UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
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 issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at February 12, 1998
Common stock $1.00 par value 100 shares
FINANCIAL INFORMATION
ITEM 1. Financial Statements
<TABLE>
HOMESIDE LENDING, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Share Data)
<CAPTION>
(Unaudited)
December 31, 1998 September 30, 1998
----------------- ------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 92,008 $ 35,008
Mortgage loans held for sale, net 2,216,981 2,048,989
Mortgage servicing rights, net 2,162,452 1,766,214
Early pool buyout advances 487,027 759,579
Accounts receivable, net 263,603 272,005
Premises and equipment, net 50,502 45,657
Goodwill, net 669,026 677,049
Other assets 119,320 115,654
------------------- ------------------
Total Assets $6,060,919 $5,720,155
=================== ==================
LIABILITIES AND STOCKHOLDER'S EQUITY
Notes payable $3,022,367 $2,749,000
Accounts payable and accrued liabilities 309,949 236,940
Deferred income taxes 209,090 192,781
Long-term debt 1,185,576 1,185,926
------------------- ------------------
Total Liabilities 4,726,982 4,364,647
------------------- ------------------
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 10,866 33,121
------------------ -----------------
Total Stockholder's Equity 1,333,937 1,355,508
------------------ -----------------
Total Liabilities and Stockholder's Equity $6,060,919 $5,720,155
================== =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
HOMESIDE LENDING, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Dollars in Thousands)
<CAPTION>
Predecessor
For the Three For the Three
Months Ended Months Ended
December 31, 1998 November 30, 1997
----------------- -----------------
<S> <C> <C>
REVENUES:
Mortgage servicing fees $ 133,197 $ 107,606
Amortization of mortgage servicing rights (82,947) (58,004)
------------------ ----------------
Net servicing revenue 50,250 49,602
Interest income 46,175 28,470
Interest expense (29,719) (23,349)
------------------ ----------------
Net interest revenue 16,456 5,121
Net mortgage origination revenue 38,286 20,676
Other income 1,786 220
------------------ ----------------
Total Revenues 106,778 75,619
EXPENSES:
Salaries and employee benefits 34,514 19,191
Occupancy and equipment 6,447 4,262
Servicing losses on investor-owned loans
and foreclosure-related expenses 9,784 5,171
Goodwill amortization 8,707 154
Other expenses 16,202 9,463
------------------ ----------------
Total Expenses 75,654 38,241
Income before income taxes 31,124 37,378
Income tax expense 15,535 14,577
------------------ ----------------
Net income $ 15,589 $ 22,801
================== ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
HOMESIDE LENDING, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(Dollars in Thousands)
<CAPTION>
Predecessor
For the Three For the Three
Months Ended Months Ended
December 31, 1998 November 30, 1997
----------------- -----------------
<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $15,589 $ 22,801
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of mortgage servicing rights 82,946 58,004
Depreciation and amortization 10,563 2,829
Servicing losses on investor-owned loans 3,673 3,682
Change in deferred income tax liability 16,309 18,396
Origination and purchase of loans held for sale, net of repayments (167,992) 44,914
Change in accounts receivable 4,442 (71,814)
Change in other assets and accounts payable and accrued liabilities 62,101 (16,891)
CASH FLOWS (USED IN) PROVIDED BY INVESTING ACTIVITIES:
Purchase of premises and equipment, net (6,457) (4,539)
Acquisition of mortgage servicing rights (254,234) (146,598)
Net (purchases of) proceeds from risk management contracts (220,933) 148,058
Early pool buyout reimbursements 272,552 56,689
------------ -----------
Net cash (used in) provided by investing activities (209,072) 53,610
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Net borrowings from (repayments to) banks (1,031,899) (135,680)
Issuance of commercial paper 1,308,367 -
Issuance of notes payable - 45,000
Payment of debt issue costs - (825)
Repayment of long term debt (182) (154)
Dividends paid to Parent (37,846) (7,313)
------------- ------------
Net cash provided by (used in) by financing activities 238,440 (98,972)
Net increase in cash and cash equivalents 57,000 16,559
Cash and cash equivalents at beginning of period 35,008 31
--------------------- ----------------------
Cash and cash equivalents at end of period $92,008 $ 16,590
===================== ======================
Supplemental disclosure of cash flow information:
Interest paid $31,865 $23,231
Income taxes paid $14,953 $(3,818)
Cash received for reinstated loans from early pool buyout advances $ 2,572 $ -
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
HOMESIDE LENDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included.
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 HomeSide Lending, Inc. ("HomeSide Lending") adopted a
fiscal year end of September 30 to conform to the fiscal year of the National.
Accordingly, comparative financial statements for the same period in the prior
year have not been presented. Instead, a comparison of the period of the prior
year that most closely corresponds to the present period is presented. HomeSide
Lending'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). In addition, because HomeSide
Lending's operating results are produced and managed on a quarterly basis, it is
not practicable to furnish a period prior to February 11, 1998 that corresponds
to any period other than the period reported according to the predecessor's
prior fiscal year periods.
Operating results for the three months ended December 31, 1998, and the
predecessor's three months ended November 30, 1997 are not necessarily
indicative of the results that may be expected for the fiscal period ending
September 30, 1999. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Form 10-K for the period from
February 11, 1998 to September 30, 1998 of HomeSide Lending, Inc.
2. ORGANIZATION
On December 11, 1995, HomeSide Lending 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 (the "BBMC Predecessor") received cash and an ownership
interest in HomeSide Lending . The transaction closed on March 15, 1996 and
HomeSide Lending 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 Lending . Barnett received cash and an ownership interest in HomeSide
Lending . The accompanying financial statements reflect the effects of both of
these acquisitions. From May 31, 1996 until the 1997 public offering of common
stock, the Investors, BankBoston and Barnett each owned approximately one-third
of HomeSide Lending . Following the public offering, the Investors, 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 $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. HomeSide Lending also adopted a fiscal year end of September 30 to
conform to the fiscal year of the National.
3. MORTGAGE SERVICING RIGHTS
The change in the balance of mortgage servicing rights was as follows (in
thousands):
Balance, September 30, 1998 $1,766,214
Additions 254,235
Sales of servicing -
Deferred hedge loss 224,950
Amortization (82,947)
----------------
Balance, December 31, 1998 $2,162,452
================
4. 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>
Commercial paper $ 1,308,367 5.40% 5.50%
Bank line of credit - 5.99% 5.55%
National Australia Bank unsecured facility 1,714,000 5.44% 5.49%
---------------------
Total, December 31, 1998 $ 3,022,367
=====================
Bank line of credit $ 995,000 5.88% 5.86%
National Australia Bank unsecured facility 1,754,000 5.66% 5.67%
---------------------
Total, September 30, 1998 $ 2,749,000
=====================
</TABLE>
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 December 31, 1998, a total of $1.3 billion of commercial
paper was outstanding. The weighted average interest rate on commercial paper
outstanding during the three months ended December 31, 1998 was 5.50%.
On June 23, 1998, HomeSide Lending entered into an agreement for an
unsecured revolving credit facility with the National. HomeSide can borrow up to
$2.1 billion, subject to limits imposed by regulatory authorities. As of
December 31, 1998, regulations limited the National's ability to lend funds to
HomeSide Lending , a non-bank affiliate, to $1.8 billion. The interest rate is
charged at the 30 day LIBOR rate. At December 31, 1998, this credit facility
totaled $1.7 billion. The weighted average interest rate on outstanding
borrowings under this facility during the three months ended December 31, 1998
was 5.49%.
HomeSide Lending 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 Lending, 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 $950.0 million. Borrowings under the bank line of credit bear
interest at rates per annum, based on, at HomeSide Lending'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 Lending, 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 Lending's
assets. HomeSide Lending is in compliance with all requirements included in the
credit agreement. At December 31, 1998, 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.
5. LONG-TERM DEBT
11.25 % Notes
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 HomeSide Lending. 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 December 31, 1998 was $130.0 million. The balance of the Parent Notes at
December 31, 1998, including the fair value adjustment resulting from the merger
with the National, was $150.6 million.
Medium-term notes
As of December 31, 1998, outstanding medium-term notes issued by
HomeSide Lending under a $1.5 billion shelf registration statement were as
follows (in thousands):
<TABLE>
<CAPTION>
Issue Date Outstanding Balance Coupon Rate Maturity Date
- ---------- ------------------- ----------- -------------
<S> <C> <C> <C>
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
====================
</TABLE>
As of December 31, 1998, $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 rate on
medium-term borrowings issued for the quarter ended December 31, 1998, including
the effect of the interest rate swap agreements, was 5.87%. Net proceeds from
the issuances were primarily used to reduce the amounts outstanding under the
bank credit agreement and to fund a $16.6 billion portfolio acquisition from
Banc One. The balance of the medium-term notes at December 31, 1998, including
the fair value adjustment resulting from the merger with the National, was $1.2
billion.
Mortgage note payable
In connection with the acquisition of BancBoston Mortgage Corporation,
HomeSide Lending assumed a mortgage note payable that is due in 2017 and bears
interest at a stated rate of 9.5%. HomeSide Lending's main office building is
pledged as collateral for the mortgage note payable. The balance of the mortgage
payable at December 31, 1998, including the fair value adjustments resulting
from the merger with the National, was $24.1 million.
6. EARLY POOL BUYOUT ADVANCES AND SALES
On November 30, 1998, HomeSide Lending formed a wholly-owned subsidiary,
HomeSide Funding, Inc. ("HomeSide Funding"), whose sole purpose is to acquire
delinquent loans from HomeSide Lending'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. HomeSide Funding is
a non-consolidated, qualifying special purpose entity.
In December 1998, HomeSide Lending entered into a Pooling and Servicing
Agreement with Bank One Trust Company, N.A., as Trustee, and HomeSide Funding,
as Transferor, pursuant to which approximately $191 million of delinquent
mortgage loans were sold to HomeSide Funding. Subsequently, these loans were
sold to the HomeSide Mortgage Loan Buyout Trust 1998-A. Residual amounts
recorded as assets and gains and losses on sales of loans as a result of this
transaction were immaterial.
7. NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard 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 a 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. This statement is effective for fiscal quarters of fiscal
years beginning after June 15, 1999. Management has not yet determined the
impact of this statement on the presentation of the financial statements of
HomeSide Lending.
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." 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 is
effective for the first fiscal quarter beginning after December 15, 1998.
Management expects that the impact of this statement on the presentation of the
financial statements of HomeSide Lending will be immaterial.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
HomeSide Lending, Inc. (the "Company) is one of the largest full service
residential mortgage banking companies in the United States. HomeSide Lending's
strategy emphasizes variable cost mortgage origination, low cost servicing, and
effective risk management. Headquartered in Jacksonville, Florida, HomeSide
Lending ranks as the 9th largest originator and the 6th largest servicer in the
United States at September 30, 1998, based on data published by Inside Mortgage
Finance .
HomeSide Lending 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 Lending intends to pursue additional
loan portfolio acquisitions and strategic origination relationships similar to
the existing BankBoston and Banc One relationships.
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 $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 $713.6 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.
As a result of the merger with the National, HomeSide Lending adopted a
fiscal year end of September 30 to conform to the fiscal year of the National.
Accordingly, comparative financial statements for the same period in the prior
year have not been presented. Instead, a comparison of the period of the prior
year that most closely corresponds to the present period is presented. HomeSide
Lending'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). In addition, because HomeSide
Lending's operating results are produced and managed on a quarterly basis, it is
not practicable to furnish a period prior to February 11, 1998 that corresponds
to any period other than the periods reported according to the predecessor's
prior fiscal year periods. Therefore, the prior three months ended November 30,
1997 have been presented in accordance with Regulation 15d-10(e)(4).
Operating results for the three months ended December 31, 1998 and the
predecessor three months ended November 30, 1997 are not necessarily indicative
of the results that may be expected for the fiscal year ending September 30,
1999. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Form 10-K for the fiscal period from
February 11, 1998 to September 30, 1998 of HomeSide Lending, Inc.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. This Quarterly Report on Form
10-Q 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 depends on its ability to
obtain additional financing in the future for originating loans, investment in
servicing rights, working capital, capital expenditure and general corporate
purposes, (2) economic downturns 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.
Loan Production Activities
As a multi-channel loan production lender, HomeSide Lending 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 Lending also purchases servicing rights in bulk from
time to time. By focusing on production channels with a variable cost structure,
HomeSide Lending eliminates the fixed costs associated with traditional mortgage
branch offices. Without the burden of high fixed cost origination overhead,
HomeSide Lending is well positioned to weather a variety of interest rate
environments.
The following information regarding loan production activities for
HomeSide Lending is presented to aid in understanding the results of operations
and financial condition of HomeSide Lending for the three months ended December
31, 1998 and the predecessor's three months ended November 30, 1997 (in
millions):
Predecessor
For the Three For the Three
Months Ended Months Ended
December 31, 1998 November 30, 1997
----------------- -----------------
Correspondent $ 5,298 $ 3,310
Co-issue 872 1,745
Broker 1,090 319
------------------ ------------------
Total wholesale 7,260 5,374
Direct 323 106
------------------ ------------------
Total production 7,583 5,480
Bulk acquisitions 7,046 1,085
------------------ ------------------
Total production and acquisitions $ 14,629 $ 6,565
================== ==================
Total loan production, excluding bulk acquisitions, was $7.6 billion for
the three months ended December 31, 1998 compared to $5.5 billion for the
predecessor three months ended November 30, 1997, a 38% increase. HomeSide
Lending's correspondent lending and broker channels were the primary
contributors to production volume increases. The correspondent lending channel
volume increased 60% from the predecessor three months ended November 30, 1997
to the three months ended December 31, 1998. A primary contributor to the
increase was the addition of Banc One as a Preferred Partner on June 5, 1998. As
a Preferred Partner, Banc One will sell a significant portion of the residential
mortgage loans it originates to HomeSide Lending for five years.
On May 29, 1998, HomeSide Lending also purchased the operations of
NationsBank's subsidiary Loan America, a national broker network. This purchase
is contributing to HomeSide Lending's expansion of its broker network, a
production channel that is key to HomeSide Lending's variable cost origination
strategy. The broker channel volume increased 242% from the three months ended
November 30, 1997 to the three months ended December 31, 1998.
The interest rate environment has significantly affected the size of the
mortgage origination market. When interest rates decline, increasing numbers of
mortgagees refinance their loans. As a result, the mortgage origination market
grows. During this period of high refinances, HomeSide Lending has strived to
keep production at a level which is sustainable should the market size return to
1997 and 1996 volumes. To maintain and increase the servicing portfolio size
during this period of relatively high portfolio runoff, HomeSide Lending has
emphasized its acquisitions strategy.
HomeSide Lending also completed bulk acquisitions totaling $7.0 billion
during the three months ended December 31, 1998 compared to $1.1 billion for the
predecessor three months ended November 30, 1997. The increase in purchases is a
continuation of HomeSide Lending's targeted approach to grow the servicing
portfolio. Included in these bulk acquisitions for the three months ended
December 31, 1998 is the November 23, 1998 servicing portfolio of People's Bank.
People's Bank is the largest mortgage lender in Connecticut. This bulk
acquisition added $5 billion to HomeSide Lending's servicing portfolio. People's
Bank also became a Preferred Partner and has committed to sell its residential
mortgage originations to HomeSide Lending for five years.
HomeSide Lending 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 Lending has formed an alliance with a subprime mortgage lender,
which allows HomeSide Lending to offer additional mortgage-related products to
the production network.
Servicing Portfolio
Management believes that HomeSide Lending is one of the most efficient
mortgage 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 $118 billion, HomeSide Lending services the
loans of approximately 1.4 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 Lending anticipates its low cost of servicing
loans will continue to maximize the bottom-line impact of its growing servicing
portfolio. HomeSide Lending'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 Lending for the three months ended December 31, 1998 and
the predecessor's three months ended November 30, 1997 (in millions):
Predecessor
For the Three For the Three
Months Ended Months Ended
December 31, 1998 November 30, 1997
----------------- -----------------
Balance at beginning of period $ 114,902 $ 95,429
Additions 14,629 6,565
Scheduled amortization 771 534
Prepayments 9,523 3,120
Foreclosures 313 220
Sales of servicing 961 337
-------------------- -------------------
Total reductions 11,569 4,211
-------------------- -------------------
Balance at end of period $117,962 $ 97,783
==================== ===================
The number of loans serviced at December 31, 1998 was 1,412,420 compared
to 1,161,547 at November 30, 1997. HomeSide Lending'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 Lending's future growth is its proprietary servicing software. This
system allows HomeSide Lending to double the number of loans typically serviced
on a single system. For the three months ended December 31, 1998, substantially
all of the servicing portfolio is serviced on the proprietary system.
Results of Operations
For the three months ended December 31, 1998 compared to the predecessor three
months ended November 30, 1997
Summary
HomeSide Lending's net income, excluding goodwill amortization from the
acquisition of HomeSide by the National, increased 7% to $24.3 million for the
three months ended December 31, 1998 compared to $22.8 million for the
predecessor three months ended November 30, 1997. Net income after the goodwill
amortization from the acquisition of HomeSide by the National for the three
months ended December 31, 1998 was $15.6 million. Total revenues for the three
months ended December 31, 1998 were $106.8 million compared to $75.6 million for
the predecessor three months ended November 30, 1997, a 41% increase. The
increases in net income, excluding goodwill amortization, and revenues for the
three months ended December 31, 1998 compared to the predecessor three months
ended November 30, 1997 were primarily attributable to increases in net mortgage
origination revenue and net interest revenue. Net mortgage origination revenue
increased due to loan production volume increases and increased margins on loan
production activities. Net interest revenue increased due to increases in the
balances of average interest-earning assets, and as a result of reduced
borrowing costs from improved credit ratings and the issuance of medium-term
notes and commercial paper. Net servicing revenue increased primarily due to an
increase in the size of the servicing portfolio, partially offset by the effect
of declining interest rates, which increased mortgage prepayments speeds and
consequently increased amortization expense. Total expenses increased as a
result of increases in production volume, expenses associated with the growing
mortgage servicing portfolio and high loan prepayment activity, and amortization
expense of $8.7 million related to the goodwill associated with the merger with
the National.
Net Servicing Revenue
Net servicing revenue was $50.3 million for the three months ended
December 31, 1998 compared to $49.6 million for the predecessor three months
ended November 30, 1997. Net servicing revenue is comprised of mortgage
servicing fees, ancillary servicing revenue, and amortization of mortgage
servicing rights.
Mortgage servicing fees increased 24% to $133.2 million for the three
months ended December 31, 1998 compared to $107.6 million for the predecessor
three months ended November 30, 1997, primarily as a result of portfolio growth.
The servicing portfolio increased $20.2 billion to $118.0 billion at December
31, 1998 compared to $97.8 billion at November 30, 1997, a 21% increase. A
significant portion of this portfolio growth was due to the purchase of Banc One
Mortgage's $16.6 billion servicing portfolio on June 5, 1998. The prepayment
rate of the servicing portfolio was 31% for the three months ended December 31,
1998, up from 15% for the three months ended November 30, 1997. The prepayment
rate is affected by the level of refinance activity, which is driven by the
relative level of mortgage interest rates and activity in the home purchase
market. HomeSide Lending's weighted average interest rate of the mortgage loans
in the servicing portfolio was 7.65% and 7.87% at December 31, 1998 and November
30, 1997, respectively. The weighted average servicing fee, including ancillary
income, for the servicing portfolio was 0.463% for the three months ended
December 31, 1998 compared to 0.444% for the predecessor three months ended
November 30, 1997. The increase in the weighted average servicing fee was due to
growth of ancillary revenues, including late fees and other mortgage related
products.
Amortization expense was $82.9 million for the three months ended December
31, 1998 compared to $58.0 million for the predecessor three months ended
November 30, 1997, a 43% increase. Amortization expense increased mainly as a
result of a higher average balance of mortgage servicing rights and a decrease
of 61 basis points in average mortgage interest rates from 7.50% at November 30,
1997 to 6.89% at December 31, 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 and the rates at which HomeSide Lending is able to borrow. These
factors influence the size of the residential mortgage origination market,
HomeSide Lending's loan production volumes and the interest rates HomeSide
Lending 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 Lending'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 from interest earned on such loans prior to their sale. This higher level
of interest income due to increased volumes is partially offset by the lower
rates earned on the loans.
Overall borrowing costs also fluctuate with changes in interest rates.
Currently, the interest expense HomeSide Lending 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 $16.5 million for the three months ended
December 31, 1998 compared to $5.1 million for the predecessor three months
ended November 30, 1997. Increases in net interest revenue were due to increases
in net interest earned on mortgage loans held for sale, escrow deposits, and
early pool buyout advances. The average balance of mortgage loans held for sale
increased 82% to $2.0 billion for the three months ended December 31, 1998 from
$1.1 billion for the predecessor three months ended November 30, 1997. The
average escrow deposits balance increased 79% to $3.4 billion for the three
months ended December 31, 1998 from $1.9 billion for the predecessor three
months ended November 30, 1997. The principal balances of prepaid mortgage loans
are accumulated in escrow accounts before they are remitted to investors. During
periods of declining interest rates, prepayments, escrow balances and the
related earnings increase. The average balance of early pool buyout advances
increased 133% to $0.7 billion for the three months ended December 31, 1998 from
$0.3 billion for the three months ended November 30, 1998. Lower funding rates
obtained through improved credit ratings and the issue of medium-term notes and
commercial paper also contributed to increases in net interest income.
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 $38.3 million for the three months
ended December 31, 1998 compared to $20.7 million for the predecessor three
months ended November 30, 1997, an 85% increase. This increase was due to
increases in HomeSide Lending's loan production volumes and an increase in
margins due to a declining interest rate environment. The declining mortgage
interest rates sparked significant increases in refinancing levels and the
origination market. As a result, HomeSide Lending's loan production volumes
increased, primarily through HomeSide Lending's correspondent lending and broker
channels.
Other Income
Other income for the three months ended December 31, 1998 was $1.8
million compared to $0.2 million for the predecessor three months ended November
30, 1997. The increase was due to volume increases in real estate tax service
fees.
Salaries and Employee Benefits
Salaries and employee benefits expense was $34.5 million for the three
months ended December 31, 1998 compared to $19.2 million for the predecessor
three months ended November 30, 1997. The average number of full-time equivalent
employees was 2,496 for the three months ended December 31, 1998 compared to
1,805 for the predecessor three months ended November 30, 1997. The increases in
salaries and employee benefits expense and average number of full-time
equivalent employees are primarily attributable to additional expenses and
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 Lending's premises and equipment. Occupancy and equipment expense for
the three months ended December 31, 1998 was $6.4 million compared to $4.3
million for the predecessor three months ended November 30, 1997. The increase
in expense was mainly due to the 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 the final disposition of loans,
non-recoverable foreclosure costs, accrued interest for which payment has been
curtailed and estimates for potential losses based on HomeSide Lending's
experience as a servicer of government loans.
The servicing losses on investor-owned loans and foreclosure-related
expenses totaled $9.8 million for the three months ended December 31, 1998
compared to $5.2 million for the predecessor three months ended November 30,
1997. The increase was due to the growth of the portfolio and increased
foreclosure losses, which may continue at this level as the servicing portfolio
ages.
Included in the balance of accounts payable and accrued liabilities at
December 31, 1998 is a reserve for estimated servicing losses on investor-owned
loans of $21.4 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 Lending's historical loss experience on VA loans generally
has been consistent with industry experience. Management believes that HomeSide
Lending 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 Lending's delinquency and
foreclosure experience:
<TABLE>
<CAPTION>
Servicing Portfolio Delinquencies
(percent by loan count)
Predecessor
December 31, 1998 November 30, 1997
----------------- -----------------
<S> <C> <C>
Servicing Portfolio Delinquencies, excluding bankruptcies (at end of period)
30 days 3.84% 4.12%
60 days 0.78% 0.82%
90+ days 0.72% 0.69%
=================== ==================
Total past due 5.34% 5.63%
=================== ==================
Foreclosures pending 0.73% 0.73%
=================== ==================
</TABLE>
As a result of a more mature portfolio at December 31, 1998 compared to
the predecessor portfolio at November 30, 1997, servicing losses on
investor-owned loans and foreclosure-related expenses increased while servicing
portfolio delinquencies decreased.
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 Lending's mortgage servicing portfolio and loan
production volumes.
Other expenses, excluding goodwill amortization from the acquisition of
HomeSide Lending by National Australia Bank, were $16.2 million for the three
months ended December 31, 1998 compared to $9.6 million for the predecessor
three months ended November 30, 1997. The increase in other expenses was
primarily due to expenses associated with higher production volumes and the
growing mortgage servicing portfolio. Other expenses, including goodwill
amortization of $8.7 million and $0.2 million, respectively, for the three
months ended December 31, 1998 and the predecessor three months ended November
30, 1997 were $24.9 million and $9.6 million, respectively.
Income Tax Expense
HomeSide Lending's income tax expense was $15.5 million for the three
months ended December 31, 1998 compared to $14.6 million for the predecessor
three months ended November 30, 1997. The effective income tax rates for the
three months ended December 31, 1998 and the predecessor three months ended
November 30, 1997 were 51% and 39%, respectively. The increase was due to the
tax effects of goodwill as a result of the merger with the National.
Risk Management Activities
HomeSide Lending 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 Lending 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 three months ended December 31, 1998, HomeSide Lending utilized
options on U.S. Treasury bond and note futures and U.S. Treasury bond and note
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 Lending 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 Lending'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
Lending'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 Lending'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 Lending 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 values 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 three months ended December 31, 1998, deferred losses on risk
management contracts resulted in net deferred hedge gains of $153.5 million
which are included in the carrying value of mortgage servicing rights. Activity
in the deferred hedge account during the three months ended December 31, 1998 is
as follows (in thousands):
Net deferred hedge balance at September 30, 1998 $ 389,572
Net deferred hedge losses (224,950)
Amortization (11,086)
================
Net deferred hedge balance at December 31, 1998 $ 153,536
================
HomeSide Lending'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 December 31, 1998 was $49.5 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 Lending's sources and uses of cash. See Note
3 of Notes to Consolidated Financial Statements for a description of HomeSide
Lending's accounting policy for its risk management contracts and Notes 13 and
14 of Notes to Consolidated Financial Statements for additional fair value
disclosures with respect to HomeSide Lending's risk management contracts
included in HomeSide Lending's Form 10-K for the period from February 11, 1998
to September 30, 1998.
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 its commercial paper
program, a credit facility with the National, medium-term notes, an independent
syndicate of banks, including a warehouse credit facility and a
servicing-related facility, and cash flow from operations. HomeSide Lending
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 Lending Mortgage Securities,
Inc., a wholly-owned subsidiary of HomeSide Lending, Inc., may continue to issue
mortgage-backed securities.
Operations
Net cash provided by operations for the three months ended December 31,
1998 was $27.6 million. Net cash provided by operations for the predecessor
three months ended November 30, 1997 was $61.9 million. Cash provided from
servicing fee income, loan sales and principal repayments were partially offset
by cash used to fund loan originations and pay corporate expenses. 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 for the three months ended December
31, 1998 was $209.1 million. Net cash provided by investing activities for the
predecessor three months ended November 30, 1997 was $53.6 million. Cash used in
investing activities was for the purchase of mortgage servicing rights and risk
management contracts. Cash was provided by proceeds from risk management
contracts and early pool buyout reimbursements. Other assets increased $3.6
million to $119.3 million at December 31, 1998 from $115.7 million at September
30, 1998 primarily as a result of increases in HomeSide Lending's hedge assets
partially offset by decreases in loans held for investment. Early pool buyout
advances totaled $487.0 million at December 31, 1998 compared to $759.6 million
at September 30, 1998 as a result of re-instatements and sales of advances to
HomeSide Funding, Inc. Future uses of cash for investing activities will be
dependent on the mortgage origination market and HomeSide Lending's hedging
needs. HomeSide Lending 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 for the three months ended
December 31, 1998 was $238.4 million. Net cash used in financing activities for
the predecessor three months ended November 30, 1997 was $99.0 million. Cash was
provided by the issuance of commercial paper and medium-term notes, borrowings
from the National, and borrowings on HomeSide Lending's line of credit during
the periods and used to repay borrowings from the National, borrowings on the
line of credit and to pay dividends to the Parent.
HomeSide Lending 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 Lending 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 Lending'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 Chief Financial Officer and Chief Information Officer.
Throughout all phases of the Year 2000 Program, including the inventory and
assessment phases, the Year 2000 teams aim to complete all required work
maximize coverage 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 has been adopted using Paragon Computer
Professionals, Inc. as the primary outsourcer. Contractors are used internally
where subject matter expertise is 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 scripts 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 have completed their
assessment of the Company's systems and business processes for Year 2000
vulnerability. The assessment has included substantially all hardware and
software systems, embedded systems, buildings and equipment, and business
processes. The assessment has also included a review of the Company's
dependencies on third parties, including vendors, suppliers and customers.
The Company has established certain key milestones in its Year 2000 Program.
Those milestones are:
Assessment of substantially all systems and processes by July 31, 1998;
Remediation and internal testing of all mission critical applications
substantially completed by December 31, 1998;
End-to-end testing of all mission critical systems with
material third parties substantially completed by March
31, 1999; and
Remediation and testing of all non-mission critical
systems and clean management of all systems through 1999.
The Company has completed its assessment of all systems and processes.
Remediation and internal testing of mission critical systems is substantially
complete. The Company is presently "on time" in complying with the milestones
and internal timetable the Company has established in preparation for the change
to 2000 in line with its regulator's suggested completion dates for core
systems. Set forth below is a graphical depiction of the Company's state of
readiness in the first five action phases of the Company's project plan, divided
to show progress as to the Information Technology (IT) portion of the project,
the Company's two primary servicing systems, and the end-user computing portion
of the project as of December 11, 1998:
<PAGE>
<TABLE>
<CAPTION>
IT Achievements (excludes servicing systems)
Date % Complete
<S> <C> <C>
Full assessment of all IT components impacted by the turn of the century. 6/30/98 100%
Remediation
Repair or Replace all IT components found to be non-compliant. 9/30/98 68%
10/31/98 91%
12/31/98 100%
Testing Internal
Test all IT Y2K impacted internal components in a simulated and real future 9/30/98 30%
date environment. 10/31/98 41%
12/11/98 76%
12/31/98 80%
1/31/99 93%
3/31/99 100%
Testing External
Testing with customers, and vendors/service providers. 12/11/98 0%
1/31/99 0%
3/31/99 80%
6/30/99 100%
Implementation
Place into the production operating environment all IT components tested 9/30/98 17%
and deemed to be Y2K ready. 10/31/98 26%
12/31/98 87%
1/31/99 89%
3/31/99 100%
Check-off
Official sign-off by the business and technology owner of the component 9/30/98 5%
that the component is Y2K ready. 10/31/98 17%
12/31/98 65%
1/31/99 78%
3/31/99 90%
6/30/99 100%
</TABLE>
The charts set forth above show the status of completion of the number of gross
technology applications identified by the Company for remediation measured by
each of the various phases of the Company's Year 2000 Program. This chart
measures the progress on thirty-four (34) key Information Technology
applications, of which 14 have been designated as mission critical. As to these
thirty-four (34) key applications, as of December 31, 1998, assessment was 100%
complete, remediation was 100% complete, and internal testing was 80% complete.
As to these thirty-four (34) key applications, as of January 31, 1999, the most
recent date for which information is available prior to this filing, internal
testing was 93% complete. The balance of testing is primarily end-to-end testing
with material third parties, which is scheduled to take place prior to March 31,
1999.
As to the fourteen (14) mission critical applications (excluding servicing
systems which are separately discussed below), as of December 31, 1998,
assessment was 100% complete, remediation was 100% complete, and internal
testing was 88% complete. As of January 31, 1999, internal testing of these
mission critical applications was substantially complete.
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). Because of their critical importance to the Company's operations,
these systems are not included in the above charts. Rather, progress as to these
two systems is set forth separately in the charts below. As to these two
systems, as of December 31, 1998, assessment was 100% complete, remediation was
100% complete, and internal testing was 95% complete. As to these two systems,
as of January 31, 1999, internal testing was substantially complete. However the
Company will continue testing of these two systems throughout 1999, including
end-to-end testing with material parties that is scheduled to take place prior
to March 31, 1999.
<PAGE>
<TABLE>
<CAPTION>
IT Achievements (servicing systems)
Date % Complete
<S> <C> <C>
Full assessment of all IT components impacted by the turn of the century. 9/30/98 100%
Remediation
Repair or Replace all IT components found to be non-compliant. 9/30/98 90%
12/31/98 100%
Testing Internal
Test all IT Y2K impacted internal components in a simulated and real future 12/31/98 95%
date environment. 1/31/99 100%
3/31/99 100%
Testing External
Testing with customers, and vendors/service providers. 12/31/98 0%
1/31/99 0%
3/31/99 100%
Implementation
Place into the production operating environment all IT components tested 12/31/98 50%
and deemed to be Y2K ready. 1/31/99 50%
3/31/99 100%
Check-off
Official sign-off by the business and technology owner of the component 12/31/98 50%
that the component is Y2K ready. 1/31/99 50%
3/31/99 75%
6/30/99 100%
</TABLE>
The Company's Year 2000 Program also addresses end-user computing issues
presented by the year 2000 change. The following chart depicts the Company's
progress in addressing systems and business processes other than information
technology systems. As to those business processes and systems, as of December
31, 1998, assessment was 100% complete, remediation was 96% complete and testing
was 56% complete. As to those business processes and systems, as of January 31,
1999, remediation was 96% complete and testing was 76% complete. The balance of
remediation is scheduled for completion by March 31, 1999. Testing,
implementation and check-off is scheduled to be completed prior to June 30,
1999.
<TABLE>
<CAPTION>
End-User Computing Achievements
Date % Complete
<S> <C> <C>
Full assessment of all non-IT components impacted by the turn of the century. 12/31/98 100%
Remediation
Repair or replace all non-IT components found to be non-compliant. 12/31/98 96%
1/31/99 96%
3/31/99 100%
Testing
Test all non-IT Y2K impacted components in a simulated and real future date 12/31/98 56%
environment. Includes testing with customers, and vendors/service providers. 1/31/99 76%
3/31/99 85%
6/30/99 100%
Implementation
Place into the production operating environment all non-IT components 12/31/98 22%
tested and deemed to be Y2K ready. 1/31/99 76%
3/31/99 80%
6/30/99 100%
Check-off
Official sign-off by the business owner of the non-IT component that the 12/31/98 28%
component is Y2K ready. 1/31/99 69%
3/31/99 75%
6/30/99 100%
</TABLE>
<PAGE>
The information set forth above is not weighted to reflect the relative
criticality of individual applications. Moreover, not all applications require
the same level of effort for remediation and testing. Therefore, a significant
percentage of completion of one phase of the program, taken out of context, may
not fully reflect the Company's overall state of preparedness. In addition, the
reality of the Year 2000 work, its breadth, dependencies and linkages (including
satisfactory and timely delivery by key vendors) means that there may be some
work which will not be completed by the milestone target.
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 is currently reviewing 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 is ongoing and testing is planned for the first quarter of
1999. The Company is also scheduled to participate in the MBA Year 2000
Readiness Test, an industry-wide test coordinated by the Mortgage Bankers
Association of America, in the first quarter of 1999.
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.
Cost of Year 2000 Efforts. The Company acknowledges that work needs to be
carried out in virtually all aspects of its business to ensure that the Company
successfully manages the change to 2000. The Company presently estimates these
costs to total approximately $13.5 million. The Company has revised its Year
2000 budget from $15.0 million to $13.5 million. The adjustment to the budget
resulted from lower than anticipated expenses relating to: (1) the Company's
primary remediation contractor, (2) software upgrades, (3) non-Y2K compliant
equipment write-offs, (4) contract labor expenses, and (5) accounting charges
resulting from capitalization of certain software costs which were budgeted to
have been expensed.
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 December 31, 1998, the Company had expended approximately $6.4 million
of its total Year 2000 budget. Through January 31, 1999, the most recent date
for which information is available prior to this filing, the Company had
expended approximately $6.8 million of its total Year 2000 budget. A significant
portion of the budget is allocated to testing and will be expended in the period
ending March 31, 1999, the scheduled conclusion of end-to-end testing. In
addition, the Company anticipates significant expenditures after March 31, 1999
associated with employee retention efforts, continued testing, clean management
of systems and maintenance of its Year 2000 Program Office. 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 December 31, 1998 was approximately 18%. 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 $15 million
is based on the current status of the Year 2000 Program and is subject to
change. The budget of $15 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.
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 a failure in its loan servicing software and/or systems. Such a
failure would result in material disruption in the Company's operations
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 and 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 are
being developed for individual applications, systems and business processes.
Individual departments within the Company, acting under the supervision and
direction of the Year 2000 Program Enterprise team, are reviewing and adjusting
existing business continuity planning to incorporate these circumstances, and to
seek to ensure that the Company meets its primary objective of "business as
usual" before, during and through 2000.
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
There have been no material changes in the Company's market risk from
September 30, 1998. For information regarding the Company's market risk, refer
to Form 10-K for the fiscal year ended September 30, 1998 of HomeSide
International, Inc.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
HomeSide Lending is a defendant in a number of legal proceedings arising
in the normal course of business. HomeSide Lending, 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 Lending, 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 Lending.
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 6. Exhibits and Reports on Form 8-K
(a) The following documents are filed as a part of this Report:
Number Description
10.1 U.S. Commercial Paper Offering Memorandum between HomeSide Lending,
Inc. and Chase Securities, Inc.
10.2 Commercial Paper Dealer Agreement between HomeSide Lending, Inc.
and Morgan Stanley & Co., Inc.
10.3 Commercial Paper Dealer Agreement between HomeSide Lending, Inc.
and Chase Securities, Inc.
12 Computation of the ratio of earnings to Fixed Charges
27 Financial Data Schedule
(b) Reports on form 8-K
HomeSide Lending has filed no reports on Form 8-K during the three
months ended December 31, 1998.
SIGNATURES
Pursuant to the requirements 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)
Date: February 12, 1999 By: __/S/_____________________
Joe K. Pickett
Chairman of the Board, Chief Executive Officer
and Director (Principal Executive Officer)
Date: February 12, 1999 By: __/S/______________________
Kevin D. Race
Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
- --------------------------------------------------------------------------------
C H A S E S E C U R I T I E S I
N C.
- --------------------------------------------------------------------------------
October 1998
HOMESIDE LENDING, INC.
U.S.$1,500,000,000
RATINGS1
Commercial Paper Senior Secured Debt
Standard & Poor's Ratings Services A-1 A+
Moody's Investors Service, Inc. P-1 A1
Fitch IBCA F-1+ (neg. Watch) AA- (neg. Watch)
SUMMARY OF TERMS
ISSUER: HomeSide Lending, Inc. ("HomeSide Lending" or the "Company").
OFFERING: Commercial paper notes offered pursuant to the
exemption from registration under the Securities Act, as
amended, provided by Section 3(a)(3) thereof.
AMOUNT: Up to $1,500,000,000.
MATURITY: Up to 270 days from the date of issue, as agreed upon from
time to time.
DENOMINATIONS: The Notes will be issued in minimum denominations of
$100,000 with integral increments of $1,000 in excess
thereof and will be issued in book-entry form.
Settlement will be made in immediately available funds.
INTEREST: The Notes will be sold at a discount with
payment of the face amount at maturity;
interest will be calculated using a 360-day
year based on the actual number of days
elapsed.
USE OF PROCEEDS: The proceeds of the notes will be used to meet working
capital requirements. The proceeds may be used to repay
indebtedness to Chase Securities Inc. ("CSI") -
affiliated lenders.
ISSUING & PAYING
AGENT: The Chase Manhattan Bank.
BANK LINES: The Company has available a backup credit facility from
various banks aggregating $1.5 billion. The Chase
Manhattan Bank is a participant in this facility.
FORM OF ISSUANCE: The Notes will be issued and purchases will be recorded
only through the book-entry system of the Depository Trust
Company ("DTC"). Beneficial owners will not receive
certificates representing their ownership interest in
the Notes. The face amount of each Note will be paid upon
maturity in immediately available funds to DTC. The
Issuer has been advised by DTC that upon receipt of such
payment DTC will credit,
on its book-entry records and transfer system, the
accounts of the DTC participants through whom Notes are
directly or indirectly owned. Payments by DTC to its
participants and by such participants to owners
of the Notes or their representatives will be governed
by customary practices and standing instructions
and will be the sole responsibility of DTC, such
DTC participants or such representatives, respectively.
MISCELLANEOUS: The Notes are not redeemable or subject to voluntary
prepayment by the Company prior to maturity. No
indenture of trust will be entered into with respect to the
Notes.
Homeside Lending, Inc.
- -------------------------------------------------------------------------------
C H A S E S E C U R I T I E S I
N C.
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED] U.S. Commercial Paper
Offering Memorandum
The information set forth herein was obtained from sources which we believe
reliable, but we do not represent or guarantee its accuracy or completeness. The
information contained herein will not typically be distributed or updated upon
each new sale of commercial paper notes. Further, the information herein is not
intended as a substitution for the investor's own inquiry into the
creditworthiness of the Issuer and, if applicable, another party providing
credit support for the commercial paper notes.
BUSINESS
HomeSide Lending is one of the largest full-service residential mortgage banking
companies in the United States. It was formed in 1996 through the acquisition of
BancBoston Mortgage Corporation from The First National Bank of Boston and
Barnett Mortgage Company from Barnett Banks, Inc. HomeSide Lending's strategy
emphasizes variable cost mortgage origination and low cost servicing. HomeSide
Lending's mortgage loan production volume, excluding bulk purchases, was $20.5
billion for the period from March 1, 1997 through February 10, 1998 and $20.9
billion for the period from March 16, 1996 to February 28, 1997. Its servicing
portfolio was $98.9 billion on February 10, 1998 and $ 89.2 billion on February
28, 1997. HomeSide Lending ranks as the 5th largest originator and 6th largest
servicer in the United States for calendar year 1997 based on data published by
Inside Mortgage Finance. As of June 30, 1998, HomeSide Lending's servicing
portfolio has grown to $114.8 billion.
On October 27, 1997, National Australia Bank Ltd., ("NAB") agreed to buy
HomeSide Inc. ("Holdings"), the parent of HomeSide Lending for total
consideration of $1.23 billion. NAB, headquartered in Melbourne, Australia, is a
bank with reported assets of US$149.8 billion as of December 31, 1997 and
operations spanning the United States, England, Scotland, Ireland, Australia,
New Zealand and Asia. HomeSide operates as a subsidiary of NAB while remaining
an active borrower under its own name.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents are hereby incorporated by reference in this Memorandum
and deemed to be a part hereof: the Annual Report of HomeSide Lending, Inc. on
Form 10-K for the year ended February 10, 1998, the most recent 10-Q dated June
30, 1998 and all documents filed by HomeSide Lending, Inc. pursuant to Section
13 or Section 15(d) of the Securities Exchange Act of 1934 subsequent to the
date thereof, hereof and prior to termination of the offering of the Notes. Any
statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Offering Memorandum to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of the Offering Memorandum.
CHASE SECURITIES INC. AND AFFILIATES
CSI is an affiliate of The Chase Manhattan Bank, which is a lender to the Issuer
and certain of its affiliates. In addition, The Chase Manhattan Bank, or its
affiliates, participates on a regular basis in various general financing and
banking transactions for the Issuer and its affiliates. Proceeds from the sales
of the Notes may be used to repay indebtedness of the Company to The Chase
Manhattan Bank or other lending affiliates of CSI.
ADDITIONAL INFORMATION
If you require additional information or have any questions, please contact:
Investor Marketing
Money Market Division
Chase Securities Inc.
270 Park Avenue, 8th Floor
New York, NY 10017
Phone: (212) 834-3435
Fax: (212) 834-6945
CSI, a wholly-owned subsidiary of The Chase Manhattan Corporation, is a separate
entity from The Chase Manhattan Bank and other lending affiliates. Unless
expressly disclosed otherwise to you, securities sold, offered or recommended by
CSI are not deposits, are not insured by the Federal Deposit Insurance
Corporation, are not guaranteed by an affiliated bank or other lending
affiliate, and are not otherwise an obligation or responsibility of any
affiliated bank or other lending affiliate.
The information contained herein has been obtained from sources which CSI
believes to be reliable; however, CSI makes no representation as to either the
completeness or accuracy of this information.
The information in the sections "Chase Securities Inc. and Affiliates" and
"Additional Information" is particular to Chase Securities Inc. All other
information contained in this memorandum has been provided by and agreed upon by
the Company.
Offering Memorandum Approval:
Approved:
By: /s/James Krakau
Title:
Date:
- --------
1 As of the date hereof, Standard & Poor's Ratings Services, Moody's Investors
Service, and Fitch IBCA continually monitor the credit of the Company. The
ratings may be changed, superseded or withdrawn, and therefore prospective
purchasers should check the current ratings before purchasing the Notes.
COMMERCIAL PAPER DEALER AGREEMENT, dated as of September 11, 1998
between HOMESIDE LENDING, INC., a Florida corporation (the "Issuer"), and MORGAN
STANLEY & CO. INCORPORATED, a Delaware corporation ("MS").
The Issuer intends to issue short-term notes pursuant to Section
3(a)(3) of the Securities Act of 1933, as amended (the "1933 Act").
The Issuer desires to enter into this Agreement with MS in order to
provide for the offer and sale of such notes in the manner described here.
The parties hereto, in consideration of the premises and mutual
covenants herein contained, agree as follows:
1. Definitions.
"Business Day" shall mean any day other than a Saturday or Sunday or a
day when banks are authorized or required by law to close in New York City.
"Company Information" shall mean the Offering Memorandum (defined
below), together with, to the extent applicable, information provided by the
Issuer pursuant to Section 6(b) hereof.
"DTC" shall mean the Depository Trust Company.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Issuing and Paying Agent" shall mean The Chase Manhattan Bank, the
issuing and paying agent under the Issuing and Paying Agency Agreement, or any
successor thereto.
"Issuing and Paying Agency Agreement" shall mean the issuing and paying
agency agreement, dated as of September 2, 1998 between the Issuer and the
Issuing and Paying Agent, as the same may from time to time be amended.
"Notes" shall mean short-term promissory notes of the Issuer,
substantially in the form of Annex A to the Issuing and Paying Agency Agreement
in the case of certificated Notes, and represented by master notes substantially
in the form of Annex B to the Issuing and Paying Agency Agreement in the case of
book-entry Notes, issued by the Issuer from time to time pursuant to the Issuing
and Paying Agency Agreement.
"Offering Materials" shall mean the offering materials concerning the
Issuer contemplated by Section 6 hereof, and such offering materials as from
time to time revised or supplemented.
"Offering Memorandum" shall mean the offering memorandum with respect
to the offer and sale of the Notes (including materials referred to therein or
incorporated by reference therein), prepared in accordance with Section 6 hereof
and provided to purchasers or prospective purchasers of the Notes, and including
all amendments and supplements thereto which may be prepared from time to time
in accordance with this Agreement.
"Person" shall mean an individual, a corporation, a partnership, a
trust, an association or any other entity.
"SEC" shall mean the U.S. Securities and Exchange Commission, or any
successor thereto.
2. Issuance and Placement of Commercial Paper Notes.
(a) The Issuer hereby appoints MS to act as the Issuer's dealer in
connection with the sale of the Notes in accordance with the terms hereof, and
MS hereby accepts such appointment. While (i) the Issuer has and shall have no
obligation to permit MS to purchase any Notes for its own account or to arrange
for the sale of the Notes and (ii) MS has and shall have no obligation to
purchase any Notes for MS's own account or to arrange for the sale of Notes, the
parties agree that, as to any and all Notes which MS may purchase or the sale of
which MS may arrange, such Notes will be purchased or sold by MS in reliance on,
among other things, the agreements, representations, warranties and covenants of
the Issuer contained herein on the terms and conditions and in the manner
provided for herein.
(b) If the Issuer and MS shall agree on the terms of the purchase of
any Note by MS or the sale of any Note arranged by MS (including, but not
limited to, agreement with respect to the date of issue, purchase price,
principal amount, maturity and interest rate (in the case of interest-bearing
Notes) or discount rate thereof (in the case of Notes issued on a discount
basis), and appropriate compensation for MS's services hereunder) pursuant to
this Agreement, MS shall confirm the terms of each such agreement promptly to
the Issuer in MS's customary form, the Issuer shall cause such Note to be issued
and delivered in accordance with the terms of the Issuing and Paying Agency
Agreement, and payment for such Note shall be made in accordance with such
Agreement. The authentication and delivery of such Note by the Issuing and
Paying Agent shall constitute the issuance of such Note by the Issuer. The
Issuer shall deliver Notes signed by the Issuer to the Issuing and Paying Agent,
and instructions shall be delivered to the Issuing and Paying Agent to complete,
authenticate and deliver such Notes in the manner prescribed in the Issuing and
Paying Agency Agreement. MS shall be entitled to compensation at such rates and
paid in such manner as the Issuer and MS shall from time to time agree upon and
to reimbursement for MS's out-of-pocket costs and expenses, including, but not
limited to, fees and disbursements of counsel, in connection with the
preparation of this Agreement and the transactions contemplated hereby.
(c) The Notes may be issued either in physical bearer form or in
book-entry form. Notes in book-entry form shall be represented by master notes
registered in the name of a nominee of DTC and recorded in the book-entry system
maintained by DTC. References to "Notes" in this Agreement shall refer to both
physical and book-entry Notes unless the context otherwise requires. The Notes
may be issued either at a discount or as interest-bearing obligations with
interest payable at maturity in a stated amount.
(d) Each Note purchased by, or the sale of which is arranged through,
MS hereunder shall (i) have a face amount of $100,000, or an integral multiple
of $1,000 in excess thereof, (ii) have a maturity which is a Business Day not
later than the 270th day next succeeding such Note's date of issuance and (iii)
not contain any provision for extension, renewal or automatic "rollover".
3. Representations and Warranties of the Issuer.
(a) The Issuer represents and warrants as follows:
(i) The Issuer is a duly organized and validly existing corporation in
good standing under the laws of the state of its incorporation and has the
corporate power and authority to own its property, to carry on its business as
presently being conducted, to execute and deliver this Agreement, the Issuing
and Paying Agency Agreement, and the Notes, and to perform and observe the
conditions hereof and thereof.
(ii) Each of this Agreement and the Issuing and Paying Agency Agreement
has been duly and validly authorized, executed and delivered by the Issuer and
constitutes the legal, valid and binding agreement of the Issuer. The issuance
and sale of Notes by the Issuer hereunder have been duly and validly authorized
by the Issuer and, when delivered by the Issuing and Paying Agent as provided in
the Issuing and Paying Agreement, each Note will be the legal, valid and binding
obligation of the Issuer.
(iii) The Notes are exempt from the registration requirements of the
1933 Act by reason of Section 3(a)(3) thereof, and, accordingly, registration of
the Notes under the 1933 Act will not be required. Qualification of an indenture
with respect to the Notes under the Trust Indenture Act of 1939, as amended,
will not be required in connection with the offer, issuance, sale or delivery of
the Notes.
(iv) The Issuer is neither an "investment company" nor a "company
controlled by an investment company" within the meaning of the Investment
Company Act of 1940, as amended.
(v) No consent or action of, or filing or registration with, any
governmental or public regulatory body or authority is required to authorize, or
is otherwise required in connection with, the execution, delivery or performance
of this Agreement, the Issuing and Paying Agency Agreement or the Notes.
(vi) Neither the execution and delivery by the Issuer of any of this
Agreement, the Issuing and Paying Agency Agreement and the Notes, nor the
fulfillment of or compliance with the terms and provisions hereof or thereof by
the Issuer, will (x) result in the creation or imposition of any mortgage, lien,
charge or encumbrance of any nature whatsoever upon any of the properties or
assets of the Issuer or (y) violate any of the terms of the Issuer's charter
documents or by-laws, any contract or instrument to which the Issuer is a party
or by which it or its property is bound, or any law or regulation, or any order,
writ, injunction or decree of any court of governmental instrumentality, to
which the Issuer is subject or by which it or its property is bound.
(vii) There are no actions, suits, proceedings, claims or governmental
investigations pending or threatened against the Issuer or any of its officers
or directors or any persons who control the Issuer (within the meaning of
Section 15 of the 1933 Act or Section 20 of the Exchange Act) or to which any
property of the Issuer is subject, which could in any way result in a material
adverse change in the condition (financial or otherwise) of the Issuer, or
materially prevent or interfere with, or materially and adversely affect the
Issuer's execution, delivery or performance of, any of this Agreement, the
Issuing and Paying Agency Agreement and the Notes.
(viii) The initial Offering Materials do not, and any amendments or
supplements thereto and any subsequent Offering Materials and any amendments or
supplements thereto will not, contain any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements made
therein, in light of the circumstances under which they are made, not
misleading.
(b) Each issuance of Notes by the Issuer shall be deemed a
representation and warranty by the Issuer to MS, as of the date thereof, that,
both before and after giving effect to such issuance, (i) the representations
and warranties of the Issuer set forth in Section 3(a) hereof remain true and
correct on and as of such date as if made on and as of such date (except to the
extent such representations and warranties expressly relate solely to an earlier
date); (ii) the corporate resolutions and certificate of incumbency referred to
in Section 5 hereof remain accurate and in full force and effect; (iii) since
the date of the most recent Offering Materials, there has been no material
adverse change in the financial condition or operations of the Issuer which has
not been disclosed to MS in writing; and (iv) the Issuer is not in default of
any of its obligations hereunder, under the issuing and Paying Agency Agreement
or under any Note.
<PAGE>
4. Covenants and Agreements of the Issuer.
(a) Without the prior written consent of MS, the Issuer shall
not permit to become effective any amendment, supplement, waiver or consent to
or under the Issuing and Paying Agency Agreement. The Issuer shall give to MS,
at least 60 Business Days prior to the proposed effective date thereof, notice
of any proposed amendment, supplement, waiver or consent under the Issuing and
Paying Agency Agreement. The Issuer shall provide to MS, promptly after the same
is executed, a copy of any amendment, supplement or written waiver or consent
covered by the notice requirements of this Section 4(a). The Issuer further
agrees to furnish prior written notice to MS, as soon as possible and in any
event at least 60 days prior to the effective date thereof, of any proposed
resignation, termination or replacement of the Issuing and Paying Agent.
(b) The Issuer shall, whenever there shall occur any change in
the Issuer's financial condition or any development or occurrence in relation to
the Issuer that would be material to the holders of Notes or potential holders
of Notes, promptly, and in any event prior to any subsequent issuance of Notes,
notify MS (by telephone, confirmed in writing) of such change, development or
occurrence.
(c) The Issuer covenants and agrees with MS that the Issuer
will promptly furnish to MS a copy of any notice, report or other information,
relating to the Notes delivered to or from rating agencies then rating the
Notes.
(d) The proceeds from the sale of Notes will be used by the
Issuer for "current transactions" within the meaning of Section 3(a)(3) of the
1933 Act.
(e) The Issuer agrees promptly from time to time to take such
action as MS may reasonably request to qualify the Notes for offering and sale
under the securities laws of such jurisdictions as MS may request and to comply
with such laws so as to permit the continuance of sales and resales therein for
as long as may be necessary to complete the transactions contemplated hereby,
provided that in connection therewith the Issuer shall not be required to
qualify as a foreign corporation or to file a general consent to service of
process in any jurisdiction other than consent to service of process under such
state securities laws. The Issuer also agrees to reimburse MS for any reasonable
fees or costs incurred in so qualifying the Notes.
<PAGE>
5. Conditions Precedent.
At or promptly after the execution of this Agreement, and as conditions
precedent to any obligations of MS hereunder, there shall have been furnished to
MS, in form and substance satisfactory to MS:
(i) an original or photocopy of the executed Issuing and Paying
Agency Agreement;
(ii) a certified copy of resolutions duly adopted by the Board of
Directors of the Issuer authorizing and approving the
transactions contemplated hereby;
(iii) a certificate of incumbency showing the officers and other representatives
of the Issuer authorized to execute Notes and to give
instructions concerning the issuances of Notes;
(iv) an opinion of counsel to the Issuer addressed to MS as to the
matters set forth in subsections (i)-(vii) of Section 3(a)
above and as to such other matters as MS shall reasonably
request;
(v) a copy of each other opinion of counsel furnished to any
Person that may be delivered in connection with the issuance
the Notes, including, but not limited to, any opinion
delivered under or relating to the Issuing and Paying Agency
Agreement, each of which shall be addressed to MS;
(vi) true and correct copies of the letters assigning ratings and
of all other correspondence to the Issuer from the rating
agencies that have assigned a rating to the Notes;
(vii) a copy of the Offering Materials, including the Offering
Memorandum, approved in writing by the Issuer;
(viii) true and correct copies of any documents relating to the Notes
executed by the Issuer and DTC; and
(ix) in connection with issuance of Notes in book-entry form, a
copy of the master note(s) evidencing such Notes.
<PAGE>
6. Disclosure.
(a) The Issuer understands that, in connection with the offer and sale
of the Notes, from time to time offering materials, including an Offering
Memorandum and any other Company Information approved by the Issuer for
dissemination to purchasers or potential purchasers of the Notes (the
"Offering Materials"), will be prepared by the Issuer, relating to the Notes
and the Issuer, which Offering Materials may be distributed to MS's sales
personnel and to purchasers and prospective purchasers of the Notes.
(b) To provide a basis for the preparation of the Offering Materials
and to assist in MS's ongoing credit review procedures and sale of the Notes,
the Issuer agrees to furnish to MS, as these items become available, (i) the
Issuer's most recent report on Form 10-K filed with the SEC and each report
on Form 10-Q or 8-K filed by the Issuer with the SEC since the most recent
Form 10-K, (ii) the Issuer's most recent annual audited financial statements
and each interim financial statement or report prepared subsequent thereto,
if not included in item (i) above, (iii) the Issuer's and its affiliates'
other publicly available recent reports, including, but not limited to, any
publicly available filings or reports provided to their respective
shareholders, any national securities exchange or any rating agency, and any
information generally supplied in writing to securities analysts, (iv)
research reports prepared by any brokerage house with respect to the Company,
(v) any other information or disclosure prepared pursuant to Section 6(f)
hereof, and (vi) any other information or document prepared or approved by
the Issuer for dissemination to purchasers or potential purchasers of the
Notes. In addition, the Issuer shall provide MS with such other information
as MS may reasonably request for the purpose of its ongoing credit review of
the Issuer.
(c) The Issuer recognizes that the accuracy and completeness of the
Offering Materials are dependent upon the accuracy and completeness of the
information obtained by MS and, subject to Section 6(d) and Section 7 hereof, MS
shall not be responsible for any inaccuracy in any Offering Materials.
(d) MS agrees that prior to the distribution of any Offering Materials
MS will provide the Issuer with a copy thereof for the Issuer's approval. The
Issuer agrees promptly to notify MS in writing of the Issuer's approval or
disapproval of any Offering Materials submitted to the Issuer for review. If the
Issuer has not indicated its written approval, and has not indicated in writing
the reasons why such approval cannot be given, by the 14th calendar day after
the Offering Materials are sent to the Issuer, the Offering Materials shall be
deemed approved by the Issuer on such 14th day. Any such approval by the Issuer
shall be deemed to be a representation by the Issuer that the Offering Materials
(excluding any information furnished by MS expressly for inclusion therein, as
set forth in the sections thereof entitled "MS Affiliates" and "Additional
Information") so approved do not contain an untrue statement of a material fact
nor omit to state a material fact necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading.
(e) The Issuer represents and warrants to MS that the financial
statements of the Issuer delivered or to be delivered to MS in accordance with
this Section 6 are or will be in accordance with generally accepted accounting
principles and practices in effect in the United States on the date such
statements were or will be prepared and fairly do or will present the financial
condition and operations of the Issuer at such date and the results of the
Issuer's operations for the period then ended.
(f) The Issuer further agrees to notify MS promptly upon the occurrence
of (i) any event that would render any fact contained in the Issuer's most
recent financial reports, as submitted to MS, untrue or misleading, or (ii) any
event relating to or affecting the Issuer that would cause the Offering
Materials then in use to include an untrue statement of a material fact or to
omit to state a material fact necessary in order to make the statements
contained therein, in light of the circumstances under which they were made, not
misleading. In such event, the Issuer agrees to supply MS promptly with such
information as will correct such untrue or misleading statement or omission.
7. Indemnification.
(a) The Issuer agrees to indemnify MS and its affiliates, their
respective directors, officers, employees, and agents, and each person who
controls MS or its affiliates within the meaning of the 1933 Act or the Exchange
Act and any successor thereto (MS and each such person being and "Indemnified
Person") from and against any and all losses, claims, damages and liabilities,
joint or several, to which such Indemnified Person may become subject under any
applicable federal or state law, or otherwise, related to or arising out of (i)
any untrue statement or alleged untrue statement of a material fact contained in
the Offering Materials or in any information (whether oral or written) or
documents furnished or made available by the Issuer to offerees of the Notes or
any of their representatives or the omission or the alleged omission to state
therein a material fact necessary to make the statements therein not misleading
in light of the circumstances under which they were made, or (ii) any matter or
transaction contemplated by this Agreement or by the engagement of MS pursuant
to, and the performance by MS of the services contemplated by, this Agreement or
by the engagement of MS pursuant to, and the performance by MS of the services
contemplated by, this Agreement and shall promptly reimburse any Indemnified
Person for all expenses (including, but not limited to, fees and disbursements
of internal and external counsel), as they are incurred, in connection with the
investigation of, preparation for or defense of any pending or threatened claim
or any action or proceeding arising therefrom, whether or not such Indemnified
Person is a party, provided, however, that, with respect to (ii), the Issuer
shall not be liable in any such case to the extent such loss, claim, damage or
liability is finally judicially determined to have resulted primarily from an
Indemnified Person's gross negligence or willful misconduct.
(b) Promptly after receipt by an Indemnified Person under this Section
7 of notice of any claim or the commencement of any action, the Indemnified
Person shall, if a claim in respect thereof is to be made against the Issuer
under this Section 7, notify the Issuer in writing of the claim or the
commencement of that action; provided, however, that the failure to notify the
Issuer shall not relieve it from any liability that the Issuer may have under
this Section 7 except up to the extent of any actual and material prejudice
suffered by the Issuer as a result of such failure; and, provided, further, that
in no event shall the failure to notify the Issuer relieve it from any liability
that the Issuer may have to an Indemnified Person otherwise than under this
Section 7. If any such claim or action shall be brought against an Indemnified
Person, and it notifies the Issuer thereof, the Issuer shall be entitled to
participate therein and, to the extent that the Issuer wishes, to assume the
defense thereof with counsel reasonably satisfactory to the Indemnified Person.
After notice from the Issuer to the Indemnified Person of the Issuer's election
to assume the defense of such claim or action, the Issuer shall not be liable to
the Indemnified Person under this Section 7 for any legal or other expenses
subsequently incurred by the Indemnified Person in connection with the defense
thereof other than reasonable costs of investigation. The Issuer shall not be
liable for any settlement of any such action effected without the Issuer's
written consent (which consent shall not be unreasonably withheld) but, if
settled with the Issuer's written consent or if there is a final judgment for
the plaintiff in any such action, the Issuer agrees to indemnify and hold
harmless any Indemnified Person from and against any loss or liability by reason
of such settlement or judgment.
(c) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in this Section 7 is for
any reason unavailable or insufficient to hold harmless an Indemnified Person,
other than as expressly provided above, the Issuer and MS shall contribute to
the aggregate costs of satisfying such liability (i) in such proportion as is
appropriate to reflect the relative benefits received by the Issuer, on the one
hand, and MS, on the other hand, or (ii) if the allocation provided by clause
(i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Issuer on the one hand and MS on the
other with respect the statements or omissions which resulted in such loss,
claim, damage or liability or action in respect thereof, as well as any other
equitable considerations. The relative benefits received by the Issuer on the
one hand and MS on the other with respect to such offering shall be deemed to be
in the same proportion as the aggregate proceeds to the Issuer of the Notes sold
pursuant hereto (before deducting expenses) bear to the aggregate commissions
and fees earned by MS hereunder. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Issuer on the one hand or MS on the
other, the intent of the parties, and their relative knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. The Issuer and MS agree that it would not be just and equitable if
contributions pursuant to this Section 7 were to be determined by pro rata
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to herein. The amount paid or payable by
an Indemnified Person as a result of the loss, claim, damage or liability, or
action in respect thereof, referred to above in this Section 7 shall be deemed
to include, for purposes of this Section 7, but not be limited to, any fees and
disbursements of internal and external counsel reasonably incurred by an
Indemnified Person in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this Section 7, the aggregate of all
amounts paid by MS pursuant to the foregoing shall not exceed the aggregate of
the commissions and fees earned by MS hereunder.
(d) The obligations of the Issuer in this Section 7 are in addition to
any other liability that the Issuer may otherwise have.
(e) The provisions of this Section 7 shall survive the termination of
this Agreement.
8. Notices.
All notices required under the terms and provisions hereof shall be in
writing, delivered by hand, by mail (postage prepaid), or by telex, telecopier
or telegram, and any such notice shall be effective when received at the address
specified below.
If to the Issuer: If to MS:
HomeSide Lending, Inc. Morgan Stanley & Co. Incorporated
7301 Baymeadows Way 1585 Broadway - 2nd Floor
Jackonsville, Florida 32256 New York, New York 10036
Attention: James Krakau Attention: Manager, Continuously Offered
Products
Fax No.: 904-281-7766 Telephone: 212-761-4000
Fax No.: 212-761-0780
With a copy to:
Morgan Stanley & Co. Incorporated
1585 Broadway - 16th Floor
New York, New York 10036
Attention: Manager, Credit Department
Telephone: 212-761-4902
Fax: 212-761-0687
<PAGE>
or, if to any of the foregoing parties or their successors, at such other
address as such party or successor may designate from time to time by notice
duly given in accordance with the terms of this Section 9 to the other party
hereto.
9. Governing Law.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO ITS CONFLICT OF LAWS
PROVISIONS.
10. Entire Agreement.
This Agreement constitutes the entire agreement between the parties
hereto with respect to the matters covered hereby and supersedes all prior
agreements and understanding between the parties.
11. Amendment and Termination; Successors; Counterparts.
(a) The terms of this Agreement shall not be waived, altered, modified,
amended or supplemented in any manner whatsoever except by written instrument
signed by both parties hereto. The Issuer or MS may terminate this Agreement
upon at least 30 days' written notice to the other, provided that such
termination shall not affect the obligations of the parties hereunder with
respect to Notes unpaid at the time of such termination or with respect to
actions or events occurring prior to such termination.
(b) This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns; provided,
however, that the Issuer may not assign, either in whole or in part, any of its
rights or obligations under this Agreement without the prior written consent of
MS, and any such assignment without such consent shall be null and void. MS may
assign or transfer, either in whole or in part, any of is rights or obligations
under this Agreement to any affiliate of MS, upon at least 30 days' prior
written notice to the Issuer.
(c) This Agreement may be executed in several counterparts, each of
which shall be deemed an original hereof.
12. Captions.
The Captions in this Agreement are for convenience of reference only
and shall not define or limit any of the terms or provisions hereof.
13. Severability of Provisions.
Any provision of this Agreement which 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 or affecting the validity of such provisions in any other
jurisdiction.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date and year first above written.
HOMESIDE LENDING, INC.
By:/s/James Krakau
Name: James Krakau
Title:Vice President
MORGAN STANLEY & CO. INCORPORATED
By:/s/Michael Zornberg
Name: Michael Zornberg
Title:
COMMERCIAL PAPER DEALER AGREEMENT, dated as of August 31, 1998 between
HOMESIDE LENDING, INC., a Florida corporation (the "Issuer"), and CHASE
SECURITIES INC., a Delaware corporation ("CSI").
The Issuer intends to issue short-term notes pursuant to Section
3(a)(3) of the Securities Act of 1933, as amended (the "1933 Act").
The Issuer desires to enter into this Agreement with CSI in order to
provide for the offer and sale of such notes in the manner described here.
The parties hereto, in consideration of the premises and mutual
covenants herein contained, agree as follows:
1. Definitions.
"Business Day" shall mean any day other than a Saturday or Sunday or a
day when banks are authorized or required by law to close in New York City.
"Company Information" shall mean the Offering Memorandum (defined
below), together with, to the extent applicable, information provided by the
Issuer pursuant to Section 6(b) hereof.
"DTC" shall mean the Depository Trust Company.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Issuing and Paying Agent" shall mean The Chase Manhattan Bank, the
issuing and paying agent under the Issuing and Paying Agency Agreement, or any
successor thereto.
"Issuing and Paying Agency Agreement" shall mean the issuing and paying
agency agreement, dated as of September 2, 1998 between the Issuer and the
Issuing and Paying Agent, as the same may from time to time be amended.
"Notes" shall mean short-term promissory notes of the Issuer,
substantially in the form of Annex A to the Issuing and Paying Agency Agreement
in the case of certificated Notes, and represented by master notes substantially
in the form of Annex B to the Issuing and Paying Agency Agreement in the case of
book-entry Notes, issued by the Issuer from time to time pursuant to the Issuing
and Paying Agency Agreement.
"Offering Materials" shall mean the offering materials concerning the
Issuer contemplated by Section 6 hereof, and such offering materials as from
time to time revised or supplemented.
"Offering Memorandum" shall mean the offering memorandum with respect
to the offer and sale of the Notes (including materials referred to therein or
incorporated by reference therein), prepared in accordance with Section 6 hereof
and provided to purchasers or prospective purchasers of the Notes, and including
all amendments and supplements thereto which may be prepared from time to time
in accordance with this Agreement.
"Person" shall mean an individual, a corporation, a partnership, a
trust, an association or any other entity.
"SEC" shall mean the U.S. Securities and Exchange Commission, or any
successor thereto.
2. Issuance and Placement of Commercial Paper Notes.
(a) The Issuer hereby appoints CSI to act as the Issuer's dealer in
connection with the sale of the Notes in accordance with the terms hereof, and
CSI hereby accepts such appointment. While (i) the Issuer has and shall have no
obligation to permit CSI to purchase any Notes for its own account or to arrange
for the sale of the Notes and (ii) CSI has and shall have no obligation to
purchase any Notes for CSI's own account or to arrange for the sale of Notes,
the parties agree that, as to any and all Notes which CSI may purchase or the
sale of which CSI may arrange, such Notes will be purchased or sold by CSI in
reliance on, among other things, the agreements, representations, warranties and
covenants of the Issuer contained herein on the terms and conditions and in the
manner provided for herein.
(b) If the Issuer and CSI shall agree on the terms of the purchase of
any Note by CSI or the sale of any Note arranged by CSI (including, but not
limited to, agreement with respect to the date of issue, purchase price,
principal amount, maturity and interest rate (in the case of interest-bearing
Notes) or discount rate thereof (in the case of Notes issued on a discount
basis), and appropriate compensation for CSI's services hereunder) pursuant to
this Agreement, CSI shall confirm the terms of each such agreement promptly to
the Issuer in CSI's customary form, the Issuer shall cause such Note to be
issued and delivered in accordance with the terms of the Issuing and Paying
Agency Agreement, and payment for such Note shall be made in accordance with
such Agreement. The authentication and delivery of such Note by the Issuing and
Paying Agent shall constitute the issuance of such Note by the Issuer. The
Issuer shall deliver Notes signed by the Issuer to the Issuing and Paying Agent,
and instructions shall be delivered to the Issuing and Paying Agent to complete,
authenticate and deliver such Notes in the manner prescribed in the Issuing and
Paying Agency Agreement. CSI shall be entitled to compensation at such rates and
paid in such manner as the Issuer and CSI shall from time to time agree upon and
to reimbursement for CSI's out-of-pocket costs and expenses, including, but not
limited to, fees and disbursements of counsel, in connection with the
preparation of this Agreement and the transactions contemplated hereby.
(c) The Notes may be issued either in physical bearer form or in
book-entry form. Notes in book-entry form shall be represented by master notes
registered in the name of a nominee of DTC and recorded in the book-entry system
maintained by DTC. References to "Notes" in this Agreement shall refer to both
physical and book-entry Notes unless the context otherwise requires. The Notes
may be issued either at a discount or as interest-bearing obligations with
interest payable at maturity in a stated amount.
(d) Each Note purchased by, or the sale of which is arranged through,
CSI hereunder shall (i) have a face amount of $100,000, or an integral multiple
of $1,000 in excess thereof, (ii) have a maturity which is a Business Day not
later than the 270th day next succeeding such Note's date of issuance and (iii)
not contain any provision for extension, renewal or automatic "rollover".
3. Representations and Warranties of the Issuer.
(a) The Issuer represents and warrants as follows:
(i) The Issuer is a duly organized and validly existing corporation in
good standing under the laws of the state of its incorporation and has the
corporate power and authority to own its property, to carry on its business as
presently being conducted, to execute and deliver this Agreement, the Issuing
and Paying Agency Agreement, and the Notes, and to perform and observe the
conditions hereof and thereof.
(ii) Each of this Agreement and the Issuing and Paying Agency Agreement
has been duly and validly authorized, executed and delivered by the Issuer and
constitutes the legal, valid and binding agreement of the Issuer. The issuance
and sale of Notes by the Issuer hereunder have been duly and validly authorized
by the Issuer and, when delivered by the Issuing and Paying Agent as provided in
the Issuing and Paying Agreement, each Note will be the legal, valid and binding
obligation of the Issuer.
(iii) The Notes are exempt from the registration requirements of the
1933 Act by reason of Section 3(a)(3) thereof, and, accordingly, registration of
the Notes under the 1933 Act will not be required. Qualification of an indenture
with respect to the Notes under the Trust Indenture Act of 1939, as amended,
will not be required in connection with the offer, issuance, sale or delivery of
the Notes.
(iv) The Issuer is neither an "investment company" nor a "company
controlled by an investment company" within the meaning of the Investment
Company Act of 1940, as amended.
(v) No consent or action of, or filing or registration with, any
governmental or public regulatory body or authority is required to authorize, or
is otherwise required in connection with, the execution, delivery or performance
of this Agreement, the Issuing and Paying Agency Agreement or the Notes.
(vi) Neither the execution and delivery by the Issuer of any of this
Agreement, the Issuing and Paying Agency Agreement and the Notes, nor the
fulfillment of or compliance with the terms and provisions hereof or thereof by
the Issuer, will (x) result in the creation or imposition of any mortgage, lien,
charge or encumbrance of any nature whatsoever upon any of the properties or
assets of the Issuer or (y) violate any of the terms of the Issuer's charter
documents or by-laws, any contract or instrument to which the Issuer is a party
or by which it or its property is bound, or any law or regulation, or any order,
writ, injunction or decree of any court of governmental instrumentality, to
which the Issuer is subject or by which it or its property is bound.
(vii) There are no actions, suits, proceedings, claims or governmental
investigations pending or threatened against the Issuer or any of its officers
or directors or any persons who control the Issuer (within the meaning of
Section 15 of the 1933 Act or Section 20 of the Exchange Act) or to which any
property of the Issuer is subject, which could in any way result in a material
adverse change in the condition (financial or otherwise) of the Issuer, or
materially prevent or interfere with, or materially and adversely affect the
Issuer's execution, delivery or performance of, any of this Agreement, the
Issuing and Paying Agency Agreement and the Notes.
(viii) The initial Offering Materials do not, and any amendments or
supplements thereto and any subsequent Offering Materials and any amendments or
supplements thereto will not, contain any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements made
therein, in light of the circumstances under which they are made, not
misleading.
(b) Each issuance of Notes by the Issuer shall be deemed a
representation and warranty by the Issuer to CSI, as of the date thereof, that,
both before and after giving effect to such issuance, (i) the representations
and warranties of the Issuer set forth in Section 3(a) hereof remain true and
correct on and as of such date as if made on and as of such date (except to the
extent such representations and warranties expressly relate solely to an earlier
date); (ii) the corporate resolutions and certificate of incumbency referred to
in Section 5 hereof remain accurate and in full force and effect; (iii) since
the date of the most recent Offering Materials, there has been no material
adverse change in the financial condition or operations of the Issuer which has
not been disclosed to CSI in writing; and (iv) the Issuer is not in default of
any of its obligations hereunder, under the issuing and Paying Agency Agreement
or under any Note.
<PAGE>
4. Covenants and Agreements of the Issuer.
(a) Without the prior written consent of CSI, the Issuer shall
not permit to become effective any amendment, supplement, waiver or consent to
or under the Issuing and Paying Agency Agreement. The Issuer shall give to CSI,
at least 60 Business Days prior to the proposed effective date thereof, notice
of any proposed amendment, supplement, waiver or consent under the Issuing and
Paying Agency Agreement. The Issuer shall provide to CSI, promptly after the
same is executed, a copy of any amendment, supplement or written waiver or
consent covered by the notice requirements of this Section 4(a). The Issuer
further agrees to furnish prior written notice to CSI, as soon as possible and
in any event at least 60 days prior to the effective date thereof, of any
proposed resignation, termination or replacement of the Issuing and Paying
Agent.
(b) The Issuer shall, whenever there shall occur any change in
the Issuer's financial condition or any development or occurrence in relation to
the Issuer that would be material to the holders of Notes or potential holders
of Notes, promptly, and in any event prior to any subsequent issuance of Notes,
notify CSI (by telephone, confirmed in writing) of such change, development or
occurrence.
(c) The Issuer covenants and agrees with CSI that the Issuer
will promptly furnish to CSI a copy of any notice, report or other information,
relating to the Notes delivered to or from rating agencies then rating the
Notes.
(d) Without limiting any obligation of the Issuer pursuant to
this Agreement to provide CSI with credit and financial information, the Issuer
hereby acknowledges and agrees that CSI may share and exchange Offering
Materials and any other information or matters relating to the Issuer or the
transactions contemplated hereby with The Chase Manhattan Corporation and its
subsidiaries, including The Chase Manhattan Bank, in the following
circumstances: (1) for approving lines of credit or borrowings thereunder, and
(2) in connection with commercial paper underwriting or placement.
(e) The proceeds from the sale of Notes will be used by the
Issuer for "current transactions" within the meaning of Section 3(a)(3) of the
1933 Act.
(f) The Issuer agrees promptly from time to time to take such
action as CSI may reasonably request to qualify the Notes for offering and sale
under the securities laws of such jurisdictions as CSI may request and to comply
with such laws so as to permit the continuance of sales and resales therein for
as long as may be necessary to complete the transactions contemplated hereby,
provided that in connection therewith the Issuer shall not be required to
qualify as a foreign corporation or to file a general consent to service of
process in any jurisdiction other than consent to service of process under such
state securities laws. The Issuer also agrees to reimburse CSI for any
reasonable fees or costs incurred in so qualifying the Notes.
5. Conditions Precedent.
At or promptly after the execution of this Agreement, and as conditions
precedent to any obligations of CSI hereunder, there shall have been furnished
to CSI, in form and substance satisfactory to CSI:
(i) an original or photocopy of the executed Issuing and Paying
Agency Agreement;
(ii) a certified copy of resolutions duly adopted by the Board of
Directors of the Issuer authorizing and approving the
transactions contemplated hereby;
(iii) a certificate of incumbency showing the officers and other
representatives of the Issuer authorized to execute Notes and
to give instructions concerning the issuances of Notes;
(iv) an opinion of counsel to the Issuer addressed to CSI as to the
matters set forth in subsections (i)-(vii) of Section 3(a)
above and as to such other matters as CSI shall reasonably
request;
(v) a copy of each other opinion of counsel furnished to any
Person that may be delivered in connection with the issuance
the Notes, including, but not limited to, any opinion
delivered under or relating to the Issuing and Paying Agency
Agreement, each of which shall be addressed to CSI;
(vi) true and correct copies of the letters assigning ratings and
of all other correspondence to the Issuer from the rating
agencies that have assigned a rating to the Notes;
(vii) a copy of the Offering Materials, including the Offering
Memorandum, approved in writing by the Issuer;
(viii) true and correct copies of any documents relating to the Notes
executed by the Issuer and DTC; and
(ix) in connection with issuance of Notes in book-entry form, a
copy of the master note(s) evidencing such Notes.
<PAGE>
6. Disclosure.
(a) The Issuer understands that, in connection with the offer and sale
of the Notes, from time to time offering materials, including an Offering
Memorandum and any other Company Information approved by the Issuer for
dissemination to purchasers or potential purchasers of the Notes (the
"Offering Materials"), will be prepared by the Issuer, relating to the Notes
and the Issuer, which Offering Materials may be distributed to CSI's sales
personnel and to purchasers and prospective purchasers of the Notes.
(b) To provide a basis for the preparation of the Offering Materials
and to assist in CSI's ongoing credit review procedures and sale of the
Notes, the Issuer agrees to furnish to CSI, as these items become available,
(i) the Issuer's most recent report on Form 10-K filed with the SEC and each
report on Form 10-Q or 8-K filed by the Issuer with the SEC since the most
recent Form 10-K, (ii) the Issuer's most recent annual audited financial
statements and each interim financial statement or report prepared subsequent
thereto, if not included in item (i) above, (iii) the Issuer's and its
affiliates' other publicly available recent reports, including, but not
limited to, any publicly available filings or reports provided to their
respective shareholders, any national securities exchange or any rating
agency, and any information generally supplied in writing to securities
analysts [in the case of an Issuer that is not a public company, specify
similar information desired], (iv) research reports prepared by any brokerage
house with respect to the Company, (v) any other information or disclosure
prepared pursuant to Section 6(f) hereof, and (vi) any other information or
document prepared or approved by the Issuer for dissemination to purchasers
or potential purchasers of the Notes. In addition, the Issuer shall provide
CSI with such other information as CSI may reasonably request for the purpose
of its ongoing credit review of the Issuer.
(c) The Issuer recognizes that the accuracy and completeness of the
Offering Materials are dependent upon the accuracy and completeness of the
information obtained by CSI and, subject to Section 6(d) and Section 7 hereof,
CSI shall not be responsible for any inaccuracy in any Offering Materials.
(d) CSI agrees that prior to the distribution of any Offering Materials
CSI will provide the Issuer with a copy thereof for the Issuer's approval. The
Issuer agrees promptly to notify CSI in writing of the Issuer's approval or
disapproval of any Offering Materials submitted to the Issuer for review. If the
Issuer has not indicated its written approval, and has not indicated in writing
the reasons why such approval cannot be given, by the 14th calendar day after
the Offering Materials are sent to the Issuer, the Offering Materials shall be
deemed approved by the Issuer on such 14th day. Any such approval by the Issuer
shall be deemed to be a representation by the Issuer that the Offering Materials
(excluding any information furnished by CSI expressly for inclusion therein, as
set forth in the sections thereof entitled "CSI Affiliates" and "Additional
Information") so approved do not contain an untrue statement of a material fact
nor omit to state a material fact necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading.
(e) The Issuer represents and warrants to CSI that the financial
statements of the Issuer delivered or to be delivered to CSI in accordance with
this Section 6 are or will be in accordance with generally accepted accounting
principles and practices in effect in the United States on the date such
statements were or will be prepared and fairly do or will present the financial
condition and operations of the Issuer at such date and the results of the
Issuer's operations for the period then ended.
(f) The Issuer further agrees to notify CSI promptly upon the
occurrence of (i) any event that would render any fact contained in the Issuer's
most recent financial reports, as submitted to CSI, untrue or misleading, or
(ii) any event relating to or affecting the Issuer that would cause the Offering
Materials then in use to include an untrue statement of a material fact or to
omit to state a material fact necessary in order to make the statements
contained therein, in light of the circumstances under which they were made, not
misleading. In such event, the Issuer agrees to supply CSI promptly with such
information as will correct such untrue or misleading statement or omission.
7. Indemnification.
(a) The Issuer agrees to indemnify CSI and its affiliates, their
respective directors, officers, employees, and agents, and each person who
controls CSI or its affiliates within the meaning of the 1933 Act or the
Exchange Act and any successor thereto (CSI and each such person being and
"Indemnified Person") from and against any and all losses, claims, damages and
liabilities, joint or several, to which such Indemnified Person may become
subject under any applicable federal or state law, or otherwise, related to or
arising out of (i) any untrue statement or alleged untrue statement of a
material fact contained in the Offering Materials or in any information (whether
oral or written) or documents furnished or made available by the Issuer to
offerees of the Notes or any of their representatives or the omission or the
alleged omission to state therein a material fact necessary to make the
statements therein not misleading in light of the circumstances under which they
were made, or (ii) any matter or transaction contemplated by this Agreement or
by the engagement of CSI pursuant to, and the performance by CSI of the services
contemplated by, this Agreement or by the engagement of CSI pursuant to, and the
performance by CSI of the services contemplated by, this Agreement and shall
promptly reimburse any Indemnified Person for all expenses (including, but not
limited to, fees and disbursements of internal and external counsel), as they
are incurred, in connection with the investigation of, preparation for or
defense of any pending or threatened claim or any action or proceeding arising
therefrom, whether or not such Indemnified Person is a party, provided, however,
that, with respect to (ii), the Issuer shall not be liable in any such case to
the extent such loss, claim, damage or liability is finally judicially
determined to have resulted primarily from an Indemnified Person's gross
negligence or willful misconduct.
(b) Promptly after receipt by an Indemnified Person under this Section
7 of notice of any claim or the commencement of any action, the Indemnified
Person shall, if a claim in respect thereof is to be made against the Issuer
under this Section 7, notify the Issuer in writing of the claim or the
commencement of that action; provided, however, that the failure to notify the
Issuer shall not relieve it from any liability that the Issuer may have under
this Section 7 except up to the extent of any actual and material prejudice
suffered by the Issuer as a result of such failure; and, provided, further, that
in no event shall the failure to notify the Issuer relieve it from any liability
that the Issuer may have to an Indemnified Person otherwise than under this
Section 7. If any such claim or action shall be brought against an Indemnified
Person, and it notifies the Issuer thereof, the Issuer shall be entitled to
participate therein and, to the extent that the Issuer wishes, to assume the
defense thereof with counsel reasonably satisfactory to the Indemnified Person.
After notice from the Issuer to the Indemnified Person of the Issuer's election
to assume the defense of such claim or action, the Issuer shall not be liable to
the Indemnified Person under this Section 7 for any legal or other expenses
subsequently incurred by the Indemnified Person in connection with the defense
thereof other than reasonable costs of investigation. The Issuer shall not be
liable for any settlement of any such action effected without the Issuer's
written consent (which consent shall not be unreasonably withheld) but, if
settled with the Issuer's written consent or if there is a final judgment for
the plaintiff in any such action, the Issuer agrees to indemnify and hold
harmless any Indemnified Person from and against any loss or liability by reason
of such settlement or judgment.
(c) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in this Section 7 is for
any reason unavailable or insufficient to hold harmless an Indemnified Person,
other than as expressly provided above, the Issuer and CSI shall contribute to
the aggregate costs of satisfying such liability (i) in such proportion as is
appropriate to reflect the relative benefits received by the Issuer, on the one
hand, and CSI, on the other hand, or (ii) if the allocation provided by clause
(i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Issuer on the one hand and CSI on the
other with respect the statements or omissions which resulted in such loss,
claim, damage or liability or action in respect thereof, as well as any other
equitable considerations. The relative benefits received by the Issuer on the
one hand and CSI on the other with respect to such offering shall be deemed to
be in the same proportion as the aggregate proceeds to the Issuer of the Notes
sold pursuant hereto (before deducting expenses) bear to the aggregate
commissions and fees earned by CSI hereunder. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Issuer on the one hand or
CSI on the other, the intent of the parties, and their relative knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission. The Issuer and CSI agree that it would not be just and
equitable if contributions pursuant to this Section 7 were to be determined by
pro rata allocation or by any other method of allocation that does not take into
account the equitable considerations referred to herein. The amount paid or
payable by an Indemnified Person as a result of the loss, claim, damage or
liability, or action in respect thereof, referred to above in this Section 7
shall be deemed to include, for purposes of this Section 7, but not be limited
to, any fees and disbursements of internal and external counsel reasonably
incurred by an Indemnified Person in connection with investigating or defending
any such action or claim. Notwithstanding the provisions of this Section 7, the
aggregate of all amounts paid by CSI pursuant to the foregoing shall not exceed
the aggregate of the commissions and fees earned by CSI hereunder.
(d) The obligations of the Issuer in this Section 7 are in
addition to any other liability that the Issuer may otherwise have.
(e) The provisions of this Section 7 shall survive the termination of
this Agreement.
8. Notices.
All notices required under the terms and provisions hereof shall be in
writing, delivered by hand, by mail (postage prepaid), or by telex, telecopier
or telegram, and any such notice shall be effective when received at the address
specified below.
If to the Issuer: If to CSI:
HomeSide Lending, Inc. Chase Securities Inc.
7301 Baymeadows Way 270 Park Avenue, 9th Floor
Jackonsville, Florida 32256 New York, New York 10017
Attention: James Krakau Attention: Money Market Division
Fax No.: 904-281-7766 Fax No.: 212-834-6560
or, if to any of the foregoing parties or their successors, at such other
address as such party or successor may designate from time to time by notice
duly given in accordance with the terms of this Section 9 to the other party
hereto.
9. Governing Law.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO ITS CONFLICT OF LAWS
PROVISIONS.
10. Entire Agreement.
This Agreement constitutes the entire agreement between the parties
hereto with respect to the matters covered hereby and supersedes all prior
agreements and understanding between the parties.
11. Amendment and Termination; Successors; Counterparts.
(a) The terms of this Agreement shall not be waived, altered, modified,
amended or supplemented in any manner whatsoever except by written instrument
signed by both parties hereto. The Issuer or CSI may terminate this Agreement
upon at least 30 days' written notice to the other, provided that such
termination shall not affect the obligations of the parties hereunder with
respect to Notes unpaid at the time of such termination or with respect to
actions or events occurring prior to such termination.
(b) This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns; provided,
however, that the Issuer may not assign, either in whole or in part, any of its
rights or obligations under this Agreement without the prior written consent of
CSI, and any such assignment without such consent shall be null and void. CSI
may assign or transfer, either in whole or in part, any of is rights or
obligations under this Agreement to any affiliate of CSI, upon at least 30 days'
prior written notice to the Issuer.
(c) This Agreement may be executed in several counterparts, each of
which shall be deemed an original hereof.
12. Captions.
The Captions in this Agreement are for convenience of reference only
and shall not define or limit any of the terms or provisions hereof.
13. Severability of Provisions.
Any provision of this Agreement which 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 or affecting the validity of such provisions in any other
jurisdiction.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date and year first above written.
HOMESIDE LENDING, INC.
By: /s/Kevin Race
Name:Kevin Race
Title:CFO
CHASE SECURITIES INC.
By:/s/ Eugene Pickens
Name: Eugene Pickens
Title: Vice President
HOMESIDE LENDING, INC.
EXHIBIT 12 - COMPUTATION OF THE RATIO OF
EARNINGS TO FIXED CHARGES
(Dollar amounts in thousands)
The following table sets forth the ratio of earnings to fixed charges of
HomeSide Lending, Inc. for the three months ended December 31, 1998, and the
predecessor company's three months ended November 30, 1997. The ratio of
earnings to fixed charges is computed by dividing net fixed charges (interest
expense on all debt plus the interest portion of rent expense) into earnings
before income taxes and fixed charges.
<TABLE>
<CAPTION>
Predecessor
For the Three For the Three
Months Ended Months Ended
December 31, 1998 November 30, 1997
----------------- -----------------
<S> <C> <C>
Earnings before income taxes $31,124 $37,378
----------------------- -----------------------
Interest expense 29,719 23,349
Interest portion of rental expense 661 370
----------------------- -----------------------
Fixed charges 30,380 23,719
----------------------- -----------------------
Earnings before fixed charges 61,504 61,097
----------------------- -----------------------
Fixed Charges:
Interest expense 29,719 23,349
Interest portion of rental expense 661 370
----------------------- -----------------------
Fixed charges $30,380 $23,719
----------------------- -----------------------
======================= =======================
Ratio of earnings to fixed charges $2.02 $2.58
======================= =======================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 92,008
<SECURITIES> 0
<RECEIVABLES> 263,603
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,059,619
<PP&E> 50,502
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,060,619
<CURRENT-LIABILITIES> 3,541,406
<BONDS> 1,185,576
0
0
<COMMON> 0
<OTHER-SE> 1,333,937
<TOTAL-LIABILITY-AND-EQUITY> 6,060,919
<SALES> 0
<TOTAL-REVENUES> 106,778
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 75,654
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 31,124
<INCOME-TAX> 15,535
<INCOME-CONTINUING> 15,589
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,589
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
