Agents or to any Lender, whether direct or indirect, absolute or contingent, due
or to become due, or now existing or hereafter incurred, which may arise under,
out of, or in connection with, this Agreement, any other Loan Document, or any
other document made, delivered or given in connection herewith or therewith,
whether on account of principal, interest, reimbursement obligations, fees,
indemnities, costs, expenses (including all fees, charges and disbursements of
counsel to the Administrative Agent or to any Lender that are required to be
paid by the Borrower pursuant hereto) or otherwise.
"Other Assets" : the dollar amount shown as "Other Assets" on the most
recent covenant compliance calculation delivered by the Borrower pursuant to
Section 5.2(b) and shall consist of all assets of the Borrower shown on the
balance sheet of the Borrower (including servicing hedge investments) as of the
most recent Applicable Financial Test Date other than assets included in the
calculation of subsections (i) - (vii) of Section 6.2(d) of the Agreement;
provided, however, that in no event shall Other Assets include intangible
assets.
"Other Taxes": any and all present or future stamp or documentary taxes or
any other excise or property taxes, charges or similar levies arising from any
payment made hereunder or from the execution, delivery or enforcement of, or
otherwise with respect to, this Agreement or any other Loan Document.
"Participant": as defined in Section 9.6(b).
"PBGC": the Pension Benefit Guaranty Corporation established pursuant to
Subtitle A of Title IV of ERISA (or any
successor).
"Person": an individual, partnership, corporation, limited liability
company, business trust, joint stock company, trust, unincorporated association,
joint venture, Governmental Authority or other entity of whatever nature.
"Plan": at a particular time, any employee benefit plan that is covered by
ERISA and in respect of which the Borrower or a Commonly Controlled Entity is
(or, if such plan were terminated at such time, would under Section 4069 of
ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA.
"Prime Rate": as defined in the definition of "ABR" in Section 1.1.
<PAGE>
"Property and Equipment" : the dollar amount shown as "Property, Equipment
and Leasehold Improvements" on the balance sheet of the Borrower as of the
relevant Applicable Financial Test Date.
"Properties": as defined in Section 3.16(a).
"Receivables": in respect of any transaction at any time, the accounts
receivable then owing to the Borrower or its Subsidiaries in respect thereof or
any similar contractual right to receive payment arising therefrom and then in
effect.
"Reference Lender": The Chase Manhattan Bank.
"Refunded Swingline Loans": as defined in Section 2.4(b).
"Register": as defined in Section 9.6(d).
"Regulation U": Regulation U of the Board as in effect from time to time.
"Reorganization": with respect to any Multiemployer Plan, the condition
that such plan is in reorganization within the meaning of Section 4241 of ERISA.
"Reportable Event": any of the events set forth in Section 4043(b) of
ERISA, other than those events as to which the thirty-day notice period is
waived under subsections .27, .28, .29, .30, .31, .32, .34 or .35 of PBGC Reg.
ss. 4043.
"Required Lenders": at any time, the holders of more than 50% of the Total
Revolving Commitments then in effect or, if the Revolving Commitments have been
terminated, the Total Revolving Extensions of Credit then outstanding.
"Requirement of Law": as to any Person, the Certificate of Incorporation
and By-Laws or other organizational or governing documents of such Person, and
any law, treaty, rule or regulation or determination of an arbitrator or a court
or other Governmental Authority, in each case applicable to or binding upon such
Person or any of its property or to which such Person or any of its property is
subject.
"Responsible Officer": the chief executive officer, president or chief
financial officer of the Borrower, but in any event, with respect to financial
matters, the chief financial officer of the Borrower.
"Restricted Payments": as defined in Section 6.6.
"Revolving Commitment": as to any Lender, the obligation of such Lender to
make Revolving Loans and participate in Swingline Loans in an aggregate
principal and/or face amount not to exceed the amount set forth under the
heading "Revolving Commitment" opposite such Lender's name on Schedule 1.1A or
in the Assignment and Acceptance pursuant to which such Lender became a party
hereto, as the same may be changed from time to time pursuant to the terms
hereof. The original amount of the Total Revolving Commitments is
$2,000,000,000.
"Revolving Commitment Period": the period from and including the Closing
Date to the Revolving Termination Date.
<PAGE>
"Revolving Extensions of Credit": as to any Revolving Lender at any time,
an amount equal to the sum of (a) the aggregate principal amount of all
Revolving Loans held by such Lender then outstanding and (b) such Lender's
Revolving Percentage of the aggregate principal amount of Swingline Loans then
outstanding.
"Revolving Lender": each Lender that has a Revolving Commitment or that
holds Revolving Loans.
"Revolving Loans": as defined in Section 2.1(a).
"Revolving Percentage": as to any Revolving Lender at any time, the
percentage which such Lender's Revolving Commitment then constitutes of the
Total Revolving Commitments (or, at any time after the Revolving Commitments
shall have expired or terminated, the percentage which the aggregate principal
amount of such Lender's Revolving Loans then outstanding constitutes of the
aggregate principal amount of the Revolving Loans then outstanding).
"Revolving Termination Date": October 16, 2000.
"SEC": the Securities and Exchange Commission, any successor thereto and
any analogous Governmental Authority.
"Single Employer Plan": any Plan that is covered by Title IV of ERISA, but
that is not a Multiemployer Plan.
"Subsidiary": as to any Person, a corporation, partnership, limited
liability company or other entity more than fifty percent (50%) of the stock or
other ownership interests of which having by the terms thereof ordinary voting
power to vote for the election of directors, managers or trustees of such
corporation, partnership, limited liability company or other entity
(irrespective of whether or not at the time stock or other ownership interests
of any other class or classes of such corporation, partnership, limited
liability company or other entity shall have or might have voting power by
reason of the happening of any contingency) shall, at the time as of which any
determination is being made, be owned, either directly and/or through
Subsidiaries of such Person.
"Swingline Commitment": the obligation of each Swingline Lender to make
Swingline Loans pursuant to Section 2.3 in an aggregate principal amount at any
one time outstanding not to exceed the amount set forth opposite its name on
Schedule 1.1A under "Swingline Commitment".
"Swingline Lender": each of The Chase Manhattan Bank, Bank of America,
N.A., Deutsche Bank AG, New York Branch and such additional Lenders, if any,
having a Swingline Commitment on Schedule 1.1A under "Swingline Commitment".
"Swingline Loans": as defined in Section 2.3(a).
"Swingline Participation Amount": as defined in Section 2.4(c).
"Total Debt": all Indebtedness of the Borrower and its Subsidiaries
described in clause (a), (c) or (e) of the definition thereof.
"Total Revolving Commitments": at any time, the aggregate amount of the
Revolving Commitments then in effect.
<PAGE>
"Total Revolving Extensions of Credit": at any time, the aggregate amount
of the Revolving Extensions of Credit of the Revolving Lenders outstanding at
such time.
"Transferee": any Assignee or Participant.
"Type": as to any Loan, its nature as an ABR Loan or a Eurodollar Loan.
"United States": the United States of America.
"VA": the Veterans Administration or any successor thereto.
"Wholly Owned Subsidiary": as to any Person, any other Person all of the
Capital Stock of which (other than directors' qualifying shares required by law)
is owned by such Person directly and/or through other Wholly Owned Subsidiaries.
"Year 2000 Compliant" : as defined in Section 3.18.
"Year 2000 Compliance" : as defined in Section 3.18.
"Year 2000 Systems" : as defined in Section 3.18.
1.2 Other Definitional Provisions. (a) Unless otherwise specified therein,
all terms defined in this Agreement shall have the defined meanings when used in
the other Loan Documents or any certificate or other document made or delivered
pursuant hereto or thereto.
(b As used herein and in the other Loan Documents, and any certificate or
other document made or delivered pursuant hereto or thereto, (i) accounting
terms relating to the Borrower and its Subsidiaries not defined in Section 1.1
and accounting terms partly defined in Section 1.1, to the extent not defined,
shall have the respective meanings given to them under GAAP, (ii) the words
"include", "includes" and "including" shall be deemed to be followed by the
phrase "without limitation", (iii) the word "incur" shall be construed to mean
incur, create, issue, assume, become liable in respect of or suffer to exist
(and the words "incurred" and "incurrence" shall have correlative meanings), and
(iv) the words "asset" and "property" shall be construed to have the same
meaning and effect and to refer to any and all tangible and intangible assets
and properties, including cash, Capital Stock, securities, revenues, accounts,
leasehold interests and contract rights.
(c The words "hereof", "herein" and "hereunder" and words of similar import
when used in this Agreement shall refer to this Agreement as a whole and not to
any particular provision of this Agreement, and Section, Schedule and Exhibit
references are to this Agreement unless otherwise specified.
(d The meanings given to terms defined herein shall be equally applicable
to both the singular and plural forms of such terms.
SECTION 2. AMOUNT AND TERMS OF COMMITMENTS
<PAGE>
2.1 Revolving Commitments. (a) Subject to the terms and conditions hereof,
each Revolving Lender severally agrees to make revolving credit loans
("Revolving Loans") to the Borrower from time to time during the Revolving
Commitment Period in an aggregate principal amount at any one time outstanding
which, when added to such Lender's Revolving Percentage of the aggregate
principal amount of the Swingline Loans then outstanding, does not exceed the
amount of such Lender's Revolving Commitment. During the Revolving Commitment
Period the Borrower may use the Revolving Commitments by borrowing, prepaying
the Revolving Loans in whole or in part, and reborrowing, all in accordance with
the terms and conditions hereof; provided that the sum of the Total Revolving
Extensions of Credit plus the aggregate principal amount of outstanding
Competitive Loans at any time shall not exceed the Total Revolving Commitments.
The Revolving Loans may from time to time be Eurodollar Loans or ABR Loans, as
determined by the Borrower and notified to the Administrative Agent in
accordance with Sections 2.2 and 2.9.
(b) The Borrower shall repay all outstanding Revolving Loans on the
Maturity Date.
2.2 Procedure for Revolving Loan Borrowing. The Borrower may borrow under
the Revolving Commitments during the Revolving Commitment Period on any Business
Day, provided that the Borrower shall give the Administrative Agent irrevocable
notice (which notice must be received by the Administrative Agent prior to 12:00
Noon, New York City time, (a) three Business Days prior to the requested
Borrowing Date, in the case of Eurodollar Loans, or (b) on the requested
Borrowing Date, in the case of ABR Loans), specifying (i) the amount and Type of
Revolving Loans to be borrowed, (ii) the requested Borrowing Date and (iii) in
the case of Eurodollar Loans, the respective amounts of each such Type of Loan
and the respective lengths of the initial Interest Period therefor. Any
Revolving Loans made on the Closing Date shall initially be ABR Loans. Each
borrowing under the Revolving Commitments shall be in an amount equal to (x) in
the case of ABR Loans, $15,000,000 or a whole multiple of $5,000,000 in excess
thereof (or, if the then aggregate Available Revolving Commitments are less than
$15,000,000, such lesser amount) and (y) in the case of Eurodollar Loans,
$25,000,000 or a whole multiple of $5,000,000 in excess thereof provided, that
any Swingline Lender may request, on behalf of the Borrower, borrowings under
the Revolving Commitments that are ABR Loans in other amounts pursuant to
Section 2.4. Upon receipt of any such notice from the Borrower, the
Administrative Agent shall promptly notify each Revolving Lender thereof. Each
Revolving Lender will make the amount of its pro rata share of each borrowing
available to the Administrative Agent for the account of the Borrower at the
Funding Office prior to 1:00 p.m., New York City time, on the Borrowing Date
requested by the Borrower in funds immediately available to the Administrative
Agent. Such borrowing will then be made available to the Borrower by the
Administrative Agent crediting the account of the Borrower on the books of such
office with the aggregate of the amounts made available to the Administrative
Agent by the Revolving Lenders and in like funds as received by the
Administrative Agent. Any borrowing made while any Swingline Loans are
outstanding must include sufficient borrowings to repay such Swingline Loans,
and such Swingline Loans shall be repaid with the proceeds thereof on the date
of such borrowing.
<PAGE>
2.3 Swingline Commitment. (a) Subject to the terms and conditions hereof,
each Swingline Lender agrees to make a portion of the credit available to the
Borrower under the Revolving Commitments from time to time during the Revolving
Commitment Period by making Swingline loans ("Swingline Loans") to the Borrower;
provided that (i) the aggregate principal amount of Swingline Loans made by each
Swingline Lender outstanding at any time shall not exceed the Swingline
Commitment of such Swingline Lender then in effect (notwithstanding that such
Swingline Loans outstanding at any time, when aggregated with such Swingline
Lender's other outstanding Revolving Loans hereunder, may exceed such Swingline
Commitment then in effect) and (ii) the Borrower shall not request, and no
Swingline Lender shall make, any Swingline Loan if, after giving effect to the
making of such Swingline Loan, the aggregate amount of the Available Revolving
Commitment would be less than zero. During the Revolving Commitment Period, the
Borrower may use the Swingline Commitment by borrowing, repaying and
reborrowing, all in accordance with the terms and conditions hereof; provided,
further, that the sum of the Total Revolving Extensions of Credit plus the
aggregate principal amount of outstanding Competitive Loans at any time shall
not exceed the Total Revolving Commitments. Swingline Loans shall bear interest
at the rate set forth in Section 2.11 applicable thereto.
(b The Borrower shall repay all outstanding Swingline Loans on the
Revolving Termination Date.
2.4 Procedure for Swingline Borrowing; Refunding of Swingline Loans. (a)
Whenever the Borrower desires that the Swingline Lenders make Swingline Loans it
shall give the Swingline Lenders and the Administrative Agent irrevocable
telephonic notice confirmed promptly in writing (which telephonic notice must be
received by the Swingline Lenders not later than 2:00 p.m., New York City time,
on the proposed Borrowing Date), specifying (i) the amount to be borrowed and
(ii) the requested Borrowing Date (which shall be a Business Day during the
Revolving Commitment Period). Each borrowing under the Swingline Commitment
shall be in an amount equal to $2,500,000 or a whole multiple of $1,000,000 in
excess thereof. Not later than 3:00 p.m., New York City time, on the Borrowing
Date specified in a notice in respect of Swingline Loans, the Swingline Lenders
shall make available to the Administrative Agent at the Funding Office an amount
in immediately available funds equal to their respective pro rata share of the
amount of the Swingline Loans so requested. The Administrative Agent shall make
the proceeds of such Swingline Loans available to the Borrower on such Borrowing
Date by depositing such proceeds in the account of the Borrower with the
Administrative Agent on such Borrowing Date in immediately available funds.
(b Each Swingline Lender, at any time and from time to time in its sole and
absolute discretion may, on behalf of the Borrower (which hereby irrevocably
directs the Swingline Lenders to act on its behalf), on notice given by such
Swingline Lender no later than 10:00 a.m., New York City time, request each
Revolving Lender to make, and each Revolving Lender hereby agrees to make, a
Revolving Loan which will initially be an ABR Loan, in an amount equal to such
Revolving Lender's Revolving Percentage of the aggregate amount of the Swingline
Loans (the "Refunded Swingline Loans") outstanding on the date of such notice,
to repay the Swingline Lenders. Each Revolving Lender shall make the amount of
such Revolving Loan available to the Administrative Agent at the Funding Office
in immediately available funds, not later than 3:00 p.m, New York City time, on
the date of such notice. The proceeds of such Revolving Loans shall be
immediately made available by the Administrative Agent to the Swingline Lenders,
pro rata based on their then outstanding Swingline Loans, for application by the
Swingline Lenders to the repayment of the Refunded Swingline Loans. The Borrower
irrevocably authorizes each Swingline Lender to charge the Borrower's accounts
with the Administrative Agent (up to the amount available in each such account)
in order to immediately pay the amount of such Refunded Swingline Loans to the
extent amounts received from the Revolving Lenders are not sufficient to repay
in full such Refunded Swingline Loans.
(c If prior to the time a Revolving Loan would have otherwise been made
pursuant to Section 2.4(b), one of the events described in Section 7(f) shall
have occurred and be continuing with respect to the Borrower or if for any other
reason, as determined by any Swingline Lender in its sole discretion, Revolving
Loans may not be made as contemplated by Section 2.4(b), each Revolving Lender
shall, on the date such Revolving Loan was to have been made pursuant to the
notice referred to in Section 2.4(b) (the "Refunding Date"), purchase for cash
an undivided participating interest in the then outstanding Swingline Loans by
paying to each Swingline Lender an amount (the "Swingline Participation Amount")
equal to (i) such Revolving Lender's Revolving Percentage times (ii) the sum of
the aggregate principal amount of Swingline Loans then outstanding that were to
have been repaid with such Revolving Loans together with accrued interest
thereon.
<PAGE>
(d Whenever, at any time after any Swingline Lender has received from any
Revolving Lender such Lender's Swingline Participation Amount, such Swingline
Lender receives any payment on account of the Swingline Loans, the Swingline
Lender will distribute to such Lender its Swingline Participation Amount
(appropriately adjusted, in the case of interest payments, to reflect the period
of time during which such Lender's participating interest was outstanding and
funded and, in the case of principal and interest payments, to reflect such
Lender's pro rata portion of such payment if such payment is not sufficient to
pay the principal of and interest on all Swingline Loans then due) in respect of
such Swingline Lender's Swingline Loans; provided, however, that in the event
that such payment received by such Swingline Lender is required to be returned,
such Revolving Lender will return to such Swingline Lender any portion thereof
previously distributed to it by such Swingline Lender.
(e Each Revolving Lender's obligation to make the Revolving Loans referred
to in Section 2.4(b) and to purchase participating interests pursuant to Section
2.4(c) shall be absolute and unconditional and shall not be affected by any
circumstance, including (i) any setoff, counterclaim, recoupment, defense or
other right that such Revolving Lender or the Borrower may have against any
Swingline Lender, the Borrower or any other Person for any reason whatsoever;
(ii) the occurrence or continuance of a Default or an Event of Default or the
failure to satisfy any of the other conditions specified in Section 5; (iii) any
adverse change in the condition (financial or otherwise) of the Borrower; (iv)
any breach of this Agreement or any other Loan Document by the Borrower or any
other Revolving Lender; or (v) any other circumstance, happening or event
whatsoever, whether or not similar to any of the foregoing.
2.5 Facility Fees, etc. (a) The Borrower agrees to pay to the
Administrative Agent for the account of each Revolving Lender a facility fee for
the period from and including the Closing Date to the last day of the Revolving
Commitment Period, computed at the Facility Fee Rate on the average daily amount
of the Revolving Commitment of such Lender during the period for which payment
is made, payable quarterly in arrears on the last Business Day of each March,
June, September and December, commencing on the first of such dates to occur
after the date hereof, and on the Revolving Termination Date or any earlier date
of termination.
(b The Borrower agrees to pay to the Administrative Agent the fees in the
amounts and on the dates previously agreed to in writing by the Borrower and the
Administrative Agent.
2.6 Termination or Reduction of Revolving Commitments. The Borrower shall
have the right, upon not less than three Business Days' notice to the
Administrative Agent (which shall promptly notify each of the Lenders), to
terminate the Revolving Commitments or, from time to time, to reduce the amount
of the Revolving Commitments; provided that no such termination or reduction of
Revolving Commitments shall be permitted if, after giving effect thereto and to
any prepayments of the Revolving Loans made on the effective date thereof, the
Total Revolving Extensions of Credit and the Competitive Loans would exceed the
Total Revolving Commitments. Any such reduction shall be in an amount equal to
$1,000,000, or a whole multiple thereof, and shall reduce permanently the
Revolving Commitments then in effect.
<PAGE>
2.7 Competitive Bid Procedure. (a) Subject to the terms and conditions set
forth herein, from time to time during the Revolving Commitment Period the
Borrower may request Competitive Bids and may (but shall not have any obligation
to) accept Competitive Bids and borrow Competitive Loans; provided that the sum
of the Total Revolving Extensions of Credit plus the aggregate principal amount
of outstanding Competitive Loans at any time shall not exceed the Total
Revolving Commitments. To request Competitive Bids, the Borrower shall notify
the Administrative Agent of such request by telephone, in the case of a
Eurodollar Competitive Loan, not later than 12:00 Noon, New York City time, four
Business Days before the date of the proposed borrowing and, in the case of a
Fixed Rate Competitive Loan, not later than 10:00 a.m., New York City time, one
Business Day before the date of the proposed Borrowing; provided that the
Borrower may submit up to (but not more than) three Competitive Bid Requests on
the same day, but a Competitive Bid Request shall not be made within five
Business Days after the date of any previous Competitive Bid Request, unless any
and all such previous Competitive Bid Requests shall have been withdrawn or all
Competitive Bids received in response thereto rejected, and each Competitive Bid
Request must refer solely to Eurodollar Competitive Loans or Fixed Rate
Competitive Loans. Each such telephonic Competitive Bid Request shall be
confirmed promptly by hand delivery or telecopy to the Administrative Agent of a
written Competitive Bid Request in a form approved by the Administrative Agent
and signed by the Borrower. Each such telephonic and written Competitive Bid
Request shall specify the following information:
(i) the aggregate amount of the requested borrowing;
(ii) the date of such borrowing, which shall be a Business Day;
(iii) whether such borrowing is to be a Eurodollar Competitive Borrowing or
a Fixed Rate Competitive Borrowing; and
(iv) the Interest Period to be applicable to such borrowing, which shall be
a period contemplated by the definition of the term "Interest Period".
Promptly following receipt of a Competitive Bid Request in accordance with this
Section, the Administrative Agent shall notify the Lenders of the details
thereof by telecopy, inviting the Lenders to submit Competitive Bids.
(b Each Lender may (but shall not have any obligation to) make one or more
Competitive Bids to the Borrower in response to a Competitive Bid Request. Each
Competitive Bid by a Lender must be in a form approved by the Administrative
Agent and must be received by the Administrative Agent by telecopy, in the case
of a Eurodollar Competitive Borrowing, not later than 10:30 a.m., New York City
time, three Business Days before the proposed date of such Competitive
Borrowing, and in the case of a Fixed Rate Competitive Borrowing, not later than
10:30 a.m., New York City time, on the proposed date of such Competitive
Borrowing. Competitive Bids that do not conform substantially to the form
approved by the Administrative Agent may be rejected by the Administrative
Agent, and the Administrative Agent shall notify the applicable Lender as
promptly as practicable. Each Competitive Bid shall specify (i) the principal
amount (which shall be a minimum of $5,000,000 and an integral multiple of
$1,000,000 and which may equal the entire principal amount of the Competitive
Borrowing requested by the Borrower) of the Competitive Loan or Loans that the
applicable Lender is willing to make, (ii) the Competitive Bid Rate or Rates at
which such Lender is prepared to make such Loan or Loans (expressed as a
percentage rate per annum in the form of a decimal to no more than four decimal
places) and (iii) the Interest Period applicable to each such Loan and the last
day thereof.
(c The Administrative Agent shall promptly notify the Borrower by telecopy
of the Competitive Bid Rate and the principal amount specified in each
Competitive Bid and the identity of the Lender that shall have made such
Competitive Bid.
<PAGE>
(d Subject only to the provisions of this paragraph, the Borrower may
accept or reject any Competitive Bid. The Borrower shall notify the
Administrative Agent by telephone, confirmed by telecopy in a form approved by
the Administrative Agent, whether and to what extent it has decided to accept or
reject each Competitive Bid, in the case of a Eurodollar Competitive Borrowing,
not later than 10:30 a.m., New York City time, three Business Days before the
date of the proposed Competitive Borrowing, and in the case of a Fixed Rate
Competitive Borrowing, not later than 10:30 a.m., New York City time, on the
proposed date of the subject borrowing; provided that (i) the failure of the
Borrower to give such notice shall be deemed to be a rejection of each
Competitive Bid, (ii) the Borrower shall not accept a Competitive Bid made at a
particular Competitive Bid Rate if the Borrower rejects a Competitive Bid made
at a lower Competitive Bid Rate, (iii) the aggregate amount of the Competitive
Bids accepted by the Borrower shall not exceed the aggregate amount of the
requested borrowing specified in the related Competitive Bid Request, (iv) to
the extent necessary to comply with clause (iii) above, the Borrower may accept
Competitive Bids at the same Competitive Bid Rate in part, which acceptance
shall be made pro rata in accordance with the amount of each such Competitive
Bid, and (v) except pursuant to clause (iv) above, no Competitive Bid shall be
accepted for a Competitive Loan unless such Competitive Loan is in a minimum
principal amount of $5,000,000 and an integral multiple of $1,000,000; provided
further that if a Competitive Loan must be in an amount less than $5,000,000
because of the provisions of clause (iv) above, such Competitive Loan may be for
a minimum of $1,000,000 or any integral multiple thereof, and in calculating the
pro rata allocation of acceptances of portions of multiple Competitive Bids at a
particular Competitive Bid Rate pursuant to clause (iv) the amounts shall be
rounded to integral multiples of $1,000,000 in a manner determined by the
Borrower. A notice given by the Borrower pursuant to this paragraph shall be
irrevocable.
(e The Administrative Agent shall promptly notify (i) each bidding Lender
by telecopy whether or not its Competitive Bid has been accepted (and, if so,
the amount and Competitive Bid Rate so accepted), and each successful bidder
will thereupon become bound, subject to the terms and conditions hereof, to make
the Competitive Loan in respect of which its Competitive Bid has been accepted
and (ii) each other Lender of the amount, Interest Period and Competitive Bid
Rate of such Competitive Loan.
(f If the entity which is the Administrative Agent shall elect to submit a
Competitive Bid in its capacity as a Lender, it shall submit such Competitive
Bid directly to the Borrower at least one quarter of an hour earlier than the
time by which the other Lenders are required to submit their Competitive Bids to
the Administrative Agent pursuant to paragraph (b) of this Section.
2.8 Optional Prepayments. The Borrower may at any time and from time to
time prepay the Loans, in whole or in part, without premium or penalty, upon
irrevocable notice delivered to the Administrative Agent at least three Business
Days prior thereto in the case of Eurodollar Loans and prior to 12:00 Noon (New
York City time) on the Business Day of such prepayment in the case of ABR Loans,
which notice shall specify the date and amount of prepayment and whether the
prepayment is of Eurodollar Loans or ABR Loans; provided, that if a Eurodollar
Loan is prepaid on any day other than the last day of the Interest Period
applicable thereto, the Borrower shall also pay any amounts owing pursuant to
Section 2.17. Upon receipt of any such notice the Administrative Agent shall
promptly notify each relevant Lender thereof. If any such notice is given, the
amount specified in such notice shall be due and payable on the date specified
therein, together with (except in the case of Revolving Loans that are ABR Loans
and Swingline Loans) accrued interest to such date on the amount prepaid.
Partial prepayments of Revolving Loans and Swingline Loans shall be in an
aggregate principal amount of $10,000,000 or a whole multiple of $5,000,000 in
excess thereof. Notwithstanding the foregoing, Competitive Loans may not be
repaid unless otherwise agreed to by the relevant Lender.
<PAGE>
2.9 Conversion and Continuation Options. (a) The Borrower may elect from
time to time to convert Revolving Loans that are Eurodollar Loans to Revolving
Loans that are ABR Loans by giving the Administrative Agent at least two
Business Days' prior irrevocable notice of such election, provided that any such
conversion of Eurodollar Loans may only be made on the last day of an Interest
Period with respect thereto. The Borrower may elect from time to time to convert
Revolving Loans that are ABR Loans to Revolving Loans that are Eurodollar Loans
by giving the Administrative Agent at least three Business Days' prior
irrevocable notice of such election (which notice shall specify the length of
the initial Interest Period therefor), provided that no ABR Loan may be
converted into a Eurodollar Loan when any Event of Default has occurred and is
continuing and the Administrative Agent has or the Required Lenders have
determined in its or their sole discretion not to permit such conversions. Upon
receipt of any such notice the Administrative Agent shall promptly notify each
relevant Lender thereof.
(b Any Revolving Loan that is a Eurodollar Loan may be continued as such
upon the expiration of the then current Interest Period with respect thereto by
the Borrower giving irrevocable notice to the Administrative Agent, in
accordance with the applicable provisions of the term "Interest Period" set
forth in Section 1.1, of the length of the next Interest Period to be applicable
to such Loans, provided that no such Eurodollar Loan may be continued as such
when any Event of Default has occurred and is continuing and the Administrative
Agent has or the Required Lenders have determined in its or their sole
discretion not to permit such continuations, and provided, further, that if the
Borrower shall fail to give any required notice as described above in this
paragraph or if such continuation is not permitted pursuant to the preceding
proviso such Loans shall be automatically converted to ABR Loans on the last day
of such then expiring Interest Period. Upon receipt of any such notice the
Administrative Agent shall promptly notify each Lender thereof.
2.10 Limitations on Eurodollar Tranches. Notwithstanding anything to the
contrary in this Agreement, all borrowings, conversions and continuations of
Revolving Loans that are Eurodollar Loans hereunder and all selections of
Interest Periods hereunder shall be in such amounts and be made pursuant to such
elections so that no more than twenty Eurodollar Tranches shall be outstanding
at any one time.
2.11 Interest Rates; Payment Dates; Evidence of Debt. (a) Subject to
clauses (d) and (e) below, each Revolving Loan that is a Eurodollar Loan shall
bear interest for each day during each Interest Period with respect thereto at a
rate per annum equal to the Eurodollar Rate determined for such day plus the
Applicable Margin.
(b Subject to clauses (d) and (e) below, each ABR Loan shall bear interest
at a rate per annum equal to the ABR.
(c Subject to clauses (d) and (e) below, each Swingline Loan shall bear
interest at a rate per annum equal to the Federal Funds Effective Rate plus * *
* * *
(d Notwithstanding the provisions of the foregoing clauses (a), (b) and
(c), for each day during the period from and including November 1, 1999 through
and including March 1, 2000 all Revolving and Swingline Loans will bear interest
at a rate per annum equal to the higher of (i) * * * * *(ii) * * * * *or, in the
case of Revolving and Swingline Loans with respect to which a borrowing notice
complying with the applicable provisions of Section 2.2 or 2.4 is received by
the Administrative Agent fewer than three Business Days prior to the Borrowing
Date therefor, a rate per annum equal to * * * * * for the first three Business
Days after such borrowing.
<PAGE>
(e (i) If all or a portion of the principal amount of any Loan shall not be
paid when due (whether at the stated maturity, by acceleration or otherwise),
such overdue amount shall bear interest at a rate per annum equal to the rate
that would otherwise be applicable thereto pursuant to this Agreement plus * * *
* * and (ii) if all or a portion of any interest payable on any Loan or any
facility fee or other amount payable hereunder shall not be paid when due
(whether at the stated maturity, by acceleration or otherwise), such overdue
amount shall bear interest at a rate per annum equal to the rate then applicable
to ABR Loans plus * * * * *, in each case from the date of such non-payment
until such amount is paid in full (as well after as before judgment).
(f) Interest shall be payable in arrears on each Interest Payment Date,
provided that interest accruing pursuant to paragraph (e) of this Section shall
be payable from time to time on demand.
(g) The Borrower agrees that, upon the request to the Administrative Agent
by any Lender, the Borrower will execute and deliver to such Lender a promissory
note of the Borrower evidencing any Revolving Loans, Competitive Loans or
Swingline Loans, as the case may be, of such Lender, substantially in the forms
of Exhibit D-1, D-2 or D-3, respectively, with appropriate insertions as to date
and principal amount.
2.12 Computation of Interest and Fees. (a) Interest and fees payable
pursuant hereto shall be calculated on the basis of a 360-day year for the
actual days elapsed, except that, with respect to ABR Loans the rate of interest
on which is calculated on the basis of the Prime Rate, the interest thereon
shall be calculated on the basis of a 365- (or 366-, as the case may be) day
year for the actual days elapsed. The Administrative Agent shall as soon as
practicable notify the Borrower and the relevant Lenders of each determination
of a Eurodollar Rate. Any change in the interest rate on a Loan resulting from a
change in the ABR or the Eurocurrency Reserve Requirements shall become
effective as of the opening of business on the day on which such change becomes
effective. The Administrative Agent shall as soon as practicable notify the
Borrower and the relevant Lenders of the effective date and the amount of each
such change in interest rate.
(b) Each determination of an interest rate by the Administrative Agent
pursuant to any provision of this Agreement shall be conclusive and binding on
the Borrower and the Lenders in the absence of manifest error. The
Administrative Agent shall, at the request of the Borrower, deliver to the
Borrower a statement showing the quotations used by the Administrative Agent in
determining any interest rate pursuant to Section 2.11(a).
2.13 Inability to Determine Interest Rate. If prior to the first day of any
Interest Period:
(a) the Administrative Agent shall have determined (which determination
shall be conclusive and binding upon the Borrower) that, by reason of
circumstances affecting the relevant market, adequate and reasonable means do
not exist for ascertaining the Eurodollar Rate for such Interest Period, or
(b) the Administrative Agent shall have received notice from the Required
Lenders that the Eurodollar Rate determined or to be determined for such
Interest Period will not adequately and fairly reflect the cost to such Lenders
(as conclusively certified by such Lenders) of making or maintaining their
affected Loans during such Interest Period,
<PAGE>
the Administrative Agent shall give telecopy or telephonic notice thereof to the
Borrower and the relevant Lenders as soon as practicable thereafter. If such
notice is given (x) any Revolving Loan that are Eurodollar Loans requested to be
made on the first day of such Interest Period shall be made as ABR Loans, (y)
any Loans that were to have been converted on the first day of such Interest
Period to Eurodollar Loans shall be continued as ABR Loans and (z) any
outstanding Revolving Loans that are Eurodollar Loans shall be converted, on the
last day of the then-current Interest Period, to ABR Loans. Until such notice
has been withdrawn by the Administrative Agent, no further Eurodollar Loans
shall be made or continued as such, nor shall the Borrower have the right to
convert ABR Loans to Eurodollar Loans.
2.14 Pro Rata Treatment and Payments. (a) Each borrowing of Revolving Loans
by the Borrower from the Lenders hereunder, each payment by the Borrower on
account of any facility fee and any reduction of the Commitments of the Lenders
shall be made pro rata according to the Revolving Percentages of the Lenders.
(b) Each payment (including each prepayment) by the Borrower on account of
principal of and interest on the Revolving Loans shall be made pro rata
according to the respective outstanding principal amounts of the Revolving Loans
then held by the Revolving Lenders.
(c) All payments (including prepayments) to be made by the Borrower
hereunder, whether on account of principal, interest, fees or otherwise, shall
be made without setoff or counterclaim and shall be made prior to 12:00 Noon,
New York City time, on the due date thereof to the Administrative Agent, for the
account of the relevant Lenders, at the Funding Office, in Dollars and in
immediately available funds. The Administrative Agent shall distribute such
payments to the relevant Lenders promptly upon receipt in like funds as
received. If any payment hereunder (other than payments on the Eurodollar Loans)
becomes due and payable on a day other than a Business Day, such payment shall
be extended to the next succeeding Business Day. If any payment on a Eurodollar
Loan becomes due and payable on a day other than a Business Day, the maturity
thereof shall be extended to the next succeeding Business Day unless the result
of such extension would be to extend such payment into another calendar month,
in which event such payment shall be made on the immediately preceding Business
Day. In the case of any extension of any payment of principal pursuant to the
preceding two sentences, interest thereon shall be payable at the then
applicable rate during such extension.
(d) Unless the Administrative Agent shall have been notified in writing by
any Lender prior to a borrowing that such Lender will not make the amount that
would constitute its share of such borrowing available to the Administrative
Agent, the Administrative Agent may assume that such Lender is making such
amount available to the Administrative Agent, and the Administrative Agent may,
in reliance upon such assumption, make available to the Borrower a corresponding
amount. If such amount is not made available to the Administrative Agent by the
required time on the Borrowing Date therefor, such Lender shall pay to the
Administrative Agent, on demand, such amount with interest thereon at a rate
equal to the daily average Federal Funds Effective Rate for the period until
such Lender makes such amount immediately available to the Administrative Agent.
A certificate of the Administrative Agent submitted to any Lender with respect
to any amounts owing under this paragraph shall be conclusive in the absence of
manifest error. If such Lender's share of such borrowing is not made available
to the Administrative Agent by such Lender within three Business Days of such
Borrowing Date, the Administrative Agent shall also be entitled to recover such
amount with interest thereon at the rate per annum equal to the higher of the
rate at which such borrowing then bears interest and the daily average Federal
Funds Effective Rate in effect for such period (subject, in each case, to
Section 2.11(d)), on demand, from the Borrower.
<PAGE>
(e) Unless the Administrative Agent shall have been notified in writing by
the Borrower prior to the date of any payment being made hereunder that the
Borrower will not make such payment to the Administrative Agent, the
Administrative Agent may assume that the Borrower is making such payment, and
the Administrative Agent may, but shall not be required to, in reliance upon
such assumption, make available to the relevant Lenders their respective pro
rata shares of a corresponding amount. If such payment is not made to the
Administrative Agent by the Borrower within three Business Days of such required
date, the Administrative Agent shall be entitled to recover, on demand, from
each Lender to which any amount was made available pursuant to the preceding
sentence, such amount with interest thereon at the rate per annum equal to the
daily average Federal Funds Effective Rate. Nothing herein shall be deemed to
limit the rights of the Administrative Agent or any Lender against the Borrower.
2.15 Requirements of Law. (a) If the adoption of or any change in any
Requirement of Law or in the interpretation or application thereof or compliance
by any Lender with any request or directive (whether or not having the force of
law) from any central bank or other Governmental Authority made subsequent to
the date hereof:
(i) shall subject any Lender to any tax of any kind whatsoever with respect to
this Agreement or any Eurodollar Loan made by it, or change the basis of
taxation of payments to such Lender in respect thereof (except for
Non-Excluded Taxes covered by Section 2.16 and changes in the rate of tax
on the overall net income of such Lender);
(ii) shall impose, modify or hold applicable any reserve, special deposit,
compulsory loan or similar requirement against assets held by, deposits or
other liabilities in or for the account of, advances, loans or other
extensions of credit by, or any other acquisition of funds by, any office
of such Lender that is not otherwise included in the determination of the
Eurodollar Rate hereunder; or
(iii) shall impose on such Lender any other condition;
and the result of any of the foregoing is to increase the cost to such Lender,
by an amount that such Lender deems to be material, of making, converting into,
continuing or maintaining Eurodollar Loans, or to reduce any amount receivable
hereunder in respect thereof, then, in any such case, the Borrower shall
promptly pay such Lender, upon its demand, any additional amounts necessary to
compensate such Lender for such increased cost or reduced amount receivable. If
any Lender becomes entitled to claim any additional amounts pursuant to this
paragraph, it shall promptly notify the Borrower (with a copy to the
Administrative Agent) of the event by reason of which it has become so entitled.
(b) If any Lender shall have determined that the adoption of or any change
in any Requirement of Law regarding capital adequacy or in the interpretation or
application thereof or compliance by such Lender or any corporation controlling
such Lender with any request or directive regarding capital adequacy (whether or
not having the force of law) from any Governmental Authority made subsequent to
the date hereof shall have the effect of reducing the rate of return on such
Lender's or such corporation's capital as a consequence of its obligations
hereunder to a level below that which such Lender or such corporation could have
achieved but for such adoption, change or compliance (taking into consideration
such Lender's or such corporation's policies with respect to capital adequacy)
by an amount deemed by such Lender to be material, then from time to time, after
submission by such Lender to the Borrower (with a copy to the Administrative
Agent) of a written request therefor, the Borrower shall pay to such Lender such
additional amount or amounts as will compensate such Lender or such corporation
for such reduction; provided that the Borrower shall not be required to
compensate a Lender pursuant to this paragraph for any amounts incurred more
than six months prior to the date that such Lender notifies the Borrower of such
Lender's intention to claim compensation therefor; and provided further that, if
the circumstances giving rise to such claim have a retroactive effect, then such
six-month period shall be extended to include the period of such retroactive
effect.
<PAGE>
(c) A certificate as to any additional amounts payable pursuant to this
Section submitted by any Lender to the Borrower (with a copy to the
Administrative Agent) shall be conclusive in the absence of manifest error. The
obligations of the Borrower pursuant to this Section shall survive the
termination of this Agreement and the payment of the Loans and all other amounts
payable hereunder.
2.16 Taxes. (a) All payments made by the Borrower under this Agreement
shall be made free and clear of, and without deduction or withholding for or on
account of, any present or future income, stamp or other taxes, levies, imposts,
duties, charges, fees, deductions or withholdings, now or hereafter imposed,
levied, collected, withheld or assessed by any Governmental Authority, excluding
net income taxes and franchise taxes (imposed in lieu of net income taxes)
imposed on the Administrative Agent or any Lender as a result of a present or
former connection between the Administrative Agent or such Lender and the
jurisdiction of the Governmental Authority imposing such tax or any political
subdivision or taxing authority thereof or therein (other than any such
connection arising solely from the Administrative Agent or such Lender having
executed, delivered or performed its obligations or received a payment under, or
enforced, this Agreement or any other Loan Document). If any such non-excluded
taxes, levies, imposts, duties, charges, fees, deductions or withholdings
("Non-Excluded Taxes") or Other Taxes are required to be withheld from any
amounts payable to the Administrative Agent or any Lender hereunder, the amounts
so payable to the Administrative Agent or such Lender shall be increased to the
extent necessary to yield to the Administrative Agent or such Lender (after
payment of all Non-Excluded Taxes and Other Taxes) interest or any such other
amounts payable hereunder at the rates or in the amounts specified in this
Agreement, provided, however, that the Borrower shall not be required to
increase any such amounts payable to any Lender with respect to any Non-Excluded
Taxes (i) that are attributable to such Lender's failure to comply (if required)
with the requirements of paragraph (d) or (e) of this Section or (ii) that are
United States withholding taxes imposed on amounts payable to such Lender at the
time such Lender becomes a party to this Agreement, except to the extent that
such Lender's assignor (if any) was entitled, at the time of assignment, to
receive additional amounts from the Borrower with respect to such Non-Excluded
Taxes pursuant to this paragraph.
(b) In addition, the Borrower shall pay any Other Taxes to the relevant
Governmental Authority in accordance with applicable law.
(c) Whenever any Non-Excluded Taxes or Other Taxes are payable by the
Borrower, as promptly as possible thereafter the Borrower shall send to the
Administrative Agent for its own account or for the account of the relevant
Lender, as the case may be, a certified copy of an original official receipt
received by the Borrower showing payment thereof. If the Borrower fails to pay
any Non-Excluded Taxes or Other Taxes when due to the appropriate taxing
authority or fails to remit to the Administrative Agent the required receipts or
other required documentary evidence, the Borrower shall indemnify the
Administrative Agent and the Lenders for any incremental taxes, interest or
penalties that may become payable by the Administrative Agent or any Lender as a
result of any such failure.
<PAGE>
(d) Each Lender (or Transferee) that is not a citizen or resident of the
United States of America, a corporation, partnership or other entity created or
organized in or under the laws of the United States of America (or any
jurisdiction thereof), or any estate or trust that is subject to federal income
taxation regardless of the source of its income (a "Non-U.S. Lender") shall
deliver to the Borrower and the Administrative Agent (or, in the case of a
Participant, to the Lender from which the related participation shall have been
purchased) two copies of either U.S. Internal Revenue Service Form 1001 or Form
4224, or, in the case of a Non-U.S. Lender claiming exemption from U.S. federal
withholding tax under Section 871(h) or 881(c) of the Code with respect to
payments of "portfolio interest", a statement substantially in the form of
Exhibit E and a Form W-8, or any subsequent versions thereof or successors
thereto, properly completed and duly executed by such Non-U.S. Lender claiming
complete exemption from, or a reduced rate of, U.S. federal withholding tax on
all payments by the Borrower under this Agreement and the other Loan Documents.
Such forms shall be delivered by each Non-U.S. Lender on or before the date it
becomes a party to this Agreement (or, in the case of any Participant, on or
before the date such Participant purchases the related participation). In
addition, each Non-U.S. Lender shall deliver such forms promptly upon the
obsolescence or invalidity of any form previously delivered by such Non-U.S.
Lender. Each Non-U.S. Lender shall promptly notify the Borrower at any time it
determines that it is no longer in a position to provide any previously
delivered certificate to the Borrower (or any other form of certification
adopted by the U.S. taxing authorities for such purpose). Notwithstanding any
other provision of this paragraph, a Non-U.S. Lender shall not be required to
deliver any form pursuant to this paragraph that such Non-U.S. Lender is not
legally able to deliver.
(e) A Lender that is entitled to an exemption from or reduction of non-U.S.
withholding tax under the law of the jurisdiction in which the Borrower is
located, or any treaty to which such jurisdiction is a party, with respect to
payments under this Agreement shall deliver to the Borrower (with a copy to the
Administrative Agent), at the time or times prescribed by applicable law or
reasonably requested by the Borrower, such properly completed and executed
documentation prescribed by applicable law as will permit such payments to be
made without withholding or at a reduced rate, provided that such Lender is
legally entitled to complete, execute and deliver such documentation and in such
Lender's judgment such completion, execution or submission would not materially
prejudice the legal position of such Lender.
(f) The agreements in this Section shall survive the termination of this
Agreement and the payment of the Loans and all other amounts payable hereunder.
2.17 Indemnity. The Borrower agrees to indemnify each Lender and to hold
each Lender harmless from any loss or expense that such Lender may sustain or
incur as a consequence of (a) default by the Borrower in making a borrowing of,
conversion into or continuation of Eurodollar Loans after the Borrower has given
a notice requesting the same in accordance with the provisions of this
Agreement, (b) default by the Borrower in making any prepayment of or conversion
from Eurodollar Loans after the Borrower has given a notice thereof in
accordance with the provisions of this Agreement or (c) the making of a
prepayment of or conversion to Eurodollar Loans on a day that is not the last
day of an Interest Period with respect thereto. Such loss will be calculated by
determining the excess, if any, of (i) the amount of interest that would have
accrued on the amount so prepaid, or not so borrowed, converted or continued,
for the period from the date of such prepayment or of such failure to borrow,
convert or continue to the last day of such Interest Period (or, in the case of
a failure to borrow, convert or continue, the Interest Period that would have
commenced on the date of such failure) in each case at the applicable rate of
interest for such Loans provided for herein (excluding, however, the Applicable
Margin included therein, if any) over (ii) the amount of interest (as reasonably
determined by such Lender) that would have accrued to such Lender on such amount
by placing such amount on deposit for a comparable period with leading banks in
the interbank eurodollar market, as well as any reasonable customary costs,
charges or expenses resulting from such circumstance. A certificate as to any
amounts payable pursuant to this Section submitted to the Borrower by any Lender
shall be conclusive in the absence of manifest error. This covenant shall
survive the termination of this Agreement and the payment of the Loans and all
other amounts payable hereunder.
<PAGE>
2.18 Change of Lending Office. Each Lender agrees that, upon the occurrence
of any event giving rise to the operation of Section 2.15 or 2.16(a) with
respect to such Lender, it will, if requested by the Borrower, use reasonable
efforts (subject to overall policy considerations of such Lender) to designate
another lending office for any Loans affected by such event with the object of
avoiding the consequences of such event; provided, that such designation is made
on terms that, in the sole judgment of such Lender, cause such Lender and its
lending office(s) to suffer no economic, legal or regulatory disadvantage, and
provided, further, that nothing in this Section shall affect or postpone any of
the obligations of the Borrower or the rights of any Lender pursuant to Section
2.15 or 2.16(a).
2.19 Replacement of Lenders. The Borrower shall be permitted to replace any
Lender that (a) requests reimbursement for amounts owing pursuant to Section
2.15 or 2.16(a) or (b) defaults in its obligation to make Loans hereunder, with
a replacement financial institution; provided that (i) such replacement does not
conflict with any Requirement of Law, (ii) no Event of Default shall have
occurred and be continuing at the time of such replacement, (iii) prior to any
such replacement, such Lender shall have taken no action under Section 2.18 so
as to eliminate the continued need for payment of amounts owing pursuant to
Section 2.15 or 2.16(a), (iv) the replacement financial institution shall
purchase, at par, all Loans and other amounts owing to such replaced Lender on
or prior to the date of replacement, (v) the Borrower shall be liable to such
replaced Lender under Section 2.17 if any Eurodollar Loan or Fixed Rate
Competitive Loan owing to such replaced Lender shall be purchased other than on
the last day of the Interest Period relating thereto, (vi) the replacement
financial institution, if not already a Lender, shall be reasonably satisfactory
to the Administrative Agent, (vii) the replaced Lender shall be obligated to
make such replacement in accordance with the provisions of Section 9.6 (provided
that the Borrower shall be obligated to pay the registration and processing fee
referred to therein), (viii) until such time as such replacement shall be
consummated, the Borrower shall pay all additional amounts (if any) required
pursuant to Section 2.15 or 2.16(a), as the case may be, and (ix) any such
replacement shall not be deemed to be a waiver of any rights that the Borrower,
the Administrative Agent or any other Lender shall have against the replaced
Lender.
SECTION 3. REPRESENTATIONS AND WARRANTIES
To induce the Agents and the Lenders to enter into this Agreement and the
Lenders to make the Loans, the Borrower hereby represents and warrants to the
Administrative Agent and each Lender that:
<PAGE>
3.1 Financial Condition. The consolidated balance sheet of the Borrower and
its consolidated Subsidiaries as at September 30, 1998, and the related
consolidated statements of income and of cash flows for the fiscal year ended on
such date, reported on by Arthur Andersen LLP, copies of which have heretofore
been furnished to each Lender, are complete and correct and present fairly the
consolidated financial condition of the Borrower and its consolidated
Subsidiaries as at such date, and the consolidated results of their operations
and their consolidated cash flows for the fiscal year then ended. The
consolidated balance sheet of the Borrower and its consolidated Subsidiaries as
at June 30, 1999, and the related consolidated statements of income and of cash
flows for the period ended on such date, certified by a Responsible Officer,
copies of which have heretofore been furnished to each Lender, are complete and
correct and present fairly the consolidated financial condition of the Borrower
and its consolidated Subsidiaries as at such date, and the consolidated results
of their operations and their consolidated cash flows for the period then ended
(subject to normal year-end adjustments). All such financial statements,
including the related schedules and notes thereto, have been prepared in
accordance with GAAP applied consistently throughout the periods involved
(except as approved by such accountants or Responsible Officer, as the case may
be, and as disclosed therein). Except for those items set forth on Schedule 3.1,
neither the Borrower nor any of its consolidated Subsidiaries had, at the date
of the most recent balance sheet referred to above, any material contingent
liability or material liability for taxes, or any material long-term lease or
material unusual forward or long-term commitment, including, without limitation,
any interest rate or foreign currency swap or exchange transaction, which is not
reflected in the foregoing statements or in the notes thereto. During the period
from June 30, 1999 to and including the date hereof there has been no sale,
transfer or other disposition by the Borrower or any of its consolidated
Subsidiaries of any material part of its business or property and no purchase or
other acquisition of any business or property (including any Capital Stock of
any other Person) material in relation to the consolidated financial condition
of the Borrower and its consolidated Subsidiaries at June 30, 1999.
3.2 No Change. Since September 30, 1998 there has been no development or
event which has had or could reasonably be expected to have a Material Adverse
Effect.
3.3 Corporate Existence; Compliance with Law. Each of the Borrower and its
Subsidiaries (a) is duly organized, validly existing and in good standing under
the laws of the jurisdiction of its organization, (b) has the corporate power
and authority, and the legal right, to own and operate its property, to lease
the property it operates as lessee and to conduct the business in which it is
currently engaged, (c) is duly qualified as a foreign corporation and in good
standing under the laws of each jurisdiction where its ownership, lease or
operation of property or the conduct of its business requires such
qualification, except to the extent that the failure to be so qualified or in
good standing could not, in the aggregate, reasonably be expected to have a
Material Adverse Effect, (d) has any other valid and current classification
under the regulations of each of the Agencies necessary in the normal conduct of
its business and (f) is in compliance with all Requirements of Law except to the
extent that the failure to comply therewith could not, in the aggregate,
reasonably be expected to have a Material Adverse Effect.
3.4 Corporate Power; Authorization; Enforceable Obligations. The Borrower
has the corporate power and authority, and the legal right, to make, deliver and
perform the Loan Documents to which it is a party and to borrow hereunder and
has taken all necessary corporate action to authorize the borrowings on the
terms and conditions of this Agreement and any Notes and to authorize the
execution, delivery and performance of the Loan Documents to which it is a
party. No consent or authorization of, filing with, notice to or other act by or
in respect of any Governmental Authority or any other Person is required in
connection with the borrowings hereunder or with the execution, delivery,
performance, validity or enforceability of the Loan Documents to which the
Borrower is a party, except as set forth on Schedule 3.4, all of which have been
duly accomplished and are valid and in full force and effect. This Agreement has
been, and each other Loan Document will be, duly executed and delivered on
behalf of the Borrower. This Agreement constitutes, and each other Loan Document
when executed and delivered by the Borrower will constitute, a legal, valid and
binding obligation of the Borrower enforceable against it in accordance with its
terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other similar laws relating to or affecting
creditors' rights generally, general equitable principles (whether considered in
a proceeding in equity or at law) and an implied covenant of good faith and fair
dealing.
3.5 No Legal Bar. The execution, delivery and performance of the Loan
Documents, the borrowings hereunder and the use of the proceeds thereof will not
violate any Requirement of Law or Contractual Obligation of the Borrower or of
any of its Subsidiaries and will not result in, or require, the creation or
imposition of any Lien on any of its or their respective properties or revenues
pursuant to any such Requirement of Law or Contractual Obligation.
<PAGE>
3.6 No Material Litigation. No litigation, investigation or proceeding of
or before any arbitrator or Governmental Authority is pending or, to the
knowledge of the Borrower, threatened by or against the Borrower or any of its
Subsidiaries or against any of its or their respective properties or revenues
(a) with respect to any of the Loan Documents or any of the transactions
contemplated hereby or thereby, or (b) except as set forth on Schedule 3.6,
which could reasonably be expected to have a Material Adverse Effect.
3.7 No Default. Neither the Borrower nor any of its Subsidiaries is in
default under or with respect to any of its Contractual Obligations in any
respect which could reasonably be expected to have a Material Adverse Effect. No
Default or Event of Default has occurred and is continuing.
3.8 Ownership of Property; Liens. Each of the Borrower and its Subsidiaries
has good record and marketable title in fee simple to, or a valid leasehold
interest in, all its real property material to the operation of its business,
and good title to, or a valid leasehold interest in, all its other property
material to the operation of its business, and none of such property is subject
to any Lien except as permitted by Section 6.3.
3.9 Intellectual Property. Each of the Borrower and each of its
Subsidiaries owns, or is licensed to use, all Intellectual Property necessary
for the conduct of its business as currently conducted except for where the
failure to own or license which could not reasonably be expected to have a
Material Adverse Effect. No claim has been asserted and is pending by any Person
challenging or questioning the use of any such Intellectual Property or the
validity or effectiveness of any such Intellectual Property, nor does the
Borrower know of any valid basis for any such claim. The use of such
Intellectual Property by the Borrower and its Subsidiaries does not infringe on
the rights of any Person, except for such claims and infringements that, in the
aggregate, could not reasonably be expected to have a Material Adverse Effect.
3.10 Taxes. Each of the Borrower and its Subsidiaries has filed or caused
to be filed all federal, state income and other material tax returns which, to
the knowledge of the Borrower, are required to be filed and has paid all taxes
shown to be due and payable on said returns or on any assessments made against
it or any of its property and all other taxes, fees or other charges imposed on
it or any of its property by any Governmental Authority (other than any the
amount or validity of which are currently being contested in good faith by
appropriate proceedings and with respect to which reserves in conformity with
GAAP have been provided on the books of the Borrower or its Subsidiaries, as the
case may be); and no material tax Lien has been filed, and, to the knowledge of
the Borrower, no material claim is being asserted, with respect to any such tax,
fee or other charge.
3.11 Federal Regulations. No part of the proceeds of any Loans will be used
in a manner that violates Regulation U as now and from time to time hereafter in
effect.
<PAGE>
3.12 ERISA. Neither a Reportable Event that reasonably could result in the
termination of a Plan (other than a standard termination) or which could have a
Material Adverse Effect nor an "accumulated funding deficiency" (within the
meaning of Section 412 of the Code or Section 302 of ERISA) has occurred during
the five-year period prior to the date on which this representation is made or
deemed made with respect to any Single Employer Plan, and each Plan has complied
in all material respects with the applicable provisions of ERISA and the Code.
No termination of a Single Employer Plan has occurred (other than a standard
termination) and no Lien in favor of the PBGC or a Plan has arisen during such
five-year period. The present value of all accrued benefits under each Single
Employer Plan (based on those assumptions used to fund such Plan) did not, as of
the last annual valuation date prior to the date on which this representation is
made or deemed made, exceed the value of the assets of such Plan allocable to
such accrued benefits. Neither the Borrower nor any Commonly Controlled Entity
has had a complete or partial withdrawal from any Multiemployer Plan, and
neither the Borrower nor any Commonly Controlled Entity would become subject to
any liability under ERISA if the Borrower or any such Commonly Controlled Entity
were to withdraw completely from all Multiemployer Plans as of the valuation
date most closely preceding the date on which this representation is made or
deemed made. No such Multiemployer Plan is in Reorganization or Insolvent.
3.13 Investment Company Act; Other Regulations. The Borrower is not an
"investment company", or a company "controlled" by an "investment company",
within the meaning of the Investment Company Act of 1940, as amended. The
Borrower is not subject to regulation under any Federal or State statute or
regulation (other than Regulation X of the Board) which limits its ability to
incur the Loans.
3.14 Subsidiaries. The Subsidiaries listed on Schedule 3.14 constitute all
the Subsidiaries of the Borrower at the date hereof.
3.15 Purpose of Loans. The proceeds of the Loans shall be used for general
corporate purposes.
3.16 Environmental Matters. Except to the extent that all of the following,
in the aggregate, could not reasonably be expected to have a Material Adverse
Effect:
(a) The facilities and properties owned, leased or operated by the Borrower
or any of its Subsidiaries (the "Properties") do not contain, and have not
previously contained, any Materials of Environmental Concern in amounts or
concentrations which (i) constitute or constituted a violation of, or (ii) could
reasonably be expected to give rise to liability under, any Environmental Law.
(b) The Properties and all operations at the Properties are in compliance,
and have in the last five years been in compliance, in all material respects
with all applicable Environmental Laws, and there is no contamination at, under
or about the Properties or violation of any Environmental Law with respect to
the Properties or the business operated by the Borrower or any of its
Subsidiaries (the "Business") which could interfere with the continued operation
of the Properties.
(c) Neither the Borrower nor any of its Subsidiaries has received any
notice of violation, alleged violation, non-compliance, liability or potential
liability regarding environmental matters or compliance with Environmental Laws
with regard to any of the Properties or the Business, nor does the Borrower have
knowledge or reason to believe that any such notice will be received or is being
threatened.
(d) Materials of Environmental Concern have not been transported or
disposed of from the Properties in violation of, or in a manner or to a location
which could reasonably be expected to give rise to liability under, any
Environmental Law, nor have any Materials of Environmental Concern been
generated, treated, stored or disposed of at, on or under any of the Properties
in violation of, or in a manner that could reasonably be expected to give rise
to liability under, any applicable Environmental Law.
(e) No judicial proceeding or governmental or administrative action is
pending or, to the knowledge of the Borrower, threatened, under any
Environmental Law to which the Borrower or any Subsidiary is or will be named as
a party with respect to the Properties or the Business, nor are there any
consent decrees or other decrees, consent orders, administrative orders or other
orders, or other administrative or judicial requirements outstanding under any
Environmental Law with respect to the Properties or the Business.
<PAGE>
(f) There has been no release or threat of release of Materials of
Environmental Concern at or from the Properties, or arising from or related to
the operations of the Borrower or any Subsidiary in connection with the
Properties or otherwise in connection with the Business, in violation of or in
amounts or in a manner that could reasonably give rise to liability under
Environmental Laws.
3.17 Disclosure. The statements and information contained herein, in any
other Loan Document and in any of the information provided to the Administrative
Agent or the Lenders in writing (other than financial projections) in connection
with this Agreement, taken as a whole, do not contain any untrue statement of
any material fact, or omit to state a fact necessary in order to make such
statements or information not misleading in any material respect, in each case
in light of the circumstances under which such statements were made or
information provided as of the date so provided and subject to any information
subsequently provided in writing which amends, modifies or corrects the
information previously furnished. There is no fact known to the Borrower, other
than economic conditions generally, including interest rate risk, that could
reasonably be expected to have a Material Adverse Effect that has not been
expressly disclosed herein, in the other Loan Documents or in such other
documents, certificates and written statements furnished to the Administrative
Agent and the Lenders for use in connection with the transactions contemplated
hereby and by the other Loan Documents.
3.18 Year 2000. The Borrower has undertaken a review of its computer
software and systems, and equipment containing embedded microchips, including
software, systems and equipment supplied by others or with which the Borrower's
systems interface, in each case necessary to the material conduct of its
business (collectively, "Year 2000 Systems"), that is reasonably sufficient to
ascertain whether the Year 2000 Systems will continue to function properly in
such capacity in and following the year 2000 (such functioning being referred to
as "Year 2000 Compliant" or "Year 2000 Compliance", as appropriate). As of the
date hereof, the Year 2000 Systems have been tested and, to the extent
necessary, remediated and are Year 2000 Compliant, to the best knowledge of the
Borrower, except to the extent that failure to be so compliant could not
reasonably be expected to have a Material Adverse Effect (taking into account
contingency plans in effect).
SECTION 4. CONDITIONS PRECEDENT
4.1 Conditions to Initial Extension of Credit. The effectiveness of this
Agreement and agreement of each Lender to make its Commitment available
hereunder is subject to the satisfaction of the following conditions precedent:
(a) Credit Agreement. The Administrative Agent shall have received this
Agreement, executed and delivered by the Administrative Agent, the Borrower and
each Person listed on Schedule 1.1A.
(b) Financial Statements. The Lenders shall have received audited
consolidated financial statements of the Borrower for its 1998 fiscal year.
(c) Fees. The Lenders and the Administrative Agent shall have received all
fees required to be paid, and all expenses for which invoices have been
presented (including the reasonable fees and expenses of legal counsel), on or
before the Closing Date.
(d) Closing Certificate. The Administrative Agent shall have received, with
a counterpart for each Lender, a certificate of the Borrower, dated the Closing
Date, substantially in the form of Exhibit A, with appropriate insertions and
attachments.
<PAGE>
(e) Legal Opinions. The Administrative Agent shall have received the
following executed legal opinions:
(i) the legal opinion of Sullivan & Cromwell, counsel to the Borrower and
its Subsidiaries, substantially in the form of Exhibit C-1; and
(ii) the legal opinion of Robert Jacobs, Esq. general counsel of the
Borrower and its Subsidiaries, substantially in the form of Exhibit C-2.
(f) Termination of Existing Credit Agreement. The Administrative Agent
shall have received evidence reasonably satisfactory to it that, simultaneously
herewith, all principal, interest, fees and other amounts owing by the Borrower
under the Existing Credit Agreement shall have been paid in full, the Existing
Credit Agreement shall have been terminated and all Liens thereunder shall have
been terminated and released. Each Lender party hereto which is also a party to
the Existing Credit Agreement hereby agrees that any notice of termination
required under the Existing Credit Agreement is hereby deemed to have been
waived.
4.2 Conditions to Each Extension of Credit. The agreement of each Lender to
make any extension of credit requested to be made by it on any date (including
its initial extension of credit) is subject to the satisfaction of the following
conditions precedent:
(a) Representations and Warranties. Each of the representations and
warranties made by the Borrower in Section 3 shall be true and correct on and as
of such date as if made on and as of such date, provided, however, that the
representations and warranties made in Section 3.2 and Section 3.6 shall not be
required as conditions to any extension of credit after the Closing Date.
(b) No Default. No Default or Event of Default shall have occurred and be
continuing on such date or after giving effect to the extensions of credit
requested to be made on such date.
Each borrowing by the Borrower hereunder shall constitute a representation
and warranty by the Borrower as of the date of such borrowing that the
conditions in clauses (a) and (b) of this Section have been satisfied.
SECTION 5. AFFIRMATIVE COVENANTS
The Borrower hereby agrees that, so long as the Commitments remain in
effect, or any Loan or other amount is owing to any Lender or the Administrative
Agent hereunder, the Borrower shall and shall cause each of its Subsidiaries to:
5.1 Financial Statements. Furnish to the Administrative Agent and each
Lender:
(a) as soon as available, but in any event within 90 days after the end of
each fiscal year of the Borrower, a copy of the audited consolidated balance
sheet of the Borrower and its consolidated Subsidiaries as at the end of such
year and the related audited consolidated statements of income and of cash flows
for such year, setting forth in each case in comparative form the figures as of
the end of and for the previous year, reported on without a "going concern" or
like qualification or exception, or qualification arising out of the scope of
the audit, by KPMG LLP or other independent certified public accountants of
nationally recognized standing; and
<PAGE>
(b) as soon as available, but in any event not later than 45 days after the
end of each of the first three quarterly periods of each fiscal year of the
Borrower, the unaudited consolidated balance sheet of the Borrower and its
consolidated Subsidiaries as at the end of such quarter and the related
unaudited consolidated statements of income and of cash flows for such quarter
and the portion of the fiscal year through the end of such quarter, setting
forth in each case in comparative form the figures as of the end of and for the
corresponding period in the previous year, certified by a Responsible Officer as
being fairly stated in all material respects (subject to normal year-end audit
adjustments).
All such financial statements shall be complete and correct in all material
respects and shall be prepared in reasonable detail and in accordance with GAAP
applied consistently throughout the periods reflected therein and with prior
periods (except as approved by such accountants or officer, as the case may be,
and disclosed therein).
5.2 Certificates; Other Information. Furnish to the Administrative Agent
and each Lender):
(a) concurrently with the delivery of the financial statements referred to
in subsection 5.1(a), a certificate of the chief financial officer or treasurer
of the Borrower certifying that no Default or Event of Default exists, except as
specified in such certificate;
(b) concurrently with the delivery of the financial statements referred to
in subsections 5.1(a) and (b), a certificate of a Responsible Officer stating
that, to the best of such Responsible Officer's knowledge, during such period,
the Borrower has observed or performed in all material respects all of its
covenants and other agreements, and satisfied in all material respects every
condition, contained in this Agreement and the other Loan Documents to be
observed, performed or satisfied by it, and that such Responsible Officer has
obtained no knowledge of any Default or Event of Default except as specified in
such certificate, and containing calculations in reasonable detail demonstrating
compliance with the provisions of subsections 6.1, 6.2 and 6.6 (including the
calculation of the amounts included in Section 6.2(d));
(c) within five days after the same are sent, copies of all financial
statements and reports which the Borrower may make to, or file with, the SEC or
any successor or analogous Governmental Authority;
(d) concurrently with any delivery of financial statements under Sections
5.1(a) or 5.1(b) above required to be delivered prior to February 16, 2000, a
summary of the results of its Year 2000 Systems review and the steps being taken
to ensure Year 2000 Compliance, in detail reasonably satisfactory to the
Administrative Agent, and promptly upon the Borrower becoming aware thereof,
notice of any development or information relating to Year 2000 Compliance that,
individually or in the aggregate, could reasonably be expected to materially
adversely affect Year 2000 Compliance; and
(e) promptly, such additional financial and other information as any Lender
may from time to time reasonably request.
<PAGE>
5.3 Payment of Obligations. Pay, discharge or otherwise satisfy at or
before maturity or before they become delinquent, as the case may be, all its
material obligations of whatever nature, except where the amount or validity
thereof is currently being contested in good faith by appropriate proceedings
and reserves in conformity with GAAP with respect thereto have been provided on
the books of the Borrower or its Subsidiaries, as the case may be.
5.4 Maintenance of Existence; Compliance. (a)(i) Preserve, renew and keep
in full force and effect its corporate existence and (ii) take all reasonable
action to maintain all rights, privileges and franchises necessary or desirable
in the normal conduct of its business, except, in each case, as otherwise
permitted by Section 6.4 and except, in the case of clause (ii) above, to the
extent that failure to do so could not reasonably be expected to have a Material
Adverse Effect; and (b) comply with all Contractual Obligations and Requirements
of Law except to the extent that failure to comply therewith could not, in the
aggregate, reasonably be expected to have a Material Adverse Effect.
5.5 Maintenance of Property; Insurance; Risk Management. Keep all property
useful and necessary in its business in good working order and condition;
maintain with financially sound and reputable insurance companies insurance on
all its property in at least such amounts and against at least such risks (but
including in any event public liability, product liability and business
interruption) as are usually insured against in the same general area by
companies engaged in the same or a similar business; furnish to each Lender,
upon written request, full information as to the insurance carried; and maintain
a risk management policy with respect to its portfolio of Mortgage Loans and
servicing rights designed to reduce fluctuations in the value of its servicing
portfolio due to interest rate movements.
5.6 Inspection of Property; Books and Records; Discussions. Keep proper
books of records and account in which full, true and correct entries in
conformity with GAAP and all Requirements of Law shall be made of all dealings
and transactions in relation to its business and activities; and permit
representatives of any Lender to visit and inspect any of its properties and
examine and make abstracts from any of its books and records at any reasonable
time and as often as may reasonably be desired and to discuss the business,
operations, properties and financial and other condition of the Borrower and its
Subsidiaries with officers and employees of the Borrower and its Subsidiaries
and with its independent certified public accountants, provided that such visits
by Lenders shall be coordinated through the Administrative Agent and, when no
Event of Default has occurred and is continuing, shall be arranged upon
reasonable prior notice during normal working hours and with reasonable efforts
to minimize disruption of the normal conduct of business of the Borrower and its
Subsidiaries.
5.7 Notices. Promptly give notice to the Administrative Agent and each
Lender of:
(a) the occurrence of any Default or Event of Default promptly after the
Borrower has knowledge thereof;
(b) any (i) default or event of default under any Indebtedness of the
Borrower or any of its Subsidiaries in aggregate principal amount in excess of
$10,000,000 or (ii) litigation, investigation or proceeding that may exist at
any time between the Borrower or any of its Subsidiaries and any Governmental
Authority, that in either case, if not cured or if adversely determined, as the
case may be, could reasonably be expected to have a Material Adverse Effect;
<PAGE>
(c) the following events, as soon as possible and in any event within 30
days after the Borrower knows or has reason to know thereof: (i) the occurrence
of any Reportable Event with respect to any Plan, a failure to make any required
contribution to a Plan, the creation of any Lien in favor of the PBGC or a Plan
or any withdrawal from, or the termination, Reorganization or Insolvency of, any
Multiemployer Plan or (ii) the institution of proceedings or the taking of any
other action by the PBGC or the Borrower or any Commonly Controlled Entity or
any Multiemployer Plan with respect to the withdrawal from, or the termination,
Reorganization or Insolvency of, any Plan; and
(d) any change in the business, operations, property or condition
(financial or otherwise) of the Borrower and its Subsidiaries taken as a whole
that has had or has a reasonable likelihood of having a Material Adverse Effect.
Each notice pursuant to this Section 5.7 shall be accompanied by a statement of
a Responsible Officer setting forth details of the occurrence referred to
therein and stating what action the Borrower or the relevant Subsidiary proposes
to take with respect thereto.
5.8 Environmental Laws. (a) Comply with, and ensure compliance by all
tenants and subtenants, if any, with, all applicable Environmental Laws and
obtain and comply in all material respects with and maintain, and ensure that
all tenants and subtenants obtain and comply in all material respects with and
maintain, any and all licenses, approvals, notifications, registrations or
permits required by applicable Environmental Laws except to the extent that
failure to do so could not be reasonably expected to have a Material Adverse
Effect.
(b) Conduct and complete all investigations, studies, sampling and testing,
and all remedial, removal and other actions required under Environmental Laws
and promptly comply in all material respects with all lawful orders and
directives of all Governmental Authorities regarding Environmental Laws except
to the extent that the same are being contested in good faith by appropriate
proceedings and the pendency of such proceedings could not be reasonably
expected to have a Material Adverse Effect.
(c) Defend, indemnify and hold harmless the Agents and the Lenders, and
their respective employees, agents, officers and directors, from and against any
claims, demands, penalties, fines, liabilities, settlements, damages, costs and
expenses of whatever kind or nature known or unknown, contingent or otherwise,
arising out of, or in any way relating to the violation of, noncompliance with
or liability under any Environmental Laws applicable to the operations of the
Borrower, or any orders, requirements or demands of Governmental Authorities
related thereto, including, without limitation, attorney's and consultant's
fees, investigation and laboratory fees, response costs, court costs and
litigation expenses, except to the extent that any of the foregoing arise out of
the gross negligence or willful misconduct of the party seeking indemnification
therefor. Notwithstanding anything in this Agreement to the contrary, this
indemnity shall continue in full force and effect regardless of the termination
of this Agreement.
5.9 Maintenance of Agency Status. In the case of the Borrower, maintain at
all times its status as an FNMA and FHMLC approved seller/servicer, a GNMA
approved issuer/servicer, a HUD Direct Endorsement Lender, a VA-approved Lender
and an FHA approved lender in good standing to the extent necessary to conduct
its normal business.
SECTION 6. NEGATIVE COVENANTS
The Borrower hereby agrees that, so long as the Commitments remain in
effect or any Loan or other amount is owing to any Lender or the Administrative
Agent hereunder, the Borrower shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly:
<PAGE>
6.1 Financial Condition Covenants. Permit Consolidated Net Worth at the
last day of any fiscal quarter to be less than $* * * * *.
6.2 Indebtedness. Create, issue, incur, assume, become liable in respect of
or suffer to exist any Indebtedness, except:
(a) Indebtedness of the Borrower to any Subsidiary;
(b) obligations of the Borrower or its Subsidiaries under Hedge Contracts
entered into in the ordinary course of business;
(c) Indebtedness constituting obligations under Hedging Agreements entered
into by the Borrower in the ordinary course of business; and
(d) additional Indebtedness, so long as Total Debt at no time exceeds the
greater of (1) an amount at any time equal to Consolidated Tangible Net Worth at
the end of the most recent fiscal quarter for which financial statements have
been delivered prior to such time multiplied by seven and (2) the sum of: (i)
100% of Cash at such time, (ii) 98% of the amount of Mortgage Loans Held For
Sale at such time, (iii) 90% of Mortgage Loans Held for Investment at such time,
(iv) 98% of the amount of Receivables for Mortgage Loans shipped (including
Mortgage Loans and Mortgage-Backed Securities subject to a Lien under a
repurchase agreement but excluding all other Mortgage Loans and Mortgage-Backed
Securities which are excluded from Eligible Mortgage Assets) at such time, (v)
90% of Early Pool Buyout Advances and Accounts Receivable at such time, (vi) 50%
of Property and Equipment at such time, (vii) 80% of Mortgage Servicing Rights
at such time, and (viii) 50% of Other Assets (including servicing hedge
investments and excluding intangible assets) at such time.
6.3 Liens. Create, incur, assume or suffer to exist any Lien upon any of
its property, whether now owned or hereafter acquired, except for:
(a) Liens for taxes not yet due or that are being contested in good faith
by appropriate proceedings;
(b) carriers', warehousemen's, mechanics', materialmen's, repairmen's or
other like Liens arising in the ordinary course of business or that are being
contested in good faith by appropriate proceedings; provided that adequate
reserves with respect thereto are maintained on the books of the Borrower or its
Subsidiaries, as the case may be, in accordance with GAAP;
(c) pledges or deposits in connection with workers' compensation,
unemployment insurance and other social security legislation;
(d) deposits to secure the performance of bids, trade contracts (other than
for borrowed money), leases, statutory obligations, surety and appeal bonds,
performance bonds and other obligations of a like nature incurred in the
ordinary course of business;
(e) easements, rights-of-way, restrictions and other similar encumbrances
incurred in the ordinary course of business that, in the aggregate, are not
substantial in amount and do not in any case materially detract from the value
of the property subject thereto or materially interfere with the ordinary
conduct of the business of the Borrower or any of its Subsidiaries;
<PAGE>
(f) Liens of landlords, arising solely by operation of law and which are
not avoidable as a matter of law, on fixtures and moveable property located on
premises leased in the ordinary course of business; provided, that the rental
payments secured thereby are not yet due;
(g) Liens (not otherwise permitted hereunder) which secure obligations
incidental to repurchase contracts ordinary in the mortgage banking businesses
of the Borrower and its Subsidiaries;
(h) Liens (not otherwise permitted hereunder) which secure obligations (as
to the Borrower and all Subsidiaries) incidental to forward delivery contracts
ordinary in the mortgage banking businesses of the Borrower and its
Subsidiaries;
(i) Liens securing Hedging Agreements;
(j) Liens in existence on the Closing Date described on Schedule 6.3;
(k) Liens securing Indebtedness (including Capital Lease Obligations) of
the Borrower or any of its Subsidiaries not in excess of $10,000,000 in
aggregate principal amount at any time outstanding incurred to finance the
acquisition of fixed or capital assets, provided that (i) such Liens shall be
created substantially simultaneously with the acquisition of such fixed or
capital assets, (ii) such Liens do not at any time encumber any property other
than the property financed by such Indebtedness and (iii) the amount of
Indebtedness secured thereby is not increased;
(l) Liens not otherwise permitted by this Section so long as neither (i)
the aggregate outstanding principal amount of the obligations secured thereby
nor (ii) the aggregate fair market value (determined as of the date such Lien is
incurred) of the assets subject thereto exceeds (as to the Borrower and all
Subsidiaries) $15,000,000 at any one time; and
(m) any extension, renewal or replacement (or successive extensions,
renewals or replacements), in whole or in part, of any Lien referred to in the
foregoing clauses; provided, that the principal amount of Indebtedness secured
thereby shall not exceed the principal amount of Indebtedness so secured
immediately prior to the time of such extension, renewal or replacement, and
that such extension, renewal, or replacement Lien shall be limited to all or a
part of the property subject to the Lien so extended, renewed or replaced (plus
improvements on such property).
6.4 Fundamental Changes. Enter into any merger, consolidation or
amalgamation, or liquidate, wind up or dissolve itself (or suffer any
liquidation or dissolution), or Dispose of all or substantially all of its
property or business, except that:
(a) any Subsidiary of the Borrower may be merged or consolidated with or
into the Borrower (provided that the Borrower shall be the continuing or
surviving corporation); and
(b) any Subsidiary of the Borrower may Dispose of any or all of its assets
(upon voluntary liquidation or otherwise) to the Borrower;
(c) the Borrower may dissolve any Subsidiary that is inactive and holds
minimal assets and the continued existence of which is of no value to the
Borrower or the interests of the Lenders; and
<PAGE>
(d) the Borrower may be consolidated with or merged with any corporation so
long as (i) in any such merger or consolidation the Borrower shall be the
surviving or resulting corporation, (ii) at the time of and immediately after
the effectiveness of such merger or consolidation there shall not have occurred
or be continuing a Default or an Event of Default, nor would a Default or an
Event of Default result therefrom, and (iii) the aggregate consideration, if
any, paid by the Borrower and its Subsidiaries in connection therewith, when
aggregated with all such other consideration paid after the Closing Date under
this clause (d), does not exceed $100,000,000.
6.5 Limitation on Sale of Assets. Convey, sell, lease, assign, transfer or
otherwise dispose of any of its property, business or assets (including, without
limitation, receivables and leasehold interests), whether now owned or hereafter
acquired, other than in the ordinary course of business, if the aggregate fair
market value of such Dispositions from the Closing Date to the time thereof
after giving effect thereto would exceed $25,000,000, or, in the case of any
Subsidiary, issue or sell any shares of such Subsidiary's Capital Stock to any
Person other than the Borrower or any Wholly Owned Subsidiary, except as
permitted by subsection 6.4(b).
6.6 Restricted Payments. Declare or pay any dividend (other than dividends
payable solely in common stock of the Person making such dividend) on, or make
any payment on account of, or set apart assets for a sinking or other analogous
fund for, the purchase, redemption, defeasance, retirement or other acquisition
of, any Capital Stock of the Borrower or any Subsidiary of the Borrower, whether
now or hereafter outstanding, or make any other distribution in respect thereof,
either directly or indirectly, whether in cash or property or in obligations of
the Borrower or any Subsidiary of the Borrower (collectively, "Restricted
Payments"), except that so long as no Event of Default has occurred and is
continuing or would result therefrom, the Borrower may declare and pay cash
dividends on its common stock.
6.7 Limitation on Investments, Loans and Advances. Make any advance, loan,
extension of credit or capital contribution to, or purchase any stock, bonds,
notes, debentures or other securities of, or any assets constituting a business
unit of, or make any other investment in, any Person, except:
(a) investments made in the ordinary course of the Borrower's business,
including investments in Mortgage Loans, Mortgage-Backed Securities, mortgage
servicing rights and Hedge Contracts;
(b) investments in Cash Equivalents;
(c) loans and advances to employees of the Borrower and its Subsidiaries in
an aggregate amount not to exceed $2,500,000 at any time outstanding;
(d) loans permitted under subsection 6.2(c); and
(e) additional investments in Persons other than the Borrower or any
Subsidiary of the Borrower, in an aggregate amount not to exceed $100,000,000 at
any time outstanding.
6.8 Transactions with Affiliates. Except for the agreements listed on
Schedule 6.8, enter into any transaction, including, without limitation, any
purchase, sale, lease or exchange of property or the rendering of any service,
with any Affiliate unless such transaction is upon fair and reasonable terms no
less favorable to the Borrower or such Subsidiary, as the case may be, than it
would obtain in a comparable arm's length transaction with a Person that is not
an Affiliate.
<PAGE>
6.9 Changes in Fiscal Periods. Permit the fiscal year of the Borrower to
end on a day other than the last day of September.
6.10 Lines of Business. Enter into any business, either directly or through
any Subsidiary of the Borrower, except for those businesses in which the
Borrower and its Subsidiaries are engaged on the date of this Agreement or that
are reasonably related thereto.
SECTION 7. EVENTS OF DEFAULT
If any of the following events shall occur and be continuing:
(a) the Borrower shall fail to pay any principal of any Loan when due in
accordance with the terms hereof; or the Borrower shall fail to pay any interest
on any Loan, or any other amount payable hereunder or under any other Loan
Document, within five days after any such interest or other amount becomes due
in accordance with the terms hereof or thereof; or
(b) any representation or warranty made or deemed made by the Borrower
herein or in any other Loan Document or that is contained in any certificate,
document or financial or other statement furnished by it at any time under or in
connection with this Agreement or any other Loan Document shall prove to have
been inaccurate in any material respect on or as of the date made or deemed
made; or
(c) the Borrower shall default in the observance or performance of any
agreement contained in clause (i) or (ii) of Section 5.4(a), Section 5.7(a) or
Section 6; or
(d) the Borrower shall default in the observance or performance of any
other agreement contained in this Agreement or any other Loan Document (other
than as provided in paragraphs (a) through (c) of this Section), and any such
default described in this paragraph (d) shall continue unremedied for a period
of 30 days; or
(e) the Borrower or any of its Subsidiaries shall (i) default in any
payment of principal of or interest on any Indebtedness (other than the Loans)
or in the payment of any Hedge Termination Obligation, beyond the period of
grace, if any, provided in the instrument or agreement under which such
Indebtedness or Hedge Termination Obligation was created; or (ii) default in the
observance or performance of any other agreement or condition relating to any
such Indebtedness or Hedge Termination Obligation or contained in any instrument
or agreement evidencing, securing or relating thereto, or any other event shall
occur or condition exist, the effect of which default or other event or
condition is to cause, or to permit the holder or holders of such Indebtedness
or Hedge Termination Obligation or beneficiary (or a trustee or agent on behalf
of such holder or holders or beneficiary) to cause, with the giving of notice if
required, such Indebtedness to become due prior to its stated maturity or such
Hedge Termination Obligation to become payable; provided, however, that no
Default or Event of Default shall exist under this paragraph unless the
aggregate amount of Indebtedness and/or Hedge Termination Obligations in respect
of which any default or other event or condition referred to in this paragraph
shall have occurred shall be equal to at least $25,000,000; or
<PAGE>
(f) (i) the Borrower or any of its Subsidiaries shall commence any case,
proceeding or other action (A) under any existing or future law of any
jurisdiction, domestic or foreign, relating to bankruptcy, insolvency,
reorganization or relief of debtors, seeking to have an order for relief entered
with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or
seeking reorganization, arrangement, adjustment, winding-up, liquidation,
dissolution, composition or other relief with respect to it or its debts, or (B)
seeking appointment of a receiver, trustee, custodian, conservator or other
similar official for it or for all or any substantial part of its assets, or the
Borrower or any of its Subsidiaries shall make a general assignment for the
benefit of its creditors; or (ii) there shall be commenced against the Borrower
or any of its Subsidiaries any case, proceeding or other action of a nature
referred to in clause (i) above that (A) results in the entry of an order for
relief or any such adjudication or appointment or (B) remains undismissed,
undischarged or unbonded for a period of 60 days; or (iii) there shall be
commenced against the Borrower or any of its Subsidiaries any case, proceeding
or other action seeking issuance of a warrant of attachment, execution,
distraint or similar process against all or any substantial part of its assets
that results in the entry of an order for any such relief that shall not have
been vacated, discharged, or stayed or bonded pending appeal within 60 days from
the entry thereof; or (iv) the Borrower or any of its Subsidiaries shall take
any action in furtherance of, or indicating its consent to, approval of, or
acquiescence in, any of the acts set forth in clause (i), (ii), or (iii) above;
or (v) the Borrower or any of its Subsidiaries shall generally not, or shall be
unable to, or shall admit in writing its inability to, pay its debts as they
become due; or
(g) (i) any Person shall engage in any "prohibited transaction" (as defined
in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (ii)
any "accumulated funding deficiency" (as defined in Section 302 of ERISA),
whether or not waived, shall exist with respect to any Plan or any Lien in favor
of the PBGC or a Plan shall arise on the assets of the Borrower or any Commonly
Controlled Entity, (iii) a Reportable Event shall occur with respect to, or
proceedings shall commence to have a trustee appointed (or a trustee shall be
appointed) to administer, or to terminate, any Single Employer Plan, which
Reportable Event or commencement of proceedings or appointment of a trustee is,
in the reasonable opinion of the Required Lenders, likely to result in the
termination of such Plan for purposes of Title IV of ERISA, (iv) any Single
Employer Plan shall terminate for purposes of Title IV of ERISA, (v) the
Borrower or any Commonly Controlled Entity shall, or in the reasonable opinion
of the Required Lenders is likely to, incur any liability in connection with a
withdrawal from, or the Insolvency or Reorganization of, a Multiemployer Plan or
(vi) any other event or condition shall occur or exist with respect to a Plan;
and in each case in clauses (i) through (vi) above, such event or condition,
together with all other such events or conditions, if any, could, in the sole
judgment of the Required Lenders, reasonably be expected to have a Material
Adverse Effect; or
(h) one or more judgments or decrees shall be entered against the Borrower
or any of its Subsidiaries involving in the aggregate a liability (not paid or
fully covered by insurance as to which the relevant insurance company has
acknowledged coverage) of $25,000,000 or more, and all such judgments or decrees
shall not have been vacated, discharged, stayed or bonded pending appeal within
60 days from the entry thereof; or
(i) National Australia Bank Limited shall cease to own, directly or
indirectly, 75% of the Capital Stock of the Borrower;
<PAGE>
then, and in any such event, (A) if such event is an Event of Default specified
in clause (i) or (ii) of paragraph (f) above with respect to the Borrower,
automatically the Commitments shall immediately terminate and the Loans
hereunder (with accrued interest thereon) and all other amounts owing under this
Agreement and the other Loan Documents shall immediately become due and payable,
and (B) if such event is any other Event of Default, either or both of the
following actions may be taken: (i) with the consent of the Required Lenders,
the Administrative Agent may, or upon the request of the Required Lenders, the
Administrative Agent shall, by notice to the Borrower declare the Revolving
Commitments to be terminated forthwith, whereupon the Revolving Commitments
shall immediately terminate; and (ii) with the consent of the Required Lenders,
the Administrative Agent may, or upon the request of the Required Lenders, the
Administrative Agent shall, by notice to the Borrower, declare the Loans
hereunder (with accrued interest thereon) and all other amounts owing under this
Agreement and the other Loan Documents to be due and payable forthwith,
whereupon the same shall immediately become due and payable.
SECTION 8. THE AGENTS
8.1 Appointment. Each Lender hereby irrevocably designates and appoints the
Administrative Agent as the agent of such Lender under this Agreement and the
other Loan Documents, and each such Lender irrevocably authorizes the
Administrative Agent, in such capacity, to take such action on its behalf under
the provisions of this Agreement and the other Loan Documents and to exercise
such powers and perform such duties as are expressly delegated to the
Administrative Agent by the terms of this Agreement and the other Loan
Documents, together with such other powers as are reasonably incidental thereto.
Notwithstanding any provision to the contrary elsewhere in this Agreement, the
Administrative Agent shall not have any duties or responsibilities, except those
expressly set forth herein, or any fiduciary relationship with any Lender, and
no implied covenants, functions, responsibilities, duties, obligations or
liabilities shall be read into this Agreement or any other Loan Document or
otherwise exist against the Administrative Agent.
8.2 Delegation of Duties. The Administrative Agent may execute any of its
duties under this Agreement and the other Loan Documents by or through agents or
attorneys-in-fact and shall be entitled to advice of counsel concerning all
matters pertaining to such duties. The Administrative Agent shall not be
responsible for the negligence or misconduct of any agents or attorneys in-fact
selected by it with reasonable care.
8.3 Exculpatory Provisions. Neither any Agent nor any of their respective
officers, directors, employees, agents, attorneys-in-fact or affiliates shall be
(i) liable for any action lawfully taken or omitted to be taken by it or such
Person under or in connection with this Agreement or any other Loan Document
(except to the extent that any of the foregoing is found by a final and
nonappealable decision of a court of competent jurisdiction to have resulted
from its or such Person's own gross negligence or willful misconduct) or (ii)
responsible in any manner to any of the Lenders for any recitals, statements,
representations or warranties made by the Borrower or any officer thereof
contained in this Agreement or any other Loan Document or in any certificate,
report, statement or other document referred to or provided for in, or received
by the Agents under or in connection with, this Agreement or any other Loan
Document or for the value, validity, effectiveness, genuineness, enforceability
or sufficiency of this Agreement or any other Loan Document or for any failure
of the Borrower to perform its obligations hereunder or thereunder. The Agents
shall not be under any obligation to any Lender to ascertain or to inquire as to
the observance or performance of any of the agreements contained in, or
conditions of, this Agreement or any other Loan Document, or to inspect the
properties, books or records of the Borrower.
<PAGE>
8.4 Reliance by Administrative Agent. The Administrative Agent shall be
entitled to rely, and shall be fully protected in relying, upon any instrument,
writing, resolution, notice, consent, certificate, affidavit, letter, telecopy,
telephone, telex or teletype message, statement, order or other document or
conversation believed by it to be genuine and correct and to have been signed,
sent or made by the proper Person or Persons and upon advice and statements of
legal counsel (including counsel to the Borrower), independent accountants and
other experts selected by the Administrative Agent. The Administrative Agent may
deem and treat the payee of any Note as the owner thereof for all purposes
unless a written notice of assignment, negotiation or transfer thereof shall
have been filed with the Administrative Agent. The Administrative Agent shall be
fully justified in failing or refusing to take any action under this Agreement
or any other Loan Document unless it shall first receive such advice or
concurrence of the Required Lenders (or, if so specified by this Agreement, all
Lenders) as it deems appropriate or it shall first be indemnified to its
satisfaction by the Lenders against any and all liability and expense that may
be incurred by it by reason of taking or continuing to take any such action. The
Administrative Agent shall in all cases be fully protected in acting, or in
refraining from acting, under this Agreement and the other Loan Documents in
accordance with a request of the Required Lenders (or, if so specified by this
Agreement, all Lenders), and such request and any action taken or failure to act
pursuant thereto shall be binding upon all the Lenders and all future holders of
the Loans.
8.5 Notice of Default. The Administrative Agent shall not be deemed to have
knowledge or notice of the occurrence of any Default or Event of Default
hereunder unless the Administrative Agent has received notice from a Lender or
the Borrower referring to this Agreement, describing such Default or Event of
Default and stating that such notice is a "notice of default". In the event that
the Administrative Agent receives such a notice, the Administrative Agent shall
give notice thereof to the Lenders. The Administrative Agent shall take such
action with respect to such Default or Event of Default as shall be reasonably
directed by the Required Lenders (or, if so specified by this Agreement, all
Lenders); provided that unless and until the Administrative Agent shall have
received such directions, the Administrative Agent may (but shall not be
obligated to) take such action, or refrain from taking such action, with respect
to such Default or Event of Default as it shall deem advisable in the best
interests of the Lenders.
8.6 Non-Reliance on Agents and Other Lenders. Each Lender expressly
acknowledges that neither the Agents nor any of their respective officers,
directors, employees, agents, attorneys-in-fact or affiliates have made any
representations or warranties to it and that no act by any Agent hereafter
taken, including any review of the affairs of the Borrower or any affiliate of
the Borrower, shall be deemed to constitute any representation or warranty by
any Agent to any Lender. Each Lender represents to the Agents that it has,
independently and without reliance upon any Agent or any other Lender, and based
on such documents and information as it has deemed appropriate, made its own
appraisal of and investigation into the business, operations, property,
financial and other condition and creditworthiness of the Borrower and its
affiliates and made its own decision to make its Loans hereunder and enter into
this Agreement. Each Lender also represents that it will, independently and
without reliance upon any Agent or any other Lender, and based on such documents
and information as it shall deem appropriate at the time, continue to make its
own credit analysis, appraisals and decisions in taking or not taking action
under this Agreement and the other Loan Documents, and to make such
investigation as it deems necessary to inform itself as to the business,
operations, property, financial and other condition and creditworthiness of the
Borrower and its affiliates. Except for notices, reports and other documents
expressly required to be furnished to the Lenders by the Administrative Agent
hereunder, the Administrative Agent shall not have any duty or responsibility to
provide any Lender with any credit or other information concerning the business,
operations, property, condition (financial or otherwise), prospects or
creditworthiness of the Borrower or any of its affiliates that may come into the
possession of the Administrative Agent or any of its officers, directors,
employees, agents, attorneys-in-fact or affiliates.
<PAGE>
8.7 Indemnification. The Lenders agree to indemnify each Agent in its
capacity as such (to the extent not reimbursed by the Borrower and without
limiting the obligation of the Borrower to do so), ratably according to their
respective Aggregate Exposure Percentages in effect on the date on which
indemnification is sought under this Section (or, if indemnification is sought
after the date upon which the Commitments shall have terminated and the Loans
shall have been paid in full, ratably in accordance with such Aggregate Exposure
Percentages immediately prior to such date), from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind whatsoever that may at any time
(whether before or after the payment of the Loans) be imposed on, incurred by or
asserted against such Agent in any way relating to or arising out of, the
Commitments, this Agreement, any of the other Loan Documents or any documents
contemplated by or referred to herein or therein or the transactions
contemplated hereby or thereby or any action taken or omitted by such Agent
under or in connection with any of the foregoing; provided that no Lender shall
be liable for the payment of any portion of such liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements resulting from such Agent's gross negligence or willful
misconduct. The agreements in this Section shall survive the payment of the
Loans and all other amounts payable hereunder.
8.8 Agent in Its Individual Capacity. Each entity which is an Agent and its
affiliates may make loans to, accept deposits from and generally engage in any
kind of business with the Borrower or any of its affiliates as though such
entity were not an Agent. With respect to its Loans made or renewed by it, each
entity which is an Agent shall have the same rights and powers under this
Agreement and the other Loan Documents as any Lender and may exercise the same
as though it were not an Agent, and the terms "Lender" and "Lenders" shall
include each entity which is an Agent in its individual capacity.
8.9 Successor Administrative Agent. The Administrative Agent may resign as
Administrative Agent upon 10 days' notice to the Lenders and the Borrower, and
the Administrative Agent may be removed at any time with cause by an instrument
or concurrent instruments in writing delivered to the Borrower and the
Administrative Agent and signed by the Required Lenders. If the Administrative
Agent shall resign or be removed as Administrative Agent under this Agreement
and the other Loan Documents, then the Required Lenders shall appoint from among
the Lenders a successor agent for the Lenders, which successor agent shall
(unless an Event of Default under Section 7(a) or Section 7(f) with respect to
the Borrower shall have occurred and be continuing) be subject to approval by
the Borrower (which approval shall not be unreasonably withheld or delayed),
whereupon such successor agent shall succeed to the rights, powers and duties of
the Administrative Agent, and the term "Administrative Agent" shall mean such
successor agent effective upon such appointment and approval, and the former
Administrative Agent's rights, powers and duties as Administrative Agent shall
be terminated, without any other or further act or deed on the part of such
former Administrative Agent or any of the parties to this Agreement or any
holders of the Loans. If no successor agent has accepted appointment as
Administrative Agent by the date that is 10 days following an Administrative
Agent's notice of resignation or its removal, the Administrative Agent's
resignation or removal shall nevertheless thereupon become effective and the
Lenders shall assume and perform all of the duties of the Administrative Agent
hereunder until such time, if any, as the Required Lenders appoint a successor
agent as provided for above. After any Administrative Agent's resignation or
removal as Administrative Agent, the provisions of this Section 8 shall inure to
its benefit as to any actions taken or omitted to be taken by it while it was
Administrative Agent under this Agreement and the other Loan Documents.
8.10 Other Agents. Notwithstanding any provision to the contrary elsewhere
in this Agreement, no Agent other than the Administrative Agent shall have any
duties or responsibilities hereunder or under any other Loan Document, or any
fiduciary relationship with any Lender, and no implied covenants, functions,
responsibilities, duties, obligations or liabilities shall be read into this
Agreement or any other Loan Document or otherwise exist against any such Agent.
<PAGE>
SECTION 9. MISCELLANEOUS
9.1 Amendments and Waivers. Neither this Agreement, any other Loan
Document, nor any terms hereof or thereof may be amended, supplemented or
modified except in accordance with the provisions of this Section 9.1. The
Required Lenders and the Borrower may, or, with the written consent of the
Required Lenders, the Administrative Agent and the Borrower may, from time to
time, (a) enter into written amendments, supplements or modifications hereto and
to the other Loan Documents for the purpose of adding any provisions to this
Agreement or the other Loan Documents or changing in any manner the rights of
the Lenders or of the Borrower hereunder or thereunder or (b) waive, on such
terms and conditions as the Required Lenders or the Administrative Agent, as the
case may be, may specify in such instrument, any of the requirements of this
Agreement or the other Loan Documents or any Default or Event of Default and its
consequences; provided, however, that no such waiver and no such amendment,
supplement or modification shall (i) eliminate or reduce any voting rights under
this Section 9.1, forgive the principal amount or extend the final scheduled
date of maturity of any Loan, reduce the stated rate of any interest or fee
payable hereunder or extend the scheduled date of any payment thereof, or
increase the amount or extend the expiration date of any Lender's Revolving
Commitment, in each case without the consent of each Lender directly affected
thereby; (ii) reduce any percentage specified in the definition of Required
Lenders or consent to the assignment or transfer by the Borrower of any of its
rights and obligations under this Agreement and the other Loan Documents without
the consent of all Lenders; (iii) amend, modify or waive any provision of
Section 8 without the consent of the Administrative Agent, or (iv) amend, modify
or waive any provision of Section 2.3 or 2.4 without the consent of the
Swingline Lenders. Any such waiver and any such amendment, supplement or
modification shall apply equally to each of the Lenders and shall be binding
upon the Borrower, the Lenders, the Administrative Agent and all future holders
of the Loans. In the case of any waiver, the Borrower, the Lenders and the
Administrative Agent shall be restored to their former position and rights
hereunder and under the other Loan Documents, and any Default or Event of
Default waived shall be deemed to be cured and not continuing; but no such
waiver shall extend to any subsequent or other Default or Event of Default, or
impair any right consequent thereon.
9.2 Notices. Unless otherwise expressly provided herein, all notices,
requests and demands to or upon the respective parties hereto to be effective
shall be in writing (including by telecopy), and, unless otherwise expressly
provided herein, shall be deemed to have been duly given or made when delivered,
or three Business Days after being deposited in the mail, postage prepaid, or,
in the case of telecopy notice, when received, addressed as follows in the case
of the Borrower and the Administrative Agent, and as set forth in an
administrative questionnaire delivered to the Administrative Agent in the case
of the Lenders, or to such other address as may be hereafter notified by the
respective parties hereto:
The Borrower: HomeSide Lending, Inc.
7301 Baymeadows Way
Jacksonville, FL 32256
Attention: W. Blake Wilson
Telecopy: 904-281-7968
The Administrative Agent: The Chase Manhattan Bank
270 Park Avenue
New York, NY 10017
Attention: Lisa Schwabe
Telecopy: 212-270-1001
<PAGE>
with a copy to: Chase Loan and Agency Services Group
One Chase Manhattan Plaza, 8th Floor
New York, NY 10081
Attention: Christina Gould
Telecopy: 212-552-7500
provided that any notice, request or demand to or upon the Administrative Agent
or the Lenders shall not be effective until received.
9.3 No Waiver; Cumulative Remedies. No failure to exercise and no delay in
exercising, on the part of the Administrative Agent or any Lender, any right,
remedy, power or privilege hereunder or under the other Loan Documents shall
operate as a waiver thereof; nor shall any single or partial exercise of any
right, remedy, power or privilege hereunder preclude any other or further
exercise thereof or the exercise of any other right, remedy, power or privilege.
The rights, remedies, powers and privileges herein provided are cumulative and
not exclusive of any rights, remedies, powers and privileges provided by law.
9.4 Survival of Representations and Warranties. All representations and
warranties made hereunder, in the other Loan Documents and in any document,
certificate or statement delivered pursuant hereto or in connection herewith
shall survive the execution and delivery of this Agreement and the making of the
Loans hereunder.
<PAGE>
9.5 Payment of Expenses and Taxes. The Borrower agrees (a) to pay or
reimburse the Administrative Agent for all its out-of-pocket costs and expenses
incurred in connection with the development, preparation and execution of, and
any amendment, supplement or modification to, this Agreement and the other Loan
Documents and any other documents prepared in connection herewith or therewith,
and the consummation and administration of the transactions contemplated hereby
and thereby, including the reasonable fees and disbursements of counsel to the
Administrative Agent and filing and recording fees and expenses, with statements
with respect to the foregoing to be submitted to the Borrower prior to the
Closing Date (in the case of amounts to be paid on the Closing Date) and from
time to time thereafter on a quarterly basis or such other periodic basis as the
Administrative Agent shall deem appropriate, (b) to pay or reimburse each Lender
and the Administrative Agent for all its costs and expenses incurred in
connection with the enforcement or preservation of any rights under this
Agreement, the other Loan Documents and any such other documents, including the
fees and disbursements of counsel (including the allocated fees and expenses of
in-house counsel) to each Lender and of counsel to the Administrative Agent, (c)
to pay and indemnify and hold harmless each Lender and the Administrative Agent
from, any and all recording and filing fees and any and all liabilities with
respect to, or resulting from any delay in paying, stamp, excise and other
taxes, if any, that may be payable or determined to be payable in connection
with the execution and delivery of, or consummation or administration of any of
the transactions contemplated by, or any amendment, supplement or modification
of, or any waiver or consent under or in respect of, this Agreement, the other
Loan Documents and any such other documents, and (d) to pay and indemnify and
hold harmless each Lender and each Agent and their respective officers,
directors, employees, affiliates, agents and controlling persons (each, an
"Indemnitee") from and against any and all other liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind or nature whatsoever with respect to the execution,
delivery, enforcement, performance and administration of this Agreement, the
other Loan Documents and any such other documents, including any of the
foregoing relating to the use of proceeds of the Loans or the violation of,
noncompliance with or liability under any Environmental Law applicable to the
operations of the Borrower, any of its Subsidiaries or any of the Properties and
the reasonable fees and expenses of legal counsel in connection with claims,
actions or proceedings by any Indemnitee against the Borrower under any Loan
Document (all the foregoing in this clause (d), collectively, the "Indemnified
Liabilities"), provided, that the Borrower shall have no obligation hereunder to
any Indemnitee with respect to Indemnified Liabilities to the extent such
Indemnified Liabilities result from the gross negligence or willful misconduct
of such Indemnitee. The agreements in this Section 9.5 shall survive repayment
of the Loans and all other amounts payable hereunder.
9.6 Successors and Assigns; Participations and Assignments. (a) This
Agreement shall be binding upon and inure to the benefit of the Borrower, the
Lenders, the Agents, all future holders of the Loans and their respective
successors and assigns, except that the Borrower may not assign or transfer any
of its rights or obligations under this Agreement without the prior written
consent of each Lender.
(b) Any Lender may, without the consent of the Borrower or the
Administrative Agent, in accordance with applicable law, at any time sell to one
or more banks, financial institutions or other entities (each, a "Participant")
participating interests in any Loan owing to such Lender, any Commitment of such
Lender or any other interest of such Lender hereunder and under the other Loan
Documents. In the event of any such sale by a Lender of a participating interest
to a Participant, such Lender's obligations under this Agreement to the other
parties to this Agreement shall remain unchanged, such Lender shall remain
solely responsible for the performance thereof, such Lender shall remain the
holder of any such Loan for all purposes under this Agreement and the other Loan
Documents, and the Borrower and the Administrative Agent shall continue to deal
solely and directly with such Lender in connection with such Lender's rights and
obligations under this Agreement and the other Loan Documents. In no event shall
any Participant under any such participation have any right to approve any
amendment or waiver of any provision of any Loan Document, or any consent to any
departure by the Borrower therefrom, except to the extent that such amendment,
waiver or consent would reduce the principal of, or interest on, the Loans or
any fees payable hereunder, or postpone the date of the final maturity of the
Loans, in each case to the extent subject to such participation. The Borrower
also agrees that each Participant shall be entitled to the benefits of Sections
2.15, 2.16 and 2.17 with respect to its participation in the Commitments and the
Loans outstanding from time to time as if it were a Lender; provided that, in
the case of Section 2.16, such Participant shall have complied with the
requirements of said Section and provided, further, that no Participant shall be
entitled to receive any greater amount pursuant to any such Section than the
transferor Lender would have been entitled to receive in respect of the amount
of the participation transferred by such transferor Lender to such Participant
had no such transfer occurred.
<PAGE>
(c) Any Lender (an "Assignor") may, in accordance with applicable law, at
any time and from time to time assign to any Lender, any affiliate of any Lender
or any Approved Fund or, with the consent of the Borrower and the Administrative
Agent (which, in each case, shall not be unreasonably withheld or delayed) to an
additional bank, financial institution or other entity (an "Assignee") all or
any part of its rights and obligations under this Agreement pursuant to an
Assignment and Acceptance executed by such Assignee, such Assignor and any other
Person whose consent is required pursuant to this paragraph and delivered to the
Administrative Agent for its acceptance and recording in the Register; provided
that no such assignment to an Assignee (other than any Lender, any affiliate of
any Lender or any Approved Fund) shall be in an aggregate principal amount of
less than $10,000,000 (other than in the case of an assignment of all of a
Lender's interests under this Agreement), unless otherwise agreed by the
Borrower and the Administrative Agent and provided further that each Lender must
retain a Commitment of not less than $10,000,000 (if it retains any Commitment)
after giving effect to any assignment. For purposes of the proviso contained in
the preceding sentence, the amount described therein shall be aggregated in
respect of each Lender and its related Approved Funds, if any. Upon such
execution, delivery, acceptance and recording, from and after the effective date
determined pursuant to such Assignment and Acceptance, (x) the Assignee
thereunder shall be a party hereto and, to the extent provided in such
Assignment and Acceptance, have the rights and obligations of a Lender hereunder
with a Commitment and/or Loans as set forth therein, and (y) the Assignor
thereunder shall, to the extent provided in such Assignment and Acceptance, be
released from its obligations under this Agreement (and, in the case of an
Assignment and Acceptance covering all of an Assignor's rights and obligations
under this Agreement, such Assignor shall cease to be a party hereto).
Notwithstanding any provision of this Section 9.6, the consent of the Borrower
shall not be required for any assignment that occurs when an Event of Default
pursuant to Section 7(f) shall have occurred and be continuing with respect to
the Borrower.
(d) The Administrative Agent shall, on behalf of the Borrower, maintain at
its address referred to in Section 9.2 a copy of each Assignment and Acceptance
delivered to it and a register (the "Register") for the recordation of the names
and addresses of the Lenders and the Commitment of, and the principal amount of
the Loans owing to, each Lender from time to time. The entries in the Register
shall be conclusive, in the absence of manifest error, and the Borrower, the
Administrative Agent and the Lenders shall treat each Person whose name is
recorded in the Register as the owner of the Loans and any Notes evidencing the
Loans recorded therein for all purposes of this Agreement. Any assignment of any
Loan, whether or not evidenced by a Note, shall be effective only upon
appropriate entries with respect thereto being made in the Register (and each
Note shall expressly so provide). Any assignment or transfer of all or part of a
Loan evidenced by a Note shall be registered on the Register only upon surrender
for registration of assignment or transfer of the Note evidencing such Loan,
accompanied by a duly executed Assignment and Acceptance, and thereupon one or
more new Notes shall be issued to the designated Assignee.
(e) Upon its receipt of an Assignment and Acceptance executed by an
Assignor, an Assignee and any other Person whose consent is required by Section
9.6(c), together with payment to the Administrative Agent of a registration and
processing fee of $3,500, the Administrative Agent shall (i) promptly accept
such Assignment and Acceptance and (ii) record the information contained therein
in the Register on the effective date determined pursuant thereto.
(f) The Borrower authorizes each Lender to disclose to any Participant or
Assignee (each, a "Transferee") and any prospective Transferee any and all
financial information in such Lender's possession concerning the Borrower and
its Affiliates which has been delivered to such Lender by or on behalf of the
Borrower pursuant to this Agreement or which has been delivered to such Lender
by or on behalf of the Borrower in connection with such Lender's credit
evaluation of the Borrower and its Affiliates prior to becoming a party to this
Agreement, so long as such Transferee is informed of the confidentiality
provisions of Section 9.14 and agrees that by its acceptance of such information
it shall be deemed to be bound thereby.
<PAGE>
(g) Anything herein to the contrary notwithstanding, any Lender (a
"Granting Lender") may grant to a special purpose funding vehicle that is
managed or administered by such Granting Lender (an "SPC"), identified as such
in writing from time to time by such Granting Lender to the Administrative Agent
and the Borrower, the option to provide to the Borrower all or any part of any
Loan that such Granting Lender otherwise would be obligated to make to the
Borrower pursuant to Section 2.1 and, in such event, such SPC shall have all
rights and benefits of a Lender to the extent of the Loan so provided by it,
provided that (i) nothing herein shall constitute a commitment or an assignment
or assumption of any portion of such Granting Lender's Commitment to or by any
SPC to make any Loan and (ii) if an SPC elects not to exercise such option to
make a Loan or otherwise fails to provide all or any part thereof, such Granting
Lender shall remain obligated to make such Loan pursuant to the terms hereof.
The making of a Loan by an SPC hereunder shall be deemed to constitute a
utilization of the Commitment of the Granting Lender to the same extent, and as
if, such Loan were made by the Granting Lender. Each party hereto hereby agrees
that no SPC shall be liable for any indemnity or similar payment obligation
under this Agreement (all liability for which shall remain with the related
Granting Lender). In furtherance of the foregoing, each party hereto hereby
agrees (which agreement shall survive the termination of this Agreement) that,
prior to the date that is one year and one day after the payment in full of all
outstanding senior indebtedness of any SPC, it will not institute against, or
join any other person in instituting against, such SPC any bankruptcy,
reorganization, arrangement, insolvency or liquidation proceedings or similar
proceedings under the laws of the United States or any State thereof. In
addition, notwithstanding anything to the contrary contained in this Section
9.6, any SPC may (i) with notice to, but without the prior written consent of,
the Borrower or the Administrative Agent and without paying any processing fee
therefor, assign all or a portion of its interests in any Loans to its Granting
Lender and (ii) disclose (subject to an agreement by the recipient to maintain
the confidentiality thereof consistent with the requirements of Section 9.6(f))
any non-public information relating to its Loans to any rating agency,
commercial paper dealer or provider of a surety, guarantee or credit or
liquidity enhancement to such SPC.
(h) For avoidance of doubt, the parties to this Agreement acknowledge that
the provisions of this Section 9.6 concerning assignments of Loans and Notes
relate only to absolute assignments and that such provisions do not prohibit
assignments creating security interests, including any pledge or assignment by a
Lender of any Loan or Note to any Federal Reserve Bank in accordance with
applicable law.
9.7 Adjustments; Set-off. (a) Except to the extent that this Agreement
expressly provides for payments to be allocated to a particular Lender, if any
Lender (a "Benefitted Lender") shall receive any payment of all or part of the
Obligations owing to it, or receive any collateral in respect thereof (whether
voluntarily or involuntarily, by set-off, pursuant to events or proceedings of
the nature referred to in Section 7(f), or otherwise), in a greater proportion
than any such payment to or collateral received by any other Lender, if any, in
respect of the Obligations owing to such other Lender, such Benefitted Lender
shall purchase for cash from the other Lenders a participating interest in such
portion of the Obligations owing to each such other Lender, or shall provide
such other Lenders with the benefits of any such collateral, as shall be
necessary to cause such Benefitted Lender to share the excess payment or
benefits of such collateral ratably with each of the Lenders; provided, however,
that if all or any portion of such excess payment or benefits is thereafter
recovered from such Benefitted Lender, such purchase shall be rescinded, and the
purchase price and benefits returned, to the extent of such recovery, but
without interest.
(b) In addition to any rights and remedies of the Lenders provided by law,
each Lender shall have the right, without prior notice to the Borrower, any such
notice being expressly waived by the Borrower to the extent permitted by
applicable law, upon any amount becoming past due and payable by the Borrower
hereunder (whether at the stated maturity, by acceleration or otherwise), to set
off and appropriate and apply against such amount any and all deposits (general
or special, time or demand, provisional or final), in any currency, and any
other credits, indebtedness or claims, in any currency, in each case whether
direct or indirect, absolute or contingent, matured or unmatured, at any time
held or owing by such Lender or any branch or agency thereof to or for the
credit or the account of the Borrower, as the case may be. Each Lender agrees
promptly to notify the Borrower and the Administrative Agent after any such
setoff and application made by such Lender, provided that the failure to give
such notice shall not affect the validity of such setoff and application.
<PAGE>
9.8 Counterparts. This Agreement may be executed by one or more of the
parties to this Agreement on any number of separate counterparts, and all of
said counterparts taken together shall be deemed to constitute one and the same
instrument. Delivery of an executed signature page of this Agreement by
facsimile transmission shall be effective as delivery of a manually executed
counterpart hereof. A set of the copies of this Agreement signed by all the
parties shall be lodged with the Borrower and the Administrative Agent.
9.9 Severability. Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
9.10 Integration. This Agreement and the other Loan Documents represent the
entire agreement of the Borrower, the Administrative Agent and the Lenders with
respect to the subject matter hereof and thereof, and there are no promises,
undertakings, representations or warranties by the Administrative Agent or any
Lender relative to subject matter hereof or thereof not expressly set forth or
referred to herein or in the other Loan Documents.
9.11 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED
IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
9.12 Submission To Jurisdiction; Waivers. Each party to this Agreement
hereby irrevocably and unconditionally:
(a) submits for itself and its property in any legal action or proceeding
relating to this Agreement and the other Loan Documents to which it is a party,
or for recognition and enforcement of any judgment in respect thereof, to the
non-exclusive general jurisdiction of the courts of the State of New York, the
courts of the United States for the Southern District of New York, and appellate
courts from any thereof;
(b) consents that any such action or proceeding may be brought in such
courts and waives any objection that it may now or hereafter have to the venue
of any such action or proceeding in any such court or that such action or
proceeding was brought in an inconvenient court and agrees not to plead or claim
the same;
(c) agrees that service of process in any such action or proceeding may be
effected by mailing a copy thereof by registered or certified mail (or any
substantially similar form of mail), postage prepaid, to its address set forth
in Section 9.2 or at such other address of which the Administrative Agent shall
have been notified pursuant thereto;
(d) agrees that nothing herein shall affect the right to effect service of
process in any other manner permitted by law or shall limit the right to sue in
any other jurisdiction; and
(e) waives, to the maximum extent not prohibited by law, any right it may
have to claim or recover in any legal action or proceeding referred to in this
Section any special, exemplary, punitive or consequential damages.
<PAGE>
9.13 Acknowledgements. The Borrower hereby acknowledges that:
(a) it has been advised by counsel in the negotiation, execution and
delivery of this Agreement and the other Loan Documents;
(b) neither the Agents nor any Lender has any fiduciary relationship with
or duty to the Borrower arising out of or in connection with this Agreement or
any of the other Loan Documents, and the relationship between the Agents and
Lenders, on the one hand, and the Borrower, on the other hand, in connection
herewith or therewith is solely that of debtor and creditor; and
(c) no joint venture is created hereby or by the other Loan Documents or
otherwise exists by virtue of the transactions contemplated hereby among the
Lenders or among the Borrower and the Lenders.
9.14 Confidentiality. Each of the Agents and each Lender agrees to keep
confidential all non-public information provided to it by the Borrower pursuant
to this Agreement that is designated by the Borrower as confidential; provided
that nothing herein shall prevent any Agent or any Lender from disclosing any
such information, in each case in clause (a), (b) and (c) below only to the
extent necessary or required to persons having responsibility for matters
related to this Credit Agreement on a "need to know" basis (a) to any Agent, any
other Lender, any affiliate of any Lender or any Approved Fund, (b) to any
Transferee or prospective Transferee that agrees to comply with the provisions
of this Section, (c) to its employees, directors, agents, attorneys, accountants
and other professional advisors or those of any of its affiliates, (d) upon the
request or demand of any Governmental Authority, (e) in response to any order of
any court or other Governmental Authority or as may otherwise be required
pursuant to any Requirement of Law, (f) if requested or required to do so in
connection with any litigation or similar proceeding to which such Lender is a
party, (g) that has been publicly disclosed not as a result of violation of this
Section 9.14, (h) to the National Association of Insurance Commissioners or any
similar organization or any nationally recognized rating agency that requires
access to information about a Lender's investment portfolio in connection with
ratings issued with respect to such Lender, or (i) in connection with the
exercise of any remedy hereunder or under any other Loan Document.
9.15 WAIVERS OF JURY TRIAL. THE BORROWER, THE AGENTS AND THE LENDERS HEREBY
IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR
PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY
COUNTERCLAIM THEREIN.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers as of
the day and year first above written. HOMESIDE LENDING, INC.
By: /s/ W. Blake Wilson
Name: W. Blake Wilson
Title: Chief Financial Officer
THE CHASE MANHATTAN BANK, as Administrative Agent and as a Lender
By: /s/ Roger Parker
Name: Roger Parker
Title: Vice-President
<PAGE>
EXHIBIT A
FORM OF CLOSING CERTIFICATE
Pursuant to subsection 4.1(d) of the Credit Agreement, dated as of
October __, 1999 (as amended, supplemented or otherwise modified from time to
time, the "Credit Agreement"; terms defined therein being used herein as therein
defined), among HomeSide Lending, Inc., as Borrower, the Lenders parties
thereto, and The Chase Manhattan Bank, as Administrative Agent, the undersigned,
as [title of Responsible Officer] of [Name of Loan Party] (the "Loan Party"),
hereby certifies that:
1 Attached hereto as Annex I is a true and complete copy of the [resolutions]
[unanimous written consent] duly adopted by the Board of Directors of the Loan
Party effective as of [date] authorizing the execution, delivery and performance
of the transactions contemplated under the Credit Agreement; such [resolutions]
[unanimous written consent] have [has] not in any way been amended, modified,
revoked or rescinded and [have] [has] been in full force and effect since
[their] [its] adoption to and including the date hereof and [are] [is] now in
full force and effect; and such [resolutions] [unanimous written consent] [are]
[is] the only corporate [proceedings] [proceeding] of the Loan Party now in
force relating to or affecting the matters referred to therein;
2 Attached hereto as Annex II is a true and complete copy of the By-laws of the
Loan Party as in full force and effect as of the date hereof; and such By-laws
have not in any way been amended, modified, revoked or rescinded and have been
in full force and effect since their adoption;
3 Attached hereto as Annex III is a true and complete copy of the [Certificate]
[Articles] of Incorporation of the Loan Party as in full force and effect as of
the date hereof;
4 Immediately prior to and immediately after the making of the Loans requested
to be made on the date hereof and the application of the proceeds thereof, no
Default or Event of Default will have occurred and be continuing;
5 The representations and warranties of the Loan Party set forth in any Loan
Document to which it is a party or which are contained in any certificate,
document or financial or other statement furnished pursuant to the Credit
Agreement are true and correct on and as of the date hereof with the same effect
as if made on the date hereof;
<PAGE>
6 The following persons are the duly elected and qualified officers of the Loan
Party holding the offices indicated next to their respective names below as of
the date hereof; the signatures appearing opposite their respective names below
are the true and genuine signatures of such officers; and each of such officers
is an authorized signatory of the Loan Party and is duly authorized to execute
and deliver on behalf of the Loan Party any and all notes, notices, documents,
statements and papers under and relating to the Loan Documents to which it is a
party, including, without limitation, promissory notes, certificates and other
agreements, and otherwise to act as an authorized signatory of the Loan Party
under the Loan Documents to which it is a party and all other documents to be
executed in connection therewith for all purposes:
Name Office Signature
IN WITNESS WHEREOF, the undersigned has hereunto set his hand
and affixed the corporate seal of the Loan Party.
Secretary
Dated: October __, 1999 Corporate Seal:
I, _____________________, [Title of Responsible Officer] of
the Loan Party, hereby certify that _____________, whose genuine signature
appears above, is, as of the date hereof, the duly elected, qualified and acting
Secretary of the Loan Party.
[Title of Responsible Officer]
<PAGE>
EXHIBIT B
FORM OF
ASSIGNMENT AND ACCEPTANCE
Reference is made to the Credit Agreement, dated as of October __, 1999
(as amended, supplemented or otherwise modified from time to time, the "Credit
Agreement"), among HOMESIDE LENDING, INC., a Florida corporation, as Borrower
(the "Borrower"), the several banks and other financial institutions from time
to time parties to the Credit Agreement (collectively, the "Lenders"), BANK OF
AMERICA, N.A., DEUTSCHE BANK AG, NEW YORK BRANCH and MORGAN GUARANTY TRUST
COMPANY OF NEW YORK, as Syndication Agents, NATIONAL AUSTRALIA BANK LIMITED, as
Senior Managing Agent and Co-Arranger, Chase Securities, Inc., as lead arranger
and book manager (in such capacity, the "Arranger"), and THE CHASE MANHATTAN
BANK, as administrative agent (in such capacity, the "Administrative Agent").
Unless otherwise defined herein, terms defined in the Credit Agreement and used
herein shall have the meanings given to them in the Credit Agreement.
The Assignor identified on Schedule l hereto (the "Assignor") and the
Assignee identified on Schedule l hereto (the "Assignee") agree as follows:
7 The Assignor hereby irrevocably sells and assigns to the Assignee without
recourse to the Assignor, and the Assignee hereby irrevocably purchases and
assumes from the Assignor without recourse to the Assignor, as of the Effective
Date (as defined below), the interest described in Schedule 1 hereto (the
"Assigned Interest") in and to the Assignor's rights and obligations under the
Credit Agreement in a principal amount for the Assigned Interest as set forth on
Schedule 1 hereto.
8 The Assignor (a) makes no representation or warranty and assumes no
responsibility with respect to any statements, warranties or representations
made in or in connection with the Credit Agreement, any other Loan Document or
any other instrument or document furnished pursuant thereto or with respect to
the execution, legality, validity, enforceability, genuineness, sufficiency or
value of the Credit Agreement, any other Loan Document or any other instrument
or document furnished pursuant thereto, other than that the Assignor has not
created any adverse claim upon the interest being assigned by it hereunder and
that such interest is free and clear of any such adverse claim; (b) makes no
representation or warranty and assumes no responsibility with respect to the
financial condition of the Borrower, any of its Subsidiaries or any other
obligor or the performance or observance by the Borrower, any of its
Subsidiaries or any other obligor of any of their respective obligations under
the Credit Agreement or any other Loan Document or any other instrument or
document furnished pursuant hereto or thereto; and (c) attaches any Notes held
by it evidencing the Assigned Interest and (i) requests that the Administrative
Agent, upon request by the Assignee, exchange the attached Notes for a new Note
or Notes payable to the Assignee and (ii) if the Assignor has retained any
interest under the Credit Agreement requests that the Administrative Agent
exchange the attached Notes for a new Note or Notes payable to the Assignor, in
each case in amounts which reflect the assignment being made hereby (and after
giving effect to any other assignments which have become effective on the
Effective Date).
<PAGE>
9 The Assignee (a) represents and warrants that it is legally authorized to
enter into this Assignment and Acceptance; (b) confirms that it has received a
copy of the Credit Agreement, together with copies of the financial statements
referred to in or delivered pursuant to Section 3.1 or 5.1 thereof and such
other documents and information as it has deemed appropriate to make its own
credit analysis and decision to enter into this Assignment and Acceptance; (c)
agrees that it will, independently and without reliance upon the Assignor, any
Agent or any other Lender and based on such documents and information as it
shall deem appropriate at the time, continue to make its own credit decisions in
taking or not taking action under the Credit Agreement, the other Loan Documents
or any other instrument or document furnished pursuant hereto or thereto; (d)
appoints and authorizes the Administrative Agent to take such action as agent on
its behalf and to exercise such powers and discretion under the Credit
Agreement, the other Loan Documents and any other instrument or document
furnished pursuant thereto as are delegated to the Administrative Agent by the
terms thereof, together with such powers as are incidental thereto; and (e)
agrees that it will be bound by the provisions of the Credit Agreement and will
perform in accordance with its terms all the obligations which by the terms of
the Credit Agreement are required to be performed by it as a Lender including,
if it is organized under the laws of a jurisdiction outside the United States,
its obligation pursuant to subsection 2.16(d) of the Credit Agreement.
10 The effective date of this Assignment and Acceptance shall be the Effective
Date of Assignment described in Schedule 1 hereto (the "Effective Date").
Following the execution of this Assignment and Acceptance, it will be delivered
to the Administrative Agent for acceptance by it and recording by the
Administrative Agent pursuant to the Credit Agreement, effective as of the
Effective Date (which shall not, unless otherwise agreed to by the
Administrative Agent, be earlier than five Business Days after the date of such
acceptance and recording by the Administrative Agent).
11 Upon such acceptance and recording, from and after the Effective Date, the
Administrative Agent shall make all payments in respect of the Assigned Interest
(including payments of principal, interest, fees and other amounts) to the
Assignor for amounts which have accrued to the Effective Date and to the
Assignee for amounts which have accrued subsequent to the Effective Date. The
Assignor and the Assignee shall make all appropriate adjustments in payments by
the Administrative Agent for periods prior to the Effective Date or with respect
to the making of this assignment directly between themselves.
12 From and after the Effective Date, (a) the Assignee shall be a party to the
Credit Agreement and, to the extent provided in this Assignment and Acceptance,
have (in addition to such rights and obligations theretofore held by it) the
rights and obligations of a Lender thereunder and under the other Loan Documents
and shall be bound by the provisions thereof and (b) the Assignor shall, to the
extent provided in this Assignment and Acceptance, relinquish its rights and be
released from its obligations under the Credit Agreement (except under sections
2.15, 2.16, 5.8(c) and 9.5 of the Credit Agreement for the period prior to the
Effective Date).
13 This Assignment and Acceptance shall be governed by and construed in
accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this
Assignment and Acceptance to be executed as of the date first above written by
their respective duly authorized officers on Schedule 1 hereto.
<PAGE>
Schedule 1
to Assignment and Acceptance
Name of Assignor:
Name of Assignee:
Effective Date of Assignment:
Principal
Amount Assigned Commitment Percentage Assigned1
$_______________ __._____%
______________________ _________________________
[Name of Assignee] [Name of Assignor]
By: By:
Title:__________________________ Title:_______________________
[Consented to and ]Accepted: Consented To:
THE CHASE MANHATTAN BANK, as HOMESIDE LENDING, INC.2
Administrative Agent
By: By:
Title: __________________________ Title: _________________________
1. Calculate the Commitment Percentage that is assigned to at least 15 decimal
places and show as a percentage of the aggregate commitments of all
Lenders.
2. The Borrower's consent may not be required. Section 9.6 of the Credit
Agreement provides that the consent of the Borrower is required unless the
assignee already is a Lender under the Credit Agreement or is an affiliate
of a Lender or an Approved Fund or there is a Section 7(f) Event of
Default.
<PAGE>
EXHIBIT D-1
REVOLVING NOTE
$ New York, New York
__________ , 199_
FOR VALUE RECEIVED, the undersigned, HOMESIDE LENDING, INC., a Florida
corporation (the "Borrower"), hereby unconditionally promises to pay to the
order of (the "Lender") at the office of The Chase Manhattan Bank, located at
270 Park Avenue, New York, New York 10017, in lawful money of the United States
of America and in immediately available funds, on the Maturity Date the
principal amount of (a) DOLLARS ($ ), or, if less, (b) the aggregate unpaid
principal amount of all Revolving Loans made by the Lender to the Borrower
pursuant to subsection 2.1 of the Credit Agreement, as hereinafter defined. The
Borrower further agrees to pay interest in like money at such office on the
unpaid principal amount hereof from time to time outstanding at the rates and on
the dates specified in subsection 2.11of such Credit Agreement.
The holder of this Note is authorized to endorse on the schedule
annexed hereto and made a part hereof or on a continuation thereof which shall
be attached hereto and made a part hereof the date, Type and amount of each
Revolving Loan made pursuant to the Credit Agreement and the date and amount of
each payment or prepayment of principal thereof, each continuation thereof, each
conversion of all or a portion thereof to another Type and, in the case of
Eurodollar Loans, the length of each Interest Period with respect thereto. Each
such endorsement shall constitute prima facie evidence of the accuracy of the
information endorsed. The failure to make any such endorsement shall not affect
the obligations of the Borrower in respect of such Revolving Loan.
This Note (a) is one of the Notes referred to in the Credit Agreement
dated as of October , 1999 (as amended, supplemented or otherwise modified from
time to time, the "Credit Agreement"), among the Borrower, the Lender, the other
banks and financial institutions or entities from time to time parties thereto,
Bank of America, N.A., Deutsche Bank AG, New York Branch and Morgan Guaranty
Trust Company of New York, as Syndication Agents, National Australia Bank
Limited, as Senior Managing Agent and Co-Arranger, Chase Securities, Inc., as
Arranger, and The Chase Manhattan Bank, as Administrative Agent, (b) is subject
to the provisions of the Credit Agreement and (c) is subject to optional and
mandatory prepayment in whole or in part as provided in the Credit Agreement.
Upon the occurrence of any one or more of the Events of Default, all
amounts then remaining unpaid on this Note shall become, or may be declared to
be, immediately due and payable, all as provided in the Credit Agreement.
All parties now and hereafter liable with respect to this Note, whether
maker, principal, surety, guarantor, endorser or otherwise, hereby waive
presentment, demand, protest and all other notices of any kind.
<PAGE>
Unless otherwise defined herein, terms defined in the Credit Agreement
and used herein shall have the meanings given to them in the Credit Agreement.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
HOMESIDE LENDING, INC.
By
Title:
<PAGE>
Schedule A
<TABLE>
<CAPTION>
to Revolving Note
LOANS, CONVERSIONS AND REPAYMENTS OF ABR LOANS
Amount Amount of ABR Loans Unpaid Principal
Converted to Amount of Principal of ABR Converted to Balance of ABR
Date Amount of ABR Loans ABR Loans Loans Repaid Eurodollar Loans Loans Notation Made By
<S> <C> <C> <C> <C> <C> <C>
- ----- ------------------- ------------- ---------------------------- ----------------------- -------------------- -----------------
- ----- ------------------- ------------- ---------------------------- ----------------------- -------------------- -----------------
- ----- ------------------- ------------- ---------------------------- ----------------------- -------------------- -----------------
- ----- ------------------- ------------- ---------------------------- ----------------------- -------------------- -----------------
- ----- ------------------- ------------- ---------------------------- ----------------------- -------------------- -----------------
- ----- ------------------- ------------- ---------------------------- ----------------------- -------------------- -----------------
- ----- ------------------- ------------- ---------------------------- ----------------------- -------------------- -----------------
- ----- ------------------- ------------- ---------------------------- ----------------------- -------------------- -----------------
- ----- ------------------- ------------- ---------------------------- ----------------------- -------------------- -----------------
- ----- ------------------- ------------- ---------------------------- ----------------------- -------------------- -----------------
- ----- ------------------- ------------- ---------------------------- ----------------------- -------------------- -----------------
- ----- ------------------- ------------- ---------------------------- ----------------------- -------------------- -----------------
- ----- ------------------- ------------- ---------------------------- ----------------------- -------------------- -----------------
- ----- ------------------- ------------- ---------------------------- ----------------------- -------------------- -----------------
- ----- ------------------- ------------- ---------------------------- ----------------------- -------------------- -----------------
- ----- ------------------- ------------- ---------------------------- ----------------------- -------------------- -----------------
- ----- ------------------- ------------- ---------------------------- ----------------------- -------------------- -----------------
- ----- ------------------- ------------- ---------------------------- ----------------------- -------------------- -----------------
- ----- ------------------- ------------- ---------------------------- ----------------------- -------------------- -----------------
- ----- ------------------- ------------- ---------------------------- ----------------------- -------------------- -----------------
- ----- ------------------- ------------- ---------------------------- ----------------------- -------------------- -----------------
- ----- ------------------- ------------- ---------------------------- ----------------------- -------------------- -----------------
- ----- ------------------- ------------- ---------------------------- ----------------------- -------------------- -----------------
- ----- ------------------- ------------- ---------------------------- ----------------------- -------------------- -----------------
- ----- ------------------- ------------- ---------------------------- ----------------------- -------------------- -----------------
</TABLE>
Schedule B
to Revolving Note
<TABLE>
<CAPTION>
LOANS, CONTINUATIONS, CONVERSIONS AND REPAYMENTS OF EURODOLLAR LOANS
Amount of
Amount of Amount Converted Interest Period and Amount of Principal of Eurodollar Loans Unpaid Principal
Eurodollar to Eurodollar Eurodollar Rate Eurodollar Loans Repaid Converted to ABR Balance of Notation
Date Loans Loans with Respect Thereto Loans Eurodollar Loans Made By
<S> <C> <C> <C> <C> <C> <C> <C>
- ---- ------------ ----------------- --------------------- ------------------------ -------------------- ------------------- --------
- ---- ------------ ----------------- --------------------- ------------------------ -------------------- ------------------- --------
- ---- ------------ ----------------- --------------------- ------------------------ -------------------- ------------------- --------
- ---- ------------ ----------------- --------------------- ------------------------ -------------------- ------------------- --------
- ---- ------------ ----------------- --------------------- ------------------------ -------------------- ------------------- --------
- ---- ------------ ----------------- --------------------- ------------------------ -------------------- ------------------- --------
- ---- ------------ ----------------- --------------------- ------------------------ -------------------- ------------------- --------
- ---- ------------ ----------------- --------------------- ------------------------ -------------------- ------------------- --------
- ---- ------------ ----------------- --------------------- ------------------------ -------------------- ------------------- --------
- ---- ------------ ----------------- --------------------- ------------------------ -------------------- ------------------- --------
- ---- ------------ ----------------- --------------------- ------------------------ -------------------- ------------------- --------
- ---- ------------ ----------------- --------------------- ------------------------ -------------------- ------------------- --------
- ---- ------------ ----------------- --------------------- ------------------------ -------------------- ------------------- --------
- ---- ------------ ----------------- --------------------- ------------------------ -------------------- ------------------- --------
- ---- ------------ ----------------- --------------------- ------------------------ -------------------- ------------------- --------
- ---- ------------ ----------------- --------------------- ------------------------ -------------------- ------------------- --------
- ---- ------------ ----------------- --------------------- ------------------------ -------------------- ------------------- --------
- ---- ------------ ----------------- --------------------- ------------------------ -------------------- ------------------- --------
- ---- ------------ ----------------- --------------------- ------------------------ -------------------- ------------------- --------
- ---- ------------ ----------------- --------------------- ------------------------ -------------------- ------------------- --------
- ---- ------------ ----------------- --------------------- ------------------------ -------------------- ------------------- --------
- ---- ------------ ----------------- --------------------- ------------------------ -------------------- ------------------- --------
- ---- ------------ ----------------- --------------------- ------------------------ -------------------- ------------------- --------
- ---- ------------ ----------------- --------------------- ------------------------ -------------------- ------------------- --------
- ---- ------------ ----------------- --------------------- ------------------------ -------------------- ------------------- --------
</TABLE>
<PAGE>
EXHIBIT D-2
FORM OF
COMPETITIVE LOAN NOTE
$ New York, New York
___________, 199_
FOR VALUE RECEIVED, the undersigned, HOMESIDE LENDING, INC., a Florida
corporation (the "Borrower"), hereby unconditionally promises to pay to the
order of (the "Lender") at the office of The Chase Manhattan Bank located at 270
Park Avenue, New York, New York 10017, in lawful money of the United States of
America and in immediately available funds, the principal amount of (a)
_____________ _______ DOLLARS ($_____________), or, if less, (b) the aggregate
unpaid principal amount of each Competitive Loan which is made by the Lender to
the Borrower pursuant to subsection 2.7 of the Credit Agreement, as hereinafter
defined. The principal amount of each Competitive Loan evidenced hereby shall be
payable on the Competitive Loan maturity date therefor set forth on the schedule
attached hereto and made a part hereof or on a continuation of such schedule
which shall be attached hereto and made a part hereof (the "Grid"). The Borrower
further agrees to pay interest in like money at such office on the unpaid
principal amount of each Competitive Loan evidenced hereby, at the rate per
annum set forth in respect of such Competitive Loan on the Grid, calculated on
the basis of a year of 360 days and actual days elapsed from the Borrowing Date
of such Competitive Loan until the due date thereof (whether at the stated
maturity, by acceleration or otherwise) and thereafter at the rates determined
in accordance with subsection 2.11(e) of the Credit Agreement. Interest on each
Competitive Loan evidenced hereby shall be payable on the date or dates set
forth in respect of such Competitive Loan on the Grid. Competitive Loans
evidenced by this Note may not be prepaid.
The holder of this Note is authorized to endorse on the Grid the
Borrowing Date, amount, interest rate, Interest Payment Dates and Competitive
Loan maturity date in respect of each Competitive Loan made pursuant to
subsection 2.7 of the Credit Agreement and each payment of principal with
respect thereto. Each such endorsement shall constitute prima facie evidence of
the accuracy of the information endorsed. The failure to make any such
endorsement shall not affect the obligations of the Borrower in respect of such
Competitive Loan.
This Note is one of the Notes referred to in the Revolving Credit
Agreement dated as of October __, 1999 (as amended, supplemented or otherwise
modified from time to time, the "Credit Agreement"), among the Borrower, the
Lender, the other banks and financial institutions or entities from time to time
parties thereto, Bank of America, N.A., Deutsche Bank AG, New York Branch and
Morgan Guaranty Trust Company of New York, as Syndication Agents, National
Australia Bank Limited, as Senior Managing Agent and Co-Arranger, Chase
Securities, Inc., as Arranger, and The Chase Manhattan Bank, as Administrative
Agent, and is subject to the provisions of the Credit Agreement.
<PAGE>
Upon the occurrence of any one or more of the Events of Default, all
amounts then remaining unpaid on this Note shall become, or may be declared to
be, immediately due and payable, all as provided in the Credit Agreement.
All parties now and hereafter liable with respect to this Note, whether
maker, principal, surety, guarantor, endorser or otherwise, hereby waive
presentment, demand, protest and all other notices of any kind.
Unless otherwise defined herein, terms defined in the Credit Agreement
and used herein shall have the meanings given to them in the Credit Agreement.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
HOMESIDE LENDING, INC.
By
Title:
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF COMPETITIVE LOANS
_________________, Lender
HomeSide Lending, Inc., Borrower
Credit Agreement dated October __, 1999
Competitive Loan
Borrowing Amount of Competitive Interest Payment Competitive Loan
Date of Competitive Loan Loan Interest Rate Dates Maturity Date Payment Date Authorization
<S> <C> <C> <C> <C> <C> <C>
- ------------------------- ----------------------- ------------- ---------------- ----------------- ------------ -------------
- ------------------------- ----------------------- ------------- ---------------- ----------------- ------------ -------------
- ------------------------- ----------------------- ------------- ---------------- ----------------- ------------ -------------
- ------------------------- ----------------------- ------------- ---------------- ----------------- ------------ -------------
- ------------------------- ----------------------- ------------- ---------------- ----------------- ------------ -------------
- ------------------------- ----------------------- ------------- ---------------- ----------------- ------------ -------------
- ------------------------- ----------------------- ------------- ---------------- ----------------- ------------ -------------
- ------------------------- ----------------------- ------------- ---------------- ----------------- ------------ -------------
- ------------------------- ----------------------- ------------- ---------------- ----------------- ------------ -------------
- ------------------------- ----------------------- ------------- ---------------- ----------------- ------------ -------------
- ------------------------- ----------------------- ------------- ---------------- ----------------- ------------ -------------
- ------------------------- ----------------------- ------------- ---------------- ----------------- ------------ -------------
- ------------------------- ----------------------- ------------- ---------------- ----------------- ------------ -------------
- ------------------------- ----------------------- ------------- ---------------- ----------------- ------------ -------------
- ------------------------- ----------------------- ------------- ---------------- ----------------- ------------ -------------
- ------------------------- ----------------------- ------------- ---------------- ----------------- ------------ -------------
- ------------------------- ----------------------- ------------- ---------------- ----------------- ------------ -------------
- ------------------------- ----------------------- ------------- ---------------- ----------------- ------------ -------------
- ------------------------- ----------------------- ------------- ---------------- ----------------- ------------ -------------
</TABLE>
<PAGE>
EXHIBIT D-3
FORM OF
SWINGLINE LOAN NOTE
$ New York, New York
___________, 1999
FOR VALUE RECEIVED, the undersigned, HOMESIDE LENDING, INC., a
Florida corporation (the "Borrower"), hereby unconditionally promises to
pay to the order of (the "Swingline Lender") at the office of The Chase
Manhattan Bank located at 270 Park Avenue, New York, New York 10017, in
lawful money of the United States of America and in immediately available
funds, the principal amount of (a) _____________ _______ DOLLARS
($_____________), or, if less, (b) the aggregate unpaid principal amount of
each Swingline Loan which is made by the Swingline Lender to the Borrower
pursuant to subsection 2.3 of the Credit Agreement, as hereinafter defined.
The principal amount of each Swingline Loan evidenced hereby shall be
payable as provided in the Credit Agreement. The Borrower further agrees to
pay interest in like money at such office on the unpaid principal amount of
each Swingline Loan evidenced hereby, at the rate per annum set forth in
respect of such Swingline Loan on the schedule attached hereto and made a
part hereof or on a continuation of such schedule which shall be attached
hereto and made a part hereof (the "Grid"), calculated on the basis of a
year of 360 days and actual days elapsed from the Borrowing Date of such
Swingline Loan until the due date thereof (whether at the stated maturity,
by acceleration or otherwise) and thereafter at the rates determined in
accordance with subsection 2.11(e) of the Credit Agreement. Interest on
each Swingline Loan evidenced hereby shall be payable on the date or dates
set forth in respect of such Swingline Loan on the Grid.
The holder of this Note is authorized to endorse on the Grid the
Borrowing Date, amount, interest rate, Interest Payment Dates and maturity
date in respect of each Swingline Loan made pursuant to subsection 2.3 of
the Credit Agreement and each payment of principal with respect thereto.
Each such endorsement shall constitute prima facie evidence of the accuracy
of the information endorsed. The failure to make any such endorsement shall
not affect the obligations of the Borrower in respect of such Swingline
Loan.
This Note is one of the Notes referred to in the Revolving Credit
Agreement dated as of October __, 1999 (as amended, supplemented or
otherwise modified from time to time, the "Credit Agreement"), among the
Borrower, the Lender, the other banks and financial institutions or
entities from time to time parties thereto, Bank of America, N.A., Deutsche
Bank AG, New York Branch and Morgan Guaranty Trust Company of New York, as
Syndication Agents, National Australia Bank Limited, as Senior Managing
Agent and Co-Arranger, Chase Securities, Inc., as Arranger, and The Chase
Manhattan Bank, as Administrative Agent, and is subject to the provisions
of the Credit Agreement.
<PAGE>
Upon the occurrence of any one or more of the Events of Default, all amounts
then remaining unpaid on this Note shall become, or may be declared to be,
immediately due and payable, all as provided in the Credit Agreement.
All parties now and hereafter liable with respect to this Note, whether
maker, principal, surety, guarantor, endorser or otherwise, hereby waive
presentment, demand, protest and all other notices of any kind.
Unless otherwise defined herein, terms defined in the Credit Agreement and
used herein shall have the meanings given to them in the Credit Agreement.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE
WITH, THE LAW OF THE STATE OF NEW YORK.
HOMESIDE LENDING, INC.
By
Title:
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF SWINGLINE LOANS
_________________, Lender
HomeSide Lending, Inc., Borrower
Credit Agreement dated October __, 1999
Swingline Loan
Borrowing Date Amount of Swingline Interest Payment Swingline Loan
of Swingline Loan Loan Interest Rate Dates Maturity Date Payment Date Authorization
<S> <C> <C> <C> <C> <C> <C>
- ----------------- ----------------------- ----------------- ------------------ ------------------ ---------------- ===============
- ----------------- ----------------------- ----------------- ------------------ ------------------ ---------------- ===============
- ----------------- ----------------------- ----------------- ------------------ ------------------ ---------------- ===============
- ----------------- ----------------------- ----------------- ------------------ ------------------ ---------------- ===============
- ----------------- ----------------------- ----------------- ------------------ ------------------ ---------------- ===============
- ----------------- ----------------------- ----------------- ------------------ ------------------ ---------------- ===============
- ----------------- ----------------------- ----------------- ------------------ ------------------ ---------------- ===============
- ----------------- ----------------------- ----------------- ------------------ ------------------ ---------------- ===============
- ----------------- ----------------------- ----------------- ------------------ ------------------ ---------------- ===============
- ----------------- ----------------------- ----------------- ------------------ ------------------ ---------------- ===============
- ----------------- ----------------------- ----------------- ------------------ ------------------ ---------------- ===============
- ----------------- ----------------------- ----------------- ------------------ ------------------ ---------------- ===============
- ----------------- ----------------------- ----------------- ------------------ ------------------ ---------------- ===============
- ----------------- ----------------------- ----------------- ------------------ ------------------ ---------------- ===============
- ----------------- ----------------------- ----------------- ------------------ ------------------ ---------------- ===============
- ----------------- ----------------------- ----------------- ------------------ ------------------ ---------------- ===============
- ----------------- ----------------------- ----------------- ------------------ ------------------ ---------------- ===============
- ----------------- ----------------------- ----------------- ------------------ ------------------ ---------------- ===============
- ----------------- ----------------------- ----------------- ------------------ ------------------ ---------------- ===============
</TABLE>
<PAGE>
EXHIBIT E
FORM OF EXEMPTION CERTIFICATE
Reference is made to the Revolving Credit Agreement, dated as of October
__, 1999 (as amended, supplemented or otherwise modified from time to time, the
"Credit Agreement") among HOMESIDE LENDING, INC., a Florida corporation (the
"Borrower"), the several banks and other financial institutions or entities from
time to time parties thereto (the "Lenders"), BANK OF AMERICA, N.A., DEUTSCHE
BANK AG. NEW YORK BRANCH and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as
syndication agents (in such capacity, the "Syndication Agents"), NATIONAL
AUSTRALIA BANK LIMITED, as Senior Managing Agent and Co-Arranger, CHASE
SECURITIES, INC., as lead arranger and book manager ( in such capacity, the
"Arranger") and THE CHASE MANHATTAN BANK, as administrative agent (in such
capacity, the "Administrative Agent"). Capitalized terms used herein that are
not defined herein shall have the meanings ascribed to them in the Credit
Agreement. ______________________ (the "Non-U.S. Lender") is providing this
certificate pursuant to subsection 2.16(d) of the Credit Agreement. The Non-U.S.
Lender hereby represents and warrants that:
1 The Non-U.S. Lender is the sole record and beneficial owner of the
Loans or the obligations evidenced by the Note(s) in respect of which it is
providing this certificate.
14 The Non-U.S. Lender is not a "bank" for purposes of Section 881(c)(3)(A) of
the Internal Revenue Code of 1986, as amended (the "Code"). In this regard, the
Non-U.S. Lender further represents and warrants that:
(a)the Non-U.S. Lender is not subject to regulatory or other legal
requirements as a bank in any jurisdiction; and
(b) the Non-U.S. Lender has not been treated as a bank for purposes of any
tax, securities law or other filing or submission made to any Governmental
Authority, any application made to a rating agency or qualification for any
exemption from tax, securities law or other legal requirements;
3. The Non-U.S. Lender is not a 10-percent shareholder of the Borrower
within the meaning of Section 881(c)(3)(B) of the Code; and
4. The Non-U.S. Lender is not a controlled foreign corporation receiving
interest from a related person within the meaning of Section 881(c)(3)(C) of the
Code.
IN WITNESS WHEREOF, the undersigned has duly executed this certificate.
[NAME OF NON-U.S. LENDER]
By:_______________________________
Name:
Title:
Date: ____________________
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 202,859
<SECURITIES> 0
<RECEIVABLES> 255,759
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,086,239
<PP&E> 67,900
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,363,652
<CURRENT-LIABILITIES> 3,823,129
<BONDS> 1,184,384
0
0
<COMMON> 0
<OTHER-SE> 1,356,139
<TOTAL-LIABILITY-AND-EQUITY> 6,363,652
<SALES> 0
<TOTAL-REVENUES> 420,167
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 287,826
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 132,341
<INCOME-TAX> 63,234
<INCOME-CONTINUING> 69,107
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 69,107
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
