UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended February 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 NO FEE REQUIRED
For the transition period from to
Commission file number: 1-8422
COUNTRYWIDE CREDIT INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13 - 2641992
(State of other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
155 N. Lake Avenue, Pasadena, California 91101-1857
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 304-8400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $.05 Par Value New York Stock Exchange
Pacific Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------------- ------------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
As of May 5, 1997, there were 106,383,483 shares of Countrywide Credit
Industries, Inc. Common Stock, $.05 par value, outstanding. Based on the closing
price for shares of Common Stock on that date, the aggregate market value of
Common Stock held by non-affiliates of the registrant was approximately
$2,935,411,000. For the purposes of the foregoing calculation only, all
directors and executive officers of the registrant have been deemed affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 1997 Annual Meeting
<PAGE>
PART I
ITEM 1. BUSINESS
A. General
Countrywide Credit Industries, Inc. (the "Company" or "CCI") is a
holding company which, through its principal subsidiary, Countrywide Home Loans,
Inc. ("CHL"), 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 prime credit quality first-lien mortgage loans secured by
single- (one-to-four) family residences ("Prime mortgages"). The Company also
offers home equity loans both in conjunction with newly produced Prime mortgages
and as a separate product. In addition, the Company offers sub-prime credit
quality first-lien single-family mortgage loans ("Sub-prime loans").
The Company, through its other wholly-owned subsidiaries, offers products and
services complementary to its mortgage banking business. One of these
subsidiaries acts as an agent in the sale of insurance, including homeowners,
fire, flood, earthquake, auto, annuities, home warranty, life and disability, to
CHL's mortgagors and others. The Company also has a subsidiary that acts as a
title insurance agent and provides escrow, credit reporting and home appraisal
services. The Company also has subsidiaries that reinsure a portion of mortgage
insurance losses on loans originated by the Company that are insured by the
mortgage insurance companies with which the Company entered into the reinsurance
agreement. Another subsidiary of the Company serves as trustee under deeds of
trust in connection with foreclosures on loans in the Company's servicing
portfolio in California and other states. There is a subsidiary of the Company
which also provides tax services to ensure that property taxes are paid current
at origination and throughout the life of the loan. On February 28, 1997, the
Company acquired a mutual fund manager which provides investment advisory
services for 15 affiliated mutual funds and individual investors and management
services for unaffiliated funds. The Company also has a registered broker-dealer
which trades to other broker-dealers and institutional investors mortgage-backed
securities ("MBS") and other mortgage-related assets. Through two subsidiaries,
the Company issues mortgage- and asset-backed securities which are backed by
Prime mortgage loans, Sub-prime loans or home equity loans. In addition,
Countrywide Asset Management Corp. ("CAMC") a wholly owned subsidiary of CCI,
receives fee income for managing the operations of CWM Mortgage Holdings, Inc.
("CWM"), a publicly-traded real estate investment trust. On January 29, 1997,
CCI and CWM entered into an agreement pursuant to which CWM will acquire the
operations and employees of CAMC, and as a result, CWM will cease paying the
management fee. The proposed transaction is structured as a merger of CAMC with
and into CWM with CCI to receive approximately 3.6 million newly issued common
shares of CWM. Based on the closing sales price of CWM common stock on the New
York Stock Exchange on May 5, 1997, the market value of CWM common stock to be
received in the proposed transaction is approximately $72 million. The closing
of the transaction is contingent on, among other things, the receipt of required
regulatory and shareholder approvals. There can be no assurance that the
proposed transaction will be consummated. Unless the context otherwise requires,
references to the "Company" herein shall be deemed to refer to the Company and
its consolidated subsidiaries.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. This Annual Report on Form 10-K
may contain forward-looking statements which reflect the Company's current views
with respect to future events and financial performance. These forward-looking
statements are subject to certain risks and uncertainties, including those
identified below, which could cause future results to differ materially from
historical results or those anticipated. The words "believe," "expect,"
"anticipate," "intend," "estimate" and other expressions which indicate future
events and trends identify forward-looking statements. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only as
of their dates. The Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise. The following factors could cause future results to
differ materially from historical results or those anticipated: (1) 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
demographics of the Company's lending markets; (2) the direction of interest
rates; (3) the relationship between mortgage interest rates and the cost of
funds; (4) federal and state regulation of the Company's mortgage banking
operations and (5) competition within the mortgage banking industry.
B. Mortgage Banking Operations
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 originates and purchases conventional mortgage loans,
mortgage loans insured by the Federal Housing Administration ("FHA"), mortgage
loans partially guaranteed by the Veterans Administration ("VA"), home equity
loans and Sub-prime 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
$214,600 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.
The following table sets forth the number and dollar amount of the
Company's Prime mortgage, home equity and Sub-prime loan production for the
periods indicated.
<TABLE>
<CAPTION>
----------------------------- --- -------------------------------------------------------------------------------
Summary of the Company's Prime Mortgage,
(Dollar amounts in millions, Home Equity and Sub-prime Loan Production
except average loan amount) Year Ended February 28(29),
----------------------------- --- -------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------------------- ---- ------------- -- ------------- --- ----------- -- ------------ -- ------------
Conventional Loans
<S> <C> <C> <C> <C> <C>
Number of Loans 190,250 191,534 175,823 315,699 192,385
Volume of Loans $22,676.2 $21,883.4 $20,958.7 $46,473.4 $28,669.9
Percent of Total Volume 60.0% 63.3% 75.2% 88.6% 88.5%
FHA/VA Loans
Number of Loans 143,587 125,127 72,365 67,154 42,022
Volume of Loans $13,657.1 $12,259.3 $6,808.3 $5,985.5 $3,717.9
Percent of Total Volume 36.1% 35.5% 24.4% 11.4% 11.5%
Home Equity Loans
Number of Loans 20,053 7,986 2,147 - -
Volume of Loans $613.2 $220.8 $99.2 - -
Percent of Total Volume 1.6% 0.6% 0.4% - -
Sub-prime Loans
Number of Loans 9,161 1,941 - - -
Volume of Loans $864.3 $220.2 - - -
Percent of Total Volume 2.3% 0.6% - - -
Total Loans
Number of Loans 363,051 326,588 250,335 382,853 234,407
Volume of Loans $37,810.8 $34,583.7 $27,866.2 $52,458.9 $32,387.8
Average Loan Amount $104,000 $106,000 $111,000 $137,000 $138,000
----------------------------- ---- ------------- -- ------------- --- ----------- -- ------------ -- ------------
</TABLE>
The increase in the dollar amount and the decrease in the number of
conventional loans in the year ended February 28, 1997 ("Fiscal 1997") as
compared to the year ended February 29, 1996 ("Fiscal 1996") was attributable
primarily to the expansion of the Company's jumbo loan production activities,
and an improvement in the relative attractiveness of FHA loan products as an
alternate to conventional loans for providing homeownership to low-and
moderate-income borrowers. The increase in the number and dollar amount of FHA
and VA loans produced in the year ended February 28, 1997 from those produced in
the years ended February 29(28), 1996 and 1995 was attributable to their
relative attractiveness discussed in the previous sentence and the Company's
effort to expand its share of that market due to the popularity of FHA and VA
loans among borrowers and the returns
<PAGE>
earned on those products by the Company. Production of the Company's home equity
and Sub-prime products also increased from the year ended February 29, 1996.
This increase was attributable primarily to the Company's efforts to grow its
production of these products due to the high returns they generate and growth
opportunities that exist in the market.
For the years ended February 28(29), 1997, 1996 and 1995, jumbo loans
represented 12%, 6% and 17%, respectively, of the Company's total volume of
mortgage loans produced. The increase in the percentage of jumbo loans was
primarily the result of more competitive pricing of the Company's jumbo loan
products from Fiscal 1996 to Fiscal 1997. For the years ended February 28(29),
1997, 1996 and 1995, adjustable-rate mortgage loans ("ARMs") comprised
approximately 26%, 22% and 34%, respectively, of the Company's total volume of
mortgage loans produced. The increase in the Company's percentage of ARM
production from Fiscal 1996 to Fiscal 1997 was primarily caused by the higher
mortgage interest rate environment that prevailed through most of the year ended
February 28, 1997 compared to the year ended February 29, 1996. For the years
ended February 28(29), 1997, 1996 and 1995, refinancing activity represented
33%, 34% and 30%, respectively, of the Company's total volume of mortgage loans
produced. The percentage of refinance loans for each of these years reflects an
interest rate environment conducive to a moderate level of refinance activity.
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 and benefits derived from economies of scale and a
noncommissioned sales force allow it to produce loans at a low cost relative to
its competition.
Consumer Markets Division
The Company's Consumer Markets Division (the "Consumer Markets Division")
originates Prime mortgage, home equity and Sub-prime loans using direct contact
with consumers through its nationwide network of retail branch offices, its
telemarketing systems and its site on the World Wide Web. As of February 28,
1997, the Company had 276 Consumer Markets Division branch offices, two
satellite offices and two processing support centers located in 42 states and
the District of Columbia. The Company's branch offices are each staffed
typically by four employees and connected to the Company's central office by a
computer network. In addition, the Company operates two telemarketing centers
which receive telephone calls placed by potential borrowers primarily in
response to print or broadcast advertising. The loan counselors employed in the
telemarketing centers provide information and accept loan applications, which
are then forwarded to a branch office for processing and funding. Business is
also solicited through other forms of telemarketing and advertising,
participation of branch management in local real estate-related business
functions and extensive use of direct mailings to borrowers, 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
high-quality 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.
<PAGE>
The following table sets forth the number and dollar amount of the
Consumer Markets Division's Prime mortgage, home equity and Sub-prime loan
production for the periods indicated.
<TABLE>
<CAPTION>
----------------------------- -- -------------------------------------------------------------------------------
Summary of the Consumer Markets Division's Prime Mortgage,
(Dollar amounts in millions, Home Equity and Sub-prime Loan Production
except average loan amount) Year Ended February 28(29),
----------------------------- -- ------------- --- ------------ -- ------------ --- ------------ -- ------------
1997 1996 1995 1994 1993
----------------------------- -- ------------- --- ------------ -- ------------ --- ------------ -- ------------
Conventional Loans
<S> <C> <C> <C> <C> <C>
Number of Loans 43,261 47,260 48.772 73,249 39,787
Volume of Loans $5,145.3 $5,271.8 $5,442.2 $9,264.8 $5,026.7
Percent of Total Volume 63.7% 70.7% 77.0% 80.2% 82.4%
FHA/VA Loans
Number of Loans 27,746 22,829 19,060 26,418 11,739
Volume of Loans $2,514.3 $2,025.4 $1,612.1 $2,282.3 $1,073.0
Percent of Total Volume 31.2% 27.1% 22.8% 19.8% 17.6%
Home Equity Loans
Number of Loans 14,028 6,000 297 - -
Volume of Loans $384.7 $160.9 $11.4 - -
Percent of Total Volume 4.8% 2.2% 0.2% - -
Sub-prime Loans
Number of Loans 303 - - - -
Volume of Loans $27.0 - - - -
Percent of Total Volume 0.3% - - - -
Total Loans
Number of Loans 85,338 76,089 68,129 99,667 51,526
Volume of Loans $8,071.3 $7,458.1 $7,065.7 $11,547.1 $6,099.7
Average Loan Amount $95,000 $98,000 $104,000 $116,000 $118,000
----------------------------- -- ------------- --- ------------ -- ------------ --- ------------ -- ------------
</TABLE>
Wholesale Division
In its Wholesale Division (the "Wholesale Division"), the Company
produces Prime mortgage, home equity and Sub-prime loans through mortgage loan
brokers. As of February 28, 1997, the Wholesale Division operated 58 loan
centers and nine regional support centers in various parts of the country. Prime
credit quality 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. Sub-prime loans are underwritten centrally by a
specialized underwriting group and comply with the Company's underwriting
criteria for such loans. In addition, quality control personnel review loans for
compliance with the Company's underwriting criteria. Approximately 10,800
mortgage brokers qualify to participate in the Wholesale Division's loan
delivery 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.
<PAGE>
The following table sets forth the number and dollar amount of the
Wholesale Division's Prime mortgage, home equity and Sub-prime loan production
for the periods indicated.
<TABLE>
<CAPTION>
----------------------------- --- ----------------------------------------------------------------------------
Summary of the Wholesale Division's Prime Mortgage,
(Dollar amounts in millions, Home Equity and Sub-prime Loan Production
except average loan amount) Year Ended February 28(29),
----------------------------- --- ------------ -- ------------- -- ------------ -- ------------ -- -----------
1997 1996 1995 1994 1993
----------------------------- --- ------------ -- ------------- -- ------------ -- ------------ -- -----------
Conventional Loans
<S> <C> <C> <C> <C> <C>
Number of Loans 50,570 59,670 65,713 130,937 92,922
Volume of Loans $6,187.8 $6,766.9 $7,790.0 $21,271.0 $15,480.1
Percent of Total Volume 73.4% 84.0% 91.6% 98.9% 100.0%
FHA/VA Loans
Number of Loans 12,505 10,448 6,239 2,700 15
Volume of Loans $1,190.0 $1,016.2 $626.3 $244.4 $1.5
Percent of Total Volume 14.1% 12.6% 7.4% 1.1% 0.0%
Home Equity Loans
Number of Loans 6,017 1,937 1,836 - -
Volume of Loans $227.7 $57.5 $86.9 - -
Percent of Total Volume 2.7% 0.7% 1.0% - -
Sub-prime Loans
Number of Loans 8,568 1,941 - - -
Volume of Loans $823.9 $220.2 - - -
Percent of Total Volume 9.8% 2.7% - - -
Total Loans
Number of Loans 77,660 73,996 73,788 133,637 92,937
Volume of Loans $8,429.4 $8,060.8 $8,503.2 $21,515.4 $15,481.6
Average Loan Amount $109,000 $109,000 $115,000 $161,000 $167,000
----------------------------- --- ------------ -- ------------- -- ------------ -- ------------ -- -----------
</TABLE>
Correspondent Division
Through its network of correspondent offices (the "Correspondent
Division"), the Company purchases loans 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 1,200 financial
intermediaries serving all 50 states are eligible to participate in this
program. 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. 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 FHA or 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. During the year
ended February 28, 1997, approximately 88% of conventional loans purchased
through the Correspondent Division were accepted without review by a Company
underwriter. In addition, quality control personnel review loans purchased from
correspondents, including those granted delegated underwriting authority, for
compliance with the Company's underwriting criteria. The purchase agreement used
by the Correspondent Division provides the Company with recourse to the
correspondent 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.
<PAGE>
The following table sets forth the number and dollar amount of the
Correspondent Division's Prime mortgages, home equity and Sub-prime loan
production for the periods indicated.
<TABLE>
<CAPTION>
----------------------------- ------------------------------------------------------------------------------- --
Summary of the Correspondent Division's Prime Mortgage,
(Dollar amounts in millions, Home Equity and Sub-prime Loan Production
except average loan amount) Year Ended February 28(29),
----------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- -------------
1997 1996 1995 1994 1993
----------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- -------------
Conventional Loans
<S> <C> <C> <C> <C> <C>
Number of Loans 96,419 84,604 61,338 111,513 59,676
Volume of Loans $11,343.1 $9,844.7 $7,726.5 $15,937.6 $8,163.0
Percent of Total Volume 53.2% 51.7% 62.8% 82.2% 75.5%
FHA/VA Loans
Number of Loans 103,336 91,850 47,066 38,036 30,268
Volume of Loans $9,952.8 $9,217.7 $4,570.0 $3,458.8 $2,643.5
Percent of Total Volume 46.7% 48.3% 37.2% 17.8% 24.5%
Home Equity Loans
Number of Loans 8 49 14 - -
Volume of Loans $0.8 $2.4 $0.8 - -
Percent of Total Volume 0.0% 0.0% 0.0% - -
Sub-prime Loans
Number of Loans 290 - - - -
Volume of Loans $13.4 - - - -
Percent of Total Volume 0.1% - - - -
Total Loans
Number of Loans 200,053 176,503 108,418 149,549 89,944
Volume of Loans $21,310.1 $19,064.8 $12,297.3 $19,396.4 $10,806.5
Average Loan Amount $107,000 $108,000 $113,000 $130,000 $120,000
----------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- -------------
</TABLE>
Fair Lending Programs
In conjunction with fair lending initiatives undertaken by both Fannie
Mae and Freddie Mac and promoted by various government agencies including the
Department of Housing and Urban Development ("HUD"), the Company has established
affordable home loan and fair lending programs for low- and moderate-income and
designated minority borrowers. These programs offer more flexible underwriting
guidelines (consistent with those guidelines adopted by Fannie Mae and Freddie
Mac) than historical industry standards, thereby enabling more people to qualify
for home loans than had qualified under such historical guidelines. Highlights
of these flexible guidelines include a lower down payment requirement, more
liberal guidelines in areas such as credit and employment history, less income
required to qualify and no cash reserve requirements at the date of funding.
House America(R) is the Company's affordable home loan program for low-
and moderate-income borrowers, offering loans that are eligible for purchase by
Fannie Mae and Freddie Mac. During the years ended February 28(29), 1997 and
1996, the Company produced approximately $0.6 billion and $1.3 billion,
respectively, of mortgage loans under this program. The decline in House America
production from the fiscal year ended February 29, 1996 to the year ended
February 28, 1997, was the result of an improvement in the relative
attractiveness of FHA loan products as an alternative means of providing
homeownership to low- and moderate-income borrowers. House America(R) personnel
work with all of the Company's production divisions to help properly implement
the flexible underwriting guidelines. In addition, an integral part of the
program is the House America(R) Counseling Center, a free educational service,
which can provide consumers a homebuyers educational program, pre-qualify them
for a loan or provide a customized budget plan to help consumers obtain their
goal of home ownership. To assist a broad spectrum of consumers, counselors are
bilingual and work with consumers for up to one year, providing guidance on a
regular basis via phone and mail. The Company also organizes and participates in
local homebuyer fairs across the country. At these fairs, branch personnel and
Counseling Center counselors discuss various loan programs, provide free
prequalfications and distribute credit counseling and homebuyer education videos
and workbooks.
The Company's affordable housing outreach also includes participation in
over 80 local mortgage revenue bond programs for first-time home buyers. Federal
law allows local government agencies to sell tax exempt bonds to purchase
mortgages securing loans made to first-time, lower-income home buyers. These
programs thereby provide for mortgages with fixed interest rates that are lower
than then-current market rates.
In addition, a selection of applications from certain designated
minority and other borrowers that are initially recommended for denial within
the Company's Consumer Markets Division is forwarded for an additional review by
a manager of the Company to insure that denial is appropriate. The application
of more flexible underwriting guidelines may carry a risk of increased
delinquencies. However, because the loans in the portfolio are generally
serviced on a non-recourse basis, the Company's exposure to credit loss
resulting from increased delinquency rates is substantially limited. Further,
related late charge income has historically been sufficient to offset
incremental servicing expenses resulting from an increased delinquency rate.
Loan Underwriting
The Company's guidelines for underwriting FHA-insured loans and
VA-guaranteed loans comply with the criteria established by such agencies. The
Company's guidelines for underwriting conventional conforming loans comply with
the underwriting criteria employed by Fannie Mae and/or Freddie Mac. The
Company's underwriting guidelines and property standards for conventional
non-conforming loans are based on the underwriting standards employed by private
investors for such loans. In addition, conventional loans originated or
purchased by the Company with a loan-to-value ratio greater than 80% at
origination are covered by private mortgage insurance (which may be paid by the
borrower or by the lender).
In conjunction with fair lending initiatives undertaken by both Fannie Mae
and Freddie Mac, the Company has established affordable home loan programs for
low- and moderate-income and designated minority borrowers offering more
flexible underwriting guidelines than historical industry standards. See
"Business--Mortgage Banking Operations--Fair Lending Programs."
The following describes the general underwriting criteria taken into
consideration by the Company in determining whether to approve a Prime mortgage
loan application.
Employment and Income
Applicants must exhibit the ability to generate income on a regular
basis in order to meet the housing payments relating to the loan as well as any
other debts they may have. Evidence of employment and income is obtained through
a written verification of employment with the current and prior employers or by
obtaining a recent pay stub and W-2 forms. Self-employed applicants are required
to provide tax returns, financial statements or other documentation to verify
income. Sources of income to be considered include salary, bonus, overtime,
commissions, retirement benefits, notes receivable, interest, dividends,
unemployment benefits and rental income.
Debt-to-Income Ratios
Generally, an applicant's monthly income should be three times the
amount of monthly housing expenses (loan payment, real estate taxes, hazard
insurance and homeowner association dues, if applicable). Monthly income should
generally be two and one-half times the amount of total fixed monthly
obligations (housing expense plus other obligations such as car loans or credit
card payments). Other areas of financial strength, such as equity in the
property, large cash reserves or a history of meeting prior home mortgage or
rental obligations are considered to be compensating factors and may result in
an adjustment of these ratio limitations.
Credit History
An applicant's credit history is examined for both favorable and
unfavorable occurrences. An applicant who has made payments on outstanding or
previous credit obligations according to the contractual terms may be considered
favorable. Unfavorable items such as slow payment records, suits, judgments,
bankruptcy, liens, foreclosure or garnishments are discussed with the applicant
in order to determine the reasons for the unfavorable rating. In some instances,
the applicant may explain the reasons for these ratings to indicate that there
were
<PAGE>
extenuating circumstances beyond the applicant's control which would mitigate
the effect of such unfavorable items on the credit decision. Credit scoring is
used in some cases to supplement evaluation of an applicant's credit history.
Property
The property's market value and physical condition as compared to the
value of similar properties in the area is assessed to ensure that the property
provides adequate collateral for the loan. Generally, properties are appraised
by licensed real estate appraisers where a purchase, rate-and-term refinance or
cash-out refinance is involved.
Funds for Closing
Generally, applicants are required to have sufficient funds of their
own to make a minimum five percent down payment. Funds for closing costs may
come from the applicant or may be a gift from a family member. Certain loan
programs require the applicant to have sufficient funds for a down payment of
only three percent and the remaining funds provided by a gift or an unsecured
loan from a municipality or a non-profit organization. Certain programs require
the applicant to have cash reserves after closing.
Maximum Indebtedness to Appraised Value
Generally, the maximum amount the Company will loan is 95% of the
appraised value of the property. For certain types of loans, this percentage may
be increased. Loan amounts in excess of 80% of the appraised value require
mortgage insurance to protect against foreclosure loss. After funding and sale
of the mortgage loans, the Company's exposure to credit loss in the event of
non-performance by the mortgagor is limited as described in the section
"Business--Mortgage Banking Operations--Sale of Loans."
Geographic Distribution
The following table sets forth the geographic distribution of the
Company's mortgage, home equity and Sub-prime loan production for the year ended
February 28, 1997.
<TABLE>
<CAPTION>
--- --------------------------------------------------------------------------------------------- ---
Geographic Distribution of the Company's
Prime Mortgage, Home Equity and Sub-prime Loan Production
--- ----------------------------- -- ------------------ -- ----------------- -- ----------------- ---
Percentage of
Number Principal Total Dollar
(Dollar amounts in of Loans Amount Amount
millions)
--- ----------------------------- -- ------------------ -- ----------------- -- ----------------- ---
<S> <C> <C> <C>
California 74,547 $9,378,990 24.8%
Florida 21,947 1,789,521 4.7%
Texas 19,627 1,725,552 4.6%
Michigan 16,291 1,633,920 4.3%
Illinois 13,530 1,478,097 3.9%
Colorado 12,693 1,427,256 3.8%
Ohio 16,624 1,407,647 3.7%
Washington 11,737 1,267,116 3.4%
Arizona 12,519 1,177,569 3.1%
Georgia 12,115 1,138,153 3.0%
Maryland 9,642 1,119,214 3.0%
New York 9,248 1,071,971 2.8%
Virginia 9,342 1,013,037 2.7%
Massachusetts 7,475 966,530 2.6%
Utah 8,994 918,843 2.4%
Nevada 7,864 854,458 2.3%
New Jersey 7,083 799,657 2.1%
Others (1) 91,773 8,643,230 22.8%
------------------ ----------------- -----------------
363,051 $37,810,761 100.0%
================== ================= =================
--- ----------------------------- -- ------------------ -- ----------------- -- ----------------- ---
(1) No other state constitutes more than 2.0% of the total dollar amount of loan production.
</TABLE>
<PAGE>
California mortgage loan production as a percentage of total mortgage loan
production (measured by principal balance) for the fiscal years ended February
28(29), 1997, 1996 and 1995 was 25%, 31% and 31%, respectively. Loan production
within California is geographically dispersed, which minimizes dependence on any
individual local economy. The decline in the percentage of the Company's
mortgage loan production in California during the period ended February 28, 1997
is the result of implementing the Company's strategy to expand production
capacity and market share outside of California. At February 28, 1997, 81% of
the Consumer Markets Division branch offices and the Wholesale Division loan
centers were located outside of California.
The following table sets forth the distribution by county of the
Company's California loan production for the year ended February 28, 1997.
<TABLE>
<CAPTION>
--- ---------------------------------------------------------------------------------------------- --
Distribution by County of the Company's California
Loan Production
--- ----------------------------- -- ------------------ -- ----------------- -- ------------------ --
Percentage of
Number Principal Total Dollar
(Dollar amounts in of Loans Amount Amount
millions)
--- ----------------------------- -- ------------------ -- ----------------- -- ------------------ --
<S> <C> <C> <C>
Los Angeles 19,163 $2,562.4 27.3%
San Diego 5,030 595.1 6.3%
Placer 3,917 561.1 6.0%
Sacramento 4,486 487.7 5.2%
Orange 3,372 476.1 5.1%
Others (1) 38,579 4,696.6 50.1%
------------------ ----------------- ------------------
74,547 $9,379.0 100.0%
================== ================= ==================
--- ----------------------------- -- ------------------ -- ----------------- -- ------------------ --
(1) No other county in California constitutes more than 5.0% of the total dollar amount of California loan production.
</TABLE>
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 MBS guaranteed by the Government
National Mortgage Association ("Ginnie Mae") to national or regional
broker-dealers. With respect to loans securitized through Ginnie Mae 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 of $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. To guarantee timely and full payment of principal and interest on
MBS and whole loans sold to permanent investors and to transfer the credit risk
of the loans in the servicing portfolio, the Company pays guarantee fees to
Fannie Mae, Freddie Mac and Ginnie Mae.
Alternatively, the Company may sell FHA-insured and VA-guaranteed mortgage
loans and conforming conventional loans, home equity and Sub-prime 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 generally have the benefit of some form of external
credit enhancement, such as insurance, letters of credit, payment guarantees or
senior/subordinated structures. Substantially all Prime mortgage 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(29), 1997, 1996 and 1995, the aggregate loss experience of the Company on VA
loans in excess of the VA guaranty was approximately $9.3 million, $3.8 million
and $2.6 million, respectively. In the opinion of management, the losses on VA
loans increased from the year ended February 29, 1996 to the year ended February
28, 1997 primarily due to the aging of the VA loan servicing portfolio and
declines in values of properties securing VA loans, particularly in California.
<PAGE>
The Company retains credit risk on the home equity and Sub-prime loans it
sells in the form of pools backing securities. As such, through retention of a
subordinated interest in the trust, the Company bears primary responsibility for
credit losses on the loans. At February 28, 1997, the Company had investments in
such subordinated interests amounting to $106 million, which represents the
maximum exposure to credit losses on the securitized home equity and Sub-prime
loans. While the Company does not retain credit risk with respect to the Prime
mortgage loans it sells, it does have potential liability under representations
and warranties made to purchasers and insurers of the loans. In the event of a
breach of the representations and warranties, the Company may be required to
repurchase a mortgage loan and any subsequent loss on the mortgage loan may be
borne by the Company.
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(29),
1997, 1996 and 1995, CWM purchased $51.5 million, $14.3 million and $80.4
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 inventory being hedged and the
hedge instruments is very high due to the similarity of the asset and the
related hedge instrument. The Company is exposed to the risk that the portion of
loans from the Committed Pipeline that actually closes at the committed price is
less than or more than the amount estimated to close in the event of a decline
or rise in rates during the commitment period. The amount of loans estimated to
close from the Committed Pipeline is influenced by many factors, including the
composition of the Company's Committed Pipeline, the historical portion of the
Committed Pipeline that has closed given changes in interest rates and the
timing of such closings. See Note G to the Company's Consolidated Financial
Statements.
Loan Servicing
The Company services on a non-recourse basis substantially all of the
mortgage loans that it originates or purchases pursuant to servicing agreements
with investors in the loans. 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 16% of the Company's mortgage servicing portfolio
as of February 28, 1997. Servicing mortgage loans includes collecting and
remitting loan payments, answering customers' questions, 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, counseling 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.
Generally, it is the Company's strategy to build and retain its servicing
portfolio. Loans are serviced from two facilities located in Simi Valley,
California and Plano, Texas (see "Properties"). The Company has developed
systems that enable it to service mortgage loans efficiently and therefore
enhance earnings from its investments in servicing rights. Some of these systems
are highlighted in the following paragraphs.
All data elements pertaining to each individual loan are entered into the
applicable automated loan system at the point of origination or acquisition.
These data elements are captured and automatically transferred to the loan
servicing system without manual intervention.
Customer service representatives in both servicing 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's telephone system controls the flow of calls to
each servicing site and has a "Smart Call Routing" filter. This filter is
designed to match the originating phone number to phone numbers in the Company's
data base. Having identified the customer, the Company can communicate topical
loan information electronically without requiring the caller to enter
information. The caller can get more detailed information through an Interactive
Voice Response application or can speak with a customer service representative.
Countrywide also features an Internet site for existing customers wherein the
customer can obtain current account status, history, answers to frequently asked
questions and a dictionary to help the customer understand industry terminology.
The collection department utilizes its collection management system in
conjunction with its predictive dialing system to maximize and track each
individual collector's performance as well as to track the success of each
collection campaign.
The Company tracks its foreclosure activity through its default processing
system ("DPS"). DPS is a client server based application which allows each
foreclosure to be assigned to a state/investor specific workflow template. The
foreclosure processor is automatically guided through each function required to
successfully complete a foreclosure in any state and for any investor.
The company's high speed payment processing equipment enables the Company to
deposit virtually all cash on the same day as it is received, thereby minimizing
float.
The insurance department, in conjunction with one of the Company's business
partners, has developed a client server based application that generally
eliminates paper billings and automates decision making.
The Company believes that the financial results of its servicing
portfolio hedging activities largely offset the effect of interest rate
fluctuations on the earnings from its loan servicing activities. The Company
also believes that its loan production earnings are countercyclical to its loan
servicing earnings. 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, the rate of current and projected future prepayments decreases,
resulting in a decreased rate of amortization and impairment of mortgage
servicing rights, and a decrease in gain from servicing portfolio hedging
activities. Amortization and impairment, net of servicing hedge gain, is
deducted from loan administration revenue. An increase in interest rates also
generally causes loan production (particularly refinancings) to decline.
Generally, in an environment of declining interest rates, the rate of current
and projected future prepayments increases, resulting in an increased rate of
amortization and impairment of mortgage servicing rights. However, the Company's
servicing portfolio hedging activities generally generate a gain during periods
of declining interest rates. At the same time, the decline in interest rates
generally contributes to high levels of loan production (particularly
refinancings).
<PAGE>
The following table sets forth certain information regarding the
Company's servicing portfolio of single-family mortgage loans, including loans
and securities held for sale and loans subserviced for others, for the periods
indicated.
<TABLE>
<CAPTION>
---------------------------------- -- -------------------------------------------------------------------------
(Dollar amounts in millions) Year Ended February 28(29),
---------------------------------- -- -------------------------------------------------------------------------
Composition of Servicing 1997 1996 1995 1994 1993
Portfolio
----------- -- ------------ -- ----------- -- ----------- -- ------------
at Period End:
<S> <C> <C> <C> <C> <C>
FHA-Insured Mortgage Loans $ 30,686.3 $ 23,206.5 $ 17,587.5 $ 9,793.7 $ 8,233.8
VA-Guaranteed Mortgage Loans 13,446.4 10,686.2 7,454.3 3,916.0 3,307.2
Conventional Mortgage Loans 112,685.4 102,417.0 87,998.2 70,915.2 42,876.8
Home Equity Loans 689.9 204.5 31.3 - -
Sub-prime Loans 1,048.9 289.1 - - -
----------- ------------ ----------- ----------- ------------
Total Servicing Portfolio $158,556.9 $136,803.3 $113,071.3 $84,624.9 $54,417.8
=========== ============ =========== =========== ===========
Beginning Servicing Portfolio $136,803.3 $113,071.3 $ 84,624.9 $54,417.8 $27,543.0
Add: Loan Production 37,810.8 34,583.7 27,866.2 52,458.9 32,387.8
Bulk Servicing and
Subservicing 2,808.1 6,428.5 17,888.1 3,514.9 3,083.9
Acquired
Less: Servicing Transferred (1) (70.8) (53.5) (6,287.4) (8.1) (12.6)
Runoff (2) (18,794.5) (17,226.7) (11,020.5) (25,758.6) (8,584.3)
=========== ============ =========== =========== ===========
Ending Servicing Portfolio $158,556.9 $136,803.3 $113,071.3 $84,624.9 $54,417.8
=========== ============ =========== =========== ===========
Delinquent Mortgage Loans and Pending
Foreclosures at Period End (3):
30 days 2.26% 2.13% 1.80% 1.82% 2.05%
60 days 0.52 0.48 0.29 0.28 0.40
90 days or more 0.66 0.59 0.42 0.39 0.58
----------- ----------- ------------ ----------- ------------
Total Delinquencies 3.44% 3.20% 2.51% 2.49% 3.03%
=========== =========== ============ =========== ===========
Foreclosures Pending 0.71% 0.49% 0.29% 0.29% 0.36%
----------- ----------- ------------ ----------- ------------
---------------------------------- -- ----------- -- ----------- -- ------------ -- ----------- -- ------------
(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 excluding
subserviced loans.
</TABLE>
At February 28, 1997, the Company's servicing portfolio of
single-family mortgage loans was stratified by interest rate as follows.
<TABLE>
<CAPTION>
-- -------------------------- -- --------------------------------------------------------------------------------
(Dollar amounts in Total Portfolio at February 28, 1997
millions)
-- -------------------------- -- --------------- -- -------------- -- --------------------- -- --------------- --
Mortgage
Weighted Servicing
Interest Principal Percent Average Rights
Rate Balance of Total Maturity (Years) Balance
-- -------------------------- -- --------------- -- -------------- -- --------------------- -- --------------- --
<S> <C> <C> <C> <C> <C>
7% and under $ 31,286.3 19.7% 23.8 $ 659.2
7.01-8% 74,886.5 47.3% 25.8 1,516.1
8.01-9% 43,501.0 27.4% 27.0 726.0
9.01-10% 7,430.3 4.7% 26.3 105.0
over 10% 1,452.8 0.9% 24.5 17.5
=============== ============== ===================== ===============
$158,556.9 100.0% 25.7 $3,023.8
=============== ============== ===================== ===============
-- -------------------------- -- --------------- -- -------------- -- --------------------- -- --------------- --
</TABLE>
The weighted average interest rate of the single-family mortgage loans
in the Company's servicing portfolio at both February 28(29), 1997 and 1996, was
7.8%. At February 28, 1997, 81% of the loans in the servicing portfolio bore
interest at fixed rates and 19% bore interest at adjustable rates. The weighted
average net service fee of the loans in the portfolio was 0.402% at February 28,
1997 and the weighted average interest rate of the fixed-rate loans in the
servicing portfolio was 7.8%.
The following table sets forth the geographic distribution of the
Company's servicing portfolio of single-family mortgage loans, including loans
and securities held for sale and loans subserviced for others, as of February
28, 1997.
<TABLE>
<CAPTION>
--------------------------------------------------------- -- ----------------------------- --------------------
Percentage of Principal
Balance Serviced
--------------------------------------------------------- -- ----------------------------- --------------------
<S> <C> <C>
California 37.3%
Florida 4.6%
Texas 4.3%
Washington 3.4%
New York 3.1%
Illinois 3.0%
Colorado 2.9%
Arizona 2.7%
Virginia 2.6%
Massachusetts 2.5%
New Jersey 2.5%
Ohio 2.5%
Maryland 2.5%
Georgia 2.3%
Michigan 2.0%
Other (1) 21.9%
==============
100.0%
==============
--------------------------------------------------------- ---------- -------------- ---------------------------
(1) No other state contains more than 2.0% of the properties securing loans in the Company's servicing portfolio.
</TABLE>
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 utilizes commercial paper supported by CHL's revolving
credit facility, medium-term notes, MBS repurchase agreements, subordinated
notes, pre-sale funding facilities, an optional cash purchase feature in the
dividend reinvestment plan, redeemable capital trust pass-through securities and
cash flow from operations. The Company estimates that it had available committed
and uncommitted credit facilities aggregating approximately $7.1 billion at
February 28, 1997. In the past the Company has utilized whole loan repurchase
agreements, servicing-secured bank facilities, private placements of unsecured
notes and other financings, direct borrowings from CHL's revolving credit
facility and public offerings of common and preferred stock. For further
information on the material terms of the borrowings utilized by the Company to
finance its inventory of mortgage loans and MBS and its investment in servicing
rights, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources." 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.
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. In addition, delinquency rates typically rise in the winter months,
which results in higher servicing costs. However, late charge income has
historically been sufficient to offset such incremental expenses.
<PAGE>
C. 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. This relationship is in the process of
being restructured, as described in the following paragraph. 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%. As of December 31, 1996, 1995 and 1994,
the consolidated total assets of CWM were $3.4 billion, $2.6 billion and $2.0
billion, respectively. During the fiscal years ended February 28(29), 1997, 1996
and 1995, CAMC earned $1.6 million, $2.0 million and $0.3 million, respectively,
in base management fees from CWM and its subsidiaries. In addition, during the
fiscal years ended February 28(29), 1997, 1996 and 1995, CAMC recorded $8.6
million, $6.6 million and $1.1 million, respectively, in incentive compensation.
At February 28, 1997, the Company owned 1,120,000 shares, or approximately 2.2%,
of the common stock of CWM.
On January 29, 1997, CCI and CWM entered into an agreement pursuant to which
CWM will acquire the operations and employees of CAMC, and as a result, CWM will
cease paying the management fee. The proposed transaction is structured as a
merger of CAMC with and into CWM with CCI to receive approximately 3.6 million
newly issued common shares of CWM. Based on the closing sales price of CWM
common stock on the New York Stock Exchange on May 5, 1997, the market value of
CWM common stock to be received in the proposed transaction is approximately $72
million. The closing of the transaction is contingent on, among other things,
the receipt of required regulatory approvals. There can be no assurance that the
proposed transaction will be consummated. See Note K to the Company's
Consolidated Financial Statements.
D. Other Operations
Through various other subsidiaries, the Company conducts business in a
number of areas related to the mortgage banking business. The activities of
these subsidiaries are described in the following paragraphs:
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 trades MBS
and other mortgage-related assets with broker-dealers and institutional
investors.
The Company's insurance agency subsidiary, Countrywide Agency, Inc.,
acts as an agent for the sale of insurance, including homeowners, fire, flood,
earthquake, auto, annuities, home warranty, life and disability, to CHL's
mortgagors and others.
Another subsidiary of the Company, CTC Foreclosure Services
Corporation, serves as trustee under deeds of trust in connection with
foreclosures on loans in the Company's servicing portfolio 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 title insurance agent and
a provider of escrow services, appraisal and credit reporting services. The
Company offers title insurance commitments and policies, settlement services and
property profiles to realtors, builders, consumers, mortgage brokers and other
financial institutions. Appraisal services are provided to consumers, mortgage
brokers and other financial institutions through a network of appraisers. Credit
reporting services are also provided to the Company and its subsidiaries.
Countrywide General Agency of Texas, Inc., manages the day-to-day
operations of an agency for the sale of homeowners, life and automobile
insurance to CHL customers in the State of Texas.
Two of the Company's subsidiaries, Charter Reinsurance Corporation
("CRC") and Second Charter Reinsurance Corporation ("SCRC"), partially reinsure
loans originated by the Company that are insured by the mortgage insurance
companies with which CRC and SCRC have entered into a reinsurance agreement. CRC
and SCRC share in the premiums collected and losses incurred by the mortgage
insurance company.
Countrywide Financial Services, Inc. ("CFSI") (formerly Leshner
Financial, Inc.), operates as a service provider for unaffiliated mutual funds,
broker-dealer, investment advisor and fund manager. CFSI currently has
approximately $1 billion in funds under management and services accounts
aggregating over $9 billion for other fund management companies.
Countrywide Tax Services Corporation ("CTSC") provides tax services for
CHL mortgagors. CTSC monitors the payment of real estate taxes and pays property
tax bills from mortgagors' escrow accounts.
E. 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 CLUESTM, an artificial intelligence system that is
designed to expedite the review of applications, credit reports and property
appraisals. The Company believes that CLUESTM increases underwriters'
productivity, reduces costs and provides greater consistency to the underwriting
process. Other systems currently in use by the production divisions are the EDGE
(primarily used by the Consumer Markets and Wholesale Lending Divisions) and
GEMS (primarily used by the Correspondent Lending Division) systems, which are
loan origination and telemarketing systems that are designed to reduce the time
and cost associated with the loan application and funding process. These
front-end systems were internally developed for the Company's exclusive use and
are integrated with the Company's loan servicing, sales, accounting, treasury
and other systems. The Company believes that both the EDGE and GEMS systems
improve the quality of its loan products and customer service by: (i) reducing
the risk of deficient loans; (ii) facilitating accurate and customized pricing;
(iii) promptly generating loan documents with the use of laser printers; (iv)
providing for electronic communication with credit bureaus, financial
institutions, HUD and other third parties; (v) providing Internet home page
access for Correspondent Lending customers and (vi) generally minimizing manual
data input. The Company believes both EDGE and GEMS significantly reduce
origination and processing costs and speed 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(R) integrate that application
with CLUES-ON-LINE, an adaptation of CLUESTM, which is designed to allow the
mortgage broker to submit loan information and receive a qualified underwriting
decision within minutes.
Another system developed and implemented by the Company is the LOAN
COUNSELOR. The LOAN COUNSELOR is designed for telemarketing and production
branches and is currently being used by the Telemarketing unit in conjunction
with its Customer Contact Management System ("CCMS"). (See discussion in the
following paragraph.) LOAN COUNSELOR provides the Telemarketing unit the ability
to: (i) pre-qualify a prospective applicant; (ii) provide "what if" scenarios to
help find the appropriate loan product; (iii) obtain an on-line price quote;
(iv) take an application; (v) request a credit report electronically through
LandSafe, Inc.; (vi) issue a LOCK 'N SHOP (R) certificate and (vii) transmit a
loan application to the production units for processing.
CCMS is a telemarketing application designed to provide enterprise-wide
information on both current and prospective customers. CCMS helps the production
divisions identify prospective customers to solicit for specific products or
services, and obtain the results of any solicitation. Management believes that
CCMS will provide the Company the opportunity to (i) reduce the loss of
customers who prepay their loan and obtain a new loan from another source and
(ii) generate additional revenue by cross-selling other products and services.
The Company also participates on the Internet with the goal of
enhancing business partner relationships and providing loan origination services
directly to the consumer. The Company has a public site on the World Wide Web
from which information as to product offerings, as well as prequalification
applications, can be obtained. In addition, a similar 'private site' is
available for business partners of the Correspondent Lending Division to view
pricing and product information, as well as loan status. In management's view,
the Internet provides a unique medium to deliver mortgage services at a cost
significantly lower than that incurred in conventional marketing methods.
F. Regulation
The Company's mortgage banking business is subject to the rules and
regulations of HUD, FHA, VA, Fannie Mae, Freddie Mac and Ginnie Mae 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 Ginnie Mae requires the maintenance of specified net worth
levels (which vary depending on the amount of Ginnie Mae 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, Federal Truth-in-Lending Act, Home
Mortgage Disclosure Act and the Real Estate Settlement Procedures Act and the
regulations promulgated thereunder which, inter alia, 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, various state laws and regulations affect the Company's
mortgage banking operations. The Company is licensed as a mortgage banker or
regulated 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 and mutual fund 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.
G. 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. Generally, the Company competes 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 57% during
calendar year 1996. The Company believes that it has benefited from this trend.
H. Employees
At February 28, 1997, the Company employed 6,134 persons, 2,460 of whom
were engaged in production activities, 1,644 were engaged in loan administration
activities and 2,030 were engaged in other activities, including 480 employees
of CAMC who provide services solely to CWM. None of these employees is
represented by a collective bargaining agent.
<PAGE>
ITEM 2. PROPERTIES
The primary executive and administrative offices of the Company and its
subsidiaries are currently located in leased space at 155 North Lake Avenue and
35 North Lake Avenue, Pasadena, California, and consist of 230,000 square feet.
The Company also leases a 44,000 square foot facility in Calabasas, California,
which primarily houses part of the Company's data processing operations. The
principal leases covering such space expire in the year 2011. In September 1996,
the Company acquired the facility at 4500 Park Granada Boulevard, Calabasas,
California, which consists of approximately 225,000 square feet and is situated
on 20.1 acres of land. This facility will house the primary executive and
administrative offices of the Company and some of its subsidiaries. The Company
also owns an office facility of approximately 300,000 square feet located on
43.5 acres in Simi Valley, California, which is used primarily to house a
portion of the Company's loan servicing and data processing operations, and a
253,000 square foot office building situated on 21.5 acres in Plano, Texas,
which houses additional loan servicing, loan production and data processing
operations. In addition, the Plano facility provides the Company with a business
recovery site located out of the state of California.
The Company leases or owns office space in several other buildings in
the Pasadena area. Additionally, CHL leases office space for each of its
Consumer Markets Division branch offices (each ranging from approximately 300 to
2,840 square feet), Wholesale Division loan centers (each ranging from
approximately 490 to 4,830 square feet) and Correspondent Division offices (each
ranging from approximately 7,130 to 10,930 square feet). These leases vary in
term and have different rent escalation provisions. In general, the leases
extend through fiscal year 2002, contain buyout provisions and provide for rent
escalation tied to increases in the Consumer Price Index or operating costs of
the premises.
ITEM 3. LEGAL PROCEEDINGS
On June 22, 1995, a lawsuit was filed by Jeff and Kathy Briggs, as a
purported class action, against CHL and a mortgage broker in the Northern
Division of the United Sates District Court for the Middle District of Alabama.
The suit claims, among other things, that in connection with residential
mortgage loan closings, CHL made certain payments to mortgage brokers in
violation of the Real Estate Settlement Procedures Act and induced mortgage
brokers to breach their alleged fiduciary duties to their customers. The
plaintiffs seek unspecified compensatory and punitive damages plus, as to
certain claims, treble damages. CHL's management believes that its compensation
programs to mortgage brokers comply with applicable law and with long-standing
industry practice, and that it has meritorious defenses to the action. CHL
intends to defend vigorously against the action and believes that the ultimate
resolution of such claims will not have a material adverse effect on the
Company's results of operations or financial position.
The Company and certain subsidiaries are defendants in various lawsuits
involving matters generally incidental to their business. Although it is
difficult to predict the ultimate outcome of these cases, management believes,
based on discussions with counsel, that any ultimate liability will not
materially affect the consolidated financial position or results of operations
of the Company and its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is listed on the New York Stock Exchange
("NYSE") and the Pacific Stock Exchange (Symbol: CCR). The following table sets
forth the high and low sales prices (as reported by the NYSE) for the Company's
common stock and the amount of cash dividends declared ` for the fiscal years
ended February 28(29), 1997 and 1996.
<TABLE>
<CAPTION>
----- --------------- ------------------------- --- ------------------------- --- -------------------------------
Cash Dividends
Fiscal 1997 Fiscal 1996 Declared
----- --------------- ------------ ------------ --- ------------ ------------ --- ---------------- --------------
Quarter High Low High Low Fiscal 1997 Fiscal 1996
----- --------------- ------------ ------------ --- ------------ ------------ --- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C>
First $23.88 $19.75 $20.50 $15.50 $0.08 $0.08
Second 25.13 20.75 23.13 18.38 0.08 0.08
Third 30.25 23.25 26.75 20.00 0.08 0.08
Fourth 31.13 26.38 24.00 19.00 0.08 0.08
----- --------------- ------------ ------------ --- ------------ ------------ --- ---------------- --------------
</TABLE>
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(29),
1997 and 1996, the Company declared quarterly cash dividends aggregating $0.32
per share. On March 19, 1997, the Company declared a quarterly cash dividend of
$0.08 per common share, paid April 30, 1997.
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 CHL's revolving credit facility, from paying
dividends on any capital stock (other than dividends payable in capital stock or
stock rights), except that so long as no event of default under the 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 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, the cash position and the capital
needs of its subsidiaries; as well as laws and regulations applicable to its
subsidiaries. Unless the Company and CHL each maintain specified minimum levels
of net worth and certain other financial ratios, dividends cannot be paid by the
Company and CHL in compliance with certain of CHL's debt obligations (including
the revolving credit facility). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
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 May 5, 1997, there were 2,779 shareholders of record of the Company's
common stock, with 106,383,483 common shares outstanding.
<PAGE>
<TABLE>
<CAPTION>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
----------------------------------------------- -----------------------------------------------------------------
Years ended February 28(29),
(Dollar amounts in thousands, except per 1997 1996 1995 1994 1993
share data)
----------------------------------------------- ------------ ------------ ------------ ------------- ------------
Selected Statement of Earnings Data:
Revenues:
<S> <C> <C> <C> <C> <C>
Loan origination fees $193,079 $199,724 $203,426 $379,533 $241,584
Gain (loss) on sale of loans 247,450 92,341 (41,342) 88,212 67,537
------------ ------------ ------------ ------------- ------------
Loan production revenue 440,529 292,065 162,084 467,745 309,121
Interest earned 350,263 308,449 249,560 300,999 179,785
Interest charges (316,705) (281,573) (205,464) (219,898) (128,612)
------------ ------------ ------------ ------------- ------------
Net interest income 33,558 26,876 44,096 81,101 51,173
Loan servicing income 773,715 620,835 460,351 326,695 188,895
Amortization and impairment/recovery of
mortgage servicing rights (101,380) (342,811) (95,768) (242,177) (151,362)
Servicing hedge benefit (expense) (125,306) 200,135 (40,030) 73,400 74,075
Less write-off of servicing hedge - - (25,600) - -
------------ ------------ ------------ ------------- ------------
Net loan administration income 547,029 478,159 298,953 157,918 111,608
91,346
Commissions, fees and other income 91,346 63,642 40,650 48,816 33,656
Gain on sale of servicing - - 56,880 - -
------------ ------------ ------------ ------------- ------------
Total revenues 1,112,462 860,742 602,663 755,580 505,558
------------ ------------ ------------ ------------- ------------
Expenses:
Salaries and related expenses 286,884 229,668 199,061 227,702 140,063
Occupancy and other office expenses 129,877 106,298 102,193 101,691 64,762
Guarantee fees 159,360 121,197 85,831 57,576 29,410
Marketing expenses 34,255 27,115 23,217 26,030 12,974
Other operating expenses 80,188 50,264 37,016 43,481 24,894
Branch and administrative office - - 8,000 - -
consolidation costs
------------ ------------ ------------ ------------- ------------
Total expenses 690,564 534,542 455,318 456,480 272,103
------------ ------------ ------------ ------------- ------------
421,898
Earnings before income taxes 421,898 326,200 147,345 299,100 233,455
Provision for income taxes 164,540 130,480 58,938 119,640 93,382
------------ ------------ ------------ ------------- ------------
============ ============ ============ ============= =============
Net earnings $257,358 $195,720 $88,407 $179,460 $140,073
=============================================== ============ ============ ============ ============= =============
----------------------------------------------- ============ ============ ============ ============= =============
Per Share Data (1):
Primary $2.44 $1.95 $0.96 $1.97 $1.65
Fully diluted $2.42 $1.95 $0.96 $1.94 $1.52
Cash dividends per share $0.32 $0.32 $0.32 $0.29 $0.25
Weighted average shares outstanding:
Primary 105,677,000 100,270,000 92,087,000 90,501,000 82,514,000
Fully diluted 106,555,000 100,270,000 92,216,000 92,445,000 92,214,000
=============================================== ============ ============ ============ ============= =============
----------------------------------------------- ============ ============ ============ ============= =============
Selected Balance Sheet Data at End of Period:
Total assets $8,089,292 $8,657,653 $5,710,182 $5,631,061 $3,369,499
Short-term debt $2,567,420 $4,423,738 $2,664,006 $3,111,945 $1,579,689
Long-term debt $2,367,661 $1,911,800 $1,499,306 $1,197,096 $ 734,762
Convertible preferred stock - - - - $
25,800
Common shareholders' equity $1,611,531 $1,319,755 $ 942,558 $ 880,137 $ 693,105
=============================================== ============ ============ ============ ============= =============
----------------------------------------------- ============ ============ ============ ============= =============
Operating Data (dollar amounts in millions):
Loan servicing portfolio (2) $158,585 $136,835 $113,111 $84,678 $54,484
Volume of loans originated $ 37,811 $ 34,584 $ 27,866 $52,459 $32,388
=============================================== ============ ============ ============ ============= =============
(1) Adjusted to reflect subsequent stock dividends and splits.
(2) Includes warehoused loans and loans under subservicing agreements.
</TABLE>
<PAGE>
ITEM 7. 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 "Business--Mortgage Banking Operations." 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 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 the effect of interest rate
changes on loan production income is countercyclical to their effect 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 insurance, including homeowners, fire, flood, earthquake, life and
disability to its mortgagors and others; providing various title insurance and
escrow services in the capacity of an agent rather than an underwriter; offering
appraisal and credit reporting services; brokering servicing contracts and
trading mortgage-backed securities ("MBS") and other mortgage-related assets.
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, 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. During
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 of expected
future prepayments, caused a reduction in amortization of the capitalized
servicing fees receivable and purchased servicing rights. 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.
The fiscal year ended February 29, 1996 ("Fiscal 1996") was then a
record year in profits for the Company. Loan production increased to $34.6
billion from $27.9 billion in Fiscal 1995. The Company attributed the increase
to: (i) a decline in mortgage interest rates during most of the year; (ii) the
implementation of a national advertising campaign aimed at developing a brand
identity for Countrywide and reaching the consumer directly and (iii) the
opening of two telemarketing centers which, through the use of proprietary
systems, provide product information specific to the potential borrower's needs
and allow a telemarketer to take an application and pass it to a branch office
for processing. For calendar 1995, the Company ranked second in the amount of
single-family mortgage originations nationwide. In Fiscal 1996, the Company's
market share increased to approximately 5% of the estimated $650 billion
single-family mortgage origination market, up from approximately 4% of the
estimated $660 billion market in Fiscal 1995. The interest rate environment that
prevailed during Fiscal 1996 was favorable for fixed-rate mortgages.
Additionally, the percentage of loan production attributable to refinances
increased from
<PAGE>
30% in Fiscal 1995 to 34% in Fiscal 1996, as borrowers took advantage of
declining interest rates. During Fiscal 1996, the Company's loan servicing
portfolio grew to $136.8 billion from $113.1 billion at the end of Fiscal 1995.
This growth resulted from the Company's loan production during the year and bulk
servicing acquisitions amounting to $5.2 billion, partially offset by
prepayments, partial prepayments and scheduled amortization of $17.2 billion.
The prepayment rate in the servicing portfolio was 12%, up from the prior year
due to the decreasing mortgage interest rate environment in Fiscal 1996.
However, this rate was lower than the 35% prepayment rate in Fiscal 1994 because
a substantial number of loans in the servicing portfolio were produced in Fiscal
1994 and bear interest at rates lower than the lowest interest rate level
reached during Fiscal 1996.
The fiscal year ended February 28, 1997 ("Fiscal 1997") was a period in
which interest rates were somewhat volatile, generally higher than during the
previous fiscal year but at levels that remained conducive to certain refinance
and home purchase activity. The Company's earnings increased 31% from Fiscal
1996. Loan production increased to $37.8 billion from $34.6 billion in the prior
year. The Company attributed the increase in production to: (i) the generally
strong economy and home purchase market; (ii) the continued implementation of a
national advertising campaign, which was started in Fiscal 1996, aimed at
developing a brand identity for Countrywide and reaching the consumer directly;
and (iii) the integration of home equity and sub-prime lending into the
Company's product offerings and production capacity. For calendar 1996, the
Company ranked second in the amount of single-family mortgage originations
nationwide. The Company's market share for both Fiscal 1997 and 1996 was
approximately 5% of the estimated $800 billion and $650 billion, respectively,
single-family mortgage origination market. During Fiscal 1997, the Company's
loan servicing portfolio grew to $158.6 billion from $136.8 billion at the end
of Fiscal 1996. This growth resulted from the Company's loan production during
the year and bulk servicing acquisitions amounting to $1.4 billion, partially
offset by prepayments, partial prepayments and scheduled amortization of $18.8
billion. The prepayment rate in the servicing portfolio was 11%, slightly down
from the prior year due to the higher mortgage interest rate environment in
Fiscal 1997.
RESULTS OF OPERATIONS
Fiscal 1997 Compared with Fiscal 1996
Revenues for Fiscal 1997 increased 29% to $1,112.5 million from $860.7
million for Fiscal 1996. Net earnings increased 31% to $257.4 million in Fiscal
1997 from $195.7 million in Fiscal 1996. The increase in revenues and net
earnings in Fiscal 1997 compared to Fiscal 1996 was primarily attributable to a
larger gain on sale of loans resulting from greater sales of higher-margin home
equity loans, sales of sub-prime loans in Fiscal 1997 at significantly higher
margins than prime credit quality first mortgages, improved pricing margins on
prime credit quality first mortgages, an increase in the size of the Company's
servicing portfolio and higher loan production volume. These positive factors
were partially offset by increased expenses in Fiscal 1997 over Fiscal 1996.
The total volume of loans produced increased 9% to $37.8 billion for
Fiscal 1997 from $34.6 billion for Fiscal 1996. Refinancings totaled $12.3
billion, or 33% of total fundings, for Fiscal 1997, as compared to $11.7
billion, or 34% of total fundings, for Fiscal 1996. Fixed-rate mortgage loan
production totaled $27.9 billion, or 74% of total fundings, for Fiscal 1997, as
compared to $26.9 billion, or 78% of total fundings, for Fiscal 1996.
<PAGE>
Total loan volume in the Company's production divisions is summarized below.
<TABLE>
<CAPTION>
- -------------------------------------------- ------------------------------------ --------
(Dollar amounts in millions) Loan Production
- -------------------------------------------- ------------------------------------ --------
Fiscal 1997 Fiscal 1996
------------- -------------
<S> <C> <C>
Consumer Markets Division $ 8,071 $ 7,458
Wholesale Lending Division 8,430 8,061
Correspondent Lending Division 21,310 19,065
============= =============
Total Loan Volume $37,811 $34,584
============= =============
- -------------------------------------------- ------------- -------- ------------- --------
</TABLE>
The factors which affect the relative volume of production among the
Company's three divisions include the price competitiveness of each division's
product offerings, the level of mortgage lending activity in each division's
market and the success of each division's sales and marketing efforts.
Included in the Company's total volume of loans produced are $613
million of home equity loans funded in Fiscal 1997 and $221 million funded in
Fiscal 1996. Sub-prime credit quality loan production, which is also included in
the Company's total production volume, was $864 million in Fiscal 1997 and $220
million in Fiscal 1996.
At February 28(29), 1997 and 1996, the Company's pipeline of loans in
process was $4.7 billion and $5.6 billion, respectively. Historically,
approximately 43% to 77% of the pipeline of loans in process has funded. In
addition, at February 28, 1997, the Company had committed to make loans in the
amount of $1.8 billion, subject to property identification and approval of the
loans (the "LOCK 'N SHOP (R) Pipeline"). At February 29, 1996, the LOCK 'N SHOP
(R) Pipeline was $1.3 billion. In Fiscal 1997 and Fiscal 1996, the Company
received 499,861 and 460,486 new loan applications, respectively, at an average
daily rate of $206 million and $194 million, respectively. 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 1997 as compared to Fiscal
1996 primarily because production by the Correspondent Division (which, due to
its lower cost structures, charges lower origination fees per dollar loaned)
comprised a greater percentage of total production in Fiscal 1997 than in Fiscal
1996. Gain on sale of loans improved in Fiscal 1997 as compared to Fiscal 1996
primarily due to the sale during Fiscal 1997 of higher-margin home equity and
sub-prime loans and improved pricing margins on prime credit quality first
mortgages. The sale of home equity loans contributed $20 million and $4 million
to gain on sale of loans in Fiscal 1997 and Fiscal 1996, respectively. Sub-prime
loans contributed $72 million to the gain on sale of loans in Fiscal 1997. There
were no sub-prime loan sales in Fiscal 1996. In general, loan origination fees
and gain (loss) on sale of loans are affected by numerous factors including the
volume and mix of loans produced and sold, loan pricing decisions, interest rate
volatility and the general direction of interest rates.
Net interest income (interest earned net of interest charges) increased
to $33.6 million for Fiscal 1997 from $26.9 million for Fiscal 1996. Net
interest income is principally a function of: (i) net interest income earned
from the Company's mortgage loan warehouse ($61.6 million and $35.0 million for
Fiscal 1997 and Fiscal 1996, respectively); (ii) interest expense related to the
Company's investment in servicing rights ($148.3 million and $112.4 million for
Fiscal 1997 and Fiscal 1996, respectively) and (iii) interest income earned from
the custodial balances associated with the Company's servicing portfolio ($116.9
million and $102.3 million for Fiscal 1997 and Fiscal 1996, respectively). The
Company earns interest on, and incurs interest expense to carry, mortgage loans
held in its warehouse. The increase in net interest income from the mortgage
loan warehouse was primarily
<PAGE>
attributed to a higher net earnings rate partially resulting from aggregating
home equity and sub-prime loans (which generally bear interest at higher rates
than prime credit quality first mortgages) prior to their sale or
securitization. The increase in interest expense on the investment in servicing
rights resulted primarily from a larger servicing portfolio, partially offset by
a decrease in the payments of interest to certain investors pursuant to
customary servicing arrangements with regard to paid-off loans in excess of 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 average custodial balances
(caused by growth of the servicing portfolio and an increase in the amount of
prepayments), offset somewhat by a decrease in the earnings rate from Fiscal
1996 to Fiscal 1997.
During Fiscal 1997, loan administration income was positively affected
by the continued growth of the loan servicing portfolio. At February 28, 1997,
the Company serviced $158.6 billion of loans (including $3.9 billion of loans
subserviced for others), compared to $136.8 billion (including $1.9 billion of
loans subserviced for others) at February 29, 1996, a 16% increase. The growth
in the Company's servicing portfolio during Fiscal 1997 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 both February 28(29), 1997 and 1996 was 7.8%. 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 production income. See
"Prospective Trends - Market Factors."
During Fiscal 1997, the prepayment rate of the Company's servicing portfolio
was 11%, compared to 12% for Fiscal 1996. In general, the prepayment rate is
affected by the level of refinance activity, which in turn is driven by the
relative level of mortgage interest rates, and activity in the home purchase
market. The slight decrease in the prepayment rate from Fiscal 1996 to Fiscal
1997 was primarily attributable to a small decrease in refinance activity caused
by somewhat higher interest rates during Fiscal 1997 than during Fiscal 1996.
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. In addition, to mitigate the effect on
earnings of higher amortization and impairment that may result from increased
current and projected future prepayment activity, the Company acquires financial
instruments, including derivative contracts, that increase in aggregate value
when interest rates decline (the "Servicing Hedge"). These financial instruments
include call options on interest rate futures and MBS, interest rate floors,
interest rate swaps (with the Company's maximum payment capped) ("Swap Caps"),
options on interest rate swaps ("Swaptions"), interest rate caps, principal-only
("P/O") swaps and certain tranches of collateralized mortgage obligations
("CMOs").
With the Swap Caps, the Company receives and pays interest on a
specified notional amount. The rate received is fixed; the rate paid is
adjustable, is indexed to the London Interbank Offered Rates for U.S. dollar
deposits ("LIBOR") and has a specified maximum or "cap."
With the Swaptions, the Company has the option to enter into a
receive-fixed, pay-floating interest rate swap at a future date or to settle the
transaction for cash.
The P/O swaps are derivative contracts, the value of which is
determined by changes in the value of the referenced P/O security. The payments
received by the Company under the P/O swaps relate to the cash flows of the
referenced P/O security. The payments made by the Company are based upon a
notional amount tied to the remaining balance of the referenced P/O security
multiplied by a floating rate indexed to LIBOR.
The CMOs, which consist primarily of P/O securities, have been
purchased at deep discounts to their par values. As interest rates decrease,
prepayments on the collateral underlying the CMOs should increase. This should
result in a decline in the average lives of the P/O securities and a
corresponding increase in the present values of their cash flows. Conversely, as
interest rates increase, prepayments on the collateral underlying the CMOs
should decrease. These changes should result in an increase in the average lives
of the P/O securities and a decrease in the present values of their cash flows.
The Servicing Hedge instruments utilized by the Company are designed to
protect the value of the investment in mortgage servicing rights ("MSRs") 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 MSRs increases while the value of the hedge instruments declines. With
respect to the options, Swaptions, floors, caps and CMOs, the Company is not
exposed to loss beyond its initial outlay to acquire the hedge instruments. With
respect to the Swap Caps contracts entered into by the Company as of February
28, 1997, the Company estimates that its maximum exposure to loss over the
contractual term is $26.2 million. The Company's exposure to loss in the P/O
swaps is related to changes in the market value of the referenced P/O security
over the life of the contract. In Fiscal 1997, the Company recognized a net
expense of $125.3 million from its Servicing Hedge. The net expense included
unrealized losses of $56.9 million and realized losses of $68.4 million from the
premium amortization and sale of various financial instruments that comprise the
Servicing Hedge. In Fiscal 1996, the Company recognized a net benefit of $200.1
million from its Servicing Hedge. The net benefit included unrealized gains of
$108.8 million and net realized gains of $91.3 million from the sale of various
financial instruments that comprise the Servicing Hedge. There can be no
assurance that the Company's Servicing Hedge will generate gains in the future,
or if gains are generated, that they will fully offset impairment of the MSRs.
See Note G to the Company's Consolidated Financial Statements.
The Company recorded amortization and net impairment of its MSRs for Fiscal
1997 totaling $101.4 million (consisting of amortization amounting to $220.1
million and recovery of previous impairment of $118.7 million), compared to
$342.8 million of amortization and impairment (consisting of amortization
amounting to $168.0 million and net impairment of $174.8 million) for Fiscal
1996. The factors affecting the amount of amortization and impairment or
recovery of the MSRs recorded in an accounting period include the level of
prepayments during the period, the change in estimated future prepayments and
the amount of Servicing Hedge gains or losses.
During Fiscal 1997, the Company acquired bulk servicing rights for
loans with principal balances aggregating $1.4 billion at a price of 1.60% of
the aggregate outstanding principal balances of the servicing portfolios
acquired. During Fiscal 1996, the Company acquired bulk servicing rights for
loans with principal balances aggregating $5.2 billion at a price of 1.30% of
the aggregate outstanding principal balances of the servicing portfolios
acquired.
Salaries and related expenses are summarized below for Fiscal 1997 and
Fiscal 1996.
<TABLE>
<CAPTION>
-- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- -----
(Dollar amounts in Fiscal 1997
thousands)
-- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- -----
Production Loan Corporate Other
Activities Administration Administration Activities Total
-- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
<S> <C> <C> <C> <C> <C>
Base Salaries $ 91,054 $41,806 $54,244 $12,852 $199,956
Incentive Bonus 34,501 763 14,820 6,799 56,883
Payroll Taxes and Benefits 15,105 7,747 5,389 1,804 30,045
------------ ------------- ------------- ------------- ------------
Total Salaries and Related
Expenses $140,660 $50,316 $74,453 $21,455 $286,884
============ ============= ============= ============= =============
Average Number of 2,303 1,555 1,107 251 5,216
Employees
-- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
-- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- -----
(Dollar amounts in Fiscal 1996
thousands)
-- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- -----
Production Loan Corporate Other
Activities Administration Administration Activities Total
-- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
<S> <C> <C> <C> <C> <C>
Base Salaries $ 68,502 $32,080 $46,504 $ 9,711 $156,797
Incentive Bonus 33,022 445 9,711 4,546 47,724
Payroll Taxes and Benefits 11,472 5,571 6,824 1,280 25,147
------------ ------------- ------------- ------------- ------------
Total Salaries and Related
Expenses $112,996 $38,096 $63,039 $15,537 $229,668
============ ============= ============= ============= =============
Average Number of 1,743 1,160 887 192 3,982
Employees
-- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
</TABLE>
The amount of salaries increased during Fiscal 1997 primarily due to an
increase in the number of employees resulting from higher loan production and
diversification of loan products, a larger servicing portfolio and growth in the
Company's non-mortgage banking activities.
Occupancy and other office expenses for Fiscal 1997 increased to $129.9
million from $106.3 million for Fiscal 1996 primarily due to: (i) the continued
effort by the Company to expand its retail branch network, particularly outside
of California, (ii) the purchase of an office facility to house the Company's
primary executive and administrative offices and some of its non-mortgage
banking subsidiaries, (iii) higher loan production, (iv) a larger servicing
portfolio and (v) growth in the Company's non-mortgage banking activities.
Guarantee fees represent fees paid to guarantee timely and full payment of
principal and interest on MBS and whole loans sold to permanent investors and to
transfer the credit risk of the loans in the servicing portfolio. For Fiscal
1997, guarantee fees increased 31% to $159.4 million from $121.2 million for
Fiscal 1996. The increase resulted from an increase in the servicing portfolio,
changes in the mix of permanent investors and terms negotiated at the time of
loan sales.
Marketing expenses for Fiscal 1997 increased 26% to $34.3 million from $27.1
million for Fiscal 1996, reflecting the Company's continued implementation of a
marketing plan to increase consumer brand awareness.
Other operating expenses for Fiscal 1997 increased from Fiscal 1996 by
$29.9 million, or 60%. This increase was due primarily to higher loan
production, a larger servicing portfolio, increased reserves for bad debts and
increased systems development and operation costs in Fiscal 1997 than in Fiscal
1996.
Profitability of Loan Production and Servicing Activities
In Fiscal 1997, the Company's pre-tax earnings from its loan production
activities (which include loan origination and purchases, warehousing and sales)
were $141.9 million. In Fiscal 1996, the Company's comparable pre-tax earnings
were $61.2 million. The increase of $80.7 million was primarily attributable to
a greater sale of higher-margin home equity loans, sales of sub-prime loans at
significantly higher margins than prime credit quality first mortgages and
improved pricing margins on prime credit quality first mortgages. There were no
sub-prime loan sales in Fiscal 1996. These positive results were partially
offset by higher production costs and a change in the internal method of
allocating overhead between the Company's production and servicing activities.
In Fiscal 1997, the Company's pre-tax income from its loan servicing activities
(which include administering the loans in the servicing portfolio, selling
homeowners and other insurance, acting as tax payment agent, marketing
foreclosed properties and acting as reinsurer) was $254.2 million as compared to
$251.2 million in Fiscal 1996. The increase of $3.0 million was due to an
increase in the size of the servicing portfolio and in the rate of servicing and
miscellaneous fees earned. Largely offsetting these positive factors was an
increase in the net expense resulting from amortization and impairment of MSRs
and from the Servicing Hedge from Fiscal 1996 to Fiscal 1997. The increase in
such net expense is due primarily to increased amortization resulting from a
higher cost basis in the MSRs. This higher basis is attributable to adoption of
a new accounting standard effective March 1, 1995 that required recognition of
originated mortgage servicing rights.
Profitability of Other Activities
In addition to loan production and loan servicing, the Company offers
ancillary products and services related to its mortgage banking activities.
These include title insurance and escrow services, home appraisals, credit
cards, management of a publicly traded real estate investment trust ("REIT"),
securities brokerage and servicing rights brokerage. For Fiscal 1997, these
activities contributed $25.8 million to the Company's pre-tax income compared to
$13.8 million for Fiscal 1996. This increase to pre-tax income primarily results
from improved performance of the title insurance, escrow and REIT management
services.
Fiscal 1996 Compared with Fiscal 1995
Revenues for Fiscal 1996 increased 43% to $860.7 million from $602.7
million for Fiscal 1995. Net earnings increased 121% to $195.7 million in Fiscal
1996 from $88.4 million in Fiscal 1995. Effective March 1, 1995, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 122, Accounting
for Mortgage Servicing Rights. SFAS No. 122 amended SFAS No. 65, Accounting for
Certain Mortgage Banking Activities. Since SFAS No. 122 prohibited retroactive
application, historical accounting results were not restated and, accordingly,
the accounting results for Fiscal 1996 are not directly comparable with Fiscal
1995. The overall impact on the Company's financial statements of adopting SFAS
No. 122 was an increase in net earnings for Fiscal 1996 of $41.9 million, or
$0.42 per share. In addition to the accounting change, the increase in revenues
and net earnings for Fiscal 1996 compared to Fiscal 1995 was attributable to an
increase in the size of the Company's servicing portfolio and improved pricing
margins, partially offset by the non-recurring gain on sale of servicing in
Fiscal 1995 which gain was offset, in part, by a non-recurring write-off of the
Servicing Hedge during the same prior period.
The total volume of loans produced increased 24% to $34.6 billion for
Fiscal 1996 from $27.9 billion for Fiscal 1995. Refinancings totaled $11.7
billion, or 34% of total fundings, for Fiscal 1996, as compared to $8.4 billion,
or 30% of total fundings, for Fiscal 1995. Fixed-rate mortgage loan production
totaled $26.9 billion, or 78% of total fundings, for Fiscal 1996, as compared to
$18.4 billion, or 66% of total fundings, for Fiscal 1995.
Total loan volume in the Company's production divisions is summarized below.
<TABLE>
<CAPTION>
- -------------------------------------------- ------------------------------------ --------
(Dollar amounts in millions) Loan Production
- -------------------------------------------- ------------------------------------ --------
Fiscal 1996 Fiscal 1995
------------- -------------
<S> <C> <C>
Consumer Markets Division $ 7,458 $ 7,066
Wholesale Lending Division 8,061 8,503
Correspondent Lending Division 19,065 12,297
============= =============
Total Loan Volume $34,584 $27,866
============= =============
- -------------------------------------------- ------------- -------- ------------- --------
</TABLE>
At February 29(28), 1996 and 1995, the Company's pipeline of loans in
process was $5.6 billion and $3.6 billion, respectively. In addition, at
February 29(28), 1996 and 1995, the Company's LOCK 'N SHOP (R) Pipeline was $1.3
billion and $2.7 billion, respectively. In Fiscal 1996 and Fiscal 1995, the
Company received 460,486 and 315,632 new loan applications, respectively, at an
average daily rate of $194 million and $141 million, respectively. The following
actions were taken during Fiscal 1996 on the total applications received during
that year: 309,433 loans (67% of total applications received) were funded and
101,747 applications (22% of total applications received) were either rejected
by the Company or withdrawn by the applicant. 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.
Loan origination fees decreased in Fiscal 1996 as compared to Fiscal
1995 primarily because production by the Correspondent Division (which, due to
lower cost structures, charges lower origination fees per dollar loaned)
comprised a greater percentage of total production in Fiscal 1996 than in Fiscal
1995. Gain (loss) on sale of loans improved in Fiscal 1996 compared to Fiscal
1995 primarily due to improved pricing margins and the impact of adopting SFAS
No. 122. SFAS No. 122 requires 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. This accounting methodology, in
turn, increases the gain (or reduces the loss) on sale of loans as compared to
the accounting results obtained from SFAS No. 65, the previously applicable
standard. Under SFAS No. 65, the cost of OMSRs was not recognized as an asset
and was included in the gain or loss recorded when the related loans were sold.
The separate impact of recognizing OMSRs as assets in the Company's financial
statements in accordance with SFAS No. 122 for Fiscal 1996 was an increase in
gain on sale of loans of $153.3 million.
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. In Fiscal 1996, 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, and therefore
negatively impact gain (loss) on sale of loans, by $83.5 million.
Net interest income (interest earned net of interest charges) decreased
to $26.9 million for Fiscal 1996 from $44.1 million for Fiscal 1995. Net
interest income is principally a function of: (i) net interest income earned
from the Company's mortgage loan warehouse ($35.0 million and $35.7 million for
Fiscal 1996 and Fiscal 1995, respectively); (ii) interest expense related to the
Company's investment in servicing rights ($112.4 million and $52.7 million for
Fiscal 1996 and Fiscal 1995, respectively) and (iii) interest income earned from
the custodial balances associated with the Company's servicing portfolio ($102.3
million and $59.8 million for Fiscal 1996 and Fiscal 1995, 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 primarily attributable to a lower net earnings rate. The
increase in interest expense on the investment in servicing rights resulted
primarily from a larger servicing portfolio and an increase in 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 and an
increase in the average custodial balances (caused by growth of the servicing
portfolio and an increase in prepayments) from Fiscal 1995 to Fiscal 1996.
During Fiscal 1996, loan administration income was positively affected
by the continued growth of the loan servicing portfolio. At February 29, 1996,
the Company serviced $136.8 billion of loans (including $1.9 billion of loans
subserviced for others), compared to $113.1 billion (including $0.7 billion of
loans subserviced for others) at February 28, 1995, a 21% increase. The growth
in the Company's servicing portfolio during Fiscal 1996 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 29, 1996 was 7.8%, compared to 7.6% at February
28, 1995.
During Fiscal 1996, the prepayment rate of the Company's servicing
portfolio was 12%, as compared to 9% for Fiscal 1995.
In Fiscal 1996, the Company recognized a net gain of $200.1 million from its
Servicing Hedge. The net gain included unrealized gains of $108.8 million and
realized gains of $91.3 million from the sale of various financial instruments
that comprise the Servicing Hedge. As a part of the adoption of SFAS No. 122,
the Company has revised its servicing hedge accounting policy, effective March
1, 1995, to adjust the basis of the capitalized servicing fees receivable and
mortgage servicing rights for unrealized gains or losses in the derivative
financial instruments comprising the Servicing Hedge. There can be no assurance
that the Company's Servicing Hedge will generate gains in the future, or if
gains are generated, that they will fully offset impairment of the MSRs. See
Note G to the Company's Consolidated Financial Statements.
The Company recorded amortization and impairment of its MSRs for Fiscal
1996 totaling $342.8 million (consisting of amortization amounting to $168.0
million and impairment of $174.8 million), compared to $95.8 million of
amortization for Fiscal 1995. SFAS No. 122 requires that all capitalized
mortgage servicing rights be evaluated for impairment based on the excess of the
carrying amount of the MSRs over their fair value. Under SFAS No. 65, the
impairment evaluation could be made using either discounted or undiscounted cash
flows. No uniform required level of disaggregation was specified. The Company
used a disaggregated undiscounted method.
During Fiscal 1996, the Company acquired bulk servicing rights for
loans with principal balances aggregating $5.2 billion at a price of $67.0
million or 1.30% of the aggregate outstanding principal balances of the
servicing portfolios acquired. 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 1995, the Company sold servicing rights for loans with
principal balances of $5.9 billion and recognized a gain of $56.9 million. No
servicing rights were sold during Fiscal 1996.
Salaries and related expenses are summarized below for Fiscal 1996 and
Fiscal 1995.
<TABLE>
<CAPTION>
-- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- -----
(Dollar amounts in Fiscal 1996
thousands)
-- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- -----
Production Loan Corporate Other
Activities Administration Administration Activities Total
-- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
<S> <C> <C> <C> <C> <C>
Base Salaries $68,502 $32,080 $46,504 $9,711 $156,797
Incentive Bonus 33,022 445 9,711 4,546 47,724
Payroll Taxes and Benefits 11,472 5,571 6,824 1,280 25,147
------------ ------------- ------------- ------------- ------------
Total Salaries and Related
Expenses $112,996 $38,096 $63,039 $15,537 $229,668
============ ============= ============= ============= =============
Average Number of 1,743 1,160 887 192 3,982
Employees
-- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
</TABLE>
<TABLE>
<CAPTION>
-- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- -----
(Dollar amounts in Fiscal 1995
thousands)
-- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- -----
Production Loan Corporate Other
Activities Administration Administration Activities Total
-- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
<S> <C> <C> <C> <C> <C>
Base Salaries $70,230 $23,929 $39,046 $6,811 $140,016
Incentive Bonus 21,178 463 8,637 4,204 34,482
Payroll Taxes and Benefits 11,633 4,020 8,062 848 24,563
------------ ------------- ------------- ------------- ------------
Total Salaries and Related
Expenses $103,041 $28,412 $55,745 $11,863 $199,061
============ ============= ============= ============= =============
Average Number of 1,780 850 851 126 3,607
Employees
-- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
</TABLE>
The amount of salaries increased during Fiscal 1996 primarily due to
the increased number of employees resulting from a larger servicing portfolio
and growth in the Company's non-mortgage banking subsidiaries. Incentive bonuses
earned during Fiscal 1996 increased primarily due to increased loan production.
Occupancy and other office expenses for Fiscal 1996 slightly increased to
$106.3 million from $102.2 million for Fiscal 1995. The increase was primarily
attributable to a larger loan servicing portfolio.
Guarantee fees for Fiscal 1996 increased 41% to $121.2 million from $85.8
million for Fiscal 1995. This increase resulted primarily from an increase in
the servicing portfolio.
Marketing expenses for Fiscal 1996 increased 17% to $27.1 million from
$23.2 million for Fiscal 1995, reflecting the Company's implementation of a new
marketing plan.
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.
No such charge was incurred in Fiscal 1996.
Other operating expenses for Fiscal 1996 increased from Fiscal 1995 by
$13.2 million, or 36%. This increase was due primarily to an increase in
unreimbursed costs on foreclosed loans resulting from a larger servicing
portfolio, and an increased provision for bad debts resulting from home equity
and sub-prime loans held in portfolio pending securitization.
Profitability of Loan Production and Servicing Activities
In Fiscal 1996, the Company's pre-tax earnings from its loan production
activities (which include loan origination and purchases, warehousing and sales)
was $61.2 million. In Fiscal 1995, the Company's comparable pre-tax loss was
$94.8 million. The increase of $156.0 million was primarily attributable to
improved pricing margins, the effect of the adoption of SFAS No. 122 previously
discussed and a change of $44.6 million in the Company's internal method of
allocating overhead between its production and servicing activities. In Fiscal
1996, 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 $251.2 million as
compared to $229.6 million in Fiscal 1995. The increase of $21.6 million was
principally due to the increase in the size of the servicing portfolio,
partially offset by the change in the Company's internal overhead allocation
method discussed above and a non-recurring gain on sale of servicing in Fiscal
1995 (which was offset, in part, by a non-recurring write-off of the Servicing
Hedge).
Profitability of Other Activities
For Fiscal 1996, these activities contributed $13.8 million to the
Company's pre-tax income compared to $12.6 million for Fiscal 1995. This
increase to pre-tax income primarily results from improved performance of the
securities brokerage and REIT management services.
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 both amortization and impairment of the MSRs 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 and impairment of the MSRs, a decreased rate of interest earned
from the custodial balances and increased Interest Costs Incurred on Payoffs.
The impacts of changing interest rates on servicing-related earnings are reduced
by performance of the Servicing Hedge, which is designed to mitigate the impact
on earnings of higher amortization and impairment that may result from declining
interest rates.
<PAGE>
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. In addition, delinquency rates typically rise in the winter months,
which results in higher servicing costs. However, late charge income has
historically been sufficient to offset such incremental expenses.
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 utilizes commercial paper supported by the revolving
credit facility, medium-term notes, MBS repurchase agreements, subordinated
notes, pre-sale funding facilities, an optional cash purchase feature in the
dividend reinvestment plan, redeemable capital trust pass-through securities and
cash flow from operations. In addition, in the past the Company has utilized
whole loan repurchase agreements, servicing-secured bank facilities, private
placements of unsecured notes and other financings, direct borrowings from the
revolving credit facility and public offerings of preferred stock.
Certain of the debt obligations of the Company and Countrywide Home
Loans, Inc. ("CHL") contain various provisions that may affect the ability of
the Company and CHL 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 CHL to pay
dividends.
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. In
December 1996, Countrywide Capital I, a statutory business trust and a
subsidiary of the Company, issued $300 million of 8% Company-obligated
redeemable capital trust pass-through securities, the proceeds of which were
used to purchase subordinated debt securities from the Company. The Company used
the net proceeds from the sale of the subordinated debt securities for general
corporate purposes, principally to reduce short-term debt.
In connection with its derivative contracts, the Company may be
required to deposit cash or certain government securities or obtain letters of
credit to meet margin requirements. The Company considers such potential margin
requirements in its overall liquidity management.
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 1997, the Company's operating activities
provided cash of approximately $2.0 billion on a short-term basis primarily from
the decrease in its mortgage loans and MBS held for sale. Mortgage loans and MBS
held for sale are generally financed with short-term borrowings; therefore, the
operating cash so provided was used to repay short-term debt as discussed under
"Financing Activities."
Investing Activities The primary investing activity for which cash was
used in Fiscal 1997 was the investment in servicing. Net cash used by investing
activities was $0.9 billion for Fiscal 1997 and Fiscal 1996.
Financing Activities Net cash used by financing activities amounted to
$1.0 billion for Fiscal 1997. Net cash provided by financing activities amounted
to $2.4 billion for Fiscal 1996. The decrease in cash flow from financing
activities was primarily the result of net short-term debt repayments by the
Company in Fiscal 1997 and net short-term borrowings during Fiscal 1996.
PROSPECTIVE TRENDS
Applications and Pipeline of Loans in Process
During Fiscal 1997, the Company received new loan applications at an
average daily rate of $206 million and at February 28, 1997, the Company's
pipeline of loans in process was $4.7 billion. This compares to a daily
application rate in Fiscal 1996 of $194 million and a pipeline of loans in
process at February 29, 1996 of $5.6 billion. The size of the pipeline is
generally an indication of the level of future fundings, as historically 43% to
77% of the pipeline of loans in process has funded. In addition, the Company's
LOCK `N SHOP(R) Pipeline at February 28, 1997 was $1.8 billion and at February
29, 1996 was $1.3 billion. For the month ended March 31, 1997, the average daily
amount of applications received was $228 million, and at March 31, 1997, the
pipeline of loans in process was $5.1 billion and the Lock n' Shop(R) Pipeline
was $2.6 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.
Market Factors
Mortgage interest rates generally decreased in Fiscal 1996 and were
somewhat volatile, although generally slightly higher than the prior year, in
Fiscal 1997. Loan production increased 9% from Fiscal 1996 to Fiscal 1997. This
is primarily due to several factors. First, sub-prime and home equity loan
fundings, which are generally less sensitive to interest rate fluctuations than
prime credit quality first mortgages, increased from Fiscal 1996 to Fiscal 1997.
Second, certain of the Company's loan products, particularly jumbo loan
products, were more competitively priced in Fiscal 1997 than in Fiscal 1996.
Further, home purchase market activity was stronger during Fiscal 1997 than in
Fiscal 1996.
The prepayment rate in the servicing portfolio declined slightly from
Fiscal 1996 to Fiscal 1997. Because interest rates were generally higher in
Fiscal 1997 than in Fiscal 1996, recovery of previously recorded impairment of
MSRs was recognized and, conversely, the Servicing Hedge posted a loss.
The Company's primary competitors are commercial banks, savings and
loans and mortgage banking subsidiaries of diversified companies, as well as
other mortgage bankers. Over the past three years, certain commercial banks have
expanded their mortgage banking operations through acquisition of formerly
independent mortgage banking companies or through internal growth. The Company
believes that these transactions and activities have not had a material impact
on the Company or on the degree of competitive pricing in the market.
The Company's California mortgage loan production (measured by
principal balance) constituted 25% of its total production during Fiscal 1997,
down from 31% for Fiscal 1996. The Company is continuing its efforts to expand
its production capacity outside of California. Some regions in which the Company
operates have experienced 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. To the extent that any geographic
region's mortgage loan production constitutes a significant portion of the
Company's production, there can be no assurance that the Company's operations
will not be adversely affected if that region experiences slow or negative
economic growth resulting in decreased residential real estate lending activity,
or market factors further impact the Company's competitive position in that
region.
The delinquency rate in the Company-owned servicing portfolio increased
to 3.44% at February 28, 1997 from 3.20% at February 29, 1996. The Company
believes that this increase was primarily the result of portfolio mix changes
and aging. The proportion of government and high loan-to-value conventional
loans, which tend to experience higher delinquency rates than low loan-to-value
conventional loans, has increased from 45% of the portfolio at February 29, 1996
to 48% at February 28, 1997. In addition, the weighted average age of the
portfolio is 27 months at February 28, 1997, up from 25 months at February 29,
1996. Delinquency rates tend to increase as loans age, reaching a peak at three
to five years of age. However, because the loans in the portfolio are generally
serviced on a non-recourse basis, the Company's exposure to credit loss
resulting from increased delinquency rates is substantially limited. Further,
related late charge income has historically been sufficient to offset
incremental servicing expenses resulting from an increased delinquency rate.
The percentage of loans in the Company's owned servicing portfolio that
are in foreclosure increased to 0.71% at February 28, 1997 from 0.49% at
February 29, 1996. 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 (28% of the Company's
servicing portfolio at February 28, 1997) are insured or partially guaranteed
against loss by the Federal Housing 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's Servicing Hedge is designed to
protect the value of its investment in servicing rights from the effects of
increased prepayment activity that generally results from declining interest
rates. In periods of increasing interest rates, the value of the Servicing Hedge
generally declines and the value of MSRs generally increases. There can be no
assurance that, in periods of increasing interest rates, the increase in value
of the MSRs will offset the amount of Servicing Hedge expense; or in periods of
declining interest rates, that the Company's Servicing Hedge will generate gains
or if gains are generated, that they will fully offset impairment of the MSRs.
Implementation of New Accounting Standard
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings per Share, which supersedes Accounting Principles Board ("APB")
Opinion No. 15, of the same name. SFAS No. 128 simplifies the standards for
computing earnings per share ("EPS") and makes them comparable to international
standards. SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997, with earlier application not permitted. Upon
adoption, all prior EPS data will be restated.
The following table presents basic and diluted EPS for the years ended
February 28(29), 1997, 1996 and 1995, computed under the provisions of SFAS No.
128.
<TABLE>
<CAPTION>
- ------------------------ --------- --------- --------- -- - ---------------------------- -- -- --------- ------- ------
Year ended February 28(29),
--------- --------- --------- -- - ---------------------------- -- -- --------- ------- ------
1997 1996 1995
--------- --------- --------- ---------- --------- --------- --------- -------- ---------
(Dollar amounts in Per-Share Per-Share Per-Share
thousands, except per Net Amount Net Amount Net Amount
share data) Earnings Shares Earnings Shares Earnings Shares
- ------------------------ --------- --------- --------- --------- -------- ---------
========= ========== =========
Net earnings $257,358 $195,720 $88,407
========= ========== =========
Basic EPS
Net earnings available
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
to common shareholders $257,358 103,112 $2.50 $195,720 98,352 $1.99 $88,407 91,240 $0.97
Effect of dilutive
stock options - 2,565 - 1,918 - 847
--------- --------- ---------- --------- --------- --------
Diluted EPS
Net earnings available
to common shareholders $257,358 105,677 $2.44 $195,720 100,270 $1.95 $88,407 92,087 $0.96
========= ========= ========= ========== ========= ========= ========= ======== ========
- ------------------------ --------- --------- --------- - ---------- --------- --------- -- --------- -------- ---------
</TABLE>
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this Item 8 is hereby incorporated by
reference from the Company's Financial Statements and Auditors' Report beginning
at page F-1 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is hereby incorporated by
reference from the Company's definitive proxy statement, to be filed pursuant to
Regulation 14A within 120 days after the end of the fiscal year.
ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS
The information required by this Item 11 is hereby incorporated by
reference from the Company's definitive proxy statement, to be filed pursuant to
Regulation 14A within 120 days after the end of the fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGERS
The information required by this Item 12 is hereby incorporated by
reference from the Company's definitive proxy statement, to be filed pursuant to
Regulation 14A within 120 days after the end of the fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is hereby incorporated by
reference from the Company's definitive proxy statement, to be filed pursuant to
Regulation 14A within 120 days after the end of the fiscal year.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2) - Financial Statement Schedules.
The information called for by this section of Item 14 is set forth in the
Financial Statements and Auditors' Report beginning at page F-1 of this Form
10-K. The index to Financial Statements and Schedules is set forth at page F-2
of this Form 10-K.
(3) - Exhibits
Exhibit
No. Description
----------- -----------------------------------------------------------
2.1 Agreement and Plan of Merger Among CWM Mortgage Holdings, Inc.,
Countrywide Asset Management Corporation and Countrywide Credit
Industries, Inc.
3.1* Certificate of Amendment of Restated Certificate of Incorporation of
Countrywide Credit Industries, Inc. (incorporated by reference to
Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q dated
August 31, 1987).
3.2* Restated Certificate of Incorporation of Countrywide Credit
Industries, Inc. (incorporated by reference to Exhibit 4.2 to the
Company's Quarterly Report on Form 10-Q dated August 31, 1987).
3.3* Bylaws of Countrywide Credit Industries, Inc., as amended and restated
(incorporated by reference to Exhibit 3 to the Company's Current
Report on Form 8-K dated February 10, 1988).
4.1* Rights Agreement, dated as of February 10, 1988, between Countrywide
Credit Industries, Inc. and Bank of America NT & SA, as Rights Agent
(incorporated by reference to Exhibit 4 to the Company's Form 8-A
filed pursuant to Section 12 of the Securities Exchange Act of 1934 on
February 12, 1988).
4.1.1* Amendment No. 1 to Rights Agreement dated as of March 24, 1992
(incorporated by reference to Exhibit 1 to the Company's Form 8 filed
with the SEC on March 27, 1992).
4.2* Specimen Certificate of the Company's Common Stock (incorporated by
reference to Exhibit 4.2 to the Current Company's Report on Form 8-K
dated February 6, 1987).
4.3* Specimen Debenture Certificate (incorporated by reference to Exhibit
4.3 to the Company's Current Report on Form 8-K dated February 6,
1987).
4.4* Form of Medium-Term Notes, Series A (fixed-rate) of Countrywide
Funding Corporation (now known as Countrywide Home Loans, Inc.)
("CHL") (incorporated by reference to Exhibit 4.2 to the Company's
registration statement on Form S-3 (File Nos. 33-44194 and 33-44194-1)
filed with the SEC on November 27, 1991).
4.5* Form of Medium-Term Notes, Series A (floating-rate) of CHL
(incorporated by reference to Exhibit 4.3 to the Company's
registration statement on Form S-3 (File Nos. 33-44194 and 33-44194-1)
filed with the SEC on November 27, 1991).
4.6* Form of Medium-Term Notes, Series B (fixed-rate) of CHL (incorporated
by reference to Exhibit 4.2 to the Company's registration statement on
Form S-3 (File No. 33-51816) filed with the SEC on September 9, 1992).
4.7* Form of Medium-Term Notes, Series B (floating-rate) of CHL
(incorporated by reference to Exhibit 4.3 to the Company's
registration statement on Form S-3 (File No. 33-51816) filed with the
SEC on September 9, 1992).
4.8* Form of Medium-Term Notes, Series C (fixed-rate) of CHL (incorporated
by reference to Exhibit 4.2 to the registration statement on Form S-3
of CHL and the Company (File Nos. 33-50661 and 33-50661-01) filed with
the SEC on October 19, 1993).
4.9* Form of Medium-Term Notes, Series C (floating-rate) of CHL
(incorporated by reference to Exhibit 4.3 to the registration
statement on Form S-3 of CHL and the Company (File Nos. 33-50661 and
33-50661-01) filed with the SEC on October 19, 1993).
4.10*Indenture dated as of January 1, 1992 among CHL, the Company and The
Bank of New York, as trustee (incorporated by reference to Exhibit 4.1
to the registration statement on Form S-3 of CHL and the Company (File
Nos. 33-50661 and 33-50661-01) filed with the SEC on October 19,
1993).
4.10.1* Form of Supplemental Indenture No. 1 dated as of June 15, 1995, to
the Indenture dated as of January 1, 1992, among CHL, the Company, and
The Bank of New York, as trustee (incorporated by reference to Exhibit
4.9 to Amendment No. 2 to the registration statement on Form S-3 of
the Company and CHL (File Nos. 33-59559 and 33-59559-01) filed with
the SEC on June 16, 1995).
4.11*Form of Medium-Term Notes, Series D (fixed-rate) of CHL (incorporated
by reference to Exhibit 4.10 to Amendment No. 2 to the registration
statement on Form S-3 of the Company and CHL (File Nos. 33-59559 and
33-59559-01) filed with the SEC on June 16, 1995).
4.12*Form of Medium-Term Notes, Series D (floating-rate) of CHL
(incorporated by reference to Exhibit 4.11 to Amendment No. 2 to the
registration statement on Form S-3 of the Company and CHL (File Nos.
33-59559 and 33-59559-01) filed with the SEC on June 16, 1995).
4.13*Form of Medium-Term Notes, Series E (fixed-rate) of CHL (incorporated
by reference to Exhibit 4.3 to Post-Effective Amendment No. 1 to the
registration statement on Form S-3 of the Company and CHL (File Nos.
333-3835 and 333-3835-01) filed with the SEC on August 2, 1996).
4.14*Form of Medium-Term Notes, Series E (floating rate) of CHL
(incorporated by reference to Exhibit 4.4 to Post-Effective Amendment
No. 1 to the registration statement on Form S-3 of the Company and CHL
(File Nos. 333-3835 and 333-3835-01) filed with the SEC on August 2,
1996).
+ 10.1*Indemnity Agreements with Directors and Officers of Countrywide
Credit Industries, Inc. (incorporated by reference to Exhibit 10.1 to
the Company's Report on Form 8-K dated February 6, 1987).
+ 10.2*Restated Employment Agreement for David S. Loeb dated March 26, 1996
(incorporated by reference to Exhibit 10.1 to the Company's Annual Report
on Form 10-Q dated August 31, 1996).
+ 10.3* Restated Employment Agreement for Angelo R Mozilo dated March 26,
1996 (incorporated by reference to Exhibit 10.2 to the Company's Annual Report
on Form 10-Q dated August 31, 1996).
+ 10.4 Employment Agreement for Stanford L. Kurland dated May 7, 1996
(incorporated by reference to Exhibit 10.3 to the Company's Annual Report on
Form 10-Q dated August 31, 1996).
+ 10.5*Countrywide Credit Industries, Inc. Deferred Compensation Agreement
for Non-Employee Directors (incorporated by reference to Exhibit 5.2 to the
Company's Quarterly Report on Form 10-Q dated August 31, 1987).
+ 10.6*Countrywide Credit Industries, Inc. Deferred Compensation Plan for
Key Management Employees dated April 15, 1992 (incorporated by reference to
Exhibit 10.3.1 to the Company's Annual Report on Form 10-K dated February 28,
1993).
+ 10.7* Countrywide Credit Industries, Inc. Deferred Compensation Plan
effective August 1, 1993 (incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q dated August 31, 1993).
10.8* Revolving Credit Agreement dated as of May 20, 1996 by and among CFC,
First National Bank of Chicago, Bankers Trust Company, The Bank of New York, The
Chase Manhattan Bank, N.A., Chase Securities, Inc. and the Lenders Party Thereto
(incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q dated May 31, 1996).
+ 10.9* Severance Plan (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q dated May 31, 1988).
+ 10.10* Key Executive Equity Plan (incorporated by reference to Exhibit
10.4 to the Company's Quarterly Report on Form 10-Q dated May 31, 1988).
+ 10.11* 1987 Stock Option Plan, as Amended and Restated on May 15, 1989
(incorporated by reference to Exhibit 10.7 to the Company's Annual Report on
Form 10-K dated February 28, 1989).
+ 10.12* 1986 Non-Qualified Stock Option Plan as amended (incorporated by
reference to Exhibit 10.11 to Post-Effective Amendment No. 2 to the Company's
registration statement on Form S-8 (File No. 33-9231) filed with the SEC on
December 20, 1988).
+ 10.13* 1985 Non-Qualified Stock Option Plan as amended (incorporated by
reference to Exhibit 10.9 to Post-Effective Amendment No. 2 to the Company's
registration statement on Form S-8 (File No. 33-9231) filed with the SEC on
December 20, 1988).
+ 10.14* 1984 Non-Qualified Stock Option Plan as amended (incorporated by
reference to Exhibit 10.7 to Post-Effective Amendment No. 2 to the Company's
registration statement on Form S-8 (File No. 33-9231) filed with the SEC on
December 20, 1988).
+ 10.15* 1982 Incentive Stock Option Plan as amended (incorporated by
reference to Exhibits 10.2 - 10.5 to Post-Effective Amendment No. 2 to the
Company's registration statement on Form S-8 (File No. 33-9231) filed with the
SEC on December 20, 1988).
+ 10.16* Amended and Restated Stock Option Financing Plan (incorporated by
reference to Exhibit 10.12 to Post-Effective Amendment No. 2 to the Company's
registration statement on Form S-8 (File No. 33-9231) filed with the SEC on
December 20, 1988).
10.17* 1995 Amended and Extended Management Agreement, dated as of May 15,
1995, between CWM Mortgage Holdings, Inc. ("CWM") and Countrywide Asset
Management Corporation (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q dated August 31, 1995).
10.18* 1987 Amended and Restated Servicing Agreement, dated as of May 15,
1987, between CWM and CHL (incorporated by reference to Exhibit 10.14 to the
Company's Annual Report on Form 10-K dated February 28, 1990).
10.19* 1995 Amended and Restated Loan Purchase and Administrative Services
Agreement, dated as of May 15, 1995, between CWM and CHL (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q dated
August 31, 1995).
+ 10.20* 1991 Stock Option Plan (incorporated by reference to Exhibit 10.19
to the Company's Annual Report on Form 10-K dated February 29, 1992).
+ 10.20.1* First Amendment to the 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.19.1 to the Company's Annual Report on Form 10-K dated
February 28, 1993).
+ 10.20.2* Second Amendment to the 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.19.2 to the Company's Annual Report on Form 10-K dated
February 28, 1993).
+ 10.20.3* Third Amendment to the 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.19.3 to the Company's Annual Report on Form 10-K dated
February 28, 1993).
+ 10.20.4* Fourth Amendment to the 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.19.4 to the Company's Annual Report on Form 10-K dated
February 28, 1993).
+ 10.20.5* Fifth Amendment to the 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.19.5 to the Company's Annual Report on Form 10-K dated
February 28, 1995).
+ 10.21* 1992 Stock Option Plan dated as of December 22, 1992 (incorporated
by reference to Exhibit 10.19.5 to the Company's Annual Report on Form 10-K
dated February 28, 1993).
+ 10.22* Amended and Restated 1993 Stock Option Plan (incorporated by
reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q dated
August 31, 1996).
+ 10.22.1* First Amendment to the Amended and Restated 1993 Stock Option
Plan (incorporated by reference to Exhibit 10.5.1 to the Company's Annual Report
on Form 10-Q dated August 31, 1996).
+ 10.23* Supplemental Executive Retirement Plan effective March 1, 1994
(incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q dated May 31, 1994).
+ 10.24* Split-Dollar Life Insurance Agreement (incorporated by reference
to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q dated May 31,
1994).
+ 10.25* Split-Dollar Collateral Assignment (incorporated by reference to
Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q dated May 31, 1994).
+ 10.26* Annual Incentive Plan (incorporated by reference to Exhibit 10.4
to the Company's Quarterly Report on Form 10-Q dated August 31, 1996).
+ 10.27 Change in Control Severance Plan
11.1 Statement Regarding Computation of Earnings Per Share.
12.1 Computation of the Ratio of Earnings to Fixed Charges.
22.1 List of subsidiaries.
24.1 Consent of Grant Thornton LLP.
27 Financial Data Schedules (included only with the electronic filing with
the SEC)
-------------------------
*Incorporated by reference.
+Constitutes a management contract or compensatory plan or arrangement.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COUNTRYWIDE CREDIT INDUSTRIES, INC.
By: /s/ DAVID S. LOEB
------------------------------------
David S. Loeb, Chairman and President
Dated: May 15, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
in the capacities and on the dates indicated.
Signatures Title Date
/s/ DAVID S. LOEB President, Chairman of the Board of May 15, 1997
------------------ Directors and Director (Principal
------------------ Executive Officer)
David S. Loeb
/s/ ANGELO R. MOZILO Executive Vice President and Director May 15, 1997
- ---------------------
- ---------------------
Angelo R. Mozilo
/s/ STANFORD L. KURLAND Senior Managing Director and Chief May 15, 1997
- ------------------------ Operating Officer
- ------------------------
Stanford L. Kurland
/s/ CARLOS M. GARCIA Managing Director; Chief Financial May 15, 1997
--------------------- Officer and Chief Accounting
--------------------- Officer (Principal Financial
Carlos M. Garcia Officer and Principal Accounting
Officer)
/s/ ROBERT J. DONATO Director May 15, 1997
---------------------
---------------------
Robert J. Donato
/s/ BEN M. ENIS Director May 15, 1997
- ---------------
- ---------------
Ben M. Enis
/s/ EDWIN HELLER Director May 15, 1997
- -----------------
Edwin Heller
/s/ HARLEY W. SNYDER Director May 15, 1997
- ----------------------
Harley W. Snyder
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
For Inclusion in Form 10-K
Annual Report Filed with
Securities and Exchange Commission
February 28, 1997
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
February 28, 1997
Page
-----------
Report of Independent Certified Public Accountants................ F-3
Financial Statements
Consolidated Balance Sheets.................................. F-4
Consolidated Statements of Earnings.......................... F-5
Consolidated Statement of Common Shareholders' Equity........ F-6
Consolidated Statements of Cash Flows........................ F-7
Notes to Consolidated Financial Statements................... F-8
Schedules
Schedule I - Condensed Financial Information of Registrant... F-30
Schedule II - Valuation and Qualifying Accounts.............. F-33
All other schedules have been omitted since the required information is
not present or not present in amounts sufficient to require submission of the
schedules, or because the information required is included in the consolidated
financial statements or notes thereto.
<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(29), 1997 and 1996,
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, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Countrywide Credit
Industries, Inc. and Subsidiaries as of February 28(29), 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended February 28, 1997, in conformity
with generally accepted accounting principles.
We have also audited Schedules I and II for each of the three years in the
period ended February 28, 1997. In our opinion, such schedules present fairly,
in all material respects, the information required to be set forth therein.
In March 1995, the Company adopted Financial Accounting Standards Board
Statement No. 122, "Accounting for Mortgage Servicing Rights." In January 1997,
the Company adopted Financial Accounting Standards Board Statement No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." These changes are discussed in Note A-5 and Note A-6 of the
Notes to Consolidated Financial Statements.
GRANT THORNTON LLP
Los Angeles, California
April 22, 1997
<PAGE>
<TABLE>
<CAPTION>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 28(29),
(Dollar amounts in thousands, except per share data)
A S S E T S
1997 1996
------------------ -------------------
<S> <C> <C>
Cash $ 18,269 $ 16,444
Mortgage loans and mortgage-backed securities held for sale 2,579,972 4,740,087
Other receivables 1,451,979 912,613
Property, equipment and leasehold improvements, at cost - net of
accumulated depreciation and amortization 190,104 140,963
Mortgage servicing rights 3,023,826 2,323,665
Other assets 825,142 523,881
------------------ -------------------
Total assets $8,089,292 $8,657,653
================== ===================
Borrower and investor custodial accounts (segregated in special
accounts - excluded from corporate assets) $1,695,523 $2,548,549
================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $4,713,324 $6,097,518
Drafts payable issued in connection with mortgage loan closings 221,757 238,020
Accounts payable and accrued liabilities 607,037 505,148
Deferred income taxes 635,643 497,212
------------------ -------------------
Total liabilities 6,177,761 7,337,898
Commitments and contingencies - -
Company-obligated mandatorily redeemable capital trust pass-through securities
of subsidiary trust holding solely a Company
guaranteed related subordinated debt 300,000 -
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, 106,095,558 shares in 1997 and
102,242,329 shares in 1996 5,305 5,112
Additional paid-in capital 917,942 820,183
Unrealized loss on available-for-sale securities (30,545) -
Retained earnings 718,829 494,460
------------------ -------------------
Total shareholders' equity 1,611,531 1,319,755
------------------ -------------------
Total liabilities and shareholders' equity $8,089,292 $8,657,653
================== ===================
Borrower and investor custodial accounts $1,695,523 $2,548,549
================== ===================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended February 28(29),
(Dollar amounts in thousands, except per share data)
1997 1996 1995
---------------- -------------- --------------
Revenues
<S> <C> <C> <C>
Loan origination fees $ 193,079 $199,724 $203,426
Gain (loss) on sale of loans, net of commitment fees 247,450 92,341 (41,342)
---------------- -------------- --------------
Loan production revenue 440,529 292,065 162,084
Interest earned 350,263 308,449 249,560
Interest charges (316,705) (281,573) (205,464)
---------------- -------------- --------------
Net interest income 33,558 26,876 44,096
Loan servicing income 773,715 620,835 460,351
Amortization and impairment/recovery of
mortgage servicing rights (101,380) (342,811) (95,768)
Servicing hedge benefit (expense) (125,306) 200,135 (40,030)
Less write-off of servicing hedge - - (25,600)
---------------- -------------- --------------
Net loan administration income 547,029 478,159 298,953
Commissions, fees and other income 91,346 63,642 40,650
Gain on sale of servicing - - 56,880
---------------- -------------- --------------
Total revenues 1,112,462 860,742 602,663
Expenses
Salaries and related expenses 286,884 229,668 199,061
Occupancy and other office expenses 129,877 106,298 102,193
Guarantee fees 159,360 121,197 85,831
Marketing expenses 34,255 27,115 23,217
Other operating expenses 80,188 50,264 37,016
Branch and administrative office consolidation costs - - 8,000
---------------- -------------- --------------
Total expenses 690,564 534,542 455,318
---------------- -------------- --------------
Earnings before income taxes 421,898 326,200 147,345
Provision for income taxes 164,540 130,480 58,938
---------------- -------------- --------------
NET EARNINGS $ 257,358 $195,720 $88,407
================ ============== ==============
Earnings per share
Primary $2.44 $1.95 $0.96
Fully diluted $2.42 $1.95 $0.96
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
Three years ended February 28, 1997
(Dollar amounts in thousands)
Unrealized
Loss on
Additional Available-
Number Common Paid-in- for-Sale Retained
of Shares Stock Capital Securities Earnings Total
---------------- -------------- -------------- ---------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 1, 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
Issuance of common stock 10,000,000 500 200,775 - - 201,275
Cash dividends paid - common - - - - (30,961) (30,961)
Stock options exercised 752,380 38 6,686 - - 6,724
Tax benefit of stock options exercised - - 1,963 - - 1,963
Dividend reinvestment plan 33,345 2 697 - - 699
401(k) Plan contribution 86,240 4 1,773 - - 1,777
Net earnings for the year - - - - 195,720 195,720
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at February 29, 1996 102,242,329 5,112 820,183 - 494,460 1,319,755
Cash dividends paid - common - - - - (32,989) (32,989)
Stock options exercised 1,000,798 50 15,337 - - 15,387
Tax benefit of stock options exercised - - 3,656 - - 3,656
Dividend reinvestment plan 2,198,563 110 60,040 - - 60,150
401(k) Plan contribution 79,878 4 2,038 - - 2,042
Issuance of common stock in business
acquisition 573,990 29 16,688 - - 16,717
Unrealized loss on available-for-sale
securities - - - (30,545) - (30,545)
Net earnings for the year - - - - 257,358 257,358
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at February 28, 1997 106,095,558 $5,305 $917,942 ($30,545) $718,829 $1,611,531
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
<TABLE>
<CAPTION>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
Year ended February 28(29),
(Dollar amounts in thousands)
1997 1996 1995
---------------- ---------------- -----------------
Cash flows from operating activities
<S> <C> <C> <C>
Net earnings $ 257,358 $ 195,720 $ 88,407
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Amortization and impairment of mortgage servicing
rights 101,380 342,811 95,768
Servicing hedge unrealized loss (gain) 56,903 (108,800) -
Depreciation and other amortization 40,378 30,545 26,050
Deferred income taxes 164,540 130,480 58,938
Gain on bulk sale of servicing rights - - (56,880)
Origination and purchase of loans held for sale (37,810,761) (34,583,653) (27,866,170)
Principal repayments and sale of loans 39,970,876 32,742,391 28,681,606
---------------- ---------------- -----------------
Decrease (increase) in mortgage loans and
mortgage-backed securities held for sale 2,160,115 (1,841,262) 815,436
Increase in other receivables and other assets (890,740) (483,364) (227,220)
Increase in accounts payable and accrued liabilities 96,712 269,531 102,258
---------------- ---------------- -----------------
Net cash provided (used) by operating activities 1,986,646 (1,464,339) 902,757
---------------- ---------------- -----------------
Cash flows from investing activities
Additions to mortgage servicing rights (858,912) (869,579) (796,714)
Purchase of property, equipment and leasehold
improvements - net (77,294) (19,003) (21,414)
Proceeds from bulk sale of servicing rights - - 100,676
---------------- ---------------- -----------------
Net cash used by investing activities (936,206) (888,582) (717,452)
---------------- ---------------- -----------------
Cash flows from financing activities
Net (decrease) increase in warehouse debt and other
short-term borrowings (1,924,308) 1,742,290 (451,915)
Issuance of long-term debt 637,624 526,500 399,205
Repayment of long-term debt (113,773) (96,563) (93,019)
Issuance of Company-obligated mandatorily redeemable
capital trust pass-through securities of subsidiary trust
holding solely a Company guaranteed related
subordinated debt 300,000 - -
Issuance of common stock 84,831 210,475 2,273
Cash dividends paid (32,989) (30,961) (28,259)
---------------- ---------------- -----------------
Net cash (used) provided by financing activities (1,048,615) 2,351,741 (171,715)
---------------- ---------------- -----------------
Net increase (decrease) in cash 1,825 (1,180) 13,590
Cash at beginning of period 16,444 17,624 4,034
================ ================ =================
Cash at end of period $ 18,269 $ 16,444 $ 17,624
================ ================ =================
Supplemental cash flow information
Cash used to pay interest $ 309,575 $ 317,156 $ 262,858
Cash used to pay (refunded from) income taxes $ 15 $ 54 ($ 841)
Noncash financing activities - issuance of common stock
in business acquisition $ 16,717 - -
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Countrywide Credit Industries, Inc. (the "Company") is a holding company.
Through its principal subsidiary, Countrywide Home Loans, Inc. ("CHL"), the
Company is engaged primarily in the mortgage banking business and as such
originates, purchases, sells and services mortgage loans throughout the United
States. In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
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. 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 and the carrying value of
mortgage-backed securities ("MBS") held for sale in the near-term are 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.
3. Mortgage-Backed Securities
The Company's MBS held for sale in the near term and MBS retained in
securitizations are classified as trading securities. Trading securities are
recorded at fair value, with the change in fair value during the period included
in earnings. The fair value of the MBS held for sale in the near term is based
on quoted market prices. The fair value of MBS retained in securitizations is
determined by discounting future cash flows using discount rates that
approximate current market rates, market consensus prepayment rates and
estimated foreclosure losses to the extent the Company has retained the risk of
such losses.
4. Property, Equipment and Leasehold Improvements
Depreciation is provided 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. Mortgage Servicing Rights, Amortization and Impairment
On January 1, 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. Retroactive application was
prohibited. SFAS No. 125 supersedes, but generally retains, the requirements of
SFAS No. 122, Accounting for Mortgage Servicing Rights, which the Company
adopted in March 1995. Both Statements
<PAGE>
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
require the recognition of originated and purchased mortgage servicing rights
("MSRs") as assets by allocating total costs incurred between the loan and the
servicing rights retained based on their relative fair values. In addition, SFAS
No. 125 eliminates the distinction between normal and excess servicing to the
extent the servicing fee does not exceed that specified in the contract. The
adoption of SFAS No. 125 did not have a material impact on the Company's
financial position or results of operations for the year ended February 28,
1997.
Amortization of MSRs is based on the ratio of net servicing income received
in the current period to total net servicing income projected to be realized
from the MSRs. Projected net servicing income is 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. Prior to January 1, 1997, amortization of
capitalized servicing fees receivable was based on the decline during the period
in the present value of the projected excess servicing fees using the same
discount rate as that implied by the price that investors were willing to pay
for the excess servicing fees at the time of the loan sale. Amortization of MSRs
(including capitalized excess servicing fees prior to January 1, 1997) amounted
to $220.1 million, $168.0 million and $95.8 million for the years ended February
28(29), 1997, 1996 and 1995, respectively.
SFAS No. 125 also requires that all MSRs be evaluated for impairment based
on the excess of the carrying amount of the MSRs over their fair value. For
purposes of measuring impairment, MSRs are stratified on the basis of interest
rate and type of interest rate (fixed or adjustable). A net recovery of
previously impaired MSRs amounted to $118.7 million and impairment of MSRs
amounted to $174.8 million for the years ended February 28(29), 1997 and 1996,
respectively.
6. Servicing Portfolio Hedge
The Company acquires financial instruments, including derivative contracts,
that change in aggregate value inversely to the movement of interest rates
("Servicing Hedge"). These financial instruments include call options on
interest rate futures and MBS, interest rate floors, interest rate swaps (with
the Company's maximum payment capped) ("Swap Caps"), options on interest rate
swaps ("Swaptions"), interest rate caps, principal-only ("P/O") swaps and
certain tranches of collateralized mortgage obligations ("CMOs"). The Servicing
Hedge is designed to protect the value of the MSRs from the effects of increased
prepayment activity that generally results from declining interest rates. The
value of the interest rate floors, caps, call options, Swap Caps, Swaptions and
P/O swaps is derived from an underlying instrument or index; however, the
notional or contractual amount is not recognized in the balance sheet. The cost
of the interest rate floors, caps and call options is charged to expense (and
deducted from net loan administration income) over the life of the contract.
Unamortized costs are included in Other Assets in the balance sheet. As part of
the adoption of SFAS No. 122, the Company revised its Servicing Hedge accounting
policy, effective March 1, 1995, to adjust the basis of the MSRs for realized
and unrealized gains and losses in the derivative financial instruments
comprising the Servicing Hedge. Effective January 1, 1997, the Company adopted
SFAS No. 125 which supersedes, but generally retains, the provisions of SFAS No.
122 related to MSRs. For the year ended February 28, 1997, the net expense from
the Servicing Hedge included a net unrealized loss of $56.9 million and a
realized loss of $68.4 million from the premium amortization and sale of various
derivative financial instruments. For the year ended February 29, 1996, the
Servicing Hedge benefit included unrealized gains of $108.8 million and realized
gains of $91.3 million. Prior to the year ended February 29, 1996, gains from
the Servicing Hedge were 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 generated gains in excess of Incremental Amortization, the Company reduced
the carrying amount of the MSRs by such excess through additional amortization.
For the year ended February 28, 1995, the Company recognized $66 million in net
loss (including a write-off of the Servicing Hedge amounting to $26 million) as
an offset to Incremental Amortization.
<PAGE>
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
7. 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 net
put and call option fees paid for the option of selling or buying MBS. Fees paid
to permanent investors are recognized as an adjustment to the sales price when
the loans are sold and 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.
8. Stock-Based Compensation
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees. That Opinion requires that compensation cost related to fixed
stock option plans be recognized only to the extent that the fair value of the
shares at the grant date exceeds the exercise price. Accordingly, the Company
recognizes no compensation expense for its stock option grants.
9. Available-for-Sale Securities
The Company has designated its purchased investments in certain tranches of
CMOs as available for sale. Those securities are included in Other Assets 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.
10. Loan Origination Fees
Loan origination fees and costs 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.
11. Interest Rate Swap Agreements
The differential to be received or paid under the interest rate swap
agreements associated with the Company's debt and custodial accounts 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.
12. Sale of Servicing Rights
The Company recognizes gain or loss on the sale of servicing rights when
title and substantially all risks and rewards have irrevocably passed to the
buyer and any minor protection provisions retained can be reasonably estimated.
13. Advertising Costs
The Company charges to expense the production costs of advertising the first
time the advertising takes place, except for direct-response advertising, which
is capitalized and amortized over the expected period of future benefits.
Advertising expense was $26.6 million and $20.6 million for the years ended
February 28(29), 1997 and 1996, respectively.
<PAGE>
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
14. Income Taxes
The Company utilizes an asset and liability approach in its accounting for
income taxes. This 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 assets and
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
stock options were converted at the beginning of the reporting period.
The weighted average shares outstanding for computing primary and fully
diluted earnings per share were 105,677,000 and 106,555,000, respectively, for
the year ended February 28, 1997; both 100,270,000 for the year ended February
29, 1996 and 92,087,000 and 92,216,000, respectively, for the year ended
February 28, 1995.
16. Financial Statement Reclassifications and Restatement
Certain amounts reflected in the Consolidated Financial Statements for the
years ended February 29(28), 1996 and 1995 have been reclassified to conform to
the presentation for the year ended February 28, 1997.
NOTE B - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consisted of the following.
<TABLE>
<CAPTION>
--------------------------------------------------------- ---- -------------------------------------------- ---
February 28(29),
----------------- --- ---------------- --
(Dollar amounts in thousands) 1997 1996
----------------------------------------------------------------- --- ----------------- --- ---------------- --
<S> <C> <C>
Buildings $ 69,786 $ 37,723
Office equipment 176,957 138,326
Leasehold improvements 26,853 25,269
----------------- ----------------
273,596 201,318
Less accumulated depreciation and amortization (102,259) (72,685)
----------------- ----------------
171,337 128,633
Land 18,767 12,330
================= ================
$190,104 $140,963
================= ================
----------------------------------------------------------------- --- ----------------- --- ---------------- --
Depreciation expense amounted to $29.0 million, $21.1 million and $19.0
million for the years ended February 28(29), 1997, 1996 and 1995, respectively.
</TABLE>
<PAGE>
NOTE C - MORTGAGE SERVICING RIGHTS
<TABLE>
<CAPTION>
The components of mortgage servicing rights were as follows.
--------------------------------------------- -- -------------------------------------------------------------
February 28(29),
---------------- --- ---------------- --- ---------------- --
(Dollar amounts in thousands) 1997 1996 1995
--------------------------------------------- -- ---------------- --- ---------------- --- ---------------- --
Mortgage Servicing Rights
<S> <C> <C> <C>
Balance at beginning of period $2,385,299 $1,796,897 $1,126,016
Additions 858,912 869,579 796,714
Sale of servicing - -
(30,065)
Scheduled amortization (220,099) (168,017) (95,768)
Hedge losses (gains) applied 59,753 (113,160) -
Reclassification of rights in excess
of contractually specified
servicing fees (57,371) - -
---------------- ---------------- ----------------
Balance before valuation reserve
at end of period 3,026,494 2,385,299 1,796,897
---------------- ---------------- ----------------
Reserve for Impairment of Mortgage Servicing Rights
Balance at beginning of period (61,634) - -
Reductions (additions) 58,966 (61,634) -
---------------- ---------------- ----------------
Balance at end of period ( 2,668) (61,634) -
================ ================ ================
Mortgage Servicing Rights, net $3,023,826 $2,323,665 $1,796,897
================ ================ ================
--------------------------------------------- -- ---------------- --- ---------------- --- ---------------- --
</TABLE>
The estimated fair value of recognized mortgage servicing rights aggregated
$3.1 billion and $2.3 billion at February 28(29), 1997 and 1996, respectively.
Fair value is determined by discounting estimated net future cash flows from
mortgage servicing activities using discount rates that approximate current
market rates and using current expected future prepayment rates.
NOTE D - NOTES PAYABLE
Notes payable consisted of the following.
<TABLE>
<CAPTION>
---------------------------------------------------------- -- ---------------------------------------------- --
February 28(29),
----------------- --- ---------------- --
(Dollar amounts in thousands) 1997 1996
------------------------------------------------------------------ -- ----------------- --- ---------------- --
<S> <C> <C>
Commercial paper $1,943,368 $2,847,442
Medium-term notes, Series A, B, C, D and E 2,346,800 1,824,800
Repurchase agreements 220,637 808,353
Subordinated notes 200,000 200,000
Unsecured notes payable - 235,000
Pre-sale funding facilities - 181,255
Other notes payable 2,519 668
================= ================
$4,713,324 $6,097,518
================= ================
------------------------------------------------------------------ -- ----------------- --- ---------------- --
</TABLE>
<PAGE>
NOTE D - NOTES PAYABLE (Continued)
Revolving Credit Facility and Commercial Paper
As of February 28, 1997, CHL had an unsecured credit agreement (revolving
credit facility) with fifty commercial banks permitting CHL to borrow an
aggregate maximum amount of $3.5 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 and mortgage-backed securities held for
sale and MSRs. The facility contains various financial covenants and
restrictions, certain of which limit the amount of dividends that can be paid by
the Company or CHL. 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
CHL's credit ratings. No amount was outstanding on the revolving credit facility
at February 28, 1997. The weighted average borrowing rate on direct and
commercial paper borrowings for the year ended February 28, 1997 was 5.40%. The
weighted average borrowing rate on commercial paper outstanding as of February
28, 1997 was 5.40%. 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 and
mortgage-backed securities held for sale and MSRs. The facility expires on May
14, 2000.
Medium-Term Notes
As of February 28, 1997, outstanding medium-term notes issued by CHL under
various shelf registrations filed with the Securities and Exchange Commission
were as follows.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands)
Outstanding Balance Interest Rate Maturity Date
---------------------- ----------------------------
-------------------------------------------
Floating-Rate Fixed-Rate Total From To From To
------------------------------------------- ----------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Series A $ - $ 304,800 $ 304,800 6.53% 8.79% Mar-1997 Mar-2002
Series B 11,000 396,000 407,000 5.82% 6.98% Aug-1997 Aug-2005
Series C 303,000 197,000 500,000 5.78% 8.43% Dec-1997 Mar-2004
Series D 115,000 385,000 500,000 5.70% 6.88% Aug-1998 Sep-2005
Series E 310,000 325,000 635,000 5.59% 7.45% Feb-2000 Oct-2008
-------------------------------------------
$739,000 $1,607,800 $2,346,800
===========================================
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
As of February 28, 1997, all of the outstanding fixed-rate notes had been
effectively converted by interest rate swap agreements to floating-rate notes.
The weighted average borrowing rate on medium-term note borrowings for the year
ended February 28, 1997, including the effect of the interest rate swap
agreements, was 6.11%.
<PAGE>
NOTE D - NOTES PAYABLE (Continued)
Repurchase Agreements
As of February 28, 1997, the Company had entered into short-term financing
arrangements to sell MBS under agreements to repurchase. The weighted average
borrowing rate for the year ended February 28, 1997 was 5.41%. The weighted
average borrowing rate on repurchase agreements outstanding as of February 28,
1997 was 5.39%. The repurchase agreements were collateralized by MBS. All MBS
underlying repurchase agreements are held in safekeeping by broker-dealers, and
all agreements are to repurchase the same or substantially identical MBS.
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
requirements.
Pre-Sale Funding Facilities
As of February 28, 1997, CHL had uncommitted revolving credit facilities
with two government-sponsored entities and an affiliate of an investment banking
firm. The credit facilities are secured by conforming mortgage loans which are
in the process of being pooled into MBS. Interest rates are based on LIBOR,
federal funds and/or the prevailing rates for MBS repurchase agreements. The
weighted average borrowing rate for all three facilities for the year ended
February 28, 1997 was 5.57%. As of February 28, 1997, the Company had no
outstanding borrowings under any of these facilities.
Maturities of notes payable are as follows.
<TABLE>
<CAPTION>
---------------- ------------------------------------------ ------------------------------------------
Year ending February 28(29), (Dollar amounts in thousands)
---------------- ------------------------------------------ ------------------------------------------
<S> <C>
1998 $2,345,663
1999 143,131
2000 328,030
2001 407,000
2002 291,000
Thereafter 1,198,500
================
$4,713,324
================
---------------- ------------------------------------------ -------- ------------------ --------------
</TABLE>
NOTE E - COMPANY-OBLIGATED CAPITAL TRUST PASS-THROUGH SECURITIES OF
SUBSIDIARY TRUST
On December 11, 1996, Countrywide Capital I (the "Subsidiary Trust"), a
subsidiary of the Company, issued $300 million of 8% Capital Trust Pass-through
Securities (the "Capital Securities"). In connection with the Subsidiary Trust's
issuance of the Capital Securities, CHL issued to the Subsidiary Trust $309
million of its 8% Junior Subordinated Deferrable Interest Debentures (the
"Subordinated Debt Securities"). The sole assets of the subsidiary trust are the
Subordinated Debt Securities and a related guarantee by the Company. CHL's and
the Company's obligations under the Subordinated Debt Securities, the related
guarantee and certain agreements, taken together, constitute a full and
unconditional guarantee by the Company of the Subsidiary Trust's obligations
under the Capital Securities.
<PAGE>
NOTE F - INCOME TAXES
Components of the provision for income taxes were as follows.
<TABLE>
<CAPTION>
-- ----------------------------------------- --- -------------------------------------------------- --
Year ended February 28(29),
---------------- -- ------------- -- ------------- --
(Dollar amounts in thousands) 1997 1996 1995
-- ----------------------------------------- --- ---------------- -- ------------- -- ------------- --
<S> <C> <C> <C>
Federal expense - deferred $135,991 $106,789 $48,680
State expense - deferred 28,549 23,691 10,258
================ ============= =============
$164,540 $130,480 $58,938
================ ============= =============
-- ----------------------------------------- --- ---------------- -- ------------- -- ------------- --
</TABLE>
The following is a reconciliation of the statutory federal income tax rate
to the effective income tax rate as reflected in the consolidated statements of
earnings.
<TABLE>
<CAPTION>
-- ----------------------------------------- --- -------------------------------------------------- --
Year ended February 28(29),
--------------- -- -------------- --- ------------ --
1997 1996 1995
-- ----------------------------------------- --- --------------- -- -------------- --- ------------ --
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income and franchise taxes, net
of federal tax effect 4.0 5.0 5.0
=============== ============== ============
Effective income tax rate 39.0% 40.0% 40.0%
=============== ============== ============
-- ----------------------------------------- --- --------------- -- -------------- --- ------------ --
</TABLE>
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(29),
--------------------------------------------------
(Dollar amounts in thousands) 1997 1996 1995
------------------------------------------------------------------------------------------------------
Deferred income tax assets:
<S> <C> <C> <C>
Net operating losses $131,253 $101,303 $85,508
Alternative minimum tax credits 3,989 3,989 3,989
State income and franchise taxes 39,487 30,276 25,183
Reserves and accrued expenses 40,193 17,740 9,392
Other 720 833 224
----------------- --------------- -------------
Total deferred income tax assets 215,642 154,141 124,296
----------------- --------------- -------------
Deferred income tax liabilities:
Mortgage servicing rights 846,450 645,693 487,269
Accumulated depreciation 4,835 5,660 5,722
----------------- --------------- -------------
Total deferred income tax liabilities 851,285 651,353 492,991
----------------- --------------- -------------
Deferred income taxes $635,643 $497,212 $368,695
================= =============== =============
------------------------------------------------------------------------------------------------------
</TABLE>
At February 28, 1997, the Company had net operating loss carryforwards for
federal income tax purposes of $4,663,000 expiring in 2003, $23,082,000 expiring
in 2004, $2,772,000 expiring in 2006, $5,064,000 expiring in 2008, $131,384,000
expiring in 2009, $74,033,000 expiring in 2010, $41,004,000 expiring in 2011 and
$92,206,000 expiring in 2012.
<PAGE>
NOTE G - FINANCIAL INSTRUMENTS
Derivative Financial Instruments
The Company utilizes a variety of derivative financial instruments to manage
interest rate risk. These instruments include MBS mandatory forward delivery and
purchase commitments, options to sell or buy MBS and treasury securities,
interest rate floors, interest rate swaps, interest rate caps, Swap Caps,
Swaptions and P/O 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.
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 put or call options to sell or buy mortgage-backed and treasury
securities, interest rate floors and caps, swaps, Swap Caps, Swaptions and P/O
swaps 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, 1997, 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 $3 million for MBS mandatory forward delivery
commitments, approximately $25 million for interest rate swaps and approximately
$19 million for interest rate floors.
Hedge of Mortgage Loan Inventory and Committed Pipeline
As of February 28, 1997, the Company had short-term rate and point
commitments amounting to approximately $2.7 billion (including $1.9 billion
fixed-rate and $0.8 billion adjustable-rate) to fund mortgage loan applications
in process subject to approval of the loans ("Committed Pipeline") and an
additional $1.8 billion of mortgage loans subject to property identification and
borrower qualification. Substantially all of these commitments are for periods
of 60 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 H5. The Company uses the same credit policies in
the commitments as are applied to all lending activities.
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
loan commitments, 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, 1997, the Company
had open commitments amounting to approximately $8.0 billion to sell MBS with
varying settlement dates generally not extending beyond December 1997 and
options to sell MBS through February 1998 with a total notional amount of $4.8
billion. 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 mortgage loan
inventory net of gains or losses of associated hedge positions. The correlation
between the price performance of the inventory being hedged and the hedge
instruments is very high due to the similarity of the asset and the related
hedge instrument. The Company
<PAGE>
NOTE G - FINANCIAL INSTRUMENTS (Continued)
is exposed to the risk that in the event of a decline or rise in rates during
the commitment period, the portion of loans from the Committed Pipeline that
actually closes at the committed price is less than or more than the amount
estimated to close. At February 28, 1997, the notional amount of forward
contracts and options to purchase MBS aggregated $3.7 billion and $3.4 billion,
respectively. The forward contracts extend through April 1997 and the options
extend through January 1998. The estimated amount of loans closing from the
Committed Pipeline is influenced by many factors, including the composition of
the Company's Committed Pipeline, the historical and expected portion of the
Committed Pipeline likely to close and the timing of such closings.
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 and impairment of MSRs resulting from increased prepayment
activity that generally occurs when interest rates decline, the Company utilizes
its Servicing Hedge, consisting of financial instruments, including derivative
contracts, that increase in aggregate value when interest rates decline. These
financial instruments include call options on interest rate futures and MBS,
interest rate floors, interest rate caps, Swap Caps, Swaptions, P/O swaps and
certain tranches of CMOs.
The CMOs, which consist primarily of 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. At February 28, 1997, the carrying value of
CMOs included in the Servicing Hedge was approximately $165 million.
The following summarizes the notional amounts of Servicing Hedge derivative
contracts.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Long Call
Options on
Interest Long Call Interest Principal
Rate Options Rate Futures Swap - Only Interest
(Dollar amounts in Floors on MBS Caps Swaps Rate Caps Swaptions
millions)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 1, 1994 $ - $2,000 $ 1,770 $ $ - $ - $ -
Additions 4,000 - 1,300 - - - -
Dispositions - 2,000 3,070 - - - -
---------- ----------- ------------- --------- ----------- ------------ ------------
Balance, February 28, 1995 4,000 - - - - - -
Additions 13,500 2,500 7,920 1,000 268 - -
Dispositions 1,750 1,000 4,370 - - - -
---------- ----------- ------------- --------- ----------- ------------ ------------
Balance, February 29, 1996 15,750 1,500 3,550 1,000 268 - -
Additions 11,500 - 13,890 - - 1,000 1,750
Dispositions/Expirations 1,000 1,500 13,240 - - - -
========== =========== ============= ========= =========== ============ ============
Balance, February 28, 1997 $26,250 $ - $ 4,200 $1,000 $268 $1,000 $1,750
========== =========== ============= ========= =========== ============ ============
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
NOTE G - FINANCIAL INSTRUMENTS (Continued)
The terms of the open Servicing Hedge derivative contracts at February 28,
1997 are presented below.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Long Call
Options on
Interest Principal
Interest Rate Rate Futures Swap - Only Interest
Floors Caps Swaps Rate Caps Swaptions
- ---------------------------------------------------------------------------------------------------------------------
Index or 2-, 5- or Interest 3-Month FNMA 10-Year 3-Month
Underlying 10-Year Constant Rate Futures LIBOR capped Trust Constant LIBOR
Instrument Maturity at 7.00% P/O Maturity
Treasury Yield (floating-pay Treasury
or rate) Yield
3-Month LIBOR
<S> <C> <C> <C> <C> <C> <C>
Strike Price 4.50%-7.00% 104.00-124.00 5.65%-5.77% 72.74% of 8.00% 5.49%-6.00%
(fixed-receive the
rate) remaining
face value
at the end
of the
contract
Term 2-10 Years 3-4 Months 5 Years 2 Years 5 Years 3-11 Years
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The Servicing Hedge instruments utilized by the Company are intended to
protect the value of the investment in MSRs 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 MSRs increases while the
value of hedge instruments declines. With respect to the options, Swaptions,
floors, caps and CMOs, the Company is not exposed to loss beyond its initial
outlay to acquire the hedge instruments. With respect to the Swap Caps contracts
entered into by the Company as of February 28, 1997, the Company estimates that
its maximum exposure to loss over the contractual term is $26.2 million. The
Company's exposure to loss in the P/O swaps is related to changes in the market
value of the referenced P/O security over the life of the contract. There can be
no assurance that the Company's Servicing Hedge will generate gains in the
future, or if gains are generated, that they will fully offset impairment of the
MSRs.
Interest Rate Swaps
As of February 28, 1997, CHL had interest rate swap agreements with certain
financial institutions having notional principal amounts totaling $2.61 billion.
The effect of these agreements is to enable CHL to convert its fixed-rate
medium-term note borrowings to LIBOR-based floating-rate cost borrowings
(notional amount $1.61 billion), to convert a portion of its commercial paper
and medium-term note borrowings from one floating-rate index to another
(notional amount $0.12 billion) and to convert the earnings rate on the
custodial accounts held by CHL from floating to fixed (notional amount $0.88
billion). Payments are due periodically through the termination date of each
agreement. The agreements expire between March 1997 and October 2008.
<PAGE>
NOTE G - FINANCIAL INSTRUMENTS (Continued)
The terms of the open interest rate swap agreements at February 28, 1997 are
presented below.
<TABLE>
<CAPTION>
- --- ------------------------------------- --------- -- --------------------------------- --
Swaps related to debt
<S> <C>
Average receive rate 6.414%
Average pay rate 5.597%
Index 3-Month LIBOR
Swaps related to escrow accounts
Average receive rate 6.783%
Average pay rate 5.541%
Index 1- thru 3-Month LIBOR
- --- ------------------------------------- --------- -- --------------------------------- --
</TABLE>
Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial
instruments as of February 28(29), 1997 and 1996 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, 1997 February 29, 1996
-------------------------------- --- --------------------------
Carrying Estimated Carrying Estimated
(Dollar amounts in thousands) amount fair value amount fair value
-- ------------------------------------------- ------------ -- ------------- --- ------------ -- -------------
Assets:
Mortgage loans and mortgage-backed
<S> <C> <C> <C> <C>
securities held for sale $2,579,972 $2,579,972 $4,740,087 $4,740,087
Items included in Other Assets:
Purchased principal-only securities 165,452 165,452 139,343 125,463
Mortgage-backed securities retained
in securitizations 293,030 293,030 132,378 129,828
Derivatives:
Interest rate floors 167,204 137,047 142,339 132,621
Contracts and options related to Committed
Pipeline, mortgage loans and mortgage-
backed securities held for sale 43,058 (8,879) 33,497 117,426
Options related to Servicing Hedge 6,431 1,625 14,341 6,102
Interest rate caps 12,259 11,614 - -
Swap Caps (11,609) (11,609) 5,910 5,910
Swaptions 19,701 19,482 - -
Principal-only swaps (19,446) (19,446) (6,625) (6,625)
Liabilities:
Notes payable 4,713,324 4,738,763 6,097,518 6,151,774
Derivatives gain (loss):
Interest rate swaps 5,340 (4,951) 1,739 31,602
Short-term commitments to extend credit - 40,439 - (39,716)
-- ------------------------------------------- ------------ -- ------------- --- ------------ -- -------------
</TABLE>
<PAGE>
NOTE G - FINANCIAL INSTRUMENTS (Continued)
The fair value estimates as of February 28(29), 1997 and 1996 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 and Mortgage-Backed Securities 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.
Purchased Principal-only Securities
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.
Mortgage-backed securities retained in securitizations
Fair value is estimated by discounting future cash flows using discount
rates that approximate current market rates, market consensus prepayment rates
and estimated foreclosure losses to the extent the Company has retained the risk
of such losses.
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 H - COMMITMENTS AND CONTINGENCIES
1. Legal Proceedings
On June 22, 1995, a lawsuit was filed by Jeff and Kathy Briggs, as a
purported class action, against CHL and a mortgage broker in the Northern
Division of the United Sates District Court for the Middle District of Alabama.
The suit claims, among other things, that in connection with residential
mortgage loan closings, CHL made certain payments to mortgage brokers in
violation of the Real Estate Settlement Procedures Act and induced mortgage
brokers to breach their alleged fiduciary duties to their customers. The
plaintiffs seek unspecified compensatory and punitive damages plus, as to
certain claims, treble damages. CHL's management believes that its compensation
programs to mortgage brokers comply with applicable law and with long-standing
industry practice, and that it has meritorious defenses to the action. CHL
intends to defend vigorously against the action and believes that the ultimate
resolution of such claims will not have a material adverse effect on the
Company's results of operations and financial position.
<PAGE>
NOTE H - COMMITMENTS AND CONTINGENCIES (Continued)
The Company and certain subsidiaries are defendants in various lawsuits
involving matters generally incidental to their business. Although it is
difficult to predict the ultimate outcome of these cases, management believes,
based on discussions with counsel, that any ultimate liability will not
materially affect the consolidated financial position or results of operations
of the Company and its subsidiaries.
2. Commitments to Buy or Sell Mortgage-Backed Securities and Interest Rate
Swap Agreements
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.
3. Lease Commitments
The Company leases office facilities under lease agreements extending
through September 2011. Future minimum annual rental commitments under these
noncancelable 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>
1998 $ 17,173
1999 14,299
2000 10,580
2001 8,604
2002 7,074
Thereafter 59,563
==============
$117,293
==============
--- ------------------------------- -------------------- -------------- --------
</TABLE>
Rent expense was $22,260,000, $20,408,000 and $22,136,000 for the years
ended February 28(29), 1997, 1996 and 1995, respectively.
4. 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, 1997, the Company is required to
maintain $1.1 billion in consolidated net worth and CHL is required to maintain
$1.0 billion of net worth, as defined in the credit agreement.
5. Loan Servicing
As of February 28(29), 1997, 1996 and 1995, the Company serviced loans
totaling approximately $158.6 billion, $136.8 billion and $113.1 billion,
respectively. Included in the loans serviced at February 28(29), 1997, 1996 and
1995 were loans being serviced under subservicing agreements with total
principal balances of $3.9 billion, $1.9 billion and $0.7 billion, respectively.
<PAGE>
NOTE H - COMMITMENTS AND CONTINGENCIES (Continued)
Conforming conventional loans serviced by the Company (57% of the servicing
portfolio at February 28, 1997) are securitized through the Federal National
Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage
Corporation ("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 (19% of the servicing portfolio at February 28, 1997) or
partially guaranteed against loss by the Veterans Administration (9% of the
servicing portfolio at February 28, 1997). In addition, jumbo mortgage loans
(15% of the servicing portfolio at February 28, 1997) 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,
1997, approximately 37% 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 5% of the properties securing
mortgage loans.
NOTE I - 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, are exercisable beginning one year from the
date of grant and expire up to eleven years from the date of grant.
Stock options transactions under the Plans were as follows.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Year ended February 28(29),
-----------------------------------------------------
1997 1996 1995
- ----- ------------------------------------------------- -- -------------- -- ------------- --- ------------- --
Number of Shares:
<S> <C> <C> <C>
Outstanding options at beginning of year 6,911,180 6,683,414 5,603,325
Options granted 4,516,237 1,110,205 1,948,290
Options exercised (1,001,510) (752,071) (307,847)
Options expired or canceled (184,045) (130,368) (560,354)
============== ============= =============
Outstanding options at end of year 10,241,862 6,911,180 6,683,414
============== ============= =============
Weighted Average Exercise Price:
Outstanding options at beginning of year $15.67
$14.75 $13.79
Options granted 23.14
18.56 16.35
Options exercised 14.26
11.60 4.79
Options expired or canceled 19.38
16.25 16.26
============== ============= =============
Outstanding options at end of year $19.03 $15.67
$14.75
============== ============= =============
Options exercisable at end of year 3,862,565 3,437,985 2,704,728
Options available for future grant 3,078,591 1,410,485 2,393,441
- ----- ------------------------------------------------- -- -------------- -- ------------- --- ------------- --
</TABLE>
<PAGE>
NOTE I - EMPLOYEE BENEFITS (Continued)
Status of the outstanding stock options under the Plans at February 28, 1997
was as follows.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Outstanding Options Exercisable Options
--------------------------------------------------- -------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Contractual Exercise Exercise
Price Range Life Number Price Number Price
------------------- --------------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
$2.39 - $16.19 5.3 years 2,575,213 $12.77 2,207,360 $12.31
$16.81 - $18.56 7.5 2,591,175 $17.65 1,152,459 $17.43
$19.50 - $23.06 7.8 1,401,540 $22.18 498,996 $21.35
$23.19 - $23.19 9.4 3,655,700 $23.19 3,750 $23.19
$23.75 - $29.31 9.6 18,234 $26.46 - $ -
=================== =============== ============== ============= ============= -------------
$2.39 - $29.31 7.7 years 10,241,862 $19.03 3,862,565 $15.01
=================== =============== ============== ============= ============= -------------
- ----- ------------------- - --------------- - -------------- -- ------------- -- ------------- -- -------------
</TABLE>
Had the estimated fair value of the options granted during the period been
included in compensation expense, the Company's net earnings and earnings per
share would have been as follows.
<TABLE>
<CAPTION>
- ------------------------------------------- -------------------------------------
(Dollar amounts in thousands, Year ended February 28(29),
-------------------------------------
except per share data) 1997 1996
- ------------------------------------------- ----------------- -- ----------------
Net Earnings
<S> <C> <C>
As reported $257,358 $195,720
Pro forma $241,115 $191,652
Primary Earnings Per Share
As reported $2.44 $1.95
Pro forma $2.28 $1.91
Fully Diluted Earnings Per Share
As reported $2.42 $1.95
Pro forma $2.26 $1.91
- ------------------------------------------- ----------------- -- ----------------
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model modified to consider cash dividends to be
paid. The following weighted-average assumptions were used for grants in fiscal
1997 and 1996, respectively: dividend yield of 1.38% and 1.72%; expected
volatility of 26% and 32%; risk-free interest rates of 6.6% and 5.9% and
expected lives of five years for options granted in both years. The average fair
value of options granted during fiscal 1997 and 1996 was $7.15 and $6.11,
respectively.
<PAGE>
NOTE I - EMPLOYEE BENEFITS (Continued)
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.
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(29),
----------------------------------
-- ------------- --- ------------
(Dollar amounts in thousands) 1997 1996
--- ------------------------------------------------------------------- -- ------------- --- ------------ ---
Actuarial present value of benefit obligations:
<S> <C> <C>
Vested $8,640 $7,641
Nonvested 3,425 2,068
------------- ------------
Total accumulated benefit obligation 12,065 9,709
Additional benefits based on estimated future salary levels 6,439 5,026
------------
-------------
Projected benefit obligations for service rendered to date 18,504 14,735
Less Plan assets at fair value, primarily mortgage-backed securities (13,677) (12,515)
------------- ------------
Projected benefit obligation in excess of Plan assets 4,827 2,220
Unrecognized net (loss) gain from past experience different from that
assumed and
effects of changes in assumptions (903) 1,422
Prior service cost not yet recognized in net periodic pension cost (1,223) (1,322)
Unrecognized net asset at February 28, 1987 being recognized over 15 years 354 425
------------- ------------
Accrued pension cost $3,055 $2,745
============= ============
Net pension cost included the following components:
Service cost - benefits earned during the period $2,331 $1,832
Interest cost on projected benefit obligations 1,153 955
Actual return on Plan assets 598 (839)
Net amortization and deferral (1,614) 29
============= ============
Net periodic pension cost $2,468 $1,977
============= ============
--- ------------------------------------------------------------------- -- ------------- --- ------------ ---
</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 7.5% and 4.0% for the years ended February
28(29), 1997 and 1996, respectively. The expected long-term rate of return on
assets used was 8.0% for both years ended February 28(29), 1997 and 1996.
Pension expense for the years ended February 28(29), 1997, 1996 and 1995 was
$2,468,000, $1,977,000 and $1,792,000, respectively. The Company makes
contributions to the Plan in amounts that are deductible in accordance with
federal income tax regulations.
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 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 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.
<PAGE>
NOTE J - SHAREHOLDERS' EQUITY (Continued)
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 ("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, 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"), a real estate investment trust. CAMC has
entered into a subcontract with its affiliate, CHL, 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. During the fiscal years ended February 28(29), 1997,
1996 and 1995, CAMC earned $1.6 million, $2.0 million and $0.3 million,
respectively, in base management fees from CWM and its subsidiaries. In
addition, during the fiscal years ended February 28(29), 1997, 1996 and 1995,
CAMC recorded $8.6 million, $6.6 million and $1.1 million, respectively, in
incentive compensation. The Management Agreement is renewable annually and
expires on May 15, 1997. As of February 28, 1997, the Company owned 1,120,000
shares, or approximately 2.2%, of the common stock of CWM.
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 ("Indy Mac"), and all other operations are conducted in
CWM. Accordingly, Indy Mac is charged with the majority of the conduit's cost
and CWM is charged with the other operations' costs. During the fiscal years
ended February 28(29), 1997, 1996 and 1995, the amount of expenses incurred by
CHL which were allocated to CAMC and reimbursed by CWM totaled $29.2 million,
$17.1 million and $9.9 million, respectively.
CWM has an option to purchase conventional loans from CHL at the prevailing
market price. During the years ended February 28(29), 1997, 1996 and 1995, CWM
purchased $51.5 million, $14.3 million and $80.4 million, respectively, of
conventional nonconforming mortgage loans from CHL pursuant to this option.
<PAGE>
NOTE K - RELATED PARTY TRANSACTIONS (Continued)
During the year ended February 28, 1995, CHL purchased from Indy Mac bulk
servicing rights for loans with principal balances aggregating $3.0 billion at a
price of $38.2 million. CHL services mortgage loans collateralizing three series
of CMOs issued by subsidiaries of CWM with outstanding balances of approximately
$77.7 million at February 28, 1997. CHL 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 CHL under such agreements for
the year ended February 28, 1997 were approximately $0.2 million. Approximately
$0.3 million of servicing fees were received for each of the years ended
February 29(28), 1996 and 1995.
The Company has reached a definitive agreement with CWM on restructuring the
business relationship between the two companies. In substance, CWM will acquire
the operations and employees of CAMC and will no longer pay a management fee. In
return, the Company will receive approximately 3.6 million newly issued common
shares of CWM. The proposed transaction is structured as a merger of CAMC with
and into CWM. The transaction will occur after regulatory and shareholder
approvals are obtained.
NOTE L - SEGMENT INFORMATION
The Company and its subsidiaries operate primarily in the mortgage banking
industry. Operations in mortgage banking involve CHL'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, 1997 was as follows.
<TABLE>
<CAPTION>
----------------------------- ---- --- -- ------------ ---- ----------- ---- ------------ ----- -------------
Adjustments
Mortgage and
(Dollar amounts in thousands) Banking Other Eliminations Consolidated
----------------------------- ---- --- -- ------------ ---- ----------- ---- ------------ ----- -------------
<S> <C> <C> <C> <C>
Unaffiliated revenue $1,006,146 $ 106,316 $ - $1,112,462
Intersegment revenue 392 - (392) -
------------ ----------- ------------ ----------
Total revenues $1,006,538 $ 106,316 $ (392) $1,112,462
============ =========== ============ =============
Earnings before income taxes $ 369,020 $ 52,878 $ - $ 421,898
============ =========== ============ =============
Identifiable assets,
February 28, 1997 $7,415,050 $ 2,559,037 ($1,884,795) $8,089,292
============ =========== ============ =============
----------------------------- ---- --- -- ------------ ---- ----------- ---- ------------ ----- -------------
</TABLE>
<PAGE>
NOTE L - SEGMENT INFORMATION (Continued)
Segment information for the year ended February 29, 1996 was as follows.
<TABLE>
<CAPTION>
----------------------------- ---- ---- -- ------------ ---- ----------- -- -------------- ---- -------------
Adjustments
Mortgage and
(Dollar amounts in thousands) Banking Other Eliminations Consolidated
----------------------------- ---- ---- -- ------------ ---- ----------- -- -------------- ---- -------------
<S> <C> <C> <C> <C>
Unaffiliated revenue $ 806,813 $ 53,929 $ - $ 860,742
Intersegment revenue 1,776 - (1,776) -
------------ ----------- -------------- -------------
Total revenues $ 808,589 $ 53,929 ($ 1,776) $ 860,742
============ =========== ============== ==============
Earnings before income taxes $ 308,596 $ 17,604 $ - $ 326,200
============ =========== ============== ==============
Identifiable assets,
February 29, 1996 $8,181,765 $ 1,775,276 ($1,299,388) $ 8,657,653
============ =========== ============== ==============
----------------------------- ---- ---- -- ------------ ---- ----------- -- -------------- ---- -------------
</TABLE>
Segment information for the year ended February 28, 1995 was as follows.
<TABLE>
<CAPTION>
----------------------------- --- ---- -- ------------ ----- ----------- -- ------------- ----- -------------
Adjustments
Mortgage and
(Dollar amounts in thousands) Banking Other Eliminations Consolidated
----------------------------- --- ---- -- ------------ ----- ----------- -- ------------- ----- -------------
<S> <C> <C> <C> <C>
Unaffiliated revenue $ 563,586 $ 39,077 $ - $ 602,663
Intersegment revenue 744 - (744) -
------------ ----------- ------------- --------------
Total revenues $ 564,330 $ 39,077 ($ 744) $ 602,663
============ =========== ============= ==============
Earnings before income taxes $ 136,220 $ 11,125 $ - $ 147,345
============ =========== ============= ==============
Identifiable assets,
February 28, 1995 $5,520,283 $1,144,911 ($955,012) $ 5,710,182
============ =========== ============= ==============
----------------------------- --- ---- -- ------------ ----- ----------- -- ------------- ----- -------------
</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.
NOTE N - SUBSEQUENT EVENTS
On March 19, 1997, the Company declared a cash dividend of $0.08 per common
share payable April 30, 1997 to shareholders of record on April 14, 1997.
<PAGE>
NOTE O - QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly data was as follows.
<TABLE>
<CAPTION>
--------------------------------------------- ---------------------------------------------------------------
Three months ended
---------------------------------------------------------------
(Dollar amounts in thousands, except per share dataMay 31 August 31 November 30 February 28(29)
-------------- --------------- -------------- ----------------
---------------------------------------------- -------------- --------------- -------------- ----------------
Year ended February 28, 1997
<S> <C> <C> <C> <C>
Revenues $263,282 $270,815 $281,530 $296,835
Expenses 163,898 168,361 173,440 184,865
Provision for income taxes 38,760 39,957 42,155 43,668
Net earnings 60,624 62,497 65,935 68,302
Earnings per share(1)
Primary $0.58 $0.60 $0.62 $0.63
Fully diluted $0.58 $0.60 $0.62 $0.63
Year ended February 29, 1996
Revenues $178,963 $209,310 $225,568 $246,901
Expenses 118,669 127,724 137,311 150,838
Provision for income taxes 24,118 32,634 35,303 38,425
Net earnings 36,176 48,952 52,954 57,638
Earnings per share(1)
Primary $0.39 $0.49 $0.51 $0.55
Fully diluted $0.39 $0.49 $0.51 $0.55
---------------------------------------------- -------------- --------------- -------------- ----------------
(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.
</TABLE>
NOTE P - SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY
Summarized financial information for Countrywide Home Loans, Inc., was as
follows.
<TABLE>
<CAPTION>
-- ----------------------------------------- ---- ------------------------------------------------- ---------
February 28(29),
-------------- ----------- -------------- ---------
(Dollar amounts in thousands) 1997 1996
-- ---------------------------------------------- ------- -------------- ----------- -------------- ---------
Balance Sheets:
Mortgage loans and mortgage-backed
<S> <C> <C>
securities held for sale $2,579,972 $4,740,087
Other assets 4,835,078 3,441,678
============== ==============
Total assets $7,415,050 $8,181,765
============== ==============
Short- and long-term debt $5,220,277 $6,335,538
Other liabilities 742,435 588,446
Equity 1,452,338 1,257,781
============== ==============
Total liabilities and equity $7,415,050 $8,181,765
============== ==============
-- ---------------------------------------------- ------- -------------- ----------- -------------- ---------
</TABLE>
<PAGE>
NOTE P - SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY (Continued)
<TABLE>
<CAPTION>
--- ----------------------------------------- --- --------------------------------------------------- --------
Year ended February 28(29),
--------------- ---------- --------------- ---------
(Dollar amounts in thousands) 1997 1996
--- --------------------------------------------- ------- --------------- ---------- --------------- ---------
Statements of Earnings:
<S> <C> <C>
Revenues $1,006,538 $808,589
Expenses 637,518 499,993
Provision for income taxes 143,918 123,438
=============== ===============
Net earnings $ 225,102 $185,158
=============== ===============
--- --------------------------------------------- ------- --------------- ---------- --------------- ---------
</TABLE>
NOTE Q - IMPLEMENTATION OF NEW ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings per Share, which supersedes APB Opinion No. 15, of the same name.
SFAS No. 128 simplifies the standards for computing earnings per share ("EPS")
and makes them comparable to international standards. SFAS No. 128 is effective
for financial statements issued for periods ending after December 15, 1997, with
earlier application not permitted. Upon adoption, all prior EPS data will be
restated.
The following table presents basic and diluted EPS for the years ended
February 28(29), 1997, 1996 and 1995, computed under the provisions of SFAS No.
128.
<TABLE>
<CAPTION>
- ------------------------ --------- --------- --------- -- - --------------------------- -- -- --------- -------- -----
Year ended February
28(29),
--------- --------- --------- -- - --------------------------- -- -- --------- -------- -----
1997 1996 1995
--------- --------- --------- ---------- --------- -------- --------- -------- ---------
(Dollar amounts in Per-Share Per-Share Per-Share
thousands, except per Net Amount Net Amount Net Amount
share data) Earnings Shares Earnings Shares Earnings Shares
- ------------------------ --------- --------- --------- -------- -------- ---------
========= ========== =========
Net earnings $257,358 $195,720 $88,407
========= ========== =========
Basic EPS
Net earnings available
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
to common shareholders $257,358 103,112 $2.50 $195,720 98,352 $1.99 $88,407 91,240 $0.97
Effect of dilutive
stock options - 2,565 - 1,918 - 847
--------- --------- ---------- --------- --------- --------
Diluted EPS
Net earnings available
to common shareholders $257,358 105,677 $2.44 $195,720 100,270 $1.95 $88,407 92,087 $0.96
========= ========= ========= ========== ========= ======== ========= ======== ---------
- ------------------------ --------- --------- --------- - ---------- --------- -------- -- --------- -------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
COUNTRYWIDE CREDIT INDUSTRIES, INC.
BALANCE SHEETS
(Dollar amounts in thousands)
February 28(29),
-------------- -- --------------
1997 1996
-------------- --------------
Assets
<S> <C> <C>
Cash $ - $ -
Other receivables 2,668 5,825
Intercompany receivable 120,126 33,805
Investment in subsidiaries at equity in net assets 1,560,341 1,299,088
Equipment and leasehold improvements 108 106
Other assets 34,266 22,442
-------------- --------------
Total assets $1,717,509 $1,361,266
============== ==============
Liabilities and Shareholders' Equity
Intercompany payable $ 44,023 $ 22,684
Accounts payable and accrued liabilities 16,971 11,437
Deferred income taxes 14,439 7,390
-------------- --------------
Total liabilities 75,433 41,511
Common shareholders' equity
Common stock 5,305 5,112
Additional paid-in capital 917,942 820,183
Retained earnings 718,829 494,460
-------------- --------------
Total shareholders' equity 1,642,076 1,319,755
-------------- --------------
Total liabilities and shareholders' equity $1,717,509 $1,361,266
============== ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
COUNTRYWIDE CREDIT INDUSTRIES, INC.
STATEMENTS OF EARNINGS
(Dollar amounts in thousands)
Year ended February 28(29),
-------------- -- -------------- -- --------------
1997 1996 1995
-------------- -------------- --------------
Revenue
<S> <C> <C> <C>
Interest earned $ 1,148 $ 31 $ 36
Interest charges - (1,952) (2,646)
-------------- -------------- --------------
Net interest income 1,148 (1,921) (2,610)
Dividend income 1,550 2,332 96
-------------- -------------- --------------
2,698 411 (2,514)
Expenses (3,398) (3,761) (3,200)
-------------- -------------- --------------
Loss before income tax benefit and equity in net
earnings of subsidiaries (700) (3,350) (5,714)
Income tax benefit 273 1,340 2,285
-------------- -------------- --------------
Loss before equity in net earnings of subsidiaries (427) (2,010) (3,429)
Equity in net earnings of subsidiaries 257,785 197,730 91,836
-------------- -------------- --------------
NET EARNINGS $257,358 $195,720 $88,407
============== ============== ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
COUNTRYWIDE CREDIT INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
(Dollar amounts in thousands)
Year ended February 28(29),
-------------- -- -------------- -- --------------
1997 1996 1995
-------------- -------------- --------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net earnings $257,358 $195,720 $88,407
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Earnings of subsidiaries (257,785) (197,730) (91,836)
Depreciation and amortization 24 18 16
Increase in other receivables and other assets (1,644) (8,241) (2,925)
Increase in accounts payable and accrued liabilities 5,534 2,488 3,079
-------------- -------------- --------------
Net cash provided (used) by operating activities 3,487 (7,745) (3,259)
-------------- -------------- --------------
Cash flows from investing activities:
Net change in intercompany receivables and payables (44,901) 76,236 31,458
Investment in subsidiaries (6,832) (239,368) (63)
-------------- -------------- --------------
Net cash (used) provided by investing activities (51,733) (163,132) 31,395
-------------- -------------- --------------
Cash flows from financing activities:
Repayment of long-term debt - (10,600) (2,150)
Issuance of common stock 81,235 212,438 2,273
Cash dividends paid (32,989) (30,961) (28,259)
-------------- -------------- --------------
Net cash provided (used) by financing activities 48,246 170,877 (28,136)
-------------- -------------- --------------
Net change in cash - - -
Cash at beginning of year - - -
-------------- -------------- --------------
Cash at end of year $ - $ - $ -
============== ============== ==============
Supplemental cash flow information:
Cash used to pay interest - $2,744 $ 2,114
Cash refunded from income taxes - - ($ 841)
Noncash financing activities - issuance of common stock
to acquire subsidiary $16,717 - -
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Three years ended February 28(29), 1997
(Dollar amounts in thousands)
Column A Column B Column C Column D Column E
- ---------------------------------- -------------- -------------------------------- ----------------- --------------
Additions
--------------------------------
Balance at Charged to Charged Balance
beginning costs and to other at end
of period expenses accounts Deductions (1) of period
- ---------------------------------- -------------- -------------- ---------------- ------------------ -------------
Year ended February 28, 1997
<S> <C> <C> <C> <C> <C>
Allowance for losses $15,635 $21,064 $ 242 $12,192 $24,749
Year ended February 29, 1996
Allowance for losses $11,183 $8,831 $ 800 $ 5,179 $15,635
Year ended February 28, 1995
Allowance for losses $13,826 $1,808 $3,466 $ 7,917 $11,183
- ----------------------------------
(1) Actual losses charged against reserve, net of recoveries and reclassification.
</TABLE>
<PAGE>
Exhibit List
Exhibit Description Page No.
- -------- ----------------------------------------------------------- ---------
---
2.1 Agreement and Plan of Merger Among CWM Mortgage Holdings, Inc.,
Countrywide Asset Management Corporation and Countrywide Credit Industries, Inc.
---
---
3.1* Certificate of Amendment of Restated Certificate of Incorporation of
Countrywide Credit Industries, Inc. (incorporated by reference to Exhibit 4.1 to
the Company's Quarterly Report on Form 10-Q dated August 31, 1987).
---
---
3.2* Restated Certificate of Incorporation of Countrywide Credit
Industries, Inc. (incorporated by reference to Exhibit 4.2 to the Company's
Quarterly Report on Form 10-Q dated August 31, 1987). ---
---
3.3* Bylaws of Countrywide Credit Industries, Inc., as amended and restated
(incorporated by reference to Exhibit 3 to the Company's Current Report on Form
8-K dated February 10, 1988).
---
---
4.1* Rights Agreement, dated as of February 10, 1988, between Countrywide
Credit Industries, Inc. and Bank of America NT & SA, as Rights Agent
(incorporated by reference to Exhibit 4 to the Company's Form 8-A filed pursuant
to Section 12 of the Securities Exchange Act of 1934 on February 12, 1988).
---
---
4.1.1* Amendment No. 1 to Rights Agreement dated as of March 24, 1992
(incorporated by reference to Exhibit 1 to the Company's Form 8 filed with the
SEC on March 27, 1992).
- ---
- ---
4.2* Specimen Certificate of the Company's Common Stock (incorporated by
reference to Exhibit 4.2 to the Current Company's Report on Form 8-K dated
February 6, 1987).
---
---
4.3* Specimen Debenture Certificate (incorporated by reference to Exhibit
4.3 to the Company's Current Report on Form 8-K dated February 6, 1987).
---
---
4.4* Form of Medium-Term Notes, Series A (fixed-rate) of Countrywide
Funding Corporation (now known as Countrywide Home Loans, Inc.) ("CHL")
(incorporated by reference to Exhibit 4.2 to the Company's registration
statement on Form S-3 (File Nos. 33-44194 and 33-44194-1) filed with the SEC on
November 27, 1991).
---
---
4.5* Form of Medium-Term Notes, Series A (floating-rate) of CHL
(incorporated by reference to Exhibit 4.3 to the Company's registration
statement on Form S-3 (File Nos. 33-44194 and 33-44194-1) filed with the SEC on
November 27, 1991).
---
---
4.6* Form of Medium-Term Notes, Series B (fixed-rate) of CHL (incorporated
by reference to Exhibit 4.2 to the Company's registration statement on Form S-3
(File No. 33-51816) filed with the SEC on September 9, 1992).
---
---
4.7* Form of Medium-Term Notes, Series B (floating-rate) of CHL
(incorporated by reference to Exhibit 4.3 to the Company's registration
statement on Form S-3 (File No. 33-51816) filed with the SEC on September 9,
1992).
---
---
4.8* Form of Medium-Term Notes, Series C (fixed-rate) of CHL (incorporated
by reference to Exhibit 4.2 to the registration statement on Form S-3 of CHL and
the Company (File Nos. 33-50661 and 33-50661-01) filed with the SEC on October
19, 1993).
---
---
4.9* Form of Medium-Term Notes, Series C (floating-rate) of CHL
(incorporated by reference to Exhibit 4.3 to the registration statement on Form
S-3 of CHL and the Company (File Nos. 33-50661 and 33-50661-01) filed with the
SEC on October 19, 1993).
---
---
4.10* Indenture dated as of January 1, 1992 among CHL, the Company and The
Bank of New York, as trustee (incorporated by reference to Exhibit 4.1 to the
registration statement on Form S-3 of CHL and the Company (File Nos. 33-50661
and 33-50661-01) filed with the SEC on October 19, 1993).
---
---
4.10.1* Form of Supplemental Indenture No. 1 dated as of June 15, 1995, to
the Indenture dated as of January 1, 1992, among CHL, the Company, and The Bank
of New York, as trustee (incorporated by reference to Exhibit 4.9 to Amendment
No. 2 to the registration statement on Form S-3 of the Company and CHL (File
Nos. 33-59559 and 33-59559-01) filed with the SEC on June 16, 1995).
---
---
4.11* Form of Medium-Term Notes, Series D (fixed-rate) of CHL (incorporated
by reference to Exhibit 4.10 to Amendment No. 2 to the registration statement on
Form S-3 of the Company and CHL (File Nos. 33-59559 and 33-59559-01) filed with
the SEC on June 16, 1995).
---
---
4.12* Form of Medium-Term Notes, Series D (floating-rate) of CHL
(incorporated by reference to Exhibit 4.11 to Amendment No. 2 to the
registration statement on Form S-3 of the Company and CHL (File Nos. 33-59559
and 33-59559-01) filed with the SEC on June 16, 1995).
---
---
4.13* Form of Medium-Term Notes, Series E (fixed-rate) of CHL (incorporated
by reference to Exhibit 4.3 to Post-Effective Amendment No. 1 to the
registration statement on Form S-3 of the Company and CHL (File Nos. 333-3835
and 333-3835-01) filed with the SEC on August 2, 1996).
---
---
4.14* Form of Medium-Term Notes, Series E (floating rate) of CHL
(incorporated by reference to Exhibit 4.4 to Post-Effective Amendment No. 1 to
the registration statement on Form S-3 of the Company and CHL (File Nos.
333-3835 and 333-3835-01) filed with the SEC on August 2, 1996).
---
---
+ 10.1* Indemnity Agreements with Directors and Officers of Countrywide
Credit Industries, Inc. (incorporated by reference to Exhibit 10.1 to the
Company's Report on Form 8-K dated February 6, 1987).
---
---
+ 10.2* Restated Employment Agreement for David S. Loeb dated March 26,
1996 (incorporated by reference to Exhibit 10.1 to the Company's Annual Report
on Form 10-Q dated August 31, 1996).
---
---
+ 10.3* Restated Employment Agreement for Angelo R Mozilo dated March 26,
1996 (incorporated by reference to Exhibit 10.2 to the Company's Annual Report
on Form 10-Q dated August 31, 1996).
---
---
+ 10.4* Employment Agreement for Stanford L. Kurland dated May 7, 1996
(incorporated by reference to Exhibit 10.3 to the Company's Annual Report on
Form 10-Q dated August 31, 1996).
---
---
+ 10.5* Countrywide Credit Industries, Inc. Deferred Compensation Agreement
for Non-Employee Directors (incorporated by reference to Exhibit 5.2 to the
Company's Quarterly Report on Form 10-Q dated August 31, 1987).
---
---
+ 10.6* Countrywide Credit Industries, Inc. Deferred Compensation Plan for
Key Management Employees dated April 15, 1992 (incorporated by reference to
Exhibit 10.3.1 to the Company's Annual Report on Form 10-K dated February 28,
1993).
---
+ 10.7* Countrywide Credit Industries, Inc. Deferred Compensation Plan
effective August 1, 1993 (incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q dated August 31, 1993).
---
---
10.8* Revolving Credit Agreement dated as of May 20, 1996 by and among CFC,
First National Bank of Chicago, Bankers Trust Company, The Bank of New York, The
Chase Manhattan Bank, N.A., Chase Securities, Inc. and the Lenders Party Thereto
(incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q dated May 31, 1996).
---
---
+ 10.9* Severance Plan (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q dated May 31, 1988).
---
---
+ 10.10* Key Executive Equity Plan (incorporated by reference to Exhibit
10.4 to the Company's Quarterly Report on Form 10-Q dated May 31, 1988).
---
---
+ 10.11* 1987 Stock Option Plan, as Amended and Restated on May 15, 1989
(incorporated by reference to Exhibit 10.7 to the Company's Annual Report on
Form 10-K dated February 28, 1989).
---
---
+ 10.12* 1986 Non-Qualified Stock Option Plan as amended (incorporated by
reference to Exhibit 10.11 to Post-Effective Amendment No. 2 to the Company's
registration statement on Form S-8 (File No. 33-9231) filed with the SEC on
December 20, 1988).
---
---
+ 10.13* 1985 Non-Qualified Stock Option Plan as amended (incorporated by
reference to Exhibit 10.9 to Post-Effective Amendment No. 2 to the Company's
registration statement on Form S-8 (File No. 33-9231) filed with the SEC on
December 20, 1988).
---
---
+ 10.14* 1984 Non-Qualified Stock Option Plan as amended (incorporated by
reference to Exhibit 10.7 to Post-Effective Amendment No. 2 to the Company's
registration statement on Form S-8 (File No. 33-9231) filed with the SEC on
December 20, 1988).
---
---
+ 10.15* 1982 Incentive Stock Option Plan as amended (incorporated by
reference to Exhibits 10.2 - 10.5 to Post-Effective Amendment No. 2 to the
Company's registration statement on Form S-8 (File No. 33-9231) filed with the
SEC on December 20, 1988).
---
---
+ 10.16* Amended and Restated Stock Option Financing Plan (incorporated by
reference to Exhibit 10.12 to Post-Effective Amendment No. 2 to the Company's
registration statement on Form S-8 (File No. 33-9231) filed with the SEC on
December 20, 1988).
---
---
10.17* 1995 Amended and Extended Management Agreement, dated as of May 15,
1995, between CWM Mortgage Holdings, Inc. ("CWM") and Countrywide Asset
Management Corporation (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q dated August 31, 1995).
---
---
10.18* 1987 Amended and Restated Servicing Agreement, dated as of May 15,
1987, between CWM and CHL (incorporated by reference to Exhibit 10.14 to the
Company's Annual Report on Form 10-K dated February 28, 1990).
---
---
10.19* 1995 Amended and Restated Loan Purchase and Administrative Services
Agreement, dated as of May 15, 1995, between CWM and CHL (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q dated
August 31, 1995).
---
---
+ 10.20* 1991 Stock Option Plan (incorporated by reference to Exhibit 10.19
to the Company's Annual Report on Form 10-K dated February 29, 1992).
---
---
+ 10.20.1* First Amendment to the 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.19.1 to the Company's Annual Report on Form 10-K dated
February 28, 1993).
---
---
+ 10.20.2* Second Amendment to the 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.19.2 to the Company's Annual Report on Form 10-K dated
February 28, 1993).
---
---
+ 10.20.3* Third Amendment to the 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.19.3 to the Company's Annual Report on Form 10-K dated
February 28, 1993).
---
---
+ 10.20.4* Fourth Amendment to the 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.19.4 to the Company's Annual Report on Form 10-K dated
February 28, 1993).
---
---
+ 10.20.5* Fifth Amendment to the 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.19.5 to the Company's Annual Report on Form 10-K dated
February 28, 1995).
---
---
+ 10.21* 1992 Stock Option Plan dated as of December 22, 1992 (incorporated
by reference to Exhibit 10.19.5 to the Company's Annual Report on Form 10-K
dated February 28, 1993).
---
---
+ 10.22* Amended and Restated 1993 Stock Option Plan (incorporated by
reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q dated
August 31, 1996).
---
---
+ 10.22.1* First Amendment to the Amended and Restated 1993 Stock Option
Plan (incorporated by reference to Exhibit 10.5.1 to the Company's Annual Report
on Form 10-Q dated August 31, 1996).
---
---
+ 10.23* Supplemental Executive Retirement Plan effective March 1, 1994
(incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q dated May 31, 1994).
---
---
+ 10.24* Split-Dollar Life Insurance Agreement (incorporated by reference
to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q dated May 31,
1994).
---
---
+ 10.25* Split-Dollar Collateral Assignment (incorporated by reference to
Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q dated May 31, 1994).
---
---
+ 10.26* Annual Incentive Plan (incorporated by reference to Exhibit 10.4
to the Company's Quarterly Report on Form 10-Q dated August 31, 1996).
---
---
+ 10.27 Change in Control Severance Plan
---
---
11.1 Statement Regarding Computation of Earnings Per Share.
---
---
12.1 Computation of the Ratio of Earnings to Fixed Charges.
---
---
22.1 List of subsidiaries.
---
---
24.1 Consent of Grant Thornton LLP.
---
---
27 Financial Data Schedules (included only with the electronic filing with
the SEC)
---
-------------------------
*Incorporated by reference.
+Constitutes a management contract or compensatory plan or arrangement.
<PAGE>
Exhibit 2.1
APPENDIX A
AGREEMENT AND PLAN OF MERGER
<PAGE>
- --------------------------------------------------------------------------------
AMONG CWM MORTGAGE HOLDINGS, INC.,
COUNTRYWIDE ASSET MANAGEMENT CORPORATION AND
COUNTRYWIDE CREDIT INDUSTRIES, INC.
- --------------------------------------------------------------------------------
<PAGE>
- ------------------------------------------------------------------------
This Agreement and Plan of Merger (this "Agreement") dated as of January 29,
1997, is by and among CWM Mortgage Holdings, Inc., a Delaware corporation ("CWM
REIT"), Countrywide Asset Management Corporation, a Delaware corporation ("CAMC
Advisor"), and Countrywide Credit Industries, Inc., a Delaware corporation
("CCR").
- ------------------------------------------------------------------------
WITNESSETH:
WHEREAS, the parties hereto wish to merge CAMC Advisor with and into
CWM REIT
pursuant to Delaware law, with CWM REIT being the surviving entity
(the "Merger"); and
WHEREAS, Section 251 of the General Corporation Law of the State of
Delaware, 8 Del.C. (S) 101, et seq. (the "DGCL"),
authorizes the merger of a Delaware
corporation with and into another Delaware corporation; and
WHEREAS, CWM REIT's Certificate of Incorporation and Bylaws permit, and
resolutions adopted by a majority of CWM REIT's independent directors and by the
CWM REIT Board of Directors authorize, this Agreement and the consummation of
the Merger, and as provided herein, this Agreement will be submitted to the
stockholders of CWM REIT for approval; and
WHEREAS, CAMC Advisor's Certificate of Incorporation and Bylaws permit, and
resolutions adopted by CAMC Advisor's Board of Directors and CCR (as the sole
shareholder of CAMC Advisor), respectively, authorize, this Agreement and the
consummation of the Merger; and
WHEREAS, for federal income tax purposes, it is intended that the Merger
qualify as a reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code");
NOW, THEREFORE, for good and valuable consideration, the receipt of
which is
hereby acknowledged, the parties to this Agreement covenant and agree
as follows:
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE 1
DEFINITIONS
1.1 Terms Defined in this Section.................................... A-2
1.2 Terms Defined in Section 5.7.................................... A-5
ARTICLE 2
THE MERGER
2.1 The Merger, Surviving Corporation................................ A-5
2.2 Closing.......................................................... A-5
2.3 Effective Time................................................... A-5
2.4 Effect of the Merger............................................. A-5
ARTICLE 3
THE SURVIVING CORPORATION
3.1 Name............................................................. A-5
3.2 Certificate of Incorporation and Bylaws.......................... A-5
3.3 Officers and Directors........................................... A-6
ARTICLE 4
MERGER CONSIDERATION; CONVERSION OR CANCELLATION
OF
CAMC ADVISOR COMMON STOCK; ADJUSTMENTS
4.1 Share Consideration; Conversion or Cancellation of CAMC Shares... A-6
4.2 Payment for CAMC Shares in the Merger............................ A-6
4.3 Fractional CAMC Shares........................................... A-7
4.4 Transfer of CAMC Shares.......................................... A-7
4.5 Lost, Stolen or Destroyed Certificates........................... A-7
4.6 Indemnification.................................................. A-7
4.7 Further Assurances............................................... A-9
ARTICLE 5
REPRESENTATIONS AND WARRANTIES REGARDING CAMC ADVISOR
5.1 Organization, Etc. of CAMC Advisor............................... A-9
5.2 Partnerships; Subsidiaries....................................... A-9
5.3 Agreement........................................................ A-9
5.4 Capital Stock.................................................... A-9
5.5 Litigation....................................................... A-9
5.6 Compensation and Employee Matters................................ A-9
5.7 Employee Benefit Plans........................................... A-9
5.8 Taxes............................................................ A-13
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5.9 Intellectual Property.......................................... A-13
5.10 No Material Adverse Change..................................... A-14
5.11 Financial Statements........................................... A-14
5.12 Books and Records.............................................. A-14
5.13 Proxy Statement................................................ A-14
5.14 Contracts and Leases........................................... A-14
5.15 Real Property.................................................. A-14
ARTICLE 6
<PAGE>
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REPRESENTATIONS AND WARRANTIES
REGARDING CCR
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6.1 Power and Authority.................................... A-15
6.2 Agreement.............................................. A-15
6.3 Foreign Person......................................... A-15
6.4 No Withholding......................................... A-15
6.6 Brokers and Finders.................................... A-15
6.7 Securities Act Representations......................... A-15
ARTICLE 7
REPRESENTATIONS AND WARRANTIES OF CWM REIT
7.1 Organization, Etc. of CWM REIT......................... A-16
7.2 Capital Stock.......................................... A-16
7.3 Authorization for CWM Common Stock..................... A-17
7.4 Brokers and Finders.................................... A-17
7.5 SEC Reports and Financial Statements................... A-17
7.6 Information............................................ A-18
7.7 Books and Records...................................... A-18
7.8 Litigation............................................. A-18
7.9 General................................................ A-18
7.10
ARTICLE 8
COVENANTS OF THE PARTIES
8.1 Maintenance of Business, Prohibited Acts............... A-19
8.2 Officers and Employees................................. A-20
8.3 Significant Business Line.............................. A-20
8.4 Meeting of Stockholders................................ A-20
8.5 Proxy Materials........................................ A-20
8.6 Fillings, Other Action................................. A-21
8.7 Access to Information.................................. A-21
8.8 Management Fee Adjustment.............................. A-21
8.9 Intellectual Property Rights........................... A-22
8.10 Tax Matters............................................ A-22
8.11 Covenant Not to Compete, Continuing Arrangements Etc... A-24
8.12 Reorganization......................................... A-24
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8.13 Public Statements..................................................... A-25
8.14 Letter of CAMC Advisor's Accountants.................................. A-25
8.15 Employee Matters...................................................... A-25
8.16 Notice of Certain Events.............................................. A-27
8.17 Director and Officer Indemnification.................................. A-27
8.18 Further Action........................................................ A-28
8.19 Books and Records..................................................... A-28
8.20 Restrictions on Resale of Share Consideration......................... A-28
8.21 CAMC Advisor Shareholder Approval..................................... A-28
8.22 Waiver of Limitations on Percentage Ownership......................... A-28
8.23 Delivery of Certain Financial Statements.............................. A-28
8.24 Distributions......................................................... A-28
8.25 Sales and Use Taxes, Etc.............................................. A-29
ARTICLE 9
CONDITIONS TO THE MERGER
9.1 Conditions to Each Party's
Obligations.............................................................. A-29
(a) CWM REIT Stockholder Approval........................................ A-29
(b) HSR Act.............................................................. A-29
(c) No Injunction or Proceedings......................................... A-29
(d) No Suspension of Trading, Etc........................................ A-29
(e) Registration Rights Agreement........................................ A-29
(f) Cooperation Agreement................................................ A-29
(g) Employment Contract.................................................. A-30
(h) Physical Facility.................................................... A-30
9.2 Conditions to Obligations of CCR and CAMC
Advisor to Effect the Merger............................................. A-30
9.3 Conditions to Obligation of CWM REIT to Effect the Merger........... A-30
ARTICLE 10
TERMINATION; AMENDMENT; WAIVER
10.1 Termination by Mutual Consent....................................... A-31
10.2 Termination by Either CWM REIT or CAMC Advisor...................... A-31
10.3 Effect of Termination and Abandonment............................... A-32
10.4 Amendment........................................................... A-32
10.5 Waiver.............................................................. A-32
ARTICLE 11
MISCELLANEOUS
11.1 Expenses............................................................ A-32
11.2 Notices, Etc........................................................ A-32
11.3 Survival............................................................ A-33
11.4 No Assignment....................................................... A-34
11.5 Entire Agreement.................................................... A-34
11.6 Specific Performance................................................ A-34
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11.7 Remedies Cumulative............ A-34
11.8 No Waiver...................... A-34
11.9 No Third-Party Beneficiaries... A-34
11.10 Jurisdiction and Venue......... A-34
11.11 Governing Law.................. A-34
11.12 Name, Captions, Etc............ A-34
11.13 Severability................... A-34
11.14 Counterparts................... A-35
11.15 Gender; Number................. A-35
11.16 Ambiguities.................... A-35
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<PAGE>
ARTICLE 1
DEFINITIONS
1.1 Terms Defined in this Section. As used in this Agreement, the
following
terms shall have the respective meanings set forth below:
"Affiliate": As defined in Rule 12b-2 under the Exchange Act.
"Agreement": As defined in the preamble.
"Authorization": Any consent, approval or authorization of,
expiration or termination of any waiting period requirement (including pursuant
to the HSR Act) by, or filing, registration, qualification, declaration or
designation with, any Governmental Body.
"Business Combination": As defined in Section 4.1(a).
"Business Day": means any day, other than a Saturday or Sunday,
that is neither a legal holiday nor a day on which banking institutions are
authorized or required by law, regulation or executive order to close in The
City of New York or in Los Angeles, California.
"CAMC Advisor": As defined in the preamble.
"CAMC Advisor Common Stock": CAMC Advisor's common stock, $0.10 par
value.
"CAMC Advisor Disclosure Schedule": As defined in Article 5.
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"CAMC Advisor Financial Statements": As defined in Section 5.11.
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"CAMC Shares": As defined in Section 4.1(a).
"CCR": As defined in the preamble.
"CCR DB Plan": As defined in Section 8.15(a).
"CWM Common Stock": CWM REIT's common stock, par value $.01 per share.
"CWM REIT": As defined in the preamble.
"CWM REIT DB Plan": As defined in Section 8.15(a).
"CWM REIT E&P Committee": A Committee consisting of no more than six
employees of, or advisors to, CWM REIT to be designated by the chief operating
officer of CWM REIT.
"CWM REIT 401(k) Plan": As defined in Section 8.15(b).
"CWM REIT Stockholders Meeting": As defined in Section 8.4.
"Certificate of Merger": The certificate of merger with respect to the
Merger containing the provisions required by, and executed in accordance with,
DGCL Section 251.
"Certificates": As defined in Section 4.l(b).
"Change of Control": As defined in the CCR 1993 Stock Option Plan, as
amended and restated as of March 27, 1996, without reference to any subsequent
amendments, modifications or alterations thereof.
"Closing": The closing of the Merger.
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"Closing Date": The date on which the Closing occurs.
"Code": As defined in the Recitals.
"Cooperation Agreement": As defined in Section 9.1(f).
"DGCL": As defined in the Recitals.
"Damages": Any loss, liability, damage, Tax, demand, claim, action, judgment
or cause of action, assessment, cost, obligation or expense (including, without
limitation, interest, penalties, reasonable costs of investigation, defense and
prosecution of litigation and reasonable attorneys' and accountants' fees)
incurred by CWM REIT or CCR, as the case may be, subject in all events to
Section 4.6(f).
"Dean Witter": Dean Witter Reynolds Inc.
"Effective Time": As defined in Section 2.3.
"Estimated Transfer Amount": As defined in Section 8.15(b).
"Exchange": Each national securities exchange (as defined in Section 12(b)
of the Exchange Act) upon which the CWM Common Stock is then listed for trading
and/or quotation system on which the CWM Common Stock is then quoted, which on
the date of this Agreement is the New York Stock Exchange.
"Exchange Act": The Securities Exchange Act of 1934, as amended.
"February 29 Balance Sheet": The audited balance sheet of CAMC Advisor
dated February 29, 1996.
"Governmental Body": Any federal, state, municipal, political subdivision
or other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign.
"HSR Act": The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended. "Indemnified Party": As defined in Section 4.6(c).
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"Indemnifying Party": As defined in Section 4.6(c).
- --------------------------------------------------------------------------------
"Indy Mac": Independent National Mortgage Corporation.
"Indy Mac Charter Amendment": As defined in Section 8.11(e).
"Intellectual Property Rights": All intellectual property rights referred to
in the letter, dated the date hereof, from CWM REIT to CCR and CAMC Advisor,
including patents, patent applications, trademarks, trademark applications and
registrations, service marks, service mark applications and registrations,
tradenames, tradename applications and registrations, copyrights, copyright
applications and registrations, licenses, logos, corporate and partnership
names, and customer lists, proprietary processes, formulae, inventions, trade
secrets, know-how, development tools and other proprietary rights, and all
documentation and media constituting, describing or relating to the above,
including, but not limited to, manuals, memoranda, know-how, notebooks,
software, records and disclosures.
"Knowledge": The terms "knowledge" and "aware" and any derivatives thereof
when applied to any party to this Agreement shall refer to the knowledge or
awareness, as the case may be, which such party or, if applicable, any director
or executive officer thereof has, or reasonably should have had, after due
inquiry of the other officers and employees of such party; provided, however,
for the purposes of determining whether CCR or CAMC Advisor is in breach of any
<PAGE>
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awareness of CCR or CAMC Advisor, no such breach shall exist if a director or
senior officer of CWM REIT
- --------------------------------------------------------------------------------
<PAGE>
(other than David S. Loeb or Angelo R. Mozilo) has knowledge or awareness of the
facts or circumstances which would otherwise constitute such breach; and
provided, further for the purposes of determining whether CWM REIT is in breach
of any representation or warranty hereunder which is based on the knowledge or
awareness of CWM REIT, no such breach shall exist if a director or senior
officer of CCR has knowledge or awareness of the facts or circumstances which
would otherwise constitute such breach.
"Management Agreement": The Amended and Extended Management Agreement dated
as of June 1, 1996 by and between CWM REIT and CAMC Advisor, as amended by the
First Amendment to 1996 Amended and Extended Management Agreement dated as of
July 25, 1996, by and between such parties.
"Material Adverse Effect": As to any Person, a material adverse effect on
the business, properties, operations or condition (financial or other) of such
Person.
"Merger": As defined in the Recitals.
"Merrill Lynch": Merrill Lynch, Pierce, Fenner & Smith Incorporated
"Person": Any individual or corporation, company, partnership, trust,
incorporated or unincorporated association, joint venture or other entity of any
kind.
"Pre-Closing Market Value": The per-share value of the CWM Common Stock
based on the average sale price thereof for the 10 Business Days next preceding
the Closing Date, using for each such Business Day the last reported sale price
on the New York Stock Exchange.
"Proxy Statement": As defined in Section 8.5.
"Quarterly Financial Statements": As defined in Section 7.6(c).
"Registration Rights Agreement": That certain agreement between CCR and CWM
REIT to be entered pursuant to and in accordance with Section 9.1(e)
hereof. "Savings Participants": As defined in Section 8.15(b).
<PAGE>
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"SEC": The Securities and Exchange Commission.
- --------------------------------------------------------------------------------
"SEC Reports": As defined in Section 7.6.
"Securities Act": The Securities Act of 1933, as amended. "Share
Consideration": As defined in Section 4.1(a).
"Special Committee": The Special Committee of the three independent members
of the Board of Directors of CWM REIT, appointed specifically for the
purpose of negotiating the terms of any proposed merger with CAMC Advisor and
any alternatives to such transaction and to make recommendations to the CWM REIT
Board of Directors and stockholders with respect to same.
"Special Purchase Rights": As defined in the Registration Rights Agreement.
"Stock": As defined in Section 8.15(b).
"Subsidiary": As to any Person, any other Person of which at the time of
determination the first Person owns or controls directly or indirectly more than
50% of the outstanding common stock; provided, however, that for purposes of
this term whenever used in this Agreement, Indy Mac shall be deemed to be a
Subsidiary of CWM REIT and not a Subsidiary of CCR.
"Tax" or "Taxes": All federal, state, local, non-U.S. and other taxes
imposed by or on behalf of any Governmental Body, including, without limitation:
(i)
<PAGE>
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net income, gross income, gross receipts, sales, use, ad A-4
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<PAGE>
valorem, transfer, franchise, profits, license, lease, service, service use,
withholding, payroll, employment, unemployment, excise, severance, stamp,
occupation, premium, real and personal property, gift or windfall profits taxes,
(ii) customs or duties and (iii) all other taxes, fees, assessments or charges
of any kind whatever, together with any interest and any penalties, additions to
tax, supplemental or retroactive assessments or additional amounts with respect
thereto.
"Tax Matter": As defined in Section 8.10(c).
"Tax Return": Any return, declaration of estimated tax, tax report, customs
declaration, claim for refund or information return or statement relating to
Taxes, including any amendment thereto.
"Transfer Amount": As defined in Section 8.15(b).
"Transferring Employees": As defined in Section 8.15(a).
1.2 Terms Defined in Section 5.7. Capitalized terms defined in Section 5.7
shall have the respective meanings set forth therein whenever such capitalized
terms appear in this Agreement.
ARTICLE 2
THE MERGER
2.1 The Merger, Surviving Corporation. Subject to the terms and conditions
set forth in this Agreement, at the Effective Time CAMC Advisor shall be merged
with and into CWM REIT pursuant to Section 251 of the DGCL, and the separate
existence of CAMC Advisor shall cease. CWM REIT shall be the surviving
corporation in the Merger and shall continue to be governed by the DGCL.
2.2 Closing. Subject to Article 10 hereof and the fulfillment or waiver of
the conditions set forth in Article 9, the Closing shall take place at (i) the
offices of Brown & Wood LLP, One World Trade Center, New York, New York, at
10:00 a.m. New York City time, on the second business day following the
fulfillment or waiver of the conditions set forth in Article 9 (other than
conditions which by their nature are intended to be fulfilled at the Closing) or
(ii) such other place or time or on such other date as CWM REIT and CCR may
agree or as may be necessary to permit the fulfillment or waiver of the
conditions set forth in Article 9.
2.3 Effective Time. In accordance with Sections 251 and 103 of the DGCL,
the Merger shall become effective (the "Effective Time") upon the filing of a
Certificate of Merger with the Secretary of State of the State of Delaware, or
at such later time, not later than five business days thereafter, as may be
specified in the Certificate of Merger. For Tax purposes, the parties agree that
the Effective Time shall be deemed to occur after the close of business on the
date on which the Effective Time occurs, and neither party shall take a position
inconsistent therewith, except as may be required by law. All other filings or
recordings required by Delaware law in connection with the Merger shall also be
made.
ARTICLE 3
THE SURVIVING CORPORATION
3.1 Name. The name of the surviving corporation shall be CWM Mortgage
Holdings, Inc. or such other name as may be approved by the stockholders of CWM
REIT.
3.2 Certificate of Incorporation and Bylaws. The Certificate of
Incorporation
<PAGE>
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and Bylaws of CWM REIT as in effect immediately prior to the Effective Time
shall be the Certificate of Incorporation and Bylaws of CWM REIT unless and
until amended in accordance with their terms and applicable law.
- --------------------------------------------------------------------------------
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<PAGE>
3.3 Officers and Directors. Except as otherwise contemplated by this
Agreement, the officers of CWM REIT immediately prior to the Effective Time
shall continue as officers of CWM REIT and remain officers until their
successors are duly appointed or their prior resignation, removal or death. The
directors of CWM REIT immediately prior to the Effective Time shall continue as
directors of CWM REIT and shall remain directors until their successors are duly
elected and qualified or their prior resignation, removal or death.
ARTICLE 4
MERGER CONSIDERATION; CONVERSION OR CANCELLATION OF
CAMC ADVISOR COMMON STOCK; ADJUSTMENTS
4.1 Share Consideration; Conversion or Cancellation of CAMC Shares.
(a) Subject to the provisions of this Article 4, at the Effective Time, by
virtue of the Merger and without any action by holders thereof, all of the
shares of CAMC Advisor Common Stock issued and outstanding immediately prior to
the Effective Time (collectively, the "CAMC Shares") shall be converted into an
aggregate of 3,597,122 shares of CWM Common Stock, subject to adjustment in
accordance with Section 4.1(c) (the "Share Consideration"). Prior to the
Effective Time, CWM REIT will not split or combine the CWM Common Stock, or pay
a stock dividend or other stock distribution in shares of CWM Common Stock, or
in rights or securities exchangeable or convertible into or exercisable for CWM
Common Stock, or otherwise change the CWM Common Stock into, or exchange the CWM
Common Stock for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization or liquidation of CWM REIT as a result of which CWM REIT
stockholders receive cash, stock or other property in exchange for, or in
connection with, their CWM Common Stock (a "Business Combination") or
otherwise), or make any other dividend or distribution on or of CWM Common Stock
(other than regular monthly or quarterly cash dividends paid on the CWM Common
Stock or any distribution pursuant to CWM REIT's dividend reinvestment plan),
without the parties hereto having first entered into an amendment to this
Agreement pursuant to which the Share Consideration will be adjusted to reflect
such split, combination, dividend, distribution, Business Combination or change.
(b) All CAMC Shares to be converted into CWM Common Stock pursuant to this
Section 4.1 shall cease to be outstanding, shall be canceled and retired and
shall cease to exist, and CCR, as the holder of a certificate or certificates
representing such CAMC Shares (a "Certificate" or the "Certificates") shall
thereafter cease to have any rights with respect to such CAMC Shares, except the
right to receive for all of the CAMC Shares, upon the surrender of such
Certificates in accordance with Section 4.2, the CWM Common Stock specified
above and cash in lieu of fractional shares of CWM Common Stock as contemplated
by Section 4.3.
(c) The Share Consideration shall be calculated and adjusted as follows:
(i) In the event that the Pre-Closing Market Value is less than $19.46, the
Share Consideration shall be adjusted and increased to that number of shares of
CWM Common Stock that is determined by dividing $70,000,000 by the Pre-Closing
Market Value, subject to the termination provisions of Section 10.2(c)(i)
hereof.
(ii) In the event that the Pre-Closing Market Value is more than $22.24, the
Share Consideration shall be adjusted and decreased to that number of shares of
CWM Common Stock that is determined by dividing $80,000,000 by the Pre-Closing
Market Value, subject to the termination provisions of Section 10.2(c)(i)
hereof.
(d) At the Effective Time, by virtue of the Merger and without any action
by holders thereof, all of the shares of CWM REIT Common Stock issued and
<PAGE>
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outstanding immediately prior to the Effective Time shall remain issued and
outstanding.
- --------------------------------------------------------------------------------
4.2 Payment for CAMC Shares in the Merger. At or after the Effective Time,
upon surrender by CCR of its Certificates for cancellation to CWM REIT, together
with any other required documents, CCR shall receive A-6
<PAGE>
for the CAMC Shares represented by such Certificates (i) the Share Consideration
and (ii) cash in lieu of fractional shares of CWM Common Stock as contemplated
by Section 4.3, and the Certificates so surrendered shall forthwith be canceled.
Until surrendered, the outstanding Certificates shall, upon and after the
Effective Time, be deemed for all purposes (other than to the extent provided in
the following sentence) to evidence ownership of the number of shares of CWM
Common Stock into which such CAMC Shares have been converted pursuant to Section
4.1 hereof and the other rights contemplated in the preceding sentence.
4.3 Fractional CAMC Shares. No fractional shares of CWM Common Stock shall
be issued in the Merger. In lieu of any such fractional securities, CCR will be
paid an amount in cash (without interest) equal to the Pre-Closing Market Value
of one share of CWM Common Stock, multiplied by such fraction.
4.4 Transfer of CAMC Shares. (a) No transfers of CAMC Shares shall be made
on the stock transfer books of CAMC Advisor after the date of this Agreement,
and (b) CCR agrees not to transfer any CAMC Shares after the date of this
Agreement and before the Closing Date.
4.5 Lost, Stolen or Destroyed Certificates. In the event any Certificate
shall have been lost, stolen or destroyed, upon receipt of an affidavit of that
fact from CCR and if reasonably satisfied that adequate provision for
indemnification has been made, CWM REIT will issue in exchange for such lost,
stolen or destroyed Certificate shares of CWM Common Stock, cash in lieu of
fractional shares, and unpaid dividends and distributions on shares of CWM
Common Stock as provided in Section 4.2, deliverable in respect thereof pursuant
to this Agreement.
4.6 Indemnification.
(a) Subject to Section 11.3, CCR agrees to indemnify and hold harmless CWM
REIT and its directors, officers, employees, affiliates, agents and permitted
assigns, without duplication, from and against: (i) any and all Damages
(excluding those items referred to in subsection (ii) of this Section 4.6(a))
asserted against, imposed upon or incurred or suffered by any of them, directly
or indirectly, as a result of, or based upon or arising from any inaccuracy in
or breach or non-fulfillment of any of the representations, warranties or
covenants or agreements made by CAMC Advisor or CCR in this Agreement; (ii) (A)
any Taxes payable by or on behalf of CAMC Advisor for any taxable period ending
on or prior to the Effective Time, including Taxes of any member of a
consolidated or combined tax group of which CAMC Advisor is, or was at any time,
part, for which CAMC Advisor is jointly or severally liable as a result of its
inclusion in such group prior to the Effective Time, (B) any claim or demand for
reimbursement or indemnification resulting from any transfer of tax benefits or
credits by CAMC Advisor to any other person, and (C) any Taxes payable by CWM
REIT as a result of any breach of any representation or warranty contained in
Section 5.8; and (iii)(A) except for liabilities (including liabilities arising
under Title IV of ERISA or Section 412 of the Code) assumed by CWM REIT pursuant
to Section 8.15, any Damages arising out of or relating to any Employee Plan
maintained or sponsored by CCR or any ERISA Affiliate and (B) any Damages
(including liabilities arising under Title IV of ERISA or Section 412 of the
Code) relating to or arising out of any employee benefit plan maintained by CCR
or any ERISA Affiliate which is not an Employee Plan.
(b) Subject to Section 11.3, CWM REIT agrees to indemnify and hold harmless
CCR and its directors, officers, employees, affiliates, agents and permitted
assigns, without duplication, from and against any and all Damages asserted
against, imposed upon or incurred or suffered by any of them, directly or
indirectly, as a result of, or based upon or arising from (i) any inaccuracy in
or breach or non-fulfillment of any of the representations, warranties or
covenants or agreements made by CWM REIT in this Agreement or (ii) termination
or any change in employment status, compensation or benefits by CWM REIT of any
employees employed by CAMC Advisor at the time of Closing.
(c) Except with respect to matters addressed in Section 8.10(c), which
matters shall be governed solely by such Section, if any action or proceeding
(including any governmental investigation) shall be brought or asserted against
a party hereto (or its officers, directors, trustees or agents) or any person
controlling such party in respect of which indemnity is required from the other
party hereunder (such party to whom indemnification is required
A-7
<PAGE>
is referred to herein as the "Indemnified Party;" the party from whom such
indemnification is required is referred to herein as the "Indemnifying Party"),
the Indemnifying Party shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to the Indemnified Party, and
shall assume the payment of all expenses. The Indemnified Party or any such
officer, director, trustee, agent or controlling person shall have the right to
employ separate counsel (approved by the Indemnified Party) in any such action
and to participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of the Indemnified Party or such officer,
director, trustee, agent or controlling person unless (i) the Indemnifying Party
shall have failed to assume the defense of such action or proceeding and employ
counsel reasonably satisfactory to the Indemnified Party in any such action or
proceeding or (ii) the named parties to any such action or proceeding (including
any impleaded parties) include both the Indemnified Party or such officer,
director, trustee, agent or controlling person and the Indemnifying Party, and
the Indemnified Party or such officer, director, trustee, agent or controlling
person shall have been advised by counsel that there may be one or more legal
defenses available to it which are different from or additional to those
available to the Indemnifying Party (in which case, if the Indemnified Party or
such officer, director, trustee, agent or controlling person notifies the
Indemnifying Party in writing that it elects to employ separate counsel at the
expense of the Indemnifying Party, the Indemnifying Party shall not have the
right to assume the defense of such action or proceeding on behalf of the
Indemnified Party or such officer, director, trustee, agent or controlling
person, it being understood, however, that the Indemnifying Party shall not, in
connection with any one such action or proceeding or separate but substantially
similar or related actions or proceedings in the same jurisdiction arising out
of the same general allegations or circumstances, be liable for the fees and
expenses of more than one separate firm of attorneys (together with local
counsel) at any time for the Indemnified Party and its officers, directors,
trustees, agents and controlling persons, which firm shall be designated in
writing by the Indemnified Party). The Indemnifying Party shall not be liable
for any settlement of any such action or proceeding effected without the
Indemnifying Party's written consent, but if settled with its written consent,
or if there be a final judgment for the plaintiff in any such action or
proceeding, the Indemnifying Party agrees to indemnify and hold harmless the
Indemnified Party and its officers, directors, trustees, agents and controlling
person from and against any loss or liability (to the extent stated above) by
reason of such settlement or judgment.
(d) (i) The obligations of CCR pursuant to Section 4.6 (a)(i) shall survive
the Closing if and to the extent that the related representation, warranty,
covenant or agreement survives the Closing as provided in Section 11.3. The
obligations of CCR pursuant to Section 4.6 (a)(ii) and (iii) shall survive the
Closing, but shall terminate upon the expiration of the applicable statute of
limitations with respect to the matters covered thereby.
(ii) The obligations of CWM REIT pursuant to Section 4.6(b)(i) shall
survive the Closing if and to the extent that the related representation,
warranty, covenant or agreement survives the Closing as provided in Section
11.3. The obligations of CWM REIT pursuant to Section 4.6(b)(ii) shall survive
the Closing, but shall terminate upon the expiration of the applicable statute
of limitations with respect to the matters covered thereby.
(e) (i) Notwithstanding anything in this Section 4.6 to the contrary, to the
extent indemnification for any inaccuracy in or breach of any representation or
warranty in Section 5, 6 or 7, as the case may be, is sought under Section
4.6(a)(i) or Section 4.6(b) hereof, CCR or CWM REIT, as the case may be, shall
be required to provide indemnification only to the extent the aggregate amount
of Damages arising under Section 4.6(a)(i) or 4.6(b), as the case may be,
exceeds $500,000.
(ii) Notwithstanding anything in Section 4.6(a)(i) to the contrary, the
aggregate amount payable by CCR with respect to any Damages under Section
4.6(a)(i) for any inaccuracy in or breach of any representation or warranty in
<PAGE>
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Section 5 or 6 shall not exceed $15,000,000 (excluding for such purposes,
however, any Damages arising out of the breach of any of the representations and
warranties contained in Sections 5.7, 5.8 and 5.13).
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(iii) Notwithstanding anything in Section 4.6(b) to the contrary, the
aggregate amount of Damages payable by CWM REIT with respect to Damages under
Section 4.6(b) for any inaccuracy in or breach of any representation or warranty
in Section 7 shall not exceed $15,000,000 (excluding for such purposes, however,
any Damages with respect to the representations and warranties contained in
Sections 7.7 and 7.10).
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(f) In case any event shall occur which would otherwise entitle any party to
assert any claim for indemnification hereunder, no Damages shall be deemed to
have been sustained by such party to the extent of (i) the value of any tax
savings actually realized or to be realized (including savings attributable to
an increase in the tax basis of an asset held by such party) by such party with
respect thereto or (ii) any proceeds received by such party from any insurance
policies with respect thereto, net of any increase in premiums or other costs
associated with such insurance recovery.
(g) The indemnification provisions of this Section 4.6 shall be the sole and
exclusive remedy of the parties against one another with respect to any money
damages under this Agreement.
(h) Anything to the contrary contained in this Agreement notwithstanding,
(i) CCR shall have no obligation to indemnify CWM REIT for any Damages as a
result of CWM REIT failing to be treated as a real estate investment trust under
the Code, unless such failure was solely a result of the breach by CCR of any of
its obligations under Section 8.10(c) of this Agreement and the remedy of
specific performance with respect thereto would not provide adequate relief to
CWM REIT, and (ii) CWM REIT shall have no obligation to indemnify CCR for any
Damages as a result of the Merger failing to qualify as a reorganization under
Code Section 368(a), unless such failure was solely a result of the breach by
CWM REIT of any of its obligations under Sections 7.10 and 8.3 of this
Agreement.
4.7 Further Assurances. If at any time CWM REIT shall consider or be advised
that any further assignment, conveyance or assurance is necessary or advisable
to vest, perfect or confirm of record in CWM REIT the title to any property or
right of CAMC Advisor, or otherwise to carry out the provisions hereof, the
proper representatives of CCR or CAMC Advisor as of the Effective Time shall
execute and deliver any and all proper deeds, assignments and assurances, and do
all things necessary and proper to vest, perfect or convey title to such
property or right in CWM REIT and otherwise to carry out the provisions hereof.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES REGARDING CAMC ADVISOR
CAMC Advisor and CCR hereby jointly and severally represent and warrant to
CWM REIT that, except as set forth in the disclosure schedule delivered by CAMC
Advisor and CCR to CWM REIT on the date hereof (the "CAMC Advisor Disclosure
Schedule") as of the date hereof:
5.1 Organization, Etc. of CAMC Advisor. CAMC Advisor is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware and has all requisite corporate power and authority to own, lease
and operate its properties, to carry on its business as now conducted by CAMC
Advisor, to enter into this Agreement and to carry out the provisions of this
Agreement and consummate the transactions contemplated hereby. CAMC Advisor is
duly qualified and in good standing in each jurisdiction in which the property
owned, leased or operated by it or the nature of the business conducted by it
makes such qualification necessary, except where the failure to so qualify or to
be in good standing has not had or would not have a Material Adverse Effect on
CAMC Advisor. True and correct copies of CAMC Advisor's Certificate of
Incorporation and Bylaws have been made available to CWM REIT.
5.2 Partnerships; Subsidiaries. CAMC Advisor is not, directly or
indirectly, a partner in any partnership. CAMC Advisor does not have, directly
or indirectly, any Subsidiaries.
5.3 Agreement. This Agreement and the consummation of the transactions
contemplated hereby have been approved by the Board of Directors of CAMC Advisor
and have been duly authorized by all other necessary corporate action on the
part of CAMC Advisor including the written consent of CCR, as sole
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stockholder. This Agreement has been duly executed and delivered by a duly
authorized officer of CAMC Advisor and constitutes a valid and binding agreement
of CAMC Advisor, enforceable against CAMC Advisor in accordance with its terms,
except as may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium and other similar laws of general application that may affect the
enforcement of creditors' rights generally and by general
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equitable principles and except to the extent that public policy considerations
may limit the enforcement of indemnification of obligations. CAMC Advisor has
delivered to CWM REIT true and correct copies of resolutions adopted by the
Board of Directors of CAMC Advisor and CCR, respectively, approving this
Agreement and the transactions contemplated hereby.
5.4 Capital Stock. The authorized capital stock of CAMC Advisor consists of
10,000 shares of common stock, of which 10,000 shares are outstanding as of the
date hereof. All outstanding shares of such common stock are duly authorized,
validly issued, fully paid and nonassessable, and no class of capital stock of
CAMC Advisor is entitled to preemptive or similar rights. There are outstanding
on the date hereof no options, warrants, calls, rights, commitments or any other
agreements of any character to which CAMC Advisor is a party or by which it may
be bound, requiring it to issue, transfer, sell, purchase, redeem or acquire any
shares of capital stock or any securities or rights convertible into,
exchangeable for or evidencing the right to subscribe for or acquire any shares
of its capital stock.
5.5 Litigation. Except as set forth in Section 5.5 of the CAMC Advisor
Disclosure Schedule, there are no actions, suits, investigations or legal
proceedings pending or, to the knowledge of CAMC Advisor and CCR, threatened
against CAMC Advisor or any property of CAMC Advisor (including the Intellectual
Property Rights) in any court or before any arbitrator of any kind or before or
by any Governmental Body or before any arbitrator of any kind except for such
actions, suits, investigations or legal proceedings that would not have a
Material Adverse Effect on CAMC Advisor. Except as set forth in Section 5.5 of
the CAMC Advisor Disclosure Schedule, CAMC Advisor is not in default with
respect to any judgment, order, writ, injunction or decree of any arbitrator,
court or Governmental Body, and there are no unsatisfied judgments against CAMC
Advisor except for such defaults or unsatisfied judgments as would not have a
Material Adverse Effect on CAMC Advisor.
5.6 Compensation and Employee Matters. A true, correct and complete list of
all directors, officers and personnel of CAMC Advisor, and the annual salary,
bonuses paid or accrued for the year ending February 29, 1996, and for the
period from March 1, 1996 through November 30, 1996, and any commitments by CAMC
Advisor entered into on or prior to the date hereof to pay any further bonuses
for or increase the salary of each such person is set forth in Section 5.6 of
the CAMC Advisor Disclosure Schedule.
5.7 Employee Benefit Plans.
(a) Definitions. The following terms, when used in this Section 5.7 or
elsewhere in this Agreement, shall have the following meanings. Any of these
terms may, unless the context otherwise requires, be used in the singular or the
plural depending on the reference.
(i) Benefit Arrangement. Any employment, consulting, severance or other
similar contract, arrangement (written or oral), program, policy, plan,
agreement or commitment providing for insurance coverage (including any
self-insured arrangements), workers' compensation, disability benefits,
supplemental unemployment benefits, vacation benefits, retirement benefits,
life, health, disability or accident benefits (including, without limitation,
any "voluntary employees' beneficiary association" as defined in Section
501(c)(9) of the Code, providing for the same or other benefits) or for deferred
compensation, profit sharing bonuses, stock options, stock appreciation rights,
stock purchases or other forms of incentive compensation or post-retirement
insurance, compensation or benefit which (A) is not a Welfare Plan, Pension Plan
or Multiemployer Plan, (B) is entered into, maintained, contributed to or
required to be contributed to, as the case may be, by CAMC Advisor or under
which CAMC Advisor may incur any liability, and (C) covers any CAMC Employee
(with respect to his or her relationship with CAMC Advisor).
(ii) CAMC Employee. Any employee or former employee of CAMC Advisor.
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(iii) Employee Plans. All Benefit Arrangements, Multiemployer Plans,
Pension Plans and Welfare Plans.
(iv) ERISA. The Employee Retirement Income Security Act of 1974, as amended.
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(v) ERISA Affiliate. "ERISA Affiliate" shall mean any entity which is (or at
any relevant time was) a member of a "controlled group of corporations" with,
under "common control" with or a member of an affiliated service group with CAMC
Advisor as defined in Section 414(b), (c) or (m) of the Code.
(vi) IRS. The Internal Revenue Service.
(vii) Multiemployer Plan. Any "multiemployer plan," as defined in Section
4001(a)(3) of ERISA, (A) which CAMC Advisor or any ERISA Affiliate maintains,
administers, contributes to or is required to contribute to, or, after September
25, 1980, maintained, administered, contributed to or was required to contribute
to, or under which CAMC Advisor or any ERISA Affiliate may incur any liability
and (B) which covers any CAMC Employee (with respect to his or her relationship
with CAMC Advisor).
(viii) PBGC. The Pension Benefit Guaranty Corporation.
(ix) Pension Plan. Any "employee pension benefit plan" as defined in Section
3(2) of ERISA (other than a Multiemployer Plan) (A) which CAMC Advisor or any
ERISA Affiliate maintains, administers, contributes to or is required to
contribute to, or, within the five years prior to the date hereof, maintained,
administered, contributed to or was required to contribute to, or under which
CAMC Advisor or any ERISA Affiliate may incur any liability and (B) which covers
any CAMC Employee (with respect to his or her relationship with CAMC Advisor).
(x) Welfare Plan. Any "employee welfare benefit plan" as defined in Section
3(1) of ERISA, (A) which CAMC Advisor or any ERISA Affiliate maintains,
administers, contributes to or is required to contribute to, or under which CAMC
Advisor or any ERISA Affiliate may incur any liability and (B) which covers any
CAMC Employee (with respect to his or her relationship with CAMC Advisor).
(b) Disclosure; Delivery of Copies of Relevant Documents and Other
Information. Section 5.7(b) of the CAMC Advisor Disclosure Schedule contains a
complete list of Employee Plans which cover or have covered CAMC Employees (with
respect to their relationship with CAMC Advisor). True and complete copies of
each of the following documents have been delivered to CWM REIT: (i) each
Welfare Plan, Pension Plan and Multiemployer Plan (and, if applicable, related
trust agreements, annuity contracts or other funding instruments) which covers
or has covered CAMC Employees (with respect to their relationship with CAMC
Advisor) and all amendments thereto, and all annuity contracts or other funding
instruments, (ii) each Benefit Arrangement which covers or has covered CAMC
Employees (with respect to their relationship with CAMC Advisor), (iii) the most
recent determination letter issued by the IRS, with respect to each Pension Plan
which covers or has covered CAMC Employees (with respect to their relationship
with CAMC Advisor) and any outstanding request for a determination letter, (iv)
any ruling letter or interpretive letter issued by the Department of Labor, the
IRS, or any other governmental agency with respect to each Employee Plan which
covers or has covered CAMC Employees (with respect to their relationship with
CAMC Advisor), (v) for the most recent plan year (or, in the case of a defined
benefit pension plan the two most recent plan years) annual reports on Form 5500
Series required to be filed with any governmental agency for each Pension Plan
which covers or has covered CAMC Employees (with respect to their relationship
with CAMC Advisor), (vi) all actuarial reports prepared for the last two plan
years for each Pension Plan which covers or has covered CAMC Employees (with
respect to their relationship with CAMC Advisor), (vii) a description of
complete age, salary, service and related data as of the last day of the last
plan year for CAMC Employees, and (viii) a description setting forth the amount
of any liability of CAMC Advisor as of the date of this Agreement for payments
more than thirty days past due with respect to each Welfare Plan which covers or
has covered CAMC Employees.
(c) Representations.
(i) All material Employee Plans are maintained and sponsored by CCR. CAMC
Advisor is not the sponsor of and does not maintain any material Employee Plan.
(ii) Pension Plans
(A) The funding method used in connection with each Pension Plan which is
subject to the minimum funding requirements of ERISA complies in all material
respects with applicable law and the actuarial
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assumptions used in connection with funding each such plan are reasonable. No
"accumulated funding deficiency" (for which an excise tax is due or would be due
in the absence of a waiver) as defined in Section 412 of the Code or as defined
in Section 302(a)(2) of ERISA, whichever may apply, has been incurred with
respect to any Pension Plan with respect to any plan year, whether or not
waived. CAMC Advisor does not have any liability for past due contributions with
respect to any Pension Plan that has not been accrued for on the February 29
Balance Sheet and as of the date hereof.
(B) The CCR DB Plan (as defined in Section 8.15(a)) and the CCR 401(k) Plan
are each the subject of a favorable determination letter received from the IRS
with respect to their qualified status under the provisions of Code Section
401(a), and CCR is not aware of any circumstance that would adversely affect
that determination and which could not be corrected without material liability
to CAMC Advisor.
(C) Each of the plans described in paragraph (c) (ii) (B) above or Section
8.15(d) presently complies and has been maintained in all material respects in
compliance with its terms during the period from its adoption to date and, both
as to form and in operation, in all material respects with the requirements
prescribed by any and all statutes, orders, rules and regulations which are
applicable to such plans, including but not limited to ERISA and the Code.
(D) CAMC Advisor has paid all premiums (and interest charges and penalties
for late payment, if applicable) due the PBGC with respect to each Pension Plan
for each plan year thereof for which such premiums are required. There has been
no "reportable event" (as defined in Section 4043(b) of ERISA and the PBGC
regulations under such Section) with respect to any Pension Plan (other than
reportable events with respect to which the PBGC has waived the reporting
requirement). No proceeding has been commenced by the PBGC to terminate any
Pension Plan. No material liability to the PBGC has been incurred by CAMC
Advisor or any ERISA Affiliate on account of the termination of any Pension
Plan. Neither CAMC Advisor nor any ERISA Affiliate has, at any time, (x) ceased
operations at a facility so as to become subject to the provisions of Section
4068(f) of ERISA, (y) withdrawn as a substantial employer so as to become
subject to the provisions of Section 4063 of ERISA, or (z) ceased making
contributions on or before the Closing Date to any Pension Plan subject to
Section 4064(a) of ERISA to which CAMC Advisor or any ERISA Affiliate made
contributions during the five years prior to the Closing Date.
(iii) Multiemployer Plans. There are no Multiemployer Plans covering any
CAMC Employees. Neither CAMC Advisor nor any ERISA Affiliate has engaged in, or
is a successor or parent corporation to an entity that has engaged in, a
transaction described in Section 4212(c) of ERISA.
(iv) Welfare Plans.
(A) Each Welfare Plan which is maintained or sponsored by CAMC Advisor and
which covers or has covered CAMC Employees (with respect to their relationship
with CAMC Advisor) has been maintained in all material respects in compliance
with its terms and, both as to form and operation in all material respects, with
the requirements prescribed by any and all statutes, orders, rules and
regulations which are applicable to such Welfare Plan, including but not limited
to ERISA and the Code.
(B) Except as may be required by applicable law, CAMC Advisor has no
obligation to make any payment to or with respect to any CAMC Employee pursuant
to any retiree medical benefit plan, or other retiree Welfare Plan.
(C) Each Welfare Plan which covers or has covered CAMC Employees and which
is a "group health plan," as defined in Section 607(1) of ERISA, has been
operated in all material respects in compliance with provisions of Part 6 of
Title I of ERISA and Section 4980B of the Code at all times except where any
failure to comply would not result in material liability to CAMC Advisor.
(v) Benefit Arrangements. Each Benefit Arrangement which is sponsored or
maintained by CAMC Advisor and which covers or has covered CAMC Employees has
been maintained in compliance in all material respects with its terms and with
the requirements prescribed by any and all statutes, orders, rules and
regulations which are applicable to such Benefit Arrangement, including but not
limited to the Code.
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(vi) Payments. CAMC Advisor has made all contributions, paid all premiums
and satisfied all liabilities with respect to each Employee Plan which have
accrued and become due and payable.
(vii) Litigation. There is no action, order, writ, injunction, judgment or
decree outstanding or claim, suit, litigation, proceeding, arbitral action,
governmental audit or governmental investigation relating to or seeking benefits
under any Employee Plan that is pending or, to the knowledge of CAMC Advisor,
threatened or anticipated, against CAMC Advisor, CCR or, to the knowledge of
CAMC Advisor or CCR, any ERISA Affiliate or any Employee Plan that would result
in material liability to CAMC Advisor.
(viii) No Amendments. Except as may be required by law, neither CCR nor CAMC
Advisor has any announced plan or legally binding commitment to create any
additional Employee Plans which are intended to cover CAMC Employees (with
respect to their relationship with CAMC Advisor) or to amend or modify any
existing Employee Plan which covers or has covered CAMC Employees (with respect
to their relationship with CAMC Advisor), in either case in a manner that would
result in material liability to CAMC Advisor.
(ix) No Acceleration or Creation of Rights. Except as the parties may
otherwise provide pursuant to Section 8.15, neither the execution and delivery
of this Agreement by CAMC Advisor nor the consummation of the transactions
contemplated hereby will result in the acceleration or creation of any rights of
any person to benefits under any Pension Plan or Welfare Plan (including,
without limitation, the acceleration of the accrual or vesting of any benefits
under any Pension Plan or the acceleration or creation of any rights under any
severance, parachute or change in control agreement).
5.8 Taxes.
(a) Neither CAMC Advisor nor any consolidated or combined group of which it
is a member or required to be included as a member has filed a consent, binding
on CAMC Advisor, under Section 341(f) of the Code concerning collapsible
corporations.
(b) CAMC Advisor operates at least one significant historic business line,
or owns at least a significant portion of its historic business assets, in each
case within the meaning of Treasury Regulation Section 1.368-1(d).
(c) CAMC Advisor will not own as of the Effective Time any equity interest
or other security in another partnership, corporation or other entity or a fee
interest in less than 100% of any property (for example as a tenant-in-common),
unless such equity interest or other security (i) would be classified as cash or
a cash item within the meaning of Section 856(c)(5)(A) of the Code and does not
represent more than 10% of the voting securities of any issuer or (ii) is CWM
Common Stock.
(d) CAMC Advisor is not an "investment company" as defined in Section
368(a)(2)(F) of the Code and the regulations thereunder.
(e) The liabilities of CAMC Advisor to be assumed by CWM REIT in the
Merger, and the liabilities to which the assets of CAMC Advisor to be
transferred to CWM REIT in the Merger are subject, were incurred by CAMC Advisor
in the ordinary course of its business.
(f) CAMC Advisor is not under the jurisdiction of a court in a Title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Code.
(g) The fair market value of the assets of CAMC Advisor to be transferred
to CWM REIT in the Merger will equal or exceed the sum of the liabilities to be
assumed by CWM REIT plus the amount of liabilities, if any, to which the
transferred assets are subject.
<PAGE>
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5.9 Intellectual Property. To the knowledge of CCR and CAMC Advisor, none
of
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the Intellectual Property Rights is subject to any lien, encumbrance or claim of
infringement (except liens and encumbrances in favor of the licensor,
sublicensor or other owner of such Intellectual Property Rights), nor requires
any consent, approval or waiver to be transferred to CWM REIT by way of the
Merger.
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<PAGE>
5.10 No Material Adverse Change. Since August 31, 1996, there have not been
any changes in the business, operations, properties, assets or condition,
financial or otherwise, of CAMC Advisor that would, individually or in the
aggregate, have a Material Adverse Effect except for changes resulting from (i)
fees or other amounts earned by CAMC Advisor under the Management Agreement or
(ii) any transactions contemplated by this Agreement, including Section 8.8.
5.11 Financial Statements. CAMC Advisor has provided to CWM REIT true and
correct copies of its audited balance sheet as of February 29, 1996 and
unaudited balance sheets as of February 28, 1995 and November 30, 1996, and
related audited statements of income and cash flows for the year ended February
29, 1996 and unaudited statements of income and cash flows for the fiscal years
ended February 28, 1994 and February 28, 1995 and the nine-month period ended
November 30, 1996 (collectively, the "CAMC Advisor Financial Statements"). Each
of such balance sheets (including the related notes) presents fairly, in all
material respects, the financial position of CAMC Advisor as of the respective
dates thereof, and such related statements (including the related notes) present
fairly, in all material respects, the results of its operations and cash flows
for the respective periods or as of the respective dates set forth therein, all
in conformity with generally accepted accounting principles consistently applied
during the periods involved, except as otherwise noted in the auditors' report
or in the notes thereto, subject, in the case of interim financial statements,
to normal year-end adjustments.
5.12 Books and Records. (a) The books of account and other financial
records of CAMC Advisor are in all material respects true and correct.
(b) The minute books and other similar records of CAMC Advisor have been
made available to CWM REIT and contain in all material respects accurate records
of the minutes of all meetings and all corporate action taken by written consent
of the stockholders and Board of Directors of CAMC Advisor, in each case prior
to April 6, 1994.
5.13 Proxy Statement. None of the information supplied or to be supplied in
writing by CCR or CAMC Advisor for inclusion in the Proxy Statement will, at the
time of filing the Proxy Statement with the SEC, at the time of mailing the
Proxy Statement to the Stockholders of CWM REIT, at the time of the CWM REIT
Stockholders Meeting or at the Effective Time, contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading.
5.14 Contracts and Leases. To the knowledge of CAMC Advisor, the letter
dated the date hereof from CWM REIT to CCR and CAMC Advisor contains an accurate
and complete listing of all material contracts, leases, agreements or
understandings, whether written or oral, of CAMC Advisor (the "Material
Agreements"). A contract, lease, agreement or understanding is "material" if it
involves (i) obligations (contingent or otherwise) of, or payments to, CAMC
Advisor in excess of $25,000 per annum, (ii) management or advisory agreements
providing for payments to or by CAMC Advisor in excess of $25,000 per annum, or
(iii) the license of any patent, copyright, trade secret or other proprietary
right (A) to CAMC Advisor which is necessary to carry on its business, other
than any software license or similar agreement which is generally available to
the public or businesses or (B) from CAMC Advisor which materially limits the
ability of CAMC Advisor to carry on its business. Neither CAMC Advisor nor, to
the knowledge of CAMC Advisor and CCR, any other party thereto has materially
breached any Material Agreement or is in material default thereunder, no event
has occurred which, with the passage of time or the giving of notice, or both,
would constitute such a material breach or material default by CAMC Advisor, or
to the knowledge of CAMC Advisor and CCR, any other party thereto, no claim of
material default thereunder has been asserted or threatened by CAMC Advisor
against any such party thereto or, to the knowledge of CAMC Advisor and CCR,
asserted or threatened against CAMC Advisor by any other party thereto, and
neither CAMC Advisor nor, to the knowledge of CAMC Advisor and CCR, any other
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party thereto is seeking the renegotiation thereof or substitute
performance thereunder.
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5.15 Real Property. CAMC Advisor does not own or lease (as lessee) and has
not at any time owned or leased, in whole or in part, any real property. A-14
<PAGE>
ARTICLE 6
REPRESENTATIONS AND WARRANTIES REGARDING CCR
CCR hereby represents and warrants to CWM REIT that as of the date hereof:
6.1 Power and Authority. CCR has all requisite corporate power and authority,
as applicable, to enter into this Agreement, the Cooperation Agreement, and the
Registration Rights Agreement and to carry out the provisions hereof and thereof
and consummate the transactions contemplated hereby and thereby.
6.2 Agreement. CCR has taken all corporate action necessary to authorize
this Agreement, the Cooperation Agreement and the Registration Rights Agreement
and the consummation of the transactions contemplated hereby and thereby. This
Agreement has been duly executed and delivered by CCR and constitutes, and each
of the Registration Rights Agreement and Cooperation Agreement when duly
executed and delivered by a duly authorized officer of CCR will constitute, a
valid and binding agreement of CCR, enforceable against CCR in accordance with
its terms, except as may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium and other similar laws of general application that
may affect the enforcement of creditors' rights generally and by general
equitable principles and except to the extent that public policy considerations
may limit the enforcement of indemnification of obligations.
6.3 Foreign Person. CCR is a United States person within the meaning of
Section 7701(a) of the Code.
6.4 No Withholding. The transaction contemplated hereby is not, insofar as
concerns CCR, subject to the tax withholding provisions of Section 3406 of the
Code, or of Subchapter A of Chapter 3 of the Code or of any other provision of
law.
6.5 No Intention to Dispose. There is not, and as of the date of the Merger
will not be, any plan or intention by CCR to sell, exchange, or otherwise
dispose of the shares of CWM REIT that CCR receives in the Merger such that the
value of its stock interest in CWM REIT would be reduced to an amount less than
50% of CAMC Advisor's value as of the date of the Merger.
6.6 Brokers and Finders. Neither CCR nor CAMC Advisor has entered into any
contract, arrangement or understanding with any person or firm which may result
in the obligation of CAMC Advisor or CWM REIT to pay any investment banking
fees, finder's fees, brokerage or agent's commissions or other like payments in
connection with the negotiations leading to this Agreement or the consummation
of the transactions contemplated hereby. The fees and expenses paid or payable
to Merrill Lynch and any claims by Merrill Lynch arising in connection therewith
are the sole obligation of CCR.
6.7 Securities Act Representations.
(a) CCR represents that it understands that the CWM Common Stock to be
issued and delivered to it at Closing pursuant to this Agreement will not have
been registered pursuant to the registration requirements of the Securities Act
and that the resale of all shares of CWM Common Stock is subject to Rule 144 of
the rules and regulations thereunder or registration under the Securities Act.
CCR represents that it is acquiring the CWM Common Stock for its own account,
not as a nominee or agent, and not with a view to the distribution thereof in
violation of applicable securities laws. CCR further represents that it has been
advised and understands that since the CWM Common Stock has not been registered
under the Securities Act, the CWM Common Stock must be held indefinitely unless
(A) the distribution of the CWM Common Stock has been registered under the
Securities Act, (B) a sale of the CWM Common Stock is made in conformity with
the holding period, volume and other limitations of Rule 144 promulgated by the
SEC under the Securities Act, or (C) in the opinion of counsel reasonably
acceptable to CWM REIT, some other exemption from
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registration is available with respect to any proposed sale, transfer or other
disposition of the CWM Common Stock.
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(b) CCR represents that it has been advised and understands that, subject
to applicable securities laws, stop transfer instructions will be given to CWM
REIT's transfer agents with respect to the CWM Common Stock
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constituting the Share Consideration and that a legend setting forth the
following restrictions on transfer will be set forth on the certificates for the
CWM Common Stock issuable under Article 4, or any substitutions therefor:
"THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE 'ACT'), AS AMENDED, OR UNDER THE SECURITIES LAWS OF
ANY STATE. NEITHER THE SHARES EVIDENCED BY THIS CERTIFICATE NOR ANY INTEREST
THEREIN MAY BE SOLD OR OTHERWISE PLEDGED, HYPOTHECATED OR TRANSFERRED IN THE
ABSENCE OF (i) REGISTRATION UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES OR
BLUE SKY LAWS OR (ii) A VALID EXEMPTION THEREFROM."
(c) CCR represents that it has such knowledge and experience in financial
and business affairs that it is capable of evaluating, alone, the merits and
risks of an investment in CWM REIT. CCR represents that it has received and
reviewed copies of (i) the most recent annual report on Form 10-K, (ii) the
three most recent quarterly reports on Form 10-Q, (iii) any current reports on
Form 8-K since December 31, 1995, in each case as filed by CWM REIT under the
Exchange Act, and (iv) the most recent annual report to stockholders of CWM
REIT. CCR represents that it has had an opportunity to ask questions and receive
answers concerning the terms of this Agreement, the Cooperation Agreement and
the Registration Rights Agreement and the foregoing information provided by CWM
REIT and to obtain any other information from CWM REIT as CCR deems necessary or
appropriate in connection with evaluating the merits of an investment in CWM
REIT.
ARTICLE 7
REPRESENTATIONS AND WARRANTIES OF
CWM REIT CWM REIT herein represents and warrants
to CAMC Advisor and CCR that as of
the date hereof:
7.1 Organization, Etc. of CWM REIT. CWM REIT is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware and has all requisite corporate power and authority to own, lease
and operate its properties, to carry on its business as now conducted and
proposed by CWM REIT to be conducted, to enter into this Agreement, the
Cooperation Agreement and the Registration Rights Agreement and to carry out the
provisions thereof and consummate the transactions contemplated hereby and
thereby. CWM REIT is duly qualified and in good standing in each jurisdiction in
which the property owned, leased or operated by it or the nature of the business
conducted by it makes such qualification necessary, except where the failure to
be so qualified or in good standing has not had or would not have a Material
Adverse Effect on CWM REIT and its Subsidiaries taken as a whole. True and
correct copies of CWM REIT's Certificate of Incorporation and Bylaws have been
made available to CAMC Advisor.
7.2 Capital Stock. The authorized capital stock of CWM REIT consists of
100,000,000 shares of CWM Common Stock, of which 50,200,176 shares are
outstanding as of December 31, 1996. Since December 31, 1996, CWM REIT has not
issued any shares of capital stock except pursuant to the exercise of options to
purchase shares of CWM Common Stock outstanding on such date or pursuant to CWM
REIT's dividend reinvestment plan. All outstanding shares of CWM Common Stock
are, and all shares of CWM Common Stock issuable under stock option plans of CWM
REIT, pursuant to CWM REIT's dividend reinvestment plan or pursuant to the
Special Purchase Rights will be when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and nonassessable. Except
for the 3,869,353 shares of CWM Common Stock reserved for issuance pursuant to
stock option plans of CWM REIT, CWM REIT's dividend reinvestment plan or for
purposes of the Special Purchase Rights, there are outstanding on the date
hereof no options, warrants, calls, rights, commitments or any other agreements
of any character to which CWM REIT is a party or by which it may be bound,
requiring it to issue, transfer, sell, purchase, register, redeem or acquire any
shares of capital stock or any securities or rights convertible into,
exchangeable for or evidencing the right to subscribe for or acquire any shares
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of its capital stock.
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<PAGE>
7.3 Agreement. This Agreement, the Cooperation Agreement and the
Registration Rights Agreement and the consummation of the transactions
contemplated hereby and thereby have been approved by the Board of Directors of
CWM REIT and have been duly authorized by all other necessary corporate action
on the part of CWM REIT (except for the approval of CWM REIT's stockholders
contemplated by Section 8.4), including without limitation, the approval of the
Special Committee. This Agreement has been duly executed and delivered by a duly
authorized officer of CWM REIT and, subject to CWM REIT stockholder approval,
constitutes, and each of the Cooperation Agreement and the Registration Rights
Agreement when duly executed and delivered by a duly authorized officer of CWM
REIT will constitute, valid and binding agreements of CWM REIT, enforceable
against CWM REIT in accordance with their terms, except as may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium and other similar
laws of general application that may affect the enforcement of creditors' rights
generally and by general equitable principles and except to the extent that
public policy considerations may limit the enforcement of indemnification of
obligations. CWM REIT has delivered to CAMC Advisor true and correct copies of
resolutions adopted by the Board of Directors of CWM REIT approving this
Agreement and the transactions contemplated hereby and, prior to the Closing
Date, will deliver to CAMC Advisor true and correct copies of resolutions
adopted by the stockholders of CWM REIT approving this Agreement and the
transactions contemplated hereby.
7.4 Authorization for CWM Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and no
stockholder of CWM REIT will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share Consideration will,
subject to the accuracy of CCR's representations in Section 6.7 hereof, be
exempt from registration under the Securities Act and will be registered or
exempt from registration under all applicable state securities laws.
7.5 Brokers and Finders. Except for the fees and expenses paid to Dean
Witter with respect to the delivery of a fairness opinion to the Special
Committee and as financial advisor to the Special Committee, which fees are
reflected in its agreement with the Special Committee and CWM REIT (a copy of
which has been delivered to CAMC Advisor), CWM REIT has not entered into any
contract, arrangement or understanding with any person or firm that may result
in the obligation of CCR or CAMC Advisor to pay any finder's fees, brokerage or
agent's commissions or other like payments in connection with the negotiations
leading to this Agreement or the consummation of the transactions contemplated
hereby. Except for the fees and expenses paid to Dean Witter by CWM REIT, there
is no claim for payment by CWM REIT of any investment banking fees, finder's
fees, brokerage or agent's commissions or other like payments in connection with
the negotiations leading to this Agreement or the consummation of the
transactions contemplated hereby. The fees and expenses paid or payable to Dean
Witter and any claims by Dean Witter arising in connection therewith are the
sole obligation of CWM REIT.
7.6 SEC Reports and Financial Statements.
(a) CWM REIT has timely filed with the SEC all reports, definitive proxy
statements or other documents required to be filed by CWM REIT with the SEC
under Section 13(a), 14 or 15(d) of the Exchange Act since January 1, 1996
(collectively, and in each case including all exhibits and schedules thereto and
all documents incorporated by reference therein, the "SEC Reports"). As of their
respective dates, the SEC Reports complied in all material respects with the
requirements of the Exchange Act and the rules and regulations of the SEC
promulgated thereunder applicable, as the case may be, to such SEC Reports, and
none of the SEC Reports contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements made therein, in light of the circumstances under which they
were made, not misleading.
(b) The consolidated balance sheets as of December 31, 1995 and December 31,
1994 and the related consolidated statements of earnings, shareholders' equity
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and cash flows for each of the three years in the period ended December 31, 1995
(including the related notes and schedules thereto) of CWM REIT contained in its
Form 10-K for the year ended December 31, 1995 included in the SEC Reports
complied in all material respects with applicable accounting requirements and
the published rules and regulations of the SEC with respect thereto
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<PAGE>
and present fairly, in all material respects, the consolidated financial
position, results of operations and cash flows of CWM REIT, its consolidated
subsidiaries and Indy Mac as of the dates or for the periods presented therein
in conformity with generally accepted accounting principles consistently applied
during the periods involved, except as otherwise noted in the auditors' report
or in the notes thereto.
(c) The consolidated balance sheets and the related statements of earnings
and cash flows (including the related notes thereto) of CWM REIT contained in
its Forms 10-Q for the periods ended September 30, 1996, June 30, 1996 and March
31, 1996 included in the SEC Reports (collectively, the "Quarterly Financial
Statements") have been prepared in accordance with the requirements for interim
financial statements contained in Regulation S-X. The Quarterly Financial
Statements present fairly, in all material respects, the consolidated financial
position, results of operations and cash flows of CWM REIT, its consolidated
subsidiaries and Indy Mac as of the dates or for the periods presented therein
in conformity with GAAP consistently applied during the periods involved except
as otherwise noted in the notes thereto, and reflect all adjustments, which
include only normal recurring adjustments, necessary to such fair presentation.
(d) Since September 30, 1996, there have not been any changes in the
business, operations, properties, assets or conditions, financial or otherwise,
of CWM REIT that would, individually or in the aggregate, have a Material
Adverse Effect on CWM REIT.
7.7 Information. The Proxy Statement will not at the time filed with the
SEC, at the time of mailing the Proxy Statement to the stockholders of CWM REIT,
at the time of the CWM REIT Stockholders Meeting or at the Effective Time
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
made therein, in light of the circumstances under which they were made, not
misleading, except that no representation is made by CWM with respect to
statements made therein based on information supplied by CCR or CAMC Advisor in
writing for inclusion in the Proxy Statement. The Proxy Statement will comply as
to form in all material respects with the provisions of the Exchange Act and the
rules and regulations promulgated thereunder.
7.8 Books and Records.
(a) The books of account and the financial records of CWM REIT are in all
material respects true and correct.
(b) The minute books and other similar records of CWM REIT have been made
available to CCR and CAMC Advisor and contain in all material respects accurate
records of the minutes of all meetings and all corporate action taken by written
consent of the stockholders and Board of Directors of CWM REIT, in each case on
and after April 6, 1994.
7.9 Litigation. There are no actions, suits, investigations or legal
proceedings, pending or, to the knowledge of CWM REIT, threatened against CWM
REIT or any property of CWM REIT in any court or before any arbitrator of any
kind or before or by any Governmental Body or before any arbitrator of any kind
except for such actions, suits, investigations or legal proceedings that would
not have a Material Adverse Effect on CWM REIT. CWM REIT is not in default with
respect to any judgment, order, writ, injunction or decree of any arbitrator,
court or Governmental Body, and there are no unsatisfied judgments against CWM
REIT except for such defaults or unsatisfied judgments as would not have a
Material Adverse Effect on CWM REIT.
7.10 General.
(a) CWM REIT has no plan or intention to reacquire any of its stock issued
in the Merger.
(b) CWM REIT has no plan or intention to sell or otherwise dispose of any of
the assets of CAMC Advisor acquired in the Merger, except for dispositions made
in the ordinary course of business.
(c) CWM REIT has made or will make a valid and effective election under
Notice 88-19, 1988-1 C.B. 486, to be subject to rules similar to those set forth
in Section 1374 of the Code with respect to assets acquired from CAMC Advisor in
connection with the Merger.
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ARTICLE 8
COVENANTS OF THE PARTIES
8.1 Maintenance of Business, Prohibited Acts. During the period from the
date of this Agreement to the Effective Time, CCR will not, and will not cause
CAMC Advisor to, take any action that adversely affects the ability of CAMC
Advisor (i) to pursue its business in the ordinary course, (ii) to seek to
preserve intact its current business organization, (iii) to keep available the
service of its current officers and employees and (iv) preserve its
relationships with customers, suppliers and others having business dealings with
it; and CCR will not allow CAMC Advisor to, without CWM REIT's prior written
consent:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrances of (i) any additional shares of its capital stock of any
class (including the CAMC Shares), or any securities or rights convertible into,
exchangeable for or evidencing the right to subscribe for any shares of its
capital stock, or any rights, warrants, options, calls, commitments or any other
agreements of any character to purchase or acquire any shares of its capital
stock or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any shares of its capital stock, or (ii)
any other securities in respect of, in lieu of or in substitution for CAMC
Shares outstanding on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase
or otherwise acquire, any of its outstanding securities (including the CAMC
Shares);
(c) split, combine, subdivide or reclassify any shares of its capital stock
or otherwise make any payments to CCR in its capacity as sole stockholder;
provided, however, that nothing shall prohibit: (i) the payment of any ordinary
distribution or dividend in respect of its capital stock at such times and in
such manner and amount as may be consistent with CAMC Advisor's past practice
(which in any event shall include any and all compensation paid or payable or
expenses reimbursed or reimbursable for the period from January 1, 1996 through
the Effective Time, to the extent not otherwise paid or distributed to CCR),
(ii) the payment of any dividend as shall be required to be paid by CAMC Advisor
in order to permit Price Waterhouse LLP to issue the letter required by Section
9.3(e), (iii) any distribution of property necessary for the representation and
warranty set forth in Section 5.8(c) to be true and correct or (iv) the
distributions referred to in Section 8.24.
(d) (i) grant any increases in the compensation of any of its directors,
officers or employees, except in the ordinary course of business consistent with
past practice (except within the parameters noted in Section 5.6 of the CAMC
Advisor Disclosure Schedule or as approved by the Special Committee), (ii) pay
or agree to pay any pension retirement allowance or other employee benefit not
required or contemplated by any Employee Plan or Benefit Arrangement as in
effect on the date hereof to any such director, officer or employee, whether
past or present, (iii) enter into any new or amend any existing employment or
severance agreement with any such director, officer or employee, except as
approved by CWM REIT in its sole discretion, (iv) pay or agree to pay any bonus
to any director, officer or employee (whether in the form of cash, capital stock
or otherwise) except as approved by the Special Committee, or (v) except as may
be required to comply with applicable law, amend any existing, or become
obligated under any new Employee Plan or Benefit Arrangement, except in the case
of (i) through (v), inclusive, under and pursuant to the employment agreement
referred to in Section 9.1(g);
(e) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization (other
than the Merger);
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(f) make any acquisition, by means of merger, consolidation or otherwise, of
any direct or indirect ownership interest in or assets comprising any business
enterprise or operation;
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(g) adopt any amendments to its Certificate of Incorporation or Bylaws;
(h) incur any indebtedness for borrowed money or guarantee such
indebtedness or agree to become contingently liable, by guaranty or otherwise,
for the obligations or indebtedness of any other person or
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<PAGE>
make any loans, advances or capital contributions to, or investments in, any
other corporation, any partnership or other legal entity or to any other
persons, except for bank deposits and other investments in marketable securities
and cash equivalents made in the ordinary course of its business;
(i) engage in the conduct of any business the nature of which is materially
different from the business in which CAMC Advisor is currently engaged;
(j) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of CAMC
Advisor except under the employment agreement referred to in Section 9.1(g);
(k) enter into any contract, arrangement or understanding requiring the
purchase of equipment, materials, supplies or services over a period greater
than 12 months which is not cancelable without penalty on 30 or fewer days'
notice, except in the ordinary course of business;
(l) forgive any indebtedness owed to CAMC Advisor or convert or contribute
by way of capital contribution any such indebtedness owed;
(m) authorize or enter into any agreement providing for management services
to be provided by CAMC Advisor to any third-party or an increase in management
fees paid by any third-party under existing management agreements;
(n) mortgage, pledge, encumber, sell, lease or transfer any material assets
of CAMC Advisor except with the prior written consent of CWM REIT or as
contemplated by this Agreement;
(o) authorize or announce an intention to do any of the foregoing, or
entering any contract, agreement, commitment or arrangement to do any of the
foregoing; or
(p) perform any act or omit to take any action that would make any of the
representations made above inaccurate or materially misleading as of the
Effective Time.
8.2 Officers and Employees. Each of CAMC Advisor and CCR severally agree
that prior to the Effective Time it will use its reasonable efforts to encourage
the officers and employees of CAMC Advisor, to the extent they are in good
standing, to become employees of CWM REIT or Indy Mac, as determined by CWM REIT
in its sole discretion.
8.3 Significant Business Line. Except for the management of Indy Mac's
business, for a period of at least one year following the Effective Time, CWM
REIT shall continue the historic business that was managed by CAMC Advisor prior
to the Merger and shall use a significant portion of the business assets of CAMC
Advisor that are received by CWM REIT in the Merger in CWM REIT's historic
business.
8.4 Meeting of Stockholders. CWM REIT will take all action necessary in
accordance with applicable law and CWM REIT's Certificate of Incorporation and
Bylaws to arrange for its stockholders to consider and vote upon the approval of
the Merger and the issuance of shares of CWM Common Stock in the Merger at the
annual or special stockholders' meeting (the "CWM REIT Stockholders Meeting") to
be held in connection with the transactions contemplated by this Agreement.
Subject to the fiduciary duties of CWM REIT's Board of Directors under
applicable law as advised by counsel, the Board of Directors of CWM REIT shall
recommend and declare advisable such approval and CWM REIT shall take all lawful
action to solicit, and use all reasonable efforts to obtain, such approval,
including, without limitation, the inclusion of the recommendation of the CWM
REIT Board of Directors and of the Special Committee in the Proxy Statement that
the stockholders of CWM REIT vote in favor of the approval of the Merger and the
adoption of this Agreement.
8.5 Proxy Materials. After the date hereof, CWM REIT shall promptly
prepare,
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and CAMC Advisor and CCR shall cooperate in the preparation of, and CWM
REIT shall file with the SEC as soon as practicable a proxy statement and a form
of proxy, in connection with the vote of CWM REIT's stockholders with respect to
the Merger (such proxy statement, together with any amendments thereof or
supplements thereto, in each case in the form or forms mailed to CWM REIT's
stockholders, is herein called the "Proxy Statement"). CWM REIT will
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<PAGE>
use all reasonable efforts to cause the Proxy Statement to be mailed to
stockholders of CWM REIT at the earliest practicable date as permitted by the
SEC and will take all such action as may be necessary to qualify the Share
Consideration for offering and sale under state securities or blue sky laws. If
at any time prior to the Effective Time any event relating to or affecting CAMC
Advisor, CCR or CWM REIT shall occur as a result of which it is necessary, in
the opinion of counsel for CAMC Advisor and CCR or of counsel for CWM REIT, to
supplement or amend the Proxy Statement in order to make such document not
misleading in light of the circumstances existing at the time approval of the
stockholders of CWM REIT is sought, CAMC Advisor, CCR and CWM REIT,
respectively, will notify the others thereof and, in the case of CAMC Advisor or
CCR, it will cooperate with CWM REIT in preparing, and, in the case of CWM REIT,
it will prepare and file, an amendment or supplement with the SEC and, if
required by law or Exchange rule, applicable state securities authorities and
each Exchange such that such document, as so supplemented or amended, will not
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in light of the
circumstances existing at such time, not misleading, and CWM REIT will, as
required by law, disseminate to its stockholders such amendment or supplement.
8.6 Filings, Other Action. CAMC Advisor, CCR and CWM REIT shall: (a) to the
extent required, promptly make all filings and thereafter make any other
required submissions under the HSR Act with respect to the Merger; (b) use all
reasonable efforts to cooperate with one another to (i) determine which
Authorizations are required to be made or obtained prior to the Effective Time
in connection with the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby and (ii) timely make and
seek all such Authorizations; (c) use all reasonable efforts to obtain in
writing any consents required from third parties in form reasonably satisfactory
to CWM REIT and CCR necessary to effectuate the Merger; (d) use all reasonable
efforts to promptly take, or cause to be taken, all other actions and do, or
cause to be done, all other things necessary, proper or appropriate to satisfy
the conditions set forth in Article 9 and to consummate and make effective the
transactions contemplated by this Agreement on the terms and conditions set
forth herein as soon as practicable (including seeking to remove promptly any
injunction or other legal barrier that may prevent such consummation); and (e)
not take any action which might reasonably be expected to impair the ability of
the parties to consummate the Merger at the earliest possible time.
8.7 Access to Information. (a) From the date hereof until the Effective
Time, CAMC Advisor and CCR (i) will give CWM REIT, its counsel, financial
advisors, auditors and other authorized representatives full access to the
offices, properties, books and records of CAMC Advisor during reasonable
business hours, (ii) will furnish copies to CWM REIT, its counsel, financial
advisors, auditors and other authorized representatives such financial and
operating data and other information as such persons may reasonably request, and
which is in the possession of or can be obtained by CAMC Advisor or CCR without
undue expense and (iii) will instruct CAMC Advisor's or CCR'S, as the case may
be, employees, counsel and financial advisors to cooperate with CWM REIT in its
investigation of the business of CAMC Advisor.
(b) From the date hereof until the Effective Time, CWM REIT (i) will give
CCR, its counsel, financial advisors, auditors and other authorized
representatives full access to the offices, properties, books and records of CWM
REIT during reasonable business hours, (ii) will furnish copies to CCR, its
counsel, financial advisors, auditors and other authorized representatives such
financial and operating data and other information as such persons may
reasonably request, and which is in the possession of or can be obtained by CWM
REIT without undue expense, and (iii) will instruct CWM REIT's employees,
counsel and financial advisors to cooperate with CCR in its investigation of the
business of CWM REIT.
8.8 Management Fee Adjustment. CWM REIT shall pay to CAMC Advisor all fees
accrued and unpaid and reimbursable expenses payable to CAMC Advisor under the
Management Agreement in respect of periods up to the Effective Time (as if the
Management Agreement had been terminated as of the Effective Time and payment
was to be made under Section 17 thereof, without giving effect for such purposes
to Section 10(d) of the Management Agreement); provided that, in the event that
the Effective Time occurs prior to the record date for the regular quarterly
dividend of CWM REIT in respect of the quarter in which the Effective Time
occurs, CAMC Advisor hereby irrevocably waives that portion of CAMC Advisor's
compensation attributable to the
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incentive fee under Section 10(c) of the Management Agreement for the quarterly
period during which the Effective Time occurs.
8.9 Intellectual Property Rights. Prior to the Closing, CAMC Advisor shall
use all reasonable efforts to cooperate with CWM REIT in obtaining all
assignments or other consents necessary with respect to the Intellectual
Property Rights, to the extent not already owned by CAMC Advisor, including all
interests that may hereafter become Intellectual Property Rights prior to
Closing. CCR acknowledges that upon Closing, it will have no right, title or
interest in or to the names "Indy Mac" and "Independent National Mortgage
Corporation" (including derivations and abbreviations thereof).
8.10 Tax Matters.
(a) Each of CCR, CAMC Advisor and CWM REIT agrees to report the Merger on
all Tax Returns and, if applicable, other filings as a reorganization under
Section 368(a) of the Code to the extent permitted by law.
(b) CCR shall prepare or cause to be prepared and filed on behalf of CAMC
Advisor, at its sole cost and expense, any federal, state, and local Tax Returns
required to be filed with respect to any short taxable year of CAMC Advisor
ending as of the Closing Date.
(c) If the U.S. Internal Revenue Service (the "IRS") or any other taxing
authority initiates an audit or examination of any Tax Return of CAMC Advisor or
any consolidated or combined group of which it was a member or required to be
included as a member (a "Tax Matter"), CCR shall-
(i) promptly, but not less frequently than quarterly, provide CWM REIT with
a summary of each issue raised in each unresolved Tax Matter, and if in the
course of reviewing such Tax Matters CCR becomes aware that such Tax Matters
could affect the amount of the current or accumulated earnings and profits of
CAMC Advisor as of the close of business on the date of the Effective Time, CCR
shall so advise CWM
(ii) as requested by CWM REIT, provide additional information sufficient (A)
to inform CWM REIT as to the nature of each such issue, and (B) to permit CWM
REIT to exercise its rights described in this Section 8.10(c);
(iii) keep CWM REIT regularly and promptly advised of the course of each
such issue which has been reasonably determined by CWM REIT to be a CAMC Tax
Issue (as defined below in this Section) pursuant to the procedure described in
this Section 8.10(c);
(iv) provide CWM REIT (not later than 10 Business Days prior to the
anticipated date of delivery or filing, or promptly after receipt as applicable)
with a copy of all pleadings or other documents to be delivered to, received
from, or filed with, any court or other tribunal, the IRS or other taxing
authority with respect to (A) any CAMC Tax Issue (which may be redacted to
eliminate all information not germane to any CAMC Tax Issue), and (B) any Tax
Matter which had not previously been summarized for CWM REIT or with respect to
which CWM REIT had requested and not received additional information (excluding
from clause (B) documents or pleadings not filed by or on behalf of CCR or any
consolidated or combined group of which it is a member);
(v) cooperate with CWM REIT and its counsel, accountants and other advisors
in connection with each such CAMC Tax Issue;
(vi) in connection with each such CAMC Tax Issue, not submit to the IRS, any
taxing authority or any court or other tribunal any pleading or other document
without the written consent of CWM REIT (provided, however, that CWM REIT (A)
shall be deemed to so consent if it has not communicated written notice of its
non-consent to CCR before the close of business on the 10th business day
following its receipt of such pleading or other document and (B) shall so
consent unless it reasonably determines that any position taken in such
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pleading or other document, if accepted, could jeopardize CWM REIT's status as a
real estate investment trust under the Code. The determination of CWM REIT that
a position taken in a pleading or other document could jeopardize its status as
a real estate investment trust shall be deemed
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<PAGE>
reasonable for this purpose if such determination is based on the advice of its
counsel or accountants, which advice shall be presented to CCR in writing within
five Business Days after CWM REIT communicates its notice of non-consent to CCR
(or such earlier time not sooner than the second Business Day thereafter as CCR
shall reasonably determine to be necessary) unless CCR agrees to waive its right
to see such advice in writing, to the effect that the position taken, if
accepted, would give the IRS a reasonable basis for asserting that CWM REIT
failed to continue to qualify as a real estate investment trust under the Code
as a consequence of its acquisition of CAMC Advisor; and
(vii) not settle, compromise or consent to the entry of any order, decree
or judgment with respect to any CAMC Tax Issue or fail to pursue an available
appeal of any such CAMC Tax Issue (a "Resolution") without the written consent
of CWM REIT (provided, however, that CWM REIT (A) shall be deemed to so consent
if it has not communicated written notice of its non-consent to CCR before the
close of business on the 10th business day following its receipt of notice of
such proposed settlement, compromise or consent and (B) shall so consent unless
it reasonably determines that such Resolution would jeopardize CWM REIT's status
as a real estate investment trust under the Code. The determination of CWM REIT
that a Resolution would jeopardize its status as a real estate investment trust
shall be deemed reasonable for this purpose if such determination is based on
the advice of its counsel or accountants, which advice shall be delivered to CCR
in writing within five Business Days after CWM REIT communicates its notice of
non-consent to CCR (or such earlier time not sooner than the second Business Day
thereafter as CCR shall reasonably determine to be necessary) unless CCR agrees
to waive its right to see such advice in writing, to the effect that the
Resolution would give the IRS a reasonable basis for asserting that CWM REIT
failed to continue to qualify as a real estate investment trust under the Code
as a consequence of its acquisition of CAMC Advisor.
An issue raised in a Tax Matter shall be identified as a "CAMC Tax Issue" if CWM
REIT communicates written notice to CCR that it has determined, with respect to
a particular issue, that it is possible that the resolution of such issue could
jeopardize its status as a real estate investment trust under the Code. The
determination of CWM REIT that a possible resolution of a Tax Matter could
jeopardize its status as a real estate investment trust shall be deemed
reasonable for this purpose if such determination is based on the advice of its
counsel or accountants, which advice shall be delivered to CCR in writing within
five Business Days after CWM REIT communicates its determination to CCR (or such
earlier time not sooner than the second Business Day thereafter as CCR shall
reasonably determine to be necessary) unless CCR agrees to waive its right to
see such advice in writing, to the effect that a possible resolution, would give
the IRS a reasonable basis for asserting that CWM REIT failed to continue to
qualify as a real estate investment trust under the Code as a consequence of its
acquisition of CAMC Advisor. In any such CAMC Tax Issue, CWM REIT may at its
expense engage counsel, accountants, or other advisors. Any CCR tax or financial
information revealed to CWM REIT, its employees or any of its advisors in
connection with matters described in this Section 8.10(c) shall be treated as
strictly confidential by CWM REIT, its employees and such advisors.
(d) Any refunds or credits of Taxes (including any interest thereon) due to
or on behalf of CAMC Advisor received by or credited to CWM REIT shall be for
the benefit of CCR, and CWM REIT shall use its best efforts to obtain any such
refunds and shall pay over to CCR any such refunds immediately upon receipt
thereof.
(e) After the Effective Time, CWM REIT shall make available to CCR, as
reasonably requested, all information, records or documents relating to tax
liabilities or potential tax liabilities of CAMC Advisor and shall preserve all
such information, records and documents until the expiration of any applicable
statute of limitations or extensions thereof. CWM REIT shall prepare and provide
to CCR such federal, state, local and foreign tax information packages as CCR
shall request for the use of CCR in preparing any Tax Return that relates to
CAMC Advisor. Such tax information packages shall be completed by
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CWM REIT and provided to CCR within 45 days after CCR's request therefor.
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(f) Other than pursuant to this Agreement, CWM REIT shall have no rights or
obligations under any tax sharing agreement among CAMC Advisor and CCR and/or
any of its affiliates.
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(g) CAMC Advisor and CCR shall make available, or shall cause to be made
available to Price Waterhouse LLP or the CWM REIT E&P Committee, on a strictly
confidential basis, as reasonably requested by Price Waterhouse LLP or the CWM
REIT E&P Committee, all information, records or documents of CAMC Advisor, or of
any consolidated or combined group of which CAMC Advisor was a member, which (i)
is reasonably available to CCR, and (ii) Price Waterhouse LLP or the CWM REIT
E&P Committee reasonably deems relevant to the preparation and delivery (by
Price Waterhouse LLP) or review (by the CWM REIT E&P Committee) of the written
comfort described in Section 9.3(e).
8.11 Covenant Not to Compete, Continuing Arrangements Etc.
(a) During the two-year period commencing on the Closing Date, CCR will not,
without the written prior consent of CWM REIT, form, manage, sponsor or own any
interest in, or in any other manner directly or indirectly including through any
other Person participate in, a real estate investment trust (the parties hereto
acknowledge and agree that the foregoing covenant is provided in connection with
the Merger and the issuance of the CWM Common Stock and is intended to preserve
the value of the goodwill and other intangible assets being acquired by CWM REIT
in the Merger).
(b) During the four-year period commencing on the Closing Date, (i) CCR will
not employ, seek to employ, recruit, hire, or otherwise retain the services of
any employee of CWM REIT without having obtained prior approval of CWM's Board
of Directors, and (ii) CWM REIT will not employ, seek to employ, recruit, hire
or otherwise retain the services of any employee of CCR without prior approval
of the Chairman, Vice Chairman or a Senior Managing Director of
(c) As long as CCR beneficially owns more than 5.0% of the issued and
outstanding Common Stock of CWM REIT, or any director, officer or other employee
or designee of CCR is also a member of the Board of Directors of CWM REIT, CCR
will continue to make available to Indy Mac the CWMBS, Inc. REMIC shelf
registration statement on a basis, and at a cost, substantially consistent with
past practices.
(d) As long as CCR beneficially owns more than 5.0% of the issued and
outstanding Common Stock of CWM REIT, (i) if either of Messrs. David S. Loeb or
Angelo R. Mozilo shall not be serving as a director of CWM REIT, CWM REIT shall
cause one other person designated by CCR to be nominated to serve as a member of
CWM REIT's Board of Directors in lieu of Mr. Loeb or Mr. Mozilo, as the case may
be, and (ii) if neither Mr. Loeb nor Mr. Mozilo is serving as a director of CWM
REIT, CWM REIT shall cause one person designated by CCR to be nominated to serve
as a member of CWM REIT's Board of Directors; provided, however, that no person
shall be nominated to serve as a director of CWM REIT pursuant to this Section
8.11(d) whose nomination to or service on CWM REIT's Board of Directors would
require disclosure pursuant to Item 401(f) of Regulation S-K under the
Securities Act.
(e) At the Effective Time, CCR shall cause the Certificate of Indy Mac to be
amended (the "Indy Mac Charter Amendment") to the effect that if (i) CCR shall
cease to beneficially own more than 5.0% of the issued and outstanding Common
Stock of CWM REIT, (ii) neither Mr. Loeb nor Mr. Mozilo is a director of CWM
REIT, or (iii) there shall occur a Change of Control, CWM REIT shall be
entitled, in its sole discretion, to compel the dissolution of Indy Mac and to
receive in the related distribution all assets thereof other than an amount of
cash, which shall be payable to CCR or its assignee, equal to three percent (3%)
of the book value of Indy Mac (with each share of capital stock of Indy Mac,
whether common, preferred or other, representing an equal economic interest
without regard to any control premium) unless CCR, in its sole discretion, shall
request an independent appraisal thereof and an appraiser mutually acceptable to
CWM REIT and CCR determines that one percent (1%) of the fair market value of
Indy Mac's assets either exceeds or is less than three percent (3%) of Indy
Mac's book value, in which event CCR or its assignee shall receive such higher
or lower value, as the case may be. The cost of such appraisal shall be borne by
CCR. Additionally, the Indy Mac Charter Amendment
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shall prohibit the holder or holders of Indy Mac common stock, or any
security into which it may be converted or for which it may be exchanged, from
causing any assets, whether tangible or intangible, of Indy Mac to be used for
any purpose other than in furtherance of Indy Mac's business.
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(f) In the event CWM REIT (i) establishes or acquires a majority ownership
interest in an entity the business activities of which are substantially the
same as all of the business activities then being conducted by Indy Mac or (ii)
transfers to such other entity substantially all of the assets of Indy Mac, then
CWM REIT shall be required, at CCR's option, to purchase CCR's interest in Indy
Mac at a purchase price equal to the amount required to be paid to CCR or its
assignee in the event of a liquidation of Indy Mac pursuant to paragraph (e)
above.
8.12 Reorganization. From and after the date hereof and prior to the
Effective Time, except for the transactions contemplated or permitted herein,
none of CAMC Advisor, CCR or CWM REIT shall knowingly take any action that would
be inconsistent with the representations and warranties made by it herein,
including, but not limited to, knowingly taking any action, or knowingly failing
to take any action, that is known to cause disqualification of the Merger as a
reorganization within the meaning of Section 368(a) of the Code. Furthermore,
from and after the date hereof and prior to the Effective Time, except for the
transactions contemplated or permitted herein, each of CWM REIT, CCR and CAMC
Advisor shall use reasonable efforts to conduct its business and file Tax
Returns in a manner that would not jeopardize the qualification of CWM REIT
after the Effective Time as a real estate investment trust as defined within
Section 856 of the Code.
8.13 Public Statements. The parties shall consult with each other prior to
issuing any public announcement or statement with respect to this Agreement or
the transactions contemplated hereby and shall not issue any such public
announcement or statement prior to such consultation, except as may be required
by law or by the rules of the Exchange.
8.14 Letter of CAMC Advisor's Accountants. CAMC Advisor shall use reasonable
efforts to cause to be delivered to CWM REIT an "agreed-upon procedures" report
of Grant Thornton LLP covering the financial statements and other financial and
statistical information of CAMC Advisor set forth in the Proxy Statement and
dated a date within five business days before the date on which the Proxy
Statement shall be mailed to the stockholders of CWM REIT and addressed to CWM
REIT, in form and substance reasonably satisfactory to CWM REIT and customary in
scope and substance for reports delivered by independent public accountants in
connection with proxy statements relating to mergers where the consideration
paid is registered on Form S-4 under the Securities Act.
8.15 Employee Matters.
(a) As of the Closing Date or as soon as practicable thereafter but
effective as of the Closing Date, CWM REIT shall establish a defined benefit
pension plan (the "CWM REIT DB Plan") providing comparable benefits to the
employees currently employed by CAMC Advisor who become employees of CWM REIT
("Transferring Employees") and who were as of the Closing Date covered by CCR's
defined benefit pension plan (the "CCR DB Plan"). Following the date hereof, the
parties shall negotiate in good faith the terms of a transfer of assets and
liabilities from the CCR DB Plan to the CWM REIT DB Plan in respect of the CAMC
Employees and CCR will provide the information required by one or more actuarial
firms acceptable to the parties to make the actuarial determinations concerning
such a transfer. If such an agreement cannot be reached, there will be no
transfer of assets and liabilities from the CCR DB Plan, the CCR DB Plan shall
retain the liability for all benefits accrued under such plan through the
Closing Date in respect of the CAMC Employees and CCR will amend the CCR DB
Plan, effective as of the Closing Date, to provide that the service of
Transferring Employees for CWM REIT and its affiliates will be counted solely
for vesting purposes under the CCR DB Plan with respect to benefits accrued as
of the Closing Date by the Transferring Employees. CCR acknowledges that if
assets are transferred (representing the cost of the accrued benefits) from the
CCR DB Plan to the CWM REIT DB Plan, they shall be considered to have been
attributable to amounts paid by CWM REIT pursuant to the provisions of the
Management Agreement. All reasonable expenses of any actuaries, consultants and
mechanics of the Transferring Employees and the accrued benefits (except the
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direct costs thereof referred to above) shall be borne by CWM REIT.
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(b) (1) Effective as of the Closing Date, all CAMC Employees who
participated in the CCR 401(k) Plan immediately prior to the Closing Date and
who are Transferring Employees (the "Savings Participants") shall become
participants under a defined contribution plan meeting the requirements of
Section 401(k) of the Code established by CWM REIT or maintained by CWM REIT or
an Affiliate of the CWM REIT (the "CWM REIT 401(k) Plan"). The CWM REIT 401(k)
Plan shall (i) provide for the transfer to the trust under the CWM REIT 401(k)
Plan of the assets attributable to the accounts of the Savings Participants
under the CCR 401(k) Plan and the crediting and maintenance of such accounts
under the CWM REIT 401(k) Plan, (ii) preserve for the Savings Participants all
benefits required to be preserved under Section 411(d)(6) of the Code with
respect to their accounts transferred to CWM REIT 401(k) Plan, and (iii) provide
that periods of employment with CAMC Advisor, its Affiliates or other
predecessor employers, to the extent recognized under the CCR 401(k) Plan
immediately prior to the Closing Date, shall be taken into account for purposes
of determining, as applicable, eligibility for participation, distributions,
vesting and amount of employer contributions of any Savings Participant under
the CWM REIT 401(k) Plan. Without limiting the foregoing, the CWM REIT 401(k)
Plan shall (i) accept the transfer of participant loans from the CCR 401(k) Plan
and shall provide for the continued administration of such transferred
participant loans for the remainder of their terms in accordance with the
provisions thereof and (ii) accept the transfer of shares of CCR common stock
("Stock") in respect of Savings Participants' interest in the CCR Stock Fund
maintained under the CCR 401(k) Plan.
(2) As promptly as practicable after the Closing, CWM REIT shall provide to
CCR documentation satisfactory to CCR regarding the qualified status of the CWM
REIT 401(k) Plan under Section 401(a) of the Code either in the form of a
favorable determination letter issued by the IRS or an opinion of outside
counsel to CWM REIT. CWM REIT covenants and agrees to take all such action as
may be necessary to establish and maintain the qualified status of the CWM REIT
401(k) Plan through the asset transfer date referred to in paragraph (b)(1)
above.
(3) Provided that CWM REIT has complied with the foregoing requirements of
this Section 8.15, CCR shall cause the trustee of the CCR 401(k) Plan to
transfer to the trustee of CWM REIT 401(k) Plan, and CWM REIT shall cause the
trustee of CWM REIT 401(k) Plan to accept such transfer, an amount equal to the
fair market value of the aggregate account balances of the Savings Participants
determined as of the Valuation Date (the "Transfer Amount"); provided, however,
that such transfer shall be made in two tranches as follows: the first tranche
shall be transferred on the Valuation Date and shall be an amount equal to not
less than 90% of the amount which CCR in good faith reasonably estimates to be
the Transfer Amount (the "Estimated Transfer Amount") and the second tranche
shall be transferred not more than 30 days after the Valuation Date and shall be
an amount equal to the difference between the Transfer Amount and the Estimated
Transfer Amount; and provided, further, however, that such transfer shall
consist only of cash, participant loans (including any promissory notes or other
documents evidencing such participant loans) and shares of Stock.
(c) Effective as of the Closing Date, CWM REIT shall offer to cover all
salaried CAMC Employees who are Transferring Employees under replacement
vacation, health, dental, prescription drug, life insurance, disability and
other health and welfare benefit plans as it may determine in its sole
discretion to be appropriate; provided, however, that in any event CWM REIT
shall (1) waive any limitation of coverage of such CAMC Employees (and their
eligible dependents) due to pre-existing conditions which were covered under
CCR's Welfare Benefit Plans, (2) credit each such CAMC Employee with all
deductible payments and co-payments paid by such CAMC Employee under CCR's
Welfare Benefit Plans during the year in which the Closing occurs for the
purpose of determining the extent to which any such CAMC Employee has satisfied
his or her deductible and whether he or she has reached the out-of-pocket
maximum under CWM REIT's health and welfare benefit plans for such year and (3)
credit each such CAMC Employee for all service with CCR and its Affiliates with
their respective predecessors prior to the closing for all purposes for which
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such service was recognized by CCR. Except with respect to liabilities arising
under plans described in Sections 8.15(a), (b) and (d) (the treatment of which
is provided for in those Sections), (i) CWM REIT shall be liable for all
benefits accrued and claims incurred on and after the Closing Date by or in
respect of Transferring Employees (including in the case of claims for medical
or dental benefits, all medical and dental expenses incurred on and after the
Closing Date) and (ii)
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CCR shall have no liability with respect thereto; and CCR shall be liable for
all benefits accrued and claims incurred prior to the Closing Date (including in
the case of medical or dental benefits, all medical and dental expenses incurred
prior to the Closing Date) and CWM REIT shall have no liability with respect
thereto (other than its obligations relating thereto pursuant to the Management
Agreement for periods through the Closing Date).
(d) Following the date hereof, the parties shall negotiate in good faith the
terms of a transfer of assets and liabilities from CCR's deferred compensation
plan and supplemental executive retirement plan to such plans of CWM REIT as CWM
REIT may reasonably establish in respect of the CAMC Employees and CCR will
provide the information required by one or more actuarial firms acceptable to
the parties to make the actuarial determinations concerning such a transfer. If
such an agreement cannot be reached, there will be no transfer of assets and
liabilities from its deferred compensation plan and supplemental executive
retirement plan, CCR's deferred compensation plan and supplemental executive
retirement plan shall retain the liability for all benefits accrued under such
plan through the Closing Date in respect of the CAMC Employees and CCR will
amend CCR's deferred compensation plan and supplemental executive retirement
plan, effective as of the Closing Date, to provide that the service of
Transferring Employees for CWM REIT and its affiliates will be counted solely
for vesting purposes under such plans with respect to benefits accrued as of the
Closing Date by the Transferring Employees. CCR acknowledges that if assets are
transferred (representing the cost of the accrued benefits) from CCR's deferred
compensation plan and supplemental executive retirement plan to such plans of
CWM REIT, they shall be considered to have been attributable to amounts paid by
CWM REIT pursuant to the provisions of the Management Agreement. All reasonable
expenses of any actuaries, consultants and mechanics of the Transferring
Employees and the accrued benefits (except the direct costs thereof referred to
above) shall be borne by CWM REIT.
8.16 Notice of Certain Events. Each party hereto shall promptly notify the
other party of (i) any notice or other communication from any Person alleging
that the consent of such Person is or may be required in connection with the
transactions contemplated by this Agreement; (ii) any notice or other
communication from any Governmental Body in connection with the transactions
contemplated by this Agreement; and (iii) any actions, suits, claims,
investigations or proceedings commenced or, to its knowledge, threatened
against, relating to or involving or otherwise affecting either such party or
any of its Subsidiaries which, if pending on the date of this Agreement, would
have been required to have been disclosed on Section 5.5 of the CAMC Advisor
Disclosure Schedule or which relate to the consummation of the transactions
contemplated by this Agreement.
8.17 Director and Officer Indemnification. From and after the Effective
Date, CCR shall not amend, repeal or otherwise modify the current provisions in
its Certificate of Incorporation or Bylaws providing for limitation of director
liability and indemnification of directors, officers, employees and agents in
any manner that would adversely affect the rights thereunder of individuals who
at any time prior to the Effective Time were directors, officers, employees or
agents of CAMC Advisor in respect of actions or omissions occurring at or prior
to the Effective Time (including, without limitation, the transactions
contemplated by this Agreement), unless such modification is required by law.
CCR shall also cause to be maintained in effect for not fewer than 60 months
from the Effective Time policies of directors' and officers' liability insurance
currently in force for its own officers and directors to cover those persons who
are or were directors and/or officers of CAMC Advisor (provided that CCR may
substitute therefor policies providing coverage in an aggregate amount of $20
million, the other terms and conditions of which are no less advantageous than
those contained in the policies currently in force) with respect to matters
occurring prior to the Effective Time, unless it can be shown that such policies
cannot be obtained or maintained, as the case may be, by CCR on terms that are
commercially reasonable at such time; provided, that, in the event any claim or
claims are asserted or made within such 60 months, such coverage in respect
thereof shall not be terminated until final
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disposition of all such claims. CWM REIT shall reimburse CCR for the cost
of obtaining or maintaining, as the case may be, such policies to the extent
that such cost is reasonably allocable to $20 million of coverage in respect of
actions or omissions of directors, officers, employees or agents of CAMC Advisor
prior to the Effective Time, provided that the amount of such reimbursement
shall not exceed $50,000 in the aggregate. This Section 8.17 which shall survive
the
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consummation of the Merger and the Effective Time, and except as set forth
herein, shall continue without limit, is intended to benefit each present and
former director and officer of CAMC Advisor and their heirs and legal
representatives (who shall be entitled to enforce the provisions hereof) and
shall be binding on all successors and assigns of CAMC Advisor and CCR. In the
event that CCR or any of its successors or assigns (i) consolidates with or
merges into any other Person and shall not be the continuing or surviving
corporation or entity of such consolidation or merger or (ii) transfers all or
substantially all of its properties and assets to any person, then and in such
case, proper provisions shall be made so that the successors and assigns of CCR
assume the obligations set forth in this Section 8.17.
8.18 Further Action. Each party hereto shall, subject to the fulfillment or
waiver at or before the Effective Time of each of the conditions of performance
set forth herein, perform such further acts and execute such documents as may
reasonably be required to effect the Merger.
8.19 Books and Records. Unless otherwise consented to in writing by CCR,
CWM REIT will not, and will not cause or permit any of its Affiliates or
Subsidiaries to, destroy or otherwise dispose of any of the books and records of
CAMC Advisor prior to the tenth anniversary of the Closing Date, and CWM REIT
will, and will cause its Affiliates and Subsidiaries to, grant CCR and its
representatives reasonable access thereto during normal business hours and
permit them to make copies thereof and, prior to destroying or discarding any of
such party's books and records, shall provide the other party hereto the
opportunity to retain copies of such records.
8.20 Restrictions on Resale of Share Consideration. Without the prior
written consent of CWM REIT or except pursuant to Section 2.2 of the
Registration Rights Agreement (a) CCR will neither sell, pledge nor otherwise
transfer any of the CAMC Share Consideration or shares of the CWM Common Stock
acquired in the exercise of its Special Purchase Rights for a two-year period
commencing upon the Closing Date and (b) during the 12 month period following
such two-year period, CCR may transfer up to 50% of all of such shares.
Thereafter, CCR may transfer up to 100% of any of such shares not previously so
transferred.
8.21 CAMC Advisor Shareholder Approval. CCR hereby agrees to vote the shares
of CWM Common Stock owned by CCR, and CAMC Advisor hereby agrees to vote the
shares of CWM Common Stock owned by CAMC Advisor, in favor of the Agreement and
the transactions contemplated hereby.
8.22 Waiver of Limitations on Percentage Ownership. In the event that CWM REIT
shall waive the application of the limitation on percentage ownership of shares
of CWM Common Stock set forth in Section 3 of CWM REIT's Certificate of
Incorporation with respect to any Person, CWM REIT shall waive the application
of such limitation in the same manner and to the same extent with respect to
8.23 Delivery of Certain Financial Statements. Promptly after they are
available, and in any event not later than the tenth business day prior to the
Closing Date, CAMC Advisor shall provide to CWM REIT (i) true and correct copies
of its unaudited consolidated balance sheet as of February 28, 1997, and related
unaudited statements of income and cash flows for the fiscal year ended on
February 28, 1996 and 1997 and (ii) true and correct copies of its unaudited
balance sheet as of the last day of each month occurring after the date hereof
and prior to the Closing Date and the related unaudited statements of income and
cash flows for the year to date ending on the last day of each such month.
Delivery of such financial statements shall be deemed to be a representation by
CAMC Advisor that to its knowledge such balance sheet (including the related
notes, if any) presents fairly, in all material respects, the financial position
of CAMC Advisor as of the specified date, and the other related statements
(including the related notes, if any) included therein present fairly, in all
material respects, the results of its operations and cash flows for the
respective periods or as of the respective dates set forth therein, all in
conformity with generally accepted accounting principles consistently
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applied during the periods involved, except as otherwise stated in the notes
thereto, subject to normal year-end audit adjustments.
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8.24 Distributions. CAMC Advisor shall declare and pay a dividend payable to
CCR immediately prior to the Effective Time in an amount equal to the amount (i)
determined by Price Waterhouse LLP to enable it to express the written comfort
required by Section 9.3(e) and (ii) timely communicated to CCR. CAMC Advisor
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shall also declare a dividend payable to CCR and payable immediately prior to
the Effective Time of any property, known or unknown, owned by CAMC Advisor
that, in the absence of such distribution, would result in the breach of the
representation and warranty contained in Section 5.8(c).
8.25 Sales and Use Taxes, Etc. All sales, use, transfer, recording and
similar Taxes imposed on and payable by CWM REIT, CCR, or CAMC Advisor arising
out of or in connection with the transactions effected pursuant to this
Agreement shall be borne equally by CCR and CWM REIT.
ARTICLE 9
CONDITIONS TO THE MERGER
9.1 Conditions to Each Party's Obligations. The respective obligations of
CWM REIT, CAMC Advisor and CCR to consummate the transactions contemplated by
this Agreement are subject to the fulfillment at or prior to the Closing Date of
each of the following conditions, which conditions may be waived only with the
consent of CCR and CWM REIT:
(a) CWM REIT Stockholder Approval. The Agreement, the transactions
contemplated hereby and any proposed amendments to or waivers in respect of CWM
REIT's Certificate of Incorporation and Bylaws necessary to carry out the
transactions contemplated hereby as to which stockholder approval is being
sought in the Proxy Statement shall have been duly approved, in each case by the
requisite holders of CWM Common Stock in accordance with applicable provisions
of the Exchange, the DGCL, and CWM REIT's Certificate of Incorporation and
Bylaws.
(b) HSR Act. The waiting period applicable to the consummation of the
Merger under the HSR Act, if applicable, shall have expired or been terminated.
(c) No Injunction or Proceedings. There shall not be in effect any
judgment, writ, order, injunction or decree of any court or Governmental Body of
competent jurisdiction restraining, enjoining or otherwise preventing
consummation of the transactions contemplated by this Agreement or permitting
such consummation only subject to any condition or restriction unacceptable to
either of CWM REIT or CAMC Advisor, each in its reasonable judgment, nor shall
there be pending or threatened by any Governmental Body any suit, action or
proceeding seeking to restrain or restrict the consummation of the transactions
contemplated hereby or seeking damages in connection therewith, which, in the
reasonable judgment of either CWM REIT or CAMC Advisor could have (i) a Material
Adverse Effect on CWM REIT or CAMC Advisor, or (ii) a material adverse effect on
the ability, of CWM REIT, CCR or CAMC Advisor to perform its respective
obligations under this Agreement, the Cooperation Agreement or the Registration
Rights Agreement.
(d) No Suspension of Trading, Etc. At the Effective Time, there shall be no
suspension of trading in, or limitation on prices for, securities generally on
the Exchange, declaration of a banking moratorium by federal or state
authorities or any suspension of payments by banks in the United States (whether
mandatory or not) or of the extension of credit by lending institutions in the
United States, or commencement of war, armed hostility, or other international
or national calamity directly or indirectly involving the United States, which
war, hostility or calamity (or any material acceleration or worsening thereof),
in the sole judgment of CWM REIT, would have a Material Adverse Effect on CAMC
Advisor or, in the sole judgment of CCR, would have a Material Adverse Effect on
CWM REIT.
(e) Registration Rights Agreement. The Registration Rights Agreement, in
substantially the form of Exhibit A attached hereto, except for such changes
therein as may be agreed upon by CCR and CWM REIT, shall have been executed and
delivered by the parties thereto.
(f) Cooperation Agreement. An agreement between CCR and CWM REIT relating
to certain interim sharing and service arrangements (the "Cooperation
Agreement"), in form and substance reasonably satisfactory to the parties
thereto, shall have been executed and delivered by each such party.
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(g) Employment Contract. Michael W. Perry, the Executive Vice President and
Chief Operating Officer of CAMC Advisor, shall have entered into a long-term
employment contract with CAMC Advisor, and CWM REIT shall have assumed such
contract.
(h) Physical Facility. A new long-term lease or sublease agreement (or
other satisfactory arrangement) relating to space at 35 North Lake Avenue or 155
North Lake Avenue, in form and substance reasonably satisfactory to each party
to the lease or sublease agreement, shall have been executed and delivered by
each such party.
9.2 Conditions to Obligations of CCR and CAMC Advisor to Effect the Merger.
The obligations of CCR and CAMC Advisor to effect the Merger shall be subject to
the fulfillment at or prior to the Closing Date of the following conditions,
unless waived in writing by CCR and CAMC Advisor:
(a) CWM REIT shall have performed in all material respects its obligations
and agreements contained in this Agreement required to be performed on or prior
to the Closing Date and the representations and warranties of CWM REIT contained
in this Agreement shall be true and correct in all material respects as of the
Closing Date as if made on the Closing Date (except for changes therein
contemplated or permitted by this Agreement), and CAMC Advisor shall have
received a certificate of the Executive Vice President and Chief Operating
Officer of CWM REIT, dated the Closing Date, certifying to such effect.
(b) Since September 30, 1996, there shall not have occurred or been
threatened any material adverse changes in the business, properties, operations
or condition (financial or other) of CWM REIT.
(c) The limitation on percentage ownership of shares of CWM Common Stock set
forth in Section 3 of CWM REIT's Certificate of Incorporation, if applicable,
shall have been duly waived for CCR for the purposes of the Merger and such
waiver shall be valid and in full force and effect. Such waiver shall also apply
to the exercise of the Special Purchase Rights of CCR.
(d) CAMC Advisor and CCR shall have received the favorable opinion of Brown
& Wood LLP, in form and substance satisfactory to CCR, as to (i) the corporate
existence and authority of CWM REIT, (ii) the due authorization, execution and
delivery of this Agreement and the Registration Rights Agreement by CWM REIT,
(iii) the enforceability of each of this Agreement and the Registration Rights
Agreement and (iv) the due authorization, issuance, delivery, validity and
nonassessability of the Share Consideration.
(e) CCR shall have received an opinion of Fried, Frank, Harris, Shriver &
Jacobson, to the effect that the Merger will be treated for federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the Code.
9.3 Conditions to Obligation of CWM REIT to Effect the Merger. The
obligations of CWM REIT to effect the Merger shall be subject to the fulfillment
at or prior to the Closing Date of the following conditions, unless waived in
writing by CWM REIT:
(a) CAMC Advisor and CCR shall have performed in all material respects their
respective obligations and agreements contained in this Agreement required to be
performed on or prior to the Closing Date and the representations and warranties
of CAMC Advisor and CCR contained in this Agreement shall be true and correct in
all material respects as of the Closing Date as if made on the Closing Date
(except for changes therein contemplated or permitted by this Agreement), and
CWM REIT shall have received a certificate of the Chairman, Vice Chairman, or a
Senior Managing Director of CCR and of the President of CAMC Advisor,
respectively, dated the Closing Date, certifying to such effect.
(b) Since August 31, 1996, there shall not have occurred or been threatened
any material adverse changes in the business, properties, operations or
condition (financial or other) of CAMC Advisor, except for changes resulting
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from (i) fees or other amounts earned by CAMC Advisor under the Management
Agreement or (ii) any transactions contemplated by this Agreement, including
Section 8.8.
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(c) If required by the Special Committee, Dean Witter shall have delivered
to the Special Committee prior to the date that the Proxy Statement is mailed to
the Stockholders of CWM REIT its opinion that the consideration to be paid to
CCR is fair, from a financial point of view.
(d) CWM REIT shall have received an appropriate affidavit from CCR stating
CCR's United States taxpayer identification number and that the CCR is not a
foreign person within the meaning of Section 1445(b)(2) of the Code.
(e) CWM REIT shall have received written comfort in form and substance
reasonably satisfactory to it from Price Waterhouse LLP that CAMC Advisor will
not have any accumulated or current earnings and profits within the meaning of
Section 312 of the Code as of the Effective Time. CCR shall provide to the CWM
REIT E&P Committee and Price Waterhouse LLP all information reasonably available
to CCR that is necessary to calculate the accumulated and current earnings and
profits of CAMC Advisor as of the Effective Time, including but not limited to
all federal income Tax Returns of CAMC Advisor and any consolidated group of
which CAMC Advisor and CCR are or have been members, working papers created with
respect to such Tax Returns, and information with respect to any federal income
Tax controversy, either pending or resolved, with respect to such returns. Any
such information shall be treated as strictly confidential by the CWM REIT E&P
Committee, Price Waterhouse LLP and every employee of, and advisor to, CWM REIT
and Price Waterhouse LLP.
(f) CWM REIT shall have received the favorable opinion of (i) Fried, Frank,
Harris, Shriver & Jacobson, in form and substance satisfactory to CWM REIT, as
to (A) the corporate existence and authority of each of CCR and CAMC Advisor,
(B) the due authorization, execution and delivery of this Agreement by each of
CCR and CAMC Advisor, (C) the due authorization, execution and delivery of the
Registration Rights Agreement by CCR, and (D) the enforceability of each of this
Agreement and the Registration Rights Agreement and (ii) Sandor E. Samuels,
General Counsel to CCR, in form and substance satisfactory to CWM REIT, as to
the due authorization, issuance, validity, nonassessability and ownership of the
CAMC Shares.
(g) CWM REIT shall have received from each of Messrs. David S. Loeb and
Angelo R. Mozilo an expression of his current intention to continue to serve as
Chairman and Vice Chairman, respectively, of the Board of Directors of CWM REIT,
subject to (i) CCR's maintaining beneficial ownership of in excess of 5.0% of
the issued and outstanding CWM Common Stock, (ii) his death or disability, and
(iii) the wishes of CWM REIT's Board of Directors and stockholders.
(h) CWM REIT shall have received from Mr. Angelo R. Mozilo an expression of
his current intention to continue to serve as of Chief Executive Officer of CWM
REIT for at least two years following the Closing Date, subject to (i) CCR's
maintaining beneficial ownership of in excess of 5.0% of the issued and
outstanding CWM Common Stock, (ii) his death or disability, and (iii) the wishes
of CWM REIT's Board of Directors and stockholders.
(i) The Indy Mac Charter Amendment, in form and substance satisfactory to
CWM REIT, shall have been filed with the Secretary of State of the State of
Delaware and shall be in effect.
ARTICLE 10
TERMINATION; AMENDMENT; WAIVER
10.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by CCR or the stockholders of CWM REIT, respectively, either
by the mutual written consent of CWM REIT and CCR or by mutual action of the
Board of Directors of CCR and the Special Committee of CWM REIT.
<PAGE>
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10.2 Termination by Either CWM REIT or CAMC Advisor. This Agreement may be
- --------------------------------------------------------------------------------
terminated and the Merger may be abandoned (a) by action of the Special
Committee in the event of a failure of a condition to the
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<PAGE>
obligations of CWM REIT set forth in Article 9 of this Agreement; (b) by action
of the Board of Directors of CCR in the event of a failure of a condition to the
obligations of CCR or CAMC Advisor set forth in Article 9 of this Agreement; or
(c) by action of the Board of Directors of CCR or the Special Committee if (i)
the Pre-Closing Market Value is greater than $26.16 or less than $16.92 or (ii)
a United States federal or state court of competent jurisdiction or United
States federal or state Governmental Body shall have issued an order, decree or
ruling or taken any other action permanently restraining, enjoining or otherwise
prohibiting the transactions contemplated by this Agreement and such order,
decree, ruling or other action shall have become final and non-appealable,
provided, that the party seeking to terminate this Agreement pursuant to this
clause (c)(ii) shall have used all reasonable efforts to remove such order,
decree, ruling or injunction; and provided, in the case of a termination
pursuant to clause (a) or (b) above, that the terminating party shall not have
breached in any material respect its obligations under this Agreement in any
manner that shall have approximately contributed to the occurrence of the
failure referred to in said clause.
10.3 Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article 10, no
party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other party to this Agreement, except that nothing
herein will relieve any party from liability for any breach of this Agreement.
10.4 Amendment. This Agreement, the Cooperation Agreement and the Registration
Rights Agreement may be amended at any time by written agreement signed by CWM
REIT, CAMC Advisor (provided that the signature of CAMC Advisor signed by CWM
REIT, CAMC Advisor (provided that the signature of CAMC Advisor shall only be
required for amendments prior to the Effective Time) and CCR; provided, however,
that an amendment to this Agreement made subsequent to the adoption by the
stockholders of CWM REIT of this Agreement shall not alter or change (i) the
amount or kind of consideration to be received in exchange for or on conversion
of all or any of the shares of CAMC Advisor, (ii) any term of the Certificate of
Incorporation of CWM REIT, or (iii) any of the terms and conditions of this
Agreement if such alteration or change would adversely affect the stockholders
of CWM REIT.
10.5 Waiver. Any party to this Agreement, the Cooperation Agreement or the
Registration Rights Agreement may extend the time for the performance of any of
the obligations or other acts of any other party hereto, or waive compliance
with any of the agreements of any other party or with any condition to the
obligations hereunder, in any case only to the extent that such obligations,
agreements and conditions are intended for its benefit.
ARTICLE 11
MISCELLANEOUS
11.1 Expenses. Except as otherwise expressly provided herein, each party shall
bear its own expenses, including the fees and expenses of any attorneys,
accountants, investment bankers, brokers, finders or other intermediaries or
other Persons engaged by it, incurred in connection with this Agreement and the
transactions contemplated hereby; provided, however, that in the event that the
Merger occurs, CWM REIT shall bear all out-of-pocket fees and expenses of CAMC
Advisor and CCR arising out of or incurred in connection with (a) the transfer
of the CAMC Employees to CWM REIT and compliance by CAMC Advisor and CCR with
the provisions of Sections 8.15 and 8.17 hereof, including, without limitation,
all actuarial, consulting and other fees and expenses, (b) the audit of the CAMC
financial statements referred to in Section 5.11, (c) the letter of Grant
Thornton LLP referred to in Section 8.14 (including the fees and expenses of
Grant Thornton LLP related thereto), (d) any of the matters described in Section
8.17 and (e) the Proxy Statement and the CWM REIT Stockholders Meeting,
including all printing, mailing, solicitation, legal, accounting and other fees
and expenses.
11.2 Notices, Etc. All notices, requests, demands or other communications
required by or otherwise with respect to this Agreement shall be in writing and
shall be deemed to have been duly given to any party when delivered personally
(by courier service or otherwise), when delivered by facsimile and confirmed by
return
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<PAGE>
facsimile, or seven days after being mailed by first-class mail, postage prepaid
and return receipt requested in each case to the applicable addresses set forth
below:
If to CAMC Advisor or to CCR:
c/o Countrywide Credit Industries, Inc.
155 North Lake Avenue
<PAGE>
- -----------------------------------------
Pasadena, CA 91101 Attention: General
Counsel Facsimile: (818) 584-2397
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with a copy to:
<PAGE>
- ------------------------------------------------
Fried, Frank, Harris, Shriver & Jacobson One
New York Plaza
- ------------------------------------------------
New York, NY 10004
Attention: Kenneth R. Blackman Facsimile:
(212) 859-4000
If to CWM REIT:
CWM Mortgage Holdings, Inc.
35 North Lake Avenue
<PAGE>
- -----------------------------------------
Pasadena, CA 91101 Attention: General
Counsel Facsimile: (818) 304-7575
- -----------------------------------------
with a copy to:
Brown & Wood LLP
One World Trade Center
<PAGE>
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New York, NY 10048-0557 Attention: Edward J. Fine Facsimile: (212) 839-5599
- --------------------------------------------------------------------------------
or to such other address as such party shall have designated by notice so given
to each other party.
11.3 Survival. The representations and warranties of the parties hereto
contained in this Agreement or in any certificate delivered pursuant hereto or
in connection herewith shall survive the Closing, but shall terminate on the
first anniversary of the Closing Date, except that those contained in Sections
5.7, 5.8 and 5.13 shall terminate upon expiration of the applicable statute of
limitations with respect to the matters covered thereby. The covenants and
agreements set forth in this Agreement shall not survive the Closing except in
such cases where such covenants and agreements by their terms contemplate
performance after the Closing Date. Notwithstanding the preceding sentences, any
covenant, agreement, representation or warranty in respect of which indemnity
may be sought pursuant to Section 4.6 shall survive the time at which it would
otherwise terminate pursuant to the preceding provisions of this Section 11.3,
if written notice of the inaccuracy or breach thereof, specifying Damages
(including the amount thereof) giving rise to such right to indemnity shall have
been given to the party against whom such indemnity may be sought. If any
governmental taxing authority asserts a deficiency with respect to a tax matter
which, if conceded, could result in a claim for which indemnity could be sought
pursuant to Section 4.6, CWM REIT shall be permitted to give notice of the
breach of a representation, warranty, covenant, or agreement and specify Damages
in the amount so asserted (including applicable interest and penalties),
notwithstanding CWM REIT's intent to dispute such claims. The amount of the
claim shall be deemed to be the amount of the settlement or adjudicated damages.
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<PAGE>
11.4 No Assignment. This Agreement shall be binding upon and shall inure to
the benefit of and be enforceable by the parties and their respective successors
and assigns; provided that, except as otherwise expressly set forth in this
Agreement, neither the rights nor the obligations of any party may be assigned
or delegated without the prior written consent of the other party.
11.5 Entire Agreement. Except as otherwise provided herein, this Agreement
,the Cooperation Agreement and the Registration Rights Agreement embody the
entire agreement and understanding among the parties relating to the subject
matter hereof and supersede all prior agreements and understandings relating to
such subject matter, and there are no representations, warranties or covenants
by the parties hereto relating to such matter other than those expressly set
forth herein (including the CAMC Advisor Disclosure Schedule) or therein and any
writings expressly required hereby or thereby.
11.6 Specific Performance. The parties acknowledge that, except for
breaches of Sections 4.6 and 8.20 as to which the sole remedy shall be
money damages, money damages are not an adequate remedy for violations of this
Agreement and that any party may, in its sole discretion, apply to a court of
competent jurisdiction for specific performance or injunctive or such other
relief as such court may deem just and proper to enforce this Agreement or to
prevent any violation hereof.
11.7 Remedies Cumulative. All rights, powers and remedies provided under
this Agreement or otherwise available in respect hereof at law or in equity
shall be cumulative and not alternative, and the exercise or beginning of the
exercise of any thereof by any party shall not preclude the simultaneous or
later exercise of any other such right, power or remedy by such party.
11.8 No Waiver. The failure of any party hereto to exercise any right,
power or remedy provided under this Agreement or otherwise available in respect
hereof at law or in equity or to insist upon compliance by any other party
hereto with its obligations hereunder, and any custom or practice of the parties
at variance with the terms hereof, shall not constitute a waiver by such party
of its right to exercise any such or other right, power or remedy or to demand
such compliance.
11.9 No Third-Party Beneficiaries. Except for the successors and assigns
referred to in Section 11.4 and the directors, officers, employees, affiliates,
agents and assigns referred to in Section 4.6, and in each such section, only to
the extent of the rights and benefits set forth therein, this Agreement is not
intended to be for the benefit of and shall not be enforceable by any Person or
entity who or which is not a party hereto.
11.10 Jurisdiction and Venue. Each party hereby irrevocably submits to the
exclusive jurisdiction of the United States District Court for the Central
District of California or any court of the State of California located in the
City of Los Angeles in any action suit or proceeding arising in connection with
this Agreement, and agrees that any such action, suit or proceeding shall be
brought only in such court (and waives any objection based on forum non
conveniens or any other objection to venue therein); provided, however, that
such consent to jurisdiction is solely for the purpose referred to in this
Section 11.10 and shall not be deemed to be a general submission to the
jurisdiction of said courts or in the State of California other than for such
purpose.
11.11 Governing Law. This Agreement and all disputes hereunder shall be
governed by and construed and enforced in accordance with the internal laws of
the State of Delaware, without regard to principles of conflict of laws.
11.12 Name, Captions, Etc. The name assigned to this Agreement and the
section captions used herein are for convenience of reference only and shall not
affect the interpretation or construction hereof. Unless otherwise specified (a)
the terms "hereof," "herein" and similar terms refer to this Agreement as a
whole and (b) references herein to Articles or Sections refer to
<PAGE>
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articles or sections of this Agreement.
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11.13 Severability. If any term of this Agreement or the application
thereof to any party or circumstance shall be held invalid or unenforceable to
any extent, the remainder of this Agreement and the application of such
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<PAGE>
term to the other parties or circumstances shall not be affected thereby and
shall be enforced to the fullest extent permitted by applicable law, provided
that in such event the parties shall negotiate in good faith in an attempt to
agree to another provision (in lieu of the term or application held to be
invalid or unenforceable) that will be valid and enforceable and will carry out
the parties' intentions hereunder.
11.14 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one instrument. Each counterpart may consist of a
number of copies, each signed by less than all, but together signed by all, the
parties hereto.
11.15 Gender; Number. All references to gender or number in this Agreement
shall be deemed interchangeably to have a masculine, feminine, neuter, singular
or plural meaning, as the context requires.
11.16 Ambiguities. Notwithstanding any rules or canons of construction to
the contrary, the parties hereto agree that the terms and provisions contained
herein shall be construed as if each party hereto participated equally in the
drafting and preparation of this Agreement.
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed by an officer duly authorized to do so, all as of the day and year
first above written.
CWM MORTGAGE HOLDINGS, INC., a Delaware
corporation
By: /s/ Michael W. Perry
<PAGE>
- --------------------------------------------------------------
- ------------------------
- --------------------------------------------------------------
COUNTRYWIDE ASSET MANAGEMENT
CORPORATION, a Delaware corporation
By: /s/ James P. Gross ------------------------
COUNTRYWIDE CREDIT INDUSTRIES, INC., a
Delaware corporation
By: /s/ Stanford L. Kurland ------------------------
<PAGE>
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<PAGE>
EXHIBIT A
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement dated as of , 1997, is made and entered
into by and between CWM Mortgage Holdings, Inc., a Delaware corporation ("CWM
REIT" or the "Company"), and Countrywide Credit Industries, Inc. ("CCR") in
connection with the issuance by CWM REIT of shares of common stock, par value
$0.01 per share ("Common Stock"), pursuant to the Agreement and Plan of Merger,
dated as of January 29, 1997 (the "Merger Agreement"), among CWM REIT,
Countrywide Asset Management Corporation, a Delaware corporation ("CAMC
Advisor"), and CCR, as sole stockholder of CAMC Advisor. Capitalized terms used
herein without definition shall have the meanings ascribed to them in the Merger
Agreement.
WHEREAS, the execution and delivery of this Registration Rights Agreement
is a condition to the closing of the transactions contemplated by the Merger
Agreement; and
WHEREAS, to induce CWM REIT to provide certain registration rights to CCR
and to perform its obligations hereunder and under the Merger Agreement, on the
one hand, and in order to induce CCR to enter into the Merger Agreement and to
perform its obligations hereunder and under the Merger Agreement, on the other
hand, and for other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, CWM REIT and CCR hereby agree as follows:
Section 1.1 Definitions
"Act" means the Securities Act of 1933, as amended, and the rules and
regulations of the Commission promulgated thereunder.
"Commission" means the Securities and Exchange Commission.
"Exchange Act" means the Securities Exchange Act of 1934, and the rules and
regulations of the Commission promulgated thereunder.
"Registrable Security" means each of the shares of Common Stock acquired by
CCR pursuant to the Merger Agreement upon original issue thereof and at all
times subsequent thereto (including through the exercise of the Special Purchase
Rights granted pursuant to Section 2.4 of this Agreement), until (i) it has been
disposed of pursuant to an effective registration statement under the Act
covering it, (ii) it is distributed to the public pursuant to Rule 144 under the
Act, as such Rule may be amended from time to time (or any similar provision
then in effect) ("Rule 144"), or (iii) it is sold, assigned or otherwise
transferred in any other transaction not requiring registration under the Act.
"Special Purchase Rights" as defined in Section 2.4.
"Triggering Date" means the second anniversary of the Effective Time.
Section 2.1 Demand Registration
(a) Request for Registration. At any time and from time to time on and
after the Triggering Date and subject to the terms and conditions hereof, CCR
may make a written request to CWM REIT to file with the Commission a
registration statement ("Demand Registration Statement") and such other
documents, including a prospectus, as may be necessary in order to comply with
the provisions of the Act so as to permit a public offering and sale of up to
all of the Registrable Securities (subject to the limitations set forth in
Section 8.20 of the Merger Agreement). Any registration effected under this
paragraph (a) is hereinafter referred to as a "Demand Registration." CCR may
make, in the aggregate, not more than two (2) requests for a Demand
Registration. CCR shall have the right to withdraw any such request by giving
written notice to CWM REIT of its
<PAGE>
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request to withdraw at any time prior to effectiveness of the registration
statement therefor; provided that in
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1
<PAGE>
the event of such withdrawal, CCR shall be responsible for all fees and expenses
(including fees and expenses of counsel) incurred by CWM REIT prior to such
withdrawal and provided further that such requested registration shall not count
toward the two Demand Registration requests permitted pursuant to this Section
2.1(a). Any request to effect a Demand Registration shall specify the number of
shares of Registrable Securities proposed to be sold and shall also specify the
intended method of disposition thereof. There shall be permitted hereunder only
one Demand Registration during any nine (9) month period, measured in each case
from the effective date of the most recent Demand Registration. The minimum
aggregate number of Registrable Securities that must be covered by any Demand
Registration Statement request shall be the lesser of (i) 1,250,000 shares of
Common Stock and (ii) Registrable Securities having a market value of
$20,000,000.
(b) Effective Registration. A registration will not be deemed to have been
effected as a Demand Registration unless and until it has been declared
effective by the Commission and CWM REIT has complied in all material respects
with its obligations under this Registration Rights Agreement with respect
thereto; provided that if, after it has become effective, the offering of
securities pursuant to such registration is or becomes the subject of any stop
order, injunction or other order or requirement of the Commission or any other
governmental or administrative agency, or if any court prevents or otherwise
limits the sale of such securities pursuant to the registration, such
registration will be deemed not to have been effected as to the shares subject
to such stop order, injunction, other order, requirement or limitation unless
such stop order, injunction, other order, requirement or limitation is rescinded
or the issuance of such stop order, injunction, other order, requirement or
limitation is imposed in response to an act or omission on the part of CCR. If a
registration requested pursuant to this Section 2.1 is deemed not to have been
effected and such failure to have been effected is not the result of any act or
omission of CCR (other than a withdrawal of such request by CCR prior to the
effectiveness of the registration statement therefor), then CWM REIT shall
continue to be obligated to effect such registration pursuant to this Section
2.1 (and such registration shall not count toward the two Demand Registration
requests permitted pursuant to Section 2.1(a)).
(c) Selection of Underwriters. If CCR so elects, the offering of
Registrable Securities pursuant to a Demand Registration shall be in the form of
an underwritten offering, in which case CWM REIT and CCR shall jointly select
one or more nationally recognized firms of investment bankers to act as the
managing underwriters (the "Underwriters") in connection with such offering.
(d) Deferral. Notwithstanding the foregoing, if CWM REIT shall furnish to
CCR a certificate signed by a duly authorized officer of CWM REIT stating that
the Board of Directors of CWM REIT has, by duly authorized resolution,
determined in good faith that, in light of the pendency of a Material
Transaction (as defined below), it would be materially detrimental to CWM REIT
and its shareholders for such registration statement to be filed and it is
therefore in the best interest of CWM REIT to defer the filing of such
registration statement, CWM REIT shall have the right to defer such filing for a
period of not more than ninety (90) days after receipt of the request for a
Demand Registration. CCR acknowledges that it would be materially detrimental to
CWM REIT and its shareholders for such registration statement to be filed and
therefore in the best interest of CWM REIT to defer such filing if such filing
would impose an undue burden upon the ability of CWM REIT to proceed with any
reorganization, merger, consolidation or acquisition of the securities or assets
of another firm or corporation or disposition of the securities or assets of CWM
REIT or a public offering by CWM REIT of common stock or other securities of CWM
REIT registered under the Act which, in each case, is material to CWM REIT (a
"Material Transaction"). If CWM REIT shall have delivered the certificate
referred to above and thereafter (if applicable) shall have entered into a
definitive agreement or filed a registration statement or a proxy statement in
connection with a Material Transaction, CWM REIT shall, upon written notice to
CCR, have the right to defer the filing of the registration statement requested
to be filed by CCR but in no event for longer than sixty (60) days from the
expiration of the initial ninety (90) day extension period referred to above as
is reasonably necessary to enable CWM REIT to satisfy its disclosure obligations
under the Act in such registration statement with respect to the Material
Transaction.
(e) Reduction of Offering. CWM REIT may include in a Demand Registration
pursuant to this Section 2.1 shares of Common Stock for the account of CWM REIT
and for the account of any other person or entity
2
<PAGE>
who holds shares of Common Stock; provided, however, that if the lead managing
Underwriter of any underwritten offering described in this Section 2.1 shall
have informed CWM REIT in writing that in its opinion the total number of shares
of Common Stock that CCR, CWM REIT and any other persons or entities desiring to
participate in such registration intend to include in such offering is such as
to materially and adversely affect the success of such offering, then CWM REIT
shall include in such Demand Registration all Registrable Securities requested
to be included in such registration by CCR up to such number of shares of Common
Stock that the lead managing Underwriter has informed CWM REIT may be included
in such registration without adversely affecting the success of such offering;
provided that, if the number of such Registrable Securities requested to be
included by CCR is less than the number of shares that the lead managing
Underwriter has informed CWM REIT may be included in such registration without
adversely affecting the success of such offering, then CWM REIT shall include in
such Demand Registration the shares of Common Stock that CWM REIT and any other
persons or entities desiring to participate in such registration desire to
include in such registration; provided further that the number of shares of
Common Stock to be offered for the account of CWM REIT and all such other
persons and entities participating in such registration shall be reduced or
limited pro rata in proportion to the respective number of shares of Common
Stock requested to be registered by such persons and entities to the extent
necessary to reduce the respective total number of shares of Common Stock
requested to be included in such offering to the number of shares of Common
Stock recommended by such lead managing Underwriter.
(f) Filings. Whenever CWM REIT is required to effect or cause the
registration of Registrable Securities pursuant to this Section 2.1, CWM REIT
will use its reasonable efforts to effect the registration of such Registrable
Securities in accordance with the intended method of disposition thereof as
promptly as practicable, and in connection with any such request CWM REIT will
as expeditiously as possible (and in no event more than forty-five (45) days
from the date of receipt of written request from CCR pursuant to Section 2.1(a)
to register Registrable Securities) prepare and file with the Commission a
registration statement as described in Section 4.1 hereof.
(g) Registration Rights of Other Parties. CWM REIT will not grant
registration rights superior to or inconsistent with the registration rights
granted to CCR under this Registration Rights Agreement.
Section 2.2 Incidental Offerings
If CWM REIT at any time proposes to file a registration statement covering
any of its Common Stock under the Act (other than any registration by CWM REIT
(A) on Form S-8 or a successor or substantially similar form of an employee
share option, share purchase or compensation plan or of Common Stock issued or
issuable pursuant to any such plan, (B) of a dividend reinvestment plan or (C)
on Form S-4 or a successor or substantially similar form of shares issuable in
connection with any acquisition, merger, exchange or similar transaction), CWM
REIT will give prompt notice to CCR of its intention to do so. Upon the written
request of CCR made within fifteen (15) days after the receipt of any such
notice (which request shall specify the number of Registrable Securities
intended to be disposed of by CCR), CWM REIT will use its best efforts to
arrange to include all the Registrable Securities as to which it has received
such requests, provided that if the registration statement relates to an
underwritten offering of Common Stock and if the lead managing Underwriter of
such underwritten offering shall by letter inform CWM REIT that in its opinion
the inclusion in such underwritten distribution of all or a specified number of
such Registrable Securities or of any other shares of Common Stock requested to
be included would interfere with the successful marketing of the Common Stock in
such distribution by the Underwriters, then CWM REIT may, upon written notice to
CCR, exclude from such underwritten offering (i) in the event the registration
statement relates to an offering for the account of CWM REIT, shares of Common
Stock requested to be included by any persons or entities other than CWM REIT,
pro rata in proportion to the respective number of shares
<PAGE>
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of Common Stock requested to be included by such persons and entities, to the
extent necessary to reduce the respective total number of shares of Common Stock
requested to be included in such offering to the number of shares of Common
Stock recommended by such Underwriter and (ii) in the event
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3
<PAGE>
the registration statements relates to an offering for the account of any person
or entity other than CWM REIT, (A) first, shares of Common Stock requested to be
registered by CWM REIT, (B) second, to the extent reduction as a result of
clause (A) is insufficient, shares of Common Stock requested to be registered
for the account of any persons or entities other than the person or entity
making the initial request for such registration (the "Requesting Party"), pro
rata in proportion to the respective number of shares of Common Stock requested
to be registered by such other persons and entities to the extent necessary to
reduce the respective total number of shares of Common Stock requested to be
included in such offering to the number of shares of Common Stock recommended by
such Underwriter and (C) third, to the extent reduction as a result of clauses
(A) and (B) is insufficient, shares of Common Stock requested to be registered
for the account of the Requesting Party.
The Company may decline to file a registration statement referred to in
this Section 2.2 after giving notice to CCR, or withdraw such a registration
statement after filing, or otherwise abandon any such proposed underwritten
offering, provided that the Company shall promptly notify CCR in writing of any
such action.
Section 2.3 CCR's Rights and Obligations
CCR may not participate in any underwritten offering under Section 2.1 or
Section 2.2 hereof unless it completes and executes all customary
questionnaires, powers of attorney, custody agreements, underwriting agreements,
and other customary documents required under the terms of such underwriting
arrangements. In connection with any underwritten offering under Section 2.1 or
2.2, each of CCR and CWM REIT shall be a party to the underwriting agreement
with the Underwriters and may be required to make certain customary
representations and warranties (in the case of CCR as to the Registrable
Securities being sold by CCR in such underwritten offering) and provide certain
customary indemnifications for the benefit of the Underwriters.
Section 2.4 Special Purchase Rights
(a) Prior to the offering of any voting capital stock of CWM REIT (or
security convertible or exchangeable into or exercisable for voting capital
stock), other than shares of Common Stock (or securities convertible or
exchangeable into or exercisable for Common Stock) issued (i) pursuant to any
employee stock option plan or employee stock purchase plan, (ii) as
consideration in making acquisitions or (iii) pursuant to the existing CWM REIT
dividend reinvestment plan or any successor thereto (the "DRIP"), (an
"Offering") CCR may offer and shall have the right (the "Right of First Offer")
to purchase from CWM REIT such number of shares of such capital stock or
securities as may be required to maintain its proportional voting interest
(based on the total voting interest of the Company's capital stock outstanding
immediately prior to such Offering). CWM REIT shall provide CCR notice of any
Offering within 30 days prior to the commencement thereof, and within 10
Business Days following receipt of such notice, CCR shall advise CWM REIT in
writing that it intends to purchase all or a portion of its proportional
percentage of the shares proposed to be issued in the Offering. Any purchase by
CCR pursuant hereto shall be made on the terms and be subject to the conditions
applicable to other purchasers in the Offering. Subject to Section 2.4(e), this
Right of First Offer shall expire on the earlier of (i) the 20th anniversary of
the Effective Time, (ii) the date on which CCR ceases to beneficially own 5% or
more of the outstanding shares of Common Stock (excluding from the number of
shares of Common Stock outstanding for purposes of such calculation all
outstanding shares of Common Stock issued after the effective time pursuant to
any employee stock option, employee stock purchase or compensation plan and all
shares of Common Stock issued after the effective time as consideration in
making acquisitions), (iii) the date on which CCR ceases to beneficially own 2%
or more of the outstanding shares of Common Stock, and (iv) the date of a Change
of Control.
(b) CCR shall be entitled to participate (the "Right to Participate" and
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together with the Right of First Offer, the "Special Purchase Rights") in the
DRIP on the same terms and subject to the same conditions and procedures
applicable to other participants, subject to and in accordance with the
following additional provisions:
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(i) With respect to Common Stock to be issued pursuant to the optional cash
payment feature of the DRIP, CWM REIT shall notify CCR, at least four (4)
Business Days prior to the applicable "Threshold 4
<PAGE>
Price and Waiver Discount Set Date" (as defined in the existing DRIP), of (x)
the dollar amount of shares of Common Stock (expressed as an aggregate cash
price) which CWM REIT desires to accept from its shareholders on the next
occurring "Investment Date" (as defined in the DRIP or the comparable date under
any successor plan) (such aggregate desired dollar amount being referred to
herein as the "Maximum Investment Amount") and (y) the aggregate number of
shares of Common Stock of CWM REIT outstanding as of the last day of the
immediately preceding month. For any Investment Date under the optional cash
payment feature of the DRIP, the maximum dollar amount permitted to be invested
by CCR pursuant to the Right to Participate shall be calculated as (x) CCR's
"Participation Percentage" (as defined below), multiplied by (y) the Maximum
Investment Amount (such product being referred to herein as the "Maximum CCR
Investment"). No later than two (2) Business Days following receipt of such
notice from CWM REIT, CCR shall specify in writing to CWM REIT (1) the number of
shares of Common Stock beneficially owned by CCR on such date, and (2) whether,
with respect to the Common Stock to be issued on the next occurring Investment
Date, CCR wishes to make any optional cash payment and the actual dollar amount
thereof, which may be any dollar amount up to and including the Maximum CCR
Investment for such month (such actual dollar amount being referred to herein as
the "Requested CCR Investment"). Any election by CCR to participate in the
optional cash payment feature of the DRIP hereunder (and the related election of
the Requested CCR Investment) shall be irrevocable for the applicable Investment
Date, and any failure by CCR to make such election shall be deemed to be an
election not to participate for the applicable Investment Date. In the event CWM
REIT elects to increase the Maximum Investment Amount for the applicable
Investment Date, CCR shall be provided with notice of such increase and an
opportunity to increase the Requested CCR Investment on a pro rata basis. In the
event CWM REIT elects to reduce the Maximum Investment Amount for the applicable
Investment Date, and/or the Maximum Investment Amount is subject to reduction
under the terms of the DRIP (such reduced amount, in either case, being referred
to herein as the "Actual Investment Amount"), CWM REIT shall so notify CCR, and
the Requested CCR Investment shall in such event be reduced on a pro rata basis.
In administering the optional cash investment feature of the DRIP, CWM REIT
shall include the Requested CCR Investment as a portion of the Maximum
Investment Amount proposed to be raised, and in the event that for any
Investment Date, the Maximum Investment Amount is reduced to the Actual
Investment Amount, the Requested CCR Investment (as reduced pro rata) shall be
included as a portion of said Actual Investment Amount. Subject to the
limitations and adjustments applicable to the Requested CCR Investment provided
herein, CCR shall be entitled to make such Requested CCR Investment. For
purposes of this Section 2.4(b), CCR's Participation Percentage shall be defined
as a percentage (expressed as a decimal) calculated as (x) the outstanding
shares of the Common Stock beneficially owned by CCR at any date of
determination, divided by (y) the aggregate shares of Common Stock of CWM REIT
outstanding at such date of determination.
(ii) With respect to the dividend reinvestment feature of the DRIP, CWM REIT
shall notify CCR, within ten (10) days after the "Record Date" (as defined in
the DRIP) for the payment of the applicable dividend for the applicable fiscal
quarter of CWM REIT, of the percentage of the outstanding shares of Common Stock
(expressed as a decimal and without giving effect to any shares of Common Stock
beneficially owned by CCR) which have theretofore validly elected to participate
in the DRIP with respect to the next occurring dividend payment (the "Maximum
Reinvestment Percentage"). No later than two (2) Business Days following receipt
of such notice from CWM REIT, CCR shall pursuant to the Right to Participate
specify in writing to CWM REIT whether (x) CCR wishes to elect for its
outstanding beneficially owned shares of Common Stock to participate in the
dividend reinvestment feature of the DRIP for the next occurring Investment
Date, and (y) the actual percentage (expressed as a decimal) of CCR's
outstanding beneficially owned Common Stock which CCR elects to participate on
such Investment Date, which may be any percentage up to and including the
Maximum Reinvestment Percentage for such Investment Date (such actual percentage
being referred to herein as the "CCR Reinvestment Percentage"). Any election by
CCR to participate in the dividend reinvestment feature of the DRIP hereunder
(and the related election of the CCR Reinvestment Percentage) shall be
irrevocable for the applicable Investment Date, and any failure by CCR to make
such election shall be deemed to be an election not to participate for the
applicable Investment Date.
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(iii) The Right to Participate shall expire on the earlier of (A) the 20th
anniversary of the Effective Time, (B) the date on which CCR ceases to
beneficially own 5% or more of the outstanding shares of Common Stock (excluding
from the number of shares of Common Stock outstanding for purposes of such
calculation all outstanding shares of Common Stock issued after the effective
time pursuant to any employee stock option, employee stock purchase or
compensation plan and all shares of Common Stock issued after the Effective Time
as consideration in making acquisitions), (C) the date on which CCR ceases to
beneficially own 2% or more of the outstanding shares of Common Stock and (D)
the date of a Change of Control.
(iv) Under the Right to Participate, CCR may elect, in respect of the Common
Stock, to participate in the optional cash payment feature of the DRIP, and/or
to participate in the dividend reinvestment feature of the DRIP, only to the
extent that such optional cash payment and/or such dividend reinvestment,
together with all other shares of Common Stock beneficially owned by CCR, would
not cause the percentage of shares of Common Stock beneficially owned by CCR in
the aggregate to exceed the then-current Participation Percentage.
(v) Except as otherwise specified in this Section 2.4(b) the Right to
Participate may be exercised only in accordance with and subject to the terms of
the DRIP in effect for CWM REIT at the time of any such exercise. Nothing in
this Section 2.4 or in this Agreement shall be deemed or construed to require
CWM REIT to create, maintain or renew any DRIP or similar plan or program;
provided, however, that CWM REIT may amend or modify the DRIP so long as such
amendments or modifications would not have a material adverse effect on CCR's
Right to Participate in the manner, and subject to the limitations, set forth in
Section 2.4(b).
(c) Neither the Right of First Offer nor the Right to Participate may be
assigned or otherwise transferred, but nothing herein shall preclude any
transferee of Common Stock owned by CCR from participating in the DRIP.
(d) Neither the Right of First Offer nor the Right to Participate may be
exercised in connection with any issuance of Common Stock pursuant to any
employee stock option, employee stock purchase or compensation plan of CWM REIT
or as consideration in making acquisitions.
(e) Notwithstanding any other provision of this Section 2.4 (i) the Special
Purchase Rights shall be subject to, and become effective only upon, the
approval of the holders of at least a majority of the shares of Common Stock CWM
REIT present and entitled to vote on the matter (the "Approval") and (ii) the
Special Purchase Rights shall be subject to the subsequent re-approval of the
holders of at least a majority of the shares of the Common Stock present and
entitled to vote on the matter upon each of the fifth, tenth and fifteenth
anniversary of the date immediately succeeding the fifth, tenth or fifteenth
anniversary of the date of the Approval. In the event that any subsequent
re-approval of the holders of Common Stock shall not be obtained, the Special
Purchase Rights shall terminate upon the date immediately succeeding the fifth,
tenth or fifteenth anniversary of the Approval, as the case may be. In
furtherance of the foregoing, in connection with the annual meetings of
stockholders of CWM REIT corresponding with the fifth, tenth and fifteenth
anniversary of the date of the Approval, subject to the fiduciary duties of CWM
REIT's Board of Directors under applicable law as advised by counsel, the Board
of Directors of CWM REIT shall recommend and declare advisable the re-approval
of the Special Purchase Rights and CWM REIT shall take all lawful action to
solicit, and use all reasonable efforts to obtain, such re-approvals, including
in each case, the inclusion of the recommendation of the CWM REIT Board of
Directors in the related proxy statement that the stockholders of CWM REIT vote
in favor of the re-approval of the Special Purchase Rights.
Section 3.1 Holdback Agreement
In the case of the registration of any underwritten primary offering of
Common Stock or Convertible Securities by CWM REIT and in which CCR will not be
participating in accordance with Section 2.2 hereof, CCR agrees, if requested in
writing by the lead managing Underwriter administering such offering, not to
effect
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<PAGE>
any offer, sale or distribution of Registrable Securities (or any option or
right to acquire Registrable Securities) during the period (not to exceed forty
(40) days) commencing on the tenth day prior to the effective date of the
registration statement covering such underwritten primary equity offering and
ending on the date specified by such managing Underwriter or Underwriters in
such written request to CCR.
Section 4.1 Registration Procedures
In connection with CWM REIT's obligations under this Registration Rights
Agreement, CWM REIT shall:
(a) Prepare and file a Demand Registration Statement pursuant to Section 2.1
on the appropriate form available for the sale of the Registrable Securities in
accordance with the intended method or methods of distribution thereof, and use
its reasonable efforts to cause such Demand Registration Statement to become
effective and remain effective; and no fewer than five days prior to the filing
of any Registration Statement (as defined below) or any amendment thereto
(including, without limitation, any document incorporated or deemed to be
incorporated by reference therein and any post-effective amendment), and not
fewer than five days prior to the filing or (if not filed) the first day of
public availability of any related preliminary prospectus or prospectus or any
amendments or supplements thereto (including any document incorporated or deemed
to be incorporated therein by reference), CWM REIT shall furnish to CCR copies
of all such documents, and shall cause the officers and directors of CWM REIT,
counsel to CWM REIT, and independent certified public accountants to CWM REIT to
respond to such inquiries as shall be necessary, in the opinion of CCR's
counsel, to conduct a reasonable investigation within the meaning of the Act.
CWM REIT shall not file the Demand Registration Statement or any related
prospectus or any amendments or supplements thereto to which CCR shall
reasonably object on a timely basis;
(b) Prepare and file with the Commission such amendments, including
post-effective amendments, to any Demand Registration Statement and any
registration statement filed with the Commission in connection with an offering
in which CCR is or will be offering or selling Registrable Securities pursuant
to Section 2.2 (an "Incidental Registration Statement"; the Demand Registration
Statement and Incidental Registration Statement are hereinafter called,
collectively, "Registration Statements" and, individually, a "Registration
Statement" (including documents incorporated or deemed to be incorporated by
reference therein)) as may be required by law; cause the related prospectus to
be supplemented by any required prospectus supplement, and as so supplemented to
be filed if, as and when required pursuant to Rule 424 (or any similar
provisions then in effect) under the Act; and comply with the provisions of the
Act and the Exchange Act with respect to the disposition of all Registrable
Securities covered by such Registration Statement;
(c) Notify CCR promptly (i) with respect to any Registration Statement or
any post-effective amendment thereto, when the same has become effective; (ii)
of any request by the Commission or any other federal or state governmental
authority for amendments or supplements to any Registration Statement
(including, without limitation, any documents incorporated or deemed to be
incorporated by reference therein) or a related prospectus or for additional
information, or of the receipt from the Commission or any other federal or state
governmental authority of any comment letter with respect to any of the
foregoing; (iii) of the issuance by the Commission of any stop order suspending
the effectiveness of any Registration Statement or the initiation of any
proceedings for that purpose; (iv) of the receipt by CWM REIT of any
notification with respect to the suspension of the qualification of any of the
Registrable Securities for offer or sale in any jurisdiction within the United
States, or the initiation or threatening of any proceeding for such purpose; and
(v) upon the occurrence of any event which makes any statement in (or
incorporated or deemed to be incorporated in) any Registration Statement or any
related prospectus or any amendments or supplements thereto untrue in any
material respect;
<PAGE>
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(d) Furnish to CCR without charge, such number of conformed copies as it
may reasonably request, of each Registration Statement and each amendment or
supplement thereto, including exhibits, financial statements and schedules;
7
<PAGE>
(e) Deliver to CCR without charge, as many copies of the preliminary
prospectus or prospectuses and the prospectus or prospectuses related to each
Registration Statement and each amendment or supplement thereto as it may
reasonably request;
(f) Prior to any public offering of Registrable Securities, use its best
efforts to register or qualify (or to obtain an exemption from registration or
qualification) of such Registrable Securities for offer and sale under the
securities or Blue Sky laws of all jurisdictions within the United States; keep
each such registration or qualification (or exemption therefrom) effective until
such time as such distribution has been completed, and do any and all other acts
or things necessary or advisable to enable the disposition in such jurisdictions
of the Registrable Securities; provided, however, that CWM REIT shall not be
required to qualify generally to do business in any jurisdiction where it is not
then so qualified or to take any action that would subject it to general service
of process in any such jurisdiction where it is not then so subject or subject
CWM REIT to any tax in any such jurisdiction where it is not then so subject;
(g) Promptly file all documents required to be filed under Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act during any period when the prospectus
related to a Registration Statement is required to be delivered under the Act:
(h) If any prospectus relating to Registrable Securities contains an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, prepare and, if
required, file with the Commission, a supplement or amendment to such prospectus
or any document incorporated or deemed to be incorporated therein by reference,
and file any other required document so that, as thereafter delivered, such
prospectus will not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading;
(i) Use its best efforts to cause all Registrable Securities to be listed on
each Exchange on which the shares of Common Stock are then listed and make all
other necessary or appropriate filings with each such Exchange;
(j) In connection with any underwritten offering in which CCR shall
participate, (i) cause each opinion delivered to CWM REIT (and any updates
thereof) also to be addressed to CCR (or expressly to provide therein or in a
separate letter that CCR may rely thereon); and (ii) (to the extent that the
independent public accountants are entitled to do so under Statement on Auditing
Standards No. 72 or any other applicable accounting standards) cause each
comfort letter from any independent certified public accountants that is
delivered to the Underwriters (and any update thereof) also to be addressed to
CCR (or expressly to provide therein or in a separate letter that CCR may rely
thereon); and
(k) Make reasonably available to CCR and its counsel and any accountant,
auditor or investment advisor retained by CCR, that information which such
parties would customarily require to satisfy their due diligence obligations
with respect to the offering and sale of the Registrable Securities and cause
CWM REIT's officers, directors and employees to supply all information
reasonably requested by any such person in connection with such due diligence
investigation; provided, however, that any information that is designated by CWM
REIT in writing as confidential at the time of delivery of such information
shall be kept confidential by such persons, unless (i) disclosure of such
information is required by court or administrative order or is necessary to
respond to inquiries of regulatory authorities or self-regulatory organizations,
or is necessary or advisable in connection with any litigation (commenced or
threatened), or any investigation or proceeding (commenced or threatened) by any
governmental agency or body, relating to the offer or sale of Registrable
Securities, or (ii) disclosure of such information, in the
<PAGE>
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opinion of counsel to such person, is required by law or pursuant to this
Registration Rights Agreement.
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CWM REIT may require CCR to furnish to CWM REIT such information regarding
CCR and the distribution of such Registrable Securities as is required by law to
be disclosed in the relevant Registration
8
<PAGE>
Statement, and CWM REIT may exclude from such registration or offering the
Registrable Securities if CCR unreasonably fails to furnish such information
within a reasonable time after receiving such request.
Section 5.1 Registration Expenses
Except as provided in Section 2.1(a) hereof, all expenses incident to CWM
REIT's performance of or compliance with this Registration Rights Agreement,
including, without limitation, all registration and filing fees, fees and
expenses of compliance with securities or Blue Sky laws (including reasonable
fees and disbursements of counsel in connection with Blue Sky qualifications of
the Registrable Securities), printing expenses, messenger and delivery expenses,
fees and expenses incurred in connection with the listing of the securities to
be registered on each Exchange, and fees and disbursements of counsel for CWM
REIT and its independent certified public accountants (including the expenses of
any special audit or comfort letters required by or incident to such
performance), the reasonable fees and expenses of any special experts retained
by CWM REIT in connection with such registration, and fees and expenses of other
Persons retained by CWM REIT (but not including any underwriting or brokerage
discounts or commissions attributable to the sale of Registrable Securities)
(all such included expenses being herein referred to as the "Registration
Expenses"), shall be borne by CWM REIT.
Section 6.1 Indemnification; Contribution
(a) Indemnification by CWM REIT. CWM REIT agrees to indemnify and hold
harmless CCR, its officers, directors, trustees and agents and each person, if
any, who controls CCR within the meaning of either Section 15 of the Act or
Section 20 of the Exchange Act, from and against any and all losses, claims,
damages, liabilities and expenses (including reasonable costs of investigation),
as incurred, arising out of or based upon any untrue statement or alleged untrue
statement of a material fact contained in (or incorporated or deemed to be
incorporated in) any Registration Statement or any related prospectus or
preliminary prospectus or in (or incorporated in or deemed to be incorporated
in) any amendment or supplement to any of the foregoing, or arising out of or
based upon any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, except insofar as such losses, claims, damages, liabilities or
expenses arise out of, or are based upon, any such untrue statement or omission
or allegation thereof based upon and in conformity with information furnished in
writing to CWM REIT by CCR expressly for use therein.
(b) Conduct of Indemnification Proceedings. If any action or proceeding
(including any governmental investigation) shall be brought or asserted against
CCR (or its officers, directors, trustees or agents) or any person controlling
CCR in respect of which indemnity is required from CWM REIT hereunder, CWM REIT
shall assume the defense thereof, including the employment of counsel reasonably
satisfactory to CCR, and shall assume the payment of all expenses. CCR or any
such officer, director, trustee, agent or controlling person shall have the
right to employ separate counsel (approved by CCR) in any such action and to
participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of CCR or such officer, director, trustee, agent or
controlling person unless (i) CWM REIT shall have failed to assume the defense
of such action or proceeding and employ counsel reasonably satisfactory to CCR
in any such action or proceeding or (ii) the named parties to any such action or
proceeding (including any impleaded parties) include both CCR or such officer,
director, trustee, agent or controlling person and CWM REIT, and CCR or such
officer, director, trustee, agent or controlling person shall have been advised
by counsel that there is an actual conflict of interest that would prevent one
law firm from representing all such persons in the same action (in which case,
if CCR or such officer, director, trustee, agent or controlling person notifies
CWM REIT in writing that it elects to employ separate counsel at the expense of
CWM REIT, CWM REIT shall not have the right to assume the defense of such action
or proceeding on behalf of CCR or such officer, director, trustee, agent or
controlling person, it being understood, however, that CWM REIT shall not, in
connection with any one such action or proceeding or separate but substantially
similar or related actions or proceedings in the same jurisdiction arising out
of the same general allegations or circumstances, be liable for the fees and
expenses of more than one separate firm of attorneys (together with local
counsel) at any time for CCR and its officers, directors, trustees, agents and
controlling persons, which firm shall be designated in writing by CCR). CWM REIT
shall not be liable for any
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<PAGE>
settlement of any such action or proceeding effected without CWM REIT's written
consent, but if settled with its written consent, or if there be a final
judgment for the plaintiff in any such action or proceeding, CWM REIT agrees to
indemnify and hold harmless CCR and its officers, directors, trustees, agents
and controlling person from and against any loss or liability (to the extent
stated above) by reason of such settlement or judgment.
(c) Indemnification by CCR of Registrable Securities. CCR agrees to
indemnify and hold harmless CWM REIT, its directors, each officer of CWM REIT
who signed a Registration Statement and each person, if any, who controls CWM
REIT within the meaning of either Section 15 of the Act or Section 20 of the
Exchange Act, to the same extent as the foregoing indemnity from CWM REIT to
CCR, but only with respect to untrue statements or omissions or alleged untrue
statements or omissions made in the Registration Statement pursuant to which
Registrable Securities of CCR have been registered under the Act, or in any
related prospectus or amendment or supplement thereto or any related preliminary
prospectus, in each case based upon and in conformity with information furnished
in writing by CCR for use therein. In case any action or proceeding shall be
brought against CWM REIT or its directors or any such officers or controlling
person, in respect of which indemnity may be sought against CCR, CCR shall have
the rights and duties given to CWM REIT, and CWM REIT or its directors or such
officers or controlling person shall have the rights and duties given to CCR, by
the preceding paragraph.
(d) Contribution. If the indemnification provided for in this Section 6.1
is unavailable or insufficient to hold an indemnified party for any reason
harmless in respect of any losses, claims, damages, liabilities or judgments
referred to herein, then the indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities and
judgments, as incurred, in such proportion as is appropriate to reflect the
relative fault of such indemnifying party, on the one hand, and such indemnified
party on the other, in connection with the statements or omissions which
resulted in such losses, claims, damages, liabilities or judgments, as well as
any other relevant equitable considerations. The relative fault of CWM REIT on
the one hand and of CCR and its officers, directors, agents, trustees and
controlling persons on the other shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by such party, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission; provided, however, that CCR shall not be liable for contribution under
this Section 6.1(d) in an aggregate amount which exceeds the total net proceeds
received by CCR from the sale of its Registrable Securities under the relevant
Registration Statement.
CWM REIT and CCR agree that it would not be just and equitable if
contribution pursuant to this Section 6.1(d) were determined by pro rata
allocation or by any other method of allocation which does not take into account
of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages, liabilities, or judgments referred to in the
immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
Section 7.1 Rule 144 CWM REIT shall timely file the reports required to be
filed by it under the Act and the Exchange Act and shall take such further
action as CCR may reasonably request, all to the extent required from time to
time to enable CCR to sell Registrable Securities without registration under the
Act within the applicable limitations of Rule 144 (or any successor thereto).
<PAGE>
Section 8.1 Termination
The parties hereto agree that this Registration Rights Agreement shall
terminate and the obligations of the parties hereto contained herein shall be
released without further action by any party if all of the Registrable
<PAGE>
<PAGE>
Securities have been (A) disposed of pursuant to an effective Registration
Statement or Registration Statements under the Act covering them, (B)
distributed to the public pursuant to Rule 144 under the Act, or (C) sold,
assigned or otherwise transferred in any other transaction not requiring
registration under the Act.
Section 9.1 Miscellaneous
(a) Amendments and Waivers. The provisions of this Registration Rights
Agreement may be amended, modified or supplemented by written instrument
executed by CWM REIT and CCR. Any party to this Registration Rights Agreement
may extend the time for the performance of any of the obligations or other acts
of any other party hereto, or waive compliance with any of the agreements or
obligations of any other party or with any condition, in each case to the extent
that such obligations, agreements and conditions are intended for its benefit;
provided that each such extension or waiver shall be in writing.
(b) Notices. All notices and other communications provided for or permitted
hereunder shall be made by hand-delivery or registered first-class mail:
(i) if to CCR, at Countrywide Credit Industries, Inc., 155 North Lake
Avenue, Pasadena, California 91101-7211, Attention: General Counsel;
(ii) if to CWM REIT, at CWM Mortgage Holdings, Inc., 35 North Lake Avenue,
Pasadena, California 91101-7211, Attention: General Counsel.
All such notices and communications shall be deemed to have been duly given
when delivered by hand or air or similar courier or, if sent by mail, seven days
after being deposited in the mail, postage prepaid.
(c) Counterparts. This Registration Rights Agreement may be executed in any
number of counterparts and by the parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original, and all of which
taken together shall constitute one and the same agreement.
(d) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE AS APPLIED TO CONTRACTS MADE
AND PERFORMED WITHIN THE STATE OF DELAWARE, WITHOUT REGARD TO PRINCIPLES OF
CONFLICTS OF LAW.
(e) Severability. The remedies provided herein are cumulative and not
exclusive of any remedies provided by law. If any term, provision, covenant or
restriction of this Registration Rights Agreement is held by a court of
competent jurisdiction to be invalid, illegal, void or unenforceable, the
remainder of the terms, provisions, covenants and restrictions set forth herein
shall remain in full force and effect and shall in no way be affected, impaired
or invalidated, and the parties hereto shall use their reasonable efforts to
find and employ an alternative means to achieve the same or substantially the
same result as that contemplated by such term, provision, covenant or
restriction. It is hereby stipulated and declared to be the intention of the
parties that they would have executed the remaining terms, provisions, covenants
and restrictions without including any of such that may be hereafter declared
invalid, illegal, void or unenforceable.
(f) Headings. The headings in this Registration Rights Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(g) Further Assurances. From and after the date hereof, CWM REIT and CCR
each covenants and agrees to execute and deliver all such agreements,
instruments and documents and to take all such further actions as any such
respective party may reasonably deem necessary from time to time (at the
requesting party's expense) to carry out the intent and purposes of this
Registration Rights Agreement and to consummate and fully effect the
transactions contemplated hereby.
(h) Entire Agreement; Integration. This Registration Rights Agreement
contains the entire agreement of the parties hereto with respect to its subject
matter and there are no promises or undertakings with respect thereto relative
to the subject matter hereof not expressly set forth or referred to herein.
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<PAGE>
(i) Successor Entity. In the event of any merger or consolidation of CWM
REIT with or into any other entity in which CWM REIT is not the surviving
entity, or in the event of any sale, lease or other disposition of all or
substantially all of the assets of CWM REIT to any other entity in a transaction
in which Registrable Securities are converted into securities of such other
entity, appropriate provision shall be made so that the successor or transferee
entity, as the case may be, shall assume the obligations of CWM REIT set forth
in this Agreement.
(j) Ambiguities. Notwithstanding any rules or canons of construction to the
contrary, the parties hereto agree that the terms and provisions contained
herein shall be construed as if each party hereto participated equally in the
drafting and preparation of this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has executed this
Registration Rights Agreement on the day of , 1997.
CWM MORTGAGE HOLDINGS, INC.
By:
Michael W. Perry
Executive Vice President and
<PAGE>
20
COUNTRYWIDE CREDIT INDUSTRIES, INC.
By:
12
<PAGE>
Exhibit 10.27
COUNTRYWIDE CREDIT INDUSTRIES, INC.
CHANGE IN CONTROL SEVERANCE PLAN
WHEREAS, the Board of Directors (the "Board") of Countrywide Credit
Industries, Inc., a Delaware corporation (the "Company"), recognizes that the
threat of an unsolicited takeover or other change in control of the Company may
occur which can result in significant distractions of its key personnel because
of the uncertainties inherent in such a situation; and
WHEREAS, the Board has determined that it is essential and in the best
interest of the Company and its stockholders to be able to retain the services
of its key personnel in the event of a threat of a change in control of the
Company, and following any change in control, to ensure their continued
dedication and efforts in any such event without undue concern for their
personal financial and employment security.
NOW, THEREFORE, in order to fulfill the above objectives, the following
plan has been developed and is hereby adopted.
1. Purpose
It is the purpose of the Company, through this Plan, to provide a
salary continuation payment and certain other benefits for each of its
employees who is a Participant in the Plan and (a) who separates from
service with the Company for Good Reason or (b) whose employment with
the Company is involuntarily terminated (other than for Cause,
Disability, death or an Excluded Termination), in either case, on or
after the date on which a Change in Control occurs and within the time
limits specified in Section 5.1.
2. Contractual Right
Upon and after a Change in Control, each Participant shall have a fully
vested, nonforfeitable contractual right, enforceable against the
Company, to the benefits provided for under Section 6 of this Plan upon
the conditions specified in Section 5.1. Such contractual right to
receive such benefits if the conditions specified in Section 5.1 are
fulfilled shall arise on the date on which the Change in Control
occurs.
3. Duration
This Plan shall be effective as of the date the Plan is approved by the
Board or such other date as the Board shall designate in its resolution
approving the Plan. The Plan shall continue in effect until terminated
in accordance with Section 9.
4. Definitions. For purposes of this Plan, the following definitions
shall apply:
4.1 Affiliate: "Affiliate" shall mean with respect to any person or entity,
any entity, directly or indirectly, controlled by, controlling or under common
control with such person or entity.
4.2 Board: "Board" shall mean the Board of Directors of Countrywide Credit
Industries, Inc.
4.3 Cause: "Cause" shall exist where the Participant (a) intentionally
failed to perform reasonably assigned duties, (b) acted dishonestly or engaged
in willful misconduct in the performance of his or her duties, (c) engaged in a
transaction in connection with the performance of his or her duties to the
Company for personal profit to himself or herself or (d) willfully violated any
law, rule or regulation in connection with the performance of his or her duties
(other than traffic violations or similar offenses).
4.4 Change in Control: A "Change in Control" shall mean the occurrence
during the term of this Plan, of any one of the following events:
(a) An acquisition (other than directly from Company) of any common stock
or other "Voting Securities" (as hereinafter defined) of Company by any "Person"
(as the term person is used for purposes of Section 13(d) or 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")), immediately
after which such Person has "Beneficial Ownership" (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of twenty five percent (25%) or more
of the then outstanding shares of Company's common stock or the combined voting
power of Company's then outstanding Voting Securities; provided, however, in
determining whether a Change in Control has occurred, Voting Securities which
are acquired in a "Non-Control Acquisition" (as hereinafter defined) shall not
constitute an acquisition which would cause a Change in Control. For purposes of
this Plan, (1) "Voting Securities" shall mean Company's outstanding voting
securities entitled to vote generally in the election of directors and (2) a
"Non-Control Acquisition" shall mean an acquisition by (i) an employee benefit
plan (or a trust forming a part thereof) maintained by (A) the Company or (B)
any corporation or other Person of which a majority of its voting power or its
voting equity securities or equity interest is owned, directly or indirectly, by
the Company (for purposes of this definition, a "Subsidiary"), (ii) the Company
or any of its Subsidiaries, or (iii) any Person in connection with a
"Non-Control Transaction" (as hereinafter defined);
(b) The individuals who, as of May 6, 1996 are members of the Board (the
"Incumbent Board"), cease for any reason to constitute at least two-thirds of
the members of the Board; provided, however, that if the election, or nomination
for election by the Company's common stockholders, of any new director was
approved by a vote of at least two-thirds of the Incumbent Board, such new
director shall, for purposes of this Plan, be considered as a member of the
Incumbent Board; provided, further, however, that no individual shall be
considered a member of the Incumbent Board if such individual initially assumed
office as a result of either an actual or threatened "Election Contest" (as
described in Rule 14a-11 promulgated under the Exchange Act) or other actual or
threatened solicitation of proxies or consents by or on behalf of a Person other
than the Board (a "Proxy Contest") including by reason of any agreement intended
to avoid or settle any Election Contest or Proxy Contest; or
(c) The consummation of: (i) A merger, consolidation or reorganization
involving the Company, unless such merger, consolidation or reorganization is a
"Non-Control Transaction." A "Non-Control Transaction" shall mean a merger,
consolidation or reorganization of the Company where:
(A) the Company's stockholders, immediately before such merger,
consolidation or reorganization, own directly or indirectly immediately
following such merger, consolidation or reorganization, at least seventy percent
(70%) of the combined voting power of the outstanding Voting Securities of the
corporation resulting from such merger, consolidation or reorganization (the
"Surviving Corporation") in substantially the same proportion as their ownership
of the Voting Securities immediately before such merger, consolidation or
reorganization;
(B) the individuals who were members of the Incumbent Board immediately
prior to the execution of the agreement providing for such merger, consolidation
or reorganization constitute at least two-thirds of the members of the board of
directors of the Surviving Corporation, or in the event that, immediately
following the consummation of such transaction, a corporation beneficially owns,
directly or indirectly, a majority of the Voting Securities of the Surviving
Corporation, the board of directors of such corporation; and
(C) no Person other than (i) the Company, (ii) any Subsidiary, (iii) any
employee benefit plan (or any trust forming a part thereof) maintained by the
Company, the Surviving Corporation, or any Subsidiary, or (iv) any Person who,
immediately prior to such merger, consolidation or reorganization had Beneficial
Ownership of twenty five percent (25%) or more of the then outstanding Voting
Securities or common stock of the Company, has Beneficial Ownership of twenty
five percent (25%) or more of the combined voting power of the Surviving
Corporation's then outstanding Voting Securities or its common stock;
(ii) A complete liquidation or dissolution of the Company; or
(iii) The sale or other disposition of all or substantially all of the
assets of the Company to any Person (other than a transfer to a Subsidiary).
Notwithstanding the foregoing, a Change in Control shall not be deemed to
occur solely because any Person (the "Subject Person") acquired Beneficial
Ownership of more than the permitted amount of the then outstanding common stock
or Voting Securities as a result of the acquisition of common stock or Voting
Securities by the Company which, by reducing the number of shares of common
stock or Voting Securities then outstanding, increases the proportional number
of shares Beneficially Owned by the Subject Person; provided, however, that if a
Change in Control would occur (but for the operation of this sentence) as a
result of the acquisition of common stock or Voting Securities by the Company,
and after such share acquisition by the Company, the Subject Person becomes the
Beneficial Owner of any additional common stock or Voting Securities which
increases the percentage of the then outstanding common stock or Voting
Securities Beneficially Owned by the Subject Person, then a Change in Control
shall occur.
Notwithstanding anything to the contrary contained herein, if the
employment of a Participant is terminated (i) at the request of a third party
who has indicated an intention or taken steps reasonably calculated to effect a
Change in Control and who effectuates a Change in Control or (ii) otherwise in
connection with, or in anticipation of, a Change in Control which actually
occurs, then for purposes of this Plan the date of a Change in Control with
respect to that Participant shall be deemed to be the date immediately prior to
the date of the Participant's termination.
4.5 Company: "Company" shall mean Countrywide Credit Industries, Inc. and
any successor thereto, including, without limitation, any person (as such term
is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934,
as amended), partnership(s) or corporation(s) acquiring directly or indirectly
all or substantially all of the business or assets of the Company.
4.6 Disability: "Disability" shall mean physical or mental infirmity which
impairs the Participant's ability to substantially perform his or her duties (as
they existed immediately prior to the illness or injury) on a full-time basis
for four (4) consecutive calendar months or for shorter periods aggregating
eighty (80) or more business days in any twelve (12) month period.
4.7 Excluded Termination: "Excluded Termination" shall have the meaning as
set forth in Section 5.2 of this Plan.
4.8 Good Reason: A Participant shall have "Good Reason" for terminating
employment with the Company only if one or more of the following occurs, within
one year after a Change in Control, without the Participant's express written
consent:
(a) a reduction by the Company in the Participant's base salary by at least
five percent (5%) or the termination or reduction of award opportunities under
any bonus or incentive award plan, practice or formula in which the Participant
participates unless a comparable arrangement (embodied in an ongoing substitute
or alternative plan, practice or formula) has been made with respect to the
Participant's participation in such bonus or incentive award plan, practice or
formula; or
(b) for any Participant who immediately prior to the
Change in Control is a member of employee
classification A or B (as set forth in Appendix A), a
change in the Participant's title, position or
responsibilities which represents an adverse change
from his or her title, position or responsibilities
as in effect immediately prior to such change; or
(c) the relocation of the Company's office at which the
Participant is located at the time of the Change in
Control to a location more than fifty (50) miles from
the location at which the Participant performed his
or her duties immediately prior to the Change in
Control.
Any event described in Section 4.8(a), (b) or (c) which occurs
prior to a Change in Control but which the Executive
reasonably demonstrates (1) was at the request of a third
party who has indicated an intention or taken steps reasonably
calculated to effect a Change in Control or (2) otherwise
arose in connection with, or in anticipation of, a Change in
Control, shall constitute Good Reason for purposes of this
Agreement notwithstanding that it occurred prior to a Change
in Control.
Notwithstanding the foregoing, no action by the Company shall
give rise to Good Reason if it results from the Participant's
termination for Cause, Disability, death or an Excluded
Termination.
4.9 Operating Unit: "Operating Unit" shall mean any subsidiary, division or
other business unit of Company or any Affiliate.
4.10 Participant: "Participant" shall mean an active, full-time employee of
the Company or any of its subsidiaries who, on the date immediately preceding
the date of a Change in Control, is (a) not covered under an individual
employment or severance agreement (as distinguished from a plan or program which
is applicable to groups of salaried employees generally) which provides for
compensation and/or benefits upon termination of employment and (b) employed in
one of the employee classifications set forth in Appendix A.
4.11 Plan: "Plan" shall mean the Countrywide Credit Industries, Inc. Change
in Control Severance Plan.
4.12 "Post-Transaction Good Reason" means with respect to offered
employment or the continued employment, as the case may be, with a
Post-Transaction Employer (as defined in Section 5.2) following a Transaction
(as defined in Section 5.2):
(a) a reduction in the Participant's annual base salary
by at least five percent (5%) below the greater of
the rate in effect (i) as of the date of the
Transaction or (ii) on any date following the
Transaction;
(b) for any Participant who immediately prior to the
Change in Control is a member of employee
classification A or B (as set forth in Appendix A), a
change in the Participant's title, position or
responsibilities which represents an adverse change
from his or her title, position or responsibilities
as in effect immediately prior to such change; or
(c) the relocation of the offices at which the
Participant is principally employed to a location
more than fifty (50) miles from the location of such
offices immediately prior to the Transaction, or the
Participant being required to be based anywhere other
than such offices, except to the extent the
Participant was not previously assigned to a
principal location and except for required travel on
the Company's business to an extent substantially
consistent with the Participant's business travel
obligations at the time of the Transaction;
4.13 Severance Benefit: "Severance Benefit" shall mean the benefits payable
in accordance with Section 6 of this Plan.
5. When Provisions Apply
5.1 The benefits provided for under Section 6 shall be provided to
each Participant who incurs a "Qualifying Termination." For
purposes of this Plan, a "Qualifying Termination" shall occur
only if a Change in Control occurs and
(a) within one year after the Change in Control occurs, the Company
terminates the Participant's employment other than for Cause; or
(b) (i) within one year after the Change in Control occurs, Good Reason
occurs, and
(ii) the Participant terminates employment with the Company within six
months after the Good Reason occurs;
provided, however, that a Qualifying Termination shall not
occur if the Participant's employment with the Company
terminates by reason of Cause, the Participant's Disability or
death, or an Excluded Termination (as defined in Section 5.2).
5.2 Sale of Business or Assets. If, following a Change in Control,
a Participant's employment with the Company and its Affiliates
terminates in connection with the sale, divestiture or other
disposition of any Operating Unit (or part thereof) (a
"Transaction"), such termination shall not be a termination of
employment of the Participant for purposes of the Plan, and
(notwithstanding the rights provided to the Participant by
Section 5.1) the Participant shall not be entitled to a
Severance Benefit as a result of such termination of
employment if (i) the Participant is offered continued
employment, or continues in employment, with the divested
Operating Unit or the purchaser of the assets of the Operating
Unit, as the case may be, (the "Post-Transaction Employer") or
their respective Affiliates on terms and conditions that would
not constitute Post-Transaction Good Reason and (ii) the
Company obtains an agreement from the acquiror of the stock or
assets of the divested Operating Unit, enforceable by the
Participant, to provide or cause the Post-Transaction Employer
to provide severance pay and benefits, if the Participant
accepts the offered employment or continues in employment with
the Post-Transaction Employer or its Affiliates following the
Transaction, (A) at least equal to the Severance Benefit and
(B) payable upon a termination of the Participant's employment
with the Post-Transaction Employer and its Affiliates within
the one year period described in Section 5.1 (or such part of
it as is then remaining) for any reason other than Cause,
Disability, the Participant's death or a termination by the
Participant without Post-Transaction Good Reason. For purposes
of this Section 5.2, the terms Cause and Disability shall have
the meanings ascribed to them in Sections 4.3 and 4.6,
respectively, but the term Company as it is used in Section
4.3 shall be deemed to refer to the entity employing the
Participant after the Transaction.
A termination of employment described in this Section 5.2 is
herein referred to as an "Excluded Termination." In the
circumstances described in this Section 5.2, the Participant
shall not be entitled to receive any Severance Benefit under
this Plan whether or not the Participant accepts the offered
employment or continues in employment. The provisions of this
Section 5.2 do not create any entitlement to any Severance
Benefit from the Company and its Affiliates in any
circumstances whatsoever and are to be construed solely as a
limitation on such entitlement in the circumstances herein set
forth.
5.3 The fact that a Participant is eligible to immediately receive
retirement benefits under the Countrywide Credit Industries,
Inc. Defined Benefit Pension Plan or any other Company
employee benefit plan, practice or policy shall not render him
or her ineligible for the benefits under this Plan.
6. Severance Benefits
6.1 Severance Payment
(a) Each Participant entitled to benefits under this Plan
shall receive within fifteen (15) days after the
Participant's Qualifying Termination a lump sum
payment in cash equal to the amount as determined in
accordance with Appendix A (the "Salary Separation
Payment").
For purposes of calculating the Salary Separation
Payment, (1) the Participant's "Base Pay" shall be
the Participant's base annual salary as of the date
of his or her termination of employment or, if
greater, as of the date on which the Change in
Control occurs and (2) the Participant's "Average
Bonus" shall be the average of the aggregate bonus
and/or incentive award, if any, paid or payable to
the Participant for each of the two (2) fiscal years
preceding the fiscal year in which the Participant's
termination of employment occurs (or such fewer
number of fiscal years for which the Participant was
eligible to receive a bonus and/or incentive award).
(b) Except as required by Section 7, the Salary Separation Payment provided
for in Section 6.1(a) shall be payable in addition to, and not in lieu of, all
other accrued, vested, earned, or deferred compensation rights, options, or
other benefits (other than severance pay or similar benefits) which may be
payable or owing to a Participant following termination of his or her employment
under any plan, including but not limited to retirement and supplemental
retirement benefits, accrued vacation or sick pay, compensation, or benefits
payable under any of the Company's employee benefit plans, practices or
policies.
(c) The Salary Separation Payment shall not be offset or
reduced by any unemployment insurance benefit or
income from subsequent employment that the
Participant may receive.
6.2 The period used in computing the Salary Separation Payment
pursuant to Section 6.1(a) (the "Salary Separation Pay
Period") shall be included as accredited service for the
purpose of receiving or accruing benefits under all employee
benefit plans of the Company, including, but not limited to,
group health and life insurance, long-term disability, the
Countrywide Credit Industries, Inc. Defined Benefit Pension
Plan, the Countrywide Credit Industries, Inc. Tax Deferred
Savings and Investment Plan, the Countrywide Credit
Industries, Inc. Supplemental Executive Retirement Plan and
the Countrywide Credit Industries, Inc. Deferred Compensation
Plan.
6.3 For the period equal to the Salary Separation Pay Period and
commencing on the date of Participant's termination of
employment (the "Continuation Period"), the Company shall at
its expense (and without contribution by the Participant)
continue on behalf of the Participant and his or her
dependents and beneficiaries (a) medical, health, dental and
prescription drug benefits, (b) long-term disability coverage
and (c) life insurance and other death benefits coverage. The
coverages and benefits (including deductibles, if any)
provided under this Section 6.3 during the Continuation Period
shall be no less favorable to the Participant and his or her
beneficiaries than the most favorable of such coverages and
benefits provided the Participant and his or her dependents
during the 90-day period immediately preceding the Change in
Control or as of any date following the Change in Control but
preceding the date of Participant's termination. The
obligation under this Section 6.3 with respect to the
foregoing benefits shall be limited if the Participant obtains
any such benefits pursuant to a subsequent employer's benefit
plans, in which case the Company may reduce or eliminate the
coverage and benefits it is required to provide the
Participant hereunder as long as the aggregate coverages and
benefits of the combined benefit plans are no less favorable
to the Participant than the coverages and benefits required to
be provided hereunder. Any period during which benefits are
continued pursuant to this Section 6.3 shall be considered to
be in satisfaction of the Company's obligation to provide
"continuation coverage" pursuant to Section 4980B of the
Internal Revenue Code of 1986, as amended, and the period of
coverage required under said Section 4980B shall be reduced by
the period during which benefits were provided pursuant to
this Section 6.3.
6.4 Any termination of employment following a Change in Control by
the Company or by the Participant shall be communicated by a
Notice of Termination to the other party herein in accordance
with Section 11. For purposes of this Plan, a "Notice of
Termination" shall mean a written notice which shall indicate
the specific Qualifying Termination provision in this Plan, if
any, relied upon and shall set forth in reasonable detail the
facts and circumstances claimed to provide a basis for
termination of the Participant's employment under the
provision so indicated and shall specify the effective date of
the Qualifying Termination which shall not be less than thirty
(30) days nor more than sixty (60) days from the date such
Notice of Termination is given or such shorter or longer
period as may be mutually agreed between the Company and the
Participant. For purposes of this Plan, no such purported
Qualifying Termination shall be effective without such Notice
of Termination.
6.5 If a Participant who is entitled to Severance Benefits under
this Plan dies before receiving the Salary Separation Payment,
such Payment shall be made to the Participant's surviving
spouse, or, if there is no surviving spouse, to the
Participant's estate. If a Participant who is entitled to
Severance Benefits under this Plan dies before the end of the
Continuation Period, then for the balance of the Continuation
Period, the Company shall be required to continue the benefits
provided for under Section 6.3 to the Participant's spouse and
dependents.
6.6 A Participant who is entitled to benefits under this Plan
shall not be required to accept or to seek other employment as
a condition of receiving such benefits, and a Participant's
benefits provided under this Plan shall not be offset by any
future compensation received by the Participant.
7. Excise Tax Limitation
(a) Notwithstanding anything contained in this Plan to the contrary, to the
extent that the payments and benefits provided under this Plan and benefits
provided to, or for the benefit of, the Participant under any other Company plan
or agreement (such payments or benefits are collectively referred to as the
"Payments") would be subject to the excise tax (the "Excise Tax") imposed under
Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), the
Severance Benefits shall be reduced (but not below zero) to the extent necessary
so that no Payment to be made or benefit to be provided to the Participant shall
be subject to the Excise Tax (such reduced amount is hereinafter referred to as
the "Limited Payment Amount"). Unless the Participant shall have given prior
written notice specifying a different order to the Company to effectuate the
Limited Payment Amount, the Company shall reduce or eliminate the Payments, by
first reducing or eliminating those payments or benefits which are not payable
in cash and then by reducing or eliminating cash payments, in each case in
reverse order beginning with payments or benefits which are to be paid the
farthest in time from the Determination (as hereinafter defined). Any notice
given by the Participant pursuant to the preceding sentence shall take
precedence over the provisions of any other plan, arrangement or agreement
governing the Participant's rights and entitlements to any benefits or
compensation.
(b) The determination as to whether the Payments shall be reduced to the
Limited Payment Amount pursuant to this Plan and the amount of such Limited
Payment Amount shall be made by an accounting firm at the Company's expense
selected by the Company which is one of the six largest accounting firms in the
United States (the "Accounting Firm"). The Accounting Firm may, at the Company's
option, be the accounting firm which audits the financial statements of the
Company. The Accounting Firm shall provide its determination (the
"Determination"), together with detailed supporting calculations and
documentation to the Company and the Participant within five (5) days of the
date of Participant's termination if applicable, or such other time as requested
by the Company. The Determination, absent manifest error, shall be binding,
final and conclusive upon the Company and the Participant.
8. Successor to Company
This Plan shall bind any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially
all of the business and/or assets of the Company, in the same manner
and to the same extent that the Company would be obligated under this
Plan if no succession had taken place. In the case of any transaction
in which a successor would not by the foregoing provision or by
operation of law be bound by this Plan, the Company shall require such
successor expressly and unconditionally to assume and agree to perform
the Company's obligations under this Plan, in the same manner and to
the same extent that the Company would be required to perform if no
such succession had taken place.
9. Amendment and Plan Termination
9.1 Amendment and Termination. Prior to a Change in Control, the
Plan may be amended or modified in any respect, and may be
terminated, by resolution adopted by two-thirds of the Board;
provided, however, that no such amendment, modification or
termination, which would adversely affect the benefits or
protections hereunder of any individual who is a Participant
as of the date such amendment, modification or termination is
adopted shall be effective as it relates to such individual
unless no Change in Control occurs within six (6) months after
such adoption, any such attempted amendment, modification or
termination adopted within six (6) months prior to a Change in
Control being null and void ab initio as it relates to all
individuals who were Participants as of the date of such
adoption; provided, further, however, that the Plan may not be
amended, modified or terminated, (a) at the request of a third
party who has indicated an intention or taken steps to effect
a Change in Control and who effectuates a Change in Control or
(b) otherwise in connection with, or in anticipation of, a
Change in Control which actually occurs, if the amendment,
modification or termination adversely affects the rights of
any Participant under the Plan, any such attempted amendment,
modification or termination being null and void ab initio.
From and after the occurrence of a Change in Control, the Plan
(x) may not be amended or modified in any manner that would in
any way adversely affect the benefits or protections provided
to any individual hereunder and (y) may not be terminated
until the later of (i) eighteen (18) months after the date of
the Change in Control or (ii) the date that all Participants
who have become entitled to a Severance Benefit hereunder
shall have received such payments in full.
9.2 Form of Amendment. Any amendment or termination of the Plan
shall be effected by a written instrument signed by a duly
authorized officer or officers of the Company, certifying that
the amendment or termination has been approved by the Board.
10. Employment Status
This Plan does not constitute a contract of employment or impose on the
Company any obligation to retain the Participant as an employee, to
change the status of the Participant's employment, or to change the
Company's policies regarding termination of employment.
11. Notices
Any notice provided for in this Plan shall be sent to the Company at
155 North Lake Avenue, Pasadena, California 91109-7137, Attention:
Corporate Counsel/Secretary, with a copy to the Chairman of the
Compensation Committee of the Board at the same address, or to such
other address as the Company may from time to time in writing
designate, and to a Participant at such address as he or she may from
time to time in writing designate (or his or her business address of
record in the absence of such designation). Such notice shall be deemed
to have been given two (2) business days after it has been deposited as
certified mail, return receipt requested, postage paid and properly
addressed to the designated address of the party to receive the notice.
12. Severability
If any provision of this Plan is held invalid or unenforceable, the
remainder of this Plan shall nevertheless remain in full force and
effect, and if any provision is held invalid or unenforceable with
respect to particular circumstances, it shall nevertheless remain in
full force and effect in all other circumstances.
13. Governing Law
The interpretation, construction and performance of this Plan shall in
all respects be governed by the laws of the State of California.
<PAGE>
APPENDIX A
Eligible Employee
Classifications Members
A Managing Directors
B Executive Vice Presidents
C Senior Vice Presidents
D First Vice Presidents, Vice Presidents
and Regional Vice Presidents
E Branch Managers and all other Exempt
Employees
F All Non-Exempt Employees
Salary Separation Payment
The Salary Separation Payment to which a Participant is entitled shall be based
on the Participant's employee classification as of the date immediately
preceding the date of the Participant's Qualifying Termination or, if greater,
as of the date on which the Change in Control occurs, and shall equal the amount
described in the table below; provided, however, that the Salary Separation
Payment for each Participant who is a member of Employee Classification C, D, E
or F shall also include an additional amount equal to one-quarter (1/4) of one
month of Base Pay for each full year of service with the Company or Operating
Unit in excess of five (5) years; provided, further, however, that such
additional amount, if any, when added to the amount of Base Pay provided in the
table below, shall not exceed twelve (12) months Base Pay.
Employee
Classification Salary Separation Payment
A Two (2) years Base Pay (as defined in Section 6.1(a)) plus 200% of the
Average Bonus (as defined in Section 6.1(a)).
B One (1) year Base Pay plus 100% of the Average Bonus.
C Six (6) months Base Pay plus 50% of the Average Bonus.
D Four (4) months Base Pay plus 33% of the Average Bonus.
E Three (3) months Base Pay plus 25% of the Average Bonus.
F Two (2) months Base Pay plus 15% of the Average Bonus.
<PAGE>
<TABLE>
<CAPTION>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 11.1 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Year ended February 28(29),
(Dollar amounts in thousands, except per share data)
1997 1996 1995
-------------- -------------- --------------
PRIMARY
<S> <C> <C> <C>
Net earnings $257,358 $195,720 $88,407
============== ============== ==============
Average shares outstanding 103,112 98,352 91,240
Net effect of dilutive stock options - based on the
treasury
stock method using average market price 2,565 1,918 847
-------------- -------------- --------------
Total average shares 105,677 100,270 92,087
============== ============== ==============
Per share amount $2.44 $1.95 $0.96
============== ============== ==============
FULLY DILUTED
Net earnings $257,358 $195,720 $88,407
============== ============== ==============
Average shares outstanding 103,112 98,352 91,240
Net effect of dilutive stock options -- based on the
treasury
stock method using the year-end market price, if higher
than average market price 3,443 1,918 976
-------------- -------------- --------------
Total average shares 106,555 100,270 92,216
============== ============== ==============
Per share amount $2.42 $1.95 $0.96
============== ============== ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 12.1 - COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
(Dollar amounts in thousands)
The following table sets forth the ratio of earnings to fixed charges of the
Company for the five fiscal years ended February 28, 1997 computed by dividing
net fixed charges (interest expense on all debt plus the interest element
(one-third) of operating leases) into earnings (income before income taxes and
fixed charges).
For Fiscal Years Ended February 28(29),
------------ -- ------------- -- ------------ -- ------------- -- -------------
1997 1996 1995 1994 1993
------------ ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Net earnings $257,358 $195,720 $88,407 $179,460 $140,073
Income tax expense 164,540 130,480 58,938 119,640 93,382
Interest charges 316,705 281,573 205,464 219,898 128,612
Interest portion of rental expense 7,420 6,803 7,379 6,372 4,350
------------ ------------- ------------ ------------- -------------
Earnings available to cover
fixed charges $746,023 $614,576 $360,188 $525,370 $366,417
============ ============= ============ ============= =============
Fixed charges
Interest charges 316,705 281,573 205,464 219,898 128,612
Interest portion of rental expense 7,420 6,803 7,379 6,372 4,350
------------ ------------- ------------ ------------- -------------
Total fixed charges $324,125 $288,376 $212,843 $226,270 $132,962
============ ============= ============ ============= =============
Ratio of earnings to fixed charges 2.30 2.13 1.69 2.32 2.76
============ ============= ============ ============= =============
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT 22.1
COUNTRYWIDE CREDIT INDUSTRIES, INC.
SUBSIDIARIES
<S> <C>
Charter Reinsurance Corporation Vermont
Continental Mobile Home Brokerage Corporation California
Countrywide Agency, Inc. New York
Countrywide Agency of New York, Inc. New York
Countrywide Agency of Ohio, Inc. Ohio
Countrywide Aircraft Corporation Oregon
Countrywide Asset Management Corporation Delaware
Countrywide Capital Markets, Inc. California
Countrywide Capital I Delaware
Countrywide Capital II Delaware
Countrywide Financial Services Corporation California
Countrywide Financial Services, Inc. California
Countrywide Fund Services, Inc. California
Countrywide General Agency of Texas, Inc. Texas
Countrywide GP, Inc. Nevada
Countrywide Home Loans, Inc. New York
Countrywide Home Loans of New Mexico, Inc. New Mexico
Countrywide Insurance Services of Texas, Inc. Texas
Countrywide Investments, Inc. Delaware
Countrywide Lending Corporation California
Countrywide LP, Inc. Nevada
Countrywide Mortgage Pass-Through Corporation Delaware
Countrywide Partnership Investments, Inc. California
Countrywide Parks I, Inc. Pecan Plantation California
Countrywide Parks V, Inc. Paradise Village California
Countrywide Parks VI, Inc. Quail Run California
Countrywide Parks VII, Inc. Allison Acres California
Countrywide Parks VIII, Inc. Northwest Pines California
Countrywide Realty Partners Incorporated Delaware
Countrywide Securities Corporation California
Countrywide Servicing Exchange California
Countrywide Tax Services Corporation California
CTC Foreclosure Services Corporation California
CWABS, Inc. Delaware
CWI, Inc. Delaware
CWMBS, Inc. Delaware
Full Spectrum Lending, Inc. California
HomeSafe, Inc. California
LandSafe, Inc. Delaware
LandSafe Appraisal Services, Inc. California
LandSafe Credit, Inc. California
LandSafe Finance, Inc. California
LandSafe of Pennsylvania, Inc. Pennsylvania
LandSafe Real Estate Partnership Services, Inc. California
LandSafe Title Agency, Inc. California
LandSafe Title Agency of New York, Inc. New York
LandSafe Title of California, Inc. Calfornia
LandSafe Title of Florida, Inc. Florida
LandSafe Title of Illinois, Inc. Illinois
LandSafe Title of Indiana, Inc. Indiana
LandSafe Title of Maryland, Inc. Maryland
LandSafe Title of Michigan, Inc. Michigan
LandSafe Title of Texas, Inc. Texas
LandSafe Title of Washington, Inc. Washington
Residential Mortgage Source of America, Inc. California
Second Charter Reinsurance Corporation Vermont
The Countrywide Foundation California
</TABLE>
Exhibit 24.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated April 22, 1997, accompanying the
consolidated financial statements and schedules included in the Annual Report of
Countrywide Credit Industries, Inc. on Form 10-K for the year ended February 28,
1997. We hereby consent to the incorporation by reference of said report in the
Registration Statements of Countrywide Credit Industries, Inc. on From S-3 (File
No. 333-06473, effective June 21, 1996; File No. 33-59559 and 33-59559-01,
effective June 26, 1995 and as amended on April 23, 1997; File No. 333-3835 and
333-3835-01, effective August 2, 1996; File No. 333-14111, 333-14111-01,
333-14111-02, and 333-14111-03, effective December 10, 1996) and on Form S-8
(File No. 33-9231, effective October 20, 1986, as amended on February 19, 1987,
and as amended on December 20, 1988; File No. 33-17271, effective December 20,
1987; File No. 33-42625, effective September 6, 1991; File No. 33-56168,
effective December 22, 1992; and File No. 33-69498, effective September 28,
1993; as supplemented on September 28, 1996).
GRANT THORNTON LLP
Los Angeles, California
April 22, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> FEB-28-1997
<CASH> 18,269
<SECURITIES> 0
<RECEIVABLES> 1,451,979
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 292,363
<DEPRECIATION> 102,259
<TOTAL-ASSETS> 8,089,292
<CURRENT-LIABILITIES> 0
<BONDS> 2,549,319
0
0
<COMMON> 5,305
<OTHER-SE> 1,606,226
<TOTAL-LIABILITY-AND-EQUITY> 8,089,292
<SALES> 0
<TOTAL-REVENUES> 1,112,462
<CGS> 0
<TOTAL-COSTS> 690,564
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 421,898
<INCOME-TAX> 164,540
<INCOME-CONTINUING> 257,358
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 257,358
<EPS-PRIMARY> 2.44
<EPS-DILUTED> 2.42
<FN>
Total Revenues includes $316,705 of interest expense related to
mortgage loan activities.
</FN>
</TABLE>
