UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
IXI ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
OR
I I TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-9742
HARBOURTON FINANCIAL SERVICES L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 52-1573349
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
2530 S. Parker Road, Suite 500, Aurora, CO 80014
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 745-3661
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Preferred Units New York 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 ]
At March 20, 1996, registrant had 41,902,891 Preferred Units
outstanding including 6,067,913 Preferred Units held by non-
affiliates of the registrant with an aggregate market value of
such units of approximately $12,894,315 based upon a closing
sales price of $2.125.
Documents incorporated by reference: None
The exhibit index begins at page 46 of this Form 10-K.
TABLE OF CONTENTS
Page
PART I
Item 1. Business 4
Item 2. Properties 11
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters 15
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 8. Financial Statements and Supplementary Data 35
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 35
PART III
Item 10. Directors, Executive Officers, Promoters and Control
Persons of the Registrant 36
Item 11. Executive Compensation 40
Item 12. Security Ownership of Certain Beneficial Owners and
Management 42
Item 13. Certain Relationships and Related Transactions 43
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 49
Signatures 84
Exhibit Index 49
PART I
Item 1. Business
General
Organization
Harbourton Financial Services L.P. ("HBT") was created pursuant
to a Certificate of Limited Partnership filed with the Secretary
of the State of Delaware on August 12, 1987 and a limited
partnership agreement (the "HBT Agreement") dated as of August
12, 1987. Harbourton Mortgage Corporation (the "General
Partner") was incorporated in the State of Delaware on August 12,
1987. The General Partner manages the business and affairs of
HBT and has exclusive authority to act on behalf of HBT. HBT's
termination date is December 31, 2050 unless sooner dissolved or
terminated pursuant to the HBT Agreement.
Harbourton Assignor Corporation ("Assignor Limited Partner") is
the sole limited partner of HBT. Pursuant to the HBT Agreement,
the Assignor Limited Partner holds for the benefit of the holders
of the Preferred Units all of the limited partnership interests
underlying such Preferred Units. Each Preferred Unit is
evidenced by a beneficial assignment certificate, which is issued
by the Assignor Limited Partner and HBT in fully registered form.
Each holder of a Preferred Unit is entitled to all of the
economic rights and interests in the underlying limited
partnership interest held by the Assignor Limited Partner, and
each holder of a Preferred Unit has the right to direct the
Assignor Limited Partner on voting and certain other matters with
respect to such underlying limited partnership interests.
As of December 31, 1995, HBT consists of HBT and its wholly-owned
subsidiaries Harbourton Mortgage Co., L.P. ("HMCLP") and
Harbourton Funding Corporation ("HFC") (collectively referred to
as the "Partnership"). HBT, through its subsidiary HMCLP, is a
full-service mortgage banking operation that originates and
services mortgage loans. As a result of the Partnership's
endeavor to enhance its mortgage banking operations, the
Partnership completed the following transactions:
Exchange Transaction
On August 5, 1994, Harbourton Holdings, L.P. ("Harbourton"), a
Delaware limited partnership, acquired from JHM Capital
Corporation ("JCC") (i) all of the issued and outstanding capital
stock of the General Partner of HBT and (ii) all of the issued
and outstanding Subordinated Units of HBT, pursuant to the terms
of a definitive acquisition agreement (the "Transfer Agreement").
Pursuant to the Transfer Agreement and New York Stock Exchange
rules, on March 14, 1995, HBT obtained the approval from existing
Unitholders to issue to Platte Valley Servicing Co., L.P.
("PVSC"), a 99% owned subsidiary of Harbourton, 21,513,509
Preferred Units of HBT in exchange for PVSC's ownership interest
of (i) all of the issued and outstanding limited partnership
interest of HMCLP (formerly Platte Valley Funding, L.P.) and (ii)
all of the issued and outstanding capital stock of HFC (formerly
Platte Valley Funding Corporation), the general partner of HMCLP
(the "Harbourton Transaction"). Pursuant to an agreement dated
October 1, 1994 (the "TMC Mortgage Agreement"), which was joined
in by HBT with the unanimous consent of the independent directors
of the General Partner, TMC Mortgage Corp. and two of its
shareholders (the "TMC Parties") agreed to contribute to HBT
their aggregate direct and indirect 50% interest in TMC Mortgage
Co., L.P. ("TMC"), a partnership engaged in the origination and
sale of mortgage loans in the eastern United States, in exchange
for 829,119 Preferred Units (the "TMC Transaction"). On the same
date, HMCLP agreed to include its 50% aggregate direct and
indirect equity interest in TMC as part of the assets owned by it
at the time of the consummation of the Harbourton Transaction
(collectively, the "Exchange Transaction").
Upon the consummation of the Exchange Transaction, HMCLP became a
subsidiary of HBT and TMC became a subsidiary of HBT, with an
aggregate 50% equity interest owned by HBT and an aggregate 50%
equity interest owned by HMCLP. The effect of the Exchange
Transaction was that PVSC acquired approximately 75.7% of the
issued and outstanding Preferred Units of HBT, and the TMC
Parties acquired approximately 2.9% of the issued and outstanding
Preferred Units at that date. HBT has continued to exist in
accordance with the provisions of the HBT Agreement, which was
substantially unchanged by the Exchange Transaction.
Western Transaction
On July 31, 1995 the Partnership completed its acquisition of
Western Sunrise Holdings, L.P. (the "Western Transaction") and
its subsidiaries, Western Sunrise Mortgage Co., L.P. and its
general partner Western Sunrise Mortgage Corporation
(collectively "Western"). Western had been an affiliated
mortgage originator and servicer headquartered in Sacramento,
California and was a subsidiary of Harbourton. At the
transaction date (July 31, 1995), the net book value of Western
was approximately $5.7 million. The fair value of Western on
that same date was approximately $15.7 million, and in exchange
for Western, Harbourton received approximately 8.6 million Series
B Preferred Units having generally the same rights as the
outstanding Preferred Units. In addition, if the performance of
the production operations of Western exceed certain projections
during a 24 month period, Harbourton will receive additional
units. The Western Transaction was accounted for as a
reorganization of entities under common control similar to a
pooling-of-interests. During the quarter ended December 31,
1995, the Preferred Unitholders voted to convert the Series B
Units to Preferred Units at a conversion ratio of one Preferred
Unit for each Series B Unit. See Submission of Matters to a Vote
of Security Holders.
In conjunction with the Western Transaction, the Partnership
merged Western into HMCLP. Simultaneously, the other mortgage
banking subsidiary of the Partnership, TMC, was also merged into
HMCLP and the Partnership transferred all of HBT's mortgage
banking-related assets to HMCLP.
Business Activities
The Partnership's primary business activity is mortgage banking,
which is conducted through its wholly-owned subsidiary HMCLP.
Mortgage banking consists of (i) mortgage loan servicing
activities, including the acquisition and sale of mortgage
servicing rights, (ii) the origination and purchase of mortgage
loans, including the securitization and sale of the mortgage
loans with the related servicing rights retained or released, and
(iii) investments in other mortgage-related securities. HMCLP is
an approved Government National Mortgage Association ("GNMA"),
Federal National Mortgage Association ("FNMA"), and Federal Home
Loan Mortgage Corporation ("Freddie Mac") licensee.
Mortgage Servicing Activities
The Partnership services and subservices a mortgage loan
portfolio totaling approximately $6.3 billion at December 31,
1995. A mortgage loan servicing portfolio represents the
contractual right to administer a pool of mortgage loans for the
owner of the loans. In return for such services, the servicer
receives a monthly servicing fee and the right to receive other
forms of compensation.
The servicing of a mortgage loan generally involves collecting
the monthly mortgage, property tax and insurance payments from
the borrower, paying the principal and interest portion of such
monthly payment to the owner of the mortgage loan, maintaining
insurance and tax escrow funds, and paying real estate taxes and
hazard insurance premiums to the appropriate recipients when due.
The mortgage loan servicer may also be required to manage the
foreclosure of the loan in the event of a default, disburse
insurance proceeds in the event of damage to the mortgaged
property, analyze the tax and insurance escrow account to ensure
that adequate funds are being reserved, and generally deal with
the variety of administrative details that can arise between the
borrower and the owner of the mortgage loan.
As compensation for servicing the mortgage loans, the servicer
generally receives a fee based on the outstanding mortgage
balances. The fee is typically paid through retention by the
servicer of a portion of the interest payments on the mortgage
loans. The servicer may maintain, on behalf of the mortgagor,
property tax and insurance payments in a custodial account, and
the servicer may derive benefits from the account balances. The
servicer may also benefit from the mortgage principal and
interest balances because the servicer may in certain
circumstances hold collected payments before having to remit such
payments to the mortgage owner or other recipient. Additional
compensation takes the form of late fees and other miscellaneous
fees. The principal operational costs related to mortgage
servicing are charges associated with personnel, electronic data
processing, and foreclosures.
In addition to the need to efficiently manage operational costs,
the amount of revenue and profit that may be received from
investments in servicing portfolios is materially affected by the
rates at which the balances of underlying mortgages loans are
paid and the default risk associated with various servicing
agreements. Rapid prepayments by borrowers reduce aggregate
mortgage loan balances and, consequently, reduces the dollar
amount of servicing fees. Prepayment rates vary based upon
market interest rate fluctuations and a wide variety of other
factors. Prepayments on a pool of mortgage loans are influenced
by a variety of economic, geographic, social and other factors,
including changes in mortgagors' housing needs, job transfers,
unemployment, and mortgagors' net equity in the mortgaged
properties. The timing and level of prepayments cannot be
predicted with any degree of certainty. Generally, prepayments
on mortgage loans will increase during a period of falling
mortgage interest rates and decrease during a period of rising
mortgage interest rates. Accordingly, servicing income earned by
the Partnership is negatively impacted during a period of
declining mortgage interest rates and favorably impacted during a
period of rising interest rates.
The adverse impact on the servicing portfolio from declining
interest rates may be offset by a positive impact on mortgage
production operations due to increased mortgage loan originations
(as discussed below). In comparison, during periods of rising
interest rates, prepayments decline causing mortgage loan
origination volume to decrease. Accordingly, this adversely
impacts the mortgage production operations, which may be
mitigated by the favorable impact on the servicing portfolio.
Ownership of servicing portfolios also involves considerations
associated with the default risk that vary depending upon, among
other things, the quality and character of the underlying
mortgage loans and the terms of the various servicing contracts.
For mortgage loans serviced on behalf of GNMA, FNMA or Freddie
Mac programs, payments of principal and interest on the mortgage
loans are generally guaranteed or insured, except that the amount
payable under the agency insurance or guarantee is typically
subject to certain reductions for amounts that the servicer is
obligated to pay in respect of foreclosure costs (such as
attorneys fees, lost interest and other expenses), and further,
in the case of the Veterans Administration ("VA") guaranteed
mortgage loans, the VA has the authority to limit its obligations
to the reimbursement of the lesser of a percentage of the
defaulted loan's outstanding principal or a specified guaranteed
amount and the servicer then takes the market risk of disposing
of the property to recover the unreimbursed principal plus unpaid
interest and foreclosure costs.
Mortgage Loan Originations
During 1995, the Partnership originated approximately $1.5
billion mortgage loans. The Partnership primarily originates and
purchases mortgage loans insured by the Federal Housing
Administration ("FHA"), mortgage loans partially guaranteed by
the VA, and conventional mortgage loans. A majority of the
conventional loans are conforming loans which qualify for
inclusion in guarantee programs sponsored by the FNMA or Freddie
Mac. The remainder of the conventional loans are non-conforming
loans (i.e., jumbo loans or other loans that do not meet FNMA or
Freddie Mac requirements). The Partnership's guidelines for
underwriting FHA-insured loans and VA-guaranteed loans comply
with the criteria established by such agencies. The
Partnership's guidelines for underwriting conventional conforming
loans comply with the underwriting criteria employed by FNMA
and/or Freddie Mac. The Partnership's guidelines for
underwriting conventional non-conforming loans are based on the
underwriting standards employed by private mortgage insurers and
private investors for such loans.
The Partnership originates and purchases mortgage loans through
three principal geographic regions (Eastern United States,
Western United States and Central United States), which consist
of approximately 25 branch offices, on both a wholesale and
retail basis.
The historic production volume has been comprised of
approximately 75% wholesale originations. On a wholesale basis,
the Partnership originates loans through and purchases loans from
mortgage loan brokers and correspondents. Loans produced on a
wholesale basis comply with the Partnership's and investor's
underwriting criteria. In addition, quality control personnel
review loans for compliance with these criteria. Approximately
1,300 mortgage brokers and correspondents qualify to participate
in the Partnership's wholesale business. Mortgage loan brokers
and correspondents qualify to participate only after a review by
the Partnership's management of their reputation, mortgage
lending expertise, and financial wherewithal. The remaining 25%
of the originations are originated on a retail basis, which
consists of originating loans directly with the mortgagor. Loans
produced on a retail basis comply with the Partnership's and
investor's underwriting criteria. In addition, quality control
personnel review loans for compliance with these criteria.
The sale of originated mortgage loans to third parties may
generate a gain or loss to the Partnership. Gains or losses
result primarily from three factors. First, mortgage loans may
be originated at a price (i.e., interest rate and discount) which
is higher or lower than the Partnership would receive if it
immediately sold the mortgage loan in the secondary market.
These pricing differences occur principally as a result of
competitive pricing conditions in the wholesale loan origination
market. Second, gains or losses may result from changes in
interest rates which result in changes in the market value of the
mortgage loans, or commitments to purchase mortgage loans, from
the time the price commitment is given to the borrower or
correspondent until the time that the mortgage loan is sold by
the Partnership. Third, the value of the originated servicing
associated with the mortgage loans may be recognized in
accordance with SFAS No. 122 or realized by selling the
originated product on a servicing released basis.
The Partnership's production is continuously subjected to
economic evaluation to determine the best execution for its
disposition (i.e., servicing released versus servicing retained).
During 1995, the Partnership retained approximately 44% of its
originated servicing.
In order to offset the risk that a change in interest rates will
result in a decrease in the value of the Partnership's current
mortgage loan inventory or its commitments to purchase or
originate mortgage loans ("Locked Pipeline"), the Partnership
enters into hedging transactions. The Partnership's hedging
policies generally require that substantially all of its
inventory of conforming and government loans and the maximum
portion of its Locked Pipeline that it believes may close be
hedged with forward contracts for the delivery of mortgage-backed
securities ("MBS") or options on MBS. The inventory is then used
to form the MBS that will fill the forward delivery contracts and
options. The Partnership is exposed to interest-rate risk to the
extent that the portion of loans from the Locked Pipeline that
actually closes at the committed price is less than the portion
expected to close in the event of a decline in rates and such
shortfall in closings is not covered by forward contacts and
options to purchase MBS. The Partnership determines the portion
of its Locked Pipeline that it will hedge based on numerous
factors, including the composition of the Partnership's Locked
Pipeline, the portion of such Locked Pipeline likely to close,
the timing of such closings, and changes in the expected number
of closings effected by changes in interest rates.
Competition
The mortgage banking activities in which the Partnership has
engaged are highly competitive. The Partnership competes with
financial institutions, such as banks, savings and loan
associations, other mortgage bankers, insurance companies, and
securities firms, in acquiring, holding and selling mortgage
loans and the related mortgage servicing rights, purchasing and
selling bulk mortgage servicing rights and servicing mortgage
loans. Many of the Partnership's mortgage banking competitors
are significantly larger, have a larger market share, and have
financial resources substantially greater than those of the
Partnership.
Regulation of Mortgage Banking
Mortgage banking is a highly regulated industry. HMCLP is
subject to the rules and regulations of, and examinations by, the
Department of Housing and Urban Development ("HUD"), FNMA,
Freddie Mac, FHA, VA, GNMA and state regulatory authorities with
respect to originating, processing, underwriting, selling,
securitizing and servicing residential mortgage loans. In
addition, there are other Federal and state statutes and
regulations affecting such activities. These rules and
regulations, among other things, impose licensing obligations on
HMCLP, establish eligibility criteria for mortgage loans,
prohibit discrimination, provide for inspection and appraisals of
properties, require credit reports on prospective borrowers,
regulate payment features, in some cases, fix maximum interest
rates, fees and loan amounts and regulate servicing. FHA lenders
are required annually to submit to the Federal Housing
Commissioner audited financial statements and are also subject to
examination by the Federal Housing Commissioner at all times to
assure compliance with FHA regulations, policies and procedures.
FNMA, Freddie Mac, GNMA and FHA require the maintenance of
specified net worth levels. Among other Federal consumer credit
laws, mortgage origination activities are subject to the Equal
Credit Opportunity Act, Federal Truth-In-Lending Act, Real Estate
Settlement Procedures Act, the Fair Housing Act, the Home
Mortgage Disclosure Act, and the regulations promulgated
thereunder which variously prohibit discrimination, unlawful
kickbacks and referral fees, and abusive escrow practices and
require the disclosure of certain information to borrowers
concerning credit and settlement costs and servicing. Many of
the aforementioned regulatory requirements are designed to
protect the interests of consumers, while others protect the
owners or insurers of mortgage loans. Failure to comply with
these requirements can lead to loss of approved status,
termination of servicing contracts without compensation to the
servicer, demands for indemnification or loan repurchases, class
action lawsuits and administrative enforcement actions which may
involve civil money penalties or treble damages.
Various state laws affect HMCLP's mortgage banking operations.
HMCLP is licensed to do business in those states where their
operations require such licensing. Certain states require that
interest must be paid to mortgagors on funds deposited by them in
escrow to cover mortgage-related payments such as property taxes
and insurance premiums.
From time to time, legislative proposals are introduced which, if
enacted, could potentially have a significant impact on HMCLP's
business. HMCLP cannot predict whether any of such proposals
will ultimately be enacted, what the final form of any such
proposals might take, or whether, if enacted, such proposals will
have a material adverse effect on the business of HMCLP.
Mortgage-Related Securities
In connection with the consummation of the Exchange Transaction,
the Partnership, acquired investments in other mortgage-related
securities and trusts. "Mortgage-related securities" are
securities that, directly or indirectly, represent participation
in, or are secured by and payable from, mortgage loans secured by
single family and multifamily residential real property and
commercial property. The cash flow generated by the mortgage
assets underlying an issue of mortgage-related securities is
applied first to make the required payments on such mortgage-
related securities and second to pay the related administrative
expenses. The residual cash flow in a mortgage-related
securities transaction generally represents the excess cash flow
remaining after making such payments (the "residual cash flows"
or "CMO residual interest").
The Partnership also owns investments in securitized mortgage
acceptance trusts ("SMATs") which are investments that indirectly
entitle the Partnership to the residual cash flows generated by
mortgage related assets underlying an issuance of a mortgage
related securities transaction. In a mortgage related securities
transaction, the residual cash flows generated represent the
excess cash flows after all required payments including
administrative expenses have been disbursed pursuant to the terms
of the mortgage related securities transaction. As owner of
these residual cash flows the Partnership retains the option to
call or redeem the underlying collateral once the balance falls
below a minimum required amount. These investments are
classified as trading securities since the Partnership is
actively seeking to sell these investments. Fair market value of
these investments generally represents the estimated amount which
such investments could be exchanged in a transaction between
willing parties. Fair value is based on estimated future cash
flows utilizing estimates of, value of the underlying collateral,
future prepayment rates, timing of the anticipated call date, and
other factors impacting the value of the underlying collateral.
Projected cash flows are discounted using estimates of discount
rates established in market transactions for instruments with
similar underlying characteristics and risks.
The SMATs investment provide a partial hedge against the
Partnership's mortgage servicing portfolio since the value of the
hedge increases during periods of declining interest rates.
Conversely, the value of the Partnership's mortgage servicing
portfolio decreases during periods of declining interest rates.
Restrictions on Business Expansion
Section 7704 of the Internal Revenue Code (the "Code") provides,
in general, that a publicly traded partnership will be taxed as a
corporation for federal income tax purposes unless at least 90%
of the partnership's gross income is "qualifying income," as
described below. An "existing partnership," however, will not be
taxed as a corporation until the partnership's first taxable year
beginning after December 31, 1997, as long as it does not add a
"substantial new line of business." An "existing partnership" is
defined to include a partnership with respect to which a
registration statement indicating the partnership was to be a
publicly traded partnership was filed with the Securities and
Exchange Commission on or before December 17, 1987, and includes
the Partnership. "Qualifying income" includes certain interest,
dividends, certain real property rents, and gains from the sale
or disposition of a capital asset or property described in
Section 1231(b) of the Code which is held for the production of
"qualifying income."
HBT has treated itself as a publicly traded partnership for
federal income tax purposes since its inception. HBT, as an
entity, currently is not subject to federal income tax because it
is an "existing partnership." Instead, each Unitholder takes
into account his distributive share of all items of Partnership
income, gain, loss, deduction, and credit for the taxable year of
HBT ending within or with the taxable year of the Unitholder in
computing his federal income tax liability for the taxable year,
regardless of whether the Unitholder has received any cash
distributions from HBT. Pursuant to the HBT Agreement, HBT may
not enter into a "substantial new line of business" as such term
is defined in the applicable provision of the Code. The law is
not clear as to the meaning of the term "substantial new line of
business," and HBT may be restricted in its ability to expand the
scope of its business. In this connection, HBT in its existing
form may be restricted from fully participating in the mortgage-
related securities markets and mortgage banking industry as they
evolve.
Possible Action in the Event of Adverse Tax Developments
As a result of provisions currently in the tax law, the
Partnership will be taxed as a corporation for federal income tax
purposes ("an Adverse Tax Consequence") unless 90% of the
Partnership's gross income is "qualifying income" as defined in
the Code for its tax year beginning on January 1, 1998. Under
the HBT Agreement, in the event that the General Partner
reasonably believes that within one year there is a substantial
risk of the occurrence of an Adverse Tax Consequence , the
General Partner may, (i) halt or limit trading in the Units or
cause the Units to be delisted from any national securities
exchange on which they may be traded, (ii) impose restrictions on
the transfer of the Units (by amending the HBT Agreement or
otherwise), (iii) modify, restructure or reorganize the
Partnership, or any other subsidiary entity of the Partnership as
a corporation, a trust or any other type of legal entity (the
"New Entity"), (iv) liquidate the Partnership or (v) continue the
Partnership and be treated as a corporation as a result of the
reclassification. In any such event, the Units may be converted
into equity of a New Entity in the manner determined by the
General Partner in its sole discretion, provided that each
outstanding Unit of the same class or series is treated equally,
and the relative fair market values of the securities into which
Units and the general partnership interest are converted are in
proportion to the amounts the holders thereof would receive upon
liquidation of the Partnership. The respective equity interests
received by the holders of Preferred Units, Subordinated Units
and the General Partner will be entitled to dividends or other
distributions on terms that the General Partner, with the consent
of the independent directors, determines are substantially
equivalent to the relevant priorities as to distributions to the
holders of Preferred Units, Subordinated Units and the General
Partner. The General Partner is required to provide written
notice of any proposed action in connection with an Adverse Tax
Consequence to the Unitholders at least 30 days prior to the
taking of any such action. In the absence of a vote of two-
thirds interest of the Unitholders against any such action, the
General Partner may take such action and is not required to
choose the action which is least disruptive to the Partnership or
Unitholders under the circumstances. The Subordinated Unitholder
is not permitted to vote for this purpose. There can be no
assurance that such action will not result in adverse tax
consequences to the Partnership or the Preferred Unitholders.
Employees
At March 20, 1996, the Partnership employed approximately 670
persons, 430 of whom were engaged in production activities, 190
were engaged in loan administration activities, and 50 were
engaged in other activities.
Item 2. Properties
The primary executive and administrative offices of the
Partnership and its subsidiaries are located in leased space at
2350 South Parker Road, Aurora, Colorado, and consists of
approximately 33,000 square feet. The lease term extends through
May 31, 2001. The Partnership also owns an office facility of
approximately 37,000 square feet located in Scottsbluff,
Nebraska, which is used to house the Partnership's loan servicing
operations. In addition, the Partnership leases office space
throughout the United States for each of its production branch
offices varying in size and lease terms.
Item 3. Legal Proceedings
Periodically, the Partnership becomes the subject of legal
proceedings in connection with the general operations of its
business. The Partnership does not believe the resolution of
such claims would have a material adverse effect on its financial
condition.
Item 4. Submission of Matters to a Vote of Security Holders
At a meeting of the Limited Partners of the Partnership on
November 28, 1995, the Limited Partners of the Partnership were
asked to approve (i) the conversion of the Partnership's Series B
Preferred Units into Preferred Units of the Partnership at a
conversion ratio of one Preferred Unit for each Series B Unit and
(ii) the adoption of the Harbourton Financial Services L.P.
Preferred Unit Option Plan.
Pursuant to the terms of an agreement dated July 28, 1995, among
Harbourton General Corporation ("HGC"), Harbourton and the
Partnership, the Partnership completed the acquisition of Western
Sunrise Holdings, L.P. ("Western") on July 31, 1995. Western was
a mortgage originator and servicer headquartered in Sacramento,
California. The acquisition was effected by the contribution to
the Partnership by Harbourton and HGC of all of the partnership
interests in Western. At the transaction date (July 31, 1995),
the net book value of Western was approximately $5.7 million.
The fair value of Western on that same date was approximately
$15.7 million. The purchase price for Western was paid by
issuing to Harbourton and HGC an aggregate of 8,574,317 Series B
Units. In addition, if the performance of the production
operations of Western exceed certain projections during a 24-
month period, Harbourton and HGC will receive additional units.
Further, on July 26, 1995, the Board of Directors of the General
Partner approved the issuance of 3,433,623 Series B Units to PVSC
and 1,484,410 Series B Units to Harbourton in exchange for the
repayment of certain indebtedness totaling approximately $9
million owed by the Partnership and its subsidiaries to PVSC and
Harbourton. The net effect of these transactions was to convert
the $9 million of debt into additional equity in the Partnership.
Accordingly, Unitholders were asked to approve the conversion of
these Series B Preferred Units into Preferred Units of the
Partnership at a conversion ratio of one Preferred Unit for each
Series B Unit. The votes of the Unitholders were as follows:
<TABLE>
<S> <C>
For 23,761,814
Against 109,268
Abstentions 53,955
Total 23,925,037
</TABLE>
In September 1995, the Board of Directors of the General Partner
adopted the Harbourton Financial Services L.P. Preferred Unit
Option Plan (the "Option Plan") for the purpose of attracting and
retaining qualified directors, officers and employees of the
Partnership, the General Partner and certain affiliates, to
provide a means of performance-based compensation for key
employees, and to provide incentives for the participants in the
Option Plan to enhance the value of the Preferred Units.
Accordingly, Unitholders were asked to approve the adoption of
the Preferred Unit Option Plan. The votes of the Unitholders
were as follows:
<TABLE>
<S> <C>
For 23,578,000
Against 302,927
Abstentions 44,110
Total 23,925,037
</TABLE>
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters
The Partnership's Preferred Units are listed on the New York
Stock Exchange ("NYSE") under the symbol "HBT".
The table below sets forth the high and low prices for the
Partnership's Preferred Units for the quarters indicated, as
reported by the NYSE.
<TABLE>
<S> <C> <C> <C> <C>
Quarter Ended High Low
Prior to Exchange Transaction:
March 31, 1994 $4.875 3.625
June 30, 1994 3.750 1.875
September 30, 1994 2.750 1.125
December 31, 1994 1.625 0.875
Subsequent to Exchange Transaction:
March 31, 1995 1.875 1.000
June 30, 1995 2.250 1.500
September 30, 1995 2.125 1.500
December 31, 1995 1.875 1.375
</TABLE>
HBT declared and distributed cash of $.05 per Preferred Unit
during the quarter ended March 31, 1994. This cash distribution
was made by HBT prior to the Exchange Transaction dated March 15,
1995. No other cash distributions have been declared or
distributed by HBT since the quarter ended March 31, 1994. At
December 31, 1995, the number of outstanding units totaled
approximately 41.9 million. Approximately 35.8 million units are
held by Harbourton and its affiliates and certain TMC parties.
The Partnership's remaining 6.1 million were held by
approximately 4,100 unitholders of record at December 31, 1995.
Distributions
The Partnership intends, at a minimum, to make annual cash
distributions to the Preferred Unitholders in an amount intended
to approximate the maximum Federal income tax liability of an
individual U.S. resident taxpayer arising from its ownership of
the Preferred Units unless, in the judgment of the board of
directors of the General Partner, with the consent of the
independent directors, such minimum distribution would materially
and adversely affect the interests of the Preferred Unitholders
or the continued operation of the Partnership.
The extent to which the Partnership will make cash distributions
beyond such minimum levels will depend upon a number of factors,
including the Partnership's cash flow, profitability, and growth
expectations, and restrictions contained in its agreements with
its lenders. Due to the fact that the Partnership incurred a tax
loss during the year ended December 31, 1995, no distributions
were made.
Distribution Reinvestment Plan
The Partnership has established a distribution reinvestment plan
(the "Plan"), pursuant to which Preferred Unitholders may elect
to have all distributions automatically reinvested by a plan
agent (the "Plan Agent") in Preferred Units pursuant to the Plan.
Participation by Preferred Unitholders in the Plan is strictly
voluntary and those who elect not to participate will receive all
distributions in the same manner as if the Partnership did not
have such a Plan.
A Preferred Unitholder may initially elect to participate in the
Plan with respect to all or a portion of the Preferred Units
registered in his or her name ("Participating Preferred Units"),
and a Preferred Unitholder may from time to time after such
initial election change the number of his or her Participating
Preferred Units by written notice to the Plan Agent. As and when
cash distributions are made on the Partnership's Preferred Units,
the Partnership will pay to the Plan Agent all distributions
payable on Participating Preferred Units (less tax withheld, if
any). On the date on which the Plan Agent receives such
distributions (or as soon as practicable thereafter), the Plan
Agent will apply such distributions to the purchase of Preferred
Units on the open market, and will allocate Preferred Units so
purchased (including fractional Preferred Units) to each
participant in accordance with the distributions received with
respect to such participant's Participating Preferred Units. The
price to a participant of Preferred Units purchased on the open
market will be the weighted average price of the Preferred Units
so purchased.
In the future, the Partnership may elect to register and issue
Preferred Units to participants in lieu of open market purchases.
The price to a participant of Preferred Units purchased from the
Partnership will be 100% of the closing price of Preferred Units
reported by the New York Stock Exchange on the first trading day
after the Plan Agent receives the distributions.
Participants in the Plan may withdraw from the Plan upon written
notice to the Plan Agent or by withdrawing all of his or her
Participating Preferred Units. When a participant withdraws from
the Plan or upon termination of the Plan as provided below,
certificates for whole Preferred Units credited to his or her
account under the Plan will be transferred to the participant and
a cash payment will be made for any fraction of a Preferred Unit
credited to such account.
The Plan Agent will maintain each Preferred Unitholder account in
the Plan and will furnish written confirmations of all
transactions in the accounts, including information needed by
Preferred Unitholders for personal and tax records. Preferred
Units in the account of each Plan participant will be held by the
Plan Agent in noncertificated form in the name of the
participant, and each Preferred Unitholder's proxy will include
those whole Preferred Units purchased pursuant to the Plan.
There is no charge to participants for reinvesting distributions,
except for certain brokerage commissions, as described below.
The Plan Agent's fees for the handling of the reinvestment of the
distributions will be paid by the Partnership. There will be no
brokerage commissions charged with respect to Preferred Units
issued directly by the Partnership. However, each participant
will pay a pro rata share of brokerage commissions incurred with
respect to the Plan Agent's open market purchases in connection
with reinvestment of distributions.
The automatic reinvestment of distributions will not relieve
participants of any Federal income tax that may be payable on
such distributions.
Experience under the Plan may indicate that changes are
desirable. Accordingly, the Partnership reserves the right to
amend or terminate the Plan by giving written notice of the
change to all Preferred Unitholders at least 30 days before the
record date for the distribution.
Item 6. Selected Financial Data
(in thousands except per unit data)
Earnings Data
The historical consolidated results of operations presented
herein primarily represent the following: a) HMCLP and Western
for the periods prior to June 30, 1994, b) HMCLP and Western plus
a 50% equity interest in TMC for the period from July 1, 1994
through March 31, 1995, and c) HMCLP, Western, HBT and TMC, from
April 1, 1995 through December 31, 1995. See Management's
Discussion and Analysis for further discussion of these
transactions.
<TABLE>
For the years ended December 31,
1995 1994 1993 1992 1991
(a)
<S> <C> <C> <C> <C> <C>
Total Revenues 53,414 36,551 41,797 14,549 5
Net Income 11,624 4,834 11,525 2,787 5
Net Income Per .31 .16 .38 .09 .00
Unit
Weighted Average
Preferred Units 37,310 30,088 30,088 30,088 21,514
Outstanding
Distributions
Declared per
Preferred Unit (b) .00 .05 .57 1.02 1.33
</TABLE>
(a) Reflects results of operations from November 5, 1991,
inception date of the predecessor/acquirer (Harbourton
Mortgage Co., L.P.), through December 31, 1991.
(b) Distributions declared per Preferred Unit reflect the
historical distributions made by HBT (formerly JHM Mortgage
Securities L.P.) for the period through March 14, 1995 and
the reorganized HBT subsequent to March 14, 1995, based on
the weighted average Preferred Units during those periods.
These distributions have no relation to the operations and
weighted average Preferred Units presented above, which are
presented on the basis of the reorganization, are further
described in Management Discussion and Analysis.
<TABLE>
Balance Sheet Data
As of December 31,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C>
Selected Assets
Mortgage loans held $232,073 $45,237 $157,858 $86,732 $ --
for sale, net
Advances 21,016 22,252 16,751 12,939 --
receivable, net
Mortgage servicing 75,846 33,899 22,194 17,567 --
rights, net
Total Assets $356,095 $116,201 $217,749 $129,085 $1,195
Selected
Liabilities
Lines of credit $232,144 $54,065 $158,578 $93,659 $ --
Term loans 37,215 22,333 6,596 8,679 --
Partners' Capital $ 54,507 $25,769 $ 31,241 $18,632 $1,105
</TABLE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following is management's discussion and analysis of the
financial condition and results of operations of the Partnership.
The discussion and analysis should be read in conjunction with
the financial statements included herein.
Recent Developments
As a result of the Partnership's endeavor to enhance its mortgage
banking operations, the Partnership has recently completed the
following transactions:
Exchange Transaction
On August 5, 1994, Harbourton Holdings, L.P. ("Harbourton"), a
Delaware limited partnership, acquired from JHM Capital
Corporation ("JCC") (i) all of the issued and outstanding capital
stock of the General Partner of HBT and (ii) all of the issued
and outstanding Subordinated Units of HBT, pursuant to the terms
of a definitive acquisition agreement (the "Transfer Agreement").
Pursuant to the Transfer Agreement and New York Stock Exchange
rules, on March 14, 1995, HBT obtained the approval from existing
Unitholders to issue to Platte Valley Servicing Co., L.P.
("PVSC"), an affiliate of Harbourton, 21,513,509 Preferred Units
of HBT in exchange for PVSC's ownership interest of (i) all of
the issued and outstanding limited partnership interest of
Harbourton Mortgage Co., L.P. (formerly Platte Valley Funding,
L.P.) ("HMCLP")and (ii) all of the issued and outstanding capital
stock of Harbourton Funding Corporation (formerly Platte Valley
Funding Corporation ("HFC"), the general partner of HMCLP (the
"Platte Valley Transaction"). Pursuant to an agreement dated
October 1, 1994 (the "TMC Mortgage Agreement"), which was joined
in by HBT with the unanimous consent of the independent directors
of the General Partner, TMC Mortgage Corp. and two of its
shareholders (the "TMC Parties") agreed to contribute to HBT
their aggregate direct and indirect 50% interest in TMC Mortgage
Co., L.P. ("TMC"), a partnership engaged in the origination and
sale of mortgage loans in the eastern United States, in exchange
for 829,119 Preferred Units (the "TMC Transaction"). On the same
date, HMCLP agreed to include its 50% aggregate direct and
indirect equity interest in TMC as part of the assets owned by it
at the time of the consummation of the Platte Valley Transaction.
Upon the consummation of the Exchange Transaction, HMCLP became a
subsidiary of HBT and TMC became a subsidiary of HBT, with an
aggregate 50% equity interest owned by HBT and an aggregate 50%
equity interest owned by Platte Valley. The effect of the
Exchange Transaction was that PVSC acquired approximately 75.7%
of the issued and outstanding Preferred Units of HBT, and the TMC
Parties owned approximately 2.9% of the issued and outstanding
Preferred Units. HBT has continued to exist in accordance with
the provisions of the HBT Agreement, which was unchanged by the
Exchange Transaction.
Western Transaction
On July 31, 1995 the Partnership completed its acquisition of
Western, an affiliated mortgage originator and servicer
headquartered in Sacramento, California. Western had been a
subsidiary of Harbourton. At the transaction date (July 31,
1995), the net book value of Western was approximately $5.7
million. The fair value of Western on that same date was
approximately $15.7 million. In exchange for Western, Harbourton
received approximately 8.6 million Series B Preferred Units
having generally the same rights as the outstanding Preferred
Units. In addition, if the performance of the production
operations of Western exceed certain projections during a
24 month period, Harbourton will receive additional Preferred
Units. During the quarter ended December 31, 1995 a majority of
the Preferred Unitholders voted to convert these Series B Units
to Preferred Units at a conversion rate of one Series B Unit to
one Preferred Unit. Western, which originated loans primarily on
a wholesale basis in the western United States, had mortgage
origination volume of approximately $846 million in 1994 and $466
million during the seven months ended July 31, 1995 (i.e., prior
to the acquisition by the Partnership). At the acquisition date,
Western owned servicing rights related to approximately
$644 million in mortgage loans, which had been subserviced by the
Partnership since the latter part of 1994. The Partnership
acquired Western to provide broader geographic coverage,
economies of scale through greater production volumes, and to act
as a valuable hedge against prepayment risk associated with the
Partnership's servicing portfolio.
The Western Transaction has been accounted for as a
reorganization of entities under common control similar to a
pooling-of-interests. Consistent with pooling-of-interests
accounting, the historical financial statements of the
Partnership have been combined with the historical financial
statements of Western and are presented as the consolidated
financial statements of the Partnership contained herein. See
also the notes to the consolidated financial statements for a
discussion of the impact of recording the Western Transaction.
Debt Refinancing
In addition to the restructuring transactions, the Partnership
refinanced the separate credit facilities of Western, TMC,
Harbourton Mortgage Co., L.P. and itself with a new syndicated
credit facility. The syndicated facility was completed by the
end of the third quarter of 1995 and consists of the following:
(i) a $200.0 million warehouse facility (which was increased to
$300 million in January of 1996), (ii) a $76.4 million servicing
facility which consists of four tranches as follows: a) a $41.4
million servicing term facility, shich was funded at closing, and
amortizes in twenty equal quarterly payments, b) a $15.0 million
line of credit, available for two years, to finance up to 65% of
the purchase price of future bulk servicing acquisitions, c) a
$15.0 million revolving credit line to finance mid-month
principal and interest advance receivables, maturing July 31,
1996 and repaid during the first week of the month following each
advance, and d) a $5.0 million revolving credit line used to
finance taxes and insurance and foreclosure advance receivables,
maturing July 31, 1996.
The syndicated facility is subject to minimum debt service
coverage requirements, net worth requirements, and loan-to-value
restrictions. The borrower on the facility is HMCLP and
borrowings are guaranteed by HBT. The Partnership incurred and
paid an up-front fee in the amount of $414 thousand on tranches
a) and b), as noted above, of the servicing secured facility.
See also the notes to the consolidated financial statements for a
further description of the credit facility. This refinancing
will provide the financial resources needed by the Partnership to
increase its servicing portfolio (as noted below) and its
origination operations through strategic acquisitions of
servicing and origination entities.
Debt Conversion
During the third quarter of 1995, Harbourton and its affiliates
converted $9.0 million of notes receivable from the Partnership
into equity in the Partnership. In connection with the debt to
equity conversion, Harbourton and its affiliates received
approximately 4.9 million of Series B Preferred Units having
generally the same rights as the outstanding Preferred Units.
During the quarter ended December 31, 1995 these Series B Units
were converted to Preferred Units at a conversion rate of one
Series B Unit to one Preferred Unit.
Following the consummation of the Western transaction and the
debt to equity conversion, Harbourton and its affiliates own
approximately 83.5% of the Preferred Units of the Partnership.
Servicing Acquisition
During the third quarter of 1995, the Partnership entered into a
Purchase and Sale Agreement for the acquisition of approximately
$1.5 billion of GNMA mortgage servicing rights. The Purchase and
Sale Agreement, among other things, called for an effective
acquisition date of August 31, 1995 with a November 1, 1995
transfer of the servicing responsibilities. The Partnership
funded the initial down payment during the third quarter of 1995
and has reflected the remaining payments due to the seller in
installment purchase obligations in the accompanying consolidated
balance sheets. In conjunction with the Purchase and Sale
Agreement, the Partnership entered in to an Interim Servicing
Agreement with the seller to perform the servicing functions, for
the period from August 31, 1995 to the transfer date, on behalf
of the Partnership. As a result the Partnership did not benefit
from any economies of scale achieved with this acquisition until
the servicing responsibilities were transferred.
The Partnership expects to continue to pursue transactions which
management believes will further enhance the Partnership's
mortgage banking operations. No assurance can be given that any
such transactions will be consummated and if consummated, that
they will have a favorable impact on the Partnership.
Other Developments
Impact of Financial Accounting Standards Board Statement No. 122
The Partnership adopted SFAS No. 122 during the third quarter of
1995 retroactive to the beginning of its fiscal year, January 1,
1995. SFAS No. 122 prohibits retroactive application to prior
years, therefore, the historical results for 1995 and the years
prior to 1995, presented herein, are reported using different
accounting rules (i.e., SFAS No. 122 in 1995 versus SFAS No. 65
in prior years). The primary differences between the two
accounting rules, as it applies to the Partnership, relate to the
accounting treatment for originated mortgage servicing rights
("OMSRs") and the methodology for evaluating and measuring
impairment of capitalized mortgage servicing rights ("MSRs").
Prior to the adoption of SFAS No. 122, the Partnership did not
capitalize its OMSRs. As a result, the Partnership's historical
financial statements, prior to January 1, 1995, did not recognize
the additional value of the OMSRs, although the OMSRs had market
value at the time they were created. Under SFAS No. 122 , OMSRs
are treated as an asset separate from the underlying loan and
capitalized as MSRs. Subsequent to the adoption of SFAS No. 122,
the cost of creating a mortgage loan was allocated, at the time
of origination, between the loan and the servicing right based on
their relative fair values. Additionally, gains on the sales of
loans, attributable to the allocation of value to the OMSRs, were
recognized at the time the related loan was sold, although the
OMSR asset was recognized on the date the loan was originated.
Further, the Partnership has capitalized approximately $2.0
million of OMSRs for which the underlying loans have not been
sold as of December 31, 1995 resulting in a reduction in the
balance of mortgage loans held for sale.
In addition to the capitalization of OMSRs as MSRs, the
Partnership has changed its methodology for evaluating and
measuring the impairment of capitalized mortgage servicing
rights. Prior to the adoption of SFAS No. 122, the Partnership
evaluated the impairment of purchased mortgage servicing rights
on an acquisition by acquisition basis, on a disaggregated basis,
based on the future undiscounted net servicing income related to
each acquired portfolio. SFAS No. 122 requires that, for the
purpose of evaluating and measuring impairment of MSRs, a
mortgage banking enterprise must stratify its MSRs based on one
or more predominant risk characteristics associated with the
underlying loans. The Partnership has determined those risk
characteristics to be loan type and interest rate. As noted
previously, the Partnership adopted SFAS No. 122 during the third
quarter ended September 30, 1995 retroactive to January 1, 1995.
At that date, the Partnership reallocated its book basis in its
mortgage servicing rights (which had previously been recorded on
an acquisition by acquisition basis) to its new risk stratum
based on a relative fair value basis. The individual tranches of
the portfolio were valued by an independent third party to
determine the fair value of the MSRs. The fair value was then
compared to the carrying value of each risk stratum, net of the
related foreclosure reserve, to determine if a reserve for
impairment was required.
The amount of impairment recognized is the amount by which the
capitalized MSRs for each risk stratum exceed the respective fair
value of the MSRs. Impairment is recognized through adjustments
to a valuation allowance to reflect changes in the measurement of
impairment. Fair value in excess of the amount capitalized as
MSRs is not recognized. In determining servicing value impairment
at December 31, 1995 on a stratum by stratum basis, the net
carrying value exceeded its respective fair market value resulting
in the recordation of a valuation allowance. As of December
31, 1995 a valuation allowance of approximately $1.1
million was recorded against various portfolio risk stratum.
This was due primarily to a decrease in interest rates during the
fourth quarter causing a decrease in the value of those related
servicing rights. Mortgage interest rates decreased in excess of
50 basis points during the fourth quarter. This decrease in
interest rates caused an increase in the risk of prepayments
associated with the servicing portfolio, thereby decreasing the
servicing portfolio's value.
As previously discussed, SFAS No. 122 prohibits retroactive
application for OMSRs created prior to the fiscal year in which
the Partnership adopted the new accounting pronouncement. As a
result the Partnership, at December 31, 1995, owns servicing
rights related to approximately $650 million in mortgage loans
that are not capitalized in its consolidated financial
statements. Further, SFAS No. 122 prohibits the recognition of
fair value in excess of the book basis of the MSRs. As a result,
the Partnership has off-balance sheet value associated with its
non-capitalized MSRs, as well as the excess in fair value of the
MSRs capitalized in the consolidated financial statements. At
December 31, 1995, the carrying value of the MSRs capitalized in
the consolidated financial statements, approximated $71.1 million
(net of the applicable foreclosure reserves of approximately $4.7
million), with an estimated fair value of approximately $74.2
million.
The following table summarizes the impact of the adoption of SFAS
No. 122 to the Partnership's historical statements of operations
(in thousands):
<TABLE>
Year Ended
December 31,
1995
<S> <C>
Increase in gain on sales of
mortgage loans and related $10,924
mortgage servicing rights
Increase in amortization of
mortgage servicing rights (311)
Valuation allowance (1,132)
Total increase in net earnings $9,481
</TABLE>
Business Strategy
The Partnership's primary business currently is focused on
mortgage banking which consists of (i) mortgage loan servicing
activities, including the acquisition and sale of mortgage
servicing rights, (ii) the origination and purchase of mortgage
loans, including the securitization and sale of the mortgage
loans with the related servicing rights retained or released, and
(iii) investments in other mortgage-related securities.
The Partnership's concentration in mortgage banking consists
primarily of mortgage servicing and originations. Accordingly,
the Partnership is subject to the risks associated with these
operations. These risks include, (i) the possible adverse effect
of regulatory changes, since virtually all aspects of the
Partnership's business are subject to federal and state
regulation; (ii) the adverse effect on loan originations and
servicing costs of downturns in real estate cycles or general
economic conditions; (iii) the continued need to maintain
financing availability to fund warehouse lines, finance bulk
acquisitions of servicing rights and to fund advance
requirements; (iv) the need for efficient and sound operations to
achieve profitability and to avoid excessive foreclosure losses
and underwriting problems; (v) the servicer's responsibility in
connection with GNMA pools (which constitute most of the
Partnership's servicing) for foreclosure expenses not reimbursed
by FHA or VA (such as attorneys fees, unreimbursed interest and
other expenses), provided further that VA has the authority to
limit its obligation to the reimbursement of the lesser of a
percentage of the defaulted loan's outstanding principal or a
specified maximum guaranteed amount (a so-called "VA no-bid") and
the servicer then takes the market risk of disposing of the
property to recover the unreimbursed principal plus unpaid
interest and foreclosure costs; and (vi) market and interest rate
risk associated with the origination and secondary marketing of
mortgage loans, such as the adverse effects of changes in
interest rates after the mortgage originator has issued
commitments to the mortgage borrower or the secondary market
purchaser. The Partnership, to a limited degree, is also subject
to the risks associated with its derivative securities
investments, including, without limitation, other factors (such
as foreclosure rates and pay-offs from home sale activity) which
affect the rate of prepayment on the mortgage loans underlying
the derivative security, actual operating expenses with respect
to the underlying mortgage-backed security, potential tax
liabilities and market conditions unique to such securities.
Mortgage Servicing Portfolio
At December 31, 1995, the Partnership's servicing and
subservicing portfolio consisted of residential mortgage loans
with underlying principal balances of approximately $6.3 billion.
The value and income from mortgage servicing rights are affected
by, among other things, changes in both short-term and long-term
interest rates. Generally, mortgage servicing portfolios
increase in value as interest rates increase (benefits from
escrows being used in compensating balance arrangements increase
when short-term rates rise and the expected income stream from
servicing lengthens as prepayments slow when long-term rates
increase). The benefit from increases in short-term rates
generally is partially offset by the increased financing costs on
borrowings incurred to fund the acquisition of mortgage servicing
rights and other working capital requirements. Decreases in
rates generally have the opposite effect of decreasing the value
and income from mortgage servicing rights. The Partnership will
attempt to mitigate this negative impact by adding loans to its
existing servicing portfolio through (i) refinancing a portion of
the prepaying loans, (ii) originating new loans and retaining the
servicing, and (iii) purchasing servicing from third parties. In
contrast, in periods of decreasing long-term rates, which
stimulate new home financing and the refinancing of existing
mortgage loans, loan production operations should provide an
increased contribution to earnings as mortgage originations rise.
As more fully described in Note 4 to the accompanying
consolidated financial statements, since its inception the
Partnership has acquired several bulk servicing portfolios with
unpaid principal balances totaling approximately $6.8 billion at
the time of acquisition (in thousands):
<TABLE>
Principal Acquired Effective Transfer of
Acquisition Date Servicing Date
<S> <C> <S> <C> <S> <C>
$ 644,276 March 31, 1992 March 31, 1992
586,335 August 31, 1992 October 1, 1992
791,856 July 30, 1993 November 1, 1993
282,693 July 30, 1993 July 30, 1993
1,045,439 June 30, 1994 September 1, 1994
636,096 June 30, 1994 July 1, 1994
304,375 June 30, 1994 July 1, 1994
1,063,303 March 15, 1995 March 15, 1995
23,615 June 30, 1995 June 30, 1995
1,435,450 August 31, 1995 November 1 and
December 1, 1995
22,130 November 30, 1995 November 30, 1995
$6,835,568 Total
</TABLE>
Mortgage Loan Originations
During 1995, the Partnership originated approximately $1.5
billion mortgage loans. The sale of originated mortgage loans to
third parties may generate a gain or loss to the Partnership.
Gains or losses result primarily from three factors. First,
mortgage loans may be originated at a price (i.e., interest rate
and discount) which is higher or lower than the Partnership would
receive if it immediately sold the mortgage loan in the secondary
market. These pricing differences occur principally as a result
of competitive pricing conditions in the wholesale loan
origination market. Second, gains or losses may result from
changes in interest rates which result in changes in the market
value of the mortgage loans, or commitments to purchase mortgage
loans, from the time the price commitment is given to the
borrower or correspondent until the time that the mortgage loan
is sold by the Partnership or until it enters into a forward
delivery commitment. Third, the value of the originated
servicing associated with the mortgage loans may be recognized in
accordance with SFAS No. 122 or realized by selling the
originated production on a servicing released basis.
The Partnership's production is continuously subjected to
economic evaluation to determine the best execution for its
disposition (i.e., servicing released versus servicing retained).
During 1995, the Partnership retained approximately 44% of its
originated servicing.
Typically, the purchaser of mortgage loans for resale, such as
the Partnership, endeavors to minimize its interest rate risk on
commitments made to customers by entering into forward sale
commitments on mortgage-backed securities and mortgage loans.
Net commitment positions are constantly adjusted by entering into
new commitments to sell or by buying back commitments to sell.
The amount of forward commitments outstanding is equal to the
closed mortgage loans held in inventory plus a portion of the
mortgage loans that the Partnership has committed to make to
customers and for which the rate has been locked. The aggregate
amount of commitments is reduced for hedging purposes by an
estimate of mortgage loans in the pipeline for which rates have
been locked which are not expected to close based on historical
experience and current market conditions. The Partnership's
projection of the portion of loans that it expects to close is
based on numerous factors including the composition of the
Partnership's locked pipeline, the portion of such locked
pipeline likely to close, the timing of such closings, and
changes in the expected number of closings effected by changes in
interest rates. The forward sale commitments are an effort to
mitigate the Partnership's risk resulting from potential changes
in market interest rates between the time that it commits to make
or purchase a mortgage loan at an agreed price and the time that
the mortgage loan is closed and sold. The use of forward
commitments as a strategy to minimize interest rate risk requires
the Partnership to make certain assumptions and projections about
future interest rate and general economic trends.
Mortgage-Related Securities
In connection with the consummation of the Exchange Transaction ,
the Partnership acquired investments in other mortgage-related
securities and trusts. "Mortgage-related securities" are
securities that, directly or indirectly, represent participation
in, or are secured by and payable from, mortgage loans secured by
single family and multifamily residential real property and
commercial property. The cash flow generated by the mortgage
assets underlying an issue of mortgage-related securities is
applied first to make the required payments on such mortgage-
related securities and second to pay the related administrative
expenses. The residual cash flow in a mortgage-related
securities transaction generally represents the excess cash flow
remaining after making such payments (the "residual cash flows"
or "CMO residual interest").
The Partnership also owns investments in Securitized Mortgage
Acceptance Trusts ("SMATs") which are investments that directly
or indirectly entitle the Partnership to the residual cash flows
generated by mortgage related assets underlying an issuance of a
mortgage related securities transaction. In a mortgage related
securities transaction, the residual cash flows generated
represent the excess cash flows after all required payments
including administrative expenses have been disbursed pursuant to
the terms of the mortgage related securities transaction. As
owner of these residual cash flows, the Partnership retains the
option to call or redeem the underlying collateral once the
balance falls below a minimum required amount. These investments
are classified as trading securities since the Partnership is
actively seeking to sell these investments. Fair market value of
these investments generally represents the estimated amount which
such investments could be exchanged in a transaction between
willing parties. Fair value is based on estimated future cash
flows utilizing estimates of, value of the underlying collateral,
future prepayment rates, timing of the anticipated call date, and
other factors impacting the value of the underlying collateral.
Projected cash flows are discounted using estimates of discount
rates established in market transactions for instruments with
similar underlying characteristics and risks.
During the first quarter of 1996, the Partnership sold its SMATs
investment that had value at December 31, 1995. The Partnership
still has additional SMATs with no value at December 31, 1995.
General
As previously discussed, the results of operations presented in
the consolidated financial statements herein, reflect a series of
recently completed transactions; a) the Exchange Transaction, b)
the TMC Transaction and c) the Western Transaction. The
following is a brief discussion relating to the accounting and
reporting implementation of these transactions:
Exchange and TMC Transactions
On March 14, 1995, the existing Unitholders of HBT approved the
issuance of 21.5 million Preferred Units of HBT (a 75.7%
controlling interest in HBT) in exchange for 100% ownership
interest in HMCLP and HFC (the "Exchange Transaction"). Because
of the change in control of HBT, this transaction was accounted
for as the reverse acquisition of HBT by HMCLP and HFC.
Concurrent with the Exchange Transaction, HBT acquired a 50%
interest in TMC in exchange for .8 million Preferred Units of HBT
(a 2.9% interest) (the "TMC Transaction"). This interest,
combined with the 50% interest previously contributed to HMCLP by
Harbourton, in June of 1994, resulted in HBT's 100% ownership of
TMC.
Accounting for a reverse acquisition requires that the historical
results of operations (prior to the Exchange Transaction) reflect
the operations of HMCLP as the continuing accounting entity.
Further, under the accounting for a reverse acquisition, HBT is
reported as if it were "purchased" as of the date of the Exchange
Transaction. Therefore, the historical results of operations
exclude the operating results of HBT prior to the date of the
Exchange Transaction. These results are reflected in the
purchase adjustments associated with the recognition of this
transaction.
The operating results of TMC are reflected as equity in earnings
in affiliates in the operating results of HMCLP for the period
from June 30, 1994 to the date of the Exchange Transaction.
Thereafter, the results of operations of TMC are reflected as a
100% owned subsidiary of the Partnership and reported in the
consolidated statements of operations.
Western Transaction
As previously discussed, on July 31, 1995, HBT acquired Western
in exchange for 8.6 million Series B Preferred Units (the
"Western Transaction") which were converted to Preferred Units
during the quarter ended December 31, 1995. This was a
transaction between entities under common control, therefore, the
transaction was accounted for using the pooling-of-interests
method of accounting. Under the pooling method of accounting,
the results of operations of Western are included in the
accompanying financial statements of the Partnership as if the
transaction occurred at the inception date of each respective
entity.
In summary, the historical consolidated results of operations
presented herein primarily represent the following: i) HMCLP and
Western for the periods prior to June 30, 1994, b) HMCLP and
Western plus a 50% equity interest in TMC for the period from
July 1, 1994 through March 31, 1995, and c) HMCLP, Western, HBT
and TMC, from April 1, 1995 through December 31, 1995.
As a result of the transactions discussed above, the Partnership
has completed name changes for the entities listed in the
following table:
Previous Name Current Name Abbreviated
Name
JHM Mortgage Securities Harbourton Financial HBT or the
L.P. Services L.P. Partnership
JHM Mortgage Capital Harbourton Mortgage General
Corporation Corporation Partner
Platte Valley Funding, Harbourton Mortgage HMCLP
L.P. Co., L.P.
Platte Valley Funding Harbourton Funding HFC
Corporation Corporation
Results of Operations
Revenues and Expenses 1995 Compared to 1994
Net income for the year ended December 31, 1995 totaled
approximately $11.6 million or $.31 per unit compared to,
approximately $4.8 million or $.16 per share earned during the
year ended December 31, 1994, an increase of approximately $6.8
million or $.15 per unit. As previously discussed, the
Partnership's 1995 results were accounted for under the new
accounting pronouncement, SFAS No. 122. This pronouncement
prohibits retroactive application to prior years. Accordingly,
the Partnership's 1994 historical results were accounted for
under SFAS No. 65. If the Partnership had not applied this new
accounting pronouncement in 1995, the Partnership would have
reported net income of approximately $2.1 million or $.06 per
share.
The following table summarizes the Partnership's operating results
for the years ended December 31 (in thousands)*:
<TABLE>
1995 1994
<S> <C> <C>
Net income from servicing $11,403 $8,263
operations
Net income (loss) from (555) 4,506*
production operations
Other investment and interest 4,081 483
income
General and administrative (6,200) (4,405)
expenses
Other expense (5,999) (2,096)
Net Income Before Equity in
Earnings of Affiliates and
Gain on Bulk Sale of Servicing 2,730 6,751
Gain on bulk sale of servicing 9,148 2,957
Equity in earnings of affiliates (254) (374)
Net Income as adjusted* $11,624 $9,334
</TABLE>
* In order to compare the results of 1995 and 1994 production
operations, the net income (loss) from production operations for
the year ended 1994 has been adjusted (by approximately $4.5
million) to recognize the value associated with originations
sold on a servicing retained basis as if SFAS No. 122 had been
applied in 1994. This adjustment is not intended to represent a
full adoption of SFAS No. 122 in 1994 as the results of operations
for servicing have not been adjusted for the change in methodology
associated with evaluating and measuring impairment of MSRs.
The decline in results of operations (after adjusting 1994 to
reflect the effect on production net income of recording SFAS
No. 122 and before gain on bulk sale of servicing and equity
in earnings of affiliates) of approximately $4.0 million
for 1995 as compared to 1994 is primarily attributable to the
following: (i) net income from production operations decreased
by approximately $5.0 million primarily due to the following
items: (a) a $3.0 million decrease in profits arising from a
decline in refinance volume derived from the Partnership's
servicing portfolio; (b) start-up costs incurred associated
with expanding the production operation, (c) duplicate expenses
incurred during the reorganization and consolidation of all
production support functions. These decreases were partially
offset by an increase in production volume. However, 1995's gross
profit margins declined as a result of increased price
competition beginning in the second half of 1994, (ii)
general and administrative expenses increased by approximately
$1.8 million due to one-time nonrecurring reorganization
costs and expenses required to support a larger, more
diverse publicly traded master limited partnership, and
(iii) other expense increased by approximately $3.9 million due
to an increase in interest expense and additional amortization
and depreciation expense associated with the transactions
discussed above. These amounts were partially offset by the
following items: (i) net income from servicing operations
increased by approximately $3.1 million due to bulk servicing
acquisitions and the retention of originated loans sold on a
servicing retained basis, and (ii) other investment and
interest income increased by approximately $3.6 million
due to the unrealized gains of the SMATs investments and CMO
bonds and residual interest portfolio.
Servicing
Net income from servicing increased approximately $3.1 million or
38% for the year ended December 31, 1995 compared to the year
ended December 31, 1994. The increase in the contribution from
servicing primarily resulted from the growth in the servicing
portfolio. The average principal balance of loans serviced for
the year ended December 31, 1995 (based on beginning of the month
totals) increased to approximately $5.3 billion from
approximately $3.3 billion for the same period 1994.
The growth in the servicing portfolio is principally due to the
acquisition of a $1.5 billion bulk servicing portfolio with an
effective acquisition date of August 31, 1995, the acquisition of
the HBT portfolio of approximately $1.1 billion effective April
1, 1995 resulting from the Exchange Transaction, the retention of
approximately $665 million in originated loans sold on a
servicing retained basis, net of the sale of an approximate $493
million bulk servicing portfolio effective January 31, 1995. The
$1.5 billion bulk servicing acquisition was acquired with an
effective acquisition date of August 31, 1995 and a transfer date
of November 1, 1995. As a result, the effects of the acquisition
are reflected for four months during the year ended December 31,
1995. In addition, pursuant to the terms of the acquisition and
interim servicing agreements, the seller was responsible for
servicing the portfolio for the period prior to the transfer
date. The Partnership was obligated to compensate the seller for
performing the servicing obligations during the interim servicing
period. As a result the Partnership did not achieve the
economies of scale normally obtained by acquiring servicing
portfolios until the fourth quarter of 1995
The increases in gross servicing revenues for the year ended
December 31, 1995, as compared to the same period for 1994 was
principally due to the growth in the servicing portfolio.
Total servicing costs, including prepayment costs and provision
for foreclosure losses, grew to approximately $12.7 million for
the year ended December 31, 1995 from $8.7 million for 1994
primarily as a result of the increase in the Partnership's
servicing portfolio.
Amortization of mortgage servicing rights increased to
approximately $8.5 million for the year ended December 31, 1995
from approximately $6.2 million for the same period in 1994, a
net change of $2.3 million. The net change primarily relates to
additional amortization associated with the acquisitions
discussed above, and the increased amortization associated with
the implementation of SFAS No. 122. In addition, in 1995 the
Partnership recorded a valuation allowance of approximately $1.1
million against its mortgage servicing assets. As noted
previously, the Partnership recorded a valuation allowance
against various portfolio risk stratum as a result of a decrease
in interest rates during the fourth quarter causing a decrease in
value of those servicing rights below carrying value. In
accordance with SFAS No. 122, the Partnership may recover all or
a portion of this valuation reserve if the servicing value
increases in subsequent periods.
Production
The principal balance of loans produced for the year ended
December 31, 1995 increased to approximately $1.5 billion from
approximately $1.1 billion for the same period of 1994, an
increase of approximately $.4 billion or 40%. The year ended
December 31, 1994 excluded the production volume of TMC. TMC was
recorded and reported on the equity method of accounting prior to
the consummation of the TMC transaction in March 1995. Included
in the consolidated 1995 production volumes are $.3 billion in
production for TMC for the period from April 1, 1995 to December
31, 1995. Excluding the impact of TMC, the Partnership's volume
increased $.1 billion or 11%.
Net income from production operations decreased by approximately
$5 million (after adjusting 1994 to reflect the effect on
production net income of recording SFAS No. 122) for 1995 as
compared to 1994 primarily due to the following. (1) A $3 million
decrease in profits arising from a decline in refinance volume
in 1995 as compared to 1994 derived from the Partnership's
servicing portfolio. This type of refinance volume is highly
profitable and results in the recognition of higher gross profit
margins than margins realized on other types of origination volume,
thus resulting in reduced production net income. (2) The increase
from December 31, 1994 to December 31, 1995 of approximately $187
million in mortgage loans held for sale which has a negative
impact of reducing earnings for the costs associated with
originating/acquiring the loans without the recognition of the
gain realized from the sale of the loan. (3) The Partnership
began a reorganization and consolidation of all production
support functions which consisted of centralizing and eliminating
duplicate production support functions such as accounting,
treasury, secondary marketing, shipping, and quality control.
The reorganization began August 31, 1995 and continued through
the end of 1995. The continued reorganization process will
result in the elimination of duplicate functions improving future
profitability of the production division of the Partnership.
(4) The Partnership has established a goal to enhance its
production operations through geographic expansion of its
wholesale operations and establish a larger presence in the
retail market. During the latter part of 1995, the Partnership
incurred costs associated with these expansion efforts without
realizing the increased revenue associated with the increased
origination volume thereby having a negative impact in the net
income generated by the production operation. The Partnership
should benefit from its expansion efforts in 1996. (5) Towards
the end of the first quarter of 1994, mortgage interest
rose dramatically and production volumes declined sharply. The
production volumes led to a period of fierce price competition
for wholesale mortgage bankers resulting in overall lower profit
margins recognized on loans originated. This pricing competition
has continued through 1995.
Other Investment and Interest Income
In conjunction with the Exchange Transaction the Partnership
acquired other mortgage related trusts (SMATs) collateralized by
FNMA mortgage-backed securities with coupon rates ranging form 9%
to 9.50%. As of the date of Exchange Transaction the fair market
value of these SMATs was estimated to total approximately $700
thousand. As of December 31, 1995 the fair market value of the
SMATs was approximately $3.1 million with underlying collateral
balances totaling in excess of approximately $51.0 million.
During 1995 the Partnership recognized an unrealized gain of $2.4
million associated with its investments in SMATs.
Additionally, during the year ended December 31, 1995, the
Partnership recognized unrealized gains in its CMO bond and
residual interest portfolio of approximately $.3 million and net
income of approximately $.5 million.
General and Administrative Expenses
General and administrative expenses increased to approximately
$6.2 million from $4.4 million for the year ended December 31,
1995 as compared to the same period of 1994. The increase in
general and administrative expenses can be attributed to a number
of factors including the recognition of transactional costs
associated with the completion of the transactions previously
discussed above and one time non-recurring expenses associated
with the reorganization and consolidation of the Partnership's
mortgage banking operations into one entity. In addition, the
Partnership's general and administrative expenses have increased
due to the functions required to maintain and support a larger
more diverse publicly traded master limited partnership.
Other Expense Items
The increase in net other income items is attributed to an
increase in term interest and other interest expense associated
with the completion of the Partnership's term facility in August
1995 and additional amortization and depreciation expense. The
remaining net increase in other items is primarily attributable
to the increase in depreciation and amortization of excess cost
over identifiable tangible and intangible assets acquired, as
well as other interest expense for interest on borrowings during
the year to Harbourton.
Equity in Earnings of Affiliates
Equity in earnings of affiliates for the period from June 30,
1994 to December 31, 1994, and from January 1, 1995 to March 31,
1995, represents the Partnership's 50% interest in TMC. As
previously discussed, prior to March 31, 1995, the Partnership
reported its interest in TMC on the equity method of accounting.
Subsequent to March 31, 1995 TMC's operations are consolidated
and included in the consolidated operating results of the
Partnership.
Revenues and Expenses 1994 Compared to 1993
Net income for the year ended December 31, 1994 totaled
approximately $4.8 million or $.16 per unit (not adjusted for
SFAS No. 122), a decrease of approximately $6.7 million or
$.22 per unit over the approximately $11.5 million or
$.38 per unit earned during the year ended December 31, 1993.
Servicing
Net income from servicing increased approximately $3.9 million
for the year ended December 31, 1994 compared to the year ended
December 31, 1993. The increase in the contribution from
servicing primarily resulted from the growth in the servicing
portfolio. The principal balance of loans serviced for the year
ended December 31, 1994 was approximately $5.2 billion compared
to the principal balance of loans serviced for the year ended
December 31, 1993 of approximately $2.6 billion. The growth in
the servicing portfolio is principally due to the acquisition of
three bulk servicing portfolios totaling approximately $2.0
billion of GNMA servicing with an effective transaction date of
June 30, 1994.
Accordingly, the increases in gross servicing revenues and total
servicing costs, including provision for foreclosure loses and
amortization of mortgage servicing rights, for the year ended
December 31, 1994, as compared to the same period for 1993 was
principally due to the growth in the servicing portfolio.
Prepayment costs and interest curtailments decreased from the
year ended December 31, 1993 to the corresponding period in 1994
due to an increase in interest rates for the period thereby
reducing the volume of refinancings and payoffs.
Servicing revenue increases in 1994 compared to 1993 were offset
by a reduction in subservicing fees from affiliates of
approximately $683 thousand. This reduction was primarily to the
sale of an affiliate's servicing portfolio of approximately $670
million in underlying mortgage loan principal balances.
Accordingly, the Partnership's subservicing arrangement with its
affiliate was terminated at that date.
Production
Net income from production operations for the year ending
December 31, 1994 was approximately $6 thousand (not adjusted for
SFAS No. 122) compared to net income of approximately $13.8
million for the year ended December 31, 1993.
The principal balance of loans produced for the year ended
December 31, 1994 decreased to approximately $1.0 billion from
approximately $1.8 billion for the same period of 1993, a
decrease of approximately $.8 million or 80%. The decrease in
production volume from 1993 to 1994 was principally due to an
increase in interest rates during the periods. The decrease in
production net income is primarily related to this decline in
production volume as well as increased pricing competition in the
market.
Equity in Earnings of Affiliates
Equity in earnings of affiliates for the period from June 30,
1994 to December 31, 1994, represents the Partnerships 50%
interest in TMC. TMC was contributed to the Partnership on June
30, 1994.
Liquidity and Capital Resources
General
The new credit facility, coupled with the $9.0 million debt to
equity conversion provided the Partnership with additional
liquidity to further expand its servicing portfolio and acquire
other investments. In addition, the Partnership may from time to
time utilize short-term subordinated borrowings from Harbourton
to fund short-term liquidity requirements. As of December 31,
1995, all of the Partnership's available liquidity had been used
to fund mortgage loans held for sale.
Subsequent to December 31, 1995, the Partnership received
approximately $10 million of subordinated borrowings from
Harbourton which was utilized to reduce its borrowings under its
warehouse facility.
The Partnership's remaining sources and uses can be categorized
into Mortgage Servicing Portfolio and Mortgage Loan Production.
Mortgage Servicing Portfolio
A source of liquidity and cash flow available to the Partnership
is its owned portfolio of servicing rights on mortgage loans, net
of its servicing term loan, with underlying principal balances
aggregating approximately $6.0 billion at December 31, 1995.
Currently, there is a liquid and active market for the sale and
acquisition of servicing rights. The Partnership has term loans
secured by its mortgage servicing portfolio. Principal and
interest on the term loans is paid monthly.
The Partnership's liquidity is affected by the level of loan
delinquencies and prepayments due to the servicer's advance
requirements on the loans it services. Under certain types of
servicing contracts, particularly contracts to service loans that
have been pooled or securitized (primarily GNMA and FNMA
mortgage-backed securities), the servicer must forward all or
part of the scheduled payments (principal and interest) on the
specified remittance day to the security holder (owner of the
loan) even though payments may not have been received from the
mortgagor. In accordance with the terms of the servicing
contracts, servicers may offset the remittance day principal and
interest ("P&I") advances against funds collected but not yet
required to be remitted to the security holders (including
prepayments and early payments). The servicer's P&I advance
requirement is reduced during high pay-off periods due to the
amount of prepayment funds available to offset the required
delinquent payment advance. However, during periods of reduced
prepayments, the advance requirement of the servicer is
increased. The servicer's P&I advance, if any, is typically
recovered within 15 days, through mortgagor payment receipts
which replenish the offsetting advance within the related
custodial account. The Partnership maintains a revolving line of
credit to provide necessary liquidity to meet such advances.
These lines of credit have been sufficient to meet the
Partnership's liquidity requirements relating to these items.
During 1995, the Partnership has repurchased defaulted loans and
resold them to affiliated parties, under a repurchase/buyout and
sale program with such affiliates, and repurchased additional
defaulted loans prior to foreclosure sale and sold the loans on a
servicing retained basis to such affiliated parties. The
servicing contract does not require the Partnership to advance
payments to the investor (the security holder) if the payments
are not received from the mortgagor or from the guarantor or
insurer, therefore, significantly reducing remittance day advance
requirement.
The Partnership is also required as a servicer to fund advances
for mortgage and hazard insurance and tax payments on the
scheduled due date even though sufficient escrow funds may not be
available. The Partnership's sources of liquidity to meet these
advance requirements are internally generated operating cash
flow, its existing lines of credit, and additional defaulted loan
repurchase and sale transactions with affiliated parties as
discussed above.
Mortgage Loan Production
One of the Partnership's other primary financing requirement is
the financing of its mortgage loan originations and purchases
until funded by secondary market investors and the cost of its
loan originations. The Partnership finances its short-term loan
funding requirements principally through warehouse lines of
credit. This financing requirement begins at the time of loan
closing and extends until the loan is sold into the secondary
market. Until such sale into the secondary market, the mortgage
loan is pledged to secure the Partnership's borrowing under the
warehouse facility. At December 31, 1995, the maximum amount of
borrowing available under the existing warehouse facility was
$200 million.
During the fourth quarter of 1995, the Partnership's growth in
production volume exceeded the Partnership's initial
expectations, resulting in liquidity requirements in excess of
its $200 warehouse facility. In order to meet the additional
liquidity requirements, the Partnership entered into a letter
agreement with its existing lenders, whereby the Partnership was
allowed to advance an additional $25 million under the warehouse
facility. Pursuant to the terms of the letter agreement, the
Partnership was permitted to advance under the letter agreement
up to the unused portions of the $15 million servicing
acquisition line of credit and the $15 million principal and
interest advance line not to exceed $25 million. Advances made
pursuant to the letter agreement reduce the availability under
the respective lines of credit. The letter agreement expired
January 31, 1995, at which time the Partnership's warehouse
facility was increased to a maximum availability of $300 million.
The Partnership expects, although there can be no assurance, that
this facility will continue to be available in the future. The
warehouse facility includes various covenants as well as certain
leverage ratio requirements and restrictions on dividends and
investments.
In addition, the decision to sell mortgage loans servicing
retained versus servicing released influences the Partnership's
liquidity. When mortgage loans are sold on a servicing released
basis, the investor pays the Partnership for the value of the
servicing related to the mortgage loan, thereby increasing the
Partnership's cash flow. Alternatively, when mortgage loans are
sold on a servicing-retained basis, the investor does not pay the
Partnership for the value of the servicing related to the
mortgage loan, thereby decreasing the Partnership's initial cash
flow.
Interest Rate Volatility
The Partnership's results of operations are affected by changes
in interest rates. During periods of declining interest rates,
servicing is adversely impacted by increases in the prepayments
of mortgage loans. The adverse impact on the servicing portfolio
from declining interest rates may be offset by a positive impact
on mortgage production operations due to increased mortgage loan
origination. In comparison, during periods of rising interest
rates, mortgage prepayments decline causing mortgage loan
origination volume to decrease, and conversely the value of the
servicing portfolio is enhanced due to the lower number of
payoffs causing the expected income stream from servicing to
lengthen.
More specifically, lower interest rates and the resulting
increased run-off (the decline in mortgage loans serviced from
increased payoffs) have the following significant negative
impacts on servicing:
1. Reduction in the value of mortgage servicing rights.
Servicing values decrease due to a reduction in the
expected future net income associated with the
declining servicing portfolio.
2. Increased amortization and impairment write-downs. An
extended period of higher than expected prepayments
will cause an increase in the amount of amortization
and/or impairment adjustments to be recognized on
mortgage servicing rights due to a decline in the
estimated fair value.
3. Reduction in the benefit rate from custodial balances.
Lower rates reduce the compensating balance benefit
derived from escrows associated with the serviced
mortgage loans. The reduced benefit rate is somewhat
offset by increased custodial balances due to an
increase in the principal and interest payoff balances
held by the servicer, and an overall reduction in the
Partnership's borrowing cost.
4. Increase in prepayment costs. Prepayment costs
increase due to the increased volume of loans
prepaying.
5. Increase in servicing costs. Servicing costs increase
due to increased operating costs associated with
administering the number of payoffs.
Conversely, periods of rising interest rates have a positive
effect on the servicing portfolio through a reduction in the
overall run-off of the servicing portfolio, which (1) increases
the value of the servicing rights, (2) decreases the amortization
of purchased servicing rights, (3) increases the benefit from
custodial balances, and (4) decreases the prepayment costs and
servicing costs associated with loan prepayments.
Seasonality
The mortgage loan origination business is generally subject to
seasonal trends. The trends reflect the general pattern of sales
and resales of homes, although refinancings tend to be less
seasonal and more closely related to changes in interest rates.
These sales typically peak during the spring and summer seasons
and decline to lower levels from mid-November through February.
Item 8. Financial Statements and Supplementary Data
The information required by this item is incorporated herein by
reference from Part IV, Item 14(a) (1) and (2).
Item 9. Changes in and Disagreements with Accountants on
Accounting and
Financial Disclosure
Not Applicable.
PART III
Item 10. Directors, Executive Officers, Promoters and Control
Persons of the
Registrant
The directors and executive officers of the General Partner are
as follows:
Name Position
David W. Mills Director and Chairman of the Board
Jack W. Schakett Director and Chief Executive Officer
Rick W. Skogg Director, President and Chief Operating
Officer
Paul A. Szymanski Executive Vice President, Chief
Financial Officer and Secretary
Leo C. Trautman, Jr. Executive Vice President
Kevin Ryan. Senior Executive Vice President of
HMCLP, President - East Region Production of HMCLP
Cynthia B. Sample Senior Executive Vice President of
HMCLP, President - West Region Production of HMCLP
Robert M. Bodell Executive Vice President of HMCLP,
Director of Risk Management of HMCLP
Robert Hermance* Director
Ronald Blaylock* Director
Andrew S. Winokur Director
* Denotes Independent Directors
The ages and principal occupations for at least the last five
years of the persons named in the foregoing table is as follows:
David W. Mills--Director and Chairman of the Board since August
1994. Mr. Mills, 48, has been the Chief Executive Officer and
sole shareholder of HGC since 1990. From 1986 to the present,
Mr. Mills has been involved in the business of reviewing,
structuring and at times arranging for the financing of the
acquisitions and dispositions of businesses. From 1986 to 1988,
he was associated with Cambrent Financial Group and from 1988 to
the present, he has been the Chairman of the Board and Chief
Executive Officer of Mills & Lynn Enterprises.
Jack W. Schakett, CPA--Director and Chief Executive Officer
(employed by Harbourton) since August 1994. Mr. Schakett, 43,
joined Harbourton in April 1993 as Chief Operating Officer and
presently serves as its Chief Executive Officer. Prior to
joining Harbourton, Mr. Schakett spent 18 years at Ernst & Young,
where he was National Director in charge of Ernst & Young's
mortgage banking practice and local office director of real
estate. Mr. Schakett is also an executive officer of Harbourton
Reassurance Inc., a reinsurance company controlled by Mr. Mills.
Rick W. Skogg--Director, President and Chief Operating Officer
since August 1994. Mr. Skogg, 34, has been the President and
Chief Executive Officer of HMCLP since January 1994 and was the
Executive Vice President and Chief Operating Officer of HMCLP
from November 1991 to January 1994. From 1986 to 1991, he served
in various capacities (including Executive Vice President) of
Platte Valley Mortgage Corporation.
Kevin Ryan--Senior Executive Vice President of HMCLP and
President - East Region Production of HMCLP. Mr. Ryan, 42, had
been the President of TMC's general partner from December 1986
through July 31, 1995 at which time TMC was merged into HMCLP.
Cynthia B. Sample--Senior Executive Vice President of HMCLP and
President - Western Region Production of HMCLP, Director of
General Partner from August 1994 through March 1996. Ms. Sample,
45, had been President and Chief Executive Officer of Western
from December 1987 through July 31, 1995, at which time Western
was merged into HMCLP.
Robert M. Bodell -- Executive Vice President of HMCLP, Director
of Risk Management of HMCLP since February 1995. Mr. Bodell, 45,
has been Executive Vice President and Director of Risk Management
of HMCLP since joining the Partnership in February of 1995.
Prior to that, Mr. Bodell served Franklin Mortgage Capital
Corporation as Executive Vice President of Secondary Marketing
(1988 to 1995) and East Coast Wholesale Production Manager (1988-
1989).
Paul A. Szymanski, CPA--Executive Vice President, Chief Financial
Officer and Secretary since August 1994. Mr. Szymanski, 34, has
been the Executive Vice President and Chief Financial Officer of
HMCLP since March 1994. Since January 1, 1996, Mr. Szymanski has
also served as an executive officer of Harbourton. From June
1991 through March 1994, he was Senior Vice President of Finance
of HMCLP. Prior to joining HMCLP, he spent four years
(1987-1991) in the national mortgage banking practice at Ernst &
Young.
Leo C. Trautman, Jr., CPA--Executive Vice President since August
1994. Mr. Trautman, 41, has been the Executive Vice President,
Loan Administration, for HMCLP since February 1994. Prior to
joining HMCLP, he spent five years (1989-1994) as President and
Chief Executive Officer of Colorado Springs Savings and Loan
Association.
Robert Hermance--Independent Director since August 1994.
Mr. Hermance, 63, is a retired partner of Ernst & Young. He
joined Ernst & Young in 1957, was admitted as a partner in 1968,
and served as the Managing Partner of the firm's Houston office
from 1980 to 1993. From 1971 to 1977, he served in the firm's
national office as Director of Services to the Real Estate
Industry. He has served on the American Institute of CPA's Real
Estate and Real Estate Investment Trusts Committees and on its
Mortgage Banking Task Force.
Ronald E. Blaylock--Independent Director. Mr. Blaylock, 35, has
been the President and Chief Executive Officer of Blaylock &
Partners, L.P., an investment banking firm in New York, New York,
since October 1993. From April 1992 to October 1993, he was an
Executive Vice President at Utendahl Capital Partners, a
broker-dealer located in New York, New York. From 1986 to 1992,
he was employed by Paine Webber as a First Vice President. Mr.
Blaylock is a member of the board of trustees of Georgetown
University.
Andrew S. Winokur--Director since March 1996. Mr. Winokur, 37,
has been a Managing Director of Harbourton Enterprises since
November 1994. From April 1989 to November 1994, Mr. Winokur was
President of AVM of California, a consultant/advisor to Wall
Street firms and fixed-income money managers. Mr. Winokur is
also Chief Executive Officer at Harbourton Reassurance, Inc., a
reinsurance company controlled by Mr. Mills.
The Independent Directors
The By-Laws of the General Partner require the General Partner to
have at least three members of the Board that are neither an
officer, director or employee of any affiliate of the General
Partner, nor an officer or employee of the General Partner, nor
any relative of the foregoing (the "independent directors").
Although the independent directors are non-affiliated, they are
not necessarily completely independent of the General Partner or
its affiliates. Each of the independent directors is elected to
a term of one year. Any approval of the independent directors
will be by majority vote, and any such approval is referred to in
this Form 10-K as a "consent of the independent directors." The
General Partner generally intends to rely upon the independent
directors for advice from time to time regarding potential
conflicts of interest and broad Partnership business policies.
Except as specifically provided in the Partnership Agreement,
however, the General Partner is not obligated to solicit the
advice of the independent directors with respect to any
Partnership matter, nor is it obligated to follow any
recommendation of the independent directors. The Partnership
Agreement provides that action in accordance with a
recommendation of the independent directors will be a complete
defense to any claim against the person asserting the invalidity
or negligence of the action or asserting that the action
constituted a breach of fiduciary duty.
As the sole current shareholder of the General Partner,
Harbourton may remove any of the independent directors for cause
(as set forth in the By-Laws of the General Partner) if it
believes that removal is in the best interests of the
Partnership. The remaining independent directors will fill any
vacancy caused by the removal or withdrawal of any independent
director.
The Partnership is authorized to reimburse the independent
directors for any expenses incurred in connection with their
activities and to pay the independent directors such compensation
as the General Partner deems appropriate. In connection
therewith, the Partnership has procured liability insurance for
the members of the board of directors of the General Partner.
All of the directors of the General Partner serve for a term of
one year or until their respective successors are elected at the
annual meeting of shareholders of the General Partner following
the expiration of such terms, and the executive officers serve at
the discretion of the Board.
Directors and executive officers of the General Partner are
required to devote only so much of their time to the
Partnership's affairs as is necessary or required for the
effective conduct and operation of the Partnership's business.
However, Messrs. Skogg, Sample, Ryan, Bodell, and Trautman as
employees of the Partnership's subsidiaries shall devote
substantially all of their business efforts to the Partnership's
affairs.
Directors' Compensation
Currently, each independent director receives an annual fee of
$12,000 and $1,000 per regular meeting attended, plus travel
costs.
Item 11. Executive Compensation
The following table summarizes salaries, bonuses paid, and other
compensation through December 31, 1995 for services rendered by
the named executive officers employed by the Partnership in all
capacities to the Partnership and its subsidiaries during 1995.
<TABLE>
SUMMARY COMPENSATION TABLE(1)
Long-Term
Annual Compensation Compensation
Securit
Other ies All
Annual Underly Other
Salary Bonus Compens ing Compens
Name Year ($) ($)(2) ation Options ation
(#) ($)(3)
<S> <C> <C> <C> <C> <C> <C>
Rick Skogg 1995 200,000 125,000 -- 126,000 9,857
Cindy Sample 1995 200,000 150,000 -- -- 3,294
Kevin Ryan 1995 202,606 -- -- -- 12,905
Bob Bodell 1995 153,000 60,000 100,000 110,000 3,732
Paul Szymanski 1995 122,400 45,000 10,707 63,000 4,786
</TABLE>
(1) Summary compensation for all executive officers as a group
(8 persons) for 1995 was salary $1,168,016; bonus $410,000;
other annual compensation $111,984; number of stock options
326,500; and all other compensation $51,701.
(2) Other annual compensation for Mr. Bodell and Mr. Szymanski
consists of relocation costs.
(3) All other compensation consists of the Partnership's
matching contributions to the 401K retirement plan and life
insurance premiums paid by the Partnership on behalf of the
named executive.
The Partnership adopted a Preferred Unit Option Plan (the "Plan")
effective September 28, 1995 (amended October 15, 1995) under
which options to acquire Preferred Units and Distribution
Equivalent Rights may be granted to key management personnel of
the Partnership and its Affiliates. The Board of Directors of
the General Partner (the "Board") is authorized to grant Options
not to exceed 1,000,000 Preferred Units in the aggregate and
Distribution Equivalent Rights not to exceed 3,000,000 Preferred
Units in the aggregate.
The Board or a delegated committee of two or more members of the
Board is responsible for administering the Plan subject to the
Plan provisions. The Board has complete authority and discretion
to interpret all provisions of the Plan; to prescribe the form of
option grants; to adopt, amend, and rescind rules and regulations
pertaining to the administration of the Plan.
The following tables present, for each of the named executive
officers of the Partnership, the aggregate amount of Preferred
Units and Distribution Equivalent Units subject to Awards granted
during the period specified and the number of
exercisable/unexercisable options at December 31, 1995.
<TABLE>
OPTIONS GRANTED IN 1995
Potential
Realizable
Value at
Assumed
Annual Rates
Individual Grants of
Stock Price
Appreciation
for
Option
Term(4)
Number of
Securitie % of Total Exercise
s Options Price
Underlyin Granted to per Expirati 5% 10%
Name g Employees Preferre on ($) ($)
Options in Fiscal d Unit Date
Granted Year (3)
(1) (2)
<S> <C> <C> <C> <C> <S> <C>
Rick 126,000 38.5% 1.83 9/28/2005 -- $79,300
Skogg
Cindy -- -- -- -- -- --
Sample
Kevin -- -- -- -- -- --
Ryan
Bob 110,000 33.6% 1.83 9/28/2005 -- 69,230
Bodell
Paul 63,000 19.2% 1.83 9/28/2005 -- 39,650
Szymanski
</TABLE>
(1) For each individual, the options shall become exercisable in
three equal installments on the first, second and third
anniversaries of the grant date. The Board in its
discretion may accelerate the time at which any option may
be exercised unless such acceleration will cause profits of
the Participant to be recoverable by the Partnership under
Section 16(b) of the Securities Exchange Act.
(2) On September 28, 1995 the Partnership granted 326,500
options to its employees at an exercise price of $1.83 per
unit, which approximated market on that date. The executive
officers as a group received 100% of these options.
(3) Amount stated below represents the initial exercise price
for each option. The exercise price of the option will
automatically increase seven percent on each anniversary of
the grant date.
(4) Use of the assumed stock price appreciation of 5 percent and
10 percent each year for ten years is required by the
Securities and Exchange Commission Regulation S-K. No
valuation method can accurately predict future stock price
or option values because there are many unknown factors such
as interest rates, stock price volatility, future dividend
yield and employment for the entire stock option period. If
the stock price does not increase, the options will have no
value.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
(a) Security ownership of certain beneficial owners.
<TABLE>
The following table sets forth information regarding the security
ownership of each person (or "group" within the meaning of
Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended) who is known to the Partnership to have beneficially
owned on March 20, 1995 more than five percent of the outstanding
equity securities in the Partnership and the security ownership
of the members of the Board and the executive officers of the
General Partner, individually and as a group.
Name of Amount and Nature of Percent
Title of Class Beneficial Owner Beneficial Ownership of Class
<S> <C> <C> <C>
Preferred David W. Mills 4,470,250 10.6%(1)
Units
Rick W. Skogg 42,000 -- (2)
Kevin Ryan 820,828 2.0%(3)
Bob Bodell 20,000 -- (2)
Lee Trautman, Jr. 6,900 -- (2)
All directors and
executive
officers as a group 5,359,978
(10 persons)
</TABLE>
(1) Mr. Mills is the sole director and shareholder of HGC, which
owns 85,743 Preferred Units of the Partnership and is the
managing general partner of PVSC, the record owner of the
24,947,132 Preferred Units. HGC is also the managing
general partner of Harbourton, the sole limited partner of
PVSC and the owner of 9,972,984 Preferred Units. On the
basis of his ownership of HGC and his direct and indirect
interest in Harbourton and PVSC, Mr. Mills has an indirect
pecuniary interest in approximately 4,470,250 Preferred
Units of the Registrant. Mr. Mills' address is 1205 Pacific
Avenue, Suite 203, 2nd Floor, Santa Cruz, California 95060.
(2) Less than 1%.
(3) Kevin Ryan is a Senior Executive Vice President of HMCLP and
President-East Region Production of HMCLP. Mr. Ryan's
address is 7926 Jones Ranch Drive, Suite 700, McLean,
Virginia 22102. The number of units above include 812,537
Preferred Units owned by TMC Mortgage Corporation with
respect to which Mr. Ryan exercises voting and investment
control.
Item 13. Certain Relationships and Related Transactions
The General Partner
Pursuant to the HBT Agreement (at times referred to as the
Partnership Agreement), the General Partner manages the business
and affairs of the Partnership and has exclusive authority to act
on behalf of the Partnership (subject to certain limitations set
forth in the Partnership Agreement). The General Partner has a
broad range of powers comparable to those held by the directors
and officers of a corporation, including the power to determine
the amount of Partnership distributions, to hire employees, and
to determine executive compensation. Harbourton, as the sole
shareholder of the General Partner, has the sole right to elect
the directors of the General Partner.
Pursuant to the Partnership Agreement, the General Partner may be
removed for "cause" as the general partner of the Partnership by
a majority vote of the Preferred Units. Pursuant to the
Partnership Agreement, "cause" generally means willful and
continued neglect of or failure to substantially perform the
duties and obligations of the General Partner or the engaging in
conduct which constitutes gross negligence, willful or wanton
misconduct or illegal activity. Cause does not include bad
judgment or negligence. In addition, pursuant to the Partnership
Agreement, the General Partner may only be removed without cause
by a vote representing 80% or more of the outstanding Preferred
Units of the Partnership. Because PVSC, Harbourton and HGC are
the owners approximately 83.54% of the issued and outstanding
Preferred Units, the ability to remove the General Partner,
either with or without cause, is effectively eliminated.
Compensation of General Partner
The General Partner receives an annual management fee equal to
1/2 of 1% of the initial investment of the Preferred Unitholders
(the "Base Management Amount). Such fee increases
proportionately to reflect the raising of additional capital
through the subsequent issuance of Units or other interests in
the Partnership. These fees are not subject to reduction in the
event that the Partnership sustains losses. Prior to 1995, HMCLP
and Western paid management fees to its General Partner of
approximately $400 thousand and $360 thousand for the years ended
December 31, 1994 and 1993, respectively.
The General Partner has contracted with Harbourton whereby
Harbourton performs all of the management functions.
Accordingly, the General Partner recognized management fees and
allocable expenses (see discussion below) due to Harbourton
totaling approximately $420 thousand and $375 thousand,
respectively for the year ended December 31, 1995.
Partnership Expenses
The Partnership bears all of its operating, marketing and
business development fees and expenses, all transaction fees and
expenses in connection with the acquisition and sale of mortgage
assets, mortgage-related securities and residual cash flows, all
Partnership investor servicing, all direct fees and expenses
incurred in connection with the issuance of mortgage-related
securities, all computer system expenses to develop and operate
tracking and inventory control and the Partnership bases, and all
legal, accounting and liability insurance costs and fees. The
Partnership may also bear any other expenses as may be approved
by the board of directors of the General Partner from time to
time. The General Partner and its affiliates shall be reimbursed
for any of the foregoing expenses that it incurs on behalf of the
Partnership.
The General Partner is reimbursed for the portion of its expenses
allocable to its activities in connection with the Partnership's
business. The General Partner is required to determine the
amount of such expenses that are allocable to the Partnership in
a reasonable manner. Allocable expenses include: (i) allocable
share of office rent and related facilities; (ii) allocable share
of cost of equipment necessary to the conduct of the
Partnership's business; (iii) allocable share of the salaries and
other compensation expenses of employees primarily engaged in the
conduct of the Partnership's business; and (iv) allocable share
of other administrative expenses, including travel, accounting
and similar costs.
The maximum aggregate amount of allocable expenses for which the
Partnership is obligated to reimburse the General Partner in a
fiscal year is an amount equal to 1.0% of the initial investment
of the Preferred Unitholders. The amount of such reimbursement
will increase proportionately to reflect the raising of
additional capital through the subsequent issuance of Units or
other interests in the Partnership. Since initial investment is
not a reflection of the Partnership's present net asset or book
value, the cap on expenses for which the General Partner may be
reimbursed will not reflect changes in the Partnership's net
asset or book values (other than commensurate changes to reflect
the issuance of additional Units). The Partnership recognized
approximately $375 thousand for such allocable expenses incurred
for the year ended December 31, 1995.
Other Related Transactions
During the third quarter of 1995, Harbourton and its affiliates
converted $9.0 million of notes receivable from the Partnership
into equity in the Partnership. In connection with the debt to
equity conversion, Harbourton and its affiliates received
approximately 4.9 million of Series B Preferred Units having
generally the same rights as the outstanding Preferred Units.
During the quarter ended December 31, 1995, the Preferred
Unitholders voted to convert the Series B Units to Preferred
Units at a conversion ratio of one Preferred Unit for each Series
B Unit. Following the consummation of the Western transaction
and the debt to equity conversion, Harbourton and its affiliates
own approximately 83.5% of the Preferred Units of the
Partnership.
Western was a party to a management services agreement with
Harbourton and paid Harbourton approximately $300 thousand and
$360 thousand in management fees under the management services
agreement during each year ended December 31, 1994, and 1993,
respectively. HMCLP was also a party to a management agreement
with Harbourton and paid management fees of approximately $100
thousand during the year ended December 31, 1994.
During August 1993, Western received a promissory note for
approximately $500 thousand from Harbourton as consideration for
Harbourton receiving a 50% participation interest in an interest-
only security. The note accrued interest at a rate of 5.5%, and
was due on December 31, 1995. Harbourton was entitled to
receive, as payment from Western, 50% of monthly cash flows that
were distributed to Western related to ownership of the interest-
only security (net of any interest due Western, as holder of the
promissory note given by Harbourton as consideration for its
participation interest). Harbourton was also entitled to
receive, as payment from Western, 50% of sale or distribution
proceeds net of 50% of any costs incurred by Western to sell or
otherwise dispose of the security and net of any interest and/or
principal that remained payable to Western under the terms of the
promissory note given by Harbourton as consideration for its
participation in the security. Further, on September 30, 1995,
Harbourton exchanged its 50% interest in its interest-only
security with the Partnership in partial settlement of the note
payable to the Partnership.
On August 21, 1992, Western issued to certain of its officers
notes related to limited partnership interests. The notes
accrued interest at prime plus 1% and had a scheduled maturity
date of August 21, 1999. The notes required mandatory
prepayments for bonuses and distributions paid in future periods
in accordance with the terms of the individual notes and
respective employment agreements. Effective January 1, 1995,
management exchanged their interests in Western for limited
partnership interests in Harbourton. This transaction was
accounted for as a purchase of Western's limited partnership
interest by Harbourton at fair value. The fair value of the
interests in Harbourton exceeded management's basis by
approximately $627 thousand. In accordance with Harbourton's
established accounting policy, the excess fair value was "pushed-
down" to Western. Accordingly, the transaction resulted in a
write-up of purchased servicing rights and excess costs over
identifiable tangible and intangible assets of $389 thousand and
$238 thousand, respectively.
Effective April 1, 1992, HMCLP entered into a Loan Purchase
Agreement on an assignment of trade basis with Platte Valley
Mortgage Corporation ("PVMC"), an affiliate of the Partnership.
The agreement provided for the assignment of specific loans
produced by PVMC on a monthly basis to HMCLP. In accordance with
the terms of the agreement, HMCLP purchased loans from PVMC at an
average rate of 102.45% of the face value of such mortgage loans,
for 1993. Effective July 1, 1993, HMCLP assumed PVMC's
production operations and, accordingly, this agreement was
terminated. The servicing rights generated from the loans
acquired from PVMC have been accounted for as OMSRs (prior to the
adoption of SFAS No. 122). As a result, all costs associated
with the origination of the OMSRs have been expensed in the
period that the underlying loans were sold.
HMCLP subserviced loans on behalf of PVMC in accordance with the
terms of a Flow Loan Subservicing Agreement dated April 1992.
This agreement provided for the payment of a subservicing fee in
the amount of $6.67 per month per loan serviced. As of December
31, 1993, PVMC's portfolio totaled 9,981 loans with an unpaid
principal balance of approximately $670 million. On April 30,
1994, PVMC was party to a Purchase and Sale Agreement selling its
servicing rights in GNMA loans to an unrelated third party, with
a sale date of April 30, 1994, and a transfer date of October 4,
1994. HMCLP entered into an interim servicing agreement with the
purchaser for the servicing rights sold by PVMC until the
transfer date of October 4, 1994.
At December 31, 1994, HMCLP had certain notes receivable and
notes payable due from or to PVSC or PVMC, which were due on
demand and accrued interest at 2% above the prime rate.
HMCLP has a working capital subordinated debt line with
Harbourton that was subordinate to all other loans with banks.
The line of credit bore interest at rates ranging from prime to
prime plus 2% (10.50% at December 31, 1994 and 8.00% at December
31, 1993). Interest paid to Harbourton for the years ended
December 31, 1995, 1994, and 1993, totaled $438 thousand,
$138 thousand and $8 thousand, respectively.
The Partnership has entered into transactions pursuant to which
it repurchases delinquent loans from GNMA pools which it services
and resells such loans on a servicing retained basis to Santa
Cruz Partners, Skillman Partners, and Harbourton Reassurance,
Inc., affiliates of the Partnership and Harbourton. As of
December 31, 1995 and December 31, 1994, loans with unpaid
principal balances totaling approximately $158.5 million and
$117.3 million were purchased out of securitized pools and sold
to these affiliates. These loans are being serviced on behalf of
the affiliated companies. The associated mortgage servicing is
reflected in the Serviced for Affiliates portion of the
Partnership's servicing portfolio. Such transactions are
expected to benefit the Partnership by reducing the Partnership's
related foreclosure loss through the reduction of the pass-
through rate due to the investor (owner of the loan). The
reduction in foreclosure loss reserve requirement is reflected as
a gain on sale of defaulted loans to affiliates in the
accompanying consolidated financial statements. In addition, the
Partnership's advance requirement for its GNMA servicing will be
reduced as the servicing contract with the affiliates is
actual/actual as opposed to GNMA's scheduled/scheduled
requirement.
Through the ordinary course of business, the Partnership acquires
mandatory forward commitments to sell whole loans and mortgage
backed securities through a dealer, whose owners also own less
than an aggregate 5% limited partnership interest in Harbourton.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) (1) Financial Statements and Supplementary Data
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1995 and 1994
Consolidated Statements of Operations for the years
ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the years
ended December 31, 1995, 1994 and 1993
Consolidated Statements of Partners' Capital for the
years ended December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
No supplemental financial data schedules specified by Item
302 of Regulation S-K are presented as the requirements are
either not applicable or the data required to be set forth
therein are included elsewhere in the Accounting Financial
Statements.
(2) Exhibits
(b) No reports on Form 8-K were filed by the Partnership
during the last quarter of the year ended December 31,
1995.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Harbourton Financial Services L.P.:
We have audited the accompanying consolidated balance sheets of
Harbourton Financial Services L.P. and subsidiaries as of
December 31, 1995 and 1994, and the related consolidated
statements of operations, cash flows and partners' capital for
each of the three years in the period ended December 31, 1995.
These consolidated financial statements are the responsibility of
the Partnership's management. Our responsibility is to express
an opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform an 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 financial position
of Harbourton Financial Services L.P. and subsidiaries as of
December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted
accounting principles.
As explained in Notes 2 and 4 to the consolidated financial
statements, effective January 1, 1995, the Partnership changed
its method of accounting for mortgage servicing rights.
Denver, Colorado
March 29, 1996.
<TABLE>
HARBOURTON FINANCIAL SERVICES L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31
(AFTER CORPORATE REORGANIZATION -- NOTE 1)
(in thousands)
1995 1994
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,273 $ 1,670
Mortgage loans held for sale, net 232,073 45,237
Mortgage loans held for investment,
net of reserve of $123 and $0, 1,507 1,084
respectively
CMO bonds, residual interests,
investment securities and SMATs, net
of accumulated amortization of $439 6,306 424
and $176, respectively
Notes receivable - affiliates 587 988
Advances receivable, net 21,016 22,252
Mortgage servicing rights, net of
accumulated amortization of $21,979
and $13,489, respectively and 75,846 33,899
valuation allowances of $1,132 and $0,
respectively
Deferred acquisition, transaction and
loan costs, net of accumulated 2,676 1,394
amortization of $1,271 and $598,
respectively
Property, equipment and leasehold
improvements, net of accumulated
amortization of $3,283 and $1,338, 4,176 2,969
respectively
Investment in affiliates -- 1,907
Due from affiliates 3,632 --
Excess cost over identifiable tangible
and intangible assets acquired, net of
accumulated amortization of $464 and 2,726 540
$85, respectively
Other assets 3,277 3,837
Total Assets $356,095 $116,201
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Installment purchase obligations - $ 9,740 $ 1,074
servicing
Foreclosure reserves 8,142 5,980
Lines of credit 232,144 54,065
Term loans 37,215 22,333
Notes payable - affiliates 581 600
Due to affiliates -- 46
Accounts payable and other 13,766 6,334
liabilities
Total Liabilities 301,588 90,432
Partners' Capital 54,507 25,769
Total Liabilities and Partners' $356,095 $116,201
Capital
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<TABLE>
HARBOURTON FINANCIAL SERVICES L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31
(AFTER CORPORATE REORGANIZATION -- NOTE 1)
(in thousands)
1995 1994 1993
REVENUES
<S> <C> <C> <C> <C>
Loan servicing fees $ 19,479 $ 14,525 $ 9,613
Loan servicing fees and subservicing
fees received from affiliates 1,678 433 1,116
Ancillary income 6,404 4,405 2,026
Gain on sale of defaulted loans to 1,412 146 --
affiliates
Investment income net of interest
expense on escrows of $265, $265, 4,774 3,725 3,226
and $110, respectively
Total servicing revenue 33,747 23,234 15,981
Gain on sale of mortgage loans and
related mortgage servicing rights 9,093 8,348 21,851
Assignment of trade fee incurred to an -- -- (3,169)
affiliate
Interest income, net of related
warehouse interest expense of $6,383, 1,059 844 1,975
$3,718, and $5,691, respectively
Other production income 5,434 3,642 5,025
Total production income - gross 15,586 12,834 25,682
Other investment and interest income 4,081 483 134
Total Revenue 53,414 36,551 41,797
EXPENSES
Servicing costs 6,991 5,681 4,127
Prepayment costs and interest 1,702 695 998
curtailments
Provision for foreclosure losses 4,029 2,364 448
Amortization of mortgage servicing 8,490 6,231 5,549
rights
Impairment of mortgage servicing
rights 1,132 -- 462
Total servicing expenses 22,344 14,971 11,584
Loan production and secondary 16,141 12,828 11,849
marketing costs
General and administrative costs,
including management fees and
reimbursed costs to its affiliates of 6,200 4,405 5,163
$795, $400, and $360, respectively
Interest expense - term loans 2,632 1,167 1,021
Other interest expense 656 55 100
Other interest expense-affiliates, net
of interest income-affiliates of $45, 776 226 287
$98, and $100, respectively
Other amortization and depreciation 1,935 648 268
Total Expenses 50,684 34,300 30,272
Net Income Before Equity in Earnings of
Affiliates and Gain on Bulk Sale of
Servicing 2,730 2,251 11,525
Equity in earnings of affiliates (254) (374) --
Gain on bulk sale of servicing 9,148 2,957 --
Net Income $ 11,624 $ 4,834 $ 11,525
Net Income per Preferred Unit, based
on 37,309,780; 30,087,826; and
30,087,826 weighted average number of $ .31 $ .16 $ .38
Preferred Units outstanding,
respectively
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<TABLE>
HARBOURTON FINANCIAL SERVICES L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
(AFTER CORPORATE REORGANIZATION -- NOTE 1)
(in thousands)
1995 1994 1993
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net Income $11,624 4,834 11,525
Adjustments to reconcile net income to net
cash from operating activities:
Gain on bulk sale of originated (9,148) (2,957) --
servicing
Gain on sale of defaulted loans (645) (146) --
Gain on sale associated with retained (10,924) -- --
servicing
Net unrealized gain on CMO bonds, (2,669) -- --
residual interests and SMATs
Mortgage servicing rights valuation 1,132 -- --
allowance
Amortization and depreciation 10,425 7,246 6,638
Equity in earnings of affiliates 254 374 --
Provision for foreclosure losses 4,029 2,364 448
Changes in operating assets and
liabilities:
Mortgage loans held for sale and (176,264) 112,682 (71,454)
investment, net
Advances receivable 2,356 (3,015) (4,661)
Other assets 7,772 (502) (1,968)
Due to/from affiliates (3,634) (2,056) (297)
Accounts payable and other
liabilities 5,708 (2,328) 5,001
Net Cash Flows From Operating Activities (159,984) 116,496 (54,768)
Net Cash Flows From Investing Activities:
Proceeds from bulk sale of originated 9,148 4,058 --
servicing
Net acquisition of mortgage servicing (4,112) (4,274) (3,869)
rights
Increase in notes receivable - affiliates 466 (3,356) (1,180)
Funding of deferred acquisition and (840) (309) (16)
transaction costs
Amortization of CMO bonds, residual 914 -- --
interests, and investment securities
Purchase of investment securities -- -- (1,071)
Funding of acquisition advances (676) (3,641) (199)
Distribution from affiliates -- 20 --
Purchases of property and equipment (1,759) (1,149) (971)
Cash acquired in Exchange Transaction 2,715 -- --
Net Cash Flows From Investing Activities 5,856 (8,651) (7,306)
Cash Flows From Financing Activities:
Principal payments on term loans (33,670) (4,571) (2,083)
Term debt advances 41,350 20,308 --
Net (repayment) borrowings on lines of 156,607 (104,513) 64,919
credit and short term borrowings
Repayments on installment purchase (5,982) (10,158) (5,600)
obligations
Funding of deferred loan costs (983) (173) --
Payment on partners' notes receivable 300 267 65
Partners' (distributions) contributions, -- (8,982) 1,644
net
Net (repayments) borrowings from notes (2,891) (8,074) 8,404
payable - affiliates
Net Cash Flows From Financing Activities 154,731 (115,896) 67,349
Increase (decrease) in cash and cash 603 (8,051) 5,275
equivalents
Cash and cash equivalents at beginning of 1,670 9,721 4,446
period
Cash and cash equivalents at end of period $2,273 1,670 9,721
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<TABLE>
HARBOURTON FINANCIAL SERVICES L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31
(AFTER CORPORATE REORGANIZATION -- NOTE 1)
(in thousands)
1995 1994 1993
<S> <C> <C> <C>
Non-cash Investing and Financing
Activities:
Acquisition and consolidation of HBT,
TMC, HFC, and TMC Mortgage Corp., net of
cash acquired:
Mortgage loans held for sale, net $12,922 -- --
Mortgage loans held for investment 222 -- --
CMO bonds and residual interests 3,864 -- --
Notes receivable - affiliates 314 -- --
Advances receivable 5,875 -- --
Mortgage servicing rights, net 18,631 -- --
Deferred acquisition and loan costs, net 86 -- --
Property and equipment, net 468 -- --
Investment in affiliates (1,652) -- --
Excess cost over identifiable tangible 2,236 -- --
and intangible assets acquired
Other assets 7,212 -- --
Total Assets 50,178 -- --
Foreclosure reserves 3,334 -- --
Lines of credit 11,890 -- --
Term loans 7,202 -- --
Short-term borrowings 9,582 -- --
Notes payable - affiliates 5,588 -- --
Due to affiliates (44) -- --
Accounts payable and other liabilities 1,724 -- --
Total Liabilities 39,276 -- --
Contribution of investment in affiliate -- 2,221 --
Installment purchases of mortgage 14,636 10,338 7,192
servicing rights
Distribution to affiliates prior to the (6,284) -- --
Exchange Transaction
Conversion of debt in exchange for 9,000 -- --
preferred units
Unrealized gain (loss) on available for (146) 65 --
sale securities
Contribution of investment in
settlement of note 249 -- 535
receivable from affiliate
Contribution of property and equipment, -- 189 854
net
Contribution of miscellaneous receivables -- (298) (23)
and payables
Conversion of payable to affiliates to -- -- 1,286
notes payable - affiliates
Net distribution of notes
receivable/payable from/to affiliates and -- (3,768) --
due from/to affiliates
Reduction in partners' capital in -- -- 1,456
exchange for note payable to affiliate
Contribution of other partners' capital -- -- 632
as notes payable
Push down of purchase price in connection
with Harbourton's Acquisition of
management interest in Western:
Purchased servicing rights 389 -- --
Excess cost over identifiable tangible
and intangible assets acquired 238 -- --
627 -- --
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<TABLE>
HARBOURTON FINANCIAL SERVICES L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31
(AFTER CORPORATE REORGANIZATION -- NOTE 1)
(in thousands)
General Limited Partners
Partner
Pre Subor-
ferred dinated Total
Amount Units Amount Units Amount Other Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December $ 148 30,088 $18,484 - - - $18,632
31, 1992
Payment on
partners' notes - - 21 - - - 21
receivable
Partners' capital - - 6,275 - - - 6,275
contributions
Distribution of (45) - (4,439) - - - (4,484)
earnings
Liquidation of (1) - (727) - - - (728)
partnership
interests
Net income for the
year ended 1993 114 - 11,411 - - - 11,525
Balance at December 216 30,088 31,025 - - - 31,241
31, 1993
Contribution of
investment in - - 2,221 - - - 2,221
affiliates
Net distribution of
assets and - - (3,877) - - - (3,877)
liabilities to
affiliates
Distribution of
earnings (97) - (8,885) - - - (8,982)
Payment on
partners' notes - - 267 - - - 267
receivable
Unrealized gain on
available-for - - - - - 65 65
sale securities
Net income for the
year ended 1994 50 - 4,784 - - - 4,834
Balance at December 169 30,088 25,535 - - 65 25,769
31, 1994
Payment on
partners' notes - - 300 - - - 300
receivable
Unrealized loss on
available-for - - - - - (146) (146)
sale securities
Push down of
purchase price in
connection with
Harbourton's
Acquisition of - - 627 - - - 627
management interest
in Western prior to
Western
Transaction:
Acquisition of HBT,
TMC, and HFC - 6,897 13,617 - - - 13,617
Conversion of debt
in exchange for - 4,918 9,000 - - - 9,000
Preferred Units
Net income for the 116 - 11,508 - - - 11,624
year ended 1995
Distribution to
affiliates prior - - (6,284) - - - (6,284)
to Exchange
Transaction
Balance at December $285 41,903 $54,303 - - (81) $54,507
31, 1995
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
HARBOURTON FINANCIAL SERVICES L.P. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(After Corporate Reorganization -- Note 1)
December 31, 1995, 1994 and 1993
Note 1. Description of Business and Organization
Harbourton Financial Services L.P. ("HBT") was created pursuant
to a Certificate of Limited Partnership filed with the Secretary
of the State of Delaware on August 12, 1987 and a limited
partnership agreement (the "HBT Agreement") dated as of August
12, 1987. Harbourton Mortgage Corporation (the "General
Partner") was incorporated in the State of Delaware on August 12,
1987. The General Partner manages the business and affairs of
HBT and has exclusive authority to act on behalf of HBT. HBT's
termination date is December 31, 2050 unless sooner dissolved or
terminated pursuant to the HBT Agreement.
Harbourton Assignor Corporation ("Assignor Limited Partner") is
the sole limited partner of HBT. Pursuant to the HBT Agreement,
the Assignor Limited Partner holds for the benefit of the holders
of the Preferred Units all of the limited partnership interests
underlying such Preferred Units. Each Preferred Unit is
evidenced by a beneficial assignment certificate, which is issued
by the Assignor Limited Partner and HBT in fully registered form.
Each holder of a Preferred Unit is entitled to all of the
economic rights and interests in the underlying limited
partnership interest held by the Assignor Limited Partner, and
each holder of a Preferred Unit has the right to direct the
Assignor Limited Partner on voting and certain other matters with
respect to such underlying limited partnership interests.
On August 5, 1994, Harbourton Holdings, L.P. ("Harbourton"), a
Delaware limited partnership, acquired from JHM Capital
Corporation ("JCC") (i) all of the issued and outstanding capital
stock of the General Partner of HBT and (ii) all of the issued
and outstanding Subordinated Units of HBT, pursuant to the terms
of a definitive acquisition agreement (the "Transfer Agreement")
for a sum of $100.
Pursuant to the Transfer Agreement and New York Stock Exchange
rules, on March 14, 1995, HBT obtained the approval from existing
Unitholders to issue to Platte Valley Servicing Co., L.P.
("PVSC"), a 99% owned subsidiary of Harbourton, approximately
21.5 million Preferred Units of HBT in exchange for PVSC's
ownership interest of (i) all of the issued and outstanding
limited partnership interests of Harbourton Mortgage Co., L.P.
(formerly Platte Valley Funding, L.P.) ("HMCLP") and (ii) all of
the issued and outstanding capital stock of Harbourton Funding
Corporation (formerly Platte Valley Funding Corporation) ("HFC"),
the general partner of HMCLP (the "Harbourton Transaction").
Pursuant to an agreement dated October 1, 1994 (the "TMC Mortgage
Agreement"), which was joined in by HBT with the unanimous
consent of the independent directors of the General Partner, TMC
Mortgage Corp. and two of its shareholders (the "TMC Parties")
agreed to contribute to HBT their direct and indirect 50%
interest in TMC Mortgage Co., L.P. ("TMC"), a partnership engaged
in the origination and sale of mortgage loans in the eastern
United States, in exchange for approximately .8 million Preferred
Units (the "TMC Transaction"). On the same date, HMCLP agreed to
include its 50% direct and indirect equity interest in TMC as
part of the assets owned by it at the time of the consummation of
the Harbourton Transaction (collectively, the "Exchange
Transaction").
Upon the consummation of the Exchange Transaction, HMCLP became a
wholly-owned subsidiary of HBT and TMC became an indirect wholly-
owned subsidiary of HBT, with an aggregate 50% equity interest
owned by HBT and an aggregate 50% equity interest owned by HMCLP.
The effect of the Exchange Transaction was that PVSC acquired
approximately 75.7% of the issued and outstanding Preferred Units
of HBT, and the TMC Parties acquired approximately 2.9% of the
issued and outstanding Preferred Units. HBT has continued to
exist in accordance with the provisions of the HBT Agreement,
which was unchanged by the Exchange Transaction.
On July 31, 1995 HBT acquired Western Sunrise Holdings, L.P. (the
"Western Transaction") and its subsidiaries, Western Sunrise
Mortgage Co., L.P. and its general partner Western Sunrise
Mortgage Corporation (collectively "Western"). Western had been
an affiliated mortgage originator and servicer headquartered in
Sacramento, California and was a 99% owned subsidiary of
Harbourton. At the transaction date (July 31, 1995), the net
book value of Western was approximately $5.7 million. The fair
value of Western on that same date was approximately
$15.7 million, and in exchange for Western, Harbourton and its
general partner Harbourton General Corporation ("HGC") received
approximately 8.6 million Series B Preferred Units having
generally the same rights as the outstanding Preferred Units.
During the quarter ended December 31, 1995, the Preferred
Unitholders voted to convert the Series B Units to Preferred
Units at a conversion ratio of one Preferred Unit for each Series
B Unit. Furthermore, as additional consideration for their
respective contributions of Western, Harbourton and HGC will be
issued additional Preferred Units if certain economic earnings
hurdles are met. Additional Preferred Units will be issued based
upon 70% and 40% of the "Excess Earnings" for the 12 month
periods commencing on April 1, 1995 and 1996, respectively.
Excess Earnings will be calculated as the economic earnings of
the Western production operation in excess of $2.5 million and
$2.6 million for the 12 month periods commencing on April 1, 1995
and 1996, respectively. The unit price for the Preferred Units
will be based upon the average closing price for the 20 business
days ending on July 31, 1997. The Western Transaction was
accounted for as a reorganization of entities under common
control similar to a pooling-of-interests.
HBT, HMCLP, and HFC are hereinafter collectively referred to the
"Partnership" unless otherwise noted. In conjunction with the
Western Transaction, HBT merged Western into HMCLP.
Simultaneously, HBT contributed its 50% interest in TMC and
transferred all of its remaining mortgage banking-related assets
to HMCLP.
HBT, HMCLP, and HFC are hereinafter collectively referred to as
the "Partnership" unless otherwise noted. The Partnership's
primary business activity is mortgage banking, which is
conducted through its wholly-owned subsidiary HMCLP.
Mortgage banking consists of (i) mortgage loan servicing
activities, including the acquisition and sale of mortgage
servicing rights, (ii) the origination and purchase of mortgage
loans, including the securitization and sale of mortgage loans
with the related servicing rights retained or released, and (iii)
investments in other mortgage-related securities. HMCLP is an
approved Government National Mortgage Association ("GNMA"),
Federal National Mortgage Association ("FNMA"), and Federal Home
Loan Mortgage Corporation ("Freddie Mac") licensee.
In general, each quarter the Partnership allocates 99% and 1% of
profits and losses to the Preferred Unitholders and General
Partner, respectively, up to a maximum amount as defined in the
Partnership Agreement ("Participating Amount"). This
Participating Amount generally does not exceed the product of the
cash or fair value of property contributed to the Partnership in
consideration for the issuance of Preferred Units, including
units issued in connection with the Exchange and Western
Transaction ("Initial Investment") and the appropriate weighted
average Treasury Index. Profits that exceed this Participating
Amount, up to an additional amount as defined, are allocated 75%,
12.5% and 12.5% to the Preferred Unitholders ("Preferred
Amount"), General Partner and Subordinated Unitholder,
respectively. Preference amounts ("Second Preference") beyond
these levels, up to an additional amount as defined, are then
allocated 62.5%, 18.75% and 18.75% to the Preferred Unitholders,
General Partner and Subordinated Unitholder, respectively.
Preference amounts in excess of the Second Preference are then
allocated 55%, 22.5%, and 22.5% to the Preferred Unitholders,
General Partner, and Subordinated Unitholder, respectively. Cash
distributions are allocated approximately in the same manner as
allocated taxable profits. Losses are allocated up to the amount
of the sum of the undistributed Preferred Amount allocations,
Second Preference allocations and Participating Amount
allocations to the Preferred Unitholders, Subordinated
Unitholders, and General Partner in proportion to their
respective interest in the sum of such undistributed allocations.
Prior to the Exchange Transaction, HMCLP's and Western's profits
and losses were allocated in accordance with their respective
partnership agreements.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation - The consolidated financial statements
include the accounts of HBT, HMCLP and HFC. The consolidated
financial statements and notes reflect the Western Transaction
for all periods presented in accordance with the pooling-of-
interests method of accounting. All intercompany accounts and
transactions have been eliminated in consolidation.
As previously discussed, on March 14, 1995, the existing
Unitholders of HBT approved the issuance of approximately 21.5
million Preferred Units of HBT (a 75.7% controlling interest in
HBT) in exchange for 100% ownership interest in HMCLP and HFC.
Because of the change in control of HBT, this transaction was
accounted for as a reverse acquisition of HBT by HMCLP.
Concurrent with the Exchange Transaction, HBT acquired a 50%
interest in TMC in exchange for approximately .8 million
Preferred Units of HBT (a 2.9% interest) (the "TMC Transaction").
This interest, combined with the 50% interest previously
contributed to HMCLP by Harbourton, in June of 1994, resulted in
HBT's direct and indirect 100% ownership of TMC. Accounting for
a reverse acquisition requires that the historical results of
operations (prior to the Exchange Transaction) reflect the
operations of HMCLP as the continuing accounting entity.
Further, under the accounting for a reverse acquisition, HBT is
reported as if it were purchased as of the date of the Exchange
Transaction. Therefore, the historical results of operations
exclude the operating results of HBT prior to the date of the
Exchange Transaction. These results are reflected in the
purchase adjustments associated with the recognition of this
transaction. The operating results of TMC are reflected as
equity in earnings in affiliates in the operating results of
HMCLP for the period from June 30, 1994 to the date of the
Exchange Transaction. Thereafter, the results of operations of
TMC are reflected as a 100% owned subsidiary of the Partnership
and reported in the consolidated statements of operations. On
July 31, 1995, HBT acquired Western in exchange for approximately
8.6 million Series B Preferred Units (the "Western Transaction")
which were converted to Preferred Units during the quarter ended
December 31, 1995. This was a transaction between entities under
common control, therefore, the transaction was accounted for
using the pooling-of-interests method of accounting. Under the
pooling method of accounting, the results of operations of
Western are presented as if the transaction occurred at the
inception date of HMCLP and Western.
In summary, the historical consolidated results of operations
presented herein primarily represent the following: a) HMCLP and
Western consolidated for the periods prior to June 30, 1994,
b) HMCLP and Western consolidated plus a 50% equity interest in
TMC for the period from July 1, 1994 through March 31, 1995, and
c) HMCLP, Western, HBT and TMC consolidated, from April 1, 1995
to December 31, 1995.
Cash and Cash Equivalents - Cash and cash equivalents consist of
cash on hand and in banks and short-term instruments with
original maturities of three months or less.
Mortgage Loans Held for Sale - Mortgage loans held for sale are
stated at the lower of aggregate cost, net of deferred loan
production fees and costs, or market value.
Mortgage Loans Held for Investment - Mortgage loans held for
investment are stated at the amount of unpaid principal, reduced
by an allowance for loan losses if necessary, based upon
management's evaluation of the economic conditions of borrowers,
loan loss experience, collateral value and other relevant
factors.
Advances Receivable - Funds advanced for the purpose of
purchasing loans out of securitized mortgage loan pools and funds
advanced for mortgagor escrow deficits, foreclosures and other
investor requirements are recorded as advances receivable in the
consolidated statements of financial condition. Such receivables
are generally recoverable from the insurers or guarantors, which
are generally government agencies, or the mortgagors through
increased monthly payments, as applicable. A reserve for
uncollectible items has been established for those receivables
which management estimates are not recoverable.
Mortgage Servicing Rights - The Partnership capitalizes the cost
of mortgage servicing rights and amortizes such costs in
proportion to, and over the period of, estimated future
undiscounted net servicing income. See also Note 4.
CMO Bonds, Residual Interests, Investment Securities, and SMATs -
The Partnership classifies its CMO bonds, residual interests, and
securitized mortgage acceptance trusts ("SMATs") portfolio as
trading securities since the securities are being held with the
intent of selling them in the near term. Accordingly, such
assets are stated at fair value and unrealized gains and losses
are recognized in earnings. The Partnership classifies its
Investment Securities as available for sale. Accordingly, such
assets are stated at fair value and unrealized gains and losses
are recognized as a component of partners' capital.
Deferred Acquisition, Transaction and Loan Costs - Deferred loan
costs totaling approximately $1.3 million are amortized over the
life of the term loan agreement using the straight line method
which approximates the effective interest method. Deferred
acquisition and transaction costs totaling approximately $2.7
million are amortized over a period of five years using the
straight-line method.
Property, Equipment and Leasehold Improvements - Property,
equipment and leasehold improvements are stated at cost less
accumulated depreciation. Depreciation is computed using the
straight-line method over the assets' useful lives, which are
estimated to be 30 years for depreciable real property and 2 to
15 years for furniture, fixtures and equipment. Leasehold
improvements are amortized using the straight-line method over
the lease life.
Investment in Affiliates - HMCLP recorded its investment in
affiliates (TMC) based on the equity method of accounting for the
period from June 30, 1994 through March 31, 1995. HMCLP's
carrying amount of its investment in affiliates exceeded its
underlying equity in net assets by approximately $1.1 million for
which amortization of $18 thousand and $35 thousand has been
recognized in the accompanying statement of operations for the
three months ended March 31, 1995 and six months ended December
31, 1994, respectively. Excess cost is amortized on a straight-
line basis over a period of 15 years.
Excess Cost Over Identifiable Tangible and Intangible Assets
Acquired - Excess cost over identifiable tangible and intangible
assets acquired is amortized using the straight-line method over
15 years.
Loan Servicing Fees - Loan servicing fees are based on a
contractual percentage of the unpaid principal balance of the
related loans and are recognized in income as earned. Loan
servicing expenses are charged to operations as incurred.
Loan Production Fees and Costs - Certain direct loan production
fees and costs associated with mortgage loans held for sale are
deferred until the related loans are sold.
Foreclosure Reserves - Foreclosure reserves are maintained to
provide for an estimate of the losses associated with delinquent
loans and loans in foreclosure or bankruptcy ("Defaulted Loans").
The reserves are established based on management's expectations
and historical loss experience and are adjusted periodically
through charges to current operations to reflect changes in the
Defaulted Loans, net of actual charge-offs. The Partnership
establishes foreclosure reserves related to Defaulted Loans for
each purchased servicing asset at the time of acquisition in
accordance with its existing reserve policy.
Income Taxes - The Partnership is a limited partnership and is
not liable for federal income taxes, however, individual
unitholders have liability for income taxes. As a result of the
provisions currently in the tax law, the Partnership could be
taxed as a corporation for federal income tax purposes for its
tax year beginning on January 1, 1998. See Note 13.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
Reclassifications - Certain amounts presented for prior periods
have been reclassified to conform to the current year's
presentation. The reclassifications primarily relate to how
deferred origination fees and costs were presented in the
accompanying consolidated statement of operations in the prior
years. Accordingly, gain on sale of mortgage loans and
servicing, other production income and loan production and
secondary marketing costs were affected. Further,
reclassification of certain general and administrative costs were
reclassed to loan production and secondary marketing costs.
SFAS No. 107 - During the year ended December 31, 1995, the
Partnership adopted the provisions of Statement of Financial
Accounting Standards No. 107, Disclosures about Fair Value of
Financial Instruments ("SFAS No. 107"), which requires that
companies disclose the fair value of financial instruments, where
practicable, and the method(s) and significant assumptions used
to estimate those fair values. The adoption of SFAS No. 107
resulted only in additional disclosure requirements and had no
effect on the Partnership's consolidated financial position or
results of operations.
SFAS No. 109 - During the year ended December 31, 1993, the
Partnership adopted Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes ("SFAS No. 109"). Under
SFAS No. 109, the Partnership is required to provide deferred
taxes on any temporary differences between the basis of its
assets and liabilities for financial reporting and income tax
purposes that are anticipated to exist after the Partnership is
treated as a corporation (see Note 13).
SFAS No. 119 - During the year ended December 31, 1995, the
Partnership adopted the provisions of Statement of Financial
Accounting Standards No. 119, Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments
("SFAS No. 119"), which requires additional disclosures about
derivative financial instruments and how companies use them. The
adoption of SFAS No. 119 resulted only in additional disclosure
requirements and had no effect on the Partnership's consolidated
financial position or results of operations.
SFAS No. 121 - In March 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of ("SFAS No. 121"), which is
effective for the Partnership in its fiscal year ending after
December 15, 1996. SFAS No. 121 requires that long-lived assets
and certain identifiable intangibles to be held and used by the
Partnership be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. The Partnership has not adopted
the principles of this statement within the accompanying
consolidated financial statements; however, it is anticipated
that its adoption will not have a material impact on the
Partnership's consolidated financial condition or results of
operations when adopted in fiscal 1996.
SFAS No. 122 - During the quarter ended September 30, 1995, the
Partnership adopted the provisions of Statement of Financial
Accounting Standards No. 122, Accounting for Mortgage Servicing
Rights--An amendment of FASB Statement No. 65 ("SFAS No. 122")
retroactive to January 1, 1995, which modifies the accounting for
originated mortgage servicing rights ("OMSRs") by mortgage
banking enterprises. The overall impact to the Partnership's
consolidated financial statements was an increase in net earnings
for the year ended December 31, 1995 of approximately $9.5
million, or $.25 per Preferred Unit. See Note 4 for further
discussion regarding the adoption of SFAS No. 122.
SFAS No. 123 - In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("SFAS
No. 123"), which is effective for the Partnership in its fiscal
year ending after December 15, 1996. SFAS No. 123 provides an
alternative to APB Opinion No. 25, Accounting for Stock Issued to
Employees, in accounting for stock-based compensation issued to
employees. The pronouncement allows for a fair value based
method of accounting for employee stock options and similar
equity instruments. However, for companies that continue to
account for stock-based compensation arrangements under Opinion
No. 25, SFAS No. 123 requires disclosure of the pro forma effect
on net income and earnings per share of its fair value based
accounting for those arrangements. The Partnership continues to
evaluate the provisions of SFAS No. 123 and has not determined
whether it will adopt the recognition and measurement provisions
of that Statement in fiscal 1996, which the Partnership expects
would have an immaterial effect on its consolidated financial
condition or results of operations.
Note 3. Mortgage Servicing Portfolio
<TABLE>
The Partnership's mortgage servicing and subservicing portfolio
included loans in all 50 states and the District of Columbia.
The following table shows the geographic concentration of the
mortgage servicing portfolio:
December 31, December 31,
1995 1994
<S> <C> <C>
California 26.6% 26.0%
Florida 8.0% 8.9%
Texas 7.8% 9.2%
Colorado 4.7% 6.1%
Other* 52.9% 49.8%
Total 100.0% 100.0%
</TABLE>
* Loans from no other state exceed 5% of the principal balance
of loans in the portfolio in either year.
The Partnership's servicing and subservicing portfolio (unpaid
principal balances and number of loans) was comprised of the
following (in thousands except number of loans):
<TABLE>
December 31, 1995 December 31, 1994
Principal Number of Principal Number of
Balance Loans Balance Loans
<S> <C> <C> <C> <C>
Servicing:
GNMA Loans $4,262,160 79,994 $3,129,359 59,169
Non-GNMA Loans 1,768,924 20,218 780,149 10,799
Serviced for 161,395 2,663 117,250 1,988
affiliates
Total Servicing 6,192,479 102,875 4,026,758 71,956
Subservicing:
Subserviced for -- -- 1,075,784 15,689
affiliates
Subserviced for 148,923 1,542 100,154 1,048
others
Total Subservicing 148,923 1,542 1,175,938 16,737
Total Portfolio $6,341,402 104,417 $5,202,696 88,693
</TABLE>
As of December 31, 1995 and December 31, 1994, the total GNMA
loans serviced and subserviced include loans insured by the
Federal Housing Administration ("FHA") of 58,829 and 55,036,
respectively, and loans guaranteed by the Veterans Administration
(`VA") of 21,455 and 18,100, respectively. In addition, at
December 31, 1995, the Partnership services 1,308 FHA loans for
FNMA which are potentially subject to the same losses experienced
on GNMA-FHA loans that complete the foreclosure process and are
conveyed to FHA. At December 31, 1994, substantially all of the
loans subserviced for affiliates consisted of loans subserviced
for HBT (prior to the Exchange Transaction).
Non-GNMA loans serviced by the Partnership are generally
securitized through FNMA or FHLMC programs on a non-recourse
basis, whereby foreclosure losses are generally the
responsibility of FNMA or FHLMC and not of the Partnership. GNMA
loans serviced by the Partnership are securitized through GNMA
programs, whereby the Partnership is insured against certain
losses by the FHA or partially guaranteed against loss by the VA,
however, the Partnership is subject to foreclosure risk. In
addition, the Partnership is not responsible for foreclosure
losses associated with loans subserviced for others.
In connection with mortgage servicing and subservicing
activities, the Partnership segregates tax and insurance ("T&I")
escrow and principal and interest ("P&I") custodial funds in
separate trust accounts maintained at federally insured financial
institutions and excludes these balances from its consolidated
balance sheet. For the years ended December 31, 1995 and
December 31, 1994, these T&I and P&I balances averaged
approximately $71.9 million and $85.0 million, respectively.
At December 31, 1995, errors and omissions and fidelity bond
insurance coverage was $10.0 million and $7.5 million,
respectively.
In conjunction with the performance of mortgage banking
activities, the Partnership is subject to minimum net worth
requirements established by GNMA, FNMA, Freddie Mac and the
Department of Housing and Urban Development ("HUD"). At December
31, 1995, the Partnership's eligible net worth exceeded these
requirements.
During the period April 1, 1992 through June 30, 1993, the
Partnership acquired loans on an assignment of trade basis with
Platte Valley Mortgage Corporation ("PVMC"), an affiliate of the
Partnership (see Note 9). The assignment of trade fee associated
with the loans acquired on June 30, 1993 was recognized during
the month of July 1993 when the related loans were sold.
Effective July 1, 1993, the Partnership began internally
originating loans.
The servicing rights generated, including the loans acquired from
PVMC have been accounted for as originated mortgage servicing
rights ("OMSRs") prior to the adoption of SFAS No. 122. As a
result, all costs associated with the origination of the OMSRs
have been expensed in the period that the underlying loans were
sold.
Note 4. Mortgage Servicing Rights
In May 1995, the Financial Accounting Standards Board issued SFAS
No. 122, which is effective for fiscal years beginning after
December 15, 1995, with earlier application encouraged. SFAS No.
122, however, prohibits retroactive application to prior years.
SFAS No. 122, among other things, modifies accounting for
originated mortgage servicing rights by mortgage banking
enterprises. The change eliminates the separate treatment of
servicing rights acquired through loan origination and those
acquired through purchase transactions, as previously required
under SFAS No. 65, Accounting for Certain Mortgage Banking
Activities. Accordingly, the Partnership's consolidated
financial statements through December 31, 1994 were accounted for
under SFAS No. 65. The Partnership adopted SFAS No. 122 in the
quarter ended September 30, 1995 retroactive to January 1, 1995
and its consolidated financial statements for the first and
second quarters of 1995 were restated to reflect the impact of
adopting SFAS No. 122. The overall impact on the Partnership's
consolidated financial statements of adopting SFAS No. 122 was an
increase in net earnings for the year ended December 31, 1995 of
approximately $9.5 million.
SFAS No. 122 requires that a portion of the cost of originating a
mortgage loan be allocated to the mortgage servicing right based
on its fair value relative to the loan as a whole. The fair
value of the Partnership's government product mortgage servicing
rights created during the year ended December 31, 1995 was
determined by an independent third-party valuation based on
market characteristics during the quarter in which the mortgage
servicing rights were created. The fair value of the
Partnership's conventional product mortgage servicing rights
created during the year ended December 31, 1995 was based on
third-party quoted market prices for similar products.
SFAS No. 122 also requires that all capitalized mortgage
servicing rights ("MSRs") be evaluated for impairment based on
the excess of the carrying amount of the MSRs over their fair
value. In determining servicing value impairment at the end of
the quarter, the mortgage servicing portfolio was disaggregated
into its predominant risk characteristics. As noted previously,
the Partnership adopted SFAS No. 122 during the quarter ended
September 30, 1995 retroactive to January 1, 1995. The
Partnership reallocated its total book basis in its mortgage
servicing rights (which had previously been recorded on an
acquisition by acquisition basis) as of January 1, 1995 to its
new risk stratum based on a relative fair value basis. The
Partnership has determined those risk characteristics to be loan
type and interest rate. These segments of the portfolio were
then valued by an independent third-party to determine the fair
value of the MSRs. The fair value, as determined by independent
appraisal, was then compared with the book value, net of the
foreclosure reserve, of each segment to determine if a reserve
for impairment was required. As of December 31, 1995 a valuation
allowance of approximately $1.1 million was recorded against
various portfolio risk stratum. Mortgage interest rates
decreased in excess of 50 basis points from the beginning of the
fourth quarter to the end of the fourth quarter. This decrease
in interest rates caused an increase in the risk of prepayments
associated with the servicing portfolio, thereby decreasing the
servicing portfolio's value.
Prior to the adoption of SFAS No. 122, the Partnership accounted
for mortgage servicing rights under SFAS No. 65. Accordingly,
the Partnership evaluated the realizability of each purchased
servicing rights portfolio based upon the future undiscounted net
servicing income related to each portfolio on a disaggregated
basis. The level of disaggregation resulted in the grouping of
loans with similar characteristics (e.g., purchase by purchase,
coupon interest rates, loan type, and maturity). If the future
undiscounted net servicing income related to each portfolio
exceeded the assets carrying amount, a write-down was recorded
for that amount.
<TABLE>
The following table presents a summary rollforward of the
Partnership's mortgage servicing rights, net of accumulated
amortization (in thousands):
<S> <C>
Balance at January 1, 1992 $ -0-
Initial contributions from affiliate 1,433
Acquisitions 19,336
Sales (1,352)
Scheduled amortization * (720)
Amortization due to acquisitions (1,100)
Unscheduled amortization (30)
Balance at December 31, 1992 $ 17,567
Acquisitions 10,638
Scheduled amortization * (4,191)
Amortization due to acquisitions (1,217)
Unscheduled amortization (141)
Impairment write-off (prior to SFAS 122) (462)
Balance, at December 31, 1993 $ 22,194
Acquisitions 18,803
Sales (867)
Scheduled Amortization* (5,692)
Amortization due to acquisitions (1,453)
Reduction in scheduled amortization due to
changes 914
in anticipated prepayments
Balance, at December 31, 1994 $33,899
Acquisitions 38,656
Capitalized OMSRs in connection with SFAS 12,913
No. 122
Scheduled amortization* (5,058)
Amortization due to acquisitions (3,314)
Unscheduled amortization (118)
Valuation allowance (1,132)
Balance, at December 31, 1995 $75,846
</TABLE>
* Scheduled amortization is based on estimates made at the
beginning of each fiscal year.
As previously discussed, SFAS No. 122 prohibits retroactive
application for OMSRs created prior to the fiscal year in which
the Partnership adopted the new accounting pronouncement. As a
result the Partnership, at December 31, 1995, owns servicing
rights related to approximately $650 million in mortgage loans
that are not capitalized in its consolidated financial
statements. Further, SFAS No. 122 prohibits the recognition of
fair value in excess of the book basis of the MSRs. As a result,
the Partnership has off-balance sheet value associated with its
non-capitalized MSRs, as well as the excess in fair value of the
MSRs capitalized in the consolidated financial statements. At
December 31, 1995, the carrying value of the MSRs capitalized in
the consolidated financial statements, approximated $71.1 million
(net of the applicable foreclosure reserves of approximately $4.7
million), with an estimated fair value of approximately $74.2
million.
Effective January 31, 1995, the Partnership entered into a
Purchase and Sale Agreement with an unrelated third party to sell
OMSRs, originated prior to the adoption of SFAS No. 122, related
to GNMA loans with unpaid principal balances totaling
approximately $493 million. The Purchase and Sale Agreement was
dated January 31, 1995 with a May 2, 1995 servicing transfer
date. In conjunction with the Purchase and Sale Agreement, the
Partnership entered into an Interim Servicing Agreement with the
purchaser to perform the servicing functions until the May 2,
1995 servicing transfer date. The Partnership realized a gain on
sale of approximately $9.1 million, net of related transaction
fees.
During the quarter ended September 30, 1995, the Partnership
acquired approximately $1.5 billion of GNMA mortgage servicing
rights from an unaffiliated third party. The Partnership
negotiated with the third party to subservice the mortgage loans
until the fourth quarter of 1995, at which time the loans were
transferred to the Partnership. During that time period, the
Partnership received servicing fees and ancillary income and paid
a subservicing fee. In addition, the seller financed a portion
of the purchase price which is reflected in installment purchase
obligations in the accompanying consolidated financial
statements. At December 31, 1995, the installment purchase
obligation related to this transaction totaled approximately
$9.1 million. The Partnership accrues interest on such
obligation at prevailing market rates.
Additionally, the Partnership retained the servicing rights to
approximately $665 million loans originated and sold during 1995,
in addition to OMSRs on mortgage loans held for sale totaling
approximately $104.3 million at December 31, 1995.
Note 5. Mortgage Loan Production
The Partnership originates and purchases mortgage loans insured
by FHA, mortgage loans partially guaranteed by the VA,
conventional mortgage loans and home equity loans. The
Partnership originates loans through three principal geographic
regions (Eastern United States, Western United States and Central
United States), which consist of approximately 25 branch offices,
on both a wholesale and retail basis. During the years ended
December 31, 1995, 1994, and 1993 HMCLP originated approximately
$1.5 billion, $1.1 billion and $1.8 billion of mortgage loans,
respectively.
Note 6. CMO Bonds, Residual Interests, Investment Securities
and SMATs
In conjunction with the Exchange Transaction, the Partnership
acquired investment in CMO bonds and residual interest
portfolios. As of December 31, 1995, the Partnership's CMO bonds
and residual interests portfolio consisted primarily of FNMA
issues with various durations ranging from five to eleven years.
These securities are classified as trading securities since the
Partnership is actively seeking to sell the portfolio. The
securities are carried at fair value and unrealized gains and
losses are reported in earnings. Because no quoted market prices
are available for CMO bonds and residual interests, fair value
generally represents the estimated amount at which such CMO bonds
and residual interests could be exchanged in a transaction
between willing parties. Fair value is based on anticipated
future cash flows utilizing projections of future prepayment
rates based on current market participants' prepayment rate
assumptions and future long-term estimates of short-term interest
rates. Projected cash flows are discounted using estimates of
discount rates established in market transactions for financial
instruments with similar underlying characteristics and risks.
For the year ended December 31, 1995, the CMO bonds and residual
interests were held as trading securities and net unrealized
gains of approximately $292 thousand are reflected in the
consolidated statement of operations.
At December 31, 1995 and December 31, 1994, the balance of
investment securities consisted of a 100% and 50% interest,
respectively, in an interest-only strip derivative (see Note 9)
of a pool of FNMA mortgage-backed securities. The securities had
an original principal balance of $12 million on April 1, 1988.
The interest-only security had an outstanding principal balance
of approximately $2.0 million as of December 31, 1995, a maturity
date of April 1, 2018, and a coupon rate of 8.5%. At December
31, 1995, the investment securities were held as available for
sale net of an allowance for unrealized losses of approximately
$81 thousand. Changes in this allowance are reflected as a
separate component of partners' capital.
In conjunction with the Exchange Transaction, the Partnership
acquired investments in SMATs which are investments that
indirectly entitle the Partnership to the residual cash flows
generated by mortgage related assets underlying an issuance of a
mortgage related securities transaction. In a mortgage related
securities transaction, the residual cash flows generated
represent the excess cash flows after all required payments
including administrative expenses have been disbursed pursuant to
the terms of the mortgage related securities transaction. As the
indirect owner of these residual cash flows the Partnership
retains the option to call or redeem the underlying collateral
once the balance falls below a minimum required amount. These
investments are classified as trading securities since the
Partnership is actively seeking to sell these investments. Fair
market value of these investments generally represents the
estimated amount which such investments could be exchanged in a
transaction between willing parties. Fair value is based on
estimated future cash flows utilizing estimates of, value of the
underlying collateral, future prepayment rates, timing of the
anticipated call date, and other factors impacting the value of
the underlying collateral. Projected cash flows are discounted
using estimates of discount rates established in market
transactions for instruments with similar underlying
characteristics and risks.
The SMATs are collateralized by FNMA mortgage backed securities
with coupon rates ranging form 9% to 9.50%. As of the date of
Exchange Transaction the fair market value of these investments
was estimated to total approximately $700 thousand. As of
December 31, 1995 the fair market value of the SMATs was
approximately $3.1 million with underlying collateral balances
totaling in excess of approximately $51.0 million. During 1995
the Partnership recognized an unrealized gain of $2.4 million
associated with its investments in SMATs. During the first
quarter of 1996, the Partnership realized the $2.4 million gain
through the sale of a portion of its SMATs portfolio. The unsold
SMATs had a fair value of $0 at December 31,1995.
Note 7. Other Mortgage-Related Assets
The Partnership owns a prepayment cap to reduce the prepayment
risks associated with the mortgage servicing portfolio. The
Partnership is entitled to a monthly payment when the reference
portfolio runoff rate exceeds the strike PSA of 485%. The
reference portfolio is a FNMA 10% mortgage-backed security issued
in 1986. The prepayment cap did not meet the requirements for
hedge accounting and therefore, was accounted for as a trading
instrument. The prepayment cap had a market value of $0 at
December 31, 1995. The termination date of the cap is January
31, 1997.
In addition, the Partnership owns a LIBOR interest rate floor
instrument to help manage a portion of the interest rate risk
associated with its mortgage servicing rights. The LIBOR floor
did not meet the requirements for hedge accounting and therefore,
was accounted for as a trading instrument. The Partnership is
entitled to a monthly payment when the LIBOR rate falls below the
strike rate of 4.00%. At December 31, 1995, the fair market
value of the instrument was $0. The termination date of the
floor is September 30, 1997.
Note 8. Bank Debt
<TABLE>
Term loans consisted of the following (in thousands):
December 31, December 31,
1995 1994
<S> <C> <C>
Term loan due in quarterly
principal installments
totaling approximately
$2.1 million each quarter.
Interest is paid monthly.
The term loan matures June
30, 2000 and is secured by
substantially all of the
assets of the Partnership,
other than mortgage loans
held for sale and assets
securing other debt. The
interest rate may be reduced
by certain compensating
balance arrangements with
respect to escrow and agency
premium deposit balances. 37,215 --
Term loan (HMCLP) due in
monthly principal installments
totaling approximately $667
thousand plus accrued
interest. The term loan
matured July 31, 1995. The
loan was secured by
substantially all of the
assets of HMCLP, other than
mortgage loans held for sale
and assets securing other
debt. The interest rate may
be reduced by certain
compensating balance
arrangements with respect to
escrow and agency premium
deposit balances. $ -- $22,333
Total $37,215 $22,333
Lines of credit consisted of the following (in thousands):
December 31, December 31,
1995 1994
A warehouse line of credit to
fund the purchase or
origination of residential
mortgage loans with a maximum
availability of $200.0 million
at December 31, 1995. This
line of credit matures July
30, 1996 and advances under
this line are secured by the
individual mortgage loans and
related assets. The interest
rate may be reduced by certain
compensating balance
arrangements with respect to
escrow and agency premium
deposit balances. 200,000 --
December 31, December 31,
1995 1994
A letter agreement dated
December 29, 1995 to fund the
purchase and origination of
residential mortgage loans
with a maximum availability of
$25 million at December 31,
1995. This agreement expired
January 31, 1996 and advances
under this agreement were
secured by the individual
mortgage loans and related
assets. Advances under this
agreement reduce the
availability of unused
portions of other lines of
credit available to the
Partnership. The interest
rate may be reduced by certain
compensating balance
arrangements with respect to
escrow and agency premium
deposit balances. 8,091
- - --
A line of credit to fund taxes
and insurance advances made on
behalf of borrowers of
residential mortgage loans
with a maximum availability of
$5.0 million at December 31,
1995. This line of credit
matures July 31, 1996 and
advances under this line are
secured by the related
advances. The interest rate
may be reduced by certain
compensating balance
arrangements with respect to
escrow and agency premium
deposit balances. 5,000 --
A line of credit to fund
principal and interest
advances made on behalf of
borrowers of residential
mortgage loans with a maximum
availability of $15.0 million
at December 31, 1995. This
line of credit matures July
31, 1996 and advances under
this line are secured by the
related advances. The
interest rate may be reduced
by certain compensating
balance arrangements with
respect to escrow and agency
premium deposit balances. 2,300
- - --
December 31, December 31,
1995 1994
A warehouse line of credit
(HMCLP) to fund the purchase
or origination of residential
mortgage loans with a maximum
availability of $10.0 million
at December 31, 1994, and a
foreclosure line sublimit for
loans purchased out of
securitized pools of $6.3
million at December 31, 1994.
This line of credit matured
July 31, 1995, and advances
under this line were secured
by the individual mortgage
loans and related assets.
The interest rate may be
reduced by certain
compensating balance
arrangements with respect to
escrow and agency premium
deposit balances. -- 3,861
A warehouse line of credit
(HMCLP) to fund the purchase
or origination of residential
mortgage loans with a maximum
availability of $12.1 million
at December 31, 1994, and a
foreclosure line sublimit for
loans purchased out of
securitized pools of $4.5
million at December 31, 1994.
This line of credit matured
July 31, 1995, and advances
under this line were secured
by the individual mortgage
loans and related assets. The
interest rate may be reduced
by certain compensating
balance arrangements with
respect to escrow and agency
premium deposit balances. -- 3,350
December 31, December 31,
1995 1994
A warehouse line of credit
(Western) to fund the
purchase or origination of
residential mortgage loans
with a maximum committed
availability of $45 million
at December 31, 1994. A
sublimit of $1 million was
available to finance the
repurchase of foreclosure or
buyback loans. This line was
secured by the individual
mortgage loans and
substantially all of the
assets of Western. The line
terminated concurrent with
the Western Transaction (see
Note 1). The interest rate
may be reduced by certain
compensating balance
arrangements with respect to
escrow and agency premium
deposit balances. -- 36,771
A warehouse line of credit
(Western) to fund the purchase
or origination of residential
mortgage loans with a maximum
committed availability of $35
million at December 31, 1994.
This line was secured by the
individual mortgage loans and
substantially all of the
assets of Western. The line
terminated concurrent with the
Western Transaction (see Note
1). The interest rate may be
reduced by certain
compensating balance
arrangements with respect to
escrow and agency premium
deposit balances. -- 5,510
Repurchase agreements with a
securities dealer (Bear
Stearns) secured by the
Partnership's CMO bond and
residual interests portfolio.
The repurchase liability
amounts mature monthly and
bear interest at LIBOR plus
1.50%. 1,733 --
Short-term funding obligations 15,020 4,573
Total $232,144 $54,065
</TABLE>
Short-term funding obligations represent obligations to fund
originations. These funding obligations were met through
subsequent bank borrowings and/or the Partnership's available
liquidity.
In conjunction with the term loan discussed above, the
Partnership has a $15 million line of credit, available to
finance up to 65% of the purchase price of future bulk servicing
acquisitions. This line of credit matures July 30, 1997. At
December 31, 1995, the Partnership had no borrowings under this
line of credit. However, pursuant to the terms of the letter
agreement dated December 29, 1995, the Partnership was allowed to
borrow up to an additional $25 million under the warehouse line
of credit for unused portions of the $15 million servicing
acquisition line of credit and the $15 million principal and
interest line of credit. At December 31, 1995, borrowings under
this letter agreement totaled $8.1 million thereby reducing the
availability under the $15 million line of credit to fund future
servicing acquisitions. The letter agreement expired January 31,
1996 at which time the Partnership's warehouse line of credit was
increased to a maximum availability of $300 million.
In addition, the Partnership has a $30 million line of credit to
finance the acquisitions of high-grade, short-term investments as
defined pursuant to the Investment Loan and Security Agreement.
Advances on the line of credit are secured by the acquired
investments. No amounts were outstanding on this line at December
31, 1995.
<TABLE>
The weighted average interest rate and the maximum and average
amounts outstanding for such obligations for the years ending
December 31, 1995 and 1994 (in thousands) are as follows:
1995 1994
Weighted Maximum Average Weighted Maximum Average
Average Outstan Outstan Average Outstand Outstan
Rate ding ding Rate ing ding
<S> <C> <C> <C> <C> <C> <C>
Lines of 5.28% 215,391 95,547 5.49% 69,490 62,835
Credit
Term 4.34% 41,350 29,475 2.06% 24,312 16,021
Loans
Total 5.06% 256,741 125,022 4.79% 93,802 78,856
</TABLE>
If the compensating balance arrangements were not in effect, the
weighted average effective interest rate under such credit
agreements would have been 7.53% and 6.79% for the years ended
December 31, 1995 and 1994, respectively, and the Partnership
would have been charged an additional $3.1 million and $1.6
million in interest for the years ended December 31, 1995 and
1994, respectively.
The Partnership must meet certain debt covenant requirements in
accordance with its bank debt agreements. At December 31, 1995
and 1994, the Partnership met all of its debt covenant
requirements.
Note 9. Transactions with Affiliates
Pursuant to the HBT Agreement, the General Partner manages and
controls the Partnership's business and operations. The General
Partner receives an annual fee, from HBT, equal to 1/2 of 1% of
the Initial Investment. The Initial Investment represents the
cash or fair value of property contributed to the Partnership in
consideration for the issuance of Preferred Units, including
units issued in connection with the Exchange and Western
Transactions. For the nine months ended December 31, 1995, the
management fee due to the General Partner was approximately
$420 thousand.
The General Partner is reimbursed for all direct expenses it
incurs or disburses on behalf of HBT and the portion of its
indirect expenses allocable to its activities in connection with
HBT's business. The maximum aggregate amount of allocable
expenses for which HBT is obligated to reimburse the General
Partner in any fiscal year is 1.0% of the Initial Investment.
The Partnership has accrued approximately $375 thousand as an
estimate of total allocable expenses to be incurred by the
General Partner and charged to the Partnership.
During the third quarter of 1995, Harbourton and its affiliates
converted $9.0 million of notes from the Partnership into equity
in the Partnership. In connection with the debt to equity
conversion, Harbourton and its affiliates received approximately
4.9 million of Series B Preferred Units having generally the same
rights as the outstanding Preferred Units. During the quarter
ended December 31, 1995, the Preferred Unitholders voted to
convert the Series B Units to Preferred Units at a conversion
ratio of one Preferred Unit for each Series B Unit. Following
the consummation of the Western Transaction and the debt to
equity conversion, Harbourton and its affiliates own
approximately 83.5% of the Preferred Units of the Partnership.
Western was a party to a management services agreement with
Harbourton and paid Harbourton approximately $300 thousand and
$360 thousand in management fees under the management services
agreement during each year ended December 31, 1994, and 1993,
respectively. HMCLP was also a party to a management agreement
with Harbourton and paid management fees of approximately $100
thousand during the year ended December 31, 1994.
During August 1993, Western received a promissory note for
approximately $500 thousand from Harbourton as consideration for
Harbourton receiving a 50% participation interest in an interest-
only security. The note accrued interest at a rate of 5.5%, and
was due on December 31, 1995. Harbourton was entitled to
receive, as payment from Western, 50% of monthly cash flows that
were distributed to Western related to ownership of the interest-
only security (net of any interest due Western, as holder of the
promissory note given by Harbourton as consideration for its
participation interest). Harbourton was also entitled to
receive, as payment from Western, 50% of sale or distribution
proceeds net of 50% of any costs incurred by Western to sell or
otherwise dispose of the security and net of any interest and/or
principal that remained payable to Western under the terms of the
promissory note given by Harbourton as consideration for its
participation in the security. Further, on September 30, 1995,
Harbourton exchanged its 50% interest in its interest-only
security with the Partnership in partial settlement of the note
payable to the Partnership.
On August 21, 1992, Western issued to certain of its officers
notes related to limited partnership interests. The notes
accrued interest at prime plus 1% and had a scheduled maturity
date of August 21, 1999. The notes required mandatory
prepayments for bonuses and distributions paid in future periods
in accordance with the terms of the individual notes and
respective employment agreements. Effective January 1, 1995,
management exchanged their interests in Western for limited
partnership interests in Harbourton. This transaction was
accounted for as a purchase of Western's limited partnership
interest by Harbourton at fair value. The fair value of the
interests in Harbourton exceeded management's basis by
approximately $627 thousand. In accordance with Harbourton's
established accounting policy, the excess fair value was "pushed-
down" to Western. Accordingly, the transaction resulted in a
write-up of purchased servicing rights and excess costs over
identifiable tangible and intangible assets of $389 thousand and
$238 thousand, respectively.
Effective April 1, 1992, HMCLP entered into a Loan Purchase
Agreement on an assignment of trade basis with Platte Valley
Mortgage Corporation ("PVMC"), an affiliate of the Partnership.
The agreement provided for the assignment of specific loans
produced by PVMC on a monthly basis to HMCLP. In accordance with
the terms of the agreement, HMCLP purchased loans from PVMC at an
average rate of 102.45% of the face value of such mortgage loans,
for 1993. Effective July 1, 1993, HMCLP assumed PVMC's
production operations and, accordingly, this agreement was
terminated. The servicing rights generated from the loans
acquired from PVMC have been accounted for as OMSRs (prior to the
adoption of SFAS No. 122). As a result, all costs associated
with the origination of the OMSRs have been expensed in the
period that the underlying loans were sold.
HMCLP subserviced loans on behalf of PVMC in accordance with the
terms of a Flow Loan Subservicing Agreement dated April 1992.
This agreement provided for the payment of a subservicing fee in
the amount of $6.67 per month per loan serviced. As of December
31, 1993, PVMC's portfolio totaled 9,981 loans with an unpaid
principal balance of approximately $670 million. On April 30,
1994, PVMC was party to a Purchase and Sale Agreement selling its
servicing rights in GNMA loans to an unrelated third party, with
a sale date of April 30, 1994, and a transfer date of October 4,
1994. HMCLP entered into an interim servicing agreement with the
purchaser for the servicing rights sold by PVMC until the
transfer date of October 4, 1994.
At December 31, 1994, HMCLP had certain notes receivable and
notes payable due from or to PVSC or PVMC, which were due on
demand and accrued interest at 2% above the prime rate.
HMCLP has a working capital subordinated debt line with
Harbourton that was subordinate to all other loans with banks.
The line of credit bore interest at rates ranging from prime to
prime plus 2% (10.50% at December 31, 1994 and 8.00% at December
31, 1993). Interest paid to Harbourton for the years ended
December 31, 1995, 1994, and 1993, totaled $438 thousand,
$138 thousand and $8 thousand, respectively.
The Partnership has entered into transactions pursuant to which
it repurchases delinquent loans from GNMA pools which it services
and resells such loans on a servicing retained basis to Santa
Cruz Partners, Skillman Partners, and Harbourton Reassurance,
Inc., affiliates of the Partnership and Harbourton. As of
December 31, 1995 and December 31, 1994, loans with unpaid
principal balances totaling approximately $158.5 million and
$117.3 million were purchased out of securitized pools and sold
to these affiliates. These loans are being serviced on behalf of
the affiliated companies. The associated mortgage servicing is
reflected in the Serviced for Affiliates portion of the
Partnership's servicing portfolio. Such transactions are
expected to benefit the Partnership by reducing the Partnership's
related foreclosure loss through the reduction of the pass-
through rate due to the investor (owner of the loan). The
reduction in foreclosure loss reserve requirement is reflected as
a gain on sale of defaulted loans to affiliates in the
accompanying consolidated financial statements. In addition, the
Partnership's advance requirement for its GNMA servicing will be
reduced as the servicing contract with the affiliates is
actual/actual as opposed to GNMA's scheduled/scheduled
requirement.
Through the ordinary course of business, the Partnership acquires
mandatory forward commitments to sell whole loans and mortgage
backed securities through a dealer, whose owners also own less
than an aggregate 5% limited partnership interest in Harbourton.
Note 10. Western Transaction
As noted previously, on July 31, 1995 the Partnership completed
its acquisition of Western. The Western Transaction was
accounted for as a reorganization of entities under common
control similar to a pooling-of-interests. Accordingly, the
results of operations for the years ended December 31, 1995, 1994
and 1993 include the operations of both Western and HMCLP as
though the combination occurred at the inception date of HMCLP
and Western. The following table summarizes the results of
operations for the individual partnerships prior to the
combination (in thousands):
<TABLE>
Year Ended Year Ended
December 31, 1994 December 31, 1993
Western HMCLP Western HMCLP
<S> <C> <C> <C> <C>
Revenues* $13,644 $25,490 $20,271 $21,526
Expenses (12,668) (21,632) (13,907) (16,365)
Net Income 976 3,858 6,364 5,161
</TABLE>
* Includes gain on bulk sale of originated servicing of
$2,957, $0, $0 and $0, respectively, and equity in earnings
of affiliates of $0, ($374), $0 and $0, respectively.
Note 11. Proforma Earnings
As noted previously, on March 15, 1995, the Exchange Transaction
was consummated. Accordingly, HMCLP became a subsidiary of HBT
and TMC became a wholly-owned subsidiary of HBT, with an
aggregate 50% equity interest owned by HBT and an aggregate 50%
equity interest owned by HMCLP. Had the transactions occurred at
the beginning of the periods presented in the accompanying
statements of operations, proforma results of operations would
have been as follows for the years ended December 31 (in
thousands):
<TABLE>
1995 1994
<S> <C> <C>
Total revenues* $ 67,532 $ 48,598
Total expenses (52,820) (42,784)
Net income $ 14,712 $ 5,814
</TABLE>
* Includes gain on bulk sale of servicing of approximately
$9,148 and $2,957, respectively.
Note 12. Commitments and Contingencies
The Partnership is a party to transactions with off-balance sheet
risk in the normal course of business through the origination and
sale of mortgage loans. These transactions include commitments
to extend credit to mortgagors (i.e., mortgage loan pipeline) and
mandatory forward commitments to sell whole loans or mortgage-
backed securities. Those transactions involve, to varying
degrees, elements of credit and interest rate risk in excess of
the amount recognized in the consolidated statements of financial
condition.
The mortgage loan pipeline of the Partnership represents
agreements to lend to a mortgagor as long as there is no
violation of any condition established in the application or
contract. Such commitments generally have fixed expiration dates
or other termination clauses. The Partnership evaluates each
mortgagor's credit worthiness on a case-by-case basis.
Collateral is limited to residential properties. As of December
31, 1995, the Partnership's mortgage loan pipeline and warehouse
of approximately $261.0 million and $232.1 million, respectively,
consisted of approximately $389.3 million in locked interest rate
commitments with interest rate risk.
In order to offset the risk that a change in interest rates will
result in a decrease in the value of the Partnership's current
mortgage loan inventory or its commitments to purchase or
originate mortgage loans ("Locked Pipeline"), the Partnership
enters into hedging transactions. The Partnership's hedging
policies generally require that substantially all of its
inventory of conforming and government loans and the maximum
portion of its Locked Pipeline that it believes may close be
hedged with forward contracts for the delivery of mortgage-backed
securities ("MBS") or options on MBS. The inventory is then used
to form the MBS that will fill the forward delivery contracts and
options. The Partnership is exposed to interest-rate risk to the
extent that the portion of loans from the Locked Pipeline that
actually closes at the committed price is less than the portion
expected to close in the event of a decline in rates and such
decline in closings is not covered by forward contracts and
options to purchase MBS needed to replace the loans in process
that do not close at their committed price. The Partnership
determines the portion of its Locked Pipeline that it will hedge
based on numerous factors, including the composition of the
Partnership's Locked Pipeline, the portion of such Locked
Pipeline likely to close, the timing of such closings and changes
in the expected number of closings affected by changes in
interest rates.
The Partnership had both mandatory and optional forward
commitments outstanding matched against mortgage loans held for
sale and its Locked Pipeline at December 31, 1995 of
approximately $309.0 million and to the extent mortgage loans are
not available to fill these commitments, the Partnership has
interest rate risk.
The Partnership is subject to inherent losses in its loan
servicing portfolio due to loan foreclosures. Certain agencies
have the authority to limit their repayment guarantees on
foreclosed loans resulting in increased foreclosure costs being
borne by servicers. The Partnership has evaluated its exposure
to such losses based on loan delinquency status, foreclosure
expectancy rates and historical foreclosure loss experience. The
Partnership has established a reserve for advances receivable and
for losses it will experience in future periods as loans complete
the foreclosure process totaling approximately $10.4 million and
$7.2 million as of December 31, 1995 and 1994, respectively.
Required adjustments, if any, to the established reserve will be
reflected in earnings in the periods in which they become known.
The total reserve at December 31, 1995 and 1994 has been
allocated between reserves for advances receivable and
foreclosure reserves as follows (in thousands):
<TABLE>
December 31, December 31,
1995 1994
<S> <C> <C>
Reserves for advances $2,264 $1,210
Foreclosure reserves 8,142 5,980
Total reserves $10,406 $7,190
</TABLE>
The following is a roll-forward of the total reserve for advances
receivable and foreclosure reserves for the years ended December
31 (in thousands):
<TABLE>
1995 1994
<S> <C> <C>
Beginning Balance $7,190 $1,577
Provision for losses 4,029 2,364
Establishment of reserves in
connection with 4,210 4,117
acquisitions of servicing rights
Net charge-offs (5,023) (868)
Ending Balance $10,406 $ 7,190
</TABLE>
The Partnership's liquidity is also affected by the level of loan
delinquencies and prepayments due to servicer's advance
requirements on the loans it services. Under certain types of
servicing contracts, particularly contracts to service loans that
have been pooled or securitized (primarily GNMA and FNMA mortgage-
backed securities), the servicer must forward all or a part of
the scheduled payments (principal and interest) on the specified
remittance day to the security holder (owner of the loan) even
though payments may not have been received from the mortgagor.
In accordance with the terms of the servicing contracts,
servicers may offset the remittance day advances against funds
collected but not required to be remitted to the security holders
(including prepayments and early payments). The servicer's
advance requirement is reduced during high refinance periods due
to the amount of prepayment funds available to offset the
required delinquent payment advance. However, during periods of
reduced runoff the advance requirement of the servicer is
increased. The servicer's advance, if any, is typically
recovered within 15 days, through mortgagor payment receipts
which replenish the offsetting advance within the related
custodial account.
Note 13. Income Taxes
The Partnership may be treated as a corporation for federal
income tax purposes beginning on January 1, 1998, unless 90% of
the Partnership's gross income is "qualifying income", as defined
in the tax law. "Qualifying income" includes certain interest,
dividends, certain real property rents, and gains from the sale
or disposition of capital assets or property described in Section
1231(b) of the Code which is held for the production of
"qualifying income." Based on the Partnership's existing
composition of gross revenue, the Partnership would be treated as
a corporation for federal income tax purposes in 1998.
Therefore, the Partnership is required to provide deferred taxes
on any existing temporary differences between the basis of its
assets and liabilities for financial reporting and income tax
purposes that are anticipated to exist on January 1, 1998. As of
December 31, 1995, no deferred taxes have been recorded as the
Partnership's management expects to take such actions to avoid
taxation at the Partnership level or management anticipates that
the net taxable temporary differences existing at December 31,
1995 will reverse prior to January 1, 1998. The following
analysis sets forth the estimated tax effects of the significant
cumulative temporary differences between the book and tax basis
of the Partnership's assets and liabilities at December 31, 1995.
This analysis does not consider permanent book and tax basis
differences.
<TABLE>
<S> <C> <C>
Deferred tax liabilities
Security Mortgage Acceptance Trusts $ (382)
Mortgage servicing rights (4,912)
Property, plant and equipment (234)
$(5,528)
Deferred tax assets:
CMO bonds, residual interests and $1,348
investment securities
Foreclosure and advances reserves 1,588
Mortgage loans held for sale 220
Other 101
3,257
Tentative net deferred tax liability $(2,271)
</TABLE>
The following is a reconciliation of net income in the
accompanying consolidated financial statements to the taxable
income (loss) reported for federal income tax purposes for the
year ended December 31 (in thousands):
<TABLE>
1995 1994 1993
<S> <C> <C> <C>
Net income per consolidated financial
statements $11,624 $4,834 $11,525
Increases (decreases) resulting from:
Amortization (10,239) (1,115) 1,006
Impairment on mortgage servicing 1,132 -- --
rights
Mark-to-market adjustments related to
investments and mortgage loans held (1,537) (1,430) (820)
for sale
Foreclosure and advances reserves 1,842 1,266 177
Equity in earnings of affiliates 254 374 --
Gain (loss) on sale of securities -- (987) (103)
Recognition of SFAS No. 122 mortgage (10,924) -- --
servicing rights
Miscellaneous (639) 480 85
Cumulative effect of the Exchange and
Western Transactions (16,030) -- --
Taxable income per federal income tax
return $(24,517) 3,422 11,870
</TABLE>
Note 14. Partners' Capital
On October 27, 1988, HBT completed its Initial Public Offering of
approximately 4.6 million Preferred Units. Simultaneously with
the closing of that offering, HBT issued an additional .4 million
Preferred Units to JCC and certain of its subsidiaries in
exchange for their interests in certain residual cash flows. On
November 4, 1991, approximately .7 million Preferred Units were
issued in connection with the settlement of a note issued in
connection with the purchase of a servicing portfolio. On
December 31, 1993, HBT issued approximately .3 million Preferred
Units to JCC to discharge amounts owed to JCC and certain of its
subsidiaries for expenses incurred on its behalf or fees for
services rendered to HBT. On March 15, 1995, in conjunction with
the Exchange Transaction, HBT issued to PVSC and the TMC Parties
approximately 21.5 million and .8 million Preferred Units,
respectively. On July 31, 1995, in conjunction with the
acquisition of Western, the Partnership issued to Harbourton and
its affiliates approximately 8.6 million Series B Preferred Units
having generally the same rights as the outstanding Preferred
Units. Further, on July 31, 1995, the Partnership issued to
Harbourton and its affiliates approximately 4.9 million of Series
B Preferred Units having generally the same rights as the
outstanding Preferred Units in settlement of $9.0 million in
notes owed to Harbourton and its affiliates. During the quarter
ended December 31, 1995, the Preferred Unitholders voted to
convert the Series B Units to Preferred Units at a conversion
ratio of one Preferred Unit for each Series B Unit.
At December 31, 1995, the number of outstanding units totaled
approximately 41.9 million. Approximately 35.8 million units are
held by Harbourton and its affiliates and certain TMC parties.
The Partnership's other 6.1 million publicly traded units were
held by approximately 4,100 unitholders of record at December 31,
1995.
Note 15. Preferred Unit Option Plan
The Partnership adopted a Preferred Unit Option Plan (the "Plan")
effective September 28, 1995 (amended October 15, 1995) under
which options to acquire Preferred Units and Distribution
Equivalent Rights may be granted to key management personnel of
the Partnership and its Affiliates. The Board of Directors of
the General Partner (the "Board") is authorized to grant Options
not to exceed 1.0 million Preferred Units in the aggregate and
Distribution Equivalent Rights not to exceed 3.0 million
Preferred Units in the aggregate. Options are generally granted
at the average market price of a Preferred Unit on the date of
grant and are exercisable beginning one year from the date of
grant and expire ten years from date of grant.
On September 28, 1995, 326.5 thousand options were granted under
the Plan at fair market value. At December 31, 1995, all 326.5
thousand options were outstanding. No options were exercisable
at December 31, 1995.
Note 16. HBT Condensed Financial Data
<TABLE>
The following condensed statement of financial condition
represents HBT on a parent-only basis at December 31, 1995:
<S> <C>
Assets:
CMO bonds and residual $ 2,613
interests
Notes receivable - 5,000
subsidiaries
Investment in subsidiaries 50,091
Other 128
Total Assets $ 57,832
Liabilities:
Repurchase agreements 1,733
Notes payable - affiliates 1,031
Other liabilities 561
Total Liabilities 3,325
Partners' Capital 54,507
Total Liabilities and $ 57,832
Partners' Capital
</TABLE>
Parent-only operations of HBT, exclusive of equity in earnings of
subsidiaries, consists primarily of net income from CMO bonds and
residual interests of approximately $.8 million offset by
interest expense on repurchase agreements and other general and
administrative expenses of $.1 million and $.6 million,
respectively, associated with HBT as a public entity.
Note 17. Fair Value of Financial Instruments
SFAS No. 107 requires disclosure of fair value information about
financial instruments, whether or not recognized in the statement
of financial condition. Fair values are based on estimates using
present value or other valuation techniques in cases where quoted
market prices are not available. Those techniques are
significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could
not be realized in immediate settlement of the instrument. SFAS
No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements.
Financial instruments are defined as cash, evidence of an
ownership interest in an entity, or a contractual obligation or
right which results in a transfer of cash or an ownership
interest in an entity. Pursuant to that definition, the
Partnership recognizes the following as financial instruments:
(1) cash and cash equivalents, (2) mortgage loans held for sale,
(3) mortgage loans held for investment, (4) CMO bonds, residual
interests, investment securities, and SMATs, (5) advances
receivable, (6) other receivables (e.g., trade receivables), (7)
installment purchase obligations, (8) lines of credit (floating
rate), (9) term loans, and (10) other payables (e.g., trade
payables).
For cash and cash equivalents, installment purchase obligations,
lines of credit, and term loans, the carrying value approximates
fair value at December 31, 1995 and 1994. The carrying value of
mortgage loans held for investment, advances receivable, other
receivables and other payables net of any applicable allowances,
also approximates fair value at December 31, 1995 and 1994. CMO
bonds, residual interests, investment securities and SMATs are
carried at fair value at December 31, 1995 and 1994. Mortgage
loans held for sale are carried at the lower of cost or market.
At December 31, 1995 the fair value of mortgage loans held for
sale approximated $233.6 million as compared to its book value at
December 31, 1995 of approximately $232.1 million. See the other
notes to the consolidated financial statements for a discussion
of how certain fair values are determined.
<TABLE>
HARBOURTON FINANCIAL SERVICES, L.P.
UNAUDITED INTERIM FINANCIAL DATA
FOR THE THREE MONTHS ENDED
March 31, June 30, September 30, December 31,
1995 1995 1995 1995
<S> <C> <C> <C> <C>
Revenues $17,151 $10,130 $15,206 $18,942
Expenses 8,467 10,888 14,762 16,567
Net income as 8,684 (758) 444 2,375
previously reported
Adjustment for
adoption of
SFAS No. 122 (1) 334 545 - -
Net income $ 9,018 $ (213) $ 444 $ 2,375
Net Profit(Loss)
Per Unit $0.30 $(0.00) $0.01 $0.06
Weighted Average 30,088 36,985 40,264 41,903
Units Outstanding
March 31, June 30, September 30, December 31,
1994 1994 1994 1994
Revenues 14,828 $7,908 $8,284 $8,114
Expenses 11,505 5,551 8,157 9,087
Net income
$3,323 $2,357 $ 127 $(973)
Net Profit (Loss) $0.11 $0.08 $0.00 $(0.03)
Per Unit
Weighted Average 30,088 30,088 30,088 30,088
Units Outstanding
</TABLE>
(1) The Partnership adopted SFAS No. 122 in the third quarter of
1995 and retroactively applied the provisions to the results of
operations for the first and second quarters of 1995. SFAS No.
122 does not allow restatement of prior years. Accordingly, the
results above have been restated for the first and second quarter
operations versus the amounts previously reported in the first
and second quarter 10-Qs.
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.
HARBOURTON MORTGAGE CO., L.P.
By: Harbourton Mortgage Corporation, its
General Partner
Date: March 29, 1996 By:
Jack W. Schakett
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
Signatures Title Date
s/ David W. Mills Chairman of the Board of March 29, 1996
Directors of the General
David W. Mills Partner
s/ Jack W. Schakett Chief Executive Officer and March 29, 1996
Director of the General
Jack W. Schakett Partner (Principal Executive
Officer)
s/ Rick W. Skogg President, Chief Operating March 29, 1996
Officer and Director of
Rick W. Skogg General Partner
s/ Paul A. Szymanski Chief Financial Officer and March 29, 1996
Secretary
Paul A. Szymanski
s/ Bill L. Reid III Chief Accounting Officer March 29, 1996
Bill L. Reid III
s/ Ronald E. Blaylock Director of the General March 29, 1996
Partner
Ronald E. Blaylock
s/ Robert Hermance Director of the General March 29, 1996
Partner
Robert Hermance
5
|ny-14530||
FIRST AMENDMENT TO CREDIT AGREEMENT
(Revolving Warehouse Credit Facility)
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (Revolving
Warehouse Credit Facility) (the "Amendment"), dated as of
November 30, 1995, is made by and among the Lenders party to the
Original Agreement (as defined below) from time to time, CHEMICAL
BANK, a New York banking corporation, as Administrative Agent for
the Lenders, FIRST BANK NATIONAL ASSOCIATION, a national banking
association, as Co-Agent for the Lenders, and HARBOURTON MORTGAGE
CO., L.P., a Delaware limited partnership (the "Borrower").
A. The Administrative Agent and the Co-Agent (for
themselves and on behalf of the Lenders from time to time), and
the Borrower entered into that certain Credit Agreement
(Revolving Warehouse Credit Facility) dated as of July 31, 1995
(the "Original Agreement," and, as amended hereby and as the same
may be further amended, modified or supplemented from time to
time, the "Agreement"). Capitalized terms used but not otherwise
defined herein shall have the meanings set forth in the
Agreement.
B. The Borrower has requested that the Lenders increase
their Commitments to an amount equal to $200,000,000.00 in the
aggregate and the Lenders have agreed to so increase their
Commitments on a pro rata basis on the terms and conditions set
forth herein.
ACCORDINGLY, the parties hereto agree as follows:
Section 1. Amendment. (a) Effective as of the
Effective Date (as defined below) the definition of "Commitment"
is hereby deleted and replaced with: ""Commitment" shall mean,
in respect of each Lender, the commitment of such Lender to make
Loans hereunder as set forth in Sections 2.1(a) and (b)."
Effective as of the Effective Date, the line in each of Sections
2.1(a) and (b) which reads "to exceed the Commitment set forth
opposite such Lender's name on the signature pages hereto" shall
be replaced with "to exceed the Commitment set forth opposite
such Lender's name on the signature pages to the First Amendment
to Credit Agreement (Revolving Warehouse Credit Facility)".
(b) Effective as of the Effective Date Section 8.6(c)
and all references to "Applicant Lender" are hereby deleted.
Section 2. Representations and Warranties.
Borrower represents and warrants that, as of the Effective Date,
both before and after giving effect to the funding of any Loans
on the Effective Date, that all of the representations and
warranties made by it in the Loan Documents are true and correct
and no Potential Default or Event of Default has occurred and is
continuing. All authorizations and approvals necessary for the
execution of this Amendment and the borrowing of the Loans
contemplated hereby have been obtained by the Borrower and its
general partner and this Amendment has been duly authorized,
executed and delivered by the Borrower.
Section 3. No Claims. Borrower represents,
warrants, covenants and agrees that there exist no defenses,
counterclaims, deductions or offsets to its obligations for the
payment of the indebtedness evidenced by the Notes or to the
performance of all of its other obligations under the Notes or
the other Loan Documents.
Section 4. Effectiveness. This Amendment
shall become effective as of the date (the "Effective Date"), on
which each of the following conditions has been satisfied:
The Borrowers shall have delivered to the
Administrative Agent, in form and substance and in quantities
reasonably satisfactory to the Administrative Agent and its
counsel, each of the following:
(a) this Amendment, duly executed and
delivered by the parties hereto;
(b) a certified copy of the partnership
authorization of the Borrower and the
resolutions of the general partner of
the Borrower approving the execution,
delivery and performance of this
Amendment and the transactions
contemplated herein; and
(c) such other documents, instruments and
agreements, duly executed, deemed
necessary or appropriate by the
Administrative Agent.
Section 10. Guaranty Reaffirmation. Each Guarantor
hereby acknowledges and agrees that its obligations under its
respective Guaranty may be increased and/or otherwise affected by
this Amendment and confirms that it shall continue to be bound by
its obligations under such Guaranty as so increased and/or
affected by this Amendment and agrees that such Guaranty is
hereby ratified and confirmed in all respects (it being
understood and agreed that that such reaffirmation and agreement
is not required by the terms of the Guaranty and that the
Borrower, the Administrative Agent and the Lenders may amend the
Loan Documents without the consent of the Guarantors).
Section 11. Miscellaneous. THIS AMENDMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK. This Amendment may be executed in any number
of counterparts, all of which taken together shall constitute one
agreement, and any party hereto may execute this Amendment by
signing any such counterpart. Except as expressly amended
hereby, the Loan Documents shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed as of the day and year first above
written.
BORROWER:
HARBOURTON MORTGAGE CO., L.P.
By: Harbourton Funding Corporation
Its General Partner
By:
Rick W. Skogg
President
GUARANTORS:
HARBOURTON FINANCIAL SERVICES L.P.
By: Harbourton Mortgage
Corporation
Its General Partner
By:
Rick W. Skogg
President
WESTERN SUNRISE HOLDINGS, L.P.
By: Harbourton Funding
Corporation,
Its General Partner
By:
Rick W. Skogg
President
Commitment: CHEMICAL BANK, as Administrative
Agent
$35,343,494.59 and as a Lender
By:
Katherine W. Sheppard
Vice President
Commitment: FIRST BANK NATIONAL ASSOCIATION,
$35,343,494.59 as Co-Agent and as a Lender
By:
Name:
Title:
Commitment: THE BANK OF NEW YORK,
$30,925,557.76 as a Lender
By:
Name:
Title:
Commitment: BANK ONE TEXAS,
$30,925,557.76 as a Lender
By:
Name:
Title:
Commitment: GUARANTY FEDERAL BANK, FSB
$26,507,620.94 as a Lender
By:
Name:
Title:
Commitment: COMERICA BANK,
$20,477,137.18 as a Lender
By:
Name:
Title:
Commitment: PNC BANK KENTUCKY,
$20,477,137.18 as a Lender
By:
Name:
Title:
2
|ny-19468||
SECOND AMENDMENT TO CREDIT AGREEMENT
(Revolving Warehouse Credit Facility)
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (Revolving
Warehouse Credit Facility) (the "Amendment"), dated as of January
26, 1996, is made by and among the Lenders party to the Original
Agreement (as defined below) from time to time, CHEMICAL BANK, a
New York banking corporation, as Administrative Agent for the
Lenders, FIRST BANK NATIONAL ASSOCIATION, a national banking
association, as Co-Agent for the Lenders, and HARBOURTON MORTGAGE
CO., L.P., a Delaware limited partnership (the "Borrower").
A. The Administrative Agent and the Co-Agent (for
themselves and on behalf of the Lenders from time to time), and
the Borrower entered into that certain Credit Agreement
(Revolving Warehouse Credit Facility) dated as of July 31, 1995
(the "Original Agreement," as amended by the First Amendment to
Credit Agreement dated as of November 30, 1995, as further
amended, modified or supplemented from time to time, the
"Agreement"). Capitalized terms used but not otherwise defined
herein shall have the meanings set forth in the Agreement.
B. The Borrower has requested that the Lenders increase
their Commitments to an amount equal to $300,000,000 in the
aggregate and agree to certain other amendments to the Agreement
and the Lenders have agreed to so increase their Commitments on a
pro rata basis and have agreed to certain other amendments on the
terms and conditions set forth herein.
ACCORDINGLY, the parties hereto agree as follows:
Section 1. Amendment. Effective as of the
Effective date (as defined below):
(a) The definition of "Cash Flow" is hereby deleted
and replaced with:
""Cash Flow" shall mean, for any fiscal quarter,
an amount equal to the net income of the Borrower for that
fiscal quarter plus all depreciation, amortization, deferred
taxes, other non-cash charges and interest incurred on all
Loans (as defined under the Servicing Credit Agreement) for
that fiscal quarter and (a) minus non-cash income and
(b) plus non-cash expense, in each case associated with the
recordation of fees resulting from the application of SFAS
No. 91 for that fiscal year and (x) minus non-cash income
associated with the recordation of gain on sale of Mortgage
Loans and (y) plus cash proceeds arising from the sale of
mortgage servicing rights which have not already been
included in net income, in each case resulting from the
application of SFAS No. 122 for that fiscal quarter. As
used herein, "SFAS" shall mean the Statements of Financial
Accounting Standards as adopted by the Financial Accounting
Standards Board."
(b) The phrase "and Eligible Home Equity Loans" is
hereby added after "Eligible Mortgage Loans" in the definition of
"Collateral Value of the Tranche A Borrowing Base" and the
following are hereby added as sections (e) and (f), respectively,
to the definition of "Collateral Value of the Tranche A Borrowing
Base" (and current sections (e) and (f) shall be relettered as
(g) and (h), respectively):
"(e) the collateral value of each Eligible Home
Equity Loan that is included in the Tranche A Borrowing Base
shall be equal to ninety-five percent (95%) of the least of:
(i) the current unpaid principal balance thereof, (ii) the
Applicable Take-Out Price multiplied by the current unpaid
principal balance thereof and (iii) the acquisition price
thereof (minus discount points and fees associated with
yield);"
"(f) if the aggregate collateral value of all
Eligible Home Equity Loans that are included in the
Tranche A Borrowing Base at any time exceeds an amount equal
to one percent (1%) of the aggregate Commitments then in
effect, such excess shall be disregarded for purposes of
determining the Collateral Value of the Tranche A Borrowing
Base;"
(c) The following is hereby added in Section 1 after
the definition of "Eligible Gestation Mortgage Loan":
""Eligible Home Equity Loan" shall mean a Mortgage
Loan (x) that satisfies the requirements for an Eligible
Mortgage Loan other than those set forth in sections (b),
(m), (n) and (p) of the definition thereof and except as
provided in clause (y) of this definition, (y) that
satisfies the requirements of sections (i) and (k) of the
definition of Eligible Mortgage Loan except that a Lien
securing a first Mortgage Loan shall be a Lien permitted
thereunder and (z) for which each of the following
statements is correct:
(a) such Mortgage Loan is a revolving line
of credit or a close-ended loan and is secured by a first
priority or second priority mortgage (or deed of trust) on
the Property;
(b) if such Mortgage Loan has been included
in the Tranche A Borrowing Base, the date of the first
advance under the promissory note of such Mortgage Loan is
no earlier than sixty (60) days prior to the date such
Mortgage Loan was first included in the Tranche A Borrowing
Base;
(c) if such Mortgage Loan has been included
in the Tranche A Borrowing Base, such Mortgage Loan has not
been included in the Tranche A Borrowing Base for more than
sixty (60) days from the date such Mortgage Loan was first
included in the Tranche A Borrowing Base;
(d) such Mortgage Loan is covered by and
allocated to a designated Take-Out Commitment issued by an
Approved Investor;
(e) the current unpaid principal balance of
such Mortgage Loan as adjusted from time to time does not
exceed $300,000; and
(f) the Loan-to-Value-Ratio of such Mortgage
Loan (including for purposes of calculating the
Loan-to-Value Ratio, the principal amount of all other
mortgage loans secured by the Property securing such
Mortgage Loan and all other mortgage loans encumbering the
Property) does not exceed ninety-five percent (95%)."
(d) Clause (a) of the definition of "Specialty
Mortgage Products" is hereby deleted and replaced with "home
equity revolving lines of credit and home equity close-ended
loans, including Eligible Home Equity Loans."
(e) The definition of "Tranche A Borrowing Base" is
hereby deleted and replaced with:
""Tranche A Borrowing Base" shall mean, at any
time, all Eligible Home Equity Loans, Eligible Jumbo
Mortgage Loans and Eligible Non-Jumbo Mortgage Loans
delivered by the Borrower and held by the Warehouse
Collateral Agent under the Warehousing Security Agreement as
collateral security for the Obligations."
(f) the line in each of Sections 2.1(a) and (b) which
reads "to exceed the Commitment set forth opposite such Lender's
name on the signature pages to the First Amendment to Credit
Agreement (Revolving Warehouse Credit Facility)" shall be
replaced with "to exceed the Commitment set forth opposite such
Lender's name on the signature pages to the Second Amendment to
Credit Agreement (Revolving Warehouse Credit Facility) or the
Commitments set forth in any subsequent Commitment Notice given
in accordance with Section 8.6(e), provided that the aggregate
amount of the Commitments shall not exceed $400,000,000.00".
(g) The phrase ", an Eligible Home Equity Loan," is
hereby added after "Eligible Conforming Mortgage Loan" in the
definition of "Type."
(h) the amount "$25,000,000" in Section 2.1(c) is
deleted and replaced with "$40,000,000."
(i) The phrase "and Eligible Home Equity Loans" is
added after "Eligible Mortgage Loans" in the first sentence of
Section 4.10.
(j) The phrase "Eligible Home Equity Loan, each" is
hereby added before "Eligible Jumbo Mortgage Loan" in
Section 4.23.
(k) The phrase "Harbourton Financial Services L.P."
wherever it appears in clauses (i) and (ii) of Section 5.1(a) is
deleted and replaced with "Harbourton Financial Services."
(l) The phrase ", Eligible Home Equity Loans," is
hereby added after "Eligible Jumbo Mortgage Loans" in the fifth
line of clause (i) of Section 5.1(b).
(m) The phrase "(or Eligible Home Equity Loan)" is
hereby added after "Eligible Mortgage Loan" in clause (ii) of
Section 5.1(b).
(n) Section 5.2(d) is hereby deleted and replaced
with:
"(d) Cash Flow to Scheduled Term Debt Service.
Permit the ratio (the "DSCR") of its Cash Flow to Scheduled
Term Debt Service for any period of four consecutive fiscal
quarters (as determined at the end of each fiscal quarter)
to be less than 1.20:1.0. Notwithstanding anything to the
contrary herein, including the definition of Cash Flow or
Scheduled Term Debt Service, the ratio described in the
preceding sentence will be determined at the end of each
fiscal quarter based on the Cash Flow and Scheduled Term
Debt Service for the preceding four fiscal quarters
(including the current quarter), subject to phase in as
follows: at the end of the first quarter of 1996, the DSCR
shall be based on the Cash Flow and Scheduled Term Debt
Service for such first quarter of 1996, at the end of the
second quarter of 1996, the DSCR shall be based on the Cash
Flow and Scheduled Term Debt Service for such first and
second quarters of 1996 (including the current quarter), at
the end of the third quarter of 1996; the DSCR shall be
based on Cash Flow and Scheduled Term Debt Service for such
first, second and third quarters of 1996 (including the
current quarter); and at the end of the fourth quarter of
1996, the DSCR shall be based on the Cash Flow and Scheduled
Term Debt Service for such first through fourth quarters of
1996 (including the current quarter). Thereafter, the DSCR
shall be based on the preceding four quarters (including the
current quarter)."
(o) Clause (vi) of Section 5.2(e) is hereby deleted
and replaced with :
"(vi) investments in Specialty Mortgage Products
(including Eligible Home Equity Loans included in the
Tranche A Borrowing Base) in an aggregate amount not to
exceed $45,000,000; provided that all Specialty Mortgage
Products other than Eligible Home Equity Loans shall be
covered by Take-Out Commitments from Approved Investors that
are not Affiliates of the Borrower that are in full force
and effect except for Specialty Mortgage Products with an
unpaid principal balance not exceeding $20,000,000 in the
aggregate at any time;"
(p) The phrase "Eligible Home Equity Loan" is hereby
added after "Eligible Mortgage Loan" in Section 8.2(ix).
(q) Sections 8.6(c) through (e) are hereby deleted and
replaced with:
"(c) So long as a Potential Default or an Event of
Default shall not have occurred and be continuing, the
Borrower may at any time propose that (i) one or more
financial institutions (each, an "Applicant Lender") become
an additional Lender hereunder and and a Lender under (and
as defined in) the Servicing Credit Agreement and/or (ii)
one or more existing Lenders (each, an "Existing Applicant
Lender") increase their respective Commitments hereunder
and under the Servicing Credit Agreement (provided that the
aggregate amount of all Commitments hereunder shall not
exceed $400,000,000 at any time). Simultaneously with the
addition of the Applicant Lender as a Lender hereunder, or,
with any Existing Applicant Lender increasing its
Commitments hereunder, the Lenders shall sell a portion of
each of their Loans and Commitments under the Servicing
Credit Agreement to the Applicant Lender (or the Existing
Applicant Lender, as applicable) so that the Applicant
Lender (or the Existing Applicant Lender, as applicable)
and each other Lender shall have the same proportionate
share of Loans and Commitments hereunder as its Loans and
Commitments under (and as defined in) the Servicing Credit
Agreement. The Borrower shall notify the other parties
hereto and the parties to the Servicing Credit Agreement of
the identity of such Applicant Lender (or the Existing
Applicant Lender, as applicable), of the proposed increase
in the aggregate Commitments hereunder resulting from the
addition of such Applicant Lender as a Lender hereunder or
the increased Commitment of the Existing Applicant Lender,
as applicable, and of such Applicant Lender's proposed
Commitment or such Existing Applicant Lender's increased
Commitment, as applicable, (which, in either case, must be
not less than $25,000,000 when combined with its
Commitments under (and as defined in) the Servicing Credit
Agreement). Upon an Applicant Lender's addition as a
Lender hereunder pursuant to this Section 8.6(c) and
Section 8.6(e), such Applicant Lender shall become a party
hereto and a Lender hereunder, shall be entitled to all
rights, benefits and privileges accorded a Lender hereunder
and under the other Loan Documents, and shall be subject to
all obligations of a Lender hereunder and under the other
Loan Documents.
(d) Any Lender (an "Assigning Lender")
may at any time and from time to time propose that a
financial institution (an "Assignee Lender") become a
Lender hereunder and under the Servicing Credit Agreement
by way of assignment of all or a portion of such Assigning
Lender's Commitment and a proportionate share of its Loans
(provided that such Assignee Lender shall, after giving
effect to the proposed assignment, have aggregate
Commitments hereunder, when combined with its Commitments
under and as defined in the Servicing Credit Agreement, in
an amount no less than $25,000,000); provided that (i) such
Assigning Lender shall retain Commitments hereunder and
Commitments under (and as defined in) the Servicing Credit
Agreement in a combined amount of no less than $25,000,000
after giving effect to such sale or assignment; (ii) such
Assigning Lender shall simultaneously assign the same
proportionate share of its Servicing Commitments and
Servicing Loans to such Assignee Lender (it being the
intention of the parties that each Lender shall at all
times have the same proportionate share of Loans and
Commitments under this Agreement as it has under the
Servicing Credit Agreement); and (iii) such Assigning
Lender or such Assignee Lender shall have paid a $2,500
assignment fee to the Administrative Agent. At such time,
such Assigning Lender shall notify the Borrower, the
Administrative Agent and each of the other Lenders of the
identity of such Assignee Lender and of such Assignee
Lender's proposed Commitment hereunder. Upon such Assignee
Lender's addition as a Lender hereunder pursuant to this
Section 8.6(d) and Section 8.6(e), such Assignee Lender
shall become a party hereto and a Lender hereunder, shall
be entitled to all rights, benefits and privileges accorded
a Lender hereunder and under the other Loan Documents, and
shall be subject to all obligations of a Lender hereunder
and under the other Loan Documents; and such Assigning
Lender shall be released from its obligations hereunder and
under the other Loan Documents to the extent such
obligations have been assumed by such Assignee Lender.
(e) The addition of any Applicant Lender or
Assignee Lender as a Lender hereunder or the increase of an
Existing Applicant Lender's Commitment hereunder, as
applicable, shall become effective upon the occurrence of
each of the following events and the events described in
Section 8.6(d) of the Servicing Credit Agreement:
(i) the Borrower and each of the Agents shall
have given their prior written consent to any Applicant
Lender and to any Assignee Lender that is not an existing
Lender or an Affiliate of the Assigning Lender, which
consent shall not be unreasonably withheld (it being
understood that no consent of the Borrower shall be
required for any Existing Applicant Lender or any Assignee
Lender that is an existing Lender or an Affiliate of the
Assigning Lender) and shall be given to the Applicant
Lender or the Assigning Lender, as applicable, not later
than the tenth (10th) day following receipt by the Borrower
and each of the Agents of a written request for the
inclusion of such Applicant Lender or Assignee Lender as a
Lender; and
(ii) the Borrower and the Agents (and such
Applicant Lender, Existing Applicant Lender, Assignee
Lender or Assigning Lender, as applicable), shall have
mutually agreed on the date (the "Adjustment Date") on
which (x) such Applicant Lender or Assignee Lender, as the
case may be, shall become a Lender hereunder and under the
other Loan Documents or (y) such Existing Applicant
Lender's Commitment shall increase. On such Adjustment
Date:
(A) the Borrower, such Applicant
Lender and the Agents shall execute and deliver to each of
the other signatories thereto an Additional Lender
Agreement (or in the case of an Existing Applicant Lender
increasing its Commitment, a statement acknowledging such
increase) or the Borrower, such Assignee Lender and
Assigning Lender and the Agents shall execute and deliver
to each of the other signatories thereto an Assignment
Agreement, as applicable, and the Borrower shall deliver a
copy thereof to each of the Lenders;
(B) the Borrower shall execute and
deliver to such Applicant Lender or Assignee Lender, as
applicable, a Note; and
(C) the Administrative Agent shall
deliver to each of the Lenders a Commitment Notice
reflecting each Lender's respective Commitment and the
aggregate Commitments of all of the Lenders as of the
Adjustment Date after giving effect to the addition of such
Applicant Lender as a Lender hereunder and under the other
Loan Documents, the assignment by the Assigning Lender to
the Assignee Lender and/or the increase in the Commitment
of the Existing Applicant Lender, as applicable."
(i) Borrower hereby agrees to pay to the
Administrative Agent on behalf of such Lender, in connection with
all further amendments, modifications and supplements to the
Agreement, a fee of $1,500 for each Lender (provided that if the
Agreement and the Servicing Credit Agreement are being amended at
the same time, such fee shall only be required to be paid under
the Agreement).
Section 2. Further Increase. The Borrower
acknowledges and agrees that the existing Lenders have no
obligation to increase their individual Commitments in order to
increase the aggregate Commitments to $400,000,000 unless they
choose to do so in the exercise of their sole and absolute
discretion.
Section 3. Representations and Warranties.
The Borrower represents and warrants that, as of the Effective
Date, both before and after giving effect to the funding of any
Loans on the Effective Date, all of the representations and
warranties made by it in the Loan Documents are true and correct
and no Potential Default or Event of Default has occurred and is
continuing. All authorizations and approvals necessary for the
execution of this Amendment have been obtained by the Borrower
and its general partner and this Amendment has been duly
authorized, executed and delivered by the Borrower.
Section 4. No Claims. The Borrower
represents, warrants, covenants and agrees that there exist no
defenses, counterclaims, deductions or offsets to its obligations
for the payment of the indebtedness evidenced by the Notes or to
the performance of all of its other obligations under the Notes
or the other Loan Documents.
Section 5. Effectiveness. This Amendment
shall become effective as of the date (the "Effective Date"), on
which each of the following conditions has been satisfied:
(a) The Borrower shall have delivered to the
Administrative Agent, in form and substance and in quantities
reasonably satisfactory to the Administrative Agent and its
counsel, each of the following:
(i) this Amendment, Additional Lender
Agreement (revolving Warehouse Credit
Facility) and the promissory note in
favor of Bank America, NT&SA, each duly
executed and delivered by the applicable
parties;
(ii) a certified copy of the partnership
authorization of the Borrower and the
resolutions of the general partner of
the Borrower and the Guarantors
approving the execution, delivery and
performance of this Amendment and the
transactions contemplated herein;
(iii) an opinion of Borrower's and
Guarantors' counsel, in form and
substance satisfactory to the
Administrative Agent, as to the due
authorization, execution and delivery,
and enforceability, of this Amendment
and all other documents delivered in
connection herewith; and
(iv) such other documents, instruments and
agreements, duly executed, deemed
necessary or appropriate by the
Administrative Agent.
(b) All conditions precedent to the "Effective
Date" under and as defined in the First Amendment to Credit
Agreement (Servicing Credit Facility) (the "Servicing Amendment")
shall have been satisfied (other than the condition precedent set
forth in Section 5(b) thereto).
(c) The Borrower shall have paid all out-of-
pocket costs and expenses of the Administrative Agent, including
reasonable attorneys' fees and expenses of its outside counsel,
in connection with the preparation, negotiation, execution and
delivery of this Amendment.
(d) The Borrower shall have paid to the
Administrative Agent on behalf of each Lender a fee of $1,500 for
each Lender in connection with the execution and delivery of this
Amendment and the Servicing Amendment.
(e) All acts and conditions required to be done
and performed and to have happened prior to the execution,
delivery and performance of this Amendment to cause the Amendment
to be the legal, valid and binding obligations of Borrower,
enforceable in accordance with its terms, shall have been done
and performed and shall have happened in due and strict
compliance with all applicable laws or if any of such have not
been done, performed or happened, such has been expressly
disclosed to the Administrative Agent and waived by all of the
Lenders in writing.
Section 6. Guaranty Reaffirmation. Each
Guarantor hereby acknowledges and agrees that its obligations
under its respective Guaranty may be increased and/or otherwise
affected by this Amendment and confirms that it shall continue to
be bound by its obligations under such Guaranty as so increased
and/or affected by this Amendment and agrees that such Guaranty
is hereby ratified and confirmed in all respects (it being
understood and agreed that that such reaffirmation and agreement
is not required by the terms of the Guaranty and that the
Borrower, the Administrative Agent and the Lenders may amend the
Loan Documents without the consent of the Guarantors).
Section 7. Miscellaneous. THIS AMENDMENT
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF NEW YORK. This Amendment may be executed in any
number of counterparts, all of which taken together shall
constitute one agreement, and any party hereto may execute this
Amendment by signing any such counterpart. Except as expressly
amended hereby, the Loan Documents shall remain in full force and
effect.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed as of the day and year first above
written.
BORROWER:
HARBOURTON MORTGAGE CO., L.P.
By: Harbourton Funding Corporation
Its General Partner
By:
Rick W. Skogg
President
GUARANTORS:
HARBOURTON FINANCIAL SERVICES L.P.
By: Harbourton Mortgage
Corporation
Its General Partner
By:
Rick W. Skogg
President
WESTERN SUNRISE HOLDINGS, L.P.
By: Harbourton Funding
Corporation,
Its General Partner
By:
Rick W. Skogg
President
Commitment: CHEMICAL BANK, as Administrative
Agent
$48,848,783.63 and as a Lender
By:
Katherine W. Sheppard
Vice President
Commitment: FIRST BANK NATIONAL ASSOCIATION,
$48,848,783.63 as Co-Agent and as a Lender
By:
Name:
Title:
Commitment: THE BANK OF NEW YORK,
$44,329,218.33 as a Lender
By:
Name:
Title:
Commitment: BANK ONE TEXAS,
$44,329,218.33 as a Lender
By:
Name:
Title:
Commitment: GUARANTY FEDERAL BANK, FSB
$32,239,431.51 as a Lender
By:
Name:
Title:
Commitment: COMERICA BANK,
$30,627,459.94 as a Lender
By:
Name:
Title:
Commitment: PNC BANK KENTUCKY,
$30,627,459.94 as a Lender
By:
Name:
Title:
Commitment: BANK OF AMERICA, NT & SA,
$20,149,644.69 as a Lender
By:
Name:
Title:
|ny-19468||
5
|ny-19585||
FIRST AMENDMENT TO CREDIT AGREEMENT
(Servicing Credit Facility)
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (Servicing
Credit Facility) (the "Amendment"), dated as of January 26, 1996,
is made by and among the Lenders party to the Original Agreement
(as defined below) from time to time, CHEMICAL BANK, a New York
banking corporation, as Administrative Agent for the Lenders,
FIRST BANK NATIONAL ASSOCIATION, a national banking association,
as Co-Agent for the Lenders, and HARBOURTON MORTGAGE CO., L.P., a
Delaware limited partnership (the "Borrower").
A. The Administrative Agent and the Co-Agent (for
themselves and on behalf of the Lenders from time to time), and
the Borrower entered into that certain Credit Agreement
(Servicing Credit Facility) dated as of July 31, 1995 (the
"Original Agreement," as amended, modified or supplemented from
time to time, the "Agreement"). Capitalized terms used but not
otherwise defined herein shall have the meanings set forth in the
Agreement.
B. The Borrower has requested that the Lenders agree to
certain amendments to the Agreement and the Lenders have agreed
to such amendments on the terms and conditions set forth herein.
ACCORDINGLY, the parties hereto agree as follows:
Section 1. Amendment. Effective as of the
Effective date (as defined below), the Agreement is amended as
follows:
(a) The definition of "Cash Flow" in Section 1 is
hereby deleted and replaced with:
""Cash Flow" shall mean, for any fiscal quarter,
an amount equal to the net income of the Borrower for that
fiscal quarter plus all depreciation, amortization, deferred
taxes, other non-cash charges and interest incurred on all
Loans for that fiscal quarter and (a) minus non-cash income
and (b) plus non-cash expense, in each case associated with
the recordation of fees resulting from the application of
SFAS No. 91 for that fiscal quarter and (x) minus non-cash
income associated with the recordation of gain on sale of
Mortgage Loans and (y) plus cash proceeds arising from the
sale of mortgage servicing rights which have not already
been included in net income, in each case resulting from the
application of SFAS No. 122 for that fiscal quarter. As
used herein, "SFAS" shall mean the Statements of Financial
Accounting Standards as adopted by the Financial Accounting
Standards Board."
(b) Clause (a) of the definition of "Specialty
Mortgage Products" in Section 1 is hereby deleted and replaced
with "(a) home equity revolving lines of credit and home equity
close-ended loans, including Eligible Home Equity Loans (as
defined in the Warehouse Credit Agreement)."
(c) The definition of "Required Lenders" in Section 1
is hereby deleted and replaced with:
""Required Lenders" shall mean, at any time,
Lenders having at least sixty-six and two-thirds (66 2/3%)
percent of the Commitments or, if there are no Commitments,
then Lenders holding at least sixty-six and two-thirds
percent (66 2/3%) of the aggregate unpaid principal amount
of the Loans then outstanding.""
(d) The date "July 31, 1996" in Section 2.2 and in
Section 2.9(a) is hereby deleted and replaced with "July 30,
1996."
(e) The phrase "Harbourton Financial Services L.P."
wherever it appears in clauses (i) and (ii) of Section 5.1(a) is
deleted and replaced with "Harbourton Financial Services."
(f) Section 5.2(d) is hereby deleted and replaced
with:
"(d) Cash Flow to Scheduled Term Debt Service.
Permit the ratio (the "DSCR") of its Cash Flow to Scheduled
Term Debt Service for any period of four consecutive fiscal
quarters (as determined at the end of each fiscal quarter)
to be less than 1.20:1.0. Notwithstanding anything to the
contrary herein, including the definition of Cash Flow or
Scheduled Term Debt Service, the ratio described in the
preceding sentence will be determined at the end of each
fiscal quarter based on the Cash Flow and Scheduled Term
Debt Service for the preceding four fiscal quarters
(including the current quarter), subject to phase in as
follows: at the end of the first quarter of 1996, the DSCR
shall be based on the Cash Flow and Scheduled Term Debt
Service for such first quarter of 1996, at the end of the
second quarter of 1996, the DSCR shall be based on the Cash
Flow and Scheduled Term Debt Service for such first and
second quarters of 1996 (including the current quarter), at
the end of the third quarter of 1996; the DSCR shall be
based on Cash Flow and Scheduled Term Debt Service for such
first, second and third quarters of 1996 (including the
current quarter); and at the end of the fourth quarter of
1996, the DSCR shall be based on the Cash Flow and Scheduled
Term Debt Service for such first through fourth quarters of
1996 (including the current quarter). Thereafter, the DSCR
shall be based on the preceding four quarters (including the
current quarter)."
(g) Clause (vi) of Section 5.2(e) is hereby deleted
and replaced with :
"(vi) investments in Specialty Mortgage Products
(including Eligible Home Equity Loans included in the
Tranche A Borrowing Base under (and as defined in) the
Warehouse Credit Agreement) in an aggregate amount not to
exceed $45,000,000; provided that all Specialty Mortgage
Products other than Eligible Home Equity Loans shall be
covered by Take-Out Commitments from Approved Investors that
are not Affiliates of the Borrower that are in full force
and effect except for Specialty Mortgage Products with an
unpaid principal balance not exceeding $20,000,000 in the
aggregate at any time;"
(h) Section 8.6(c) is hereby deleted and replaced
with:
"(c) Any Lender (an "Assigning Lender") may at any
time and from time to time propose that a financial
institution (an "Assignee Lender") become a Lender
hereunder and under the Warehouse Credit Agreement by way
of assignment of all or a portion of such Assigning
Lender's Commitments and a proportionate share of its Loans
(provided that such Assignee Lender shall, after giving
effect to the proposed assignment, have aggregate
Commitments hereunder, when combined with its Commitments
under and as defined in the Warehouse Credit Agreement, in
an amount no less than $25,000,000); provided that (i) such
Assigning Lender shall retain aggregate Commitments in an
amount no less than $25,000,000 when combined with its
Commitments under and as defined in the Warehouse Credit
Agreement after giving effect to such sale or assignment
and any simultaneous sale or assignment under the Warehouse
Credit Agreement; (ii) such Assigning Lender shall assign
the same proportionate share of (A) its Tranche B
Commitment, its Tranche C Commitment and its Tranche D
Commitment, and (B) its Tranche A Loans, its Tranche B
Loans, its Tranche C Loans and its Tranche D Loans; (iii)
unless such assignment is being made in connection with the
addition of an Applicant Lender (as defined in the
Warehouse Credit Agreement) as a lender under the Warehouse
Credit Agreement, such Assigning Lender shall
simultaneously assign the same proportionate share of its
Warehouse Commitments and Warehouse Loans to such Assignee
Lender (it being the intention of the parties that each
Lender shall at all times have the same proportionate share
of Loans and Commitments under this Agreement as it has
under the Warehouse Credit Agreement); and (iv) the
Assigning Lender or the Assignee Lender shall have paid a
$2,500 assignment fee to the Administrative Agent, unless
such assignment is being made in connection with the
addition of an Applicant Lender (or an increase by an
Existing Applicant Lender) as a Lender under the Warehouse
Credit Agreement, in which case the Borrower shall have
paid such $2,500 assignment fee to the Administrative
Agent. Such Assigning Lender shall notify the Borrower,
the Administrative Agent and each of the other Lenders of
the identity of such Assignee Lender and of such Assignee
Lender's proposed aggregate Commitments hereunder. Upon
such Assignee Lender's addition as a Lender hereunder, such
Assignee Lender shall become a party hereto and a Lender
hereunder, shall be entitled to all rights, benefits and
privileges accorded a Lender hereunder and under the other
Loan Documents, and shall be subject to all obligations of
a Lender hereunder and under the other Loan Documents; and
such Assigning Lender shall be released from its
obligations hereunder and under the other Loan Documents to
the extent such obligations have been assumed by such
Assignee Lender. In addition to and not in limitation of
the foregoing, each Lender agrees to assign a portion of
its Loans and Commitments hereunder to any Applicant Lender
under the Warehouse Credit Agreement that becomes a Lender
thereunder, as required under Section 8.6(c) of the
Warehouse Credit Agreement, so that such Applicant Lender
and each other Lender shall have the same proportionate
share of Loans and Commitments hereunder as it has under
the Warehouse Credit Agreement."
(i) Borrower hereby agrees to pay to the
Administrative Agent on behalf of such Lender, in connection
with all further amendments, modifications and supplements
to the Agreement, a fee of $1,500 for each Lender (provided
that if the Agreement and the Warehouse Credit Agreement are
being amended at the same time, such fee shall only be
required to be paid under the Warehouse Credit Agreement).
Section 2. Representations and Warranties.
The Borrower represents and warrants that, as of the Effective
Date, both before and after giving effect to the funding of any
Loans on the Effective Date, all of the representations and
warranties made by it in the Loan Documents are true and correct
and no Potential Default or Event of Default has occurred and is
continuing. All authorizations and approvals necessary for the
execution of this Amendment have been obtained by the Borrower
and its general partner and this Amendment has been duly
authorized, executed and delivered by the Borrower.
Section 3. No Claims. The Borrower
represents, warrants, covenants and agrees that there exist no
defenses, counterclaims, deductions or offsets to its obligations
for the payment of the indebtedness evidenced by the Notes or to
the performance of all of its other obligations under the Notes
or the other Loan Documents.
Section 4. Effectiveness. This Amendment
shall become effective as of the date (the "Effective Date"), on
which each of the following conditions has been satisfied:
(a) The Borrower shall have delivered to the
Administrative Agent, in form and substance and in quantities
reasonably satisfactory to the Administrative Agent and its
counsel, each of the following:
(i) this Amendment, the Omnibus Assignment
Agreement (Servicing Credit Facility),
and the promissory note in favor of Bank
America, NT&SA, each duly executed and
delivered by the applicable parties
hereto;
(ii) a certified copy of the partnership
authorization of the Borrower and the
resolutions of the general partner of
the Borrower and the Guarantors
approving the execution, delivery and
performance of this Amendment and the
transactions contemplated herein;
(iii) an opinion of Borrower's and
Guarantors' counsel, in form and
substance satisfactory to the
Administrative Agent, as to the due
authorization, execution and delivery,
and enforceability, of this Amendment
and all other documents delivered in
connection herewith; and
(iv) such other documents, instruments and
agreements, duly executed, deemed
necessary or appropriate by the
Administrative Agent.
(b) All conditions precedent to the "Effective
Date" under and as defined in the Second Amendment to Credit
Agreement (Revolving Warehouse Credit Facility) (the "Warehouse
Amendment") shall have been satisfied (other than the condition
precedent set forth in Section 5(b) thereto).
(c) The Borrower shall have paid all out-of-
pocket costs and expenses of the Administrative Agent, including
reasonable attorneys' fees and expenses of its outside counsel,
in connection with the preparation, negotiation, execution and
delivery of this Amendment.
(d) The Borrower shall have paid to the
Administrative Agent on behalf of each Lender a fee of $1,500 for
each Lender in connection with the execution and delivery of this
Amendment and the Warehouse Amendment.
(e) All acts and conditions required to be done
and performed and to have happened prior to the execution,
delivery and performance of this Amendment to cause the Amendment
to be the legal, valid and binding obligations of Borrower,
enforceable in accordance with its terms, shall have been done
and performed and shall have happened in due and strict
compliance with all applicable laws or if any of such have not
been done, performed or happened, such has been expressly
disclosed to the Administrative Agent and waived by all of the
Lenders in writing.
Section 5. Guaranty Reaffirmation. Each
Guarantor hereby acknowledges and agrees that its obligations
under its respective Guaranty may be increased and/or otherwise
affected by this Amendment and confirms that it shall continue to
be bound by its obligations under such Guaranty as so increased
and/or affected by this Amendment and agrees that such Guaranty
is hereby ratified and confirmed in all respects (it being
understood and agreed that that such reaffirmation and agreement
is not required by the terms of the Guaranty and that the
Borrower, the Administrative Agent and the Lenders may amend the
Loan Documents without the consent of the Guarantors).
Section 6. Miscellaneous. THIS AMENDMENT
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF NEW YORK. This Amendment may be executed in any
number of counterparts, all of which taken together shall
constitute one agreement, and any party hereto may execute this
Amendment by signing any such counterpart. Except as expressly
amended hereby, the Loan Documents shall remain in full force and
effect.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed as of the day and year first above
written.
BORROWER:
HARBOURTON MORTGAGE CO., L.P.
By: Harbourton Funding Corporation
Its General Partner
By:
Rick W. Skogg
President
GUARANTORS:
HARBOURTON FINANCIAL SERVICES L.P.
By: Harbourton Mortgage
Corporation
Its General Partner
By:
Rick W. Skogg
President
WESTERN SUNRISE HOLDINGS, L.P.
By: Harbourton Funding
Corporation,
Its General Partner
By:
Rick W. Skogg
President
CHEMICAL BANK, as Administrative
Agent
and as a Lender
By:
Katherine W. Sheppard
Vice President
FIRST BANK NATIONAL ASSOCIATION,
as Co-Agent and as a Lender
By:
Name:
Title:
THE BANK OF NEW YORK,
as a Lender
By:
Name:
Title:
BANK ONE TEXAS,
as a Lender
By:
Name:
Title:
GUARANTY FEDERAL BANK, FSB
as a Lender
By:
Name:
Title:
COMERICA BANK,
as a Lender
By:
Name:
Title:
PNC BANK KENTUCKY,
as a Lender
By:
Name:
Title:
BANK OF AMERICA, NT & SA,
as a Lender
By:
Name:
Title:
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