<PAGE>
RULE NO. 424(b)(1)
REGISTRATION NO. 33-59559
PROSPECTUS SUPPLEMENT
- ---------------------
(TO PROSPECTUS DATED JUNE 26, 1995)
10,000,000 SHARES
LOGO COUNTRYWIDE (SM)
----------------------
CREDIT INDUSTRIES, INC.
COMMON STOCK
----------------
The Company's Common Stock (the "Common Stock") is listed on the New York
Stock Exchange and the Pacific Stock Exchange under the trading symbol "CCR."
On June 26, 1995, the last reported sale price of the Common Stock on the New
York Stock Exchange was $21 7/8 per share.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS TO WHICH IT RELATES. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED
ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............................... $21.00 $.83 $20.17
- --------------------------------------------------------------------------------
Total(3)................................ $210,000,000 $8,300,000 $201,700,000
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $425,000.
(3) The Company has granted the several Underwriters an option to purchase up
to an additional 1,500,000 shares of Common Stock to cover over-allotments.
If all of such shares are purchased, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $241,500,000,
$9,545,000 and $231,955,000, respectively. See "Underwriting."
----------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters. The
Underwriters reserve the right to withdraw, cancel or modify such offer and to
reject orders in whole or in part. It is expected that delivery of the shares
will be made in New York, New York on or about June 30, 1995.
----------------
MERRILL LYNCH & CO.
GOLDMAN, SACHS & CO.
LEHMAN BROTHERS
SALOMON BROTHERS INC
ALEX. BROWN & SONS
INCORPORATED
DEAN WITTER REYNOLDS INC.
----------------
The date of this Prospectus Supplement is June 26, 1995.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, THE PACIFIC STOCK
EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT
ANY TIME.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE COMMISSIONER OF
INSURANCE FOR THE STATE OF NORTH CAROLINA, NOR HAS THE COMMISSIONER OF
INSURANCE RULED UPON THE ACCURACY OR ADEQUACY OF THIS DOCUMENT.
----------------
S-2
<PAGE>
SUMMARY INFORMATION
The following material, which is presented herein solely to furnish limited
introductory information regarding the Company, has been selected from or is
based upon the detailed information appearing elsewhere or incorporated by
reference in this Prospectus Supplement and the accompanying Prospectus, and is
qualified in its entirety by reference thereto, and, therefore, should be read
together therewith.
THE COMPANY
Countrywide Credit Industries, Inc. (the "Company" or "CCI") is a holding
company which through its principal subsidiary, Countrywide Funding Corporation
("CFC"), is engaged primarily in the mortgage banking business, and as such
originates, purchases, sells and services mortgage loans. The Company's
mortgage loans are principally first-lien mortgage loans secured by single-(one
to four) family residences. The Company also offers home equity loans both in
conjunction with newly produced first-lien mortgages and as a separate product.
During the years ended February 28, 1995 and 1994, the Company produced $27.9
billion and $52.5 billion of mortgage loans, respectively. The Company's
mortgage loan production during the months of March 1995 and April 1995 was
$2.1 billion and $2.1 billion, respectively, compared to $4.0 billion and $3.0
billion, respectively, during the months of March 1994 and April 1994. This
decrease in mortgage loan production was attributable principally to a higher
mortgage interest rate environment, resulting in a decrease of mortgage loan
activity. The Company services substantially all of the mortgage loans that it
originates or purchases. In addition, the Company purchases bulk servicing
contracts to service certain residential mortgage loans originated by other
lenders. The Company receives fee income for servicing mortgage loans.
Servicing mortgage loans includes collecting and remitting loan payments,
making advances when required, accounting for principal and interest, holding
custodial (impound) funds for payment of property taxes and hazard insurance,
making any physical inspections of the property, contacting delinquent
mortgagors, supervising foreclosures and property dispositions in the event of
unremedied defaults and generally administering the loans. At February 28, 1995
and 1994, the Company's servicing portfolio of mortgage loans aggregated
approximately $113.1 billion and $84.7 billion, respectively.
THE OFFERING
Unless otherwise indicated, the information in this Prospectus Supplement
assumes that the over-allotment option described in "Underwriting" is not
exercised.
Shares Offered...................... 10,000,000 shares of Common Stock.
Shares to be Outstanding After the
Offering (1)(2).................... 101,574,247 shares of Common Stock.
Use of Proceeds..................... The net proceeds from the sale of the
shares of Common Stock offered hereby
will be used for general corporate
purposes, which may include retirement of
indebtedness of the Company or CFC and
investment in servicing rights through
the current production of loans and the
bulk acquisition of contracts to service
loans. See "Use of Proceeds" herein.
New York Stock Exchange and Pacific
Stock Exchange Symbol.............. CCR
- --------
(1) Based on 91,574,247 shares outstanding as of June 14, 1995.
(2) Does not include 7,459,321 shares reserved for issuance upon exercise of
stock options granted, of which options for 2,972,935 shares were
exercisable as of June 1, 1995.
S-3
<PAGE>
RECENT DEVELOPMENTS
UNAUDITED FIRST QUARTER EARNINGS
The Company's unaudited net earnings for the quarter ended May 31, 1995 were
$36.2 million, or $0.39 per fully diluted share. Net earnings for the quarter
ended May 31, 1994 were $33.7 million, or $0.37 per fully diluted share, while
net earnings for the quarter ended February 28, 1995 were $19.4 million, or
$0.21 per fully diluted share. As noted below, effective with the quarter ended
May 31, 1995 the Company has adopted Statement of Financial Accounting
Standards ("SFAS") No. 122, Accounting for Mortgage Servicing Rights. Since
SFAS No. 122 prohibits retroactive application, historical accounting results
have not been restated and, accordingly, the accounting results for the quarter
ended May 31, 1995 are not directly comparable to prior periods. Pre-tax
earnings from the Company's loan servicing activities amounted to $60.0 million
and $32.0 million for the quarters ended May 31, 1995 and 1994, respectively.
The increase of $28.0 million was principally due to an increase in the size of
the servicing portfolio, but was offset, in part, by a change of $10.0 million
in the Company's internal method of allocating overhead between its servicing
and production activities. For the quarter ended May 31, 1995, the pre-tax loss
from the Company's loan production activities was $1.5 million versus a pre-tax
profit of $20.9 million for the quarter ended May 31, 1994. The decrease of
$22.4 million was primarily attributed to lower loan production and increased
price competition caused by lower demand for mortgage loans, but was offset, in
part, by the effect of the adoption of SFAS No. 122 as discussed below and the
change in the Company's internal overhead allocation method discussed above.
IMPLEMENTATION OF NEW ACCOUNTING STANDARD
In May 1995, the Financial Accounting Standards Board issued SFAS No. 122,
which the Company adopted in the quarter ended May 31, 1995. SFAS No. 122
amended SFAS No. 65, Accounting for Certain Mortgage Banking Activities. The
overall impact on the Company's financial statements of adopting SFAS No. 122
was an increase in net earnings for the quarter ended May 31, 1995 of $8.9
million, or $0.10 per fully diluted share.
SFAS No. 122 requires the recognition of originated mortgage servicing rights
("OMSRs"), as well as purchased mortgage servicing rights ("PMSRs"), as assets
by allocating total costs incurred between the loan and the servicing rights
based on their relative fair values. Under SFAS No. 65, the cost of OMSRs was
not recognized as an asset and was charged to earnings when the related loan
was sold. The separate impact of recognizing OMSRs as assets in the Company's
financial statements in accordance with SFAS No. 122 for the quarter ended May
31, 1995 was an increase in net earnings of $18.6 million, or $0.20 per fully
diluted share.
With respect to PMSRs, SFAS No. 122 has a different cost allocation
methodology than SFAS No. 65. In contrast to a cost allocation based on
relative market value as set forth in SFAS No. 122, the prior requirement was
to allocate the costs incurred in excess of the market value of the loans
without the servicing rights to PMSRs. During the quarter ended May 31, 1995,
the separate impact of the application of SFAS No. 122 cost allocation method,
along with the effect of changes in market conditions, was to reduce PMSR
capitalization by $9.7 million, or $0.10 per fully diluted share.
SFAS No. 122 also requires that all capitalized mortgage servicing rights be
evaluated for impairment based on the excess of the carrying amount of the
mortgage servicing rights over their value. In addition to normal amortization
of the servicing assets amounting to $29.1 million, the Company reduced the
servicing assets by an additional $116.7 million of impairment during the
quarter ended May 31, 1995. The entire amount of such impairment was offset by
a net gain of $117.0 million in the Company's servicing hedge which is designed
to protect its servicing investment. The net gain includes unrealized gains of
$106.9 million and realized gains of $10.1 million from the sale of various
financial instruments that comprise the hedge. As a part of the adoption of
SFAS No. 122, the Company has revised its servicing hedge accounting policy,
effective with the quarter ended May 31, 1995, to adjust the basis of the
servicing assets for unrealized gains or losses in the derivative financial
instruments comprising the servicing hedge.
S-4
<PAGE>
OPERATING HIGHLIGHTS
The Company's loan servicing portfolio totaled $120.9 billion and $93.6
billion at May 31, 1995 and 1994, respectively. The Company's loan production
for the quarter ended May 31, 1995 was $6.8 billion compared to $9.4 billion
for the quarter ended May 31, 1994. The pipeline of loan applications in
process amounted to $4.3 billion at May 31, 1995 versus $4.4 billion at May 31,
1994.
RECENT INTEREST RATE DECLINES
Interest rates declined substantially during the month of May 1995. Average
daily applications increased 12% in May over the prior month to $172 million.
The pipeline of applications in process increased $226 million during the month
to $4.3 billion. However, lower interest rates may also contribute to increased
future prepayment activity in the Company's servicing portfolio. The decline in
interest rates also resulted in servicing hedge gains and higher future
prepayment estimates which contributed to the servicing asset impairment charge
described above.
AMENDMENT OF REVOLVING CREDIT FACILITY
In June 1995, the Company's mortgage banking subsidiary entered into an
amendment to its revolving credit facility. The borrowing limit under such
revolving credit facility was increased by $500 million to $3 billion and the
expiration date was extended from September 1997 to May 1998. In addition,
under the amendment, the aggregate amount of indebtedness that the subsidiary
is permitted to incur was increased from $3 billion to $4 billion.
USE OF PROCEEDS
The net proceeds to be received from the sale of shares of Common Stock
offered hereby are estimated to be approximately $201,275,000. The Company
intends to use such net proceeds for general corporate purposes, which may
include retirement of indebtedness of the Company or CFC and investment in
servicing rights through the current production of loans and the bulk
acquisition of contracts to service loans.
DIVIDENDS AND PRICE RANGE OF COMMON STOCK
The Common Stock is listed on the New York Stock Exchange (the "NYSE") and
the Pacific Stock Exchange (Symbol: CCR). The following table sets forth on a
per share basis the high and low sales prices (as reported by the NYSE) for the
Common Stock, as adjusted to reflect stock dividends and stock splits:
<TABLE>
<CAPTION>
COMMON STOCK
-------------
HIGH LOW
------ ------
<S> <C> <C>
Year Ended February 28, 1994
First Quarter............................................. $23.25 $16.92
Second Quarter............................................ 22.17 17.25
Third Quarter............................................. 23.33 16.25
Fourth Quarter............................................ 19.08 15.25
Year Ended February 28, 1995
First Quarter............................................. $17.50 $13.33
Second Quarter............................................ 18.75 12.88
Third Quarter............................................. 15.38 13.63
Fourth Quarter............................................ 16.25 12.38
Current Fiscal Year Ending February 29, 1996
First Quarter............................................. $20.50 $15.50
Period June 1, 1995 through June 26, 1995................. 22.88 18.38
</TABLE>
On June 26, 1995, the last reported sale price of the Common Stock on the
NYSE was $21.88 per share.
The Company has declared and paid cash dividends on its Common Stock
quarterly since 1979, except that no cash dividend was declared in the fiscal
quarter ended February 28, 1982. For the fiscal years ended February 28, 1995
and 1994, the Company declared quarterly cash dividends, as adjusted for stock
dividends and stock splits, aggregating $0.32 per share and $0.29 per share,
respectively. On March 20, 1995, the Company declared a quarterly cash dividend
of $0.08 per share, paid April 17, 1995. On June 9, 1995, the Company declared
a quarterly cash dividend of $0.08 per share, payable July 17, 1995 to
shareholders of record on June 26, 1995.
S-5
<PAGE>
The ability of the Company to pay dividends in the future is limited by
various restrictive covenants in the debt agreements of the Company, the
earnings, cash position and capital needs of the Company, general business
conditions and other factors deemed relevant by the Company's Board of
Directors. The Company is prohibited under certain of its debt agreements,
including its guaranties of CFC's revolving credit facility, from paying
dividends on any capital stock (other than dividends payable in capital stock
or in stock rights), except that, so long as no event of default under such
agreements exists at the time, the Company may pay dividends in an aggregate
amount not to exceed the greater of: (i) the after-tax net income of the
Company, determined in accordance with generally accepted accounting
principles, for the fiscal year to the end of the quarter to which the
dividends relate and (ii) the aggregate amount of dividends paid on the Common
Stock during the immediately preceding year. The primary source of funds for
payments to stockholders by the Company is dividends received from its
subsidiaries. Accordingly, such payments by the Company in the future also
depend on various restrictive covenants in the debt obligations of its
subsidiaries, the earnings, cash position and capital needs of its
subsidiaries, as well as laws and regulations applicable to its subsidiaries.
Unless the Company and CFC each maintain specified minimum levels of net worth
and certain other financial ratios, dividends cannot be paid by the Company and
CFC, in compliance with certain of CFC's debt obligations (including CFC's
existing revolving credit facility). See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources" in the accompanying Prospectus.
The Company has paid stock dividends and declared stock splits since 1978 as
follows: 50% in October 1978; 50% in July 1979; 15% in November 1979; 15% in
May 1980; 30% in November 1980; 30% in May 1981; 3% in February 1982; 2% in May
1982; 0.66% in April 1983; 1% in July 1983; 2% in April 1984; 2% in November
1984; 2% in June 1985; 2% in October 1985; 2% in March 1986; 3-for-2 split in
September 1986; 2% in April 1987; 2% in April 1988; 2% in October 1988; 2% in
November 1989; 3-for-2 split in July 1992; 5% in April 1993; and 3-for-2 split
in May 1994.
As of June 14, 1995, there were 2,572 shareholders of record of the Common
Stock.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of May
31, 1995 on an actual basis and as adjusted to give effect to the issuance of
the shares of Common Stock offered hereby:
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
-------------- -----------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C>
Long-term debt................................ $ 1,450,780 $ 1,450,780
============== ==============
Preferred Stock--authorized, 1,500,000 shares
of $.05 par value; issued and outstanding,
none......................................... $ -- $ --
Common stockholders' equity
Common Stock--authorized, 240,000,000 shares
of $.05 par value; issued and outstanding,
91,561,027 and 103,061,027 shares (assuming
exercise of the Underwriters' over-allotment
option), as adjusted(1)..................... 4,578 5,153
Additional paid-in capital................... 609,971 840,926
Retained earnings............................ 358,562 358,562
-------------- --------------
Total common stockholders' equity.......... 973,111 1,204,641
-------------- --------------
Total Preferred Stock and common stockholders'
equity....................................... $ 973,111 $ 1,204,641
============== ==============
</TABLE>
- --------
(1) Does not include 6,470,129 shares reserved for issuance upon exercise of
stock options granted, of which options for 2,934,647 shares were
exercisable as of May 31, 1995.
S-6
<PAGE>
THE COMPANY
GENERAL
Countrywide Credit Industries, Inc. (the "Company" or "CCI") is a holding
company which through its principal subsidiary, Countrywide Funding Corporation
("CFC"), is engaged primarily in the mortgage banking business, and as such
originates, purchases, sells and services mortgage loans. The Company's
mortgage loans are principally first-lien mortgage loans secured by single-(one
to four) family residences. The Company also offers home equity loans both in
conjunction with newly produced first-lien mortgages and as a separate product.
The Company, through its other wholly owned subsidiaries, offers products and
services complementary to its mortgage banking business. A subsidiary of the
Company sells mortgage-backed securities, primarily on an odd-lot basis (i.e.,
in denominations between $25,000 and $1,000,000), to broker- dealers and also
sells subordinate interests in mortgage-backed securities evidencing interests
in whole mortgage loans to institutional investors. In addition, a subsidiary
of the Company receives fee income for managing the operations of CWM Mortgage
Holdings, Inc. ("CWM"), a real estate investment trust whose shares are traded
on the NYSE. CWM conducts real estate lending activities and has an affiliate
engaged in the operation of a jumbo and non-conforming mortgage loan conduit.
The Company also has a subsidiary which acts as an agent in the sale of
homeowners, fire, flood, earthquake, mortgage life and disability insurance to
CFC's mortgagors in connection with CFC's mortgage banking operations. Another
subsidiary of the Company earns fee income by brokering servicing contracts
owned by other mortgage lenders and loan servicers. The Company has recently
begun operating a title agent business through newly formed subsidiaries.
Unless the context otherwise requires, references to the "Company" herein shall
be deemed to refer to the Company and its consolidated subsidiaries.
MORTGAGE BANKING OPERATIONS
General
The principal sources of revenue from the Company's mortgage banking business
are (i) loan origination fees; (ii) gains from the sale of loans, if any; (iii)
interest earned on mortgage loans during the period that they are held by the
Company pending sale, net of interest paid on funds borrowed to finance such
mortgage loans; (iv) loan servicing fees; and (v) interest benefit derived from
the custodial balances associated with the Company's servicing portfolio.
Loan Production
The Company produces mortgage loans through three separate divisions. The
Company maintains a staff of central office quality control personnel that
performs audits of the loan production of the three divisions on a regular
basis. In addition, each division has implemented various procedures to control
the quality of loans produced, as described below. The Company believes that
its use of technology, benefits derived from economies of scale and a
noncommissioned sales force allow it to produce loans at a low cost relative to
its competition.
The Company's Consumer Markets Division (the "Consumer Markets Division")
originates loans through a nationwide network of retail branch offices and
direct contact with consumers. As of April 30, 1995, the Company had 196
Consumer Markets Division branch offices, 47 "lite" offices and three
processing support centers located in 41 states. The Company's branch offices
are each typically staffed by two to four employees and connected to the
Company's central office by a computer network. The Company's "lite" offices,
which are characterized by low operating costs, are each typically staffed by
two employees. Business is also solicited through telemarketing, advertising in
various forms of mass media, participation of branch
S-7
<PAGE>
management in local real estate-related business functions and extensive use of
direct mailings to real estate brokers and builders. Consumer Markets Division
personnel are not paid a commission on sales; however, they are paid a bonus
based on various factors, including branch profitability. The Company believes
that this approach allows it to originate loans at a comparatively low cost.
The Consumer Markets Division uses continuous quality control audits of loans
originated within each branch by branch management and quality control
personnel to monitor compliance with the Company's underwriting criteria.
During the year ended February 28, 1995, the Consumer Markets Division produced
an aggregate of $7.1 billion of mortgage loans.
Through its Wholesale Division (the "Wholesale Division"), the Company
originates loans through and purchases loans from mortgage loan brokers. As of
April 30, 1995, the Wholesale Division operated 56 branch offices and six
regional support centers in various parts of the country. Loans produced by the
Wholesale Division comply with the Company's general underwriting criteria for
loans originated through the Consumer Markets Division, and each such loan is
approved by one of the Company's loan underwriters. In addition, quality
control personnel review loans for compliance with the Company's underwriting
criteria. Approximately 8,700 mortgage brokers qualify to participate in this
program. Mortgage loan brokers qualify to participate in the Wholesale
Division's program only after a review by the Company's management of their
reputation and mortgage lending expertise, including a review of their
references and financial statements. During the year ended February 28, 1995,
the Wholesale Division produced an aggregate of $8.5 billion of mortgage loans.
Through its network of correspondent offices (the "Correspondent Division"),
the Company purchases loans primarily from other mortgage bankers, commercial
banks, savings and loan associations, credit unions and other financial
intermediaries. The Company's correspondent offices are located in Pasadena,
California, Plano, Texas and Pittsburgh, Pennsylvania. Over 1,500 financial
intermediaries serving all 50 states are eligible to participate in this
program. Loans purchased by the Company through the Correspondent Division
comply with the Company's general underwriting criteria for loans that it
originates through the Consumer Markets Division, and, except as described in
the next sentence, each loan is accepted only after review either by one of the
Company's loan underwriters or, in the case of Federal Housing Administration
("FHA") or Veterans Administration ("VA") loans, by a government-approved
underwriter. The Company accepts loans without such review from an institution
that has met the Company's standards for the granting of delegated underwriting
authority following a review by the Company of the institution's financial
strength, underwriting and quality control procedures, references and prior
experience with the Company. In addition, quality control personnel review
loans purchased from correspondents for compliance with the Company's
underwriting criteria. The purchase agreement used by the Correspondent
Division provides the Company with recourse to the seller in the event of such
occurrences as fraud or misrepresentation in the origination process or a
request by the investor who purchased an underlying mortgage loan that the
Company repurchase the loan due to the loan's failure to meet eligibility
requirements at the time the Company originally purchased the loan. Financial
intermediaries qualify to participate in the Correspondent Division's program
after a review by the Company's management of the reputation and mortgage
lending expertise of such institutions, including a review of their references
and financial statements. During the year ended February 28, 1995, the
Correspondent Division purchased an aggregate of $12.3 billion of mortgage
loans.
The Company originates and purchases conventional mortgage loans, mortgage
loans insured by the FHA, mortgage loans partially guaranteed by the VA and,
beginning in 1994, home equity loans. A majority of the conventional loans are
conforming loans which qualify for inclusion in guarantee programs sponsored by
the Federal National Mortgage Association ("Fannie Mae") or the Federal Home
Loan Mortgage Corporation ("Freddie Mac"). The remainder of the conventional
loans are non-conforming loans (i.e., jumbo loans with an original balance in
excess of $203,150 or other loans that do not meet Fannie Mae or Freddie Mac
guidelines). As part of its mortgage banking activities, the Company makes
conventional loans generally with original balances of up to $1 million.
S-8
<PAGE>
The following table sets forth the number and dollar amount of the Company's
mortgage and home equity loan production for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28(29),
---------------------------------------------------------------
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- -----------
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT AVERAGE LOAN AMOUNT)
<S> <C> <C> <C> <C> <C>
Conventional Loans
Number of Loans........ 175,823 315,699 192,385 63,919 23,130
Volume of Loans........ $ 20,959 $ 46,473 $ 28,670 $ 9,987 $ 3,141
Percent of Total Vol-
ume................... 75.2% 88.6% 88.5% 82.2% 68.6%
FHA/VA Loans
Number of Loans........ 72,365 67,154 42,022 24,329 17,328
Volume of Loans........ $ 6,808 $ 5,986 $ 3,718 $ 2,170 $ 1,436
Percent of Total Vol-
ume................... 24.4% 11.4% 11.5% 17.8% 31.4%
Home Equity Loans
Number of Loans........ 2,147 -- -- -- --
Volume of Loans........ $ 99.2 -- -- -- --
Percent of Total Vol-
ume................... 0.4% -- -- -- --
Total Loans
Number of Loans........ 250,335 382,853 234,407 88,248 40,458
Volume of Loans........ $ 27,866 $ 52,459 $ 32,388 $ 12,156 $ 4,577
Average Loan Amount.... $ 111,000 $ 137,000 $ 138,000 $ 138,000 $ 113,000
</TABLE>
The decrease in the number and dollar amount of conventional loans in the
year ended February 28, 1995 as compared to the year ended February 28, 1994
was attributable principally to the increasing mortgage interest rate
environment, resulting in a decrease in mortgage loan activity, particularly
refinancings. The increase in the number and dollar amount of FHA and VA loans
produced in the year ended February 28, 1995 from that produced in the years
ended February 28, 1994 and February 28, 1993 was attributable to the Company's
effort to expand its share of that market. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Results of
Operations--Fiscal 1995 Compared with Fiscal 1994" in the accompanying
Prospectus.
For the years ended February 28, 1995, 1994 and 1993, jumbo loans represented
17%, 30% and 27%, respectively, of the Company's total volume of mortgage loans
produced. The decrease in the percentage of jumbo loans was primarily the
result of diversification of the Company's loan production out of states with
relatively higher housing costs (particularly California) and into states with
relatively lower housing costs. For the years ended February 28, 1995, 1994 and
1993, adjustable-rate mortgage loans ("ARMs") comprised approximately 34%, 19%
and 28%, respectively, of the Company's total volume of mortgage loans
produced. The increase in the Company's percentage of ARM production from 1994
to 1995 was primarily caused by consumer preference for adjustable-rate
mortgages due to the increasing mortgage interest rate environment that
prevailed through most of the year ended February 28, 1995. For the years ended
February 28, 1995, 1994 and 1993, refinancing activity represented 30%, 75% and
73%, respectively, of the Company's total volume of mortgage loans produced.
The decrease in the percentage of refinance loans was principally due to the
general increase in average mortgage interest rates which caused a decline in
the demand for refinance loans.
California mortgage loan production as a percentage of total mortgage loan
production (measured by principal balance) for the fiscal years ended February
28, 1995, 1994 and 1993 was 31%, 46% and 58%, respectively. Loan production
within California is geographically dispersed, which minimizes dependence on
any individual local economy. The continued decline in the percentage of the
Company's mortgage loan production in California is the result of implementing
the Company's strategy to expand production capacity and market share outside
of California and increased price competition in the California mortgage loan
market, particularly with respect to adjustable-rate mortgage products which,
as described above, are generally
S-9
<PAGE>
preferred by consumers in an increasing interest rate environment. In
California, the Company competes with savings and loans and other portfolio
lenders which offer aggressively-priced ARM products. At February 28, 1995 and
1994, 79% and 77%, respectively, of the Consumer Markets Division branch
offices and the Wholesale Division loan centers were located outside of
California.
Sale of Loans
As a mortgage banker, the Company customarily sells all loans that it
originates or purchases. The Company packages substantially all of its FHA-
insured and VA-guaranteed mortgage loans into pools of loans. It sells these
pools in the form of modified pass-through mortgage-backed securities ("MBS")
guaranteed by the Government National Mortgage Association ("GNMA") to national
or regional broker-dealers. With respect to loans securitized through GNMA
programs, the Company is insured against foreclosure loss by the FHA or
partially guaranteed against foreclosure loss by the VA (at present, generally
25% to 50% of the loan, up to a maximum amount ranging from $22,500 to $50,750,
depending upon the amount of the loan). Conforming conventional loans may be
pooled by the Company and exchanged for securities guaranteed by Fannie Mae or
Freddie Mac, which securities are then sold to national or regional broker-
dealers. Loans securitized through Fannie Mae or Freddie Mac are sold on a non-
recourse basis whereby foreclosure losses are generally the responsibility of
Fannie Mae and Freddie Mac, and not the Company. Alternatively, the Company may
sell FHA-insured and VA-guaranteed mortgage loans and conforming conventional
loans, and consistently sells its jumbo loan production, to large buyers in the
secondary market (which can include national or regional broker-dealers) on a
non-recourse basis. These loans can be sold either on a whole-loan basis or in
the form of pools backing securities which are not guaranteed by any
governmental instrumentality but which may have the benefit of some form of
external credit enhancement, such as insurance, letters of credit, payment
guarantees or senior/subordinated structures. Substantially all loans sold by
the Company are sold without recourse, subject, in the case of VA loans to the
limits of the VA guaranty described above. For the fiscal years ended February
28, 1995, 1994 and 1993, the aggregate loss experience of the Company on VA
loans in excess of the VA guaranty was approximately $2.6 million, $2.1 million
and $1.0 million, respectively. In the opinion of management, the losses
increased from the year ended February 28, 1994 to the year ended February 28,
1995 due to an increase in the size of the VA loan servicing portfolio.
CWM, a real estate investment trust managed by a subsidiary of the Company,
may purchase at market prices both conforming and non-conforming conventional
loans from the Company. During the years ended February 28, 1995, 1994 and
1993, CWM purchased $80.4 million, $300.5 million and $130.3 million,
respectively, of conventional non-conforming mortgage loans from the Company.
In order to offset the risk that a change in interest rates will result in a
decrease in the value of the Company's current mortgage loan inventory or its
commitments to purchase or originate mortgage loans ("Committed Pipeline"), the
Company enters into hedging transactions. The Company's hedging policies
generally require that substantially all of the Company's inventory of
conforming and government loans and the maximum portion of its Committed
Pipeline that the Company believes may close be hedged with forward contracts
for the delivery of MBS or options on MBS. The inventory is then used to form
the MBS that will fill the forward delivery contracts and options. The Company
hedges its inventory and Committed Pipeline of jumbo mortgage loans by using
whole-loan sale commitments to ultimate buyers or by using temporary "cross
hedges" with sales of MBS since such loans are ultimately sold based on a
market spread to MBS. As such, the Company is not exposed to significant risk
nor will it derive any significant benefit from changes in interest rates on
the price of the inventory net of gains or losses of associated hedge
positions. The correlation between the price performance of the hedge
instruments and the inventory being hedged is very high due to the similarity
of the asset and the related hedge instrument. The Company is exposed to
interest-rate risk to the extent that the portion of loans from the Committed
Pipeline that actually closes at the committed price is less than the portion
expected to close in the event of a decline in rates and such decline in
closings is not covered by forward contracts and options to purchase MBS needed
to replace the loans in process that do
S-10
<PAGE>
not close at their committed price. The Company determines the portion of its
Committed Pipeline that it will hedge based on numerous factors, including the
composition of the Committed Pipeline, the portion of such Committed Pipeline
likely to close, the timing of such closings and anticipated changes in
interest rates. See Note F to the Company's Consolidated Financial Statements
included in the accompanying Prospectus.
Loan Servicing
The Company services on a non-recourse basis substantially all of the
mortgage loans that it originates or purchases. In addition, the Company
purchases bulk servicing contracts, also on a non-recourse basis, to service
single-family residential mortgage loans originated by other lenders. Servicing
contracts acquired through bulk purchases accounted for 17% of the Company's
mortgage servicing portfolio as of February 28, 1995. Servicing mortgage loans
includes collecting and remitting loan payments, making advances when required,
accounting for principal and interest, holding custodial (impound) funds for
payment of property taxes and hazard insurance, making any physical inspections
of the property, contacting delinquent mortgagors, supervising foreclosures and
property dispositions in the event of unremedied defaults and generally
administering the loans. The Company receives a fee for servicing mortgage
loans ranging generally from 1/4% to 1/2% per annum on the declining principal
balances of the loans. The servicing fee is collected by the Company out of
monthly mortgage payments.
The Company's servicing portfolio is subject to reduction by scheduled
amortization or by prepayment or foreclosure of outstanding loans. In addition,
the Company has sold, and may sell in the future, a portion of its portfolio of
loan servicing rights to other mortgage servicers. In general, the decision to
sell servicing rights or newly originated loans on a servicing-released basis
is based upon management's assessment of the Company's cash requirements, the
Company's debt-to-equity ratio and other significant financial ratios, the
market value of servicing rights and the Company's current and future earnings
objectives.
It is the Company's strategy to build and retain its servicing portfolio.
Loans are serviced from two facilities, one in Simi Valley, California and one
in Plano, Texas. The Company has developed systems that enable it to service
mortgage loans efficiently and therefore enhance the returns it can earn from
its investments in servicing rights. For example, data elements pertaining to
loans originated or purchased by the Company are entered into the Company's
advanced automated loan system (EDGE) at the time of origination or purchase
and are transferred to the loan servicing system without manual re-entry.
Customer service representatives in both the California and Texas facilities
have access to on-line screens containing all pertinent data about a customer's
account, thus eliminating the need to refer to paper files and shortening the
average length of a customer call. The Company has a telephone system which
enables it to control the flow of calls to both locations. The Company's
payment processing equipment can process 10,000 checks per hour, which enables
the Company to deposit virtually all cash on the same day it is received. Many
tax and insurance remittances on behalf of borrowers are processed
electronically, thus eliminating the need for printed documentation and
shortening the processing time required.
The Company believes that loan production earnings will partially offset the
effect of interest rate fluctuations on the earnings from its servicing
portfolio. In general, the value of the Company's servicing portfolio and the
income generated therefrom improve as interest rates increase and decline when
interest rates fall. Generally, in an environment of increasing interest rates,
which prevailed through most of the Company's fiscal year ended February 28,
1995, the rate of current and projected future prepayments decreases, resulting
in a decreased rate of amortization of capitalized servicing fees receivable
and purchased servicing rights, and a decrease in income from servicing
portfolio hedging activities. Such amortization, net of servicing hedge gain,
is deducted from loan administration revenue. The increase in interest rates
also causes loan production (particularly refinancings) to decline. Generally,
in an environment of declining interest rates, which prevailed through most of
the Company's fiscal year ended February 28, 1994, the rate of current and
projected future prepayments increases, resulting in an increased rate of
amortization of capitalized servicing fees receivable and purchased servicing
rights. At the same time, the decline in interest rates contributes to high
levels of loan production (particularly refinancings).
S-11
<PAGE>
The following table sets forth certain information regarding the Company's
servicing portfolio of single-family mortgage loans, including loans held for
sale and loans subserviced for others, for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28(29),
---------------------------------------------
1995 1994 1993 1992 1991
-------- -------- ------- ------- -------
(DOLLAR AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Composition of Servicing
Portfolio
at Period End:
FHA-Insured Mortgage Loans... $ 17,588 $ 9,794 $ 8,234 $ 6,271 $ 4,474
VA-Guaranteed Mortgage Loans. 7,454 3,916 3,307 2,438 1,910
Conventional Mortgage Loans.. 88,029 70,915 42,877 18,834 9,297
-------- -------- ------- ------- -------
Total Servicing Portfolio.. $113,071 $ 84,625 $54,418 $27,543 $15,681
======== ======== ======= ======= =======
Beginning Servicing Portfolio.. $ 84,625 $ 54,418 $27,543 $15,681 $12,512
Add:Loan Production............ 27,866 52,459 32,388 12,156 4,577
Bulk Servicing and
Subservicing Acquired...... 17,888 3,515 3,084 2,932 572
Less:Servicing Transferred(1).. (6,287) (8) (13) (269) (860)
Runoff(2)................... (11,021) (25,759) (8,584) (2,957) (1,120)
-------- -------- ------- ------- -------
Ending Servicing Portfolio..... $113,071 $ 84,625 $54,418 $27,543 $15,681
======== ======== ======= ======= =======
Delinquent Mortgage Loans and
Pending Foreclosures at Period
End(3):
30 days...................... 1.84% 1.89% 2.08% 2.46% 3.09%
60 days...................... 0.30 0.29 0.41 0.59 0.61
90 days or more.............. 0.44 0.40 0.60 0.80 0.76
-------- -------- ------- ------- -------
Total Delinquencies........ 2.58% 2.58% 3.09% 3.85% 4.46%
======== ======== ======= ======= =======
Foreclosures Pending........... 0.30% 0.30% 0.38% 0.46% 0.40%
======== ======== ======= ======= =======
</TABLE>
- --------
(1) Servicing rights sold are generally deleted from the servicing portfolio at
the time of sale. The Company generally subservices such loans from the
sales contract date to the transfer date.
(2) Runoff refers to scheduled principal repayments on loans and unscheduled
prepayments (partial prepayments or total prepayments due to refinancing,
modifications, sale, condemnation or foreclosure).
(3) As a percentage of the total number of loans serviced.
At February 28, 1995, the Company's servicing portfolio of single-family
mortgage loans was stratified by interest rate as follows:
<TABLE>
<CAPTION>
TOTAL PORTFOLIO AT FEBRUARY 28, 1995
----------------------------------------------
SERVICING
PRINCIPAL PERCENT WEIGHTED AVERAGE ASSETS
INTEREST RATE BALANCE OF TOTAL MATURITY (YEARS) BALANCE(1)
------------- --------- -------- ---------------- ----------
(DOLLAR AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C>
7.00% and under.................. $ 38,293 33.9% 25.5 $ 603
7.01-8.00%....................... 45,013 39.8 25.7 694
8.01-9.00%....................... 21,313 18.8 26.6 366
9.01-10.00%...................... 7,165 6.3 26.5 115
over 10.00%...................... 1,287 1.2 23.4 19
-------- ----- ---- ------
$113,071 100.0% 25.8 $1,797
======== ===== ==== ======
</TABLE>
- --------
(1) Capitalized servicing fees receivable and purchased servicing rights.
S-12
<PAGE>
The weighted average interest rate of the single-family mortgage loans in the
Company's servicing portfolio at February 28, 1995 was 7.6% as compared with
7.2% at February 28, 1994. At February 28, 1995, 77% of the loans in the
servicing portfolio bore interest at fixed rates and 23% bore interest at
adjustable rates. The weighted average net servicing fee of the portfolio was
0.356% at February 28, 1995 and the weighted average interest rate of the
fixed-rate loans in the servicing portfolio was 7.8%.
Financing of Mortgage Banking Operations
The Company's principal financing needs are the financing of loan funding
activities and the investment in servicing rights. To meet these needs, the
Company currently relies on commercial paper backed by CFC's revolving credit
facility, medium-term note issuances, pre-sale funding facilities, mortgage-
backed securities and whole loan reverse-repurchase agreements, subordinated
notes and cash flows from operations. The Company estimates that it has
available committed and uncommitted credit facilities aggregating approximately
$5.6 billion at February 28, 1995. In addition, in the past the Company has
relied on direct borrowings from its revolving credit facility, servicing-
secured bank facilities, privately-placed financings and public offerings of
Preferred Stock and Common Stock. For further information on the material terms
of the borrowings utilized by the Company to finance its inventory of mortgage
loans and mortgage-backed securities and its investment in servicing rights,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" in the accompanying Prospectus.
The Company continues to investigate and pursue alternative and supplementary
methods to finance its operations through the public and private capital
markets. These may include such methods as mortgage loan sale transactions
designed to expand the Company's financial capacity and reduce its cost of
capital and the securitization of servicing income cash flows.
COUNTRYWIDE ASSET MANAGEMENT CORPORATION
Through its subsidiary Countrywide Asset Management Corporation ("CAMC"), the
Company manages the investments and oversees the day-to-day operations of CWM
and its subsidiaries. For performing these services, CAMC receives a base
management fee of 1/8 of 1% per annum of CWM's average-invested mortgage-
related assets not pledged to secure collateralized mortgage obligations
("CMOs"). CAMC also receives a management fee equal to 0.2% per annum of the
average amounts outstanding under CWM's warehouse lines of credit. In addition,
CAMC receives incentive compensation equal to 25% of the amount by which the
CWM annualized return on equity exceeds the ten-year U.S. treasury rate plus
2%. In connection with a new business plan implemented by CWM in 1993, CAMC
waived all management fees for calendar year 1993 and 25% of the incentive
compensation earned in 1994. In addition, in 1993 CAMC absorbed $0.9 million of
operating expenses incurred in connection with the new business plan. In June
1993, CWM and its subsidiaries began reimbursing CAMC for all expenses of the
new operations. As of December 31, 1994, 1993 and 1992, the consolidated total
assets of CWM were $2.0 billion, $1.4 billion and $0.7 billion, respectively.
During the fiscal years ended February 28, 1995, 1994 and 1993, CAMC earned
$0.3 million, $0.1 million and $0.8 million, respectively, in management fees
from CWM and its subsidiaries. In addition, during the fiscal year ended
February 28, 1995, CAMC recorded $1.1 million in incentive compensation, net of
the amount waived as described above. At February 28, 1995, the Company and
CAMC owned 1,120,000 shares or approximately 2.77% of the common stock of CWM.
See Note K to the Company's Consolidated Financial Statements included in the
accompanying Prospectus.
OTHER OPERATIONS
Through various other subsidiaries, the Company conducts business in a number
of areas related to the mortgage banking business. The following is a brief
description of the activities of these subsidiaries.
The Company operates a securities broker-dealer, Countrywide Securities
Corporation ("CSC"), which is a member of the National Association of
Securities Dealers, Inc. and the Securities Investor Protection Corporation.
CSC sells mortgage-backed securities on an odd-lot basis, generally at prices
higher than those available in the wholesale, round-lot market and subordinate
structures of whole loan CMOs.
The Company's insurance agency subsidiary, Countrywide Agency, Inc., acts as
an agent for the sale of homeowners, fire, flood, earthquake, mortgage life and
disability insurance to mortgagors whose loans are serviced by CFC.
S-13
<PAGE>
Another subsidiary of the Company, CTC Foreclosure Services Corporation,
formerly Countrywide Title Corporation, serves as trustee under deeds of trust
in connection with the Company's mortgage loan production in California and
certain other states.
Countrywide Servicing Exchange ("CSE") is a national servicing brokerage and
consulting firm. CSE acts as an agent facilitating transactions between buyers
and sellers of bulk servicing contracts.
LandSafe, Inc. and its subsidiaries act as a provider of various title
insurance services in the capacity of an agent rather than an underwriter. The
Company offers title insurance commitments and policies, settlement services
and property profiles to realtors, builders, consumers, mortgage brokers and
other financial institutions.
The Company is no longer engaged in the business of originating mobile home
installment contracts. During the fiscal year ended February 28, 1995, the
Company sold three of its five mobile home parks located in Texas and Florida
and the mobile home coaches contained therein. Subsequent to February 28, 1995,
the Company sold its remaining two mobile home parks located in Texas and the
mobile home coaches contained therein for $7.2 million; at February 28, 1995,
the Company's investment in these two mobile home parks and the mobile home
coaches contained therein was approximately $8.2 million.
PROPRIETARY DATA PROCESSING SYSTEMS
The Company employs technology wherever applicable and continually searches
for new and better ways of both providing services to its customers and
maximizing the efficiency of its operations. Proprietary systems currently in
use by the Company include CLUES(TM), an artificial intelligence system that is
designed to expedite the review of applications, credit reports and property
appraisals. The Company believes that CLUES increases underwriters'
productivity, reduces costs and provides greater consistency to the
underwriting process. Another system in use is EDGE, which is an advanced
automated loan origination system that is designed to reduce the time and cost
associated with the loan application and funding process. This front-end system
was internally developed for the Company's exclusive use and is integrated with
the Company's loan servicing, sales, accounting and other systems. The Company
believes that the EDGE system improves the quality of the loan products and
customer service by: (i) reducing risk of deficient loans; (ii) facilitating
accurate pricing; (iii) promptly generating loan documents with the use of
laser printers; (iv) providing for electronic communication with credit bureaus
and other vendors; and (v) generally minimizing manual data input. From pre-
qualification to funding, the Company believes EDGE significantly reduces
origination and processing costs and speeds funding time.
The Company has developed and implemented DirectLine Plus(R), which is
designed to provide support to mortgage brokers and enable them to obtain the
latest pricing, to review the Company's lending program guidelines, to submit
applications, to directly obtain information about specific loans in progress
and to send and receive electronic messages to and from the Company's
processing center. Recent enhancements to DirectLine Plus integrate that
application with CLUES-ON-LINE, an adaptation of CLUES for use with DirectLine
Plus, which is designed to allow the mortgage broker to submit loan information
and receive a qualified underwriting decision within minutes.
In addition, the Company is developing CLASS, which is designed to offer
automated loan settlement services by using electronic data interchange to
facilitate the preparation of closing documents at the office of the closing
agent. The Company plans to deploy CLASS in the offices of a wide range of
business partners (such as realtors and other entities that are involved in the
closing of a mortgage loan transaction). Currently under development is the
LOAN COUNSELOR. The LOAN COUNSELOR is being designed to give business partners
direct access to the Company's package of financial services and to permit such
business partners to pre-qualify prospective applicants, provide "what if"
scenarios to help find the appropriate loan products, take the applications and
receive qualified underwriting decisions. The Company plans to integrate the
LOAN COUNSELOR with both CLUES and the EDGE system.
The Company intends to implement a telemarketing application designed to
provide enterprise-wide information on both current and prospective customers.
The purpose of the telemarketing system is to enable production divisions to
identify prospective customers to solicit for specific products or services,
and to obtain the results of any solicitation. Management believes that the
database will give the Company a significant
S-14
<PAGE>
advantage in its ability to protect its servicing portfolio and generate
additional revenue by cross-selling other products and services.
REGULATION
The Company's mortgage banking business is subject to the rules and
regulations of the Department of Housing and Urban Development, FHA, VA, Fannie
Mae, Freddie Mac and GNMA with respect to originating, processing, selling and
servicing mortgage loans. Those rules and regulations, among other things,
prohibit discrimination, provide for inspections and appraisals, require credit
reports on prospective borrowers and fix maximum loan amounts. Moreover, FHA
lenders such as the Company are required annually to submit to the Federal
Housing Commissioner audited financial statements, and GNMA requires the
maintenance of specified net worth levels (which vary depending on the amount
of GNMA securities issued by the Company). The Company's affairs are also
subject to examination by the Federal Housing Commissioner at all times to
assure compliance with the FHA regulations, policies and procedures. Mortgage
origination activities are subject to the Equal Credit Opportunity Act, the
Federal Truth-in-Lending Act, the Home Mortgage Disclosure Act and the Real
Estate Settlement Procedures Act and the regulations promulgated thereunder
which prohibit discrimination, require the disclosure of certain basic
information to mortgagors concerning credit and settlement costs, limit payment
for settlement services to the reasonable value of the services rendered and
require the maintenance and disclosure of information regarding the disposition
of mortgage applications based on race, gender, geographical distribution and
income level.
Additionally, there are various state laws and regulations affecting the
Company's mortgage banking operations. The Company is licensed as a mortgage
banker or retail installment lender in those states in which such license is
required.
Conventional mortgage operations may also be subject to state usury statutes.
FHA and VA loans are exempt from the effect of such statutes.
Securities broker-dealer operations are subject to federal and state
securities laws, as well as the rules of both the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc.
Insurance agency and title insurance operations are subject to insurance laws
of each of the states in which the Company conducts such operations.
COMPETITION
The mortgage banking industry is highly competitive and fragmented. The
Company competes with other financial intermediaries (such as mortgage bankers,
commercial banks, savings and loan associations, credit unions and insurance
companies) and mortgage banking subsidiaries or divisions of diversified
companies. During the year ended February 28, 1995, increased mortgage interest
rates resulted in a substantial decrease in mortgage originations. This
decrease in mortgage originations created excess industry capacity which
resulted in increased price competition. Consequently, loan production for the
year ended February 28, 1995 was unprofitable. In addition, during periods of
increasing interest rates, as existed for most of the year ended February 28,
1995, consumers tend to prefer adjustable-rate mortgage products. Particularly
in California, savings and loans and other portfolio lenders competed with the
Company by offering aggressively-priced ARM products. The Company competes
principally by offering products with competitive features, by emphasizing the
quality of its service and by pricing its range of products at competitive
rates.
In recent years, the aggregate share of the United States market for
residential mortgage loans that is served by mortgage bankers has risen,
principally due to the decline in the savings and loan industry. According to
industry statistics, mortgage bankers' aggregate share of this market increased
from approximately 19% during calendar year 1989 to approximately 49% during
the third quarter of calendar year 1994. The Company believes that it has
benefited from this trend.
The Company is a Delaware corporation, and was originally incorporated in New
York under the name of OLM Credit Industries, Inc. in 1969. Its principal
executive offices are located at 155 North Lake Avenue, P. O. Box 7137,
Pasadena, California 91109-7137, and its telephone number is (818) 304-8400.
S-15
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"Purchase Agreement"), the Company has agreed to sell to each of the
Underwriters named below (the "Underwriters"), and each of the Underwriters
severally has agreed to purchase, the aggregate number of shares of Common
Stock set forth opposite its name below. In the Purchase Agreement, the several
Underwriters have agreed, subject to the terms and conditions set forth
therein, to purchase all the shares of Common Stock offered hereby if any of
the shares of Common Stock are purchased. In the event of a default by an
Underwriter, the Purchase Agreement provides that, in certain circumstances,
the purchase commitments of the nondefaulting Underwriters may be increased or
the Purchase Agreement may be terminated.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................................ 1,875,000
Goldman, Sachs & Co. ............................................ 1,875,000
Lehman Brothers Inc. ............................................ 1,875,000
Salomon Brothers Inc ............................................ 1,875,000
Alex. Brown & Sons Incorporated.................................. 1,250,000
Dean Witter Reynolds Inc. ....................................... 1,250,000
----------
Total....................................................... 10,000,000
==========
</TABLE>
The Underwriters have advised the Company that they propose initially to
offer the shares to the public at the public offering price set forth on the
cover page of this Prospectus Supplement, and to certain dealers at such price
less a concession not in excess of $.50 per share. The Underwriters may allow,
and such dealers may reallow, a discount not in excess of $.10 per share on
sales to certain other dealers. After the initial public offering, the public
offering price, concession and discount may be changed.
The Company has granted the Underwriters an option exercisable for 30 days
after the date hereof to purchase up to 1,500,000 additional shares of Common
Stock to cover over-allotments, if any, at the initial public offering price,
less the underwriting discount. If the Underwriters exercise this option, each
of the Underwriters have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage thereof which the number of shares
of Common Stock to be purchased by it shown in the foregoing table is of the
10,000,000 shares of Common Stock initially offered hereby.
The Company has agreed that, for a period of 120 days from the date of this
Prospectus Supplement, it will not, without the prior written consent of the
Underwriters, directly or indirectly, sell, offer to sell, grant any option for
the sale of, or otherwise dispose of, any Common Stock or any securities
convertible into or exchangeable or exercisable for Common Stock (except for
Common Stock issued pursuant to the Purchase Agreement, pursuant to employee
benefit plans referred to in this Prospectus Supplement or the Prospectus, or
pursuant to the exercise of convertible securities or options referred to in
this Prospectus Supplement or the Prospectus), or file any registration
statement under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to any of the foregoing. Certain officers and directors of the
Company have each agreed that, for a period of 90 days from the date of this
Prospectus Supplement, they will not, without the prior written consent of the
Underwriters, offer, sell or contract to sell, or otherwise dispose of,
directly or indirectly, or announce an offering of, any shares of Common Stock
beneficially owned by such officer or director, or any securities convertible
into, or exchangeable for, shares of Common Stock, other than shares of Common
Stock disposed of as bona fide gifts or shares of Common Stock pledged,
hypothecated or otherwise encumbered in connection with the incurrence of
indebtedness.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
S-16
<PAGE>
VALIDITY OF SECURITIES
The validity of the shares of Common Stock offered hereby will be passed upon
for the Company by Fried, Frank, Harris, Shriver & Jacobson, a partnership
including professional corporations, New York, New York. Edwin Heller, whose
professional corporation is a member of Fried, Frank, Harris, Shriver &
Jacobson, is a director of the Company. Brown & Wood, New York, New York will
serve as counsel to the Underwriters. Brown & Wood also serves as counsel for
CWMBS, Inc., a wholly owned subsidiary of the Company, in connection with
offerings of mortgage pass-through certificates, and as counsel for CWM.
S-17
<PAGE>
PROSPECTUS
LOGO COUNTRYWIDE (SM)
----------------------
CREDIT INDUSTRIES, INC.
COMMON STOCK, PREFERRED STOCK AND DEBT SECURITIES
COUNTRYWIDE FUNDING CORPORATION
DEBT SECURITIES
PAYMENT OF PRINCIPAL, PREMIUM, IF ANY, AND INTEREST
UNCONDITIONALLY GUARANTEED BY
COUNTRYWIDE CREDIT INDUSTRIES, INC.
---------------
Countrywide Credit Industries, Inc. (the "Company" or "CCI") may offer, from
time to time, together or separately, (i) shares of its common stock, $.05 par
value per share (the "Common Stock"), (ii) shares of its preferred stock, $.05
par value per share (the "Preferred Stock") and (iii) debt securities (the
"Company Debt Securities"), in each case, in amounts, at prices and on the
terms to be determined at the time of the offering. In addition, Countrywide
Funding Corporation, a wholly owned subsidiary of the Company ("CFC"), may
offer, from time to time, its debt securities (the "CFC Debt Securities", and
together with the Company Debt Securities, the "Debt Securities"), which will
be unconditionally guaranteed (the "Guarantees") as to payment of principal,
premium, if any, and interest by the Company (in its capacity as guarantor,
the "Guarantor"), in the amounts, at prices and on the terms to be determined
at the time of the offering. The Common Stock, Preferred Stock and Debt
Securities are collectively called the "Securities."
The Securities offered pursuant to this Prospectus may be issued in one or
more series or issuances and will have an aggregate public offering price of
up to $750,000,000 (or the equivalent thereof, based on the applicable
exchange rate at the time of sale, in one or more foreign currencies, currency
units or composite currencies as shall be designated by the Company or CFC, as
the case may be). Certain specific terms of the particular Securities in
respect of which this Prospectus is being delivered are set forth in the
accompanying Prospectus Supplement (the "Prospectus Supplement"), including,
where applicable, (i) in the case of Common Stock, the aggregate number of
shares offered, the public offering price and other terms of the offering and
sale thereof, (ii) in the case of Preferred Stock, the specific title, the
aggregate number of shares offered, any dividend (including the method of
calculating payment of dividends), liquidation, redemption, voting and other
rights, any terms for any conversion or exchange into other securities, and
the public offering price and other terms of the offering and sale thereof and
(iii) in the case of Debt Securities, the specific title, the aggregate
principal amount, aggregate offering price, the denomination, the maturity,
the premium, if any, the interest rate (which may be fixed, floating or
adjustable), if any, the time and method of calculating payment of interest,
if any, the place or places where principal of, premium, if any, and interest,
if any, on such Debt Securities will be payable, the currency in which
principal of, premium, if any, and interest, if any, on such Debt Securities
will be payable, any terms of redemption at the option of the Company or CFC,
as the case may be, or repayment at the option of the holder, any sinking fund
provisions, the terms (in the case of Company Debt Securities) for any
conversion or exchange into other securities, any other special terms, and the
public offering price and other terms of the offering and sale thereof. If so
specified in the applicable Prospectus Supplement, Debt Securities of a series
may be issued in whole or in part in the form of one or more temporary or
permanent global securities.
The Common Stock is listed on the New York Stock Exchange and the Pacific
Stock Exchange under the trading symbol "CCR." Any Common Stock sold pursuant
to a Prospectus Supplement will be listed on such exchanges, subject to
official notice of issuance.
Unless otherwise specified in a Prospectus Supplement, the Debt Securities
and any Guarantees, when issued, will be unsecured and unsubordinated
obligations of the Company or CFC, as the case may be, and will rank pari
passu in right of payment with all other unsecured and unsubordinated
indebtedness of the Company or CFC, as the case may be.
This Prospectus may not be used to consummate sales of Securities unless
accompanied by a Prospectus Supplement.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURI-
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY
REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
---------------
The Securities may be sold directly, through agents, underwriters or dealers
as designated from time to time, or through a combination of such methods. If
agents of the Company or any dealers or underwriters are involved in the sale
of the Securities in respect of which this Prospectus is being delivered, the
names of such agents, dealers or underwriters and any applicable commissions
or discounts will be set forth in or may be calculated from the Prospectus
Supplement with respect to such Securities.
---------------
The date of this Prospectus is June 26, 1995.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF ANY CLASS OR
SERIES OF SECURITIES OFFERED HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT
OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE
NEW YORK STOCK EXCHANGE, THE PACIFIC STOCK EXCHANGE OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
----------------
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Information as of particular dates concerning
its directors and officers and any material interest of such persons in
transactions with the Company is disclosed in proxy statements distributed to
stockholders and filed with the Commission. Such reports, proxy statements and
other information can be inspected and copied at the offices of the Commission
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and at its regional offices located at Suite 1400, Citicorp Center, 500 West
Madison Street, Chicago, Illinois 60661 and Suite 1300, 7 World Trade Center,
New York, New York 10048. Copies of such materials can also be obtained from
the Public Reference Section of the Commission at its principal office in
Washington, D.C. at prescribed rates. The Common Stock is listed on the New
York and Pacific Stock Exchanges. Reports, proxy material and other
information concerning securities of the Company can also be inspected at the
offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New
York; and the Pacific Stock Exchange, Inc., 115 Sansome Street, San Francisco,
California.
This Prospectus constitutes a part of the Registration Statement on Form S-3
(together with all amendments, schedules and exhibits thereto, the
"Registration Statement") filed by the Company and CFC with the Commission
under the Securities Act of 1933, as amended (the "Securities Act"). This
Prospectus and the accompanying Prospectus Supplement omit certain of the
information contained in the Registration Statement in accordance with the
rules and regulations of the Commission. For further information with respect
to the Company, CFC and the Securities, reference is made to the Registration
Statement, including the schedules and exhibits filed therewith. Statements
contained in this Prospectus as to the contents of certain documents are not
necessarily complete, and, with respect to each such document filed as an
exhibit to the Registration Statement or otherwise filed with the Commission,
reference is made to the copy of the document so filed. Each such statement is
qualified in its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
There is incorporated herein by reference the following documents of the
Company heretofore filed by it with the Commission: (1) Annual Report on Form
10-K for the year ended February 28, 1995; and (2) Current Report on Form 8-K
dated June 12, 1995.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus or any
Prospectus Supplement and prior to the termination of the offering of the
Securities are incorporated herein by reference and such documents shall be
deemed to be a part hereof from the date of filing of such documents. 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 Prospectus or any Prospectus Supplement 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 so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Prospectus or any Prospectus Supplement.
The Company will provide without charge to each person to whom this
Prospectus or any Prospectus Supplement is delivered, on the request of any
such person, a copy of any or all of the foregoing documents incorporated
herein by reference (not including exhibits to the information that is
incorporated by reference unless such exhibits are specifically incorporated
by reference into the information that this Prospectus or any Prospectus
Supplement incorporates). Requests for copies of such documents should be
directed to Countrywide Credit Industries, Inc., 155 North Lake Avenue, P. O.
Box 7137, Pasadena, California 91109-7137, telephone (818) 304-8400,
Attention: Investor Relations.
2
<PAGE>
THE COMPANY AND CFC
COUNTRYWIDE CREDIT INDUSTRIES, INC.
Countrywide Credit Industries, Inc. (the "Company", "CCI" or, in its capacity
as guarantor of the CFC Debt Securities (as defined below), the "Guarantor") is
a holding company which through its principal subsidiary, Countrywide Funding
Corporation ("CFC"), is engaged primarily in the mortgage banking business.
CCI, through its other wholly owned subsidiaries, offers products and services
complementary to its mortgage banking business. A subsidiary of CCI sells
mortgage-backed securities, primarily on an odd-lot basis (i.e., in
denominations between $25,000 and $1,000,000), to broker-dealers and also sells
subordinate interests in mortgage-backed securities evidencing interests in
whole mortgage loans to institutional investors. In addition, a subsidiary of
CCI receives fee income for managing the operations of CWM Mortgage Holdings,
Inc. ("CWM"), a real estate investment trust whose shares are traded on the New
York Stock Exchange. CWM conducts real estate lending activities and has an
affiliate engaged in the operation of a jumbo and non-conforming mortgage loan
conduit. CCI also has a subsidiary which acts as an agent in the sale of
homeowners, fire, flood, earthquake, mortgage life and disability insurance to
CFC's mortgagors in connection with CFC's mortgage banking operations. Another
subsidiary of CCI earns fee income by brokering servicing contracts owned by
other mortgage lenders and loan servicers. CCI has recently begun operating a
title agent business through newly formed subsidiaries. Unless the context
otherwise requires, references to the "Company" herein shall be deemed to refer
to the Company and its consolidated subsidiaries.
CCI is a Delaware corporation, and was originally incorporated in New York
under the name of OLM Credit Industries, Inc. in 1969. Its principal executive
offices are located at 155 North Lake Avenue, P. O. Box 7137, Pasadena,
California 91109-7137, and its telephone number is (818) 304-8400.
COUNTRYWIDE FUNDING CORPORATION
CFC is engaged primarily in the mortgage banking business and as such
originates, purchases, sells and services mortgage loans. CFC's mortgage loans
are principally first-lien mortgage loans secured by single-(one to four)
family residences. CFC also offers home equity loans both in conjunction with
newly produced first- lien mortgages and as a separate product. The principal
sources of revenue of CFC are (i) loan origination fees; (ii) gains from the
sale of loans, if any; (iii) interest earned on mortgage loans during the
period that they are held by CFC pending sale, net of interest paid on funds
borrowed to finance such mortgage loans; (iv) loan servicing fees; and (v)
interest benefit derived from the custodial balances associated with CFC's
servicing portfolio.
CFC produces mortgage loans through three separate divisions. The Consumer
Markets Division originates loans through a nationwide network of retail branch
offices and direct contact with consumers. Through the Wholesale Division, CFC
originates and purchases loans through mortgage loan brokers. Through the
Correspondent Division, CFC purchases loans primarily from other mortgage
bankers, savings and loan associations, commercial banks, credit unions and
other financial intermediaries. CFC customarily sells all loans that it
originates or purchases. Substantially all loans sold by CFC are sold without
recourse, subject, in the case of loan guaranties by the Veterans
Administration ("VA"), to the limits of such guaranties.
CFC services on a non-recourse basis substantially all of the mortgage loans
that it originates or purchases. In addition, CFC purchases bulk servicing
contracts, also on a non-recourse basis, to service single-family residential
mortgage loans originated by other lenders. Servicing mortgage loans includes
collecting and remitting loan payments, making advances when required,
accounting for principal and interest, holding custodial (impound) funds for
payment of property taxes and hazard insurance, making any physical inspections
of the property, contacting delinquent mortgagors, supervising foreclosures and
property dispositions in the event of unremedied defaults and generally
administering the loans. CFC receives fee income for servicing mortgage loans
ranging generally from 1/4% to 1/2% per annum on the declining principal
balances of the loans. CFC has in the past and may in the future sell to other
mortgage servicers a portion of its portfolio of loan servicing rights.
3
<PAGE>
CFC's principal financing needs are the financing of loan funding activities
and the investment in servicing rights. To meet these needs, CFC currently
relies on commercial paper backed by its revolving credit facility, medium-term
note issuances, pre-sale funding facilities, mortgage-backed securities, whole
loan reverse-repurchase agreements, subordinated notes and cash flows from
operations. In addition, in the past, CFC has relied on direct borrowings under
its revolving credit facility, servicing-secured bank facilities, privately-
placed financings and contributions from CCI of the proceeds of public
offerings of Common Stock and Preferred Stock.
CFC is a New York corporation, originally incorporated in 1969. Its principal
executive offices are located at 155 North Lake Avenue, P. O. Box 7137,
Pasadena, California 91109-7137, and its telephone number is (818) 304-8400.
USE OF PROCEEDS
Except as may be otherwise stated in any Prospectus Supplement, the Company
and/or CFC intend to use the net proceeds from the sale of the Securities for
general corporate purposes, which may include retirement of indebtedness of the
Company or CFC and investment in servicing rights through the current
production of loans and the bulk acquisition of contracts to service loans.
4
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated financial data with respect to CCI set forth below for each
of the five fiscal years in the period ended February 28, 1995 has been derived
from, and should be read in conjunction with, the related audited financial
statements and accompanying notes included elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 28(29),
----------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT OPERATING DATA)
<S> <C> <C> <C> <C> <C>
SELECTED STATEMENT OF
EARNINGS DATA:
Revenues:
Loan origination fees.. $ 203,426 $ 379,533 $ 241,584 $ 91,933 $ 38,317
Gain (loss) on sale of
loans................. (41,342) 88,212 67,537 38,847 24,236
---------- ---------- ---------- ---------- ----------
Loan production reve-
nue................... 162,084 467,745 309,121 130,780 62,553
Interest earned........ 343,138 376,225 211,542 115,213 83,617
Interest charges....... (267,685) (275,906) (148,765) (81,959) (73,428)
---------- ---------- ---------- ---------- ----------
Net interest income.... 75,453 100,319 62,777 33,254 10,189
Loan servicing income.. 428,994 307,477 177,291 94,830 66,486
Less amortization of
servicing assets...... (95,768) (242,177) (151,362) (53,768) (24,871)
Add (less) servicing
hedge benefit (ex-
pense)................ (40,030) 73,400 74,075 17,000 --
Less write-off of ser-
vicing hedge.......... (25,600) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net loan administration
income................ 267,596 138,700 100,004 58,062 41,615
Gain on sale of servic-
ing................... 56,880 -- -- 4,302 6,258
Commissions, fees and
other income.......... 40,650 48,816 33,656 19,714 14,396
---------- ---------- ---------- ---------- ----------
Total revenues........ 602,663 755,580 505,558 246,112 135,011
---------- ---------- ---------- ---------- ----------
Expenses:
Salaries and related
expenses.............. 199,061 227,702 140,063 72,654 48,961
Occupancy and other of-
fice expenses......... 102,193 101,691 64,762 36,645 24,577
Guarantee fees......... 85,831 57,576 29,410 13,622 9,529
Marketing expenses..... 23,217 26,030 12,974 5,015 3,117
Branch and administra-
tive office consolida-
tion costs............ 8,000 -- -- -- --
Other operating
expenses.............. 37,016 43,481 24,894 17,849 11,642
---------- ---------- ---------- ---------- ----------
Total expenses........ 455,318 456,480 272,103 145,785 97,826
---------- ---------- ---------- ---------- ----------
Earnings before income
taxes.................. 147,345 299,100 233,455 100,327 37,185
Provision for income
taxes.................. 58,938 119,640 93,382 40,131 14,874
---------- ---------- ---------- ---------- ----------
Net earnings............ $ 88,407 $ 179,460 $ 140,073 $ 60,196 $ 22,311
========== ========== ========== ========== ==========
SELECTED BALANCE SHEET
DATA AT END OF PERIOD:
Mortgage loans shipped
and held for sale...... $2,898,825 $3,714,261 $2,316,297 $1,585,392 $ 509,008
Total assets............ 5,579,662 5,585,521 3,299,133 2,409,974 1,121,999
Short-term debt......... 2,664,006 3,111,945 1,579,689 1,046,289 459,470
Long-term debt.......... 1,499,306 1,197,096 734,762 383,065 153,811
7% convertible subordi-
nated debentures....... -- -- -- -- 20,918
Convertible preferred
stock.................. -- -- 25,800 37,531 38,098
Common shareholders' eq-
uity................... 942,558 880,137 693,105 558,617 133,460
OPERATING DATA (DOLLAR
AMOUNTS IN MILLIONS):
Volume of loans origi-
nated.................. $ 27,866 $ 52,459 $ 32,388 $ 12,156 $ 4,577
Loan servicing portfolio
(at period end)(1)..... 113,111 84,678 54,484 27,546 15,684
Ratio of earnings to
fixed charges(2)....... 1.54 2.06 2.52 2.18 1.49
</TABLE>
- --------
(1) Includes warehoused loans and loans under subservicing agreements.
(2) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before Federal income taxes, plus fixed charges.
Fixed charges include interest expense on debt and the portion of rental
expenses which is considered to be representative of the interest factor
(one-third of operating leases). Since the major portion of CCI's interest
costs is incurred to finance mortgage loans which generate interest income,
and since interest income and interest expense are generated
simultaneously, management of CCI believes that a more meaningful measure
of its debt service requirements is the ratio of earnings to net fixed
charges. Under this alternative formula, net fixed charges are defined as
interest expense on debt, other than debt incurred to finance CCI's
mortgage loan inventory, plus the interest element (one-third of operating
leases). Under such alternative formula, these ratios for each of the five
fiscal years in the period ended February 28, 1995, commencing with the
fiscal year ended February 28, 1995, were 3.36, 4.26, 5.18, 3.06 and 2.43,
respectively.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's strategy is concentrated on three components of its business:
loan production, loan servicing and businesses ancillary to mortgage lending.
See "The Company and CFC." The Company intends to continue its efforts to
increase its market share of, and realize increased income from, its loan
production. In addition, the Company is engaged in building its loan servicing
portfolio because of the returns it can earn from such investment. A strong
loan production capability and a growing servicing portfolio are the primary
means used by the Company to reduce the sensitivity of its earnings to changes
in interest rates because loan production income characteristics are
countercyclical to the effect of interest rate changes on servicing income.
Finally, the Company is involved in business activities complementary to its
mortgage banking business, such as acting as agent in the sale of homeowners,
fire, flood, earthquake, mortgage life and disability insurance to its
mortgagors, brokering servicing rights and selling odd-lot and other mortgage-
backed securities ("MBS").
The Company's results of operations historically have been primarily
influenced by: (i) the level of demand for mortgage credit, which is affected
by such external factors as the level of interest rates, the strength of the
various segments of the economy and the demographics of the Company's lending
markets; (ii) the direction of interest rates; and (iii) the relationship
between mortgage interest rates and the cost of funds.
The fiscal year ended February 28, 1993 ("Fiscal 1993") was a then-record
performance year for the Company. The Company became the nation's leader in
single-family mortgage loan originations in calendar year 1992. This
performance was due to: (i) the development of a stronger capital base that
supported increased production; (ii) the implementation of an expansion
strategy for the production divisions designed to penetrate new markets and
expand in existing markets, particularly outside California, and to further
increase market share in both the purchase and refinance market segments; (iii)
the development of state-of-the-art technologies that expanded the Company's
production and servicing capabilities and capacity; and (iv) a decline in
average mortgage interest rates. In Fiscal 1993, the Company's market share
increased to approximately 4% of the single-family mortgage origination market.
During the year ended February 28, 1993, the Company' servicing portfolio
nearly doubled to $54.5 billion.
The Company's performance during the fiscal year ended February 28, 1994
("Fiscal 1994") set new operating records. In calendar year 1993, the Company
became the nation's largest servicer of single-family mortgages and at February
28, 1994 had a servicing portfolio of $84.7 billion, an increase of 55% over
the portfolio at the end of Fiscal 1993. This servicing portfolio growth was
accomplished through increased loan production volume of low-coupon mortgages.
In addition, the Company acquired bulk servicing rights with an aggregate
principal balance of $3.4 billion. The Company also maintained its position as
the nation's leader in originations of single-family mortgages for the second
consecutive year. This performance was due to: (i) continued implementation of
the Company's production expansion strategy designed to penetrate new markets
and expand in existing markets, particularly outside California, and to further
increase market share; (ii) a continued decline in average mortgage interest
rates that prevailed during most of 1993; and (iii) the introduction of new
technologies that improved productivity. In Fiscal 1994, the Company's market
share increased to approximately 5.1% of the estimated $1.0 trillion single-
family mortgage origination market, up from approximately 4% of the estimated
$825 billion market in Fiscal 1993.
The fiscal year ended February 28, 1995 ("Fiscal 1995") was a period of
transition from a mortgage market dominated by refinances resulting from
historically low interest rates to an extremely competitive and smaller
mortgage market in which refinances declined to a relatively small percentage
of total fundings and customer preference for adjustable-rate mortgages
increased. In this transition, which resulted from the increase in interest
rates during the year, intense price competition developed that resulted in the
Company experiencing negative production margins in Fiscal 1995. At the same
time, the increase in interest rates caused a decline in the prepayment rate in
the servicing portfolio which, combined with a decline in the rate
6
<PAGE>
of expected future prepayments, caused a reduction in amortization of the
capitalized servicing fees receivable and purchased servicing rights
("Servicing Assets"). This decrease in amortization contributed to improved
earnings from the Company's servicing activities. The Company addressed the
challenges of the year by: (i) expanding its share of the home purchase market;
(ii) reducing costs to maintain its production infrastructure in line with
reduced production levels; and (iii) accelerating the growth of its servicing
portfolio by aggressively acquiring servicing contracts through bulk purchases.
These strategies produced the following results: (i) home purchase production
increased from $13.3 billion, or 25% of total fundings, in Fiscal 1994 to $19.5
billion, or 70% of total fundings, in Fiscal 1995, helping the Company maintain
its position as the nation's leader in originations of single-family mortgages
for the third consecutive year; (ii) the number of staff engaged in production
activities declined from approximately 3,900 at the end of Fiscal 1994 to
approximately 2,400 at the end of Fiscal 1995; (iii) production-related and
overhead costs declined from $328 million in Fiscal 1994 to $270 million in
Fiscal 1995; and (iv) bulk servicing purchases increased to $17.6 billion in
Fiscal 1995 from $3.4 billion in Fiscal 1994. These bulk servicing
acquisitions, combined with slower prepayments caused by increased mortgage
interest rates, helped the Company maintain its position as the nation's
largest servicer of single-family mortgages for the second consecutive year. In
Fiscal 1995, the Company's market share decreased to approximately 4% of the
estimated $660 billion single-family mortgage origination market.
RESULTS OF OPERATIONS
Fiscal 1995 Compared with Fiscal 1994
Revenues for Fiscal 1995 decreased 20% to $602.7 million from $755.6 million
for Fiscal 1994. Net earnings decreased 51% to $88.4 million in Fiscal 1995
from $179.5 million in Fiscal 1994. The decrease in revenues was due to
decreased loan production resulting from increased mortgage interest rates in
Fiscal 1995. In addition, intense price competition during Fiscal 1995 resulted
in the Company's recording a loss on the sale of loans. The Company had a gain
on sale of loans in Fiscal 1994. In Fiscal 1995, the Company did not realize
any servicing hedge gains; in addition, amortization of option and interest
rate floor premiums related to the servicing hedge amounted to $40.0 million
and the write-off of the remaining unamortized costs of the Company's prior
servicing hedge amounted to $25.6 million. During Fiscal 1994, the Company
realized $73.4 million in net servicing hedge gains. These negative effects
experienced in Fiscal 1995 were somewhat offset by the favorable impact of a
larger and more slowly prepaying loan servicing portfolio and of a gain
recognized on the sale of servicing. The decrease in net earnings for Fiscal
1995 was primarily the result of the decrease in revenues, a smaller decline in
expenses than revenues from Fiscal 1994 to Fiscal 1995, higher guarantee fees
caused by the larger servicing portfolio and a charge due to the Company's
downsizing and office consolidation process.
The total volume of loans produced decreased 47% to $27.9 billion for Fiscal
1995 from $52.5 billion for Fiscal 1994. Refinancings totaled $8.4 billion, or
30% of total fundings, for Fiscal 1995, as compared to $39.2 billion, or 75% of
total fundings, for Fiscal 1994. Adjustable-rate mortgage loan ("ARM")
production totaled $9.5 billion, or 34% of total fundings, for Fiscal 1995, as
compared to $10.1 billion, or 19% of total fundings, for Fiscal 1994.
Production in the Company's Consumer Markets Division decreased to $7.1 billion
for Fiscal 1995 compared to combined production of $11.6 billion for the Retail
and Consumer Divisions for Fiscal 1994. Production in the Company's Wholesale
Division decreased to $8.5 billion (which included approximately $3.3 billion
of originated loans and $5.2 billion of purchased loans) for Fiscal 1995 from
$21.5 billion (which included approximately $10.9 billion of originated loans
and $10.6 billion of purchased loans) for Fiscal 1994. The Company's
Correspondent Division purchased $12.3 billion in mortgage loans for Fiscal
1995 compared to $19.4 billion for Fiscal 1994. The factors which affect the
relative volume of production among the Company's three divisions include
pricing decisions and the relative competitiveness of such pricing, the level
of real estate and mortgage lending activity in each division's markets, and
the success of each division's sales and marketing efforts.
At February 28, 1995 and 1994, the Company's pipeline of loans in process was
$3.6 billion and $7.6 billion, respectively. In addition, at February 28, 1995,
the Company had committed to make loans in the
7
<PAGE>
amount of $2.7 billion, subject to property identification and approval of the
loans ("Lock N' Shop SM Pipeline"). At February 28, 1994, the Lock N' Shop
Pipeline was $1.6 billion. Historically, approximately 43% to 75% of the
pipeline of loans in process has funded. In Fiscal 1995 and Fiscal 1994, the
Company received 315,632 and 515,104 new loan applications, respectively, at
an average daily rate of $141 million and $282 million, respectively. The
following actions were taken during Fiscal 1995 on the total applications
received during that year: 220,715 loans (70% of total applications received)
were funded and 66,725 applications (21% of total applications received) were
either rejected by the Company or withdrawn by the applicant. The following
actions were taken during Fiscal 1994 on the total applications received
during that year: 358,257 loans (70% of total applications received) were
funded and 98,809 applications (19% of total applications received) were
either rejected by the Company or withdrawn by the applicant. The factors that
affect the percentage of applications received and funded during a given time
period include the movement and direction of interest rates, the average
length of loan commitments issued, the creditworthiness of applicants, the
production divisions' loan processing efficiency and loan pricing decisions.
Loan origination fees decreased in Fiscal 1995 as compared to Fiscal 1994
and a loss was recorded in Fiscal 1995 on the sale of loans due to lower loan
production that resulted from the increase in the level of mortgage interest
rates. Reduced margins due to increased price competition caused by lower
demand for mortgage loans during Fiscal 1995 than Fiscal 1994 also contributed
to the loss on the sale of loans. In general, loan origination fees and gain
or loss on sale of loans are affected by numerous factors, including loan
pricing decisions, volatility of and the general direction of interest rates
and the volume of loans produced.
Net interest income (interest earned net of interest charges) decreased to
$75.5 million for Fiscal 1995 from $100.3 million for Fiscal 1994.
Consolidated net interest income is principally a function of: (i) net
interest income earned from the Company's mortgage loan warehouse ($35.7
million and $110.1 million for Fiscal 1995 and Fiscal 1994, respectively);
(ii) interest expense related to the Company's investment in servicing rights
($20.0 million and $68.0 million for Fiscal 1995 and Fiscal 1994,
respectively); and (iii) interest income earned from the custodial balances
associated with the Company's servicing portfolio ($59.8 million and $58.2
million for Fiscal 1995 and Fiscal 1994, respectively). The Company earns
interest on, and incurs interest expense to carry, mortgage loans held in its
warehouse. The decrease in net interest income from the mortgage loan
warehouse was attributable to a decrease in the average amount of the mortgage
loan warehouse due to the decline in production and to a decrease in the net
earnings rate. The decrease in interest expense on the investment in servicing
rights resulted primarily from a decline in the payments of interest to
certain investors pursuant to customary servicing arrangements with regard to
paid-off loans which payments exceeded the interest earned on these loans
through their respective payoff dates ("Interest Costs Incurred on Payoffs").
The increase in net interest income earned from the custodial balances was
related to an increase in the earnings rate, offset somewhat by a decline in
the average custodial balances from Fiscal 1994 to Fiscal 1995.
During Fiscal 1995, loan administration income was positively affected by
the continued growth of the Company's loan servicing portfolio. At February
28, 1995, the Company serviced $113.1 billion of loans (including $0.7 billion
of loans subserviced for others) compared to $84.7 billion (including $0.6
billion of loans subserviced for others) at February 28, 1994, a 34% increase.
The growth in the Company's servicing portfolio during Fiscal 1995 was the
result of loan production volume and the acquisition of bulk servicing rights,
partially offset by prepayments, partial prepayments, scheduled amortization
of mortgage loans and a sale of servicing rights of loans with principal
balances aggregating $5.9 billion. The weighted average interest rate of the
mortgage loans in the Company's servicing portfolio at February 28, 1995 was
7.6% compared to 7.2% at February 28, 1994. It is the Company's strategy to
build and retain its servicing portfolio because of the returns the Company
can earn from such investment and because the Company believes that servicing
income is countercyclical to loan origination income. See "--Prospective
Trends--Market Factors."
During Fiscal 1995, the prepayment rate of the Company's servicing portfolio
was 9%, as compared to 35% for Fiscal 1994. In general, the prepayment rate is
affected by the relative level of mortgage interest rates, activity in the
home purchase market and the relative level of home prices in a particular
market. The decrease in the prepayment rate is primarily attributable to
decreased refinance activity caused by increased
8
<PAGE>
mortgage interest rates in Fiscal 1995 from Fiscal 1994. The primary means used
by the Company to reduce the sensitivity of its earnings to changes in interest
rates is through a strong loan production capability and a growing servicing
portfolio. To mitigate the effect on earnings of higher amortization (which is
deducted from loan servicing income) resulting from increased prepayment
activity, the Company acquires financial instruments, including derivative
contracts, that increase in value when interest rates decline (the "Servicing
Hedge"). These financial instruments include call options on U.S. treasury
futures and MBS, interest rate floors and certain tranches of collateralized
mortgage obligations ("CMOs").
The CMOs, which consist primarily of principal-only ("P/O") securities, have
been purchased at deep discounts to their par values. As interest rates
decline, prepayments on the collateral underlying the CMOs should increase.
These changes should result in a decline in the average lives of P/O securities
and an increase in the present values of their cash flows.
The Servicing Hedge instruments utilized by the Company partially protect the
value of the investment in servicing rights from the effects of increased
prepayment activity that generally results from declining interest rates. To
the extent that interest rates increase, as they did in Fiscal 1995, the value
of the servicing rights increases while the value of the hedge instruments
declines. However, the Company is not exposed to loss beyond its initial outlay
to acquire the hedge instruments. At February 28, 1995, the carrying value of
interest rate floor contracts and P/O securities included in the Servicing
Hedge was approximately $16 million and $42 million, respectively. There can be
no assurance the Company's Servicing Hedge will generate gains in the future.
See Note F to the Company's Consolidated Financial Statements included
elsewhere herein.
For Fiscal 1995, total amortization amounted to $95.8 million, representing
an annual rate of 7% of average Servicing Assets. During Fiscal 1995, the
Company did not realize any Servicing Hedge gains; in addition, amortization of
option and interest rate floor premiums related to the Servicing Hedge amounted
to $40.0 million. Also during Fiscal 1995, the Company decided to replace its
prior Servicing Hedge with a new hedge resulting in a write-down of the
remaining unamortized costs of the prior hedge of $25.6 million. For Fiscal
1994, total amortization was $242.2 million, or an annual rate of 28% of the
average Servicing Assets. Amortization for Fiscal 1994 was offset by Servicing
Hedge gains which aggregated $73.4 million. The decline in the rate of
amortization from Fiscal 1994 to Fiscal 1995 resulted primarily from a decline
in the current and projected future prepayment rates caused by an increase in
mortgage interest rates. The factors affecting the rate of amortization
recorded in an accounting period include the level of prepayments during the
period, the change in prepayment expectations and the amount of Servicing Hedge
gains in excess of amortization due to impairment.
During Fiscal 1995, the Company acquired bulk servicing rights for loans with
principal balances aggregating $17.6 billion at a price of $261.9 million or
1.49% of the aggregate outstanding principal balances of the servicing
portfolios acquired. During Fiscal 1994, the Company acquired bulk servicing
rights for loans with principal balances aggregating $3.4 billion at a price of
$46.6 million or 1.36% of the aggregate outstanding principal balances of the
servicing portfolios acquired.
During Fiscal 1995, the Company sold servicing rights for loans with
principal balances aggregating $5.9 billion and recognized a gain of $56.9
million. No servicing rights were sold during Fiscal 1994.
Salaries and related expenses are summarized below for Fiscal 1995 and Fiscal
1994.
<TABLE>
<CAPTION>
FISCAL 1995
---------------------------------------------
PRODUCTION LOAN OTHER
ACTIVITIES ADMINISTRATION ACTIVITIES TOTAL
---------- -------------- ---------- --------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Base Salaries.................... $109,276 $23,929 $ 6,811 $140,016
Incentive Bonus.................. 29,815 463 4,204 34,482
Payroll Taxes and Benefits....... 19,695 4,020 848 24,563
-------- ------- ------- --------
Total Salaries and Related Ex-
penses.......................... $158,786 $28,412 $11,863 $199,061
======== ======= ======= ========
Average Number of Employees...... 2,631 850 246 3,727
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
FISCAL 1994
---------------------------------------------
PRODUCTION LOAN OTHER
ACTIVITIES ADMINISTRATION ACTIVITIES TOTAL
---------- -------------- ---------- --------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Base Salaries.................... $123,454 $18,974 $4,730 $147,158
Incentive Bonus.................. 54,460 323 2,663 57,446
Payroll Taxes and Benefits....... 18,896 3,544 658 23,098
-------- ------- ------ --------
Total Salaries and Related Ex-
penses.......................... $196,810 $22,841 $8,051 $227,702
======== ======= ====== ========
Average Number of Employees...... 3,351 680 145 4,176
</TABLE>
The amount of salaries decreased during Fiscal 1995 primarily due to the
decreased number of employees resulting from reduced loan production, offset
somewhat by an increased number of employees due to a larger servicing
portfolio. Incentive bonuses earned during Fiscal 1995 decreased primarily due
to decreased loan production and decreased loan production personnel.
Occupancy and other office expenses for Fiscal 1995 slightly increased to
$102.2 million from $101.7 million for Fiscal 1994. This was due to increased
office and equipment rental expenses resulting from the opening of 59 Consumer
Markets Division branch offices in Fiscal 1995, partially offset by a decline
in expenses resulting from the closure of 86 Consumer Markets Division
satellite offices and 13 Wholesale Division branch offices.
Guarantee fees (fees paid to guarantee timely and full payment of principal
and interest on mortgage-backed securities and whole loans sold to permanent
investors and to transfer the credit risk of the loans in the servicing
portfolio) for Fiscal 1995 increased 49% to $85.8 million from $57.6 million
for Fiscal 1994. This increase resulted primarily from an increase in the
servicing portfolio.
Marketing expenses for Fiscal 1995 decreased 11% to $23.2 million from $26.0
million for Fiscal 1994. The decrease in marketing expenses reflected the
Company's strategy to centralize and streamline its marketing functions.
In Fiscal 1995, the Company incurred an $8.0 million charge related to the
consolidation and relocation of branch and administrative offices that occurred
as a result of the reduction in staff caused by declining production.
Other operating expenses for Fiscal 1995 decreased from Fiscal 1994 by $6.5
million, or 15%. This decrease was due primarily to decreased loan production.
Profitability of Loan Production and Servicing Activities. In Fiscal 1995,
the Company's pre-tax loss from its loan production activities (which include
loan origination and purchases, warehousing and sales) was $94.8 million. In
Fiscal 1994, the Company's comparable pre-tax earnings were $250.1 million. The
decrease of $344.9 million is primarily attributed to lower loan production and
increased price competition caused by lower demand for mortgage loans. In
Fiscal 1995, the Company's pre-tax earnings from its loan servicing activities
(which include administering the loans in the servicing portfolio, selling
homeowners and other insurance and acting as tax payment agent) was $229.6
million as compared to $46.6 million in Fiscal 1994. This increase was
primarily due to an increase in the servicing portfolio, a reduction in
amortization due to lower prepayment activity and reduced prepayment
expectations and a sale of servicing during Fiscal 1995 which resulted in a
gain of $56.9 million. The increase was partially offset by an increase in
Servicing Hedge expense and a write-off of the remaining costs of the prior
Servicing Hedge.
10
<PAGE>
Fiscal 1994 Compared to Fiscal 1993
Revenues for Fiscal 1994 increased 49% to $755.6 million from $505.6 million
for Fiscal 1993. Net earnings increased 28% to $179.5 million in Fiscal 1994
from $140.1 million in Fiscal 1993. The increase in revenues and net earnings
for Fiscal 1994 reflected increased loan production and continued growth of the
loan servicing portfolio. The increase in revenues was partially offset by an
increase in expenses.
The total volume of loans produced increased 62% to $52.5 billion for Fiscal
1994 from $32.4 billion for Fiscal 1993. Refinancings totaled $39.2 billion, or
75% of total fundings, for Fiscal 1994, as compared to $23.6 billion, or 73% of
total fundings, for Fiscal 1993. ARM loan production totaled $10.1 billion, or
19% of total fundings, for Fiscal 1994, as compared to $9.2 billion, or 28% of
total fundings, for Fiscal 1993. Production in the Company's Retail Division
(which in Fiscal 1995 became part of the Consumer Markets Division) increased
to $7.7 billion for Fiscal 1994 compared to $4.6 billion for Fiscal 1993.
Production in the Company's Wholesale Division increased to $21.5 billion
(which included approximately $10.9 billion of originated loans and $10.6
billion of purchased loans) for Fiscal 1994 compared to $15.5 billion (which
included approximately $8.7 billion of originated loans and $6.8 billion of
purchased loans) for Fiscal 1993. The Company's Correspondent Division
purchased $19.4 billion in mortgage loans for Fiscal 1994 compared to $10.8
billion for Fiscal 1993. Production in the Company's Consumer Division (which
in Fiscal 1995 became part of the Consumer Markets Division) increased to $3.9
billion for Fiscal 1994 compared to $1.5 billion for Fiscal 1993.
At February 28, 1994 and 1993, the Company's pipeline of loans in process was
$7.6 billion and $5.9 billion, respectively. In addition, at February 28, 1994,
the Company had committed to make loans in the amount of $1.6 billion, subject
to property identification and borrower qualification. At February 28, 1993,
the amount of loan commitments subject to property identification and borrower
qualification was not material. Historically, approximately 43% to 75% of the
pipeline of loans in process has funded. In Fiscal 1994 and Fiscal 1993, the
Company received 515,104 and 340,242 new loan applications, respectively, at an
average daily rate of $282 million and $191 million, respectively. The
following actions were taken during Fiscal 1994 on the total applications
received during that year: 358,257 loans (70% of total applications received)
were funded and 98,809 applications (19% of total applications received) were
either rejected by the Company or withdrawn by the applicant. The following
actions were taken during Fiscal 1993 on the total applications received during
that year: 212,765 loans (63% of total applications received) were funded and
79,991 applications (24% of total applications received) were either rejected
by the Company or withdrawn by the applicant.
Loan origination fees and gain on sale of loans benefited from the increase
in loan production. The percentage increase in loan origination fees was less
than the percentage increase in total production primarily because of an
increase in the percentage of production attributable to products that
contained lower origination fees in their pricing structure.
Net interest income (interest earned net of interest charges) increased to
$100.3 million for Fiscal 1994 from $62.8 million for Fiscal 1993. Consolidated
net interest income is principally a function of: (i) net interest income
earned from the Company's mortgage loan warehouse ($110.1 million and $59.4
million for Fiscal 1994 and Fiscal 1993, respectively); (ii) interest expense
related to the Company's investment in servicing rights ($68.0 million and
$21.3 million for Fiscal 1994 and Fiscal 1993, respectively); and (iii)
interest income earned from the custodial balances associated with the
Company's servicing portfolio ($58.2 million and $21.8 million for Fiscal 1994
and Fiscal 1993, respectively). The increase in net interest income from the
mortgage loan warehouse was attributable to an increase in loan production. The
increase in interest expense on the investment in servicing rights resulted
primarily from an increase in Interest Costs Incurred on Payoffs. The increase
in net interest income earned from the custodial balances was related to larger
custodial account balances (caused by a larger servicing portfolio and an
increase in the prepayment rate of the Company's servicing portfolio), offset
somewhat by a decline in the earnings rate from Fiscal 1993 to Fiscal 1994.
11
<PAGE>
During Fiscal 1994, loan administration income was positively affected by the
continued growth of the loan servicing portfolio. At February 28, 1994, the
Company serviced $84.7 billion of loans (including $0.6 billion of loans
subserviced for others) compared to $54.5 billion (including $0.6 billion of
loans subserviced for others) at February 28, 1993, a 55% increase. The growth
in the Company's servicing portfolio during Fiscal 1994 was the result of loan
production volume and the acquisition of bulk servicing rights, partially
offset by prepayments, partial prepayments and scheduled amortization of
mortgage loans. The weighted average interest rate of the mortgage loans in the
Company's servicing portfolio at February 28, 1994 was 7.2% compared to 8.0% at
February 28, 1993.
During Fiscal 1994, the prepayment rate of the Company's servicing portfolio
was 35%, as compared to 20% for Fiscal 1993. The increase in the prepayment
rate was primarily attributable to increased refinance activity caused by
generally declining mortgage interest rates. During most of Fiscal 1994,
interest rates continued their decline to historically low levels although they
began to rise toward the end of the year.
For Fiscal 1994, total amortization amounted to $242.2 million, representing
an annual rate of 28% of average Servicing Assets. Amortization for Fiscal 1994
was partially offset by net Servicing Hedge gains which aggregated $73.4
million. For Fiscal 1993, total amortization was $151.4 million, or an annual
rate of 29% of the average Servicing Assets. This amortization amount was
comprised of $101.4 million related to current and projected prepayment rates
and $50.0 million resulting from Servicing Hedge gains, in accordance with the
Company's accounting policies. Amortization for Fiscal 1993 was offset by
Servicing Hedge gains which aggregated $74.1 million.
The following summarizes the notional amounts of Servicing Hedge
transactions.
<TABLE>
<CAPTION>
LONG LONG CALL OPTIONS
CALL OPTIONS ON U.S. TREASURY
ON MBS FUTURES
------------ -----------------
(DOLLAR AMOUNTS IN MILLIONS)
<S> <C> <C>
Balance, March 1, 1991........................... $ -- $ --
Additions...................................... 560 --
------ ------
Balance, February 29, 1992....................... 560 --
Additions...................................... 2,287 700
Dispositions................................... 2,847 700
------ ------
Balance, February 28, 1993....................... -- --
Additions...................................... 4,700 2,520
Dispositions................................... 2,700 750
------ ------
Balance, February 28, 1994....................... $2,000 $1,770
====== ======
</TABLE>
The long call options purchased by the Company partially protect the value of
the investment in servicing rights from the effects of increased prepayment
activity that generally results from declining interest rates. To the extent
that interest rates increase, as they did toward the end of Fiscal 1994, the
value of the servicing rights increases while the value of the options
declines. The value (i.e., replacement cost) of the options can decline below
the remaining unamortized cost of such options, but the options cannot expose
the Company to loss beyond its initial outlay to acquire them. Although the
replacement cost of the call options tends to decline when interest rates rise,
the options continue to provide protection over their remaining term against a
decline in interest rates below the level implied at purchase by their exercise
price. Accordingly, the Company amortizes option premiums over the lives of the
respective options. Any unamortized premium remaining when an option gain is
realized (through exercise or sale) is deducted from such gain. At February 28,
1994, the call options on MBS, which expired from March through September 1994,
had an unamortized cost of approximately $19 million and a replacement value of
approximately $1 million. At February 28, 1994, the call options on U.S.
treasury futures, which expired in September 1994, had an unamortized cost of
approximately $21 million and a replacement value of approximately $7 million.
12
<PAGE>
During Fiscal 1994, the Company acquired bulk servicing rights for loans with
principal balances aggregating $3.4 billion at a price of $46.6 million or
1.36% of the aggregate outstanding principal balances of the servicing
portfolios acquired. During Fiscal 1993, the Company acquired bulk servicing
rights for loans with principal balances aggregating $2.7 billion at a price of
$34.3 million or 1.29% of the aggregate outstanding principal balances of the
servicing portfolios acquired.
Salaries and related expenses are summarized below for Fiscal 1994 and Fiscal
1993.
<TABLE>
<CAPTION>
FISCAL 1994
---------------------------------------------
PRODUCTION LOAN OTHER
ACTIVITIES ADMINISTRATION ACTIVITIES TOTAL
---------- -------------- ---------- --------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Base Salaries.................... $123,454 $18,974 $4,730 $147,158
Incentive Bonus.................. 54,460 323 2,663 57,446
Payroll Taxes and Benefits....... 18,896 3,544 658 23,098
-------- ------- ------ --------
Total Salaries and Related Ex-
penses.......................... $196,810 $22,841 $8,051 $227,702
======== ======= ====== ========
Average Number of Employees...... 3,351 680 145 4,176
<CAPTION>
FISCAL 1993
---------------------------------------------
PRODUCTION LOAN OTHER
ACTIVITIES ADMINISTRATION ACTIVITIES TOTAL
---------- -------------- ---------- --------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Base Salaries.................... $ 73,114 $13,801 $4,666 $ 91,581
Incentive Bonus.................. 32,455 145 2,502 35,102
Payroll Taxes and Benefits....... 10,253 2,470 657 13,380
-------- ------- ------ --------
Total Salaries and Related Ex-
penses.......................... $115,822 $16,416 $7,825 $140,063
======== ======= ====== ========
Average Number of Employees...... 2,024 490 118 2,632
</TABLE>
The amount of salaries increased during Fiscal 1994 primarily due to the
increased number of employees resulting from increased loan production and an
increased servicing portfolio. Incentive bonuses earned during Fiscal 1994
increased primarily due to increased loan production and increases in loan
production personnel.
Occupancy and other office expenses for Fiscal 1994 increased 57% to $101.7
million from $64.8 million for Fiscal 1993. This increase was attributable
primarily to the expansion of the Retail and Wholesale Divisions' branch
networks. As of February 28, 1994, there were 295 Retail Division branch
offices (including 110 satellite offices and nine regional support centers) and
80 Wholesale Division branch offices (including 11 regional support centers).
As of February 28, 1993, there were 167 Retail Division branch offices
(including 45 satellite offices and two regional support centers) and 55
Wholesale Division branch offices (including nine regional support centers). In
addition, the increase in the Company's loan production and loan servicing
portfolio resulted in an increase in occupancy and other office expenses
related to the Company's central office.
Guarantee fees for Fiscal 1994 increased 96% to $57.6 million from $29.4
million for Fiscal 1993. This increase resulted primarily from an increase in
the servicing portfolio.
Marketing expenses for Fiscal 1994 increased 101% to $26.0 million from $13.0
million for Fiscal 1993. The increase in marketing expenses reflected the
Company's strategy to expand its market share, particularly in the home
purchase lending market.
Other operating expenses for Fiscal 1994 increased over Fiscal 1993 by $18.6
million, or 75%. This increase was due primarily to several factors, including
loan production, a larger servicing portfolio and expansion of loan production
capabilities.
13
<PAGE>
Profitability of Loan Production and Servicing Activities. In Fiscal 1994,
the Company's pre-tax earnings from its loan production activities (which
include loan origination and purchases, warehousing and sales) was $250.1
million. In Fiscal 1993, the Company's comparable pre-tax earnings were $175.8
million. The increase of $74.3 million was primarily attributed to higher loan
production. In Fiscal 1994, the Company's pre-tax earnings from its loan
servicing activities was $46.6 million as compared to $53.0 million in Fiscal
1993. The additional loan administration revenues derived from a larger
portfolio during Fiscal 1994 were more than offset by an increase in
amortization of the Servicing Assets, net of gains from the Servicing Hedge,
and an increase in Interest Costs Incurred on Payoffs.
INFLATION
Inflation affects the Company in the areas of loan production and servicing.
Interest rates normally increase during periods of high inflation and decrease
during periods of low inflation. Historically, as interest rates increase, loan
production, particularly from loan refinancings, decreases, although in an
environment of gradual interest rate increases, purchase activity may actually
be stimulated by an improving economy or the anticipation of increasing real
estate values. In such periods of reduced loan production, production margins
may decline due to increased competition resulting from overcapacity in the
market. In a higher interest rate environment, servicing-related earnings are
enhanced because prepayment rates tend to slow down, thereby extending the
average life of the Company's servicing portfolio and reducing amortization of
the Servicing Assets and Interest Costs Incurred on Payoffs, and because the
rate of interest earned from the custodial balances tends to increase.
Conversely, as interest rates decline, loan production, particularly from loan
refinancings, increases. However, during such periods, prepayment rates tend to
accelerate (principally on the portion of the portfolio having a note rate
higher than the then-current interest rates), thereby decreasing the average
life of the Company's servicing portfolio and adversely impacting its
servicing-related earnings primarily due to increased amortization of the
Servicing Assets, a decreased rate of interest earned from the custodial
balances, and increased Interest Costs Incurred on Payoffs.
SEASONALITY
The mortgage banking industry is generally subject to seasonal trends. These
trends reflect the general national pattern of sales and resales of homes,
although refinancings tend to be less seasonal and more closely related to
changes in interest rates. Sales and resales of homes typically peak during the
spring and summer seasons and decline to lower levels from mid-November through
February.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal financing needs are the financing of loan funding
activities and the investment in servicing rights. To meet these needs, the
Company currently relies on commercial paper supported by its revolving credit
facility, medium-term note issuances, pre-sale funding facilities, MBS and
whole loan reverse-repurchase agreements, subordinated notes and cash flow from
operations. In addition, in the past the Company has relied on direct
borrowings from its revolving credit facility, servicing-secured bank
facilities, privately-placed financings and public offerings of preferred and
common stock. See Note D to the Company's Consolidated Financial Statements
included elsewhere herein for more information on the Company's financings.
Certain of the debt obligations of the Company and CFC contain various
provisions that may affect the ability of the Company and CFC to pay dividends
and remain in compliance with such obligations. These provisions include
requirements concerning net worth, current ratio and other financial covenants.
These provisions have not had, and are not expected to have, an adverse impact
on the ability of the Company and CFC to pay dividends.
On September 23, 1994, CFC entered into a new three-year revolving credit
agreement with a group of forty commercial banks, replacing the existing
mortgage warehouse credit facility. The agreement permits
14
<PAGE>
CFC to borrow an aggregate maximum amount of $2.5 billion, less commercial
paper backed by the agreement. The amount available under the facility is
subject to a borrowing base, which consists of mortgage loans held for sale,
receivables for mortgage loans shipped and mortgage servicing rights. The
agreement expires on May 31, 1998.
The Company continues to investigate and pursue alternative and supplementary
methods to finance its growing operations through the public and private
capital markets. These may include such methods as mortgage loan sale
transactions designed to expand the Company's financial capacity and reduce its
cost of capital and the securitization of servicing income cash flows.
At times, the Company must meet margin requirements to cover changes in the
market value of its commitments to sell MBS and of its interest rate swaps. To
the extent that aggregate commitment prices are less than the current market
prices, the Company must deposit cash or certain government securities or
obtain letters of credit. The Company's credit facility provides a means of
obtaining such letters of credit to meet these margin requirements. With
respect to the interest rate swap agreements, the margin requirements are
negotiated with the various counterparties and are generally tied to the credit
ratings of CFC and each counterparty.
In the course of the Company's mortgage banking operations, the Company sells
to investors the mortgage loans it originates and purchases but generally
retains the right to service the loans, thereby increasing the Company's
investment in loan servicing rights. The Company views the sale of loans on a
servicing-retained basis in part as an investment vehicle. Significant
unanticipated prepayments in the Company's servicing portfolio could have a
material adverse effect on the Company's future operating results and
liquidity.
Cash Flows
Operating Activities. In Fiscal 1995, the Company's operating activities
provided cash primarily from the decline in its warehouse of mortgage loans of
approximately $815 million, offset by increases in other assets and working
capital of $125 million. The Company's operating activities also generated $212
million of positive cash flow. Cash provided by operating activities was
principally allocated to the long-term investment in servicing as discussed
below under "--Investing Activities."
Investing Activities. The primary investing activity for which cash was used
in Fiscal 1995 was the investment in servicing. Net cash used by investing
activities decreased to $717 million for Fiscal 1995 from $765 million for
Fiscal 1994. This decrease was primarily from the cash provided by the sale of
servicing rights during Fiscal 1995 and lower cash outlay for purchases of
property, equipment and leasehold improvements during Fiscal 1995 than in
Fiscal 1994, offset somewhat by an increase in purchased servicing rights and
capitalized servicing fees receivable of $97 million during Fiscal 1995.
Financing Activities. Net cash used by financing activities amounted to $0.2
billion for Fiscal 1995. Net cash provided by financing activities amounted to
$2.0 billion for Fiscal 1994. This change was primarily attributable to the
Company's net reduction in borrowings in Fiscal 1995 and net additions to
borrowings in Fiscal 1994.
PROSPECTIVE TRENDS
Applications and Pipeline of Loans in Process. During Fiscal 1995, the
Company received new loan applications at an average daily rate of $141 million
and at February 28, 1995, the Company's pipeline of loans in process was $3.6
billion. This compares to a daily application rate in Fiscal 1994 of $282
million and a pipeline of loans in process at February 28, 1994 of $7.6
billion. The decline in the pipeline of loans in process from Fiscal 1994 to
Fiscal 1995 was primarily due to a decrease in demand for mortgage loans caused
by an increase in mortgage interest rates. The size of the pipeline is
generally an indication of the level of future fundings, as historically 43% to
75% of the pipeline loans in process has funded. In addition, the
15
<PAGE>
Company's Lock N' Shop Pipeline at February 28, 1995 was $2.7 billion and at
February 28, 1994 was $1.6 billion. Future application levels and loan fundings
are dependent on numerous factors, including the level of demand for mortgage
credit, the extent of price competition in the market, the direction of
interest rates, seasonal factors and general economic conditions. For the month
ended March 31, 1995, the average daily amount of applications received was
$153 million, and at March 31, 1995, the pipeline of loans in process was $3.9
billion and the Lock N' Shop Pipeline was $1.9 billion.
Market Factors. Since late 1993, mortgage interest rates have increased. An
environment of rising interest rates has resulted in lower production
(particularly from refinancings) and greater price competition, which has
adversely impacted earnings from loan origination activities and may continue
to do so in the future. The Company has taken steps to maintain its
productivity and efficiency, particularly in the loan production area, by
reducing staff and embarking on a program to reduce production-related and
overhead costs. However, there was a time lag between the reduction in income
caused by declining production and the reduction in expenses. The Company's
production staff declined from approximately 3,900 at February 28, 1994 to
approximately 2,400 at February 28, 1995. The Company has reduced its total
staffing levels from approximately 4,900 at February 28, 1994 to approximately
3,600 at February 28, 1995. However, the rising interest rates enhanced
earnings from the Company's loan servicing portfolio as amortization of the
Servicing Assets and Interest Costs Incurred on Payoffs decreased from levels
experienced during the prior periods of declining interest rates, and the rate
of interest earned from the custodial balances associated with the Company's
servicing portfolio increased. The Company has further increased the size of
its servicing portfolio, thereby increasing its servicing revenue base, by
acquiring servicing contracts through bulk purchases. During Fiscal 1995, the
Company purchased such servicing contracts with principal balances amounting to
$17.6 billion.
The Company's primary competitors are commercial banks and savings and loans
and mortgage banking subsidiaries of diversified companies, as well as other
mortgage bankers. Particularly in California, savings and loans and other
portfolio lenders are competing with the Company by offering aggressively
priced adjustable-rate mortgage products which have grown in popularity with
the rise in interest rates. Generally, the Company has experienced significant
price competition among mortgage lenders which has resulted in downward
pressure on loan production earnings.
Some regions in which the Company operates, particularly some regions of
California, have been experiencing slower economic growth, and real estate
financing activity in these regions has been negatively impacted. As a result,
home lending activity for single-(one to four) family residences in these
regions may also have experienced slower growth. There can be no assurance that
the Company's operations and results will not continue to be negatively
impacted by such adverse economic conditions. The Company's California mortgage
loan production (measured by principal balance) constituted 31% of its total
production during Fiscal 1995, down from 46% for Fiscal 1994. The decline in
the percentage of California loan production was due to the Company's
continuing effort to expand its production capacity outside of California and
the aggressively priced adjustable-rate mortgage products offered by the
Company's competitors in the state. Since California's mortgage loan production
constituted a significant portion of the Company's production during Fiscal
1995, there can be no assurance that the Company's operations will not continue
to be adversely affected to the extent California continues to experience a
slower or negative economic growth resulting in decreased residential real
estate lending activity or market factors further impact the Company's
competitive position in the state.
Because the Company services substantially all conventional loans on a non-
recourse basis, foreclosure losses are generally the responsibility of the
investor or insurer and not the Company. Accordingly, any increase in
foreclosure activity should not result in significant foreclosure losses to the
Company. However, the Company's expenses may be increased somewhat as a result
of the additional staff efforts required to foreclose on a loan. Similarly,
government loans serviced by the Company (22% of the Company's servicing
portfolio at February 28, 1995) are insured or partially guaranteed against
loss by the Federal Housing
16
<PAGE>
Administration or the Veterans Administration. In the Company's view, the
limited unreimbursed costs that may be incurred by the Company on government
foreclosed loans are not material to the Company's consolidated financial
statements.
Servicing Hedge. As previously discussed, the Company realized no gains and
recorded amortization of Servicing Hedge option premiums amounting to $40.0
million during Fiscal 1995. In addition, the Company decided to replace its
prior Servicing Hedge with a new hedge, which the Company believed would be
more cost effective. As a result, the Company recorded an additional write-down
of $25.6 million during Fiscal 1995, representing the unamortized costs of the
prior Servicing Hedge. At February 28, 1995, the carrying value of interest
rate floor contracts and P/O securities included in the Servicing Hedge was
approximately $16 million and $42 million, respectively. There can be no
assurance the Company's Servicing Hedge will generate gains in the future.
Federal Legislation. In August 1993, a one percent increase in the corporate
federal tax rate was enacted. However, the Company has been diversifying its
business activities outside California, a state which has a corporate tax rate
that is higher than the average tax rate among the states in which the Company
does business. This diversification serves to reduce the Company's average tax
rate which offsets the enacted increase in the federal tax rate.
Implementation of New Accounting Standards. Statement of Financial Accounting
Standards No. 114, Accounting by Creditors for Impairment of a Loan, was issued
in May 1993. Implementation of this standard, which is required for the
Company's fiscal year beginning March 1, 1995, is not expected to have a
material effect on the Company's financial statements.
In May 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 122, Accounting for Mortgage
Servicing Rights. This Statement, among other provisions, requires the
recognition of originated mortgage servicing rights ("OMSRs"), as well as
purchased mortgage servicing rights ("PMSRs"), as assets by allocating total
costs incurred between the loan and the servicing rights based on their
relative fair values. Presently, the cost of OMSRs is included with the cost of
the related loans and written off against income when the loans are sold, while
the cost of PMSRs is recorded as an asset. Also under the new Statement, all
capitalized mortgage servicing rights are evaluated for impairment based on the
excess of the carrying amount of the mortgage servicing rights over their fair
value. In measuring impairment, the carrying amount must be stratified based on
one or more predominant risk characteristics of the underlying loans.
Impairment is recognized through a valuation allowance for an individual
stratum. Under current accounting requirements, the impairment evaluation may
be made using either discounted or undiscounted cash flows. No uniform required
level of disaggregation is specified. The Company uses a disaggregated,
undiscounted method.
The Statement is effective prospectively in fiscal years beginning after
December 15, 1995, with earlier application encouraged. The Company adopted the
Statement in the quarter ended May 31, 1995. The actual effect of implementing
this new Statement on the Company's financial position and results of
operations will depend on factors determined as of the end of a reporting
period, including the amount and mix of originated and purchased production,
the level of interest rates and market estimates of future prepayment rates.
Accordingly, the Company will have to determine as of the end of each reporting
period the impact on its earnings of applying the new methodologies of
recording all mortgage servicing rights as assets, of calculating impairment
and of applying the other provisions of the Statement.
17
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 240,000,000 shares of
Common Stock, par value $.05 per share, and 1,500,000 shares of Preferred
Stock, par value $.05 per share. The following summary description of the
capital stock of the Company does not purport to be complete and is qualified
in its entirety by reference to the Company's Restated Certificate of
Incorporation, as amended (the "Certificate of Incorporation"), a copy of which
is filed as an exhibit to the Registration Statement of which this Prospectus
is part and the certificate of designations which will be filed with the
Commission in connection with any offering of Preferred Stock.
COMMON STOCK
As of June 14, 1995, 91,574,247 shares of Common Stock were issued and
outstanding and there were 2,572 holders of record of the Common Stock. Each
holder of record of Common Stock is entitled to one vote per share on all
matters submitted to a vote of holders. Dividends may be paid to the record
holders of Common Stock when, as and if declared by the Board of Directors of
the Company (the "Board of Directors"), out of funds legally available
therefor, and each share of Common Stock is entitled to share equally therein
and in other distributions to holders of Common Stock, including distributions
upon liquidation, dissolution or winding up of the Company. The Common Stock
carries no preemptive rights, conversion or subscription rights, redemption
provisions, sinking fund provisions or cumulative voting rights.
PREFERRED STOCK PURCHASE RIGHTS
In February 1988, the Board of Directors declared a dividend distribution of
one preferred stock purchase right ("Right") for each outstanding share of the
Common Stock. As the result of stock splits and stock dividends, 0.399 of a
Right is presently associated with each outstanding share of Common Stock and
the same fraction of a Right will be associated with each share of Common Stock
issued prior to the Distribution Date (as defined below). Each Right, when
exercisable, entitles the holder to purchase from the Company one one-hundredth
of a share of Series A Participating Preferred Stock, par value $0.05 per
share, of the Company (the "Series A Preferred Stock"), at a price of $145,
subject to adjustments in certain cases to prevent dilution.
The Rights are evidenced by the Common Stock certificates and are not
exercisable or transferable, apart from the Common Stock, until the date (the
"Distribution Date") of the earlier of a public announcement that a person or
group, without prior consent of the Company, has acquired 20% or more of the
Common Stock (an "Acquiring Person"), or ten days (subject to extension by the
Board of Directors) after the commencement of a tender offer made without the
prior consent of the Company.
In the event a person becomes an Acquiring Person, then each Right (other
than those owned by the Acquiring Person) will entitle its holder to purchase,
at the then current exercise price of the Right, that number of shares of
Common Stock, or the equivalent thereof, which, at the time of such
transaction, would have a market value of two times the exercise price of the
Right. The Board of Directors may delay the exercisability of the Rights during
the period in which they are exercisable only for Series A Preferred Stock (and
not Common Stock).
In the event that, after a person has become an Acquiring Person, the Company
is acquired in a merger or other business combination, as defined for the
purposes of the Rights, each Right (other than those held by the Acquiring
Person) will entitle its holder to purchase, at the then current exercise price
of the Right, that number of shares of Common Stock, or the equivalent thereof,
of the other party (or publicly traded parent thereof) to such merger or
business combination which at the time of such transaction would have a market
value of two times the exercise price of the Right. The Rights expire on the
earlier of February 28, 2002, the consummation of certain merger transactions
or the optional redemption by the Company prior to any person becoming an
Acquiring Person.
18
<PAGE>
PREFERRED STOCK
Certain terms of any series of Preferred Stock offered by any Prospectus
Supplement will be described in the Prospectus Supplement relating to such
series of Preferred Stock. The Board of Directors is authorized to provide for
the issuance of Preferred Stock in one or more series with such distinctive
designations as may be stated in the resolution or resolutions providing for
the issue of such Preferred Stock. At the time that any series of Preferred
Stock is authorized, the Board of Directors will fix the dividend rights, any
conversion rights, any voting rights, redemption provisions, liquidation
preferences and any other rights, preferences, privileges and restrictions of
such series, as well as the number of shares constituting such series and the
designation thereof.
The only series of Preferred Stock currently authorized by the Board of
Directors for issuance is the Series A Preferred Stock in connection with the
exercise of Rights. See "--Preferred Stock Purchase Rights."
The Board of Directors could, without stockholder approval, cause the Company
to issue Preferred Stock which has voting, conversion and other rights which
could adversely affect the holders of Common Stock or make it more difficult to
effect a change in control of the Company. The Preferred Stock could be used to
dilute the stock ownership of persons seeking to obtain control of the Company
and thereby hinder a possible takeover attempt which, if stockholders were
offered a premium over the market value of their shares, might be viewed as
being beneficial to the stockholders of the Company. In addition, the Preferred
Stock could be issued with voting, conversion and other rights and preferences
which would adversely affect the voting power and other rights of holders of
Common Stock.
CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS OF THE
COMPANY
In addition to the Rights described above under "--Preferred Stock Purchase
Rights" and the terms of any Preferred Stock that the Company may determine to
issue as described above under "--Preferred Stock," certain other provisions of
the Certificate of Incorporation and the Company's Bylaws may have the effect
of making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, control of the Company. The Certificate
of Incorporation (i) provides for a three-year staggered Board of Directors,
vacancies on which shall be filled by the Board of Directors and whose members
may be removed only for cause and only by the vote of the holders of two-thirds
of the outstanding shares of Common Stock, (ii) limits the Company's power to
purchase shares of voting stock of the Company (capital stock having the right
to vote generally on matters relating to the Company and any security which is
convertible into such stock) from a five percent holder at a price in excess of
its fair market value, unless such purchase is approved by a majority of these
shares (unless a greater vote is required by law), excluding the vote of such
five percent holder, (iii) prohibits action by written consent of the
stockholders and (iv) provides that the Company's Bylaws may be amended by the
Board of Directors or, with certain exceptions, a vote of two-thirds of the
voting shares and further provides that a two-thirds vote of all voting shares
of the Company is required to amend the provisions of the Certificate of
Incorporation referred to in this sentence, unless such amendment has been
approved by two-thirds of the Board of Directors and a majority of the
continuing directors (directors who became members of the Board of Directors
prior to the time when any stockholder who beneficially owns ten percent of the
outstanding shares first became a ten percent stockholder). The Company's
Bylaws provide that special meetings of the stockholders may be called only by
the directors and limits the business which may be transacted at such meetings
to those matters set forth in the request of the proposed meeting.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is The Bank of New
York.
19
<PAGE>
DESCRIPTION OF DEBT SECURITIES AND GUARANTEES
The following description of the terms of the Company Debt Securities and the
terms of the CFC Debt Securities sets forth certain general terms and
provisions of such Debt Securities. To the extent any terms described below
apply specifically to the Company Debt Securities or the CFC Debt Securities,
specific references to "Company Debt Securities" or "CFC Debt Securities" will
be made; otherwise, references to "Debt Securities" shall be deemed to apply to
both the Company Debt Securities and the CFC Debt Securities. The extent, if
any, to which such general provisions do not apply to the Debt Securities
offered by any Prospectus Supplement will be described in such Prospectus
Supplement.
The Company Debt Securities are to be issued under an Indenture, as amended,
supplemented or modified from time to time (the "Company Indenture"), between
the Company and The Bank of New York, as trustee (in such capacity, the
"Company Trustee"), the form of which is filed as an exhibit to the
Registration Statement of which this Prospectus forms a part. Each series of
Company Debt Securities issued pursuant to the Company Indenture will be issued
pursuant to an amendment or supplement thereto in the form of a supplemental
indenture or pursuant to an Officers' Certificate, in each case delivered
pursuant to resolutions of the Board of Directors of the Company and in
accordance with the provisions of Section 301 or Article Ten of the Company
Indenture, as the case may be. The terms of the Company Debt Securities include
those stated in the Company Indenture and those made a part of the Company
Indenture by reference to the Trust Indenture Act of 1939, as amended (the
"TIA"). The Company Debt Securities are subject to all such terms and the
holders of Company Debt Securities are referred to the Company Indenture and
the TIA for a statement of such terms.
The CFC Debt Securities are to be issued under the Indenture dated as of
January 1, 1992, as amended, supplemented or modified from time to time (the
"CFC Indenture", and together with the Company Indenture, the "Indentures")
among CFC, the Guarantor and The Bank of New York, as Trustee (in such
capacity, the "CFC Trustee," and together with the Company Trustee, the
"Trustees"), which is incorporated by reference in the Registration Statement
of which this Prospectus forms a part. Each series of CFC Debt Securities
issued pursuant to the CFC Indenture will be issued pursuant to an amendment or
supplement thereto in the form of a supplemental indenture or pursuant to an
Officers' Certificate, in each case delivered pursuant to resolutions of the
Board of Directors of CFC and in accordance with the provisions of Section 301
or Article Ten of the CFC Indenture, as the case may be. The CFC Indenture is
expected to be amended by Supplemental Indenture No. 1 thereto, among CFC, the
Guarantor and the CFC Trustee, the form of which is filed as an exhibit to the
Registration Statement of which this Prospectus forms a part. The terms of the
CFC Debt Securities include those stated in the CFC Indenture and those made
part of the CFC Indenture by reference to the TIA. The CFC Debt Securities are
subject to all such terms and the holders of CFC Debt Securities are referred
to the CFC Indenture and the TIA for a statement of such terms.
The following summaries of certain provisions of each Indenture and the Debt
Securities are not complete and are qualified in their entirety by reference to
the provisions of each Indenture, including the definitions of capitalized
terms used herein without definition. Numerical references in parentheses are
to sections in the applicable Indenture and unless otherwise indicated
capitalized terms have the meanings given them in the applicable Indenture.
GENERAL
Neither Indenture limits the aggregate principal amount of Debt Securities
that may be issued from time to time in series. (Section 301)
The Company Debt Securities will constitute unsecured and unsubordinated
indebtedness of the Company and will rank pari passu in right of payment with
the Company's other unsecured and unsubordinated indebtedness.
Substantially all the Company's operations are conducted through
subsidiaries, and any right of the Company to receive assets of any of its
subsidiaries upon the liquidation or recapitalization of any such subsidiary
(and the consequent right of holders of the Company Debt Securities, or the
holders of the CFC
20
<PAGE>
Debt Securities looking to the Guarantees for repayment thereof, to participate
in those assets) will be subject to the claims of such subsidiary's creditors,
except to the extent that the Company itself is recognized as a creditor of
such subsidiary. Even if the Company is recognized as a creditor of a
subsidiary, the Company's claims would still be subject to any security
interests in the assets of such subsidiary and any indebtedness or other
liability of such subsidiary that is senior to the Company's claims.
Accordingly, by operation of the foregoing principles, the Company Debt
Securities and the Guarantees will effectively be subordinated to all
indebtedness and other liabilities, including trade accounts payable, of the
Company's subsidiaries. "Holder" means a person in whose name a Debt Security
is registered in the related Security Register.
The CFC Debt Securities will constitute unsecured and unsubordinated
indebtedness of CFC and will rank pari passu in right of payment with CFC's
other unsecured and unsubordinated indebtedness. A substantial portion of the
assets of CFC may be pledged under various credit agreements among CFC and
various lending institutions. See Note D to the Company's Consolidated
Financial Statements included elsewhere herein.
Reference is made to the Prospectus Supplement and pricing supplement, if
any, relating to the particular series of Debt Securities offered thereby for a
description of the terms of such Debt Securities in respect of which this
Prospectus is being delivered, including, where applicable: (i) the title of
such Debt Securities; (ii) any limit on the aggregate principal amount of such
Debt Securities; (iii) the date or dates, or the method or methods, if any, by
which such date or dates shall be determined or extended, on which the
principal of such Debt Securities is payable; (iv) any places other than the
issuer's office or agency in The City of New York where such Debt Securities
shall be payable or surrendered for registration of transfer or exchange; (v)
the denominations in which such Debt Securities shall be issuable; (vi) the
currency of denomination of such Debt Securities, which may be in U.S. dollars,
any foreign currency or currency unit, including European Currency Units
("ECU"), and, if applicable, certain other information relating to such foreign
currency or currency unit; (vii) the designation of the currency or currencies
in which payment of the principal of and premium, if any, and interest on such
Debt Securities will be made and whether payment of the principal of and
premium, if any, or the interest on Debt Securities designated in a foreign
currency or currency unit, at the election of a holder thereof, may instead be
payable in U.S. dollars and the terms and conditions upon which such election
may be made; (viii) the rate or rates (which may be fixed or floating), if any,
at which such Debt Securities will bear interest, or the method or methods, if
any, by which such rate or rates are to be determined or reset, the date or
dates, if any, from which such interest will accrue, or the method or methods,
if any, by which such date or dates shall be determined or reset, the dates on
which such interest will be payable, the record date for the interest payable
on any interest payment date, and the basis upon which interest shall be
calculated if other than that of a 360-day year of twelve 30-day months; (ix)
the terms and conditions, if any, on which such Debt Securities may be redeemed
at the option of the Company or CFC, as the case may be, or repaid at the
option of the Holders thereof; (x) the obligation, if any, of the Company or
CFC, as the case may be, to redeem, repay or purchase such Debt Securities
pursuant to any sinking fund or analogous provisions, and the terms and
conditions on which such Debt Securities shall be redeemed, repaid or
purchased, in whole or in part, pursuant to such obligation; (xi) if other than
the principal amount thereof, the portion of the principal amount of such Debt
Securities which will be payable upon declaration of acceleration of the
maturity thereof; (xii) provisions, if any, for the defeasance of such Debt
Securities; (xiii) the ability, if any, of the Holder of a Debt Security to
renew all or any portion of a Debt Security; (xiv) any additional Events of
Default or restrictive covenants provided for with respect to such Debt
Securities; (xv) the obligation, if any, of the Company to permit the
conversion or exchange of any Company Debt Securities into or for other
securities and the terms and conditions upon which such conversion or exchange
shall be effected (including, without limitation, the initial conversion or
exchange price or rate, the conversion or exchange period, any adjustment of
the applicable conversion or exchange price and any requirements relative to
the reservation of such other securities for purposes of conversion or
exchange); (xvi) any other terms not inconsistent with the applicable
Indenture, including any terms which may be required by or advisable under
United States laws or regulations; (xvii) if such Debt Securities are
denominated or payable in a currency or currency unit other than U.S. dollars,
the designation of the initial Exchange Rate Agent and, if other than as set
forth in the applicable Indenture, the definition of the
21
<PAGE>
"Exchange Rate"; and (xviii) the form of such Debt Securities and, if in global
form, the name of the depositary with respect thereto and the terms upon which
and the circumstances under which such Debt Securities may be exchanged.
(Section 301)
Unless otherwise indicated in the Prospectus Supplement relating thereto, the
Debt Securities will be issued only in fully registered form without coupons.
Debt Securities denominated in U.S. dollars will be issued in denominations of
$1,000 or any integral multiple thereof unless otherwise provided in the
Prospectus Supplement relating thereto. (Section 302) The Prospectus
Supplement relating to a series of Debt Securities denominated in a foreign
currency or currency unit will specify the denominations thereof.
The Indentures do not contain any provisions that would limit the ability of
the Company, CFC or any of their respective affiliates to incur indebtedness
(secured or unsecured) or that would afford Holders of Debt Securities
protection in the event of a highly leveraged transaction, restructuring,
change in control, merger or similar transaction involving the Company or CFC
that may adversely affect Holders of the Debt Securities.
One or more series of Debt Securities may be sold at a substantial discount
below their stated principal amount, bearing no interest or interest at a rate
which at the time of issuance is below market rates. One or more series of Debt
Securities may be floating rate debt securities, and may be exchangeable for
fixed rate debt securities. Federal income tax consequences and special
considerations applicable to any such series will be described in the
Prospectus Supplement relating thereto.
Unless otherwise indicated in the Prospectus Supplement relating thereto, the
principal of, and any premium or interest on, any series of Company Debt
Securities will be payable, and such Company Debt Securities will be
exchangeable and transfers thereof will be registerable, at the Corporate Trust
Office of the Company Trustee, initially at 101 Barclay Street, New York, New
York 10286, provided that, at the option of the Company, payment of interest
may be made by check mailed to the address of the Person entitled thereto as it
appears in the related Security Register. (Sections 301, 305, 306, 307 and
1102)
Unless otherwise indicated in the Prospectus Supplement relating thereto, the
principal of, and any premium or interest on, any series of CFC Debt Securities
will be payable, and such CFC Debt Securities will be exchangeable and
transfers thereof will be registerable, at the Corporate Trust Office of the
CFC Trustee, initially at 101 Barclay Street, New York, New York 10286,
provided that, at the option of CFC, payment of interest may be made by check
mailed to the address of the Person entitled thereto as it appears in the
related Security Register. (Sections 301, 305, 306, 307 and 1102)
No Debt Security shall be entitled to any benefit under the applicable
Indenture or be valid or obligatory for any purpose unless there appears on
such Debt Security a certificate of authentication substantially in the form
provided for in such Indenture duly executed by the applicable Trustee by
manual signature of one of its authorized officers, and such certificate upon
any Debt Security shall be conclusive evidence, and the only evidence, that
such Debt Security has been duly authenticated and delivered under such
Indenture and is entitled to the benefits of such Indenture. (Section 203)
EVENTS OF DEFAULT
The Company Indenture provides that the following shall constitute "Events of
Default" with respect to any series of Company Debt Securities thereunder: (i)
default in payment of principal of (or premium, if any, on) any Company Debt
Security of such series at Maturity; (ii) default for 30 days in payment of
interest on any Company Debt Security of such series when due; (iii) default in
the deposit of any sinking fund payment on any Company Debt Security of such
series when due; (iv) default in the performance or breach of any other
covenant or warranty of the Company in the Company Indenture or the Company
Debt Securities, continued for 60 days after written notice thereof by the
Company Trustee or the Holders of at least 25% in aggregate principal amount of
the Company Debt Securities of such series at the time outstanding; (v) default
22
<PAGE>
resulting in acceleration of maturity of any other indebtedness for borrowed
money of the Company or any direct or indirect subsidiary of the Company in an
amount in excess of $10,000,000 and such acceleration shall not be rescinded or
annulled for a period of 10 days after written notice thereof by the Company
Trustee or the Holders of at least 25% in aggregate principal amount of the
Company Debt Securities of such series at the time outstanding; (vi) certain
events of bankruptcy, insolvency or reorganization; and (vii) any other Event
of Default provided with respect to such series of Company Debt Securities.
(Section 601) No Event of Default with respect to a particular series of
Company Debt Securities issued under the Company Indenture necessarily
constitutes an Event of Default with respect to any other series of Company
Debt Securities issued thereunder. "Maturity," when used with respect to any
Debt Security, means the date on which the principal of such Debt Security
becomes due and payable as provided in such Debt Security or in the applicable
Indenture, whether at the Stated Maturity or by declaration of acceleration,
notice of redemption, notice of option to elect repayment or otherwise. "Stated
Maturity," when used with respect to any Debt Security or any installment of
principal thereof or interest thereon, means the date specified in such Debt
Security as the fixed date on which the principal of such Debt Security or such
installment of principal or interest is due and payable.
The CFC Indenture provides that the following shall constitute "Events of
Default" with respect to any series of CFC Debt Securities thereunder: (i)
default in payment of principal of (or premium, if any, on) any CFC Debt
Security of such series at Maturity; (ii) default for 30 days in payment of
interest on any CFC Debt Security of such series when due; (iii) default in the
deposit of any sinking fund payment on any CFC Debt Security of such series
when due; (iv) default in the performance or breach of any other covenant or
warranty of CFC or the Guarantor in the CFC Indenture, the CFC Debt Securities
or the related Guarantees, continued for 60 days after written notice thereof
by the CFC Trustee or the Holders of at least 25% in aggregate principal amount
of the CFC Debt Securities of such series at the time outstanding; (v) default
resulting in acceleration of maturity of any other indebtedness for borrowed
money of CFC, the Guarantor or any direct or indirect subsidiary of the
Guarantor in an amount in excess of $10,000,000 and such acceleration shall not
be rescinded or annulled for a period of 10 days after written notice thereof
by the CFC Trustee or the Holders of at least 25% in aggregate principal amount
of the CFC Debt Securities of such series at the time outstanding; (vi) certain
events of bankruptcy, insolvency or reorganization; and (vii) any other Event
of Default provided with respect to such series of CFC Debt Securities.
(Section 601) No Event of Default with respect to a particular series of CFC
Debt Securities issued under the CFC Indenture necessarily constitutes an Event
of Default with respect to any other series of CFC Debt Securities issued
thereunder.
Each Indenture provides that if an Event of Default specified therein shall
occur and be continuing, either the applicable Trustee or the Holders of at
least 25% in aggregate principal amount of the Debt Securities of such series
then outstanding may declare the principal amount of the Debt Securities of
such series (or, in the case of Original Issue Discount Securities, such other
amount, if any, as provided for in the terms of such Original Issue Discount
Securities) to be due and payable immediately upon written notice thereof to
the Company, and, in the case of the CFC Indenture, CFC. In certain cases, the
Holders of a majority in aggregate principal amount of the outstanding Debt
Securities of any such series may, on behalf of the Holders of all such Debt
Securities, rescind and annul such declaration of acceleration. (Section 602)
"Original Issue Discount Security" means, except as otherwise defined in a Debt
Security, any Debt Security which is issued with original issue discount within
the meaning of Section 1273(a) of the Internal Revenue Code of 1986, as
amended, and the regulations thereunder.
The agreements governing certain of the Company's and CFC's outstanding
indebtedness, including CFC's Subordinated Notes due July 15, 2002 and CFC's
revolving credit agreement described under "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources", contain provisions to the effect that certain Events of
Default under the Company Indenture or the CFC Indenture would constitute an
event of default under such agreements which, among other things, could cause
an acceleration of the indebtedness thereunder.
23
<PAGE>
Each Indenture contains a provision entitling the applicable Trustee, subject
to the duty of such Trustee during default under any series of Debt Securities
to act with the required standard of care, to be indemnified by the Holders of
the Debt Securities of such series before proceeding to exercise any right or
power under such Indenture with respect to such series at the request of such
Holders. (Sections 701, 703) Each Indenture provides that no Holders of Debt
Securities of any series issued thereunder may institute any proceedings,
judicial or otherwise, to enforce such Indenture except in the case of failure
of the applicable Trustee thereunder, for 60 days, to act after it has received
a written request to enforce such Indenture by the Holders of at least 25% in
aggregate principal amount of the then outstanding Debt Securities of such
series, and an offer of reasonable indemnity. (Section 607) This provision will
not prevent any Holder of Debt Securities from enforcing payment of the
principal thereof, premium, if any, and interest thereon at the respective due
dates thereof. (Section 608) The Holders of a majority in aggregate principal
amount of the Debt Securities of any series issued under either Indenture then
outstanding may direct the time, method and place of conducting any proceeding
for any remedy available to the applicable Trustee or exercising any trust or
power conferred on it with respect to the Debt Securities of such series. Such
Trustee may, however, refuse to follow any direction that it determines may not
lawfully be taken or would be illegal or in conflict with such Indenture or
involve it in personal liability or which would be unjustly prejudicial to
Holders of the Debt Securities of such series not joining therein. (Section
612)
Each Indenture provides that the applicable Trustee will, within 90 days
after the occurrence of a default with respect to any series of Debt Securities
issued thereunder, give to the Holders thereof notice of such default, unless
such default has been cured or waived. Except in the case of a default in the
payment of principal of, or premium, if any, or interest on any Debt Securities
or payment of any sinking fund installment, each Trustee shall be protected in
the withholding of such notice if it determines in good faith that the
withholding of such notice is in the interest of the Holders of the Debt
Securities of such series. (Section 702)
The Company and, in the case of the CFC Debt Securities, CFC will be required
to file with each Trustee annually an Officers' Certificate as to the absence
of certain defaults under the terms of the applicable Indenture. (Section 1105)
MODIFICATION AND WAIVER
Modifications of and amendments to each Indenture may be made by the Company
and, in the case of the CFC Indenture, CFC, and the applicable Trustee with the
consent of the Holders of a majority in aggregate principal amount of the
outstanding Debt Securities of each series affected by such modification or
amendment; provided, however, that no such modification or amendment may,
without the consent of the Holder of each outstanding Debt Security affected
thereby: (i) except as otherwise permitted in such Indenture in connection with
Debt Securities for which the Stated Maturity is extendible, change the Stated
Maturity of the principal of, or any installment of interest on, such Debt
Security; (ii) reduce the principal amount of, or, except as otherwise
permitted in such Indenture in connection with Debt Securities for which the
interest rate may be reset, interest on, or any premium payable upon redemption
or repayment of, such Debt Security; (iii) reduce the amount of the principal
of an Original Issue Discount Security that would be due and payable upon a
declaration of acceleration of the Maturity thereof; (iv) adversely affect the
right of repayment at the option of a Holder of such Debt Security; (v) reduce
the amount of, or postpone the date fixed for, any payment under any sinking
fund or analogous provisions of such Debt Security; (vi) change the place or
currency or currency unit of payment of the principal of, premium, if any, or
interest on such Debt Security; (vii) change or eliminate the rights of a
Holder to receive payment in a designated currency; (viii) impair the right to
institute suit for the enforcement of any required payment on or with respect
to such Debt Security; (ix) reduce the percentage of the aggregate principal
amount of the outstanding Debt Securities of any series the consent of whose
Holders is required for modification or amendment of such Indenture, for waiver
of compliance with certain provisions of such Indenture, or for waiver of
certain defaults; (x) modify any of the provisions of Section 613 (described
below) except to increase such percentage or to provide that certain other
provisions of such Indenture cannot be modified or waived without the consent
of the Holder
24
<PAGE>
of each outstanding Debt Security affected thereby; or (xi) in the case of the
CFC Indenture, modify or affect the terms and conditions of the related
Guarantees in a manner adverse to the interests of the Holders of the CFC Debt
Securities.
Each Indenture also contains provisions permitting the Company and, in the
case of the CFC Indenture, CFC, and the applicable Trustee, without the consent
of any Holders of Debt Securities under such Indenture, to enter into
supplemental indentures, in form satisfactory to such Trustee, for any of the
following purposes: (i) to evidence the succession of another corporation to
the Company or, in the case of the CFC Indenture, CFC or the Guarantor and the
assumption by such successor of the obligations and covenants of the Company
or, in the case of the CFC Indenture, CFC or the Guarantor contained in such
Indenture and in the Debt Securities and, in the case of the CFC Indenture, the
related Guarantees, as the case may be; (ii) to add to the covenants of the
Company or, in the case of the CFC Indenture, CFC or the Guarantor, for the
benefit of the Holders of all or any series of Debt Securities issued under
such Indenture (and if such covenants are to be for the benefit of less than
all series of Debt Securities issued under such Indenture, stating that such
covenants are expressly being included solely for the benefit of such series),
or to surrender any right or power herein conferred upon the Company or, in the
case of the CFC Indenture, CFC or the Guarantor; (iii) to add any additional
Events of Default (and if such Events of Default are to be applicable to less
than all series of Debt Securities issued under such Indenture, stating that
such Events of Default are expressly being included solely to be applicable to
such series); (iv) to add or change any of the provisions of such Indenture to
such extent as shall be necessary to permit or facilitate the issuance of Debt
Securities in bearer form, registrable or not registrable as to principal, and
with or without interest coupons; (v) to change or eliminate any of the
provisions of such Indenture, provided that any such change or elimination
shall become effective only when there is no Debt Security outstanding of any
series created prior to the execution of such supplemental indenture which is
entitled to the benefit of such provision; (vi) to establish the form or terms
of Debt Securities of any series as otherwise permitted by such Indenture;
(vii) to evidence and provide for the acceptance of appointment under such
Indenture by a successor Trustee with respect to the Debt Securities of one or
more series issued under such Indenture and to add to or change any of the
provisions of such Indenture as shall be necessary to provide for or facilitate
the administration of the trusts thereunder by more than one Trustee, pursuant
to the requirements of such Indenture; (viii) to secure the Debt Securities
issued under such Indenture; (ix) to cure any ambiguity, to correct or
supplement any provision in such Indenture which may be defective or
inconsistent with any other provision of such Indenture, or to make any other
provisions with respect to matters or questions arising under such Indenture
which shall not be inconsistent with any provision of such Indenture, provided
such other provisions shall not adversely affect the interests of the Holders
of Debt Securities of any series issued under such Indenture in any material
respect; (x) to modify, eliminate or add to the provisions of such Indenture to
such extent as shall be necessary to effect the qualification of such Indenture
under the TIA or under any similar federal statute subsequently enacted and to
add to such Indenture such other provisions as may be expressly required under
the TIA; or (xi) in the case of the CFC Indenture, to effect the assumption, by
the Guarantor or a Subsidiary thereof, of the payment obligations with respect
to the CFC Debt Securities and of the performance of every covenant of the CFC
Indenture on the part of CFC to be performed or observed. (Section 1001)
The Holders of a majority in aggregate principal amount of the outstanding
Debt Securities of each series may, on behalf of all Holders of Debt Securities
of that series, waive any past default under the applicable Indenture with
respect to Debt Securities of that series except a default in the payment of
the principal of, (or premium, if any) or interest on, any Debt Security of
that series and except a default in respect of a covenant or provision the
modification or amendment of which would require the consent of the Holder of
each outstanding Debt Security of the affected series. (Section 613)
CONVERSION AND EXCHANGE RIGHTS
The terms and conditions, if any, upon which the Company Debt Securities of
any series are convertible into or exchangeable for other securities will be
set forth in the applicable Prospectus Supplement relating
25
<PAGE>
thereto. Such terms will include whether such Company Debt Securities are
convertible into or exchangeable for other securities, the conversion or
exchange price (or manner of calculation thereof), the conversion period,
provisions as to whether conversion will be at the option of the Holders
thereof or the Company, the events requiring an adjustment of the conversion
or exchange price and provisions affecting conversion or exchange in the event
of the redemption of such Company Debt Securities.
GLOBAL SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more global securities ("Global Securities") that will be
deposited with, or on behalf of, a depositary (the "Depositary") identified in
the Prospectus Supplement relating to such series. Global Securities may be
issued in either registered or bearer form and in either temporary or
permanent form. Unless and until it is exchanged in whole or in part for
individual certificates evidencing Debt Securities in definitive form
represented thereby, a Global Security may not be transferred except as a
whole by the Depositary for such Global Security to a nominee of such
Depositary or by a nominee of such Depositary to such Depositary or another
nominee of such Depositary or by such Depositary or any such nominee to a
successor of such Depositary or a nominee of such successor.
The specific terms of the depositary arrangement with respect to a series of
Debt Securities will be described in the Prospectus Supplement relating to
such series.
CONSOLIDATION, MERGER AND TRANSFER OF ASSETS
Under the Company Indenture, the Company may not consolidate with or merge
into any corporation, or transfer its assets substantially as an entirety to
any Person, unless: (i) the successor corporation or transferee assumes the
Company's obligations on the Company Debt Securities and under the Company
Indenture; (ii) after giving effect to the transaction, no Event of Default
and no event which, after notice or lapse of time or both, would become an
Event of Default shall have occurred and be continuing; and (iii) certain
other conditions are met. (Section 901)
Under the CFC Indenture, neither CFC nor the Guarantor may consolidate with
or merge into any corporation, or transfer its assets substantially as an
entirety to any Person, unless: (i) the successor corporation or transferee
assumes the Company's or the Guarantor's obligations on the Debt Securities or
the related Guarantees, as the case may be, and under the CFC Indenture, and
in the case of a consolidation or merger of CFC, the Guarantor delivers an
affirmation of the continuance of its obligations to the CFC Trustee; (ii)
after giving effect to the transaction, no Event of Default and no event
which, after notice or lapse of time or both, would become an Event of Default
shall have occurred and be continuing; and (iii) certain other conditions are
met. (Sections 901 and 903)
SATISFACTION, DISCHARGE AND DEFEASANCE
Each Indenture, with respect to any series of Debt Securities (except for
certain specified surviving obligations, including (A) any rights of
registration of transfer and exchange and (B) rights to receive the principal,
premium, if any, and interest on the Debt Securities) will be discharged and
cancelled upon the satisfaction of certain conditions, including the
following: (i) all Debt Securities of such series not theretofore delivered to
the applicable Trustee for cancellation have become due or payable, will
become due and payable at their Stated Maturity within one year, or are to be
called for redemption within one year and (ii) the deposit with such Trustee
of an amount in the Specified Currency sufficient to pay the principal,
premium, if any, and interest to the Maturity of all Debt Securities of such
series. (Section 501)
If so specified in the Prospectus Supplement with respect to Debt Securities
of any series, the Company or CFC, as the case may be, at its option, (i) will
be discharged from any and all obligations in respect of the Debt Securities
of such series (except for certain obligations to register the transfer or
exchange of Debt Securities of such series, replace stolen, lost or mutilated
Debt Securities of such series, maintain certain offices or agencies in each
Place of Payment, and hold moneys for payment in trust), or (ii) will not be
subject
26
<PAGE>
to provisions of the applicable Indenture described above under "--
Consolidation, Merger and Transfer of Assets" with respect to the Debt
Securities of such series, in each case if the Company or CFC, as the case may
be, irrevocably deposits with the applicable Trustee, in trust, money or U.S.
Government Obligations (as defined in the applicable Indenture) which through
the payment of interest thereon and principal thereof in accordance with their
terms will provide money in an amount sufficient (in the opinion of independent
public accountants) to pay all the principal (including any mandatory sinking
fund payments) of, and premium, if any, and interest on, the Debt Securities of
such series on the dates such payments are due in accordance with the terms of
such Debt Securities. To exercise any such option, the Company or CFC, as the
case may be, is required to deliver to the applicable Trustee (1) an opinion of
counsel to the effect that (a) the deposit and related defeasance would not
cause the Holders of the Debt Securities of such series to recognize income,
gain or loss for Federal income tax purposes, (b) the Company's exercise of
such option will not cause any violation of the Investment Company Act of 1940,
as amended, and (c) if the Debt Securities of such series are then listed on
the New York Stock Exchange, such Debt Securities would not be delisted as a
result of the exercise of such option and (2) in the case of the Debt
Securities of such series being discharged, a ruling received from or published
by the United States Internal Revenue Service to the effect that the deposit
and related defeasance would not cause the Holders of the Debt Securities of
such series to recognize income, gain or loss for Federal income tax purposes.
(Sections 1401 and 1402)
GUARANTEES
The CFC Debt Securities will be unconditionally guaranteed (the "Guarantees")
by the Guarantor as to payment of principal, premium, if any, and interest when
and as the same shall become due and payable, whether at their Stated Maturity
or upon redemption or repayment or otherwise. (Section 401) The Guarantees will
rank pari passu in right of payment with all other unsecured and unsubordinated
obligations of the Guarantor, including the Company Debt Securities.
The obligations of the Guarantor under the Guarantees will be unconditional
regardless of the enforceability of the CFC Debt Securities or the CFC
Indenture and will not be discharged until all obligations contained in such
CFC Debt Securities and the CFC Indenture are satisfied. Holders of the CFC
Debt Securities may proceed directly against the Guarantor in the event of an
Event of Default with respect to such CFC Debt Securities without first
proceeding against CFC. (Section 401)
Because the Guarantor is a holding company, the rights of its creditors,
including the Holders of the CFC Debt Securities in the event the Guarantees
are enforced, to share in the distribution of the assets of any subsidiary upon
the subsidiary's liquidation or recapitalization will be subject to the prior
claims of the subsidiary's creditors, except to the extent the Guarantor may
itself be a creditor with recognized claims against the subsidiary. See "--
General" above.
CONCERNING THE TRUSTEES
The Bank of New York is the Trustee under each of the Company Indenture and
the CFC Indenture. The Company and CFC maintain banking relationships in the
ordinary course of business with the Trustee. Among other things, The Bank of
New York is a lending bank under CFC's revolving credit facility. See Notes to
the Company's Consolidated Financial Statements included elsewhere herein.
PLAN OF DISTRIBUTION
The Company or CFC may sell Securities to or through one or more underwriters
or dealers and also may sell Securities directly to institutional investors or
other purchasers, or through agents.
The distribution of the Securities may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, or at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices.
In connection with the sale of Securities, underwriters or agents may receive
compensation from the Company or CFC or from purchasers of Securities for whom
they may act as agents in the form of discounts,
27
<PAGE>
concessions or commissions. Underwriters may sell Securities to or through
dealers, and such dealers may receive compensation in the form of discounts,
concessions or commissions from the underwriters and/or commissions from the
purchasers for whom they may act as agents. Underwriters, dealers and agents
that participate in the distribution of Securities may be deemed to be
underwriters, and any discounts or commissions received by them from the
Company and any profit on the resale of Securities by them may be deemed to be
underwriting discounts and commissions, under the Securities Act. Any such
underwriter or agent will be identified, and any such compensation received
from the Company or CFC will be described, in the related Prospectus
Supplement.
Under agreements which may be entered into by the Company and/or CFC,
underwriters and agents who participate in the distribution of Securities may
be entitled to indemnification by the Company and CFC against certain
liabilities, including liabilities under the Securities Act.
If so indicated in the related Prospectus Supplement, the Company or CFC will
authorize underwriters or other persons acting as the Company's or CFC's agents
to solicit offers by certain institutions to purchase Securities from the
Company or CFC pursuant to contracts providing for payment and delivery on a
future date. Institutions with which such contracts may be made include
commercial and savings banks, insurance companies, pension funds, investment
companies, educational and charitable institutions and others, but in all cases
such institutions must be approved by the Company or CFC. The obligations of
any purchaser under any such contract will be subject to the condition that the
purchase of the Securities shall not at the time of delivery be prohibited
under the laws of the jurisdiction to which such purchaser is subject. The
underwriters and such other agents will not have any responsibility in respect
of the validity or performance of such contracts.
Certain of the underwriters or agents and their associates may engage in
transactions with and perform services for the Company, CFC or their respective
affiliates in the ordinary course of their respective businesses.
The Securities may or may not be listed on a national securities exchange
(other than the Common Stock, which is listed on the New York Stock Exchange
and the Pacific Stock Exchange). Any Common Stock sold pursuant to a Prospectus
Supplement will be listed on the New York Stock Exchange and the Pacific Stock
Exchange, subject to official notice of issuance. No assurances can be given
that there will be an active trading market for the Securities.
VALIDITY OF SECURITIES
The validity of the Securities will be passed upon for the Company and CFC by
Fried, Frank, Harris, Shriver & Jacobson, a partnership including professional
corporations, New York, New York. Edwin Heller, whose professional corporation
is a member of Fried, Frank, Harris, Shriver & Jacobson, is a director of the
Company. Brown & Wood, New York, New York will serve as counsel for any
underwriters and agents. Brown & Wood also serves as counsel for CWMBS, Inc., a
wholly owned subsidiary of the Company, in connection with offerings of
mortgage pass-through certificates, and as counsel to CWM.
EXPERTS
The consolidated financial statements of the Company included or incorporated
by reference in this Registration Statement, of which this Prospectus forms a
part, have been audited by Grant Thornton LLP, independent certified public
accountants, for the periods and to the extent indicated in their report
thereon, and have been included or so incorporated in reliance upon the
authority of said firm as experts in accounting and auditing.
28
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
FEBRUARY 28, 1995
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants ........................ F-2
Financial Statements
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Earnings...................................... F-4
Consolidated Statement of Common Shareholders' Equity.................... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Countrywide Credit Industries, Inc.
We have audited the accompanying consolidated balance sheets of Countrywide
Credit Industries, Inc. and Subsidiaries as of February 28, 1995 and 1994, and
the related consolidated statements of earnings, common shareholders' equity,
and cash flows for each of the three years in the period ended February 28,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Countrywide
Credit Industries, Inc. and Subsidiaries as of February 28, 1995 and 1994, and
the consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ended February 28, 1995, in
conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Los Angeles, California
April 18, 1995
F-2
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FEBRUARY 28,
<TABLE>
<CAPTION>
1995 1994
ASSETS ---------- ----------
(DOLLAR AMOUNTS IN
THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Cash..................................................... $ 17,624 $ 4,034
Receivables for mortgage loans shipped................... 1,174,648 1,970,431
Mortgage loans held for sale............................. 1,724,177 1,743,830
Other receivables........................................ 476,754 349,770
Property, equipment and leasehold improvements, at cost--
net of
accumulated depreciation and amortization............... 145,612 145,625
Capitalized servicing fees receivable.................... 464,268 289,541
Purchased servicing rights............................... 1,332,629 836,475
Other assets............................................. 243,950 245,815
---------- ----------
Total assets........................................... $5,579,662 $5,585,521
========== ==========
Borrower and investor custodial accounts (segregated in
special
accounts--excluded from corporate assets)............... $1,063,676 $1,366,643
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Notes payable............................................ $3,963,091 $3,859,227
Drafts payable issued in connection with mortgage loan
closings................................................ 200,221 449,814
Accounts payable and accrued liabilities................. 105,097 87,818
Deferred income taxes.................................... 368,695 308,525
---------- ----------
Total liabilities...................................... 4,637,104 4,705,384
Commitments and contingencies............................ -- --
Shareholders' equity
Preferred stock--authorized, 1,500,000 shares of $0.05
par value;
issued and outstanding, none............................ -- --
Common stock--authorized, 240,000,000 shares of $0.05 par
value;
issued and outstanding, 91,370,364 shares in 1995 and
91,063,751 shares in 1994............................... 4,568 4,553
Additional paid-in capital............................... 608,289 606,031
Retained earnings........................................ 329,701 269,553
---------- ----------
Total shareholders' equity............................. 942,558 880,137
---------- ----------
Total liabilities and shareholders' equity............. $5,579,662 $5,585,521
========== ==========
Borrower and investor custodial accounts................. $1,063,676 $1,366,643
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED FEBRUARY 28,
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
(DOLLAR AMOUNTS IN
THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues
Loan origination fees.......................... $203,426 $379,533 $241,584
Gain (loss) on sale of loans, net of commitment
fees.......................................... (41,342) 88,212 67,537
-------- -------- --------
Loan production revenue...................... 162,084 467,745 309,121
Interest earned................................ 343,138 376,225 211,542
Interest charges............................... (267,685) (275,906) (148,765)
-------- -------- --------
Net interest income.......................... 75,453 100,319 62,777
Loan servicing income.......................... 428,994 307,477 177,291
Less amortization of servicing assets.......... (95,768) (242,177) (151,362)
Add (less) servicing hedge benefit (expense)... (40,030) 73,400 74,075
Less write-off of servicing hedge.............. (25,600) -- --
-------- -------- --------
Net loan administration income............... 267,596 138,700 100,004
Gain on sale of servicing...................... 56,880 -- --
Commissions, fees and other income............. 40,650 48,816 33,656
-------- -------- --------
Total revenues............................. 602,663 755,580 505,558
Expenses
Salaries and related expenses.................. 199,061 227,702 140,063
Occupancy and other office expenses............ 102,193 101,691 64,762
Guarantee fees................................. 85,831 57,576 29,410
Marketing expenses............................. 23,217 26,030 12,974
Branch and administrative office consolidation
costs......................................... 8,000 -- --
Other operating expenses....................... 37,016 43,481 24,894
-------- -------- --------
Total expenses............................. 455,318 456,480 272,103
-------- -------- --------
Earnings before income taxes..................... 147,345 299,100 233,455
Provision for income taxes..................... 58,938 119,640 93,382
-------- -------- --------
NET EARNINGS................................... $ 88,407 $179,460 $140,073
======== ======== ========
Earnings per share
Primary........................................ $0.96 $1.97 $1.65
Fully diluted.................................. $0.96 $1.94 $1.52
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
THREE YEARS ENDED FEBRUARY 28, 1995
<TABLE>
<CAPTION>
ADDITIONAL
NUMBER COMMON PAID-IN RETAINED
OF SHARES STOCK CAPITAL EARNINGS TOTAL
---------- ------ ---------- -------- --------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE AT MARCH 1, 1992...... 50,474,619 $2,523 $462,465 $ 93,629 $558,617
Cash dividends paid--
preferred.................... -- -- -- (3,482) (3,482)
Cash dividends paid--common... -- -- -- (20,090) (20,090)
Stock options exercised....... 471,288 24 2,252 -- 2,276
Tax benefit of stock options
exercised.................... -- -- 2,808 -- 2,808
Conversion of preferred stock
for common stock............. 1,964,794 98 11,633 -- 11,731
Dividend reinvestment plan.... 1,571 -- 38 -- 38
401(k) Plan contribution...... 39,716 2 1,141 -- 1,143
Settlement of three-for-two
stock split.................. 65,688 4 (13) -- (9)
Net earnings for the year..... -- -- -- 140,073 140,073
Effect of 5% stock dividend
effective subsequent to year
end.......................... 2,650,884 133 93,311 (93,444) --
---------- ------ -------- -------- --------
BALANCE AT FEBRUARY 28, 1993.. 55,668,560 2,784 573,635 116,686 693,105
Cash dividends paid--
preferred.................... -- -- -- (732) (732)
Cash dividends paid--common... -- -- -- (24,389) (24,389)
Stock options exercised....... 452,522 22 3,338 -- 3,360
Tax benefit of stock options
exercised.................... -- -- 2,495 -- 2,495
Conversion of preferred stock
for common stock............. 4,511,283 225 25,575 -- 25,800
Dividend reinvestment plan.... 1,994 -- 55 -- 55
401(k) Plan contribution...... 33,637 2 1,005 -- 1,007
Settlement of 5% stock
dividend..................... 41,171 2 1,446 (1,472) (24)
Net earnings for the year..... -- -- -- 179,460 179,460
Effect of three-for-two stock
split effective subsequent to
year end..................... 30,354,584 1,518 (1,518) -- --
---------- ------ -------- -------- --------
BALANCE AT FEBRUARY 28, 1994.. 91,063,751 4,553 606,031 269,553 880,137
Cash dividends paid--common... -- -- -- (28,259) (28,259)
Stock options exercised....... 283,147 14 1,584 -- 1,598
Tax benefit of stock options
exercised.................... -- -- 697 -- 697
Dividend reinvestment plan.... -- -- (14) -- (14)
Settlement of three-for-two
stock split.................. 23,466 1 (9) -- (8)
Net earnings for the year..... -- -- -- 88,407 88,407
---------- ------ -------- -------- --------
BALANCE AT FEBRUARY 28, 1995.. 91,370,364 $4,568 $608,289 $329,701 $942,558
========== ====== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
YEAR ENDED FEBRUARY 28,
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings........................ $ 88,407 $ 179,460 $ 140,073
Adjustments to reconcile net
earnings to net cash provided
(used) by operating activities:
Amortization of purchased servicing
rights............................ 92,897 141,321 119,878
Amortization of capitalized
servicing fees receivable......... 2,871 100,856 31,484
Depreciation and other
amortization...................... 26,050 15,737 8,746
Deferred income taxes.............. 58,938 119,640 93,382
Gain on bulk sale of servicing
rights............................ (56,880) -- --
Origination and purchase of loans
held for sale..................... (27,866,170) (52,458,879) (32,387,774)
Principal repayments and sale of
loans............................. 28,681,606 51,060,915 31,725,953
------------ ------------ ------------
Decrease (increase) in mortgage
loans shipped and held for sale... 815,436 (1,397,964) (661,821)
Increase in other receivables and
other assets...................... (142,241) (407,080) (28,700)
Increase in accounts payable and
accrued liabilities............... 17,279 30,221 16,462
------------ ------------ ------------
Net cash provided (used) by
operating activities.............. 902,757 (1,217,809) (280,496)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to purchased servicing
rights............................. (589,051) (521,326) (280,459)
Additions to capitalized servicing
fees receivable.................... (207,663) (178,611) (148,248)
Purchase of property, equipment and
leasehold improvements--net........ (21,414) (64,660) (49,401)
Proceeds from bulk sale of servicing
rights............................. 100,676 -- --
Proceeds from sale of finance
receivables........................ -- -- 111,897
Finance receivables originations.... -- -- (425)
Principal repayments on finance
receivables........................ -- -- 4,254
------------ ------------ ------------
Net cash used by investing
activities........................ (717,452) (764,597) (362,382)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in warehouse
debt and other short-term
borrowings......................... (451,915) 1,477,593 526,820
Issuance of long-term debt.......... 399,205 576,718 462,000
Repayment of long-term debt......... (93,019) (59,721) (103,723)
Issuance of common stock............ 2,273 4,398 3,448
Cash dividends paid................. (28,259) (25,121) (23,572)
Net decrease in thrift investment
accounts........................... -- -- (224,036)
------------ ------------ ------------
Net cash (used) provided by
financing activities.............. (171,715) 1,973,867 640,937
------------ ------------ ------------
Net increase (decrease) in cash...... 13,590 (8,539) (1,941)
Cash at beginning of period.......... 4,034 12,573 14,514
------------ ------------ ------------
Cash at end of period................ $ 17,624 $ 4,034 $ 12,573
============ ============ ============
Supplemental cash flow information:
Cash used to pay interest........... $262,858 $277,518 $143,106
Cash (refunded from) used to pay
income taxes....................... $(841) $(1,823) $4,567
Noncash financing activities--
conversion of preferred stock...... $-- $25,800 $11,731
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies consistently
applied in the preparation of the accompanying consolidated financial
statements follows.
1. Principles of Consolidation
The consolidated financial statements include the accounts of the parent and
all wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.
2. Receivables for Mortgage Loans Shipped
Gain or loss on the sale of mortgage loans is recognized at the date the
loans are shipped to investors pursuant to existing sales commitments.
3. Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of cost or market,
which is computed by the aggregate method (unrealized losses are offset by
unrealized gains). The cost of mortgage loans is adjusted by gains and losses
generated from corresponding closed hedging transactions entered into to
protect the inventory value from increases in interest rates. Hedge positions
are also used to protect the pipeline of loan applications in process from
changes in interest rates. Gains and losses resulting from changes in the
market value of the inventory, pipeline and open hedge positions are netted.
Any net gain that results is deferred; any net loss that results is recognized
when incurred. Hedging gains and losses realized during the commitment and
warehousing period related to the pipeline and mortgage loans held for sale are
deferred. Hedging losses are recognized currently if deferring such losses
would result in mortgage loans held for sale and the pipeline being valued in
excess of their estimated net realizable value.
4. Property, Equipment and Leasehold Improvements
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives using the
straight-line method. Leasehold improvements are amortized over the lesser of
the life of the lease or service lives of the improvements using the straight-
line method.
5. Capitalized Servicing Fees Receivable
The Company sells substantially all of the mortgage loans it produces and
retains the servicing rights thereto. These servicing rights entitle the
Company to a future stream of cash flows based on the outstanding principal
balance of the mortgage loans and the related contractual service fee. The
sales price of the loans, which is generally at or near par, and the resulting
gain or loss on sale are adjusted to provide for the recognition of a normal
service fee rate over the estimated lives of the serviced loans. The amount of
the adjustment approximates the amount that investors were willing to pay for
the excess servicing fees at the time of the loan sale. The adjustment results
in a receivable that is expected to be realized through receipt of the excess
service fee over time.
6. Purchased Servicing Rights
The Company capitalizes the cost of bulk purchases of servicing rights, as
well as the net cost of servicing rights acquired through the purchase of loans
servicing-released which will be sold servicing-retained. The purchase price of
loans acquired servicing-released is allocated between the servicing rights and
the value of the loans on a servicing-retained basis. The portion of the
purchase price that represents the cost of acquiring the servicing rights in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 65,
F-7
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounting for Certain Mortgage Banking Activities, is capitalized as purchased
servicing. The remainder of the purchase price represents the cost basis of the
loan that will be sold. Purchased mortgage loans include closed loans acquired
from financial institutions and table funded loans meeting all the criteria set
forth in EITF Issue 92-10, "Loan Acquisitions Involving Table Funding
Arrangements," acquired from financial institutions and mortgage brokers. The
amount capitalized does not exceed the present value of future net servicing
income related to the purchased loans.
7. Servicing Portfolio Hedge
The Company acquires financial instruments, including derivative contracts,
that increase in value when interest rates decline ("Servicing Hedge"). These
financial instruments include call options on U.S. treasury futures and
mortgage-backed securities ("MBS"), interest rate floors and certain tranches
of collateralized mortgage obligations ("CMOs"). The Servicing Hedge partially
protects the value of the capitalized servicing fees receivable and purchased
servicing rights ("Servicing Assets") from the effects of increased prepayment
activity. The value of the interest rate floors and call options is derived
from an underlying instrument or index. The notional or contractual amount is
not recognized in the balance sheet. The cost of the interest rate floors and
call options is charged to expense (and included in net loan administration
income) over the contractual life of the contract. Unamortized costs are
included in Other Assets in the balance sheet. Realized gains from the
Servicing Hedge are recognized first as an offset to the "Incremental
Amortization" of the Servicing Assets (i.e., amortization due to impairment
caused by increased projected prepayment speeds). To the extent the Servicing
Hedge generates gains in excess of Incremental Amortization, the Company
reduces the carrying amount of the Servicing Assets by such excess through
additional amortization. The Company recognized $65 million in net expense
(including a write-off of the Servicing Hedge amounting to $26 million) and $73
million as an offset to incremental amortization for the years ended February
28, 1995 and 1994, respectively. The Company measures the effectiveness of its
Servicing Hedge by computing the correlation under a variety of interest rate
scenarios between the present value of servicing cash flows and the value of
the Servicing Hedge instruments.
8. Amortization of Purchased Servicing Rights and Capitalized Servicing Fees
Receivable
Amortization of each year's purchased servicing rights is based on the ratio
of net servicing income received in the current period to total net servicing
income projected to be realized from each year's purchased servicing rights.
The Company evaluates the recoverability of each year's purchased servicing
rights separately by type of loan and interest rate stratum. This level of
disaggregation results in pools of loans which have homogeneous credit and
prepayment risk characteristics. The Company records any additional
amortization necessary to adjust the carrying value of each such stratum's
purchased servicing portfolio to its net realizable value. Amortization of
capitalized servicing fees receivable is based on the decline during the period
in the present value of the projected excess servicing fees using the same
discount rate as that which is implied by the price that investors were willing
to pay for the excess servicing fees at the time of the loan sale. Projected
net servicing income and excess servicing fees are in turn determined on the
basis of the estimated future balance of the underlying mortgage loan
portfolio, which declines over time from prepayments and scheduled loan
amortization. The Company estimates future prepayment rates based on current
interest rate levels, other economic conditions and market forecasts, as well
as relevant characteristics of the servicing portfolio, such as loan types,
interest rate stratification and recent prepayment experience.
9. Deferred Commitment Fees
Deferred commitment fees, included in Other Assets, primarily consist of fees
paid to permanent investors to ensure the ultimate sale of loans and put and
call option fees paid for the option of selling or
F-8
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
buying MBS. Fees paid to permanent investors are recognized as an adjustment
to the sales price when the loans are shipped to permanent investors or
charged to expense when it becomes evident the commitment will not be used.
Put and call option fees are amortized over the life of the option to reflect
the decline in its time value. Any unamortized option fees are charged to
income when the related option is exercised.
10. Investment Securities
The Company has designated its investments in certain tranches of CMOs as
available for sale. Those securities are reported at fair value, with any net
material unrealized gains and losses included in equity. Unrealized losses
that are other than temporary are recognized in earnings.
11. Loan Origination Fees
Loan origination fees and discount points are recorded as an adjustment of
the cost of the loan and are included in loan production revenue when the loan
is sold.
12. Interest Rate Swap Agreements
The differential to be received or paid under the agreements is accrued and
is recognized as an adjustment to net interest income. The related amount
payable to or receivable from counterparties is included in Accounts Payable
and Accrued Liabilities.
13. Sale of Servicing Rights
The Company recognizes gain or loss on the sale of servicing rights when
title and all risks and rewards have irrevocably passed to the buyer and there
are no significant unresolved contingencies.
14. Income Taxes
Effective March 1, 1993, the Company adopted SFAS No. 109, Accounting for
Income Taxes. The adoption of SFAS 109 changes the Company's method of
accounting from the deferred method to an asset and liability approach.
Previously, the Company deferred the past tax effects of timing differences
between financial reporting and taxable income. The asset and liability
approach requires the recognition of deferred tax liabilities and assets for
the expected future tax consequences of temporary differences between the
financial statement carrying amounts and the tax bases of other assets and
liabilities. Adoption of SFAS 109 did not result in a material adjustment to
previously recorded deferred income tax liabilities.
15. Earnings Per Share
Primary earnings per share is computed on the basis of the weighted average
number of common and common equivalent shares outstanding during the
respective periods after giving retroactive effect to stock dividends and
stock splits. Fully diluted earnings per share is based on the assumption that
all dilutive convertible preferred stock and stock options were converted at
the beginning of the reporting period. The computations assume that net
earnings have been adjusted for the dividends on the convertible preferred
stock.
The weighted average shares outstanding for computing primary and fully
diluted earnings per share were 92,087,000 and 92,216,000, respectively, for
the year ended February 28, 1995; 90,501,000 and 92,445,000, respectively, for
the year ended February 28, 1994 and 82,514,000 and 92,214,000, respectively,
for the year ended February 28, 1993.
16. Financial Statement Reclassifications and Restatement
Certain amounts reflected in the Consolidated Financial Statements for the
years ended February 28, 1994 and 1993 have been reclassified to conform to
the presentation for the year ended February 28, 1995.
F-9
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
On July 17, 1992, a 3-for-2 split of the Company's $0.05 par value common
stock was accomplished. On April 23, 1993, a 5% stock dividend was paid. On May
3, 1994, the Company's $0.05 par value common stock was split 3 for 2. All
references in the accompanying consolidated balance sheets, consolidated
statements of earnings and notes to consolidated financial statements to the
number of common shares and share amounts have been restated to reflect the
stock splits and the stock dividend.
NOTE B--PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consisted of the following:
<TABLE>
<CAPTION>
FEBRUARY 28,
------------------------------
1995 1994
-------------- --------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C>
Buildings................................... $ 36,983 $ 35,305
Office equipment............................ 116,661 95,976
Leasehold improvements...................... 25,729 23,656
Mobile homes................................ 3,751 8,829
-------------- --------------
183,124 163,766
Less: accumulated depreciation and
amortization............................... (55,848) (41,823)
-------------- --------------
127,276 121,943
Land........................................ 18,336 23,682
-------------- --------------
$ 145,612 $ 145,625
============== ==============
</TABLE>
NOTE C--CAPITALIZED SERVICING FEES RECEIVABLE AND PURCHASED SERVICING RIGHTS
The components of capitalized servicing fees receivable and purchased
servicing rights are as follows:
<TABLE>
<CAPTION>
FEBRUARY 28,
-------------------------------
1995 1994 1993
---------- --------- --------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
CAPITALIZED SERVICING FEES RECEIVABLE
Balance at beginning of period............ $ 289,541 $ 211,785 $ 95,021
Additions................................. 207,663 178,612 148,248
Sale of servicing......................... (30,065) -- --
Amortization
Scheduled............................... (2,871) (32,970) (21,333)
Unscheduled............................. -- (67,886) (10,151)
---------- --------- --------
Balance at end of period.................. $ 464,268 $ 289,541 $211,785
========== ========= ========
PURCHASED SERVICING RIGHTS
Balance at beginning of period............ $ 836,475 $ 456,470 $295,889
Additions................................. 589,051 521,326 280,459
Amortization
Scheduled............................... (92,897) (108,822) (55,511)
Unscheduled............................. -- (32,499) (64,367)
---------- --------- --------
Balance at end of period.................. $1,332,629 $ 836,475 $456,470
========== ========= ========
</TABLE>
F-10
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D--NOTES PAYABLE
Notes payable consisted of the following:
<TABLE>
<CAPTION>
FEBRUARY 28,
-----------------------------
1995 1994
-------------- --------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C>
Commercial paper.............................. $ 2,122,348 $ 2,194,543
Medium-term notes, Series A, B and C, net of
discounts.................................... 1,393,900 1,088,550
Reverse-repurchase agreements................. 245,212 312,129
Pre-sale funding facilities................... -- 63,210
Subordinated notes............................ 200,000 200,000
Other notes payable (2.40%-2.90%)............. 1,631 795
-------------- --------------
$ 3,963,091 $ 3,859,227
============== ==============
</TABLE>
REVOLVING CREDIT FACILITY AND COMMERCIAL PAPER
As of February 28, 1995, Countrywide Funding Corporation ("CFC"), the
Company's mortgage banking subsidiary, had an unsecured credit agreement
(revolving credit facility) with forty-two commercial banks permitting CFC to
borrow an aggregate maximum amount of $2.5 billion, less commercial paper
backed by the agreement. The amount available under the facility is subject to
a borrowing base, which consists of mortgage loans held for sale, receivables
for mortgage loans shipped and mortgage servicing rights. The facility
contains various financial covenants and restrictions, certain of which limit
the amount of dividends that can be paid by the Company or CFC. The interest
rate on direct borrowings is based on a variety of sources, including the
prime rate and the London Interbank Offered Rates ("LIBOR") for U.S. dollar
deposits. This interest rate varies depending on CFC's credit ratings. The
weighted average borrowing rate on direct borrowings and commercial paper
borrowings for the year ended February 28, 1995, including the effect of the
interest rate swap agreements discussed in Note F, was 4.69%. The weighted
average borrowing rate on commercial paper outstanding as of February 28, 1995
was 5.94%. Under certain circumstances, including the failure to maintain
specified minimum credit ratings, borrowings under the revolving credit
facility and commercial paper may become secured by mortgage loans held for
sale, receivables for mortgage loans shipped and mortgage servicing rights.
The revolving credit facility expires on September 19, 1997.
MEDIUM-TERM NOTES
As of February 28, 1995, outstanding medium-term notes issued by the parent
and CFC under various shelf registrations filed with the Securities and
Exchange Commission were as follows:
<TABLE>
<CAPTION>
OUTSTANDING BALANCE INTEREST RATE MATURITY DATE
------------------------------- -------------- -----------------
FLOATING-
RATE FIXED-RATE TOTAL FROM TO FROM TO
--------- ---------- ---------- ------- ------ -------- --------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Parent
Series A... $ -- $ 10,600 $ 10,600 10.60% 10.60% Jun 1995 Aug 1995
CFC
Series A... 5,000 424,800 429,800 6.10% 8.79% Mar 1995 Mar 2002
Series B... 11,000 469,000 480,000 5.11% 6.98% Mar 1996 Aug 2005
Series C... 278,000 195,500 473,500 6.31% 8.43% Dec 1997 Mar 2004
-------- ---------- ----------
Subtotal... $294,000 $1,089,300 $1,383,300
-------- ---------- ----------
Total...... $294,000 $1,099,900 $1,393,900
======== ========== ==========
</TABLE>
F-11
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D--NOTES PAYABLE (CONTINUED)
As of February 28, 1995, all of the outstanding fixed-rate notes of CFC had
been effectively converted by interest rate swap agreements to floating-rate
notes. The weighted average borrowing rate on CFC's medium-term note borrowings
for the year ended February 28, 1995, including the effect of the interest rate
swap agreements, was 5.54%. As of February 28, 1995, $26.5 million was
available for future issuance under the Series C shelf registration.
REVERSE-REPURCHASE AGREEMENTS
As of February 28, 1995, the Company had entered into short-term financing
arrangements to sell MBS and whole loans under agreements to repurchase. The
weighted average borrowing rate for the year ended February 28, 1995, was
4.63%. The weighted average borrowing rate on reverse-repurchase agreements
outstanding as of February 28, 1995 was 6.01%. The reverse-repurchase
agreements were collateralized by either MBS or whole loans. All MBS and whole
loans underlying reverse-repurchase agreements are held in safekeeping by
broker-dealers, and all agreements are to repurchase the same or substantially
identical MBS or whole loans.
PRE-SALE FUNDING FACILITIES
As of February 28, 1995, CFC had a $500 million revolving credit facility
("As Soon as Pooled Agreement") with the Federal National Mortgage Association
("Fannie Mae"). The credit facility is secured by conforming mortgage loans
which are in the process of being pooled into Fannie Mae MBS. Interest rates
are based on LIBOR and/or federal funds. The weighted average borrowing rate
for the year ended February 28, 1995, was 5.03%. This facility is committed
through July 20, 1995, subject to CFC's compliance with certain financial and
operational covenants. As of February 28, 1995, the Company had no outstanding
borrowings under this facility.
As of February 28, 1995, CFC had an uncommitted revolving credit facility
("Pre-sale Funding Facility") with an affiliate of an investment banking firm.
The credit facility is secured by conforming mortgage loans which are in the
process of being pooled into MBS. Interest rates are based on LIBOR. The
weighted average borrowing rate for the year ended February 28, 1995, was
6.03%. As of February 28, 1995, the Company had no outstanding borrowings under
this facility.
As of February 28, 1995, CFC had an uncommitted revolving credit facility
("Early Funding Agreement") with the Federal Home Loan Mortgage Corporation
("Freddie Mac"). The credit facility is secured by conforming mortgage loans
which are in the process of being pooled into Freddie Mac participation
certificates. Interest rates under the agreement are based on the prevailing
rates for MBS reverse-repurchase agreements. The weighted average borrowing
rate for the year ended February 28, 1995 was 3.91%. As of February 28, 1995,
the Company had no outstanding borrowings under this facility.
SUBORDINATED NOTES
The 8.25% subordinated notes are due July 15, 2002. Interest is payable semi-
annually on each January 15 and July 15. The subordinated notes are not
redeemable prior to maturity and are not subject to any sinking fund.
F-12
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D--NOTES PAYABLE (CONTINUED)
Maturities of notes payable are as follows:
<TABLE>
<CAPTION>
YEAR ENDING FEBRUARY 28(29),
---------------------------- (DOLLAR AMOUNTS IN THOUSANDS)
<S> <C>
1996....................................... $2,463,785
1997....................................... 114,006
1998....................................... 180,300
1999....................................... 102,000
2000....................................... 228,000
Thereafter................................. 875,000
----------
$3,963,091
==========
</TABLE>
NOTE E--INCOME TAXES
Components of the provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
------------------------------
1995 1994 1993
--------- ---------- ---------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Federal expense--deferred.................. $ 48,680 $ 99,074 $ 71,152
State expense--deferred.................... 10,258 20,566 22,230
--------- ---------- ---------
$ 58,938 $ 119,640 $ 93,382
========= ========== =========
</TABLE>
The following is a reconciliation of the statutory federal income tax rate to
the effective income tax rate reflected in the consolidated statements of
earnings:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
-------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Statutory federal income tax rate.............. 35.0% 35.0% 34.0%
State income and franchise taxes............... 5.0 5.0 6.4
Tax rate differential on reversing timing dif-
ferences...................................... -- -- (.4)
------- ------- -------
Effective income tax rate.................... 40.0% 40.0% 40.0%
======= ======= =======
</TABLE>
In August 1993, legislation was enacted that implemented a one percent
increase in the corporate federal tax rate. As a result, the Company increased
its deferred federal tax liability in the amount of approximately $5 million.
Also, the Company has diversified its business activities outside California, a
state that has a corporate tax rate that is higher than the average tax rate
among the states in which the Company does business. This diversification
reduced the Company's effective state tax rate by approximately one percent,
and therefore its deferred state tax liability was decreased by approximately
$5 million. Consequently, the Company's total deferred tax liability and
combined tax rate did not change materially as a result of these two events.
F-13
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E--INCOME TAXES (CONTINUED)
The tax effects of temporary differences that gave rise to deferred income
tax assets and liabilities are presented below:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
-----------------------
1995 1994
----------- -----------
(DOLLAR AMOUNTS
IN THOUSANDS)
<S> <C> <C>
Deferred income tax assets:
Federal net operating losses...................... $ 111,455 $ 68,240
State net operating losses........................ 10,685 7,342
Alternative minimum tax credits................... 2,664 2,664
State income and franchise taxes.................. 25,183 22,326
Allowance for losses.............................. 4,968 5,965
Other............................................. 3,297 1,650
----------- -----------
Total deferred income tax assets.................... 158,252 108,187
----------- -----------
Deferred income tax liabilities:
Capitalized servicing fees receivable and pur-
chased servicing rights.......................... 521,225 410,773
Accumulated depreciation.......................... 5,722 5,939
----------- -----------
Total deferred income tax liabilities............... 526,947 416,712
----------- -----------
Deferred income taxes............................... $ 368,695 $ 308,525
=========== ===========
</TABLE>
Deferred income tax expense (benefit) resulted from timing differences in the
recognition of revenues and expenses for tax and financial statement purposes.
The sources of these differences and the effects of each were as follows:
<TABLE>
<CAPTION>
FEBRUARY 28, 1993
-----------------
(DOLLAR AMOUNTS
IN THOUSANDS)
<S> <C>
Capitalized servicing fees............................... $101,800
State income and franchise taxes......................... (7,729)
Accelerated depreciation................................. 1,022
Allowance for credit losses.............................. (1,711)
--------
$ 93,382
========
</TABLE>
At February 28, 1995, the Company had net operating loss carryforwards for
federal income tax purposes of $13,612,000 expiring in 2003, $16,448,000
expiring in 2004, $4,712,000 expiring in 2006, $8,034,000 expiring in 2008,
$124,160,000 expiring in 2009 and $151,477,000 expiring in 2010.
NOTE F--FINANCIAL INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes a variety of derivative financial instruments in the
management of interest-rate risk. These instruments include priced short-term
commitments to extend credit, MBS mandatory forward delivery and purchase
commitments, put and call options to sell or buy mortgage-backed and treasury
securities, interest rate floors and interest rate swaps. These instruments
involve, to varying degrees, elements of credit and interest-rate risk. All of
the Company's derivative financial instruments are held or issued for purposes
other than trading.
F-14
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F--FINANCIAL INSTRUMENTS (CONTINUED)
While the Company does not anticipate nonperformance by any counterparty, the
Company is exposed to credit loss in the event of nonperformance by the
counterparties to the various instruments. The Company manages credit risk with
respect to MBS mandatory forward commitments, put or call options to sell or
buy mortgage-backed and treasury securities and interest rate swaps and floors
by entering into agreements with entities approved by senior management and
initially having a long-term credit rating of single A or better. These
entities include Wall Street firms having primary dealer status, money center
banks and permanent investors. The Company's exposure to credit risk in the
event of default by the counterparty is the difference between the contract
price and the current market price offset by any available margins retained by
the Company or an independent clearing agent. The amounts of credit risk as of
February 28, 1995, if the counterparties failed completely and if the margins,
if any, retained by the Company or an independent clearing agent were to become
unavailable, are approximately $61 million for MBS mandatory forward
commitments, approximately $14 million for interest rate swaps and
approximately $23 million for interest rate floors.
As of February 28, 1995, the Company had priced short-term commitments
amounting to approximately $2.2 billion (including $1.5 billion fixed-rate and
$0.7 billion adjustable-rate) to fund mortgage loan applications in process
subject to approval of the loans and an additional $2.7 billion (including $2.5
billion fixed-rate and $0.2 billion adjustable-rate) subject to property
identification and approval of the loans. Substantially all of these
commitments are for periods of 90 days or less. After funding and sale of the
mortgage loans, the Company's exposure to credit loss in the event of
nonperformance by the mortgagor is limited as described in Note G4. The Company
uses the same credit policies in the approval of the commitments as are applied
to all lending activities.
HEDGE OF MORTGAGE LOAN INVENTORY AND COMMITTED PIPELINE
In order to offset the risk that a change in interest rates will result in a
decrease in the value of the Company's current mortgage loan inventory or its
commitments to purchase or originate mortgage loans ("Committed Pipeline"), the
Company enters into hedging transactions. The Company's hedging policies
generally require that substantially all of its inventory of conforming and
government loans and the maximum portion of its Committed Pipeline that may
close be hedged with forward contracts for the delivery of MBS or options on
MBS. The MBS that are to be delivered under these contracts and options are
fixed- or adjustable-rate, corresponding with the composition of the Company's
inventory and Committed Pipeline. At February 28, 1995, the Company had open
commitments amounting to approximately $8.5 billion to sell MBS with varying
settlement dates generally not extending beyond May 1995 and options on MBS
through October 1995 with a total notional amount of $4.2 billion. The mortgage
loan inventory is used to form the MBS that will fill the forward delivery
contracts and options. The Company hedges its inventory and Committed Pipeline
of jumbo mortgage loans by using whole-loan sale commitments to ultimate buyers
or by using temporary "cross hedges" with sales of MBS since such loans are
ultimately sold based on a market spread to MBS. As such, the Company is not
exposed to significant risk nor will it derive any significant benefit from
changes in interest rates on the price of the mortgage loan inventory net of
gains or losses of associated hedge positions. The correlation between the
price performance of the hedge instruments and the inventory being hedged is
very high due to the similarity of the asset and the related hedge instrument.
The Company is exposed to interest-rate risk to the extent that the portion of
loans from the Committed Pipeline that actually closes at the committed price
is less than the portion expected to close in the event of a decline in rates
and such decline in closings is not covered by forward contracts and options to
purchase MBS needed to replace the loans in process that do not close at their
committed price. At February 28, 1995, the notional amount of forward contracts
and options to purchase MBS aggregated $4.1 billion and $2.6 billion,
F-15
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F--FINANCIAL INSTRUMENTS (CONTINUED)
respectively. The forward contracts extend through May 1995 and the options
extend through September 1995. The Company determines the portion of its
Committed Pipeline that it will hedge based on numerous factors, including the
composition of the Company's Committed Pipeline, the portion of such Committed
Pipeline likely to close, the timing of such closings and anticipated changes
in interest rates.
SERVICING HEDGE
The primary means used by the Company to reduce the sensitivity of its
earnings to changes in interest rates is through a strong production capability
and a growing servicing portfolio. To further mitigate the effect on earnings
of higher amortization (which is deducted from loan servicing income) resulting
from increased prepayment activity, the Company utilizes its Servicing Hedge,
consisting of financial instruments, including derivative contracts, that
increase in value when interest rates decline. These financial instruments
include call options on U.S. treasury futures and MBS, interest rate floors and
certain tranches of CMOs.
The CMOs, which consist primarily of principal-only ("P/O") securities, have
been purchased at deep discounts to their par values. As interest rates
decline, prepayments on the collateral underlying the CMOs should increase.
These changes should result in a decline in the average lives of the P/O
securities and an increase in the present values of their cash flows.
The following summarizes the notional amounts of Servicing Hedge derivative
contracts:
<TABLE>
<CAPTION>
INTEREST LONG LONG CALL OPTIONS
RATE CALL OPTIONS ON U.S. TREASURY
FLOORS ON MBS FUTURES
-------- ------------ -----------------
(DOLLAR AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
Balance, March 1, 1992............... $ -- $ 560 $ --
Additions.......................... -- 2,287 700
Dispositions....................... -- 2,847 700
------ ------ ------
Balance, February 28, 1993........... -- -- --
Additions.......................... -- 4,700 2,520
Dispositions....................... -- 2,700 750
------ ------ ------
Balance, February 28, 1994........... -- 2,000 1,770
Additions.......................... 4,000 -- 1,300
Dispositions....................... -- 2,000 3,070
------ ------ ------
Balance, February 28, 1995........... $4,000 $ -- $ --
====== ====== ======
</TABLE>
The terms of the open Servicing Hedge derivative contracts at February 28,
1995 are presented below:
<TABLE>
<CAPTION>
INTEREST RATE FLOORS
--------------------
<S> <C>
Index............................. 10-Year Constant Maturity Treasury Yield
Floor............................. 6.50%--7.25%
Term.............................. 3--5 Years
</TABLE>
The Servicing Hedge instruments utilized by the Company partially protect the
value of the investment in servicing rights from the effects of increased
prepayment activity that generally results from declining interest rates. To
the extent that interest rates increase, the value of the servicing rights
increases while the value of the hedge instruments declines. However, the
Company is not exposed to loss beyond its initial outlay to acquire the hedge
instruments. At February 28, 1995, the carrying value of interest rate floor
contracts and P/O securities included in the Servicing Hedge was approximately
$16 million and $42 million, respectively. There can be no assurance the
Company's Servicing Hedge will generate gains in the future.
F-16
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F--FINANCIAL INSTRUMENTS (CONTINUED)
INTEREST RATE SWAPS
As of February 28, 1995, CFC had interest rate swap agreements with certain
financial institutions having notional principal amounts totaling $2.47
billion. The effect of these agreements is to enable CFC to convert a portion
of its medium-term note borrowings to LIBOR-based floating-rate cost borrowings
(notional amount $1.09 billion), to convert a portion of its commercial paper
and medium-term note borrowings from one floating-rate index to another
(notional amount $0.13 billion) and to convert the earnings rate on the
custodial accounts held by CFC from floating to fixed (notional amount $1.25
billion). Payments are due periodically through the termination date of each
agreement. The agreements expire between March 1995 and August 2005.
The terms of the open interest rate swap agreements at February 28, 1995 are
presented below:
<TABLE>
<S> <C>
Swaps related to debt
Average receive rate..................................... 6.367%
Average pay rate......................................... 6.329%
Index.................................................... 3-month LIBOR
Swaps related to custodial accounts
Average receive rate..................................... 6.468%
Average pay rate......................................... 6.223%
Index.................................................... 1-3 month LIBOR
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments
as of February 28, 1995 and 1994 is made by the Company using available market
information and appropriate valuation methodologies. However, considerable
judgment is necessarily required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
<TABLE>
<CAPTION>
FEBRUARY 28, 1995 FEBRUARY 28, 1994
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Mortgage loans shipped and held
for sale...................... $2,898,825 $2,941,709 $3,714,261 $3,725,913
Capitalized servicing fees re-
ceivable...................... 464,268 473,623 289,541 295,403
Items included in other assets: -- -- 238,841 173,829
Principal-only securities.... 91,793 92,726 -- --
Derivatives:
Interest rate floors......... 15,820 23,396 -- --
Contracts and options related
to mortgage loans shipped
and held for sale........... 47,647 (2,926) -- 59,533
Liabilities:
Notes payable.................. 3,963,091 3,934,160 3,859,227 3,901,179
Derivatives gain (loss):
Interest rate swaps.......... 4,093 (55,570) 2,950 (6,669)
Short-term commitments to ex-
tend credit................. -- 69,252 -- (59,533)
</TABLE>
F-17
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F--FINANCIAL INSTRUMENTS (CONTINUED)
The fair value estimates as of February 28, 1995 and 1994 are based on
pertinent information available to management as of the respective dates.
Although management is not aware of any factors that would significantly affect
the estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since those dates and,
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
The following describes the methods and assumptions used by the Company in
estimating fair values.
Mortgage Loans Shipped and Held for Sale
Fair value is estimated using the quoted market prices for securities backed
by similar types of loans and dealer commitments to purchase loans on a
servicing-retained basis.
Capitalized Servicing Fees Receivable
Fair value is estimated by discounting future cash flows from excess
servicing fees using discount rates that approximate current market rates and
market consensus prepayment rates.
Other Financial Instruments
Fair value is estimated using quoted market prices and by discounting future
cash flows using discount rates that approximate current market rates and
market consensus prepayment rates.
Derivatives
Fair value is estimated as the amounts that the Company would receive or pay
to terminate the contracts at the reporting date, taking into account the
current unrealized gains or losses on open contracts. Market or dealer quotes
are available for many derivatives; otherwise, pricing or valuation models are
applied to current market information to estimate fair value.
Notes Payable
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate the fair value of existing debt.
NOTE G--COMMITMENTS AND CONTINGENCIES
1. Commitments to Sell Mortgage-Backed Securities
In connection with its open commitments to buy or sell MBS and with its
interest rate swap agreements, the Company may be required to maintain margin
deposits. With respect to the MBS commitments, these requirements are generally
greatest during periods of rapidly declining interest rates. The interest rate
swap margin requirements are generally greatest during periods of increasing
interest rates.
F-18
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G--COMMITMENTS AND CONTINGENCIES (CONTINUED)
2. Lease Commitments
The Company leases office facilities under lease agreements extending through
September 2011. Future minimum annual rental commitments under these non-
cancelable operating leases with initial or remaining terms of one year or more
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING FEBRUARY 28(29),
---------------------------- (DOLLAR AMOUNTS IN THOUSANDS)
<S> <C>
1996....................................... $ 15,214
1997....................................... 13,151
1998....................................... 10,778
1999....................................... 8,619
2000....................................... 6,078
Thereafter................................. 55,588
--------
$109,428
========
</TABLE>
Rent expense was $22,136,000, $19,115,000 and $13,049,000 for the years ended
February 28, 1995, 1994 and 1993, respectively.
3. Restrictions on Transfers of Funds
The Company and certain of its subsidiaries are subject to regulatory and/or
credit agreement restrictions which limit their ability to transfer funds to
the Company through intercompany loans, advances or dividends. Pursuant to the
revolving credit facility as of February 28, 1995, the Company is required to
maintain $750 million in consolidated net worth and CFC is required to maintain
$725 million of net worth, as defined in the credit agreement.
4. Loan Servicing
As of February 28, 1995, 1994 and 1993, the Company was servicing loans
totaling approximately $113.1 billion, $84.7 billion and $54.5 billion,
respectively. Included in the loans serviced as of February 28, 1995, 1994 and
1993 were loans being serviced under subservicing agreements with total
principal balances of $679 million, $592 million and $627 million,
respectively.
Conforming conventional loans serviced by the Company (57% of the servicing
portfolio at February 28, 1995) are securitized through Fannie Mae or Freddie
Mac programs on a non-recourse basis, whereby foreclosure losses are generally
the responsibility of Fannie Mae or Freddie Mac and not of the Company.
Similarly, the government loans serviced by the Company are securitized through
Government National Mortgage Association programs, whereby the Company is
insured against loss by the Federal Housing Administration (16% of the
servicing portfolio at February 28, 1995) or partially guaranteed against loss
by the Veterans Administration (6% of the servicing portfolio at February 28,
1995). In addition, jumbo mortgage loans (21% of the servicing portfolio at
February 28, 1995) are also serviced on a non-recourse basis.
Properties securing the mortgage loans in the Company's servicing portfolio
are geographically dispersed throughout the United States. As of February 28,
1995, approximately 43% of the mortgage loans (measured by unpaid principal
balance) in the Company's servicing portfolio are secured by properties located
in California. No other state contains more than 4% of the properties securing
mortgage loans.
F-19
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H--EMPLOYEE BENEFITS
1. Stock Option Plans
The Company has stock option plans (the "Plans") that provide for the
granting of both qualified and non-qualified options to employees and
directors. Options are generally granted at the average market price of the
Company's common stock on the date of grant and are exercisable beginning one
year from the date of grant and expire up to eleven years from date of grant.
Stock option transactions under the Plans were as follows:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
----------------------------------------
1995 1994 1993
------------ ------------ ------------
(NUMBER OF SHARES)
<S> <C> <C> <C>
Shares subject to:
Outstanding options at beginning of
year.............................. 5,603,325 4,478,703 3,653,193
Options granted.................. 1,948,290 1,955,273 1,749,678
Options exercised................ (307,847) (701,619) (837,621)
Options expired or canceled...... (560,354) (129,032) (86,547)
------------ ------------ ------------
Outstanding options at end of year. 6,683,414 5,603,325 4,478,703
============ ============ ============
Exercise price:
Per share for options exercised
during the year................... $2.19-$19.50 $2.19-$16.19 $1.98-$12.65
Per share for options outstanding
at end of year.................... $2.39-$21.83 $2.19-$21.83 $2.19-$16.19
</TABLE>
Of the outstanding options as of February 28, 1995, 2,704,728 shares were
immediately exercisable under the Plans. Also as of February 28, 1995,
2,393,441 shares were designated for future grants under the Plans.
2. Pension Plan
The Company has a defined benefit pension plan (the "Plan") covering
substantially all of its employees. The Company's policy is to contribute the
amount actuarially determined to be necessary to pay the benefits under the
Plan, and in no event to pay less than the amount necessary to meet the minimum
funding standards of ERISA.
F-20
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H--EMPLOYEE BENEFITS (CONTINUED)
The following table sets forth the Plan's funded status and amounts
recognized in the Company's financial statements.
<TABLE>
<CAPTION>
YEAR ENDED
FEBRUARY 28,
----------------
1995 1994
------- -------
(DOLLAR AMOUNTS
IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested.................................................. $ 5,112 $ 5,024
Non-vested.............................................. 1,095 1,540
------- -------
Total accumulated benefit obligation...................... 6,207 6,564
Additional benefits based on estimated future salary lev-
els...................................................... 4,250 4,517
------- -------
Projected benefit obligations for service rendered to
date..................................................... 10,457 11,081
Less Plan assets at fair value, primarily mortgage-backed
securities............................................... (9,484) (7,482)
------- -------
Projected benefit obligation in excess of Plan assets..... 973 3,599
Unrecognized net gain (loss) from past experience
different from that assumed and effects of changes in
assumptions.............................................. 1,862 (780)
Prior service cost not yet recognized in net periodic pen-
sion cost................................................ (1,422) (1,522)
Unrecognized net asset at February 28, 1987 being recog-
nized over 15 years...................................... 496 566
------- -------
Accrued pension cost...................................... $ 1,909 $ 1,863
======= =======
Net pension cost included the following components:
Service cost--benefits earned during the period......... $ 1,648 $ 1,395
Interest cost on projected benefit obligations.......... 789 677
Actual return on Plan assets............................ (318) (413)
Net amortization and deferral........................... (327) (28)
------- -------
Net periodic pension cost................................. $ 1,792 $ 1,631
======= =======
</TABLE>
The weighted average discount rate and the rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 7.625% and 5.0%, respectively. The weighted
average expected long-term rate of return on assets used was 8.125%. Pension
expense for 1995, 1994 and 1993 was $1,792,000, $1,631,000 and $992,000,
respectively. The Company makes contributions to the Plan in amounts that are
deductible in accordance with federal income tax regulations.
NOTE I--REDEEMABLE PREFERRED STOCK
On July 6, 1993, the Company called all of its outstanding convertible
preferred stock, which was represented by depositary convertible shares (each
depositary share represented 1/10 of a share of convertible preferred stock).
Each depositary share was convertible into 6.3 shares of common stock, and each
depositary share not converted was redeemable for $27.375 in cash. All holders
converted their shares into common stock.
NOTE J--SHAREHOLDERS' EQUITY
In February 1988, the Board of Directors of the Company declared a dividend
distribution of one preferred stock purchase right ("Right") for each
outstanding share of the Company's common stock. As a
F-21
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J--SHAREHOLDERS' EQUITY (CONTINUED)
result of stock splits and stock dividends, 0.399 of a Right is presently
associated with each outstanding share of the Company's common stock and the
same fraction of a Right will be associated with each share of the Company's
common stock issued prior to the Distribution Date (as defined below). Each
Right, when exercisable, entitles the holder to purchase from the Company one
one-hundredth of a share of Series A Participating Preferred Stock, par value
$0.05 per share, of the Company (the "Series A Preferred Stock"), at a price of
$145, subject to adjustments in certain cases to prevent dilution.
The Rights are evidenced by the common stock certificates and are not
exercisable or transferable, apart from the common stock, until the date (the
"Distribution Date") of the earlier of a public announcement that a person or
group, without prior consent of the Company, has acquired 20% or more of the
common stock (an "Acquiring Person"), or ten days (subject to extension by the
Board of Directors) after the commencement of a tender offer made without the
prior consent of the Company.
In the event a person becomes an Acquiring Person, then each Right (other
than those owned by the Acquiring Person) will entitle its holder to purchase,
at the then current exercise price of the Right, that number of shares of
common stock, or the equivalent thereof, of the Company which, at the time of
such transaction, would have a market value of two times the exercise price of
the Right. The Board of Directors of the Company may delay the exercisability
of the Rights during the period in which they are exercisable only for Series A
Preferred Stock (and not common stock).
In the event that, after a person has become an Acquiring Person, the Company
is acquired in a merger or other business combination, as defined for the
purposes of the Rights, each Right (other than those held by the Acquiring
Person) will entitle its holder to purchase, at the then current exercise price
of the Right, that number of shares of common stock, or the equivalent thereof,
of the other party (or publicly traded parent thereof) to such merger or
business combination which at the time of such transaction would have a market
value of two times the exercise price of the Right. The Rights expire on the
earlier of February 28, 2002, the consummation of certain merger transactions
or optional redemption by the Company prior to any person becoming an Acquiring
Person.
NOTE K--RELATED PARTY TRANSACTIONS
Countrywide Asset Management Corporation ("CAMC"), a wholly-owned subsidiary
of the Company, has entered into an agreement (the "Management Agreement") with
CWM Mortgage Holdings, Inc. ("CWM"), formerly Countrywide Mortgage Investments,
Inc., a real estate investment trust. CAMC has entered into a subcontract with
its affiliate, CFC, to perform such services for CWM and its subsidiaries as
CAMC deems necessary. In accordance with the Management Agreement, CAMC advises
CWM on various facets of its business and manages its operations subject to the
supervision of CWM's Board of Directors. For performing these services, CAMC
receives certain management fees and incentive compensation. CAMC waived all
management fees pursuant to the above for calendar year 1993 and 25% of
incentive compensation earned in 1994. In addition, in 1993 CAMC absorbed $0.9
million of operating expenses incurred in connection with its duties under the
Management Agreement. CWM and its subsidiaries began paying all expenses of the
new operations in June 1993. During the fiscal years ended February 28, 1995,
1994 and 1993, CAMC earned $0.3 million, $0.1 million and $0.8 million,
respectively, in base management fees from CWM and its subsidiaries. In
addition, during the fiscal year ended February 28, 1995, CAMC recorded $1.1
million in incentive compensation, net of the amount waived as described above.
The Management Agreement is renewable annually and expires on May 15, 1995. As
of February 28, 1995, the Company and CAMC own 1,120,000 shares or
approximately 2.77% of the common stock of CWM.
F-22
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE K--RELATED PARTY TRANSACTIONS (CONTINUED)
CAMC incurs many of the expenses related to the operations of CWM and its
subsidiaries, including personnel and related expenses, subject to
reimbursement by CWM. CWM's conduit operations are primarily conducted in
Independent National Mortgage Corporation ("INMC"), formerly Countrywide
Mortgage Conduit, and all other operations are conducted in CWM. Accordingly,
INMC is charged with the majority of the conduit's cost and CWM is charged with
the other operations' costs. During Fiscal 1995, the amount of common expenses
incurred by CFC which were allocated to CAMC and reimbursed by CWM totaled $1.2
million.
CWM has an option to purchase conventional loans from CFC at the prevailing
market price. During the years ended February 28, 1995, 1994 and 1993, CWM
purchased $80.4 million, $300.5 million and $130.3 million, respectively, of
conventional non-conforming mortgage loans from CFC pursuant to this option.
During the year ended February 28, 1995, CFC purchased from INMC bulk
servicing rights for loans with principal balances aggregating $3.0 billion at
a price of $38.2 million. In 1987 and 1993, subsidiaries of CWM entered into
servicing agreements appointing CFC as servicer of mortgage loans
collateralizing five series of CMOs with outstanding balances of approximately
$94.0 million at February 28, 1995. CFC is entitled under each agreement to an
annual fee of up to 0.32% of the aggregate unpaid principal balance of the
pledged mortgage loans. Servicing fees received by CFC under such agreements
for the years ended February 28, 1995, 1994 and 1993 were approximately $0.3
million, $0.5 million and $0.3 million, respectively.
CFC has extended CWM a $10 million line of credit bearing interest at prime
and maturing September 30, 1995. At February 28, 1995, there was no outstanding
amount under the agreement.
NOTE L--SEGMENT INFORMATION
The Company and its subsidiaries operate primarily in the mortgage banking
industry. Operations in mortgage banking involve CFC's origination and purchase
of mortgage loans, sale of mortgage loans in the secondary mortgage market,
servicing of mortgage loans and the purchase and sale of rights to service
mortgage loans.
Segment information for the year ended February 28, 1995 follows:
<TABLE>
<CAPTION>
ADJUSTMENTS
MORTGAGE AND
BANKING OTHER ELIMINATIONS CONSOLIDATED
---------- ---------- ------------ ------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Unaffiliated revenue........... $ 563,586 $ 39,077 $ -- $ 602,663
Intersegment revenue........... 744 -- (744) --
---------- ---------- --------- ----------
Total revenue................ $ 564,330 $ 39,077 $ (744) $ 602,663
========== ========== ========= ==========
Earnings before income taxes... $ 136,220 $ 11,125 $ -- $ 147,345
========== ========== ========= ==========
Identifiable assets as of Feb-
ruary 28, 1995................ $5,520,283 $1,014,391 $(955,012) $5,579,662
========== ========== ========= ==========
</TABLE>
F-23
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE L--SEGMENT INFORMATION (CONTINUED)
Segment information for the year ended February 28, 1994 follows:
<TABLE>
<CAPTION>
ADJUSTMENTS
MORTGAGE AND
BANKING OTHER ELIMINATIONS CONSOLIDATED
---------- -------- ------------ ------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Unaffiliated revenue.......... $ 719,533 $ 36,047 $ -- $ 755,580
Intersegment revenue.......... 744 -- (744) --
---------- -------- --------- ----------
Total revenue............... $ 720,277 $ 36,047 $ (744) $ 755,580
========== ======== ========= ==========
Earnings before income taxes.. $ 286,069 $ 13,031 $ -- $ 299,100
========== ======== ========= ==========
Identifiable assets as of Feb-
ruary 28, 1994............... $5,523,664 $930,720 $(868,863) $5,585,521
========== ======== ========= ==========
</TABLE>
Segment information for the year ended February 28, 1993 follows.
<TABLE>
<CAPTION>
ADJUSTMENTS
MORTGAGE AND
BANKING OTHER ELIMINATIONS CONSOLIDATED
---------- -------- ------------ ------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Unaffiliated revenue.......... $ 463,394 $ 42,164 $ -- $ 505,558
Intersegment revenue.......... 3,021 -- (3,021) --
---------- -------- --------- ----------
Total revenue............... $ 466,415 $ 42,164 $ (3,021) $ 505,558
========== ======== ========= ==========
Earnings before income taxes.. $ 217,073 $ 16,382 $ -- $ 233,455
========== ======== ========= ==========
Identifiable assets as of Feb-
ruary 28, 1993............... $3,229,243 $765,954 $(696,064) $3,299,133
========== ======== ========= ==========
</TABLE>
NOTE M--BRANCH AND ADMINISTRATIVE OFFICE CONSOLIDATION COSTS
As a result of the decline in production caused by increasing mortgage
interest rates during Fiscal 1995, the Company reduced headcount by
approximately 30%, closed underperforming branch offices and consolidated its
administrative offices. A charge of $8 million related to these consolidation
efforts was recorded during the year ended February 28, 1995.
Branch and administrative office consolidation costs incurred during Fiscal
1995 and related reserves at February 28, 1995 are presented below:
<TABLE>
<CAPTION>
RESERVED AT
EXPENSE INCURRED FEBRUARY 28, 1995
---------------- -----------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C>
Office lease costs....................... $4,348 $ 743
Equipment and improvement relocation,
disposal and abandonment costs.......... 1,976 474
Other.................................... 1,676 1,146
------ ------
$8,000 $2,363
====== ======
</TABLE>
NOTE N--SUBSEQUENT EVENTS
On March 20, 1995, the Company declared a cash dividend of $0.08 per common
share paid April 17, 1995 to shareholders of record on April 3, 1995.
F-24
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE O--QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly data is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------
MAY 31 AUGUST 31 NOVEMBER 30 FEBRUARY 28
------------- ------------- -------------- --------------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Year ended February 28,
1995
Revenue............... $ 177,118 $ 151,106 $ 133,726 $ 140,713
Expenses.............. 120,903 119,257 106,795 108,363
Provision for income
taxes................ 22,486 12,739 10,773 12,940
Net earnings.......... 33,729 19,110 16,158 19,410
Earnings per share(1)
Primary............. $ 0.37 $ 0.21 $ 0.18 $ 0.21
Fully diluted....... $ 0.37 $ 0.21 $ 0.18 $ 0.21
Year ended February 28,
1994
Revenue............... $ 166,665 $ 188,272 $ 196,446 $ 204,197
Expenses.............. 94,503 111,507 124,844 125,626
Provision for income
taxes................ 28,865 30,706 28,641 31,428
Net earnings.......... 43,297 46,059 42,961 47,143
Earnings per share(1)
Primary............. $ 0.49 $ 0.51 $ 0.46 $ 0.51
Fully diluted....... $ 0.47 $ 0.50 $ 0.46 $ 0.51
</TABLE>
- --------
(1) Earnings per share is computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share amounts
may not equal the annual amount. This is caused by rounding and the
averaging effect of the number of share equivalents utilized throughout the
year, which changes with the market price of the common stock.
NOTE P--SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY
Summarized financial information for Countrywide Funding Corporation is as
follows:
<TABLE>
<CAPTION>
FEBRUARY 28,
-----------------------------
1995 1994
-------------- --------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C>
Balance Sheets:
Mortgage loans shipped and held for sale..... $ 2,898,825 $ 3,714,261
Other assets................................. 2,621,458 1,809,403
-------------- --------------
Total assets............................... $ 5,520,283 $ 5,523,664
============== ==============
Short- and long-term debt.................... $ 4,152,712 $ 4,296,291
Other liabilities............................ 433,025 374,559
Equity....................................... 934,546 852,814
-------------- --------------
Total liabilities and equity............... $ 5,520,283 $ 5,523,664
============== ==============
Statements of Earnings:
Revenues..................................... $ 564,330 $ 720,277
Expenses..................................... 428,110 434,208
Provision for income taxes................... 54,488 114,427
-------------- --------------
Net earnings............................... $ 81,732 $ 171,642
============== ==============
</TABLE>
F-25
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL, OR
A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY JURISDICTION WHERE,
OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY
SALE MADE HEREUNDER AND THEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PROSPECTUS SUPPLEMENT
<S> <C>
Summary Information....................................................... S-3
Recent Developments....................................................... S-4
Use of Proceeds........................................................... S-5
Dividends and Price Range of
Common Stock............................................................. S-5
Capitalization............................................................ S-6
The Company............................................................... S-7
Underwriting.............................................................. S-16
Validity of Securities.................................................... S-17
PROSPECTUS
Available Information..................................................... 2
Incorporation of Certain Documents
by Reference............................................................. 2
The Company and CFC....................................................... 3
Use of Proceeds........................................................... 4
Selected Consolidated Financial Data...................................... 5
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 6
Description of Capital Stock.............................................. 18
Description of Debt Securities and
Guarantees............................................................... 20
Plan of Distribution...................................................... 27
Validity of Securities.................................................... 28
Experts................................................................... 28
Index to Financial Statements............................................. F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10,000,000 SHARES
LOGO COUNTRYWIDE (SM)
----------------------
CREDIT INDUSTRIES, INC.
COMMON STOCK
----------------
PROSPECTUS SUPPLEMENT
----------------
MERRILL LYNCH & CO.
GOLDMAN, SACHS & CO.
LEHMAN BROTHERS
SALOMON BROTHERS INC
ALEX. BROWN & SONS
INCORPORATED
DEAN WITTER REYNOLDS INC.
JUNE 26, 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
