Financial Statements and Report of
Independent Certified Public Accountants
COUNTRYWIDE SECURITIES CORPORATION
(A wholly-owned subsidiary of
Countrywide Capital Markets, Inc.)
February 29, 2000
<PAGE>
<TABLE>
C o n t e n t s
Page
<S> <C>
Report of Independent Certified Public Accountants 3
Financial Statements
Statement of Financial Condition 4
Statement of Earnings 5
Statement of Changes in Stockholder's Equity 6
Statement of Changes in Subordinated Borrowings 7
Statement of Cash Flows 8
Notes to Financial Statements 9
Supplementary Information
Report of Independent Certified Public Accountants on Supplementary Information
Required by Rule 17a-5 of the Securities and Exchange Commission 18
SCHEDULE I - Computation of Net Capital under Rule 15c3-1 of the Securities
and Exchange Commission 19
SCHEDULE II - Computation for Determination of Reserve Requirements under
Rule 15c3-3 of the Securities and Exchange Commission 20
SCHEDULE III - Information Relating to Possession or Control Requirements
under
Rule 15c3-3 of the Securities and Exchange Commission 21
Report of Independent Certified Public Accountants on Internal Control Structure Required by
Rule 17a-5 of the Securities and Exchange Commission 23
</TABLE>
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Countrywide Securities Corporation
We have audited the accompanying statement of financial condition of Countrywide
Securities Corporation (a wholly-owned subsidiary of Countrywide Capital
Markets, Inc.) as of February 29, 2000, and the related statements of earnings,
changes in stockholder's equity, changes in subordinated borrowings, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Countrywide Securities
Corporation as of February 29, 2000, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
Los Angeles, California
April 12, 2000
<PAGE>
The accompanying notes are an integral part of this
statement.
<TABLE>
Countrywide Securities Corporation
(A wholly-owned subsidiary of
Countrywide Capital Markets, Inc.)
STATEMENT OF FINANCIAL CONDITION
February 29, 2000
(Dollars in thousands)
ASSETS
<S> <C>
Cash segregated under federal regulations $ 5,600
Receivables from brokers and dealers 18,461
Receivables from customers 4,628
Trading securities owned, at market value 1,984,031
Securities purchased under agreements to resell 457,524
Other assets 17,670
------------------
Total assets $2,487,914
==================
LIABILITIES AND STOCKHOLDER'S EQUITY
Payables to brokers and dealers $ 34,155
Payables to customers 3,753
Trading securities sold, not yet purchased, at market value 181,904
Securities sold under agreements to repurchase 2,075,257
Accounts payable and accrued liabilities 10,669
Due to affiliates 41,661
------------------
Total liabilities 2,347,399
------------------
Commitments and contingencies -
Liabilities subordinated to claims of general creditors 52,093
------------------
Stockholder's equity
Capital stock - no par value; authorized, 100,000
shares; issued and outstanding, 30 shares 288
Additional paid-in capital 30,400
Retained earnings 57,734
------------------
Total stockholder's equity 88,422
------------------
Total liabilities and stockholder's equity $2,487,914
==================
</TABLE>
<PAGE>
<TABLE>
Countrywide Securities Corporation
(A wholly-owned subsidiary of
Countrywide Capital Markets, Inc.)
STATEMENT OF EARNINGS
Year ended February 29, 2000
(Dollars in thousands)
Revenues
<S> <C>
Gain on securities trading accounts and fees $ 52,256
Interest earned 108,981
------------------
161,237
Expenses
Employee compensation and benefits 37,126
Interest expense 84,084
Transfer and clearing fees 1,169
Rent 752
Data processing 3,735
Other operating expenses 7,107
------------------
------------------
133,973
------------------
Earnings before income taxes 27,264
Provision for income taxes 9,245
------------------
NET EARNINGS $ 18,019
==================
</TABLE>
<TABLE>
<PAGE>
The accompanying notes are an integral part of this
statement.
Countrywide Securities Corporation
(A wholly-owned subsidiary of
Countrywide Capital Markets, Inc.)
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
Year ended February 29, 2000
(Dollars in thousands)
Total
Common Stock Paid-in Capital Retained Stockholder's
Earnings Equity
--------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Balances at March 1, 1999 $288 $30,400 $39,715 $70,403
Net earnings for the year - - 18,019 18,019
--------------- ----------------- ---------------- -----------------
Balances at February 29, 2000 $288 $30,400 $57,734 $88,422
=============== ================= ================ =================
</TABLE>
<TABLE>
<PAGE>
Countrywide Securities Corporation
(A wholly-owned subsidiary of
Countrywide Capital Markets, Inc.)
STATEMENT OF CHANGES IN
SUBORDINATED BORROWINGS
Year ended February 29, 2000
(Dollars in thousands)
<S> <C>
Subordinated borrowings at March 1, 1999 $52,190
Increases:
Issuance of subordinated notes 52,793
Decreases:
Payment of subordinated notes (52,890)
-----------------
Subordinated borrowings at February 29, 2000 $52,093
=================
</TABLE>
<TABLE>
<PAGE>
The accompanying notes are an integral part of this
statement.
Countrywide Securities Corporation
(A wholly-owned subsidiary of
Countrywide Capital Markets, Inc.)
STATEMENT OF CASH FLOWS
Year ended February 29, 2000
(Dollars in thousands)
Cash flows from operating activities:
<S> <C>
Net earnings $ 18,019
Adjustments to reconcile net earnings to net cash used in operating activities:
Decrease in cash segregated under federal regulations 2,034
Decrease in receivables from brokers and dealers 378,035
Decrease in receivables from customers 4,326
Increase in trading securities owned, at market value (523,585)
Increase in securities purchased under agreements to resell (372,438)
Increase in other assets (6,560)
Increase in payables to brokers and dealers 28,615
Decrease in payables to customers (5,536)
Increase in trading securities sold, not yet purchased, at market value 97,129
Increase in securities sold under agreements to repurchase 451,486
Increase in accounts payable and accrued liabilities 1,434
-------------------
Net cash provided by operating activities 72,959
Cash flows from financing activities:
Decrease in due to affiliates (72,862)
Net decrease in subordinated notes (97)
-------------------
Net cash used in financing activities (72,959)
Net change in cash -
Cash at beginning of year -
-------------------
Cash at end of year $ -
===================
Supplemental disclosure of cash flow information:
Interest paid $ 82,984
===================
</TABLE>
<PAGE>
Countrywide Securities Corporation
(A wholly-owned subsidiary of
Countrywide Capital Markets, Inc.)
NOTES TO FINANCIAL STATEMENTS - Cont'd
February 29, 2000
Countrywide Securities Corporation
(A wholly-owned subsidiary of
Countrywide Capital Markets, Inc.)
NOTES TO FINANCIAL STATEMENTS
February 29, 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Countrywide Securities Corporation (the "Company") is a broker-dealer
registered with the Securities and Exchange Commission ("SEC") and is a
member of the National Association of Securities Dealers, Inc. ("NASD"). The
Company trades mortgage-backed securities ("MBS") and other fixed income
securities with broker-dealers and institutional investors. 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 significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows:
Organization
The Company is a California corporation that is a wholly-owned subsidiary of
Countrywide Capital Markets, Inc. (the "Parent"), which in turn is a
wholly-owned subsidiary of Countrywide Credit Industries, Inc. ("CCI").
Cash
Financing of the Company's assets and operations is provided by
collateralized financing arrangements, bank loans, or loans from affiliates,
on an as needed basis. Accordingly, the unrestricted cash balance is zero.
Securities Transactions
Proprietary securities transactions are recorded on a trade date basis,
while customers' securities transactions are recorded on settlement date
basis.
Trading securities owned and sold, not yet purchased, are carried at market
value. Gains or losses resulting from changes in the market value of the
securities are recorded in gain on securities trading accounts and fees.
<PAGE>
14
Countrywide Securities Corporation
(A wholly-owned subsidiary of
Countrywide Capital Markets, Inc.)
NOTES TO FINANCIAL STATEMENTS - Continue
February 29, 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Contiued
Securities Purchased Under Agreements to Resell and Securities Sold Under
Agreements to Repurchase
Securities purchased under agreements to resell and securities sold under
agreements to repurchase are treated as collateralized financing
transactions and are carried at the amounts at which the securities will
subsequently be resold or reacquired as specified in the respective
agreements, plus accrued interest.
At February 29, 2000, the market value of the securities purchased under
agreements to resell was $465,990,000 and the average effective interest
rate was 4.48% for the year ended February 29, 2000. The market value of the
securities sold under agreements to repurchase was $2,112,132,000 and the
average effective interest rate was 5.23% for the year ended February 29,
2000.
Resell and repurchase agreements are collateralized by U.S. Treasury
securities or various MBS securities. Collateral is valued daily and the
Company may require counter-parties to deposit additional collateral or
return collateral pledged when appropriate.
Collateral
The Company continues to report assets it has pledged as collateral in
secured borrowing and other arrangements when the secured party cannot sell
or repledge the assets or the Company can substitute collateral or otherwise
redeem it on short notice. The Company generally does not report assets
received as collateral in secured lending and other arrangements since the
debtor typically has the right to redeem the collateral on short notice.
Income Taxes
CCI and its subsidiaries, including the Company, have elected to file
consolidated federal and combined state income and franchise tax returns.
The policy of CCI is for each member of the consolidated group to recognize
tax expense based on that member's financial statement income at the rate of
33.9%. The income tax liability generated by the Company, as well as
payments thereof, are reflected in the amount due to affiliates.
<PAGE>
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Stock-Based Compensation
CCI grants stock options for a fixed number of shares to employees of the
Company with an exercise price equal to the fair value of the shares at the
date of grant. The Company recognizes compensation cost related to its stock
option plans only to the extent that the fair value of the shares at the
grant date exceeds the exercise price.
NOTE B - CASH SEGREGATED UNDER FEDERAL REGULATIONS
Cash of $5,600,000 at February 29, 2000 has been segregated in a special
reserve bank account for the exclusive benefit of customers under Rule
15c3-3 of the Securities and Exchange Commission.
<TABLE>
NOTE C - RECEIVABLES FROM AND PAYABLES TO BROKERS AND DEALERS
The components of receivables from and payables to brokers and dealers
consisted of the following at February 29, 2000:
(Dollars in thousands)
<S> <C>
Securities failed to deliver $17,136
Other receivables 1,325
------------------
Total receivables from brokers and dealers $18,461
==================
</TABLE>
<PAGE>
<TABLE>
NOTE C - RECEIVABLES FROM AND PAYABLES TO BROKERS AND DEALERS - Continued
(Dollars in thousands)
<S> <C>
Securities failed to receive $26,388
Unsettled proprietary trades, net 7,468
Other payables 299
------------------
Total payables to $34,155
brokers and dealers
==================
"Fails" represent the contract value of securities which have not been
delivered or received by settlement date.
</TABLE>
NOTE D - RECEIVABLES FROM AND PAYABLES TO CUSTOMERS
Receivables from and payables to customers represent amounts due on
securities transactions reflected on a settlement date basis. Securities
owned by the customers are held as collateral to secure the receivable from
customers. Such collateral is not reflected in the financial statements.
<TABLE>
NOTE E - TRADING SECURITIES OWNED AND SOLD, NOT YET PURCHASED
Trading securities owned, at market value, consisted of the following at
February 29, 2000:
(Dollars in thousands)
<S> <C>
Mortgage pass-through certificates $1,744,406
Agency debt securities 129,389
Collateralized mortgage obligations 88,104
Negotiable certificates of deposit 19,024
Options 2,832
Other securities 276
-------------------
Total trading securities owned, at market value $1,984,031
===================
</TABLE>
<PAGE>
<TABLE>
NOTE E - TRADING SECURITIES OWNED AND SOLD, NOT YET PURCHASED Continued
Trading securities sold, not yet purchased, at market value, consisted of
the following at February 29, 2000:
(Dollars in thousands)
<S> <C>
U. S. Treasury securities $107,709
Agency debt securities 72,356
Negotiable certificates of deposit 1,780
Other 59
-------------------
Total trading securities sold, not yet purchased, at
market value $181,904
===================
</TABLE>
NOTE F - TRANSACTIONS WITH AFFILIATES
The Company paid its affiliates $2,287,000 for data processing, marketing,
management and accounting for the year ended February 29, 2000. In addition,
the Company paid its affiliates $666,000 for rent charged or paid on its
behalf for the year ended February 29, 2000. The Company reimbursed its
affiliates for all other direct expenses paid on its behalf. Intercompany
interest income and expense on the intercompany receivable or payable was
based upon a weighted average interest rate of 5.29% for the year. Net
interest on the intercompany balance amounted to an expense of $3,903,000
for the year ended February 29, 2000. All such payments and reimbursements
are charged or credited through the intercompany account. Included in gain
on securities trading accounts and fees are fees in the amount of
$32,616,000 earned from an affiliate for the year ended February 29, 2000.
Outstanding at February 29, 2000 were securities sold under agreements to
repurchase with an affiliate in the amount of $620,101,000. During the year,
the Company entered into agreements for options on interest rate swaps
("swaptions") with an affiliate having a notional amount of $60,000,000 and
a fair market value at February 29, 2000 of $2,832,000.
During the year ended February 29, 2000, the Company purchased and sold
$45,062,515,000 of securities from affiliates at prevailing market prices.
Refer to Note J for subordinated borrowings from an affiliate at February 29,
2000.
<PAGE>
NOTE G - NET CAPITAL REQUIREMENTS
The Company is subject to the Securities and Exchange Commission Uniform Net
Capital Rule (SEC Rule 15c3-1), which requires the maintenance of minimum
net capital. The Company has elected to use the alternative method,
permitted by the rule, which requires that the Company maintain minimum net
capital, as defined, equal to the greater of $250,000 or two percent of
aggregate debit balances arising from customer transactions, as defined. At
February 29, 2000, the Company's net capital was $80,462,000 and net capital
in excess of the minimum required was $80,212,000. The rule also prohibits
the Company from
withdrawing equity capital or making distributions to its shareholder (the
Parent) if resulting net capital would be less than five percent of
aggregate debits.
NOTE H - EMPLOYEE BENEFIT PLANS
Eligible full-time employees of the Company are covered under CCI's defined
benefit plans, including dental, medical, life insurance, dependent care and
others. A portion of the employee benefit plan expense is allocated to the
Company based on the Company's employees' participation in these plans.
Eligible full-time employees of the Company are also covered under CCI's
defined benefit pension and tax deferred savings and investment plans. A
portion of the benefit plan expense is allocated to the Company based upon
the percentage of the Company's salary expense to the total salary expense
of CCI and its subsidiaries. The Company's expense related to these plans
was $347,000 for the year ended February 29, 2000. Because the Company
participates in these plans with other subsidiaries of CCI, an analysis
setting forth the funding status at February 29, 2000, cannot be separately
determined for the Company.
<PAGE>
NOTE I - COMMITMENTS AND CONTINGENCIES
The Company is contingently liable under an irrevocable letter of credit
agreement used in lieu of margin and clearing deposits with the MBS Clearing
Corporation in the amount of $10,000,000. The total margin requirement was
$10,435,000 at February 29, 2000, which was satisfied with the letter of
credit and a cash deposit of $435,000.
The Company is a defendant in various legal proceedings involving matters
generally incidental to its business. Although it is difficult to predict
the ultimate outcome of these proceedings, management believes, based on
discussions with counsel, that any ultimate liability will not materially
affect the financial position or results of operations of the Company.
<TABLE>
NOTE J - LIABILITIES SUBORDINATED TO CLAIMS OF GENERAL CREDITORS
All borrowings under revolving subordination agreements are with an
affiliate. At February 29, 2000, the balances are:
(Dollars in thousands)
<S> <C>
Revolving subordinated note, 5.47%, due May 24, 2000 $35,457
Revolving subordinated note, 5.88%, due June 26, 2000 11,423
Revolving subordinated note, 5.00%, due April 28, 2000 5,213
------------------
Total liabilities subordinated to claims of general creditors $52,093
</TABLE>
==================
The liabilities subordinated to claims of general creditors are subordinated
to all existing and future claims of all non-subordinated creditors of the
Company and constitute part of the Company's Net Capital (SEC Rule 15c3-1)
and may be repaid only if, after giving effects to such repayment, the
Company meets specified requirements of the SEC. Interest expense on the
subordinated borrowings amounted to $2,795,000 for the year ended February
29, 2000.
<PAGE>
NOTE K - FINANCIAL INSTRUMENTS
The Company utilizes a variety of derivative and other financial instruments
for trading purposes and to manage interest rate risk. These instruments
include MBS mandatory forward delivery and purchase commitments, short sales
of cash market U.S. Treasury securities and swaptions. Risks arise from the
potential fluctuations of interest rates during the term of these contracts.
The following summarizes the notional amounts of MBS mandatory forward
delivery and purchase commitments and swaptions, and fair values (carrying
amounts) of the related assets and liabilities at February 29, 2000, as well
as the average fair values of the related assets and liabilities for the
year ended February 29, 2000.
<TABLE>
---------------------------------- --- ---------------- --- --------------------------- -------------------------------
Fair Value Average
Notional At 2/29/00 Fair Values
(Dollars in Thousands) Amount Assets Liabilities Assets Liabilities
---------------------------------- ----------------- ------------ -------------- --------------- -------------
---------------------------------- ----------------- ------------ -------------- --------------- -------------
Forward contracts for
<S> <C> <C> <C>
sale of MBS $3,095,708 - $15,474 - ($4,314)
Forward contracts for
purchase of MBS $1,331,271 $4,394 - ($2,772)
-
Swaptions $ 60,000 $2,832 - $2,970 -
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
While the Company does not anticipate nonperformance by any counter-party,
the Company is exposed to credit loss in the event of nonperformance by the
counter-parties to the various instruments. These entities include other
broker/dealers and institutional investors. The Company has established
credit policies applicable to making commitments involving financial
instruments with off-balance-sheet risk. Such policies include credit
reviews, approvals, limits and monitoring procedures.
The fair values of financial instruments approximate the carrying value.
<PAGE>
Countrywide Securities Corporation
(A wholly-owned subsidiary of
Countrywide Capital Markets, Inc.)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
February 28, 1995 and 1994
SUPPLEMENTARY INFORMATION
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON
SUPPLEMENTARY INFORMATION REQUIRED BY RULE 17a-5
OF THE SECURITIES AND EXCHANGE COMMISSION
<PAGE>
17
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON
SUPPLEMENTARY INFORMATION REQUIRED BY RULE 17a-5
OF THE SECURITIES AND EXCHANGE COMMISSION
Board of Directors
Countrywide Securities Corporation
We have audited the financial statements of Countrywide Securities Corporation
as of and for the year ended February 29, 2000, and have issued our report
thereon dated April 12, 2000. Our audit was conducted for the purpose of forming
an opinion on the basic financial statements taken as a whole of Countrywide
Securities Corporation, which are presented in the preceding section of this
report. The supplementary information contained in Schedules I, II, and III on
the following pages is presented for purposes of additional analysis and is not
a required part of the basic financial statements, but is supplementary
information required by Rule 17a-5 of the Securities and Exchange Act of 1934.
Such information has been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, is fairly stated in
all material respects in relation to the basic financial statements taken as a
whole.
Los Angeles, California
April 12, 2000
<PAGE>
Countrywide Securities Corporation
(A wholly-owned subsidiary of
Countrywide Capital Markets, Inc.)
February 29, 2000
SCHEDULE I
COMPUTATION OF NET CAPITAL UNDER RULE 15c3-1 OF THE
SECURITIES AND EXCHANGE COMMISSION
(Dollars in thousands)
AGGREGATE DEBITS
Total aggregate debits from the reserve formula $ 6,196
===============
<TABLE>
NET CAPITAL
Stockholder's equity $ 88,422
Add: Allowable liabilities subordinated to claims of general creditors 52,093
---------------
Total capital and allowable subordinated liabilities 140,515
Deductions and/or charges
A (1) Nonallowable assets
<S> <C>
Receivables from brokers and dealers $ 889
Receivables from customers 797
Furniture, equipment and leasehold 3,465
improvements, net
Other nonallowable assets 1,176
-------------
6,327
(2) Additional charges on customer's securities accounts 66
B. Aged fails to deliver 809
Number of items - 45
<S> <C> <C>
C. Other deductions and/or charges 517 (7,719)
------------- ---------------
Net capital before haircuts on security positions 132,796
Haircuts on securities (computed pursuant to rule 15c3-1(c)(2)(vi))
Trading and investment securities
1. Bankers acceptances, CDs and commercial paper 862
2. U.S. and Canadian government obligations 42,220
3. Corporate obligations 5,623
4. Options 2,832
5. Other securities 44
6. Undue concentration 753 (52,334)
------------- ---------------
NET CAPITAL $ 80,462
===============
</TABLE>
NET CAPITAL REQUIREMENTS/PERCENTAGE
<TABLE>
<S> <C>
Minimum net capital requirement (2% aggregate debit items) $124
Net capital requirement (minimum requirement)
$250
Excess net capital $80,212
Excess net capital greater than 5% of aggregate debits $80,152
Percentage: Net capital to aggregate debit items 1299%
There are no material differences between the above computation and the
computation included with the Company's FOCUS II Form X-17A-5 for the period
ending February 29, 2000.
</TABLE>
Countrywide Securities Corporation
(A wholly-owned subsidiary of
Countrywide Capital Markets, Inc.)
February 29, 2000
SCHEDULE II
COMPUTATION FOR DETERMINATION OF RESERVE REQUIREMENTS
UNDER RULE 15c3-3 OF THE SECURITIES AND EXCHANGE COMMISSION
(Dollars in thousands)
<TABLE>
CREDIT BALANCES
<S> <C>
Free credit balances and other credit balances in customers' security accounts $2,749
Monies borrowed collateralized by securities carried for the accounts of customers -
Monies payable against customers' securities loaned -
Customers' securities failed to receive 415
Credit balances in firm accounts which are attributable to principal sales to customers 2,288
Market value of stock dividends, stock splits, and similar distributions
receivable outstanding over 7 business days -
Market value of short security count differences over 7 business days -
Market value of short securities and credits in all suspense accounts over 7
business days 8
Market value of securities which are in transfer in excess of 40 calendar
days and have not been confirmed to be in transfer -
------------------
Total Credits 5,460
==================
DEBIT BALANCES
Debit balances in customers' cash and margin accounts excluding
unsecured accounts and accounts doubtful of collection 3,827
Securities borrowed to effectuate short sales by customers and securities
borrowed to make delivery on customers' securities failed to deliver -
Failed to deliver of customers' securities not older than 30 calendar days 2,369
Margin required and on deposit with the Options Clearing Corporation -
------------------
Aggregate Debit Items 6,196
less 3% (for alternative method only) (186)
------------------
Total 15c3-3 Debits 6,010
==================
Excess of total debits over total credits 550
==================
==================
Required deposit None
==================
Amount held on deposit in "reserve" bank account including value of
qualified securities at end of reporting period $5,600
==================
There are no material differences between the above computation and the
computation included with the Company's FOCUS II Form X-17A-5 for the period
ending February 29, 2000.
</TABLE>
Countrywide Securities Corporation
(A wholly-owned subsidiary of
Countrywide Capital Markets, Inc.)
February 29, 2000
SCHEDULE III
INFORMATION RELATING TO POSSESSION OR CONTROL
REQUIREMENTS UNDER RULE 15c3-3
OF THE SECURITIES AND EXCHANGE COMMISSION
Market valuation and number of items for:
Value Number
------------ ------------
1. Customer's fully paid securities and
excess margin securities not in respondent's
possession or control as of the report date
(for which instructions to reduce to possession
or control had been issued as of the report date)
but for which the required action was not taken by
respondent within the time frames specified under
rule 15c3-3. $ - -
2. Customer's fully paid securities and excess
margin securities for which instructions to
reduce to possession or control had not been
issued as of the report date,excluding items
arising from "temporary lags which result from
normal business operations" as permitted under
rule 15c3-3. $- -
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON THE
INTERNAL CONTROL STRUCTURE REQUIRED BY RULE 17a-5
OF THE SECURITIES AND EXCHANGE COMMISSION
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON
INTERNAL CONTROL STRUCTURE REQUIRED BY RULE 17a-5
OF THE SECURITIES AND EXCHANGE COMMISSION
Board of Directors
Countrywide Securities Corporation
In planning and performing our audit of the financial statements of Countrywide
Securities Corporation (the Company), for the year ended February 29, 2000, we
considered its internal control, including control activities for safeguarding
securities, in order to determine our auditing procedures for the purpose of
expressing our opinion on the financial statements and not to provide assurance
on internal control.
Also, as required by rule 17a-5(g)(1) of the Securities and Exchange Commission
(SEC), we have made a study of the practices and procedures followed by the
Company, including tests of compliance with such practices and procedures that
we considered relevant to the objectives stated in rule 17a-5(g), in the
following:
1. Making the periodic computations of aggregate indebtedness (or aggregate
debits) and net capital under rule 17a-3(a)(11) and the reserve required by rule
15c3-3(e).
2. Making the quarterly securities examinations, counts, verifications, and
comparisons, and the recordation of differences required by rule 17a-13.
3. Complying with the requirements for prompt payment for securities under
Section 8 of Federal Reserve Regulation T of the Board of Governors of the
Federal Reserve System.
4. Obtaining and maintaining physical possession or control of all fully paid
and excess margin securities of customers as required by rule 15c3-3.
The management of the Company is responsible for establishing and maintaining
internal control and the practices and procedures referred to in the preceding
paragraph. In fulfilling this responsibility, estimates and judgments by
management are required to assess the expected benefits and related costs of
controls, and of the practices and procedures referred to in the
<PAGE>
preceding paragraph, and to assess whether those practices and procedures can be
expected to achieve the SEC's above-mentioned objectives. Two of the objectives
of internal control and the practices and procedures are to provide management
with reasonable but not absolute assurance that assets for which the Company has
responsibility are safeguarded against loss from unauthorized use or
disposition, and that transactions are executed in accordance with management's
authorization and recorded properly to permit the preparation of financial
statements in accordance with generally accepted accounting principles. Rule
17a-5(g) lists additional objectives of the practices and procedures listed in
the preceding paragraph.
Because of inherent limitations in internal control or the practices and
procedures referred to above, errors or fraud may occur and not be detected.
Also, projection of any evaluation of them to future periods is subject to the
risk that they may become inadequate because of changes in conditions or that
the effectiveness of their design and operation may deteriorate. Our
consideration of internal control would not necessarily disclose all matters in
internal control that might be material weaknesses under standards established
by the American Institute of Certified Public Accountants. A material weakness
is a condition in which the design or operation of the specific internal control
components does not reduce to a relatively low level the risk that errors or
fraud in amounts that would be material in relation to the financial statements
being audited may occur and not be detected within a timely period by employees
in the normal course of performing their assigned functions. However, we noted
no matters involving internal control, including control activities for
safeguarding securities, that we consider to be material weaknesses as defined
above.
We understand that practices and procedures that accomplish the objectives
referred to in the second paragraph of this report are considered by the SEC to
be adequate for its purposes in accordance with the Securities Exchange Act of
1934 and related regulations, and that practices and procedures that do not
accomplish such objectives in all material respects indicate a material
inadequacy for such purposes. Based on this understanding and on our study, we
believe that the Company's practices and procedures were adequate at February
29, 2000, to meet the Commission's objectives.
This report is intended solely for the information and use of the Board of
Directors, management, the SEC, the National Association of Securities Dealers,
Inc., and other regulatory agencies that rely on rule 17a-5(g) under the
Securities Exchange Act of 1934 in their regulation of registered brokers and
dealers, and should not be used for any other purpose.
Los Angeles, California
April 12, 2000
