-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OyPw+T7CKHQ6qnMPVXX13lzvE7RfosP5C17j9a20q1PE+LFjiGXZairiYkN3TBfC /wbscttAclCpNQkyFO3aAw== 0000025191-97-000007.txt : 19970522 0000025191-97-000007.hdr.sgml : 19970522 ACCESSION NUMBER: 0000025191-97-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19970228 FILED AS OF DATE: 19970521 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COUNTRYWIDE CREDIT INDUSTRIES INC CENTRAL INDEX KEY: 0000025191 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 132641992 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12331-01 FILM NUMBER: 97612660 BUSINESS ADDRESS: STREET 1: 155 NORTH LAKE AVE CITY: PASADENA STATE: CA ZIP: 91101-1857 BUSINESS PHONE: 8183048400 10-K 1 ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended February 28, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 NO FEE REQUIRED For the transition period from to Commission file number: 1-8422 COUNTRYWIDE CREDIT INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Delaware 13 - 2641992 (State of other jurisdiction (I.R.S. Employer Identification No.) of incorporation) 155 N. Lake Avenue, Pasadena, California 91101-1857 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (818) 304-8400 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $.05 Par Value New York Stock Exchange Pacific Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange Pacific Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------------- ------------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] As of May 5, 1997, there were 106,383,483 shares of Countrywide Credit Industries, Inc. Common Stock, $.05 par value, outstanding. Based on the closing price for shares of Common Stock on that date, the aggregate market value of Common Stock held by non-affiliates of the registrant was approximately $2,935,411,000. For the purposes of the foregoing calculation only, all directors and executive officers of the registrant have been deemed affiliates. DOCUMENTS INCORPORATED BY REFERENCE Proxy Statement for the 1997 Annual Meeting PART I ITEM 1. BUSINESS A. General Countrywide Credit Industries, Inc. (the "Company" or "CCI") is a holding company which, through its principal subsidiary, Countrywide Home Loans, Inc. ("CHL"), is engaged primarily in the mortgage banking business, and as such originates, purchases, sells and services mortgage loans. The Company's mortgage loans are principally prime credit quality first-lien mortgage loans secured by single- (one-to-four) family residences ("Prime mortgages"). The Company also offers home equity loans both in conjunction with newly produced Prime mortgages and as a separate product. In addition, the Company offers sub-prime credit quality first-lien single-family mortgage loans ("Sub-prime loans"). The Company, through its other wholly-owned subsidiaries, offers products and services complementary to its mortgage banking business. One of these subsidiaries acts as an agent in the sale of insurance, including homeowners, fire, flood, earthquake, auto, annuities, home warranty, life and disability, to CHL's mortgagors and others. The Company also has a subsidiary that acts as a title insurance agent and provides escrow, credit reporting and home appraisal services. The Company also has subsidiaries that reinsure a portion of mortgage insurance losses on loans originated by the Company that are insured by the mortgage insurance companies with which the Company entered into the reinsurance agreement. Another subsidiary of the Company serves as trustee under deeds of trust in connection with foreclosures on loans in the Company's servicing portfolio in California and other states. There is a subsidiary of the Company which also provides tax services to ensure that property taxes are paid current at origination and throughout the life of the loan. On February 28, 1997, the Company acquired a mutual fund manager which provides investment advisory services for 15 affiliated mutual funds and individual investors and management services for unaffiliated funds. The Company also has a registered broker-dealer which trades to other broker-dealers and institutional investors mortgage-backed securities ("MBS") and other mortgage-related assets. Through two subsidiaries, the Company issues mortgage- and asset-backed securities which are backed by Prime mortgage loans, Sub-prime loans or home equity loans. In addition, Countrywide Asset Management Corp. ("CAMC") a wholly owned subsidiary of CCI, receives fee income for managing the operations of CWM Mortgage Holdings, Inc. ("CWM"), a publicly-traded real estate investment trust. On January 29, 1997, CCI and CWM entered into an agreement pursuant to which CWM will acquire the operations and employees of CAMC, and as a result, CWM will cease paying the management fee. The proposed transaction is structured as a merger of CAMC with and into CWM with CCI to receive approximately 3.6 million newly issued common shares of CWM. Based on the closing sales price of CWM common stock on the New York Stock Exchange on May 5, 1997, the market value of CWM common stock to be received in the proposed transaction is approximately $72 million. The closing of the transaction is contingent on, among other things, the receipt of required regulatory and shareholder approvals. There can be no assurance that the proposed transaction will be consummated. Unless the context otherwise requires, references to the "Company" herein shall be deemed to refer to the Company and its consolidated subsidiaries. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for certain forward-looking statements. This Annual Report on Form 10-K may contain forward-looking statements which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those identified below, which could cause future results to differ materially from historical results or those anticipated. The words "believe," "expect," "anticipate," "intend," "estimate" and other expressions which indicate future events and trends identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The following factors could cause future results to differ materially from historical results or those anticipated: (1) the level of demand for mortgage credit, which is affected by such external factors as the level of interest rates, the strength of the various segments of the economy and demographics of the Company's lending markets; (2) the direction of interest rates; (3) the relationship between mortgage interest rates and the cost of funds; (4) federal and state regulation of the Company's mortgage banking operations and (5) competition within the mortgage banking industry. B. Mortgage Banking Operations The principal sources of revenue from the Company's mortgage banking business are: (i) loan origination fees; (ii) gains from the sale of loans, if any; (iii) interest earned on mortgage loans during the period that they are held by the Company pending sale, net of interest paid on funds borrowed to finance such mortgage loans; (iv) loan servicing fees and (v) interest benefit derived from the custodial balances associated with the Company's servicing portfolio. Loan Production The Company originates and purchases conventional mortgage loans, mortgage loans insured by the Federal Housing Administration ("FHA"), mortgage loans partially guaranteed by the Veterans Administration ("VA"), home equity loans and Sub-prime loans. A majority of the conventional loans are conforming loans which qualify for inclusion in guarantee programs sponsored by the Federal National Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage Corporation ("Freddie Mac"). The remainder of the conventional loans are non-conforming loans (i.e., jumbo loans with an original balance in excess of $214,600 or other loans that do not meet Fannie Mae or Freddie Mac guidelines). As part of its mortgage banking activities, the Company makes conventional loans generally with original balances of up to $1 million. The following table sets forth the number and dollar amount of the Company's Prime mortgage, home equity and Sub-prime loan production for the periods indicated.
----------------------------- --- ------------------------------------------------------------------------------- Summary of the Company's Prime Mortgage, (Dollar amounts in millions, Home Equity and Sub-prime Loan Production except average loan amount) Year Ended February 28(29), ----------------------------- --- ------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ----------------------------- ---- ------------- -- ------------- --- ----------- -- ------------ -- ------------ Conventional Loans Number of Loans 190,250 191,534 175,823 315,699 192,385 Volume of Loans $22,676.2 $21,883.4 $20,958.7 $46,473.4 $28,669.9 Percent of Total Volume 60.0% 63.3% 75.2% 88.6% 88.5% FHA/VA Loans Number of Loans 143,587 125,127 72,365 67,154 42,022 Volume of Loans $13,657.1 $12,259.3 $6,808.3 $5,985.5 $3,717.9 Percent of Total Volume 36.1% 35.5% 24.4% 11.4% 11.5% Home Equity Loans Number of Loans 20,053 7,986 2,147 - - Volume of Loans $613.2 $220.8 $99.2 - - Percent of Total Volume 1.6% 0.6% 0.4% - - Sub-prime Loans Number of Loans 9,161 1,941 - - - Volume of Loans $864.3 $220.2 - - - Percent of Total Volume 2.3% 0.6% - - - Total Loans Number of Loans 363,051 326,588 250,335 382,853 234,407 Volume of Loans $37,810.8 $34,583.7 $27,866.2 $52,458.9 $32,387.8 Average Loan Amount $104,000 $106,000 $111,000 $137,000 $138,000 ----------------------------- ---- ------------- -- ------------- --- ----------- -- ------------ -- ------------
The increase in the dollar amount and the decrease in the number of conventional loans in the year ended February 28, 1997 ("Fiscal 1997") as compared to the year ended February 29, 1996 ("Fiscal 1996") was attributable primarily to the expansion of the Company's jumbo loan production activities, and an improvement in the relative attractiveness of FHA loan products as an alternate to conventional loans for providing homeownership to low-and moderate-income borrowers. The increase in the number and dollar amount of FHA and VA loans produced in the year ended February 28, 1997 from those produced in the years ended February 29(28), 1996 and 1995 was attributable to their relative attractiveness discussed in the previous sentence and the Company's effort to expand its share of that market due to the popularity of FHA and VA loans among borrowers and the returns earned on those products by the Company. Production of the Company's home equity and Sub-prime products also increased from the year ended February 29, 1996. This increase was attributable primarily to the Company's efforts to grow its production of these products due to the high returns they generate and growth opportunities that exist in the market. For the years ended February 28(29), 1997, 1996 and 1995, jumbo loans represented 12%, 6% and 17%, respectively, of the Company's total volume of mortgage loans produced. The increase in the percentage of jumbo loans was primarily the result of more competitive pricing of the Company's jumbo loan products from Fiscal 1996 to Fiscal 1997. For the years ended February 28(29), 1997, 1996 and 1995, adjustable-rate mortgage loans ("ARMs") comprised approximately 26%, 22% and 34%, respectively, of the Company's total volume of mortgage loans produced. The increase in the Company's percentage of ARM production from Fiscal 1996 to Fiscal 1997 was primarily caused by the higher mortgage interest rate environment that prevailed through most of the year ended February 28, 1997 compared to the year ended February 29, 1996. For the years ended February 28(29), 1997, 1996 and 1995, refinancing activity represented 33%, 34% and 30%, respectively, of the Company's total volume of mortgage loans produced. The percentage of refinance loans for each of these years reflects an interest rate environment conducive to a moderate level of refinance activity. The Company produces mortgage loans through three separate divisions. The Company maintains a staff of central office quality control personnel that performs audits of the loan production of the three divisions on a regular basis. In addition, each division has implemented various procedures to control the quality of loans produced, as described below. The Company believes that its use of technology and benefits derived from economies of scale and a noncommissioned sales force allow it to produce loans at a low cost relative to its competition. Consumer Markets Division The Company's Consumer Markets Division (the "Consumer Markets Division") originates Prime mortgage, home equity and Sub-prime loans using direct contact with consumers through its nationwide network of retail branch offices, its telemarketing systems and its site on the World Wide Web. As of February 28, 1997, the Company had 276 Consumer Markets Division branch offices, two satellite offices and two processing support centers located in 42 states and the District of Columbia. The Company's branch offices are each staffed typically by four employees and connected to the Company's central office by a computer network. In addition, the Company operates two telemarketing centers which receive telephone calls placed by potential borrowers primarily in response to print or broadcast advertising. The loan counselors employed in the telemarketing centers provide information and accept loan applications, which are then forwarded to a branch office for processing and funding. Business is also solicited through other forms of telemarketing and advertising, participation of branch management in local real estate-related business functions and extensive use of direct mailings to borrowers, real estate brokers and builders. Consumer Markets Division personnel are not paid a commission on sales; however, they are paid a bonus based on various factors, including branch profitability. The Company believes that this approach allows it to originate high-quality loans at a comparatively low cost. The Consumer Markets Division uses continuous quality control audits of loans originated within each branch by branch management and quality control personnel to monitor compliance with the Company's underwriting criteria. The following table sets forth the number and dollar amount of the Consumer Markets Division's Prime mortgage, home equity and Sub-prime loan production for the periods indicated.
----------------------------- -- ------------------------------------------------------------------------------- Summary of the Consumer Markets Division's Prime Mortgage, (Dollar amounts in millions, Home Equity and Sub-prime Loan Production except average loan amount) Year Ended February 28(29), ----------------------------- -- ------------- --- ------------ -- ------------ --- ------------ -- ------------ 1997 1996 1995 1994 1993 ----------------------------- -- ------------- --- ------------ -- ------------ --- ------------ -- ------------ Conventional Loans Number of Loans 43,261 47,260 48.772 73,249 39,787 Volume of Loans $5,145.3 $5,271.8 $5,442.2 $9,264.8 $5,026.7 Percent of Total Volume 63.7% 70.7% 77.0% 80.2% 82.4% FHA/VA Loans Number of Loans 27,746 22,829 19,060 26,418 11,739 Volume of Loans $2,514.3 $2,025.4 $1,612.1 $2,282.3 $1,073.0 Percent of Total Volume 31.2% 27.1% 22.8% 19.8% 17.6% Home Equity Loans Number of Loans 14,028 6,000 297 - - Volume of Loans $384.7 $160.9 $11.4 - - Percent of Total Volume 4.8% 2.2% 0.2% - - Sub-prime Loans Number of Loans 303 - - - - Volume of Loans $27.0 - - - - Percent of Total Volume 0.3% - - - - Total Loans Number of Loans 85,338 76,089 68,129 99,667 51,526 Volume of Loans $8,071.3 $7,458.1 $7,065.7 $11,547.1 $6,099.7 Average Loan Amount $95,000 $98,000 $104,000 $116,000 $118,000 ----------------------------- -- ------------- --- ------------ -- ------------ --- ------------ -- ------------
Wholesale Division In its Wholesale Division (the "Wholesale Division"), the Company produces Prime mortgage, home equity and Sub-prime loans through mortgage loan brokers. As of February 28, 1997, the Wholesale Division operated 58 loan centers and nine regional support centers in various parts of the country. Prime credit quality loans produced by the Wholesale Division comply with the Company's general underwriting criteria for loans originated through the Consumer Markets Division, and each such loan is approved by one of the Company's loan underwriters. Sub-prime loans are underwritten centrally by a specialized underwriting group and comply with the Company's underwriting criteria for such loans. In addition, quality control personnel review loans for compliance with the Company's underwriting criteria. Approximately 10,800 mortgage brokers qualify to participate in the Wholesale Division's loan delivery program. Mortgage loan brokers qualify to participate in the Wholesale Division's program only after a review by the Company's management of their reputation and mortgage lending expertise, including a review of their references and financial statements. The following table sets forth the number and dollar amount of the Wholesale Division's Prime mortgage, home equity and Sub-prime loan production for the periods indicated.
----------------------------- --- ---------------------------------------------------------------------------- Summary of the Wholesale Division's Prime Mortgage, (Dollar amounts in millions, Home Equity and Sub-prime Loan Production except average loan amount) Year Ended February 28(29), ----------------------------- --- ------------ -- ------------- -- ------------ -- ------------ -- ----------- 1997 1996 1995 1994 1993 ----------------------------- --- ------------ -- ------------- -- ------------ -- ------------ -- ----------- Conventional Loans Number of Loans 50,570 59,670 65,713 130,937 92,922 Volume of Loans $6,187.8 $6,766.9 $7,790.0 $21,271.0 $15,480.1 Percent of Total Volume 73.4% 84.0% 91.6% 98.9% 100.0% FHA/VA Loans Number of Loans 12,505 10,448 6,239 2,700 15 Volume of Loans $1,190.0 $1,016.2 $626.3 $244.4 $1.5 Percent of Total Volume 14.1% 12.6% 7.4% 1.1% 0.0% Home Equity Loans Number of Loans 6,017 1,937 1,836 - - Volume of Loans $227.7 $57.5 $86.9 - - Percent of Total Volume 2.7% 0.7% 1.0% - - Sub-prime Loans Number of Loans 8,568 1,941 - - - Volume of Loans $823.9 $220.2 - - - Percent of Total Volume 9.8% 2.7% - - - Total Loans Number of Loans 77,660 73,996 73,788 133,637 92,937 Volume of Loans $8,429.4 $8,060.8 $8,503.2 $21,515.4 $15,481.6 Average Loan Amount $109,000 $109,000 $115,000 $161,000 $167,000 ----------------------------- --- ------------ -- ------------- -- ------------ -- ------------ -- -----------
Correspondent Division Through its network of correspondent offices (the "Correspondent Division"), the Company purchases loans from other mortgage bankers, commercial banks, savings and loan associations, credit unions and other financial intermediaries. The Company's correspondent offices are located in Pasadena, California; Plano, Texas and Pittsburgh, Pennsylvania. Over 1,200 financial intermediaries serving all 50 states are eligible to participate in this program. Financial intermediaries qualify to participate in the Correspondent Division's program after a review by the Company's management of the reputation and mortgage lending expertise of such institutions, including a review of their references and financial statements. Loans purchased by the Company through the Correspondent Division comply with the Company's general underwriting criteria for loans that it originates through the Consumer Markets Division, and, except as described in the next sentence, each loan is accepted only after review either by one of the Company's loan underwriters or, in the case of FHA or VA loans, by a government-approved underwriter. The Company accepts loans without such review from an institution that has met the Company's standards for the granting of delegated underwriting authority following a review by the Company of the institution's financial strength, underwriting and quality control procedures, references and prior experience with the Company. During the year ended February 28, 1997, approximately 88% of conventional loans purchased through the Correspondent Division were accepted without review by a Company underwriter. In addition, quality control personnel review loans purchased from correspondents, including those granted delegated underwriting authority, for compliance with the Company's underwriting criteria. The purchase agreement used by the Correspondent Division provides the Company with recourse to the correspondent in the event of such occurrences as fraud or misrepresentation in the origination process or a request by the investor who purchased an underlying mortgage loan that the Company repurchase the loan due to the loan's failure to meet eligibility requirements at the time the Company originally purchased the loan. The following table sets forth the number and dollar amount of the Correspondent Division's Prime mortgages, home equity and Sub-prime loan production for the periods indicated.
----------------------------- ------------------------------------------------------------------------------- -- Summary of the Correspondent Division's Prime Mortgage, (Dollar amounts in millions, Home Equity and Sub-prime Loan Production except average loan amount) Year Ended February 28(29), ----------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- ------------- 1997 1996 1995 1994 1993 ----------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- ------------- Conventional Loans Number of Loans 96,419 84,604 61,338 111,513 59,676 Volume of Loans $11,343.1 $9,844.7 $7,726.5 $15,937.6 $8,163.0 Percent of Total Volume 53.2% 51.7% 62.8% 82.2% 75.5% FHA/VA Loans Number of Loans 103,336 91,850 47,066 38,036 30,268 Volume of Loans $9,952.8 $9,217.7 $4,570.0 $3,458.8 $2,643.5 Percent of Total Volume 46.7% 48.3% 37.2% 17.8% 24.5% Home Equity Loans Number of Loans 8 49 14 - - Volume of Loans $0.8 $2.4 $0.8 - - Percent of Total Volume 0.0% 0.0% 0.0% - - Sub-prime Loans Number of Loans 290 - - - - Volume of Loans $13.4 - - - - Percent of Total Volume 0.1% - - - - Total Loans Number of Loans 200,053 176,503 108,418 149,549 89,944 Volume of Loans $21,310.1 $19,064.8 $12,297.3 $19,396.4 $10,806.5 Average Loan Amount $107,000 $108,000 $113,000 $130,000 $120,000 ----------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- -------------
Fair Lending Programs In conjunction with fair lending initiatives undertaken by both Fannie Mae and Freddie Mac and promoted by various government agencies including the Department of Housing and Urban Development ("HUD"), the Company has established affordable home loan and fair lending programs for low- and moderate-income and designated minority borrowers. These programs offer more flexible underwriting guidelines (consistent with those guidelines adopted by Fannie Mae and Freddie Mac) than historical industry standards, thereby enabling more people to qualify for home loans than had qualified under such historical guidelines. Highlights of these flexible guidelines include a lower down payment requirement, more liberal guidelines in areas such as credit and employment history, less income required to qualify and no cash reserve requirements at the date of funding. House America(R) is the Company's affordable home loan program for low- and moderate-income borrowers, offering loans that are eligible for purchase by Fannie Mae and Freddie Mac. During the years ended February 28(29), 1997 and 1996, the Company produced approximately $0.6 billion and $1.3 billion, respectively, of mortgage loans under this program. The decline in House America production from the fiscal year ended February 29, 1996 to the year ended February 28, 1997, was the result of an improvement in the relative attractiveness of FHA loan products as an alternative means of providing homeownership to low- and moderate-income borrowers. House America(R) personnel work with all of the Company's production divisions to help properly implement the flexible underwriting guidelines. In addition, an integral part of the program is the House America(R) Counseling Center, a free educational service, which can provide consumers a homebuyers educational program, pre-qualify them for a loan or provide a customized budget plan to help consumers obtain their goal of home ownership. To assist a broad spectrum of consumers, counselors are bilingual and work with consumers for up to one year, providing guidance on a regular basis via phone and mail. The Company also organizes and participates in local homebuyer fairs across the country. At these fairs, branch personnel and Counseling Center counselors discuss various loan programs, provide free prequalfications and distribute credit counseling and homebuyer education videos and workbooks. The Company's affordable housing outreach also includes participation in over 80 local mortgage revenue bond programs for first-time home buyers. Federal law allows local government agencies to sell tax exempt bonds to purchase mortgages securing loans made to first-time, lower-income home buyers. These programs thereby provide for mortgages with fixed interest rates that are lower than then-current market rates. In addition, a selection of applications from certain designated minority and other borrowers that are initially recommended for denial within the Company's Consumer Markets Division is forwarded for an additional review by a manager of the Company to insure that denial is appropriate. The application of more flexible underwriting guidelines may carry a risk of increased delinquencies. However, because the loans in the portfolio are generally serviced on a non-recourse basis, the Company's exposure to credit loss resulting from increased delinquency rates is substantially limited. Further, related late charge income has historically been sufficient to offset incremental servicing expenses resulting from an increased delinquency rate. Loan Underwriting The Company's guidelines for underwriting FHA-insured loans and VA-guaranteed loans comply with the criteria established by such agencies. The Company's guidelines for underwriting conventional conforming loans comply with the underwriting criteria employed by Fannie Mae and/or Freddie Mac. The Company's underwriting guidelines and property standards for conventional non-conforming loans are based on the underwriting standards employed by private investors for such loans. In addition, conventional loans originated or purchased by the Company with a loan-to-value ratio greater than 80% at origination are covered by private mortgage insurance (which may be paid by the borrower or by the lender). In conjunction with fair lending initiatives undertaken by both Fannie Mae and Freddie Mac, the Company has established affordable home loan programs for low- and moderate-income and designated minority borrowers offering more flexible underwriting guidelines than historical industry standards. See "Business--Mortgage Banking Operations--Fair Lending Programs." The following describes the general underwriting criteria taken into consideration by the Company in determining whether to approve a Prime mortgage loan application. Employment and Income Applicants must exhibit the ability to generate income on a regular basis in order to meet the housing payments relating to the loan as well as any other debts they may have. Evidence of employment and income is obtained through a written verification of employment with the current and prior employers or by obtaining a recent pay stub and W-2 forms. Self-employed applicants are required to provide tax returns, financial statements or other documentation to verify income. Sources of income to be considered include salary, bonus, overtime, commissions, retirement benefits, notes receivable, interest, dividends, unemployment benefits and rental income. Debt-to-Income Ratios Generally, an applicant's monthly income should be three times the amount of monthly housing expenses (loan payment, real estate taxes, hazard insurance and homeowner association dues, if applicable). Monthly income should generally be two and one-half times the amount of total fixed monthly obligations (housing expense plus other obligations such as car loans or credit card payments). Other areas of financial strength, such as equity in the property, large cash reserves or a history of meeting prior home mortgage or rental obligations are considered to be compensating factors and may result in an adjustment of these ratio limitations. Credit History An applicant's credit history is examined for both favorable and unfavorable occurrences. An applicant who has made payments on outstanding or previous credit obligations according to the contractual terms may be considered favorable. Unfavorable items such as slow payment records, suits, judgments, bankruptcy, liens, foreclosure or garnishments are discussed with the applicant in order to determine the reasons for the unfavorable rating. In some instances, the applicant may explain the reasons for these ratings to indicate that there were extenuating circumstances beyond the applicant's control which would mitigate the effect of such unfavorable items on the credit decision. Credit scoring is used in some cases to supplement evaluation of an applicant's credit history. Property The property's market value and physical condition as compared to the value of similar properties in the area is assessed to ensure that the property provides adequate collateral for the loan. Generally, properties are appraised by licensed real estate appraisers where a purchase, rate-and-term refinance or cash-out refinance is involved. Funds for Closing Generally, applicants are required to have sufficient funds of their own to make a minimum five percent down payment. Funds for closing costs may come from the applicant or may be a gift from a family member. Certain loan programs require the applicant to have sufficient funds for a down payment of only three percent and the remaining funds provided by a gift or an unsecured loan from a municipality or a non-profit organization. Certain programs require the applicant to have cash reserves after closing. Maximum Indebtedness to Appraised Value Generally, the maximum amount the Company will loan is 95% of the appraised value of the property. For certain types of loans, this percentage may be increased. Loan amounts in excess of 80% of the appraised value require mortgage insurance to protect against foreclosure loss. After funding and sale of the mortgage loans, the Company's exposure to credit loss in the event of non-performance by the mortgagor is limited as described in the section "Business--Mortgage Banking Operations--Sale of Loans." Geographic Distribution The following table sets forth the geographic distribution of the Company's mortgage, home equity and Sub-prime loan production for the year ended February 28, 1997.
--- --------------------------------------------------------------------------------------------- --- Geographic Distribution of the Company's Prime Mortgage, Home Equity and Sub-prime Loan Production --- ----------------------------- -- ------------------ -- ----------------- -- ----------------- --- Percentage of Number Principal Total Dollar (Dollar amounts in of Loans Amount Amount millions) --- ----------------------------- -- ------------------ -- ----------------- -- ----------------- --- California 74,547 $9,378,990 24.8% Florida 21,947 1,789,521 4.7% Texas 19,627 1,725,552 4.6% Michigan 16,291 1,633,920 4.3% Illinois 13,530 1,478,097 3.9% Colorado 12,693 1,427,256 3.8% Ohio 16,624 1,407,647 3.7% Washington 11,737 1,267,116 3.4% Arizona 12,519 1,177,569 3.1% Georgia 12,115 1,138,153 3.0% Maryland 9,642 1,119,214 3.0% New York 9,248 1,071,971 2.8% Virginia 9,342 1,013,037 2.7% Massachusetts 7,475 966,530 2.6% Utah 8,994 918,843 2.4% Nevada 7,864 854,458 2.3% New Jersey 7,083 799,657 2.1% Others (1) 91,773 8,643,230 22.8% ------------------ ----------------- ----------------- 363,051 $37,810,761 100.0% ================== ================= ================= --- ----------------------------- -- ------------------ -- ----------------- -- ----------------- --- (1) No other state constitutes more than 2.0% of the total dollar amount of loan production.
California mortgage loan production as a percentage of total mortgage loan production (measured by principal balance) for the fiscal years ended February 28(29), 1997, 1996 and 1995 was 25%, 31% and 31%, respectively. Loan production within California is geographically dispersed, which minimizes dependence on any individual local economy. The decline in the percentage of the Company's mortgage loan production in California during the period ended February 28, 1997 is the result of implementing the Company's strategy to expand production capacity and market share outside of California. At February 28, 1997, 81% of the Consumer Markets Division branch offices and the Wholesale Division loan centers were located outside of California. The following table sets forth the distribution by county of the Company's California loan production for the year ended February 28, 1997.
--- ---------------------------------------------------------------------------------------------- -- Distribution by County of the Company's California Loan Production --- ----------------------------- -- ------------------ -- ----------------- -- ------------------ -- Percentage of Number Principal Total Dollar (Dollar amounts in of Loans Amount Amount millions) --- ----------------------------- -- ------------------ -- ----------------- -- ------------------ -- Los Angeles 19,163 $2,562.4 27.3% San Diego 5,030 595.1 6.3% Placer 3,917 561.1 6.0% Sacramento 4,486 487.7 5.2% Orange 3,372 476.1 5.1% Others (1) 38,579 4,696.6 50.1% ------------------ ----------------- ------------------ 74,547 $9,379.0 100.0% ================== ================= ================== --- ----------------------------- -- ------------------ -- ----------------- -- ------------------ -- (1) No other county in California constitutes more than 5.0% of the total dollar amount of California loan production.
Sale of Loans As a mortgage banker, the Company customarily sells all loans that it originates or purchases. The Company packages substantially all of its FHA-insured and VA-guaranteed mortgage loans into pools of loans. It sells these pools in the form of modified pass-through MBS guaranteed by the Government National Mortgage Association ("Ginnie Mae") to national or regional broker-dealers. With respect to loans securitized through Ginnie Mae programs, the Company is insured against foreclosure loss by the FHA or partially guaranteed against foreclosure loss by the VA (at present, generally 25% to 50% of the loan, up to a maximum amount of $50,750, depending upon the amount of the loan). Conforming conventional loans may be pooled by the Company and exchanged for securities guaranteed by Fannie Mae or Freddie Mac, which securities are then sold to national or regional broker-dealers. Loans securitized through Fannie Mae or Freddie Mac are sold on a non-recourse basis whereby foreclosure losses are generally the responsibility of Fannie Mae and Freddie Mac, and not the Company. To guarantee timely and full payment of principal and interest on MBS and whole loans sold to permanent investors and to transfer the credit risk of the loans in the servicing portfolio, the Company pays guarantee fees to Fannie Mae, Freddie Mac and Ginnie Mae. Alternatively, the Company may sell FHA-insured and VA-guaranteed mortgage loans and conforming conventional loans, home equity and Sub-prime loans, and consistently sells its jumbo loan production, to large buyers in the secondary market (which can include national or regional broker-dealers) on a non-recourse basis. These loans can be sold either on a whole-loan basis or in the form of pools backing securities which are not guaranteed by any governmental instrumentality but which generally have the benefit of some form of external credit enhancement, such as insurance, letters of credit, payment guarantees or senior/subordinated structures. Substantially all Prime mortgage loans sold by the Company are sold without recourse, subject in the case of VA loans to the limits of the VA guaranty described above. For the fiscal years ended February 28(29), 1997, 1996 and 1995, the aggregate loss experience of the Company on VA loans in excess of the VA guaranty was approximately $9.3 million, $3.8 million and $2.6 million, respectively. In the opinion of management, the losses on VA loans increased from the year ended February 29, 1996 to the year ended February 28, 1997 primarily due to the aging of the VA loan servicing portfolio and declines in values of properties securing VA loans, particularly in California. The Company retains credit risk on the home equity and Sub-prime loans it sells in the form of pools backing securities. As such, through retention of a subordinated interest in the trust, the Company bears primary responsibility for credit losses on the loans. At February 28, 1997, the Company had investments in such subordinated interests amounting to $106 million, which represents the maximum exposure to credit losses on the securitized home equity and Sub-prime loans. While the Company does not retain credit risk with respect to the Prime mortgage loans it sells, it does have potential liability under representations and warranties made to purchasers and insurers of the loans. In the event of a breach of the representations and warranties, the Company may be required to repurchase a mortgage loan and any subsequent loss on the mortgage loan may be borne by the Company. CWM, a real estate investment trust managed by a subsidiary of the Company, may purchase at market prices both conforming and non-conforming conventional loans from the Company. During the years ended February 28(29), 1997, 1996 and 1995, CWM purchased $51.5 million, $14.3 million and $80.4 million, respectively, of conventional non-conforming mortgage loans from the Company. In order to offset the risk that a change in interest rates will result in a decrease in the value of the Company's current mortgage loan inventory or its commitments to purchase or originate mortgage loans ("Committed Pipeline"), the Company enters into hedging transactions. The Company's hedging policies generally require that substantially all of the Company's inventory of conforming and government loans and the maximum portion of its Committed Pipeline that the Company believes may close be hedged with forward contracts for the delivery of MBS or options on MBS. The inventory is then used to form the MBS that will fill the forward delivery contracts and options. The Company hedges its inventory and Committed Pipeline of jumbo mortgage loans by using whole-loan sale commitments to ultimate buyers or by using temporary "cross hedges" with sales of MBS since such loans are ultimately sold based on a market spread to MBS. As such, the Company is not exposed to significant risk nor will it derive any significant benefit from changes in interest rates on the price of the inventory net of gains or losses of associated hedge positions. The correlation between the price performance of the inventory being hedged and the hedge instruments is very high due to the similarity of the asset and the related hedge instrument. The Company is exposed to the risk that the portion of loans from the Committed Pipeline that actually closes at the committed price is less than or more than the amount estimated to close in the event of a decline or rise in rates during the commitment period. The amount of loans estimated to close from the Committed Pipeline is influenced by many factors, including the composition of the Company's Committed Pipeline, the historical portion of the Committed Pipeline that has closed given changes in interest rates and the timing of such closings. See Note G to the Company's Consolidated Financial Statements. Loan Servicing The Company services on a non-recourse basis substantially all of the mortgage loans that it originates or purchases pursuant to servicing agreements with investors in the loans. In addition, the Company purchases bulk servicing contracts, also on a non-recourse basis, to service single-family residential mortgage loans originated by other lenders. Servicing contracts acquired through bulk purchases accounted for 16% of the Company's mortgage servicing portfolio as of February 28, 1997. Servicing mortgage loans includes collecting and remitting loan payments, answering customers' questions, making advances when required, accounting for principal and interest, holding custodial (impound) funds for payment of property taxes and hazard insurance, making any physical inspections of the property, counseling delinquent mortgagors, supervising foreclosures and property dispositions in the event of unremedied defaults and generally administering the loans. The Company receives a fee for servicing mortgage loans ranging generally from 1/4% to 1/2% per annum on the declining principal balances of the loans. The servicing fee is collected by the Company out of monthly mortgage payments. The Company's servicing portfolio is subject to reduction by scheduled amortization or by prepayment or foreclosure of outstanding loans. In addition, the Company has sold, and may sell in the future, a portion of its portfolio of loan servicing rights to other mortgage servicers. In general, the decision to sell servicing rights or newly originated loans on a servicing-released basis is based upon management's assessment of the Company's cash requirements, the Company's debt-to-equity ratio and other significant financial ratios, the market value of servicing rights and the Company's current and future earnings objectives. Generally, it is the Company's strategy to build and retain its servicing portfolio. Loans are serviced from two facilities located in Simi Valley, California and Plano, Texas (see "Properties"). The Company has developed systems that enable it to service mortgage loans efficiently and therefore enhance earnings from its investments in servicing rights. Some of these systems are highlighted in the following paragraphs. All data elements pertaining to each individual loan are entered into the applicable automated loan system at the point of origination or acquisition. These data elements are captured and automatically transferred to the loan servicing system without manual intervention. Customer service representatives in both servicing facilities have access to on-line screens containing all pertinent data about a customer's account, thus eliminating the need to refer to paper files and shortening the average length of a customer call. The Company's telephone system controls the flow of calls to each servicing site and has a "Smart Call Routing" filter. This filter is designed to match the originating phone number to phone numbers in the Company's data base. Having identified the customer, the Company can communicate topical loan information electronically without requiring the caller to enter information. The caller can get more detailed information through an Interactive Voice Response application or can speak with a customer service representative. Countrywide also features an Internet site for existing customers wherein the customer can obtain current account status, history, answers to frequently asked questions and a dictionary to help the customer understand industry terminology. The collection department utilizes its collection management system in conjunction with its predictive dialing system to maximize and track each individual collector's performance as well as to track the success of each collection campaign. The Company tracks its foreclosure activity through its default processing system ("DPS"). DPS is a client server based application which allows each foreclosure to be assigned to a state/investor specific workflow template. The foreclosure processor is automatically guided through each function required to successfully complete a foreclosure in any state and for any investor. The company's high speed payment processing equipment enables the Company to deposit virtually all cash on the same day as it is received, thereby minimizing float. The insurance department, in conjunction with one of the Company's business partners, has developed a client server based application that generally eliminates paper billings and automates decision making. The Company believes that the financial results of its servicing portfolio hedging activities largely offset the effect of interest rate fluctuations on the earnings from its loan servicing activities. The Company also believes that its loan production earnings are countercyclical to its loan servicing earnings. In general, the value of the Company's servicing portfolio and the income generated therefrom improve as interest rates increase and decline when interest rates fall. Generally, in an environment of increasing interest rates, the rate of current and projected future prepayments decreases, resulting in a decreased rate of amortization and impairment of mortgage servicing rights, and a decrease in gain from servicing portfolio hedging activities. Amortization and impairment, net of servicing hedge gain, is deducted from loan administration revenue. An increase in interest rates also generally causes loan production (particularly refinancings) to decline. Generally, in an environment of declining interest rates, the rate of current and projected future prepayments increases, resulting in an increased rate of amortization and impairment of mortgage servicing rights. However, the Company's servicing portfolio hedging activities generally generate a gain during periods of declining interest rates. At the same time, the decline in interest rates generally contributes to high levels of loan production (particularly refinancings). The following table sets forth certain information regarding the Company's servicing portfolio of single-family mortgage loans, including loans and securities held for sale and loans subserviced for others, for the periods indicated.
---------------------------------- -- ------------------------------------------------------------------------- (Dollar amounts in millions) Year Ended February 28(29), ---------------------------------- -- ------------------------------------------------------------------------- Composition of Servicing 1997 1996 1995 1994 1993 Portfolio ----------- -- ------------ -- ----------- -- ----------- -- ------------ at Period End: FHA-Insured Mortgage Loans $ 30,686.3 $ 23,206.5 $ 17,587.5 $ 9,793.7 $ 8,233.8 VA-Guaranteed Mortgage Loans 13,446.4 10,686.2 7,454.3 3,916.0 3,307.2 Conventional Mortgage Loans 112,685.4 102,417.0 87,998.2 70,915.2 42,876.8 Home Equity Loans 689.9 204.5 31.3 - - Sub-prime Loans 1,048.9 289.1 - - - ----------- ------------ ----------- ----------- ------------ Total Servicing Portfolio $158,556.9 $136,803.3 $113,071.3 $84,624.9 $54,417.8 =========== ============ =========== =========== =========== Beginning Servicing Portfolio $136,803.3 $113,071.3 $ 84,624.9 $54,417.8 $27,543.0 Add: Loan Production 37,810.8 34,583.7 27,866.2 52,458.9 32,387.8 Bulk Servicing and Subservicing 2,808.1 6,428.5 17,888.1 3,514.9 3,083.9 Acquired Less: Servicing Transferred (1) (70.8) (53.5) (6,287.4) (8.1) (12.6) Runoff (2) (18,794.5) (17,226.7) (11,020.5) (25,758.6) (8,584.3) =========== ============ =========== =========== =========== Ending Servicing Portfolio $158,556.9 $136,803.3 $113,071.3 $84,624.9 $54,417.8 =========== ============ =========== =========== =========== Delinquent Mortgage Loans and Pending Foreclosures at Period End (3): 30 days 2.26% 2.13% 1.80% 1.82% 2.05% 60 days 0.52 0.48 0.29 0.28 0.40 90 days or more 0.66 0.59 0.42 0.39 0.58 ----------- ----------- ------------ ----------- ------------ Total Delinquencies 3.44% 3.20% 2.51% 2.49% 3.03% =========== =========== ============ =========== =========== Foreclosures Pending 0.71% 0.49% 0.29% 0.29% 0.36% ----------- ----------- ------------ ----------- ------------ ---------------------------------- -- ----------- -- ----------- -- ------------ -- ----------- -- ------------ (1) Servicing rights sold are generally deleted from the servicing portfolio at the time of sale. The Company generally subservices such loans from the sales contract date to the transfer date. (2) Runoff refers to scheduled principal repayments on loans and unscheduled prepayments (partial prepayments or total prepayments due to refinancing, modifications, sale, condemnation or foreclosure). (3) As a percentage of the total number of loans serviced excluding subserviced loans.
At February 28, 1997, the Company's servicing portfolio of single-family mortgage loans was stratified by interest rate as follows.
-- -------------------------- -- -------------------------------------------------------------------------------- (Dollar amounts in Total Portfolio at February 28, 1997 millions) -- -------------------------- -- --------------- -- -------------- -- --------------------- -- --------------- -- Mortgage Weighted Servicing Interest Principal Percent Average Rights Rate Balance of Total Maturity (Years) Balance -- -------------------------- -- --------------- -- -------------- -- --------------------- -- --------------- -- 7% and under $ 31,286.3 19.7% 23.8 $ 659.2 7.01-8% 74,886.5 47.3% 25.8 1,516.1 8.01-9% 43,501.0 27.4% 27.0 726.0 9.01-10% 7,430.3 4.7% 26.3 105.0 over 10% 1,452.8 0.9% 24.5 17.5 =============== ============== ===================== =============== $158,556.9 100.0% 25.7 $3,023.8 =============== ============== ===================== =============== -- -------------------------- -- --------------- -- -------------- -- --------------------- -- --------------- --
The weighted average interest rate of the single-family mortgage loans in the Company's servicing portfolio at both February 28(29), 1997 and 1996, was 7.8%. At February 28, 1997, 81% of the loans in the servicing portfolio bore interest at fixed rates and 19% bore interest at adjustable rates. The weighted average net service fee of the loans in the portfolio was 0.402% at February 28, 1997 and the weighted average interest rate of the fixed-rate loans in the servicing portfolio was 7.8%. The following table sets forth the geographic distribution of the Company's servicing portfolio of single-family mortgage loans, including loans and securities held for sale and loans subserviced for others, as of February 28, 1997.
--------------------------------------------------------- -- ----------------------------- -------------------- Percentage of Principal Balance Serviced --------------------------------------------------------- -- ----------------------------- -------------------- California 37.3% Florida 4.6% Texas 4.3% Washington 3.4% New York 3.1% Illinois 3.0% Colorado 2.9% Arizona 2.7% Virginia 2.6% Massachusetts 2.5% New Jersey 2.5% Ohio 2.5% Maryland 2.5% Georgia 2.3% Michigan 2.0% Other (1) 21.9% ============== 100.0% ============== --------------------------------------------------------- ---------- -------------- --------------------------- (1) No other state contains more than 2.0% of the properties securing loans in the Company's servicing portfolio.
Financing of Mortgage Banking Operations The Company's principal financing needs are the financing of loan funding activities and the investment in servicing rights. To meet these needs, the Company currently utilizes commercial paper supported by CHL's revolving credit facility, medium-term notes, MBS repurchase agreements, subordinated notes, pre-sale funding facilities, an optional cash purchase feature in the dividend reinvestment plan, redeemable capital trust pass-through securities and cash flow from operations. The Company estimates that it had available committed and uncommitted credit facilities aggregating approximately $7.1 billion at February 28, 1997. In the past the Company has utilized whole loan repurchase agreements, servicing-secured bank facilities, private placements of unsecured notes and other financings, direct borrowings from CHL's revolving credit facility and public offerings of common and preferred stock. For further information on the material terms of the borrowings utilized by the Company to finance its inventory of mortgage loans and MBS and its investment in servicing rights, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." The Company continues to investigate and pursue alternative and supplementary methods to finance its operations through the public and private capital markets. These may include such methods as mortgage loan sale transactions designed to expand the Company's financial capacity and reduce its cost of capital and the securitization of servicing income cash flows. Seasonality The mortgage banking industry is generally subject to seasonal trends. These trends reflect the general national pattern of sales and resales of homes, although refinancings tend to be less seasonal and more closely related to changes in interest rates. Sales and resales of homes typically peak during the spring and summer seasons and decline to lower levels from mid-November through February. In addition, delinquency rates typically rise in the winter months, which results in higher servicing costs. However, late charge income has historically been sufficient to offset such incremental expenses. C. Countrywide Asset Management Corporation Through its subsidiary Countrywide Asset Management Corporation ("CAMC"), the Company manages the investments and oversees the day-to-day operations of CWM and its subsidiaries. This relationship is in the process of being restructured, as described in the following paragraph. For performing these services, CAMC receives a base management fee of 1/8 of 1% per annum of CWM's average-invested mortgage-related assets not pledged to secure collateralized mortgage obligations ("CMOs"). CAMC also receives a management fee equal to 0.2% per annum of the average amounts outstanding under CWM's warehouse lines of credit. In addition, CAMC receives incentive compensation equal to 25% of the amount by which the CWM annualized return on equity exceeds the ten-year U.S. treasury rate plus 2%. As of December 31, 1996, 1995 and 1994, the consolidated total assets of CWM were $3.4 billion, $2.6 billion and $2.0 billion, respectively. During the fiscal years ended February 28(29), 1997, 1996 and 1995, CAMC earned $1.6 million, $2.0 million and $0.3 million, respectively, in base management fees from CWM and its subsidiaries. In addition, during the fiscal years ended February 28(29), 1997, 1996 and 1995, CAMC recorded $8.6 million, $6.6 million and $1.1 million, respectively, in incentive compensation. At February 28, 1997, the Company owned 1,120,000 shares, or approximately 2.2%, of the common stock of CWM. On January 29, 1997, CCI and CWM entered into an agreement pursuant to which CWM will acquire the operations and employees of CAMC, and as a result, CWM will cease paying the management fee. The proposed transaction is structured as a merger of CAMC with and into CWM with CCI to receive approximately 3.6 million newly issued common shares of CWM. Based on the closing sales price of CWM common stock on the New York Stock Exchange on May 5, 1997, the market value of CWM common stock to be received in the proposed transaction is approximately $72 million. The closing of the transaction is contingent on, among other things, the receipt of required regulatory approvals. There can be no assurance that the proposed transaction will be consummated. See Note K to the Company's Consolidated Financial Statements. D. Other Operations Through various other subsidiaries, the Company conducts business in a number of areas related to the mortgage banking business. The activities of these subsidiaries are described in the following paragraphs: The Company operates a securities broker-dealer, Countrywide Securities Corporation ("CSC"), which is a member of the National Association of Securities Dealers, Inc. and the Securities Investor Protection Corporation. CSC trades MBS and other mortgage-related assets with broker-dealers and institutional investors. The Company's insurance agency subsidiary, Countrywide Agency, Inc., acts as an agent for the sale of insurance, including homeowners, fire, flood, earthquake, auto, annuities, home warranty, life and disability, to CHL's mortgagors and others. Another subsidiary of the Company, CTC Foreclosure Services Corporation, serves as trustee under deeds of trust in connection with foreclosures on loans in the Company's servicing portfolio in California and certain other states. Countrywide Servicing Exchange ("CSE") is a national servicing brokerage and consulting firm. CSE acts as an agent facilitating transactions between buyers and sellers of bulk servicing contracts. LandSafe, Inc. and its subsidiaries act as a title insurance agent and a provider of escrow services, appraisal and credit reporting services. The Company offers title insurance commitments and policies, settlement services and property profiles to realtors, builders, consumers, mortgage brokers and other financial institutions. Appraisal services are provided to consumers, mortgage brokers and other financial institutions through a network of appraisers. Credit reporting services are also provided to the Company and its subsidiaries. Countrywide General Agency of Texas, Inc., manages the day-to-day operations of an agency for the sale of homeowners, life and automobile insurance to CHL customers in the State of Texas. Two of the Company's subsidiaries, Charter Reinsurance Corporation ("CRC") and Second Charter Reinsurance Corporation ("SCRC"), partially reinsure loans originated by the Company that are insured by the mortgage insurance companies with which CRC and SCRC have entered into a reinsurance agreement. CRC and SCRC share in the premiums collected and losses incurred by the mortgage insurance company. Countrywide Financial Services, Inc. ("CFSI") (formerly Leshner Financial, Inc.), operates as a service provider for unaffiliated mutual funds, broker-dealer, investment advisor and fund manager. CFSI currently has approximately $1 billion in funds under management and services accounts aggregating over $9 billion for other fund management companies. Countrywide Tax Services Corporation ("CTSC") provides tax services for CHL mortgagors. CTSC monitors the payment of real estate taxes and pays property tax bills from mortgagors' escrow accounts. E. Proprietary Data Processing Systems The Company employs technology wherever applicable and continually searches for new and better ways of both providing services to its customers and maximizing the efficiency of its operations. Proprietary systems currently in use by the Company include CLUESTM, an artificial intelligence system that is designed to expedite the review of applications, credit reports and property appraisals. The Company believes that CLUESTM increases underwriters' productivity, reduces costs and provides greater consistency to the underwriting process. Other systems currently in use by the production divisions are the EDGE (primarily used by the Consumer Markets and Wholesale Lending Divisions) and GEMS (primarily used by the Correspondent Lending Division) systems, which are loan origination and telemarketing systems that are designed to reduce the time and cost associated with the loan application and funding process. These front-end systems were internally developed for the Company's exclusive use and are integrated with the Company's loan servicing, sales, accounting, treasury and other systems. The Company believes that both the EDGE and GEMS systems improve the quality of its loan products and customer service by: (i) reducing the risk of deficient loans; (ii) facilitating accurate and customized pricing; (iii) promptly generating loan documents with the use of laser printers; (iv) providing for electronic communication with credit bureaus, financial institutions, HUD and other third parties; (v) providing Internet home page access for Correspondent Lending customers and (vi) generally minimizing manual data input. The Company believes both EDGE and GEMS significantly reduce origination and processing costs and speed funding time. The Company has developed and implemented DirectLine Plus(R), which is designed to provide support to mortgage brokers and enable them to obtain the latest pricing, to review the Company's lending program guidelines, to submit applications, to directly obtain information about specific loans in progress and to send and receive electronic messages to and from the Company's processing center. Recent enhancements to DirectLine Plus(R) integrate that application with CLUES-ON-LINE, an adaptation of CLUESTM, which is designed to allow the mortgage broker to submit loan information and receive a qualified underwriting decision within minutes. Another system developed and implemented by the Company is the LOAN COUNSELOR. The LOAN COUNSELOR is designed for telemarketing and production branches and is currently being used by the Telemarketing unit in conjunction with its Customer Contact Management System ("CCMS"). (See discussion in the following paragraph.) LOAN COUNSELOR provides the Telemarketing unit the ability to: (i) pre-qualify a prospective applicant; (ii) provide "what if" scenarios to help find the appropriate loan product; (iii) obtain an on-line price quote; (iv) take an application; (v) request a credit report electronically through LandSafe, Inc.; (vi) issue a LOCK 'N SHOP (R) certificate and (vii) transmit a loan application to the production units for processing. CCMS is a telemarketing application designed to provide enterprise-wide information on both current and prospective customers. CCMS helps the production divisions identify prospective customers to solicit for specific products or services, and obtain the results of any solicitation. Management believes that CCMS will provide the Company the opportunity to (i) reduce the loss of customers who prepay their loan and obtain a new loan from another source and (ii) generate additional revenue by cross-selling other products and services. The Company also participates on the Internet with the goal of enhancing business partner relationships and providing loan origination services directly to the consumer. The Company has a public site on the World Wide Web from which information as to product offerings, as well as prequalification applications, can be obtained. In addition, a similar 'private site' is available for business partners of the Correspondent Lending Division to view pricing and product information, as well as loan status. In management's view, the Internet provides a unique medium to deliver mortgage services at a cost significantly lower than that incurred in conventional marketing methods. F. Regulation The Company's mortgage banking business is subject to the rules and regulations of HUD, FHA, VA, Fannie Mae, Freddie Mac and Ginnie Mae with respect to originating, processing, selling and servicing mortgage loans. Those rules and regulations, among other things, prohibit discrimination, provide for inspections and appraisals, require credit reports on prospective borrowers and fix maximum loan amounts. Moreover, FHA lenders such as the Company are required annually to submit to the Federal Housing Commissioner audited financial statements, and Ginnie Mae requires the maintenance of specified net worth levels (which vary depending on the amount of Ginnie Mae securities issued by the Company). The Company's affairs are also subject to examination by the Federal Housing Commissioner at all times to assure compliance with the FHA regulations, policies and procedures. Mortgage origination activities are subject to the Equal Credit Opportunity Act, Federal Truth-in-Lending Act, Home Mortgage Disclosure Act and the Real Estate Settlement Procedures Act and the regulations promulgated thereunder which, inter alia, prohibit discrimination, require the disclosure of certain basic information to mortgagors concerning credit and settlement costs, limit payment for settlement services to the reasonable value of the services rendered and require the maintenance and disclosure of information regarding the disposition of mortgage applications based on race, gender, geographical distribution and income level. Additionally, various state laws and regulations affect the Company's mortgage banking operations. The Company is licensed as a mortgage banker or regulated lender in those states in which such license is required. Conventional mortgage operations may also be subject to state usury statutes. FHA and VA loans are exempt from the effect of such statutes. Securities broker-dealer and mutual fund operations are subject to federal and state securities laws, as well as the rules of both the Securities and Exchange Commission and the National Association of Securities Dealers, Inc. Insurance agency and title insurance operations are subject to insurance laws of each of the states in which the Company conducts such operations. G. Competition The mortgage banking industry is highly competitive and fragmented. The Company competes with other financial intermediaries (such as mortgage bankers, commercial banks, savings and loan associations, credit unions and insurance companies) and mortgage banking subsidiaries or divisions of diversified companies. Generally, the Company competes by offering products with competitive features, by emphasizing the quality of its service and by pricing its range of products at competitive rates. In recent years, the aggregate share of the United States market for residential mortgage loans that is served by mortgage bankers has risen, principally due to the decline in the savings and loan industry. According to industry statistics, mortgage bankers' aggregate share of this market increased from approximately 19% during calendar year 1989 to approximately 57% during calendar year 1996. The Company believes that it has benefited from this trend. H. Employees At February 28, 1997, the Company employed 6,134 persons, 2,460 of whom were engaged in production activities, 1,644 were engaged in loan administration activities and 2,030 were engaged in other activities, including 480 employees of CAMC who provide services solely to CWM. None of these employees is represented by a collective bargaining agent. ITEM 2. PROPERTIES The primary executive and administrative offices of the Company and its subsidiaries are currently located in leased space at 155 North Lake Avenue and 35 North Lake Avenue, Pasadena, California, and consist of 230,000 square feet. The Company also leases a 44,000 square foot facility in Calabasas, California, which primarily houses part of the Company's data processing operations. The principal leases covering such space expire in the year 2011. In September 1996, the Company acquired the facility at 4500 Park Granada Boulevard, Calabasas, California, which consists of approximately 225,000 square feet and is situated on 20.1 acres of land. This facility will house the primary executive and administrative offices of the Company and some of its subsidiaries. The Company also owns an office facility of approximately 300,000 square feet located on 43.5 acres in Simi Valley, California, which is used primarily to house a portion of the Company's loan servicing and data processing operations, and a 253,000 square foot office building situated on 21.5 acres in Plano, Texas, which houses additional loan servicing, loan production and data processing operations. In addition, the Plano facility provides the Company with a business recovery site located out of the state of California. The Company leases or owns office space in several other buildings in the Pasadena area. Additionally, CHL leases office space for each of its Consumer Markets Division branch offices (each ranging from approximately 300 to 2,840 square feet), Wholesale Division loan centers (each ranging from approximately 490 to 4,830 square feet) and Correspondent Division offices (each ranging from approximately 7,130 to 10,930 square feet). These leases vary in term and have different rent escalation provisions. In general, the leases extend through fiscal year 2002, contain buyout provisions and provide for rent escalation tied to increases in the Consumer Price Index or operating costs of the premises. ITEM 3. LEGAL PROCEEDINGS On June 22, 1995, a lawsuit was filed by Jeff and Kathy Briggs, as a purported class action, against CHL and a mortgage broker in the Northern Division of the United Sates District Court for the Middle District of Alabama. The suit claims, among other things, that in connection with residential mortgage loan closings, CHL made certain payments to mortgage brokers in violation of the Real Estate Settlement Procedures Act and induced mortgage brokers to breach their alleged fiduciary duties to their customers. The plaintiffs seek unspecified compensatory and punitive damages plus, as to certain claims, treble damages. CHL's management believes that its compensation programs to mortgage brokers comply with applicable law and with long-standing industry practice, and that it has meritorious defenses to the action. CHL intends to defend vigorously against the action and believes that the ultimate resolution of such claims will not have a material adverse effect on the Company's results of operations or financial position. The Company and certain subsidiaries are defendants in various lawsuits involving matters generally incidental to their business. Although it is difficult to predict the ultimate outcome of these cases, management believes, based on discussions with counsel, that any ultimate liability will not materially affect the consolidated financial position or results of operations of the Company and its subsidiaries. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's common stock is listed on the New York Stock Exchange ("NYSE") and the Pacific Stock Exchange (Symbol: CCR). The following table sets forth the high and low sales prices (as reported by the NYSE) for the Company's common stock and the amount of cash dividends declared ` for the fiscal years ended February 28(29), 1997 and 1996.
----- --------------- ------------------------- --- ------------------------- --- ------------------------------- Cash Dividends Fiscal 1997 Fiscal 1996 Declared ----- --------------- ------------ ------------ --- ------------ ------------ --- ---------------- -------------- Quarter High Low High Low Fiscal 1997 Fiscal 1996 ----- --------------- ------------ ------------ --- ------------ ------------ --- ---------------- -------------- First $23.88 $19.75 $20.50 $15.50 $0.08 $0.08 Second 25.13 20.75 23.13 18.38 0.08 0.08 Third 30.25 23.25 26.75 20.00 0.08 0.08 Fourth 31.13 26.38 24.00 19.00 0.08 0.08 ----- --------------- ------------ ------------ --- ------------ ------------ --- ---------------- --------------
The Company has declared and paid cash dividends on its common stock quarterly since 1979, except that no cash dividend was declared in the fiscal quarter ended February 28, 1982. For the fiscal years ended February 28(29), 1997 and 1996, the Company declared quarterly cash dividends aggregating $0.32 per share. On March 19, 1997, the Company declared a quarterly cash dividend of $0.08 per common share, paid April 30, 1997. The ability of the Company to pay dividends in the future is limited by various restrictive covenants in the debt agreements of the Company; the earnings, cash position and capital needs of the Company; general business conditions and other factors deemed relevant by the Company's Board of Directors. The Company is prohibited under certain of its debt agreements, including its guaranties of CHL's revolving credit facility, from paying dividends on any capital stock (other than dividends payable in capital stock or stock rights), except that so long as no event of default under the agreements exists at the time, the Company may pay dividends in an aggregate amount not to exceed the greater of: (i) the after-tax net income of the Company, determined in accordance with generally accepted accounting principles, for the fiscal year to the end of the quarter to which the dividends relate and (ii) the aggregate amount of dividends paid on common stock during the immediately preceding year. The primary source of funds for payments to stockholders by the Company is dividends received from its subsidiaries. Accordingly, such payments by the Company in the future also depend on various restrictive covenants in the debt obligations of its subsidiaries; the earnings, the cash position and the capital needs of its subsidiaries; as well as laws and regulations applicable to its subsidiaries. Unless the Company and CHL each maintain specified minimum levels of net worth and certain other financial ratios, dividends cannot be paid by the Company and CHL in compliance with certain of CHL's debt obligations (including the revolving credit facility). See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." The Company has paid stock dividends and declared stock splits since 1978 as follows: 50% in October 1978; 50% in July 1979; 15% in November 1979; 15% in May 1980; 30% in November 1980; 30% in May 1981; 3% in February 1982; 2% in May 1982; 0.66% in April 1983; 1% in July 1983; 2% in April 1984; 2% in November 1984; 2% in June 1985; 2% in October 1985; 2% in March 1986; 3-for-2 split in September 1986; 2% in April 1987; 2% in April 1988; 2% in October 1988; 2% in November 1989; 3-for-2 split in July 1992; 5% in April 1993 and 3-for-2 split in May 1994. As of May 5, 1997, there were 2,779 shareholders of record of the Company's common stock, with 106,383,483 common shares outstanding.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA ----------------------------------------------- ----------------------------------------------------------------- Years ended February 28(29), (Dollar amounts in thousands, except per 1997 1996 1995 1994 1993 share data) ----------------------------------------------- ------------ ------------ ------------ ------------- ------------ Selected Statement of Earnings Data: Revenues: Loan origination fees $193,079 $199,724 $203,426 $379,533 $241,584 Gain (loss) on sale of loans 247,450 92,341 (41,342) 88,212 67,537 ------------ ------------ ------------ ------------- ------------ Loan production revenue 440,529 292,065 162,084 467,745 309,121 Interest earned 350,263 308,449 249,560 300,999 179,785 Interest charges (316,705) (281,573) (205,464) (219,898) (128,612) ------------ ------------ ------------ ------------- ------------ Net interest income 33,558 26,876 44,096 81,101 51,173 Loan servicing income 773,715 620,835 460,351 326,695 188,895 Amortization and impairment/recovery of mortgage servicing rights (101,380) (342,811) (95,768) (242,177) (151,362) Servicing hedge benefit (expense) (125,306) 200,135 (40,030) 73,400 74,075 Less write-off of servicing hedge - - (25,600) - - ------------ ------------ ------------ ------------- ------------ Net loan administration income 547,029 478,159 298,953 157,918 111,608 91,346 Commissions, fees and other income 91,346 63,642 40,650 48,816 33,656 Gain on sale of servicing - - 56,880 - - ------------ ------------ ------------ ------------- ------------ Total revenues 1,112,462 860,742 602,663 755,580 505,558 ------------ ------------ ------------ ------------- ------------ Expenses: Salaries and related expenses 286,884 229,668 199,061 227,702 140,063 Occupancy and other office expenses 129,877 106,298 102,193 101,691 64,762 Guarantee fees 159,360 121,197 85,831 57,576 29,410 Marketing expenses 34,255 27,115 23,217 26,030 12,974 Other operating expenses 80,188 50,264 37,016 43,481 24,894 Branch and administrative office - - 8,000 - - consolidation costs ------------ ------------ ------------ ------------- ------------ Total expenses 690,564 534,542 455,318 456,480 272,103 ------------ ------------ ------------ ------------- ------------ 421,898 Earnings before income taxes 421,898 326,200 147,345 299,100 233,455 Provision for income taxes 164,540 130,480 58,938 119,640 93,382 ------------ ------------ ------------ ------------- ------------ ============ ============ ============ ============= ============= Net earnings $257,358 $195,720 $88,407 $179,460 $140,073 =============================================== ============ ============ ============ ============= ============= ----------------------------------------------- ============ ============ ============ ============= ============= Per Share Data (1): Primary $2.44 $1.95 $0.96 $1.97 $1.65 Fully diluted $2.42 $1.95 $0.96 $1.94 $1.52 Cash dividends per share $0.32 $0.32 $0.32 $0.29 $0.25 Weighted average shares outstanding: Primary 105,677,000 100,270,000 92,087,000 90,501,000 82,514,000 Fully diluted 106,555,000 100,270,000 92,216,000 92,445,000 92,214,000 =============================================== ============ ============ ============ ============= ============= ----------------------------------------------- ============ ============ ============ ============= ============= Selected Balance Sheet Data at End of Period: Total assets $8,089,292 $8,657,653 $5,710,182 $5,631,061 $3,369,499 Short-term debt $2,567,420 $4,423,738 $2,664,006 $3,111,945 $1,579,689 Long-term debt $2,367,661 $1,911,800 $1,499,306 $1,197,096 $ 734,762 Convertible preferred stock - - - - $ 25,800 Common shareholders' equity $1,611,531 $1,319,755 $ 942,558 $ 880,137 $ 693,105 =============================================== ============ ============ ============ ============= ============= ----------------------------------------------- ============ ============ ============ ============= ============= Operating Data (dollar amounts in millions): Loan servicing portfolio (2) $158,585 $136,835 $113,111 $84,678 $54,484 Volume of loans originated $ 37,811 $ 34,584 $ 27,866 $52,459 $32,388 =============================================== ============ ============ ============ ============= ============= (1) Adjusted to reflect subsequent stock dividends and splits. (2) Includes warehoused loans and loans under subservicing agreements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company's strategy is concentrated on three components of its business: loan production, loan servicing and businesses ancillary to mortgage lending. See "Business--Mortgage Banking Operations." The Company intends to continue its efforts to increase its market share of, and realize increased income from, its loan production. In addition, the Company is engaged in building its loan servicing portfolio because of the returns it can earn from such investment. A strong production capability and a growing servicing portfolio are the primary means used by the Company to reduce the sensitivity of its earnings to changes in interest rates because the effect of interest rate changes on loan production income is countercyclical to their effect on servicing income. Finally, the Company is involved in business activities complementary to its mortgage banking business, such as acting as agent in the sale of insurance, including homeowners, fire, flood, earthquake, life and disability to its mortgagors and others; providing various title insurance and escrow services in the capacity of an agent rather than an underwriter; offering appraisal and credit reporting services; brokering servicing contracts and trading mortgage-backed securities ("MBS") and other mortgage-related assets. The Company's results of operations historically have been primarily influenced by: (i) the level of demand for mortgage credit, which is affected by such external factors as the level of interest rates, the strength of the various segments of the economy and the demographics of the Company's lending markets; (ii) the direction of interest rates and (iii) the relationship between mortgage interest rates and the cost of funds. The fiscal year ended February 28, 1995 ("Fiscal 1995") was a period of transition from a mortgage market dominated by refinances resulting from historically low interest rates to an extremely competitive and smaller mortgage market in which refinances declined to a relatively small percentage of total fundings and customer preference for adjustable-rate mortgages increased. During this transition, which resulted from the increase in interest rates during the year, intense price competition developed that resulted in the Company experiencing negative production margins in Fiscal 1995. At the same time, the increase in interest rates caused a decline in the prepayment rate in the servicing portfolio which, combined with a decline in the rate of expected future prepayments, caused a reduction in amortization of the capitalized servicing fees receivable and purchased servicing rights. This decrease in amortization contributed to improved earnings from the Company's servicing activities. The Company addressed the challenges of the year by: (i) expanding its share of the home purchase market; (ii) reducing costs to maintain its production infrastructure in line with reduced production levels and (iii) accelerating the growth of its servicing portfolio by aggressively acquiring servicing contracts through bulk purchases. These strategies produced the following results: (i) home purchase production increased from $13.3 billion, or 25% of total fundings, in Fiscal 1994 to $19.5 billion, or 70% of total fundings, in Fiscal 1995, helping the Company maintain its position as the nation's leader in originations of single-family mortgages for the third consecutive year; (ii) the number of staff engaged in production activities declined from approximately 3,900 at the end of Fiscal 1994 to approximately 2,400 at the end of Fiscal 1995; (iii) production-related and overhead costs declined from $328 million in Fiscal 1994 to $270 million in Fiscal 1995 and (iv) bulk servicing purchases increased to $17.6 billion in Fiscal 1995 from $3.4 billion in Fiscal 1994. These bulk servicing acquisitions, combined with slower prepayments caused by increased mortgage interest rates, helped the Company maintain its position as the nation's largest servicer of single-family mortgages for the second consecutive year. In Fiscal 1995, the Company's market share decreased to approximately 4% of the estimated $660 billion single-family mortgage origination market. The fiscal year ended February 29, 1996 ("Fiscal 1996") was then a record year in profits for the Company. Loan production increased to $34.6 billion from $27.9 billion in Fiscal 1995. The Company attributed the increase to: (i) a decline in mortgage interest rates during most of the year; (ii) the implementation of a national advertising campaign aimed at developing a brand identity for Countrywide and reaching the consumer directly and (iii) the opening of two telemarketing centers which, through the use of proprietary systems, provide product information specific to the potential borrower's needs and allow a telemarketer to take an application and pass it to a branch office for processing. For calendar 1995, the Company ranked second in the amount of single-family mortgage originations nationwide. In Fiscal 1996, the Company's market share increased to approximately 5% of the estimated $650 billion single-family mortgage origination market, up from approximately 4% of the estimated $660 billion market in Fiscal 1995. The interest rate environment that prevailed during Fiscal 1996 was favorable for fixed-rate mortgages. Additionally, the percentage of loan production attributable to refinances increased from 30% in Fiscal 1995 to 34% in Fiscal 1996, as borrowers took advantage of declining interest rates. During Fiscal 1996, the Company's loan servicing portfolio grew to $136.8 billion from $113.1 billion at the end of Fiscal 1995. This growth resulted from the Company's loan production during the year and bulk servicing acquisitions amounting to $5.2 billion, partially offset by prepayments, partial prepayments and scheduled amortization of $17.2 billion. The prepayment rate in the servicing portfolio was 12%, up from the prior year due to the decreasing mortgage interest rate environment in Fiscal 1996. However, this rate was lower than the 35% prepayment rate in Fiscal 1994 because a substantial number of loans in the servicing portfolio were produced in Fiscal 1994 and bear interest at rates lower than the lowest interest rate level reached during Fiscal 1996. The fiscal year ended February 28, 1997 ("Fiscal 1997") was a period in which interest rates were somewhat volatile, generally higher than during the previous fiscal year but at levels that remained conducive to certain refinance and home purchase activity. The Company's earnings increased 31% from Fiscal 1996. Loan production increased to $37.8 billion from $34.6 billion in the prior year. The Company attributed the increase in production to: (i) the generally strong economy and home purchase market; (ii) the continued implementation of a national advertising campaign, which was started in Fiscal 1996, aimed at developing a brand identity for Countrywide and reaching the consumer directly; and (iii) the integration of home equity and sub-prime lending into the Company's product offerings and production capacity. For calendar 1996, the Company ranked second in the amount of single-family mortgage originations nationwide. The Company's market share for both Fiscal 1997 and 1996 was approximately 5% of the estimated $800 billion and $650 billion, respectively, single-family mortgage origination market. During Fiscal 1997, the Company's loan servicing portfolio grew to $158.6 billion from $136.8 billion at the end of Fiscal 1996. This growth resulted from the Company's loan production during the year and bulk servicing acquisitions amounting to $1.4 billion, partially offset by prepayments, partial prepayments and scheduled amortization of $18.8 billion. The prepayment rate in the servicing portfolio was 11%, slightly down from the prior year due to the higher mortgage interest rate environment in Fiscal 1997. RESULTS OF OPERATIONS Fiscal 1997 Compared with Fiscal 1996 Revenues for Fiscal 1997 increased 29% to $1,112.5 million from $860.7 million for Fiscal 1996. Net earnings increased 31% to $257.4 million in Fiscal 1997 from $195.7 million in Fiscal 1996. The increase in revenues and net earnings in Fiscal 1997 compared to Fiscal 1996 was primarily attributable to a larger gain on sale of loans resulting from greater sales of higher-margin home equity loans, sales of sub-prime loans in Fiscal 1997 at significantly higher margins than prime credit quality first mortgages, improved pricing margins on prime credit quality first mortgages, an increase in the size of the Company's servicing portfolio and higher loan production volume. These positive factors were partially offset by increased expenses in Fiscal 1997 over Fiscal 1996. The total volume of loans produced increased 9% to $37.8 billion for Fiscal 1997 from $34.6 billion for Fiscal 1996. Refinancings totaled $12.3 billion, or 33% of total fundings, for Fiscal 1997, as compared to $11.7 billion, or 34% of total fundings, for Fiscal 1996. Fixed-rate mortgage loan production totaled $27.9 billion, or 74% of total fundings, for Fiscal 1997, as compared to $26.9 billion, or 78% of total fundings, for Fiscal 1996. Total loan volume in the Company's production divisions is summarized below.
- -------------------------------------------- ------------------------------------ -------- (Dollar amounts in millions) Loan Production - -------------------------------------------- ------------------------------------ -------- Fiscal 1997 Fiscal 1996 ------------- ------------- Consumer Markets Division $ 8,071 $ 7,458 Wholesale Lending Division 8,430 8,061 Correspondent Lending Division 21,310 19,065 ============= ============= Total Loan Volume $37,811 $34,584 ============= ============= - -------------------------------------------- ------------- -------- ------------- --------
The factors which affect the relative volume of production among the Company's three divisions include the price competitiveness of each division's product offerings, the level of mortgage lending activity in each division's market and the success of each division's sales and marketing efforts. Included in the Company's total volume of loans produced are $613 million of home equity loans funded in Fiscal 1997 and $221 million funded in Fiscal 1996. Sub-prime credit quality loan production, which is also included in the Company's total production volume, was $864 million in Fiscal 1997 and $220 million in Fiscal 1996. At February 28(29), 1997 and 1996, the Company's pipeline of loans in process was $4.7 billion and $5.6 billion, respectively. Historically, approximately 43% to 77% of the pipeline of loans in process has funded. In addition, at February 28, 1997, the Company had committed to make loans in the amount of $1.8 billion, subject to property identification and approval of the loans (the "LOCK 'N SHOP (R) Pipeline"). At February 29, 1996, the LOCK 'N SHOP (R) Pipeline was $1.3 billion. In Fiscal 1997 and Fiscal 1996, the Company received 499,861 and 460,486 new loan applications, respectively, at an average daily rate of $206 million and $194 million, respectively. The factors that affect the percentage of applications received and funded during a given time period include the movement and direction of interest rates, the average length of loan commitments issued, the creditworthiness of applicants, the production divisions' loan processing efficiency and loan pricing decisions. Loan origination fees decreased in Fiscal 1997 as compared to Fiscal 1996 primarily because production by the Correspondent Division (which, due to its lower cost structures, charges lower origination fees per dollar loaned) comprised a greater percentage of total production in Fiscal 1997 than in Fiscal 1996. Gain on sale of loans improved in Fiscal 1997 as compared to Fiscal 1996 primarily due to the sale during Fiscal 1997 of higher-margin home equity and sub-prime loans and improved pricing margins on prime credit quality first mortgages. The sale of home equity loans contributed $20 million and $4 million to gain on sale of loans in Fiscal 1997 and Fiscal 1996, respectively. Sub-prime loans contributed $72 million to the gain on sale of loans in Fiscal 1997. There were no sub-prime loan sales in Fiscal 1996. In general, loan origination fees and gain (loss) on sale of loans are affected by numerous factors including the volume and mix of loans produced and sold, loan pricing decisions, interest rate volatility and the general direction of interest rates. Net interest income (interest earned net of interest charges) increased to $33.6 million for Fiscal 1997 from $26.9 million for Fiscal 1996. Net interest income is principally a function of: (i) net interest income earned from the Company's mortgage loan warehouse ($61.6 million and $35.0 million for Fiscal 1997 and Fiscal 1996, respectively); (ii) interest expense related to the Company's investment in servicing rights ($148.3 million and $112.4 million for Fiscal 1997 and Fiscal 1996, respectively) and (iii) interest income earned from the custodial balances associated with the Company's servicing portfolio ($116.9 million and $102.3 million for Fiscal 1997 and Fiscal 1996, respectively). The Company earns interest on, and incurs interest expense to carry, mortgage loans held in its warehouse. The increase in net interest income from the mortgage loan warehouse was primarily attributed to a higher net earnings rate partially resulting from aggregating home equity and sub-prime loans (which generally bear interest at higher rates than prime credit quality first mortgages) prior to their sale or securitization. The increase in interest expense on the investment in servicing rights resulted primarily from a larger servicing portfolio, partially offset by a decrease in the payments of interest to certain investors pursuant to customary servicing arrangements with regard to paid-off loans in excess of the interest earned on these loans through their respective payoff dates ("Interest Costs Incurred on Payoffs"). The increase in net interest income earned from the custodial balances was related to an increase in the average custodial balances (caused by growth of the servicing portfolio and an increase in the amount of prepayments), offset somewhat by a decrease in the earnings rate from Fiscal 1996 to Fiscal 1997. During Fiscal 1997, loan administration income was positively affected by the continued growth of the loan servicing portfolio. At February 28, 1997, the Company serviced $158.6 billion of loans (including $3.9 billion of loans subserviced for others), compared to $136.8 billion (including $1.9 billion of loans subserviced for others) at February 29, 1996, a 16% increase. The growth in the Company's servicing portfolio during Fiscal 1997 was the result of loan production volume and the acquisition of bulk servicing rights, partially offset by prepayments, partial prepayments and scheduled amortization of mortgage loans. The weighted average interest rate of the mortgage loans in the Company's servicing portfolio at both February 28(29), 1997 and 1996 was 7.8%. It is the Company's strategy to build and retain its servicing portfolio because of the returns the Company can earn from such investment and because the Company believes that servicing income is countercyclical to loan production income. See "Prospective Trends - Market Factors." During Fiscal 1997, the prepayment rate of the Company's servicing portfolio was 11%, compared to 12% for Fiscal 1996. In general, the prepayment rate is affected by the level of refinance activity, which in turn is driven by the relative level of mortgage interest rates, and activity in the home purchase market. The slight decrease in the prepayment rate from Fiscal 1996 to Fiscal 1997 was primarily attributable to a small decrease in refinance activity caused by somewhat higher interest rates during Fiscal 1997 than during Fiscal 1996. The primary means used by the Company to reduce the sensitivity of its earnings to changes in interest rates is through a strong production capability and a growing servicing portfolio. In addition, to mitigate the effect on earnings of higher amortization and impairment that may result from increased current and projected future prepayment activity, the Company acquires financial instruments, including derivative contracts, that increase in aggregate value when interest rates decline (the "Servicing Hedge"). These financial instruments include call options on interest rate futures and MBS, interest rate floors, interest rate swaps (with the Company's maximum payment capped) ("Swap Caps"), options on interest rate swaps ("Swaptions"), interest rate caps, principal-only ("P/O") swaps and certain tranches of collateralized mortgage obligations ("CMOs"). With the Swap Caps, the Company receives and pays interest on a specified notional amount. The rate received is fixed; the rate paid is adjustable, is indexed to the London Interbank Offered Rates for U.S. dollar deposits ("LIBOR") and has a specified maximum or "cap." With the Swaptions, the Company has the option to enter into a receive-fixed, pay-floating interest rate swap at a future date or to settle the transaction for cash. The P/O swaps are derivative contracts, the value of which is determined by changes in the value of the referenced P/O security. The payments received by the Company under the P/O swaps relate to the cash flows of the referenced P/O security. The payments made by the Company are based upon a notional amount tied to the remaining balance of the referenced P/O security multiplied by a floating rate indexed to LIBOR. The CMOs, which consist primarily of P/O securities, have been purchased at deep discounts to their par values. As interest rates decrease, prepayments on the collateral underlying the CMOs should increase. This should result in a decline in the average lives of the P/O securities and a corresponding increase in the present values of their cash flows. Conversely, as interest rates increase, prepayments on the collateral underlying the CMOs should decrease. These changes should result in an increase in the average lives of the P/O securities and a decrease in the present values of their cash flows. The Servicing Hedge instruments utilized by the Company are designed to protect the value of the investment in mortgage servicing rights ("MSRs") from the effects of increased prepayment activity that generally results from declining interest rates. To the extent that interest rates increase, the value of the MSRs increases while the value of the hedge instruments declines. With respect to the options, Swaptions, floors, caps and CMOs, the Company is not exposed to loss beyond its initial outlay to acquire the hedge instruments. With respect to the Swap Caps contracts entered into by the Company as of February 28, 1997, the Company estimates that its maximum exposure to loss over the contractual term is $26.2 million. The Company's exposure to loss in the P/O swaps is related to changes in the market value of the referenced P/O security over the life of the contract. In Fiscal 1997, the Company recognized a net expense of $125.3 million from its Servicing Hedge. The net expense included unrealized losses of $56.9 million and realized losses of $68.4 million from the premium amortization and sale of various financial instruments that comprise the Servicing Hedge. In Fiscal 1996, the Company recognized a net benefit of $200.1 million from its Servicing Hedge. The net benefit included unrealized gains of $108.8 million and net realized gains of $91.3 million from the sale of various financial instruments that comprise the Servicing Hedge. There can be no assurance that the Company's Servicing Hedge will generate gains in the future, or if gains are generated, that they will fully offset impairment of the MSRs. See Note G to the Company's Consolidated Financial Statements. The Company recorded amortization and net impairment of its MSRs for Fiscal 1997 totaling $101.4 million (consisting of amortization amounting to $220.1 million and recovery of previous impairment of $118.7 million), compared to $342.8 million of amortization and impairment (consisting of amortization amounting to $168.0 million and net impairment of $174.8 million) for Fiscal 1996. The factors affecting the amount of amortization and impairment or recovery of the MSRs recorded in an accounting period include the level of prepayments during the period, the change in estimated future prepayments and the amount of Servicing Hedge gains or losses. During Fiscal 1997, the Company acquired bulk servicing rights for loans with principal balances aggregating $1.4 billion at a price of 1.60% of the aggregate outstanding principal balances of the servicing portfolios acquired. During Fiscal 1996, the Company acquired bulk servicing rights for loans with principal balances aggregating $5.2 billion at a price of 1.30% of the aggregate outstanding principal balances of the servicing portfolios acquired. Salaries and related expenses are summarized below for Fiscal 1997 and Fiscal 1996.
-- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- ----- (Dollar amounts in Fiscal 1997 thousands) -- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- ----- Production Loan Corporate Other Activities Administration Administration Activities Total -- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------ Base Salaries $ 91,054 $41,806 $54,244 $12,852 $199,956 Incentive Bonus 34,501 763 14,820 6,799 56,883 Payroll Taxes and Benefits 15,105 7,747 5,389 1,804 30,045 ------------ ------------- ------------- ------------- ------------ Total Salaries and Related Expenses $140,660 $50,316 $74,453 $21,455 $286,884 ============ ============= ============= ============= ============= Average Number of 2,303 1,555 1,107 251 5,216 Employees -- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
-- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- ----- (Dollar amounts in Fiscal 1996 thousands) -- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- ----- Production Loan Corporate Other Activities Administration Administration Activities Total -- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------ Base Salaries $ 68,502 $32,080 $46,504 $ 9,711 $156,797 Incentive Bonus 33,022 445 9,711 4,546 47,724 Payroll Taxes and Benefits 11,472 5,571 6,824 1,280 25,147 ------------ ------------- ------------- ------------- ------------ Total Salaries and Related Expenses $112,996 $38,096 $63,039 $15,537 $229,668 ============ ============= ============= ============= ============= Average Number of 1,743 1,160 887 192 3,982 Employees -- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
The amount of salaries increased during Fiscal 1997 primarily due to an increase in the number of employees resulting from higher loan production and diversification of loan products, a larger servicing portfolio and growth in the Company's non-mortgage banking activities. Occupancy and other office expenses for Fiscal 1997 increased to $129.9 million from $106.3 million for Fiscal 1996 primarily due to: (i) the continued effort by the Company to expand its retail branch network, particularly outside of California, (ii) the purchase of an office facility to house the Company's primary executive and administrative offices and some of its non-mortgage banking subsidiaries, (iii) higher loan production, (iv) a larger servicing portfolio and (v) growth in the Company's non-mortgage banking activities. Guarantee fees represent fees paid to guarantee timely and full payment of principal and interest on MBS and whole loans sold to permanent investors and to transfer the credit risk of the loans in the servicing portfolio. For Fiscal 1997, guarantee fees increased 31% to $159.4 million from $121.2 million for Fiscal 1996. The increase resulted from an increase in the servicing portfolio, changes in the mix of permanent investors and terms negotiated at the time of loan sales. Marketing expenses for Fiscal 1997 increased 26% to $34.3 million from $27.1 million for Fiscal 1996, reflecting the Company's continued implementation of a marketing plan to increase consumer brand awareness. Other operating expenses for Fiscal 1997 increased from Fiscal 1996 by $29.9 million, or 60%. This increase was due primarily to higher loan production, a larger servicing portfolio, increased reserves for bad debts and increased systems development and operation costs in Fiscal 1997 than in Fiscal 1996. Profitability of Loan Production and Servicing Activities In Fiscal 1997, the Company's pre-tax earnings from its loan production activities (which include loan origination and purchases, warehousing and sales) were $141.9 million. In Fiscal 1996, the Company's comparable pre-tax earnings were $61.2 million. The increase of $80.7 million was primarily attributable to a greater sale of higher-margin home equity loans, sales of sub-prime loans at significantly higher margins than prime credit quality first mortgages and improved pricing margins on prime credit quality first mortgages. There were no sub-prime loan sales in Fiscal 1996. These positive results were partially offset by higher production costs and a change in the internal method of allocating overhead between the Company's production and servicing activities. In Fiscal 1997, the Company's pre-tax income from its loan servicing activities (which include administering the loans in the servicing portfolio, selling homeowners and other insurance, acting as tax payment agent, marketing foreclosed properties and acting as reinsurer) was $254.2 million as compared to $251.2 million in Fiscal 1996. The increase of $3.0 million was due to an increase in the size of the servicing portfolio and in the rate of servicing and miscellaneous fees earned. Largely offsetting these positive factors was an increase in the net expense resulting from amortization and impairment of MSRs and from the Servicing Hedge from Fiscal 1996 to Fiscal 1997. The increase in such net expense is due primarily to increased amortization resulting from a higher cost basis in the MSRs. This higher basis is attributable to adoption of a new accounting standard effective March 1, 1995 that required recognition of originated mortgage servicing rights. Profitability of Other Activities In addition to loan production and loan servicing, the Company offers ancillary products and services related to its mortgage banking activities. These include title insurance and escrow services, home appraisals, credit cards, management of a publicly traded real estate investment trust ("REIT"), securities brokerage and servicing rights brokerage. For Fiscal 1997, these activities contributed $25.8 million to the Company's pre-tax income compared to $13.8 million for Fiscal 1996. This increase to pre-tax income primarily results from improved performance of the title insurance, escrow and REIT management services. Fiscal 1996 Compared with Fiscal 1995 Revenues for Fiscal 1996 increased 43% to $860.7 million from $602.7 million for Fiscal 1995. Net earnings increased 121% to $195.7 million in Fiscal 1996 from $88.4 million in Fiscal 1995. Effective March 1, 1995, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 122, Accounting for Mortgage Servicing Rights. SFAS No. 122 amended SFAS No. 65, Accounting for Certain Mortgage Banking Activities. Since SFAS No. 122 prohibited retroactive application, historical accounting results were not restated and, accordingly, the accounting results for Fiscal 1996 are not directly comparable with Fiscal 1995. The overall impact on the Company's financial statements of adopting SFAS No. 122 was an increase in net earnings for Fiscal 1996 of $41.9 million, or $0.42 per share. In addition to the accounting change, the increase in revenues and net earnings for Fiscal 1996 compared to Fiscal 1995 was attributable to an increase in the size of the Company's servicing portfolio and improved pricing margins, partially offset by the non-recurring gain on sale of servicing in Fiscal 1995 which gain was offset, in part, by a non-recurring write-off of the Servicing Hedge during the same prior period. The total volume of loans produced increased 24% to $34.6 billion for Fiscal 1996 from $27.9 billion for Fiscal 1995. Refinancings totaled $11.7 billion, or 34% of total fundings, for Fiscal 1996, as compared to $8.4 billion, or 30% of total fundings, for Fiscal 1995. Fixed-rate mortgage loan production totaled $26.9 billion, or 78% of total fundings, for Fiscal 1996, as compared to $18.4 billion, or 66% of total fundings, for Fiscal 1995. Total loan volume in the Company's production divisions is summarized below.
- -------------------------------------------- ------------------------------------ -------- (Dollar amounts in millions) Loan Production - -------------------------------------------- ------------------------------------ -------- Fiscal 1996 Fiscal 1995 ------------- ------------- Consumer Markets Division $ 7,458 $ 7,066 Wholesale Lending Division 8,061 8,503 Correspondent Lending Division 19,065 12,297 ============= ============= Total Loan Volume $34,584 $27,866 ============= ============= - -------------------------------------------- ------------- -------- ------------- --------
At February 29(28), 1996 and 1995, the Company's pipeline of loans in process was $5.6 billion and $3.6 billion, respectively. In addition, at February 29(28), 1996 and 1995, the Company's LOCK 'N SHOP (R) Pipeline was $1.3 billion and $2.7 billion, respectively. In Fiscal 1996 and Fiscal 1995, the Company received 460,486 and 315,632 new loan applications, respectively, at an average daily rate of $194 million and $141 million, respectively. The following actions were taken during Fiscal 1996 on the total applications received during that year: 309,433 loans (67% of total applications received) were funded and 101,747 applications (22% of total applications received) were either rejected by the Company or withdrawn by the applicant. The following actions were taken during Fiscal 1995 on the total applications received during that year: 220,715 loans (70% of total applications received) were funded and 66,725 applications (21% of total applications received) were either rejected by the Company or withdrawn by the applicant. Loan origination fees decreased in Fiscal 1996 as compared to Fiscal 1995 primarily because production by the Correspondent Division (which, due to lower cost structures, charges lower origination fees per dollar loaned) comprised a greater percentage of total production in Fiscal 1996 than in Fiscal 1995. Gain (loss) on sale of loans improved in Fiscal 1996 compared to Fiscal 1995 primarily due to improved pricing margins and the impact of adopting SFAS No. 122. SFAS No. 122 requires recognition of originated mortgage servicing rights ("OMSRs"), as well as purchased mortgage servicing rights ("PMSRs"), as assets by allocating total costs incurred between the loan and the servicing rights based on their relative fair values. This accounting methodology, in turn, increases the gain (or reduces the loss) on sale of loans as compared to the accounting results obtained from SFAS No. 65, the previously applicable standard. Under SFAS No. 65, the cost of OMSRs was not recognized as an asset and was included in the gain or loss recorded when the related loans were sold. The separate impact of recognizing OMSRs as assets in the Company's financial statements in accordance with SFAS No. 122 for Fiscal 1996 was an increase in gain on sale of loans of $153.3 million. With respect to PMSRs, SFAS No. 122 has a different cost allocation methodology than SFAS No. 65. In contrast to a cost allocation based on relative market value as set forth in SFAS No. 122, the prior requirement was to allocate the costs incurred in excess of the market value of the loans without the servicing rights to PMSRs. In Fiscal 1996, the separate impact of the application of SFAS No. 122 cost allocation method, along with the effect of changes in market conditions, was to reduce PMSR capitalization, and therefore negatively impact gain (loss) on sale of loans, by $83.5 million. Net interest income (interest earned net of interest charges) decreased to $26.9 million for Fiscal 1996 from $44.1 million for Fiscal 1995. Net interest income is principally a function of: (i) net interest income earned from the Company's mortgage loan warehouse ($35.0 million and $35.7 million for Fiscal 1996 and Fiscal 1995, respectively); (ii) interest expense related to the Company's investment in servicing rights ($112.4 million and $52.7 million for Fiscal 1996 and Fiscal 1995, respectively) and (iii) interest income earned from the custodial balances associated with the Company's servicing portfolio ($102.3 million and $59.8 million for Fiscal 1996 and Fiscal 1995, respectively). The Company earns interest on, and incurs interest expense to carry, mortgage loans held in its warehouse. The decrease in net interest income from the mortgage loan warehouse was primarily attributable to a lower net earnings rate. The increase in interest expense on the investment in servicing rights resulted primarily from a larger servicing portfolio and an increase in Interest Costs Incurred on Payoffs. The increase in net interest income earned from the custodial balances was related to an increase in the earnings rate and an increase in the average custodial balances (caused by growth of the servicing portfolio and an increase in prepayments) from Fiscal 1995 to Fiscal 1996. During Fiscal 1996, loan administration income was positively affected by the continued growth of the loan servicing portfolio. At February 29, 1996, the Company serviced $136.8 billion of loans (including $1.9 billion of loans subserviced for others), compared to $113.1 billion (including $0.7 billion of loans subserviced for others) at February 28, 1995, a 21% increase. The growth in the Company's servicing portfolio during Fiscal 1996 was the result of loan production volume and the acquisition of bulk servicing rights, partially offset by prepayments, partial prepayments and scheduled amortization of mortgage loans. The weighted average interest rate of the mortgage loans in the Company's servicing portfolio at February 29, 1996 was 7.8%, compared to 7.6% at February 28, 1995. During Fiscal 1996, the prepayment rate of the Company's servicing portfolio was 12%, as compared to 9% for Fiscal 1995. In Fiscal 1996, the Company recognized a net gain of $200.1 million from its Servicing Hedge. The net gain included unrealized gains of $108.8 million and realized gains of $91.3 million from the sale of various financial instruments that comprise the Servicing Hedge. As a part of the adoption of SFAS No. 122, the Company has revised its servicing hedge accounting policy, effective March 1, 1995, to adjust the basis of the capitalized servicing fees receivable and mortgage servicing rights for unrealized gains or losses in the derivative financial instruments comprising the Servicing Hedge. There can be no assurance that the Company's Servicing Hedge will generate gains in the future, or if gains are generated, that they will fully offset impairment of the MSRs. See Note G to the Company's Consolidated Financial Statements. The Company recorded amortization and impairment of its MSRs for Fiscal 1996 totaling $342.8 million (consisting of amortization amounting to $168.0 million and impairment of $174.8 million), compared to $95.8 million of amortization for Fiscal 1995. SFAS No. 122 requires that all capitalized mortgage servicing rights be evaluated for impairment based on the excess of the carrying amount of the MSRs over their fair value. Under SFAS No. 65, the impairment evaluation could be made using either discounted or undiscounted cash flows. No uniform required level of disaggregation was specified. The Company used a disaggregated undiscounted method. During Fiscal 1996, the Company acquired bulk servicing rights for loans with principal balances aggregating $5.2 billion at a price of $67.0 million or 1.30% of the aggregate outstanding principal balances of the servicing portfolios acquired. During Fiscal 1995, the Company acquired bulk servicing rights for loans with principal balances aggregating $17.6 billion at a price of $261.9 million or 1.49% of the aggregate outstanding principal balances of the servicing portfolios acquired. During Fiscal 1995, the Company sold servicing rights for loans with principal balances of $5.9 billion and recognized a gain of $56.9 million. No servicing rights were sold during Fiscal 1996. Salaries and related expenses are summarized below for Fiscal 1996 and Fiscal 1995.
-- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- ----- (Dollar amounts in Fiscal 1996 thousands) -- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- ----- Production Loan Corporate Other Activities Administration Administration Activities Total -- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------ Base Salaries $68,502 $32,080 $46,504 $9,711 $156,797 Incentive Bonus 33,022 445 9,711 4,546 47,724 Payroll Taxes and Benefits 11,472 5,571 6,824 1,280 25,147 ------------ ------------- ------------- ------------- ------------ Total Salaries and Related Expenses $112,996 $38,096 $63,039 $15,537 $229,668 ============ ============= ============= ============= ============= Average Number of 1,743 1,160 887 192 3,982 Employees -- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
-- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- ----- (Dollar amounts in Fiscal 1995 thousands) -- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- ----- Production Loan Corporate Other Activities Administration Administration Activities Total -- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------ Base Salaries $70,230 $23,929 $39,046 $6,811 $140,016 Incentive Bonus 21,178 463 8,637 4,204 34,482 Payroll Taxes and Benefits 11,633 4,020 8,062 848 24,563 ------------ ------------- ------------- ------------- ------------ Total Salaries and Related Expenses $103,041 $28,412 $55,745 $11,863 $199,061 ============ ============= ============= ============= ============= Average Number of 1,780 850 851 126 3,607 Employees -- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
The amount of salaries increased during Fiscal 1996 primarily due to the increased number of employees resulting from a larger servicing portfolio and growth in the Company's non-mortgage banking subsidiaries. Incentive bonuses earned during Fiscal 1996 increased primarily due to increased loan production. Occupancy and other office expenses for Fiscal 1996 slightly increased to $106.3 million from $102.2 million for Fiscal 1995. The increase was primarily attributable to a larger loan servicing portfolio. Guarantee fees for Fiscal 1996 increased 41% to $121.2 million from $85.8 million for Fiscal 1995. This increase resulted primarily from an increase in the servicing portfolio. Marketing expenses for Fiscal 1996 increased 17% to $27.1 million from $23.2 million for Fiscal 1995, reflecting the Company's implementation of a new marketing plan. In Fiscal 1995, the Company incurred an $8.0 million charge related to the consolidation and relocation of branch and administrative offices that occurred as a result of the reduction in staff caused by declining production. No such charge was incurred in Fiscal 1996. Other operating expenses for Fiscal 1996 increased from Fiscal 1995 by $13.2 million, or 36%. This increase was due primarily to an increase in unreimbursed costs on foreclosed loans resulting from a larger servicing portfolio, and an increased provision for bad debts resulting from home equity and sub-prime loans held in portfolio pending securitization. Profitability of Loan Production and Servicing Activities In Fiscal 1996, the Company's pre-tax earnings from its loan production activities (which include loan origination and purchases, warehousing and sales) was $61.2 million. In Fiscal 1995, the Company's comparable pre-tax loss was $94.8 million. The increase of $156.0 million was primarily attributable to improved pricing margins, the effect of the adoption of SFAS No. 122 previously discussed and a change of $44.6 million in the Company's internal method of allocating overhead between its production and servicing activities. In Fiscal 1996, the Company's pre-tax earnings from its loan servicing activities (which include administering the loans in the servicing portfolio, selling homeowners and other insurance and acting as tax payment agent) was $251.2 million as compared to $229.6 million in Fiscal 1995. The increase of $21.6 million was principally due to the increase in the size of the servicing portfolio, partially offset by the change in the Company's internal overhead allocation method discussed above and a non-recurring gain on sale of servicing in Fiscal 1995 (which was offset, in part, by a non-recurring write-off of the Servicing Hedge). Profitability of Other Activities For Fiscal 1996, these activities contributed $13.8 million to the Company's pre-tax income compared to $12.6 million for Fiscal 1995. This increase to pre-tax income primarily results from improved performance of the securities brokerage and REIT management services. INFLATION Inflation affects the Company in the areas of loan production and servicing. Interest rates normally increase during periods of high inflation and decrease during periods of low inflation. Historically, as interest rates increase, loan production, particularly from loan refinancings, decreases, although in an environment of gradual interest rate increases, purchase activity may actually be stimulated by an improving economy or the anticipation of increasing real estate values. In such periods of reduced loan production, production margins may decline due to increased competition resulting from overcapacity in the market. In a higher interest rate environment, servicing-related earnings are enhanced because prepayment rates tend to slow down thereby extending the average life of the Company's servicing portfolio and reducing both amortization and impairment of the MSRs and Interest Costs Incurred on Payoffs, and because the rate of interest earned from the custodial balances tends to increase. Conversely, as interest rates decline, loan production, particularly from loan refinancings, increases. However, during such periods, prepayment rates tend to accelerate (principally on the portion of the portfolio having a note rate higher than the then-current interest rates), thereby decreasing the average life of the Company's servicing portfolio and adversely impacting its servicing-related earnings primarily due to increased amortization and impairment of the MSRs, a decreased rate of interest earned from the custodial balances and increased Interest Costs Incurred on Payoffs. The impacts of changing interest rates on servicing-related earnings are reduced by performance of the Servicing Hedge, which is designed to mitigate the impact on earnings of higher amortization and impairment that may result from declining interest rates. SEASONALITY The mortgage banking industry is generally subject to seasonal trends. These trends reflect the general national pattern of sales and resales of homes, although refinancings tend to be less seasonal and more closely related to changes in interest rates. Sales and resales of homes typically peak during the spring and summer seasons and decline to lower levels from mid-November through February. In addition, delinquency rates typically rise in the winter months, which results in higher servicing costs. However, late charge income has historically been sufficient to offset such incremental expenses. LIQUIDITY AND CAPITAL RESOURCES The Company's principal financing needs are the financing of loan funding activities and the investment in servicing rights. To meet these needs, the Company currently utilizes commercial paper supported by the revolving credit facility, medium-term notes, MBS repurchase agreements, subordinated notes, pre-sale funding facilities, an optional cash purchase feature in the dividend reinvestment plan, redeemable capital trust pass-through securities and cash flow from operations. In addition, in the past the Company has utilized whole loan repurchase agreements, servicing-secured bank facilities, private placements of unsecured notes and other financings, direct borrowings from the revolving credit facility and public offerings of preferred stock. Certain of the debt obligations of the Company and Countrywide Home Loans, Inc. ("CHL") contain various provisions that may affect the ability of the Company and CHL to pay dividends and remain in compliance with such obligations. These provisions include requirements concerning net worth, current ratio and other financial covenants. These provisions have not had, and are not expected to have, an adverse impact on the ability of the Company and CHL to pay dividends. The Company continues to investigate and pursue alternative and supplementary methods to finance its growing operations through the public and private capital markets. These may include such methods as mortgage loan sale transactions designed to expand the Company's financial capacity and reduce its cost of capital and the securitization of servicing income cash flows. In December 1996, Countrywide Capital I, a statutory business trust and a subsidiary of the Company, issued $300 million of 8% Company-obligated redeemable capital trust pass-through securities, the proceeds of which were used to purchase subordinated debt securities from the Company. The Company used the net proceeds from the sale of the subordinated debt securities for general corporate purposes, principally to reduce short-term debt. In connection with its derivative contracts, the Company may be required to deposit cash or certain government securities or obtain letters of credit to meet margin requirements. The Company considers such potential margin requirements in its overall liquidity management. In the course of the Company's mortgage banking operations, the Company sells to investors the mortgage loans it originates and purchases but generally retains the right to service the loans, thereby increasing the Company's investment in loan servicing rights. The Company views the sale of loans on a servicing-retained basis in part as an investment vehicle. Significant unanticipated prepayments in the Company's servicing portfolio could have a material adverse effect on the Company's future operating results and liquidity. Cash Flows Operating Activities In Fiscal 1997, the Company's operating activities provided cash of approximately $2.0 billion on a short-term basis primarily from the decrease in its mortgage loans and MBS held for sale. Mortgage loans and MBS held for sale are generally financed with short-term borrowings; therefore, the operating cash so provided was used to repay short-term debt as discussed under "Financing Activities." Investing Activities The primary investing activity for which cash was used in Fiscal 1997 was the investment in servicing. Net cash used by investing activities was $0.9 billion for Fiscal 1997 and Fiscal 1996. Financing Activities Net cash used by financing activities amounted to $1.0 billion for Fiscal 1997. Net cash provided by financing activities amounted to $2.4 billion for Fiscal 1996. The decrease in cash flow from financing activities was primarily the result of net short-term debt repayments by the Company in Fiscal 1997 and net short-term borrowings during Fiscal 1996. PROSPECTIVE TRENDS Applications and Pipeline of Loans in Process During Fiscal 1997, the Company received new loan applications at an average daily rate of $206 million and at February 28, 1997, the Company's pipeline of loans in process was $4.7 billion. This compares to a daily application rate in Fiscal 1996 of $194 million and a pipeline of loans in process at February 29, 1996 of $5.6 billion. The size of the pipeline is generally an indication of the level of future fundings, as historically 43% to 77% of the pipeline of loans in process has funded. In addition, the Company's LOCK `N SHOP(R) Pipeline at February 28, 1997 was $1.8 billion and at February 29, 1996 was $1.3 billion. For the month ended March 31, 1997, the average daily amount of applications received was $228 million, and at March 31, 1997, the pipeline of loans in process was $5.1 billion and the Lock n' Shop(R) Pipeline was $2.6 billion. Future application levels and loan fundings are dependent on numerous factors, including the level of demand for mortgage credit, the extent of price competition in the market, the direction of interest rates, seasonal factors and general economic conditions. Market Factors Mortgage interest rates generally decreased in Fiscal 1996 and were somewhat volatile, although generally slightly higher than the prior year, in Fiscal 1997. Loan production increased 9% from Fiscal 1996 to Fiscal 1997. This is primarily due to several factors. First, sub-prime and home equity loan fundings, which are generally less sensitive to interest rate fluctuations than prime credit quality first mortgages, increased from Fiscal 1996 to Fiscal 1997. Second, certain of the Company's loan products, particularly jumbo loan products, were more competitively priced in Fiscal 1997 than in Fiscal 1996. Further, home purchase market activity was stronger during Fiscal 1997 than in Fiscal 1996. The prepayment rate in the servicing portfolio declined slightly from Fiscal 1996 to Fiscal 1997. Because interest rates were generally higher in Fiscal 1997 than in Fiscal 1996, recovery of previously recorded impairment of MSRs was recognized and, conversely, the Servicing Hedge posted a loss. The Company's primary competitors are commercial banks, savings and loans and mortgage banking subsidiaries of diversified companies, as well as other mortgage bankers. Over the past three years, certain commercial banks have expanded their mortgage banking operations through acquisition of formerly independent mortgage banking companies or through internal growth. The Company believes that these transactions and activities have not had a material impact on the Company or on the degree of competitive pricing in the market. The Company's California mortgage loan production (measured by principal balance) constituted 25% of its total production during Fiscal 1997, down from 31% for Fiscal 1996. The Company is continuing its efforts to expand its production capacity outside of California. Some regions in which the Company operates have experienced slower economic growth, and real estate financing activity in these regions has been negatively impacted. As a result, home lending activity for single- (one-to-four) family residences in these regions may also have experienced slower growth. To the extent that any geographic region's mortgage loan production constitutes a significant portion of the Company's production, there can be no assurance that the Company's operations will not be adversely affected if that region experiences slow or negative economic growth resulting in decreased residential real estate lending activity, or market factors further impact the Company's competitive position in that region. The delinquency rate in the Company-owned servicing portfolio increased to 3.44% at February 28, 1997 from 3.20% at February 29, 1996. The Company believes that this increase was primarily the result of portfolio mix changes and aging. The proportion of government and high loan-to-value conventional loans, which tend to experience higher delinquency rates than low loan-to-value conventional loans, has increased from 45% of the portfolio at February 29, 1996 to 48% at February 28, 1997. In addition, the weighted average age of the portfolio is 27 months at February 28, 1997, up from 25 months at February 29, 1996. Delinquency rates tend to increase as loans age, reaching a peak at three to five years of age. However, because the loans in the portfolio are generally serviced on a non-recourse basis, the Company's exposure to credit loss resulting from increased delinquency rates is substantially limited. Further, related late charge income has historically been sufficient to offset incremental servicing expenses resulting from an increased delinquency rate. The percentage of loans in the Company's owned servicing portfolio that are in foreclosure increased to 0.71% at February 28, 1997 from 0.49% at February 29, 1996. Because the Company services substantially all conventional loans on a non-recourse basis, foreclosure losses are generally the responsibility of the investor or insurer and not the Company. Accordingly, any increase in foreclosure activity should not result in significant foreclosure losses to the Company. However, the Company's expenses may be increased somewhat as a result of the additional staff efforts required to foreclose on a loan. Similarly, government loans serviced by the Company (28% of the Company's servicing portfolio at February 28, 1997) are insured or partially guaranteed against loss by the Federal Housing Administration or the Veterans Administration. In the Company's view, the limited unreimbursed costs that may be incurred by the Company on government foreclosed loans are not material to the Company's consolidated financial statements. Servicing Hedge As previously discussed, the Company's Servicing Hedge is designed to protect the value of its investment in servicing rights from the effects of increased prepayment activity that generally results from declining interest rates. In periods of increasing interest rates, the value of the Servicing Hedge generally declines and the value of MSRs generally increases. There can be no assurance that, in periods of increasing interest rates, the increase in value of the MSRs will offset the amount of Servicing Hedge expense; or in periods of declining interest rates, that the Company's Servicing Hedge will generate gains or if gains are generated, that they will fully offset impairment of the MSRs. Implementation of New Accounting Standard In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings per Share, which supersedes Accounting Principles Board ("APB") Opinion No. 15, of the same name. SFAS No. 128 simplifies the standards for computing earnings per share ("EPS") and makes them comparable to international standards. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, with earlier application not permitted. Upon adoption, all prior EPS data will be restated. The following table presents basic and diluted EPS for the years ended February 28(29), 1997, 1996 and 1995, computed under the provisions of SFAS No. 128.
- ------------------------ --------- --------- --------- -- - ---------------------------- -- -- --------- ------- ------ Year ended February 28(29), --------- --------- --------- -- - ---------------------------- -- -- --------- ------- ------ 1997 1996 1995 --------- --------- --------- ---------- --------- --------- --------- -------- --------- (Dollar amounts in Per-Share Per-Share Per-Share thousands, except per Net Amount Net Amount Net Amount share data) Earnings Shares Earnings Shares Earnings Shares - ------------------------ --------- --------- --------- --------- -------- --------- ========= ========== ========= Net earnings $257,358 $195,720 $88,407 ========= ========== ========= Basic EPS Net earnings available to common shareholders $257,358 103,112 $2.50 $195,720 98,352 $1.99 $88,407 91,240 $0.97 Effect of dilutive stock options - 2,565 - 1,918 - 847 --------- --------- ---------- --------- --------- -------- Diluted EPS Net earnings available to common shareholders $257,358 105,677 $2.44 $195,720 100,270 $1.95 $88,407 92,087 $0.96 ========= ========= ========= ========== ========= ========= ========= ======== ======== - ------------------------ --------- --------- --------- - ---------- --------- --------- -- --------- -------- ---------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information called for by this Item 8 is hereby incorporated by reference from the Company's Financial Statements and Auditors' Report beginning at page F-1 of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item 10 is hereby incorporated by reference from the Company's definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year. ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS The information required by this Item 11 is hereby incorporated by reference from the Company's definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGERS The information required by this Item 12 is hereby incorporated by reference from the Company's definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item 13 is hereby incorporated by reference from the Company's definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) and (2) - Financial Statement Schedules. The information called for by this section of Item 14 is set forth in the Financial Statements and Auditors' Report beginning at page F-1 of this Form 10-K. The index to Financial Statements and Schedules is set forth at page F-2 of this Form 10-K. (3) - Exhibits Exhibit No. Description ----------- ----------------------------------------------------------- 2.1 Agreement and Plan of Merger Among CWM Mortgage Holdings, Inc., Countrywide Asset Management Corporation and Countrywide Credit Industries, Inc. 3.1* Certificate of Amendment of Restated Certificate of Incorporation of Countrywide Credit Industries, Inc. (incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q dated August 31, 1987). 3.2* Restated Certificate of Incorporation of Countrywide Credit Industries, Inc. (incorporated by reference to Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q dated August 31, 1987). 3.3* Bylaws of Countrywide Credit Industries, Inc., as amended and restated (incorporated by reference to Exhibit 3 to the Company's Current Report on Form 8-K dated February 10, 1988). 4.1* Rights Agreement, dated as of February 10, 1988, between Countrywide Credit Industries, Inc. and Bank of America NT & SA, as Rights Agent (incorporated by reference to Exhibit 4 to the Company's Form 8-A filed pursuant to Section 12 of the Securities Exchange Act of 1934 on February 12, 1988). 4.1.1* Amendment No. 1 to Rights Agreement dated as of March 24, 1992 (incorporated by reference to Exhibit 1 to the Company's Form 8 filed with the SEC on March 27, 1992). 4.2* Specimen Certificate of the Company's Common Stock (incorporated by reference to Exhibit 4.2 to the Current Company's Report on Form 8-K dated February 6, 1987). 4.3* Specimen Debenture Certificate (incorporated by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K dated February 6, 1987). 4.4* Form of Medium-Term Notes, Series A (fixed-rate) of Countrywide Funding Corporation (now known as Countrywide Home Loans, Inc.) ("CHL") (incorporated by reference to Exhibit 4.2 to the Company's registration statement on Form S-3 (File Nos. 33-44194 and 33-44194-1) filed with the SEC on November 27, 1991). 4.5* Form of Medium-Term Notes, Series A (floating-rate) of CHL (incorporated by reference to Exhibit 4.3 to the Company's registration statement on Form S-3 (File Nos. 33-44194 and 33-44194-1) filed with the SEC on November 27, 1991). 4.6* Form of Medium-Term Notes, Series B (fixed-rate) of CHL (incorporated by reference to Exhibit 4.2 to the Company's registration statement on Form S-3 (File No. 33-51816) filed with the SEC on September 9, 1992). 4.7* Form of Medium-Term Notes, Series B (floating-rate) of CHL (incorporated by reference to Exhibit 4.3 to the Company's registration statement on Form S-3 (File No. 33-51816) filed with the SEC on September 9, 1992). 4.8* Form of Medium-Term Notes, Series C (fixed-rate) of CHL (incorporated by reference to Exhibit 4.2 to the registration statement on Form S-3 of CHL and the Company (File Nos. 33-50661 and 33-50661-01) filed with the SEC on October 19, 1993). 4.9* Form of Medium-Term Notes, Series C (floating-rate) of CHL (incorporated by reference to Exhibit 4.3 to the registration statement on Form S-3 of CHL and the Company (File Nos. 33-50661 and 33-50661-01) filed with the SEC on October 19, 1993). 4.10*Indenture dated as of January 1, 1992 among CHL, the Company and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.1 to the registration statement on Form S-3 of CHL and the Company (File Nos. 33-50661 and 33-50661-01) filed with the SEC on October 19, 1993). 4.10.1* Form of Supplemental Indenture No. 1 dated as of June 15, 1995, to the Indenture dated as of January 1, 1992, among CHL, the Company, and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.9 to Amendment No. 2 to the registration statement on Form S-3 of the Company and CHL (File Nos. 33-59559 and 33-59559-01) filed with the SEC on June 16, 1995). 4.11*Form of Medium-Term Notes, Series D (fixed-rate) of CHL (incorporated by reference to Exhibit 4.10 to Amendment No. 2 to the registration statement on Form S-3 of the Company and CHL (File Nos. 33-59559 and 33-59559-01) filed with the SEC on June 16, 1995). 4.12*Form of Medium-Term Notes, Series D (floating-rate) of CHL (incorporated by reference to Exhibit 4.11 to Amendment No. 2 to the registration statement on Form S-3 of the Company and CHL (File Nos. 33-59559 and 33-59559-01) filed with the SEC on June 16, 1995). 4.13*Form of Medium-Term Notes, Series E (fixed-rate) of CHL (incorporated by reference to Exhibit 4.3 to Post-Effective Amendment No. 1 to the registration statement on Form S-3 of the Company and CHL (File Nos. 333-3835 and 333-3835-01) filed with the SEC on August 2, 1996). 4.14*Form of Medium-Term Notes, Series E (floating rate) of CHL (incorporated by reference to Exhibit 4.4 to Post-Effective Amendment No. 1 to the registration statement on Form S-3 of the Company and CHL (File Nos. 333-3835 and 333-3835-01) filed with the SEC on August 2, 1996). + 10.1*Indemnity Agreements with Directors and Officers of Countrywide Credit Industries, Inc. (incorporated by reference to Exhibit 10.1 to the Company's Report on Form 8-K dated February 6, 1987). + 10.2*Restated Employment Agreement for David S. Loeb dated March 26, 1996 (incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-Q dated August 31, 1996). + 10.3* Restated Employment Agreement for Angelo R Mozilo dated March 26, 1996 (incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-Q dated August 31, 1996). + 10.4 Employment Agreement for Stanford L. Kurland dated May 7, 1996 (incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-Q dated August 31, 1996). + 10.5*Countrywide Credit Industries, Inc. Deferred Compensation Agreement for Non-Employee Directors (incorporated by reference to Exhibit 5.2 to the Company's Quarterly Report on Form 10-Q dated August 31, 1987). + 10.6*Countrywide Credit Industries, Inc. Deferred Compensation Plan for Key Management Employees dated April 15, 1992 (incorporated by reference to Exhibit 10.3.1 to the Company's Annual Report on Form 10-K dated February 28, 1993). + 10.7* Countrywide Credit Industries, Inc. Deferred Compensation Plan effective August 1, 1993 (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q dated August 31, 1993). 10.8* Revolving Credit Agreement dated as of May 20, 1996 by and among CFC, First National Bank of Chicago, Bankers Trust Company, The Bank of New York, The Chase Manhattan Bank, N.A., Chase Securities, Inc. and the Lenders Party Thereto (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q dated May 31, 1996). + 10.9* Severance Plan (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q dated May 31, 1988). + 10.10* Key Executive Equity Plan (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q dated May 31, 1988). + 10.11* 1987 Stock Option Plan, as Amended and Restated on May 15, 1989 (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K dated February 28, 1989). + 10.12* 1986 Non-Qualified Stock Option Plan as amended (incorporated by reference to Exhibit 10.11 to Post-Effective Amendment No. 2 to the Company's registration statement on Form S-8 (File No. 33-9231) filed with the SEC on December 20, 1988). + 10.13* 1985 Non-Qualified Stock Option Plan as amended (incorporated by reference to Exhibit 10.9 to Post-Effective Amendment No. 2 to the Company's registration statement on Form S-8 (File No. 33-9231) filed with the SEC on December 20, 1988). + 10.14* 1984 Non-Qualified Stock Option Plan as amended (incorporated by reference to Exhibit 10.7 to Post-Effective Amendment No. 2 to the Company's registration statement on Form S-8 (File No. 33-9231) filed with the SEC on December 20, 1988). + 10.15* 1982 Incentive Stock Option Plan as amended (incorporated by reference to Exhibits 10.2 - 10.5 to Post-Effective Amendment No. 2 to the Company's registration statement on Form S-8 (File No. 33-9231) filed with the SEC on December 20, 1988). + 10.16* Amended and Restated Stock Option Financing Plan (incorporated by reference to Exhibit 10.12 to Post-Effective Amendment No. 2 to the Company's registration statement on Form S-8 (File No. 33-9231) filed with the SEC on December 20, 1988). 10.17* 1995 Amended and Extended Management Agreement, dated as of May 15, 1995, between CWM Mortgage Holdings, Inc. ("CWM") and Countrywide Asset Management Corporation (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q dated August 31, 1995). 10.18* 1987 Amended and Restated Servicing Agreement, dated as of May 15, 1987, between CWM and CHL (incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K dated February 28, 1990). 10.19* 1995 Amended and Restated Loan Purchase and Administrative Services Agreement, dated as of May 15, 1995, between CWM and CHL (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q dated August 31, 1995). + 10.20* 1991 Stock Option Plan (incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K dated February 29, 1992). + 10.20.1* First Amendment to the 1991 Stock Option Plan (incorporated by reference to Exhibit 10.19.1 to the Company's Annual Report on Form 10-K dated February 28, 1993). + 10.20.2* Second Amendment to the 1991 Stock Option Plan (incorporated by reference to Exhibit 10.19.2 to the Company's Annual Report on Form 10-K dated February 28, 1993). + 10.20.3* Third Amendment to the 1991 Stock Option Plan (incorporated by reference to Exhibit 10.19.3 to the Company's Annual Report on Form 10-K dated February 28, 1993). + 10.20.4* Fourth Amendment to the 1991 Stock Option Plan (incorporated by reference to Exhibit 10.19.4 to the Company's Annual Report on Form 10-K dated February 28, 1993). + 10.20.5* Fifth Amendment to the 1991 Stock Option Plan (incorporated by reference to Exhibit 10.19.5 to the Company's Annual Report on Form 10-K dated February 28, 1995). + 10.21* 1992 Stock Option Plan dated as of December 22, 1992 (incorporated by reference to Exhibit 10.19.5 to the Company's Annual Report on Form 10-K dated February 28, 1993). + 10.22* Amended and Restated 1993 Stock Option Plan (incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q dated August 31, 1996). + 10.22.1* First Amendment to the Amended and Restated 1993 Stock Option Plan (incorporated by reference to Exhibit 10.5.1 to the Company's Annual Report on Form 10-Q dated August 31, 1996). + 10.23* Supplemental Executive Retirement Plan effective March 1, 1994 (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q dated May 31, 1994). + 10.24* Split-Dollar Life Insurance Agreement (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q dated May 31, 1994). + 10.25* Split-Dollar Collateral Assignment (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q dated May 31, 1994). + 10.26* Annual Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q dated August 31, 1996). + 10.27 Change in Control Severance Plan 11.1 Statement Regarding Computation of Earnings Per Share. 12.1 Computation of the Ratio of Earnings to Fixed Charges. 22.1 List of subsidiaries. 24.1 Consent of Grant Thornton LLP. 27 Financial Data Schedules (included only with the electronic filing with the SEC) ------------------------- *Incorporated by reference. +Constitutes a management contract or compensatory plan or arrangement. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COUNTRYWIDE CREDIT INDUSTRIES, INC. By: /s/ DAVID S. LOEB ------------------------------------ David S. Loeb, Chairman and President Dated: May 15, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Signatures Title Date /s/ DAVID S. LOEB President, Chairman of the Board of May 15, 1997 ------------------ Directors and Director (Principal ------------------ Executive Officer) David S. Loeb /s/ ANGELO R. MOZILO Executive Vice President and Director May 15, 1997 - --------------------- - --------------------- Angelo R. Mozilo /s/ STANFORD L. KURLAND Senior Managing Director and Chief May 15, 1997 - ------------------------ Operating Officer - ------------------------ Stanford L. Kurland /s/ CARLOS M. GARCIA Managing Director; Chief Financial May 15, 1997 --------------------- Officer and Chief Accounting --------------------- Officer (Principal Financial Carlos M. Garcia Officer and Principal Accounting Officer) /s/ ROBERT J. DONATO Director May 15, 1997 --------------------- --------------------- Robert J. Donato /s/ BEN M. ENIS Director May 15, 1997 - --------------- - --------------- Ben M. Enis /s/ EDWIN HELLER Director May 15, 1997 - ----------------- Edwin Heller /s/ HARLEY W. SNYDER Director May 15, 1997 - ---------------------- Harley W. Snyder COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS For Inclusion in Form 10-K Annual Report Filed with Securities and Exchange Commission February 28, 1997 COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND SCHEDULES February 28, 1997 Page ----------- Report of Independent Certified Public Accountants................ F-3 Financial Statements Consolidated Balance Sheets.................................. F-4 Consolidated Statements of Earnings.......................... F-5 Consolidated Statement of Common Shareholders' Equity........ F-6 Consolidated Statements of Cash Flows........................ F-7 Notes to Consolidated Financial Statements................... F-8 Schedules Schedule I - Condensed Financial Information of Registrant... F-30 Schedule II - Valuation and Qualifying Accounts.............. F-33 All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedules, or because the information required is included in the consolidated financial statements or notes thereto. REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Shareholders Countrywide Credit Industries, Inc. We have audited the accompanying consolidated balance sheets of Countrywide Credit Industries, Inc. and Subsidiaries as of February 28(29), 1997 and 1996, and the related consolidated statements of earnings, common shareholders' equity, and cash flows for each of the three years in the period ended February 28, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Countrywide Credit Industries, Inc. and Subsidiaries as of February 28(29), 1997 and 1996, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended February 28, 1997, in conformity with generally accepted accounting principles. We have also audited Schedules I and II for each of the three years in the period ended February 28, 1997. In our opinion, such schedules present fairly, in all material respects, the information required to be set forth therein. In March 1995, the Company adopted Financial Accounting Standards Board Statement No. 122, "Accounting for Mortgage Servicing Rights." In January 1997, the Company adopted Financial Accounting Standards Board Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." These changes are discussed in Note A-5 and Note A-6 of the Notes to Consolidated Financial Statements. GRANT THORNTON LLP Los Angeles, California April 22, 1997
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS February 28(29), (Dollar amounts in thousands, except per share data) A S S E T S 1997 1996 ------------------ ------------------- Cash $ 18,269 $ 16,444 Mortgage loans and mortgage-backed securities held for sale 2,579,972 4,740,087 Other receivables 1,451,979 912,613 Property, equipment and leasehold improvements, at cost - net of accumulated depreciation and amortization 190,104 140,963 Mortgage servicing rights 3,023,826 2,323,665 Other assets 825,142 523,881 ------------------ ------------------- Total assets $8,089,292 $8,657,653 ================== =================== Borrower and investor custodial accounts (segregated in special accounts - excluded from corporate assets) $1,695,523 $2,548,549 ================== =================== LIABILITIES AND SHAREHOLDERS' EQUITY Notes payable $4,713,324 $6,097,518 Drafts payable issued in connection with mortgage loan closings 221,757 238,020 Accounts payable and accrued liabilities 607,037 505,148 Deferred income taxes 635,643 497,212 ------------------ ------------------- Total liabilities 6,177,761 7,337,898 Commitments and contingencies - - Company-obligated mandatorily redeemable capital trust pass-through securities of subsidiary trust holding solely a Company guaranteed related subordinated debt 300,000 - Shareholders' equity Preferred stock - authorized, 1,500,000 shares of $0.05 par value; issued and outstanding, none - - Common stock - authorized, 240,000,000 shares of $0.05 par value; issued and outstanding, 106,095,558 shares in 1997 and 102,242,329 shares in 1996 5,305 5,112 Additional paid-in capital 917,942 820,183 Unrealized loss on available-for-sale securities (30,545) - Retained earnings 718,829 494,460 ------------------ ------------------- Total shareholders' equity 1,611,531 1,319,755 ------------------ ------------------- Total liabilities and shareholders' equity $8,089,292 $8,657,653 ================== =================== Borrower and investor custodial accounts $1,695,523 $2,548,549 ================== ===================
The accompanying notes are an integral part of these statements.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Year ended February 28(29), (Dollar amounts in thousands, except per share data) 1997 1996 1995 ---------------- -------------- -------------- Revenues Loan origination fees $ 193,079 $199,724 $203,426 Gain (loss) on sale of loans, net of commitment fees 247,450 92,341 (41,342) ---------------- -------------- -------------- Loan production revenue 440,529 292,065 162,084 Interest earned 350,263 308,449 249,560 Interest charges (316,705) (281,573) (205,464) ---------------- -------------- -------------- Net interest income 33,558 26,876 44,096 Loan servicing income 773,715 620,835 460,351 Amortization and impairment/recovery of mortgage servicing rights (101,380) (342,811) (95,768) Servicing hedge benefit (expense) (125,306) 200,135 (40,030) Less write-off of servicing hedge - - (25,600) ---------------- -------------- -------------- Net loan administration income 547,029 478,159 298,953 Commissions, fees and other income 91,346 63,642 40,650 Gain on sale of servicing - - 56,880 ---------------- -------------- -------------- Total revenues 1,112,462 860,742 602,663 Expenses Salaries and related expenses 286,884 229,668 199,061 Occupancy and other office expenses 129,877 106,298 102,193 Guarantee fees 159,360 121,197 85,831 Marketing expenses 34,255 27,115 23,217 Other operating expenses 80,188 50,264 37,016 Branch and administrative office consolidation costs - - 8,000 ---------------- -------------- -------------- Total expenses 690,564 534,542 455,318 ---------------- -------------- -------------- Earnings before income taxes 421,898 326,200 147,345 Provision for income taxes 164,540 130,480 58,938 ---------------- -------------- -------------- NET EARNINGS $ 257,358 $195,720 $88,407 ================ ============== ============== Earnings per share Primary $2.44 $1.95 $0.96 Fully diluted $2.42 $1.95 $0.96
The accompanying notes are an integral part of these statements.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY Three years ended February 28, 1997 (Dollar amounts in thousands) Unrealized Loss on Additional Available- Number Common Paid-in- for-Sale Retained of Shares Stock Capital Securities Earnings Total ---------------- -------------- -------------- ---------------- -------------- ------------ Balance at March 1, 1994 91,063,751 $4,553 $606,031 $ - $269,553 $ 880,137 Cash dividends paid - common - - - - (28,259) (28,259) Stock options exercised 283,147 14 1,584 - - 1,598 Tax benefit of stock options exercised - - 697 - - 697 Dividend reinvestment plan - - (14) - - (14) Settlement of three-for-two stock split 23,466 1 (9) - - (8) Net earnings for the year - - - - 88,407 88,407 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at February 28, 1995 91,370,364 4,568 608,289 - 329,701 942,558 Issuance of common stock 10,000,000 500 200,775 - - 201,275 Cash dividends paid - common - - - - (30,961) (30,961) Stock options exercised 752,380 38 6,686 - - 6,724 Tax benefit of stock options exercised - - 1,963 - - 1,963 Dividend reinvestment plan 33,345 2 697 - - 699 401(k) Plan contribution 86,240 4 1,773 - - 1,777 Net earnings for the year - - - - 195,720 195,720 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at February 29, 1996 102,242,329 5,112 820,183 - 494,460 1,319,755 Cash dividends paid - common - - - - (32,989) (32,989) Stock options exercised 1,000,798 50 15,337 - - 15,387 Tax benefit of stock options exercised - - 3,656 - - 3,656 Dividend reinvestment plan 2,198,563 110 60,040 - - 60,150 401(k) Plan contribution 79,878 4 2,038 - - 2,042 Issuance of common stock in business acquisition 573,990 29 16,688 - - 16,717 Unrealized loss on available-for-sale securities - - - (30,545) - (30,545) Net earnings for the year - - - - 257,358 257,358 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at February 28, 1997 106,095,558 $5,305 $917,942 ($30,545) $718,829 $1,611,531 ====================================================================================================================================
The accompanying notes are an integral part of this statement.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash Year ended February 28(29), (Dollar amounts in thousands) 1997 1996 1995 ---------------- ---------------- ----------------- Cash flows from operating activities Net earnings $ 257,358 $ 195,720 $ 88,407 Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Amortization and impairment of mortgage servicing rights 101,380 342,811 95,768 Servicing hedge unrealized loss (gain) 56,903 (108,800) - Depreciation and other amortization 40,378 30,545 26,050 Deferred income taxes 164,540 130,480 58,938 Gain on bulk sale of servicing rights - - (56,880) Origination and purchase of loans held for sale (37,810,761) (34,583,653) (27,866,170) Principal repayments and sale of loans 39,970,876 32,742,391 28,681,606 ---------------- ---------------- ----------------- Decrease (increase) in mortgage loans and mortgage-backed securities held for sale 2,160,115 (1,841,262) 815,436 Increase in other receivables and other assets (890,740) (483,364) (227,220) Increase in accounts payable and accrued liabilities 96,712 269,531 102,258 ---------------- ---------------- ----------------- Net cash provided (used) by operating activities 1,986,646 (1,464,339) 902,757 ---------------- ---------------- ----------------- Cash flows from investing activities Additions to mortgage servicing rights (858,912) (869,579) (796,714) Purchase of property, equipment and leasehold improvements - net (77,294) (19,003) (21,414) Proceeds from bulk sale of servicing rights - - 100,676 ---------------- ---------------- ----------------- Net cash used by investing activities (936,206) (888,582) (717,452) ---------------- ---------------- ----------------- Cash flows from financing activities Net (decrease) increase in warehouse debt and other short-term borrowings (1,924,308) 1,742,290 (451,915) Issuance of long-term debt 637,624 526,500 399,205 Repayment of long-term debt (113,773) (96,563) (93,019) Issuance of Company-obligated mandatorily redeemable capital trust pass-through securities of subsidiary trust holding solely a Company guaranteed related subordinated debt 300,000 - - Issuance of common stock 84,831 210,475 2,273 Cash dividends paid (32,989) (30,961) (28,259) ---------------- ---------------- ----------------- Net cash (used) provided by financing activities (1,048,615) 2,351,741 (171,715) ---------------- ---------------- ----------------- Net increase (decrease) in cash 1,825 (1,180) 13,590 Cash at beginning of period 16,444 17,624 4,034 ================ ================ ================= Cash at end of period $ 18,269 $ 16,444 $ 17,624 ================ ================ ================= Supplemental cash flow information Cash used to pay interest $ 309,575 $ 317,156 $ 262,858 Cash used to pay (refunded from) income taxes $ 15 $ 54 ($ 841) Noncash financing activities - issuance of common stock in business acquisition $ 16,717 - -
The accompanying notes are an integral part of these statements. NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Countrywide Credit Industries, Inc. (the "Company") is a holding company. Through its principal subsidiary, Countrywide Home Loans, Inc. ("CHL"), the Company is engaged primarily in the mortgage banking business and as such originates, purchases, sells and services mortgage loans throughout the United States. In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. A summary of the Company's significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows. 1. Principles of Consolidation The consolidated financial statements include the accounts of the parent and all wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated. 2. Mortgage Loans Held for Sale Mortgage loans held for sale are carried at the lower of cost or market, which is computed by the aggregate method (unrealized losses are offset by unrealized gains). The cost of mortgage loans and the carrying value of mortgage-backed securities ("MBS") held for sale in the near-term are adjusted by gains and losses generated from corresponding closed hedging transactions entered into to protect the inventory value from increases in interest rates. Hedge positions are also used to protect the pipeline of loan applications in process from changes in interest rates. Gains and losses resulting from changes in the market value of the inventory, pipeline and open hedge positions are netted. Any net gain that results is deferred; any net loss that results is recognized when incurred. Hedging gains and losses realized during the commitment and warehousing period related to the pipeline and mortgage loans held for sale are deferred. Hedging losses are recognized currently if deferring such losses would result in mortgage loans held for sale and the pipeline being valued in excess of their estimated net realizable value. 3. Mortgage-Backed Securities The Company's MBS held for sale in the near term and MBS retained in securitizations are classified as trading securities. Trading securities are recorded at fair value, with the change in fair value during the period included in earnings. The fair value of the MBS held for sale in the near term is based on quoted market prices. The fair value of MBS retained in securitizations is determined by discounting future cash flows using discount rates that approximate current market rates, market consensus prepayment rates and estimated foreclosure losses to the extent the Company has retained the risk of such losses. 4. Property, Equipment and Leasehold Improvements Depreciation is provided in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives using the straight-line method. Leasehold improvements are amortized over the lesser of the life of the lease or service lives of the improvements using the straight-line method. 5. Mortgage Servicing Rights, Amortization and Impairment On January 1, 1997, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Retroactive application was prohibited. SFAS No. 125 supersedes, but generally retains, the requirements of SFAS No. 122, Accounting for Mortgage Servicing Rights, which the Company adopted in March 1995. Both Statements NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) require the recognition of originated and purchased mortgage servicing rights ("MSRs") as assets by allocating total costs incurred between the loan and the servicing rights retained based on their relative fair values. In addition, SFAS No. 125 eliminates the distinction between normal and excess servicing to the extent the servicing fee does not exceed that specified in the contract. The adoption of SFAS No. 125 did not have a material impact on the Company's financial position or results of operations for the year ended February 28, 1997. Amortization of MSRs is based on the ratio of net servicing income received in the current period to total net servicing income projected to be realized from the MSRs. Projected net servicing income is in turn determined on the basis of the estimated future balance of the underlying mortgage loan portfolio, which declines over time from prepayments and scheduled loan amortization. The Company estimates future prepayment rates based on current interest rate levels, other economic conditions and market forecasts, as well as relevant characteristics of the servicing portfolio, such as loan types, interest rate stratification and recent prepayment experience. Prior to January 1, 1997, amortization of capitalized servicing fees receivable was based on the decline during the period in the present value of the projected excess servicing fees using the same discount rate as that implied by the price that investors were willing to pay for the excess servicing fees at the time of the loan sale. Amortization of MSRs (including capitalized excess servicing fees prior to January 1, 1997) amounted to $220.1 million, $168.0 million and $95.8 million for the years ended February 28(29), 1997, 1996 and 1995, respectively. SFAS No. 125 also requires that all MSRs be evaluated for impairment based on the excess of the carrying amount of the MSRs over their fair value. For purposes of measuring impairment, MSRs are stratified on the basis of interest rate and type of interest rate (fixed or adjustable). A net recovery of previously impaired MSRs amounted to $118.7 million and impairment of MSRs amounted to $174.8 million for the years ended February 28(29), 1997 and 1996, respectively. 6. Servicing Portfolio Hedge The Company acquires financial instruments, including derivative contracts, that change in aggregate value inversely to the movement of interest rates ("Servicing Hedge"). These financial instruments include call options on interest rate futures and MBS, interest rate floors, interest rate swaps (with the Company's maximum payment capped) ("Swap Caps"), options on interest rate swaps ("Swaptions"), interest rate caps, principal-only ("P/O") swaps and certain tranches of collateralized mortgage obligations ("CMOs"). The Servicing Hedge is designed to protect the value of the MSRs from the effects of increased prepayment activity that generally results from declining interest rates. The value of the interest rate floors, caps, call options, Swap Caps, Swaptions and P/O swaps is derived from an underlying instrument or index; however, the notional or contractual amount is not recognized in the balance sheet. The cost of the interest rate floors, caps and call options is charged to expense (and deducted from net loan administration income) over the life of the contract. Unamortized costs are included in Other Assets in the balance sheet. As part of the adoption of SFAS No. 122, the Company revised its Servicing Hedge accounting policy, effective March 1, 1995, to adjust the basis of the MSRs for realized and unrealized gains and losses in the derivative financial instruments comprising the Servicing Hedge. Effective January 1, 1997, the Company adopted SFAS No. 125 which supersedes, but generally retains, the provisions of SFAS No. 122 related to MSRs. For the year ended February 28, 1997, the net expense from the Servicing Hedge included a net unrealized loss of $56.9 million and a realized loss of $68.4 million from the premium amortization and sale of various derivative financial instruments. For the year ended February 29, 1996, the Servicing Hedge benefit included unrealized gains of $108.8 million and realized gains of $91.3 million. Prior to the year ended February 29, 1996, gains from the Servicing Hedge were recognized first as an offset to the "Incremental Amortization" of the Servicing Assets (i.e., amortization due to impairment caused by increased projected prepayment speeds). To the extent the Servicing Hedge generated gains in excess of Incremental Amortization, the Company reduced the carrying amount of the MSRs by such excess through additional amortization. For the year ended February 28, 1995, the Company recognized $66 million in net loss (including a write-off of the Servicing Hedge amounting to $26 million) as an offset to Incremental Amortization. NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The Company measures the effectiveness of its Servicing Hedge by computing the correlation under a variety of interest rate scenarios between the present value of servicing cash flows and the value of the Servicing Hedge instruments. 7. Deferred Commitment Fees Deferred commitment fees, included in Other Assets, primarily consist of fees paid to permanent investors to ensure the ultimate sale of loans and net put and call option fees paid for the option of selling or buying MBS. Fees paid to permanent investors are recognized as an adjustment to the sales price when the loans are sold and option fees are amortized over the life of the option to reflect the decline in its time value. Any unamortized option fees are charged to income when the related option is exercised. 8. Stock-Based Compensation The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees. That Opinion requires that compensation cost related to fixed stock option plans be recognized only to the extent that the fair value of the shares at the grant date exceeds the exercise price. Accordingly, the Company recognizes no compensation expense for its stock option grants. 9. Available-for-Sale Securities The Company has designated its purchased investments in certain tranches of CMOs as available for sale. Those securities are included in Other Assets at fair value, with any net material unrealized gains and losses included in equity. Unrealized losses that are other than temporary are recognized in earnings. 10. Loan Origination Fees Loan origination fees and costs and discount points are recorded as an adjustment of the cost of the loan and are included in loan production revenue when the loan is sold. 11. Interest Rate Swap Agreements The differential to be received or paid under the interest rate swap agreements associated with the Company's debt and custodial accounts is accrued and is recognized as an adjustment to net interest income. The related amount payable to or receivable from counterparties is included in Accounts Payable and Accrued Liabilities. 12. Sale of Servicing Rights The Company recognizes gain or loss on the sale of servicing rights when title and substantially all risks and rewards have irrevocably passed to the buyer and any minor protection provisions retained can be reasonably estimated. 13. Advertising Costs The Company charges to expense the production costs of advertising the first time the advertising takes place, except for direct-response advertising, which is capitalized and amortized over the expected period of future benefits. Advertising expense was $26.6 million and $20.6 million for the years ended February 28(29), 1997 and 1996, respectively. NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 14. Income Taxes The Company utilizes an asset and liability approach in its accounting for income taxes. This approach requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities. 15. Earnings Per Share Primary earnings per share is computed on the basis of the weighted average number of common and common equivalent shares outstanding during the respective periods after giving retroactive effect to stock dividends and stock splits. Fully diluted earnings per share is based on the assumption that all dilutive stock options were converted at the beginning of the reporting period. The weighted average shares outstanding for computing primary and fully diluted earnings per share were 105,677,000 and 106,555,000, respectively, for the year ended February 28, 1997; both 100,270,000 for the year ended February 29, 1996 and 92,087,000 and 92,216,000, respectively, for the year ended February 28, 1995. 16. Financial Statement Reclassifications and Restatement Certain amounts reflected in the Consolidated Financial Statements for the years ended February 29(28), 1996 and 1995 have been reclassified to conform to the presentation for the year ended February 28, 1997. NOTE B - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Property, equipment and leasehold improvements consisted of the following.
--------------------------------------------------------- ---- -------------------------------------------- --- February 28(29), ----------------- --- ---------------- -- (Dollar amounts in thousands) 1997 1996 ----------------------------------------------------------------- --- ----------------- --- ---------------- -- Buildings $ 69,786 $ 37,723 Office equipment 176,957 138,326 Leasehold improvements 26,853 25,269 ----------------- ---------------- 273,596 201,318 Less accumulated depreciation and amortization (102,259) (72,685) ----------------- ---------------- 171,337 128,633 Land 18,767 12,330 ================= ================ $190,104 $140,963 ================= ================ ----------------------------------------------------------------- --- ----------------- --- ---------------- -- Depreciation expense amounted to $29.0 million, $21.1 million and $19.0 million for the years ended February 28(29), 1997, 1996 and 1995, respectively.
NOTE C - MORTGAGE SERVICING RIGHTS
The components of mortgage servicing rights were as follows. --------------------------------------------- -- ------------------------------------------------------------- February 28(29), ---------------- --- ---------------- --- ---------------- -- (Dollar amounts in thousands) 1997 1996 1995 --------------------------------------------- -- ---------------- --- ---------------- --- ---------------- -- Mortgage Servicing Rights Balance at beginning of period $2,385,299 $1,796,897 $1,126,016 Additions 858,912 869,579 796,714 Sale of servicing - - (30,065) Scheduled amortization (220,099) (168,017) (95,768) Hedge losses (gains) applied 59,753 (113,160) - Reclassification of rights in excess of contractually specified servicing fees (57,371) - - ---------------- ---------------- ---------------- Balance before valuation reserve at end of period 3,026,494 2,385,299 1,796,897 ---------------- ---------------- ---------------- Reserve for Impairment of Mortgage Servicing Rights Balance at beginning of period (61,634) - - Reductions (additions) 58,966 (61,634) - ---------------- ---------------- ---------------- Balance at end of period ( 2,668) (61,634) - ================ ================ ================ Mortgage Servicing Rights, net $3,023,826 $2,323,665 $1,796,897 ================ ================ ================ --------------------------------------------- -- ---------------- --- ---------------- --- ---------------- --
The estimated fair value of recognized mortgage servicing rights aggregated $3.1 billion and $2.3 billion at February 28(29), 1997 and 1996, respectively. Fair value is determined by discounting estimated net future cash flows from mortgage servicing activities using discount rates that approximate current market rates and using current expected future prepayment rates. NOTE D - NOTES PAYABLE Notes payable consisted of the following.
---------------------------------------------------------- -- ---------------------------------------------- -- February 28(29), ----------------- --- ---------------- -- (Dollar amounts in thousands) 1997 1996 ------------------------------------------------------------------ -- ----------------- --- ---------------- -- Commercial paper $1,943,368 $2,847,442 Medium-term notes, Series A, B, C, D and E 2,346,800 1,824,800 Repurchase agreements 220,637 808,353 Subordinated notes 200,000 200,000 Unsecured notes payable - 235,000 Pre-sale funding facilities - 181,255 Other notes payable 2,519 668 ================= ================ $4,713,324 $6,097,518 ================= ================ ------------------------------------------------------------------ -- ----------------- --- ---------------- --
NOTE D - NOTES PAYABLE (Continued) Revolving Credit Facility and Commercial Paper As of February 28, 1997, CHL had an unsecured credit agreement (revolving credit facility) with fifty commercial banks permitting CHL to borrow an aggregate maximum amount of $3.5 billion, less commercial paper backed by the agreement. The amount available under the facility is subject to a borrowing base, which consists of mortgage loans and mortgage-backed securities held for sale and MSRs. The facility contains various financial covenants and restrictions, certain of which limit the amount of dividends that can be paid by the Company or CHL. The interest rate on direct borrowings is based on a variety of sources, including the prime rate and the London Interbank Offered Rates ("LIBOR") for U.S. dollar deposits. This interest rate varies, depending on CHL's credit ratings. No amount was outstanding on the revolving credit facility at February 28, 1997. The weighted average borrowing rate on direct and commercial paper borrowings for the year ended February 28, 1997 was 5.40%. The weighted average borrowing rate on commercial paper outstanding as of February 28, 1997 was 5.40%. Under certain circumstances, including the failure to maintain specified minimum credit ratings, borrowings under the revolving credit facility and commercial paper may become secured by mortgage loans and mortgage-backed securities held for sale and MSRs. The facility expires on May 14, 2000. Medium-Term Notes As of February 28, 1997, outstanding medium-term notes issued by CHL under various shelf registrations filed with the Securities and Exchange Commission were as follows.
- ----------------------------------------------------------------------------------------------------------------- (Dollar amounts in thousands) Outstanding Balance Interest Rate Maturity Date ---------------------- ---------------------------- ------------------------------------------- Floating-Rate Fixed-Rate Total From To From To ------------------------------------------- ----------- ---------- ------------- -------------- Series A $ - $ 304,800 $ 304,800 6.53% 8.79% Mar-1997 Mar-2002 Series B 11,000 396,000 407,000 5.82% 6.98% Aug-1997 Aug-2005 Series C 303,000 197,000 500,000 5.78% 8.43% Dec-1997 Mar-2004 Series D 115,000 385,000 500,000 5.70% 6.88% Aug-1998 Sep-2005 Series E 310,000 325,000 635,000 5.59% 7.45% Feb-2000 Oct-2008 ------------------------------------------- $739,000 $1,607,800 $2,346,800 =========================================== - -----------------------------------------------------------------------------------------------------------------
As of February 28, 1997, all of the outstanding fixed-rate notes had been effectively converted by interest rate swap agreements to floating-rate notes. The weighted average borrowing rate on medium-term note borrowings for the year ended February 28, 1997, including the effect of the interest rate swap agreements, was 6.11%. NOTE D - NOTES PAYABLE (Continued) Repurchase Agreements As of February 28, 1997, the Company had entered into short-term financing arrangements to sell MBS under agreements to repurchase. The weighted average borrowing rate for the year ended February 28, 1997 was 5.41%. The weighted average borrowing rate on repurchase agreements outstanding as of February 28, 1997 was 5.39%. The repurchase agreements were collateralized by MBS. All MBS underlying repurchase agreements are held in safekeeping by broker-dealers, and all agreements are to repurchase the same or substantially identical MBS. Subordinated Notes The 8.25% subordinated notes are due July 15, 2002. Interest is payable semi-annually on each January 15 and July 15. The subordinated notes are not redeemable prior to maturity and are not subject to any sinking fund requirements. Pre-Sale Funding Facilities As of February 28, 1997, CHL had uncommitted revolving credit facilities with two government-sponsored entities and an affiliate of an investment banking firm. The credit facilities are secured by conforming mortgage loans which are in the process of being pooled into MBS. Interest rates are based on LIBOR, federal funds and/or the prevailing rates for MBS repurchase agreements. The weighted average borrowing rate for all three facilities for the year ended February 28, 1997 was 5.57%. As of February 28, 1997, the Company had no outstanding borrowings under any of these facilities. Maturities of notes payable are as follows.
---------------- ------------------------------------------ ------------------------------------------ Year ending February 28(29), (Dollar amounts in thousands) ---------------- ------------------------------------------ ------------------------------------------ 1998 $2,345,663 1999 143,131 2000 328,030 2001 407,000 2002 291,000 Thereafter 1,198,500 ================ $4,713,324 ================ ---------------- ------------------------------------------ -------- ------------------ --------------
NOTE E - COMPANY-OBLIGATED CAPITAL TRUST PASS-THROUGH SECURITIES OF SUBSIDIARY TRUST On December 11, 1996, Countrywide Capital I (the "Subsidiary Trust"), a subsidiary of the Company, issued $300 million of 8% Capital Trust Pass-through Securities (the "Capital Securities"). In connection with the Subsidiary Trust's issuance of the Capital Securities, CHL issued to the Subsidiary Trust $309 million of its 8% Junior Subordinated Deferrable Interest Debentures (the "Subordinated Debt Securities"). The sole assets of the subsidiary trust are the Subordinated Debt Securities and a related guarantee by the Company. CHL's and the Company's obligations under the Subordinated Debt Securities, the related guarantee and certain agreements, taken together, constitute a full and unconditional guarantee by the Company of the Subsidiary Trust's obligations under the Capital Securities. NOTE F - INCOME TAXES Components of the provision for income taxes were as follows.
-- ----------------------------------------- --- -------------------------------------------------- -- Year ended February 28(29), ---------------- -- ------------- -- ------------- -- (Dollar amounts in thousands) 1997 1996 1995 -- ----------------------------------------- --- ---------------- -- ------------- -- ------------- -- Federal expense - deferred $135,991 $106,789 $48,680 State expense - deferred 28,549 23,691 10,258 ================ ============= ============= $164,540 $130,480 $58,938 ================ ============= ============= -- ----------------------------------------- --- ---------------- -- ------------- -- ------------- --
The following is a reconciliation of the statutory federal income tax rate to the effective income tax rate as reflected in the consolidated statements of earnings.
-- ----------------------------------------- --- -------------------------------------------------- -- Year ended February 28(29), --------------- -- -------------- --- ------------ -- 1997 1996 1995 -- ----------------------------------------- --- --------------- -- -------------- --- ------------ -- Statutory federal income tax rate 35.0% 35.0% 35.0% State income and franchise taxes, net of federal tax effect 4.0 5.0 5.0 =============== ============== ============ Effective income tax rate 39.0% 40.0% 40.0% =============== ============== ============ -- ----------------------------------------- --- --------------- -- -------------- --- ------------ --
The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities are presented below.
--- ------------------------------------------- -------------------------------------------------- -- Year Ended February 28(29), -------------------------------------------------- (Dollar amounts in thousands) 1997 1996 1995 ------------------------------------------------------------------------------------------------------ Deferred income tax assets: Net operating losses $131,253 $101,303 $85,508 Alternative minimum tax credits 3,989 3,989 3,989 State income and franchise taxes 39,487 30,276 25,183 Reserves and accrued expenses 40,193 17,740 9,392 Other 720 833 224 ----------------- --------------- ------------- Total deferred income tax assets 215,642 154,141 124,296 ----------------- --------------- ------------- Deferred income tax liabilities: Mortgage servicing rights 846,450 645,693 487,269 Accumulated depreciation 4,835 5,660 5,722 ----------------- --------------- ------------- Total deferred income tax liabilities 851,285 651,353 492,991 ----------------- --------------- ------------- Deferred income taxes $635,643 $497,212 $368,695 ================= =============== ============= ------------------------------------------------------------------------------------------------------
At February 28, 1997, the Company had net operating loss carryforwards for federal income tax purposes of $4,663,000 expiring in 2003, $23,082,000 expiring in 2004, $2,772,000 expiring in 2006, $5,064,000 expiring in 2008, $131,384,000 expiring in 2009, $74,033,000 expiring in 2010, $41,004,000 expiring in 2011 and $92,206,000 expiring in 2012. NOTE G - FINANCIAL INSTRUMENTS Derivative Financial Instruments The Company utilizes a variety of derivative financial instruments to manage interest rate risk. These instruments include MBS mandatory forward delivery and purchase commitments, options to sell or buy MBS and treasury securities, interest rate floors, interest rate swaps, interest rate caps, Swap Caps, Swaptions and P/O swaps. These instruments involve, to varying degrees, elements of credit and interest rate risk. All of the Company's derivative financial instruments are held or issued for purposes other than trading. While the Company does not anticipate nonperformance by any counterparty, the Company is exposed to credit loss in the event of nonperformance by the counterparties to the various instruments. The Company manages credit risk with respect to put or call options to sell or buy mortgage-backed and treasury securities, interest rate floors and caps, swaps, Swap Caps, Swaptions and P/O swaps by entering into agreements with entities approved by senior management and initially having a long-term credit rating of single A or better. These entities include Wall Street firms having primary dealer status, money center banks and permanent investors. The Company's exposure to credit risk in the event of default by the counterparty is the difference between the contract price and the current market price offset by any available margins retained by the Company or an independent clearing agent. The amounts of credit risk as of February 28, 1997, if the counterparties failed completely and if the margins, if any, retained by the Company or an independent clearing agent were to become unavailable, are approximately $3 million for MBS mandatory forward delivery commitments, approximately $25 million for interest rate swaps and approximately $19 million for interest rate floors. Hedge of Mortgage Loan Inventory and Committed Pipeline As of February 28, 1997, the Company had short-term rate and point commitments amounting to approximately $2.7 billion (including $1.9 billion fixed-rate and $0.8 billion adjustable-rate) to fund mortgage loan applications in process subject to approval of the loans ("Committed Pipeline") and an additional $1.8 billion of mortgage loans subject to property identification and borrower qualification. Substantially all of these commitments are for periods of 60 days or less. After funding and sale of the mortgage loans, the Company's exposure to credit loss in the event of nonperformance by the mortgagor is limited as described in Note H5. The Company uses the same credit policies in the commitments as are applied to all lending activities. In order to offset the risk that a change in interest rates will result in a decrease in the value of the Company's current mortgage loan inventory or its loan commitments, the Company enters into hedging transactions. The Company's hedging policies generally require that substantially all of its inventory of conforming and government loans and the maximum portion of its Committed Pipeline that may close be hedged with forward contracts for the delivery of MBS or options on MBS. The MBS that are to be delivered under these contracts and options are fixed- or adjustable-rate, corresponding with the composition of the Company's inventory and Committed Pipeline. At February 28, 1997, the Company had open commitments amounting to approximately $8.0 billion to sell MBS with varying settlement dates generally not extending beyond December 1997 and options to sell MBS through February 1998 with a total notional amount of $4.8 billion. The inventory is then used to form the MBS that will fill the forward delivery contracts and options. The Company hedges its inventory and Committed Pipeline of jumbo mortgage loans by using whole-loan sale commitments to ultimate buyers or by using temporary "cross hedges" with sales of MBS since such loans are ultimately sold based on a market spread to MBS. As such, the Company is not exposed to significant risk nor will it derive any significant benefit from changes in interest rates on the price of the mortgage loan inventory net of gains or losses of associated hedge positions. The correlation between the price performance of the inventory being hedged and the hedge instruments is very high due to the similarity of the asset and the related hedge instrument. The Company NOTE G - FINANCIAL INSTRUMENTS (Continued) is exposed to the risk that in the event of a decline or rise in rates during the commitment period, the portion of loans from the Committed Pipeline that actually closes at the committed price is less than or more than the amount estimated to close. At February 28, 1997, the notional amount of forward contracts and options to purchase MBS aggregated $3.7 billion and $3.4 billion, respectively. The forward contracts extend through April 1997 and the options extend through January 1998. The estimated amount of loans closing from the Committed Pipeline is influenced by many factors, including the composition of the Company's Committed Pipeline, the historical and expected portion of the Committed Pipeline likely to close and the timing of such closings. Servicing Hedge The primary means used by the Company to reduce the sensitivity of its earnings to changes in interest rates is through a strong production capability and a growing servicing portfolio. To further mitigate the effect on earnings of higher amortization and impairment of MSRs resulting from increased prepayment activity that generally occurs when interest rates decline, the Company utilizes its Servicing Hedge, consisting of financial instruments, including derivative contracts, that increase in aggregate value when interest rates decline. These financial instruments include call options on interest rate futures and MBS, interest rate floors, interest rate caps, Swap Caps, Swaptions, P/O swaps and certain tranches of CMOs. The CMOs, which consist primarily of P/O securities, have been purchased at deep discounts to their par values. As interest rates decline, prepayments on the collateral underlying the CMOs should increase. These changes should result in a decline in the average lives of the P/O securities and an increase in the present values of their cash flows. At February 28, 1997, the carrying value of CMOs included in the Servicing Hedge was approximately $165 million. The following summarizes the notional amounts of Servicing Hedge derivative contracts.
- -------------------------------------------------------------------------------------------------------------------------- Long Call Options on Interest Long Call Interest Principal Rate Options Rate Futures Swap - Only Interest (Dollar amounts in Floors on MBS Caps Swaps Rate Caps Swaptions millions) - -------------------------------------------------------------------------------------------------------------------------- Balance, March 1, 1994 $ - $2,000 $ 1,770 $ $ - $ - $ - Additions 4,000 - 1,300 - - - - Dispositions - 2,000 3,070 - - - - ---------- ----------- ------------- --------- ----------- ------------ ------------ Balance, February 28, 1995 4,000 - - - - - - Additions 13,500 2,500 7,920 1,000 268 - - Dispositions 1,750 1,000 4,370 - - - - ---------- ----------- ------------- --------- ----------- ------------ ------------ Balance, February 29, 1996 15,750 1,500 3,550 1,000 268 - - Additions 11,500 - 13,890 - - 1,000 1,750 Dispositions/Expirations 1,000 1,500 13,240 - - - - ========== =========== ============= ========= =========== ============ ============ Balance, February 28, 1997 $26,250 $ - $ 4,200 $1,000 $268 $1,000 $1,750 ========== =========== ============= ========= =========== ============ ============ - --------------------------------------------------------------------------------------------------------------------------
NOTE G - FINANCIAL INSTRUMENTS (Continued) The terms of the open Servicing Hedge derivative contracts at February 28, 1997 are presented below.
- --------------------------------------------------------------------------------------------------------------------- Long Call Options on Interest Principal Interest Rate Rate Futures Swap - Only Interest Floors Caps Swaps Rate Caps Swaptions - --------------------------------------------------------------------------------------------------------------------- Index or 2-, 5- or Interest 3-Month FNMA 10-Year 3-Month Underlying 10-Year Constant Rate Futures LIBOR capped Trust Constant LIBOR Instrument Maturity at 7.00% P/O Maturity Treasury Yield (floating-pay Treasury or rate) Yield 3-Month LIBOR Strike Price 4.50%-7.00% 104.00-124.00 5.65%-5.77% 72.74% of 8.00% 5.49%-6.00% (fixed-receive the rate) remaining face value at the end of the contract Term 2-10 Years 3-4 Months 5 Years 2 Years 5 Years 3-11 Years - ---------------------------------------------------------------------------------------------------------------------
The Servicing Hedge instruments utilized by the Company are intended to protect the value of the investment in MSRs from the effects of increased prepayment activity that generally results from declining interest rates. To the extent that interest rates increase, the value of the MSRs increases while the value of hedge instruments declines. With respect to the options, Swaptions, floors, caps and CMOs, the Company is not exposed to loss beyond its initial outlay to acquire the hedge instruments. With respect to the Swap Caps contracts entered into by the Company as of February 28, 1997, the Company estimates that its maximum exposure to loss over the contractual term is $26.2 million. The Company's exposure to loss in the P/O swaps is related to changes in the market value of the referenced P/O security over the life of the contract. There can be no assurance that the Company's Servicing Hedge will generate gains in the future, or if gains are generated, that they will fully offset impairment of the MSRs. Interest Rate Swaps As of February 28, 1997, CHL had interest rate swap agreements with certain financial institutions having notional principal amounts totaling $2.61 billion. The effect of these agreements is to enable CHL to convert its fixed-rate medium-term note borrowings to LIBOR-based floating-rate cost borrowings (notional amount $1.61 billion), to convert a portion of its commercial paper and medium-term note borrowings from one floating-rate index to another (notional amount $0.12 billion) and to convert the earnings rate on the custodial accounts held by CHL from floating to fixed (notional amount $0.88 billion). Payments are due periodically through the termination date of each agreement. The agreements expire between March 1997 and October 2008. NOTE G - FINANCIAL INSTRUMENTS (Continued) The terms of the open interest rate swap agreements at February 28, 1997 are presented below.
- --- ------------------------------------- --------- -- --------------------------------- -- Swaps related to debt Average receive rate 6.414% Average pay rate 5.597% Index 3-Month LIBOR Swaps related to escrow accounts Average receive rate 6.783% Average pay rate 5.541% Index 1- thru 3-Month LIBOR - --- ------------------------------------- --------- -- --------------------------------- --
Fair Value of Financial Instruments The following disclosure of the estimated fair value of financial instruments as of February 28(29), 1997 and 1996 is made by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
-- ------------------------------------------- -------------------------------- --- -------------------------- February 28, 1997 February 29, 1996 -------------------------------- --- -------------------------- Carrying Estimated Carrying Estimated (Dollar amounts in thousands) amount fair value amount fair value -- ------------------------------------------- ------------ -- ------------- --- ------------ -- ------------- Assets: Mortgage loans and mortgage-backed securities held for sale $2,579,972 $2,579,972 $4,740,087 $4,740,087 Items included in Other Assets: Purchased principal-only securities 165,452 165,452 139,343 125,463 Mortgage-backed securities retained in securitizations 293,030 293,030 132,378 129,828 Derivatives: Interest rate floors 167,204 137,047 142,339 132,621 Contracts and options related to Committed Pipeline, mortgage loans and mortgage- backed securities held for sale 43,058 (8,879) 33,497 117,426 Options related to Servicing Hedge 6,431 1,625 14,341 6,102 Interest rate caps 12,259 11,614 - - Swap Caps (11,609) (11,609) 5,910 5,910 Swaptions 19,701 19,482 - - Principal-only swaps (19,446) (19,446) (6,625) (6,625) Liabilities: Notes payable 4,713,324 4,738,763 6,097,518 6,151,774 Derivatives gain (loss): Interest rate swaps 5,340 (4,951) 1,739 31,602 Short-term commitments to extend credit - 40,439 - (39,716) -- ------------------------------------------- ------------ -- ------------- --- ------------ -- -------------
NOTE G - FINANCIAL INSTRUMENTS (Continued) The fair value estimates as of February 28(29), 1997 and 1996 are based on pertinent information available to management as of the respective dates. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein. The following describes the methods and assumptions used by the Company in estimating fair values. Mortgage Loans and Mortgage-Backed Securities Held for Sale Fair value is estimated using the quoted market prices for securities backed by similar types of loans and dealer commitments to purchase loans on a servicing-retained basis. Purchased Principal-only Securities Fair value is estimated using quoted market prices and by discounting future cash flows using discount rates that approximate current market rates and market consensus prepayment rates. Mortgage-backed securities retained in securitizations Fair value is estimated by discounting future cash flows using discount rates that approximate current market rates, market consensus prepayment rates and estimated foreclosure losses to the extent the Company has retained the risk of such losses. Derivatives Fair value is estimated as the amounts that the Company would receive or pay to terminate the contracts at the reporting date, taking into account the current unrealized gains or losses on open contracts. Market or dealer quotes are available for many derivatives; otherwise, pricing or valuation models are applied to current market information to estimate fair value. Notes Payable Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt. NOTE H - COMMITMENTS AND CONTINGENCIES 1. Legal Proceedings On June 22, 1995, a lawsuit was filed by Jeff and Kathy Briggs, as a purported class action, against CHL and a mortgage broker in the Northern Division of the United Sates District Court for the Middle District of Alabama. The suit claims, among other things, that in connection with residential mortgage loan closings, CHL made certain payments to mortgage brokers in violation of the Real Estate Settlement Procedures Act and induced mortgage brokers to breach their alleged fiduciary duties to their customers. The plaintiffs seek unspecified compensatory and punitive damages plus, as to certain claims, treble damages. CHL's management believes that its compensation programs to mortgage brokers comply with applicable law and with long-standing industry practice, and that it has meritorious defenses to the action. CHL intends to defend vigorously against the action and believes that the ultimate resolution of such claims will not have a material adverse effect on the Company's results of operations and financial position. NOTE H - COMMITMENTS AND CONTINGENCIES (Continued) The Company and certain subsidiaries are defendants in various lawsuits involving matters generally incidental to their business. Although it is difficult to predict the ultimate outcome of these cases, management believes, based on discussions with counsel, that any ultimate liability will not materially affect the consolidated financial position or results of operations of the Company and its subsidiaries. 2. Commitments to Buy or Sell Mortgage-Backed Securities and Interest Rate Swap Agreements In connection with its open commitments to buy or sell MBS and with its interest rate swap agreements, the Company may be required to maintain margin deposits. With respect to the MBS commitments, these requirements are generally greatest during periods of rapidly declining interest rates. The interest rate swap margin requirements are generally greatest during periods of increasing interest rates. 3. Lease Commitments The Company leases office facilities under lease agreements extending through September 2011. Future minimum annual rental commitments under these noncancelable operating leases with initial or remaining terms of one year or more are as follows.
--- ------------------------------------------ --------------------------------- Year ending February 28(29), (Dollar amounts in thousands) --- ------------------------------- -------------------- -------------- -------- 1998 $ 17,173 1999 14,299 2000 10,580 2001 8,604 2002 7,074 Thereafter 59,563 ============== $117,293 ============== --- ------------------------------- -------------------- -------------- --------
Rent expense was $22,260,000, $20,408,000 and $22,136,000 for the years ended February 28(29), 1997, 1996 and 1995, respectively. 4. Restrictions on Transfers of Funds The Company and certain of its subsidiaries are subject to regulatory and/or credit agreement restrictions which limit their ability to transfer funds to the Company through intercompany loans, advances or dividends. Pursuant to the revolving credit facility as of February 28, 1997, the Company is required to maintain $1.1 billion in consolidated net worth and CHL is required to maintain $1.0 billion of net worth, as defined in the credit agreement. 5. Loan Servicing As of February 28(29), 1997, 1996 and 1995, the Company serviced loans totaling approximately $158.6 billion, $136.8 billion and $113.1 billion, respectively. Included in the loans serviced at February 28(29), 1997, 1996 and 1995 were loans being serviced under subservicing agreements with total principal balances of $3.9 billion, $1.9 billion and $0.7 billion, respectively. NOTE H - COMMITMENTS AND CONTINGENCIES (Continued) Conforming conventional loans serviced by the Company (57% of the servicing portfolio at February 28, 1997) are securitized through the Federal National Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage Corporation ("Freddie Mac") programs on a non-recourse basis, whereby foreclosure losses are generally the responsibility of Fannie Mae or Freddie Mac and not of the Company. Similarly, the government loans serviced by the Company are securitized through Government National Mortgage Association programs, whereby the Company is insured against loss by the Federal Housing Administration (19% of the servicing portfolio at February 28, 1997) or partially guaranteed against loss by the Veterans Administration (9% of the servicing portfolio at February 28, 1997). In addition, jumbo mortgage loans (15% of the servicing portfolio at February 28, 1997) are also serviced on a non-recourse basis. Properties securing the mortgage loans in the Company's servicing portfolio are geographically dispersed throughout the United States. As of February 28, 1997, approximately 37% of the mortgage loans (measured by unpaid principal balance) in the Company's servicing portfolio are secured by properties located in California. No other state contains more than 5% of the properties securing mortgage loans. NOTE I - EMPLOYEE BENEFITS 1. Stock Option Plans The Company has stock option plans (the "Plans") that provide for the granting of both qualified and non-qualified options to employees and directors. Options are generally granted at the average market price of the Company's common stock on the date of grant, are exercisable beginning one year from the date of grant and expire up to eleven years from the date of grant. Stock options transactions under the Plans were as follows.
- --------------------------------------------------------------------------------------------------------------- Year ended February 28(29), ----------------------------------------------------- 1997 1996 1995 - ----- ------------------------------------------------- -- -------------- -- ------------- --- ------------- -- Number of Shares: Outstanding options at beginning of year 6,911,180 6,683,414 5,603,325 Options granted 4,516,237 1,110,205 1,948,290 Options exercised (1,001,510) (752,071) (307,847) Options expired or canceled (184,045) (130,368) (560,354) ============== ============= ============= Outstanding options at end of year 10,241,862 6,911,180 6,683,414 ============== ============= ============= Weighted Average Exercise Price: Outstanding options at beginning of year $15.67 $14.75 $13.79 Options granted 23.14 18.56 16.35 Options exercised 14.26 11.60 4.79 Options expired or canceled 19.38 16.25 16.26 ============== ============= ============= Outstanding options at end of year $19.03 $15.67 $14.75 ============== ============= ============= Options exercisable at end of year 3,862,565 3,437,985 2,704,728 Options available for future grant 3,078,591 1,410,485 2,393,441 - ----- ------------------------------------------------- -- -------------- -- ------------- --- ------------- --
NOTE I - EMPLOYEE BENEFITS (Continued) Status of the outstanding stock options under the Plans at February 28, 1997 was as follows.
- ---------------------------------------------------------------------------------------------------------------- Outstanding Options Exercisable Options --------------------------------------------------- ------------------------------- Weighted Average Weighted Weighted Remaining Average Average Exercise Contractual Exercise Exercise Price Range Life Number Price Number Price ------------------- --------------- -------------- ------------- ------------- ------------- $2.39 - $16.19 5.3 years 2,575,213 $12.77 2,207,360 $12.31 $16.81 - $18.56 7.5 2,591,175 $17.65 1,152,459 $17.43 $19.50 - $23.06 7.8 1,401,540 $22.18 498,996 $21.35 $23.19 - $23.19 9.4 3,655,700 $23.19 3,750 $23.19 $23.75 - $29.31 9.6 18,234 $26.46 - $ - =================== =============== ============== ============= ============= ------------- $2.39 - $29.31 7.7 years 10,241,862 $19.03 3,862,565 $15.01 =================== =============== ============== ============= ============= ------------- - ----- ------------------- - --------------- - -------------- -- ------------- -- ------------- -- -------------
Had the estimated fair value of the options granted during the period been included in compensation expense, the Company's net earnings and earnings per share would have been as follows.
- ------------------------------------------- ------------------------------------- (Dollar amounts in thousands, Year ended February 28(29), ------------------------------------- except per share data) 1997 1996 - ------------------------------------------- ----------------- -- ---------------- Net Earnings As reported $257,358 $195,720 Pro forma $241,115 $191,652 Primary Earnings Per Share As reported $2.44 $1.95 Pro forma $2.28 $1.91 Fully Diluted Earnings Per Share As reported $2.42 $1.95 Pro forma $2.26 $1.91 - ------------------------------------------- ----------------- -- ----------------
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model modified to consider cash dividends to be paid. The following weighted-average assumptions were used for grants in fiscal 1997 and 1996, respectively: dividend yield of 1.38% and 1.72%; expected volatility of 26% and 32%; risk-free interest rates of 6.6% and 5.9% and expected lives of five years for options granted in both years. The average fair value of options granted during fiscal 1997 and 1996 was $7.15 and $6.11, respectively. NOTE I - EMPLOYEE BENEFITS (Continued) 2. Pension Plan The Company has a defined benefit pension plan (the "Plan") covering substantially all of its employees. The Company's policy is to contribute the amount actuarially determined to be necessary to pay the benefits under the Plan, and in no event to pay less than the amount necessary to meet the minimum funding standards of ERISA. The following table sets forth the Plan's funded status and amounts recognized in the Company's financial statements.
--- ---------------------------------------------------------------------- ---------------------------------- Year ended February 28(29), ---------------------------------- -- ------------- --- ------------ (Dollar amounts in thousands) 1997 1996 --- ------------------------------------------------------------------- -- ------------- --- ------------ --- Actuarial present value of benefit obligations: Vested $8,640 $7,641 Nonvested 3,425 2,068 ------------- ------------ Total accumulated benefit obligation 12,065 9,709 Additional benefits based on estimated future salary levels 6,439 5,026 ------------ ------------- Projected benefit obligations for service rendered to date 18,504 14,735 Less Plan assets at fair value, primarily mortgage-backed securities (13,677) (12,515) ------------- ------------ Projected benefit obligation in excess of Plan assets 4,827 2,220 Unrecognized net (loss) gain from past experience different from that assumed and effects of changes in assumptions (903) 1,422 Prior service cost not yet recognized in net periodic pension cost (1,223) (1,322) Unrecognized net asset at February 28, 1987 being recognized over 15 years 354 425 ------------- ------------ Accrued pension cost $3,055 $2,745 ============= ============ Net pension cost included the following components: Service cost - benefits earned during the period $2,331 $1,832 Interest cost on projected benefit obligations 1,153 955 Actual return on Plan assets 598 (839) Net amortization and deferral (1,614) 29 ============= ============ Net periodic pension cost $2,468 $1,977 ============= ============ --- ------------------------------------------------------------------- -- ------------- --- ------------ ---
The weighted average discount rate and the rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7.5% and 4.0% for the years ended February 28(29), 1997 and 1996, respectively. The expected long-term rate of return on assets used was 8.0% for both years ended February 28(29), 1997 and 1996. Pension expense for the years ended February 28(29), 1997, 1996 and 1995 was $2,468,000, $1,977,000 and $1,792,000, respectively. The Company makes contributions to the Plan in amounts that are deductible in accordance with federal income tax regulations. NOTE J - SHAREHOLDERS' EQUITY In February 1988, the Board of Directors of the Company declared a dividend distribution of one preferred stock purchase right ("Right") for each outstanding share of the Company's common stock. As a result of stock splits and stock dividends, 0.399 of a Right is presently associated with each outstanding share of the Company's common stock issued prior to the Distribution Date (as defined below). Each Right, when exercisable, entitles the holder to purchase from the Company one one-hundredth of a share of Series A Participating Preferred Stock, par value $0.05 per share, of the Company (the "Series A Preferred Stock"), at a price of $145, subject to adjustments in certain cases to prevent dilution. NOTE J - SHAREHOLDERS' EQUITY (Continued) The Rights are evidenced by the common stock certificates and are not exercisable or transferable, apart from the common stock, until the date (the "Distribution Date") of the earlier of a public announcement that a person or group, without prior consent of the Company, has acquired 20% or more of the common stock ("Acquiring Person"), or ten days (subject to extension by the Board of Directors) after the commencement of a tender offer made without the prior consent of the Company. In the event a person becomes an Acquiring Person, then each Right (other than those owned by the Acquiring Person) will entitle its holder to purchase, at the then current exercise price of the Right, that number of shares of common stock, or the equivalent thereof, of the Company which, at the time of such transaction, would have a market value of two times the exercise price of the Right. The Board of Directors of the Company may delay the exercisability of the Rights during the period in which they are exercisable only for Series A Preferred Stock (and not common stock). In the event that, after a person has become an Acquiring Person, the Company is acquired in a merger or other business combination, as defined for the purposes of the Rights, each Right (other than those held by the Acquiring Person) will entitle its holder to purchase, at the then current exercise price of the Right, that number of shares of common stock, or the equivalent thereof, of the other party (or publicly traded parent thereof) to such merger or business combination which at the time of such transaction would have a market value of two times the exercise price of the Right. The Rights expire on the earlier of February 28, 2002, consummation of certain merger transactions or optional redemption by the Company prior to any person becoming an Acquiring Person. NOTE K - RELATED PARTY TRANSACTIONS Countrywide Asset Management Corporation ("CAMC"), a wholly owned subsidiary of the Company, has entered into an agreement (the "Management Agreement") with CWM Mortgage Holdings, Inc. ("CWM"), a real estate investment trust. CAMC has entered into a subcontract with its affiliate, CHL, to perform such services for CWM and its subsidiaries as CAMC deems necessary. In accordance with the Management Agreement, CAMC advises CWM on various facets of its business and manages its operations subject to the supervision of CWM's Board of Directors. For performing these services, CAMC receives certain management fees and incentive compensation. During the fiscal years ended February 28(29), 1997, 1996 and 1995, CAMC earned $1.6 million, $2.0 million and $0.3 million, respectively, in base management fees from CWM and its subsidiaries. In addition, during the fiscal years ended February 28(29), 1997, 1996 and 1995, CAMC recorded $8.6 million, $6.6 million and $1.1 million, respectively, in incentive compensation. The Management Agreement is renewable annually and expires on May 15, 1997. As of February 28, 1997, the Company owned 1,120,000 shares, or approximately 2.2%, of the common stock of CWM. CAMC incurs many of the expenses related to the operations of CWM and its subsidiaries, including personnel and related expenses, subject to reimbursement by CWM. CWM's conduit operations are primarily conducted in Independent National Mortgage Corporation ("Indy Mac"), and all other operations are conducted in CWM. Accordingly, Indy Mac is charged with the majority of the conduit's cost and CWM is charged with the other operations' costs. During the fiscal years ended February 28(29), 1997, 1996 and 1995, the amount of expenses incurred by CHL which were allocated to CAMC and reimbursed by CWM totaled $29.2 million, $17.1 million and $9.9 million, respectively. CWM has an option to purchase conventional loans from CHL at the prevailing market price. During the years ended February 28(29), 1997, 1996 and 1995, CWM purchased $51.5 million, $14.3 million and $80.4 million, respectively, of conventional nonconforming mortgage loans from CHL pursuant to this option. NOTE K - RELATED PARTY TRANSACTIONS (Continued) During the year ended February 28, 1995, CHL purchased from Indy Mac bulk servicing rights for loans with principal balances aggregating $3.0 billion at a price of $38.2 million. CHL services mortgage loans collateralizing three series of CMOs issued by subsidiaries of CWM with outstanding balances of approximately $77.7 million at February 28, 1997. CHL is entitled under each agreement to an annual fee of up to 0.32% of the aggregate unpaid principal balance of the pledged mortgage loans. Servicing fees received by CHL under such agreements for the year ended February 28, 1997 were approximately $0.2 million. Approximately $0.3 million of servicing fees were received for each of the years ended February 29(28), 1996 and 1995. The Company has reached a definitive agreement with CWM on restructuring the business relationship between the two companies. In substance, CWM will acquire the operations and employees of CAMC and will no longer pay a management fee. In return, the Company will receive approximately 3.6 million newly issued common shares of CWM. The proposed transaction is structured as a merger of CAMC with and into CWM. The transaction will occur after regulatory and shareholder approvals are obtained. NOTE L - SEGMENT INFORMATION The Company and its subsidiaries operate primarily in the mortgage banking industry. Operations in mortgage banking involve CHL's origination and purchase of mortgage loans, sale of mortgage loans in the secondary mortgage market, servicing of mortgage loans and the purchase and sale of rights to service mortgage loans. Segment information for the year ended February 28, 1997 was as follows.
----------------------------- ---- --- -- ------------ ---- ----------- ---- ------------ ----- ------------- Adjustments Mortgage and (Dollar amounts in thousands) Banking Other Eliminations Consolidated ----------------------------- ---- --- -- ------------ ---- ----------- ---- ------------ ----- ------------- Unaffiliated revenue $1,006,146 $ 106,316 $ - $1,112,462 Intersegment revenue 392 - (392) - ------------ ----------- ------------ ---------- Total revenues $1,006,538 $ 106,316 $ (392) $1,112,462 ============ =========== ============ ============= Earnings before income taxes $ 369,020 $ 52,878 $ - $ 421,898 ============ =========== ============ ============= Identifiable assets, February 28, 1997 $7,415,050 $ 2,559,037 ($1,884,795) $8,089,292 ============ =========== ============ ============= ----------------------------- ---- --- -- ------------ ---- ----------- ---- ------------ ----- -------------
NOTE L - SEGMENT INFORMATION (Continued) Segment information for the year ended February 29, 1996 was as follows.
----------------------------- ---- ---- -- ------------ ---- ----------- -- -------------- ---- ------------- Adjustments Mortgage and (Dollar amounts in thousands) Banking Other Eliminations Consolidated ----------------------------- ---- ---- -- ------------ ---- ----------- -- -------------- ---- ------------- Unaffiliated revenue $ 806,813 $ 53,929 $ - $ 860,742 Intersegment revenue 1,776 - (1,776) - ------------ ----------- -------------- ------------- Total revenues $ 808,589 $ 53,929 ($ 1,776) $ 860,742 ============ =========== ============== ============== Earnings before income taxes $ 308,596 $ 17,604 $ - $ 326,200 ============ =========== ============== ============== Identifiable assets, February 29, 1996 $8,181,765 $ 1,775,276 ($1,299,388) $ 8,657,653 ============ =========== ============== ============== ----------------------------- ---- ---- -- ------------ ---- ----------- -- -------------- ---- -------------
Segment information for the year ended February 28, 1995 was as follows.
----------------------------- --- ---- -- ------------ ----- ----------- -- ------------- ----- ------------- Adjustments Mortgage and (Dollar amounts in thousands) Banking Other Eliminations Consolidated ----------------------------- --- ---- -- ------------ ----- ----------- -- ------------- ----- ------------- Unaffiliated revenue $ 563,586 $ 39,077 $ - $ 602,663 Intersegment revenue 744 - (744) - ------------ ----------- ------------- -------------- Total revenues $ 564,330 $ 39,077 ($ 744) $ 602,663 ============ =========== ============= ============== Earnings before income taxes $ 136,220 $ 11,125 $ - $ 147,345 ============ =========== ============= ============== Identifiable assets, February 28, 1995 $5,520,283 $1,144,911 ($955,012) $ 5,710,182 ============ =========== ============= ============== ----------------------------- --- ---- -- ------------ ----- ----------- -- ------------- ----- -------------
NOTE M - BRANCH AND ADMINISTRATIVE OFFICE CONSOLIDATION COSTS As a result of the decline in production caused by increasing mortgage interest rates during fiscal 1995, the Company reduced headcount by approximately 30%, closed underperforming branch offices and consolidated its administrative offices. A charge of $8 million related to these consolidation efforts was recorded during the year ended February 28, 1995. NOTE N - SUBSEQUENT EVENTS On March 19, 1997, the Company declared a cash dividend of $0.08 per common share payable April 30, 1997 to shareholders of record on April 14, 1997. NOTE O - QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly data was as follows.
--------------------------------------------- --------------------------------------------------------------- Three months ended --------------------------------------------------------------- (Dollar amounts in thousands, except per share dataMay 31 August 31 November 30 February 28(29) -------------- --------------- -------------- ---------------- ---------------------------------------------- -------------- --------------- -------------- ---------------- Year ended February 28, 1997 Revenues $263,282 $270,815 $281,530 $296,835 Expenses 163,898 168,361 173,440 184,865 Provision for income taxes 38,760 39,957 42,155 43,668 Net earnings 60,624 62,497 65,935 68,302 Earnings per share(1) Primary $0.58 $0.60 $0.62 $0.63 Fully diluted $0.58 $0.60 $0.62 $0.63 Year ended February 29, 1996 Revenues $178,963 $209,310 $225,568 $246,901 Expenses 118,669 127,724 137,311 150,838 Provision for income taxes 24,118 32,634 35,303 38,425 Net earnings 36,176 48,952 52,954 57,638 Earnings per share(1) Primary $0.39 $0.49 $0.51 $0.55 Fully diluted $0.39 $0.49 $0.51 $0.55 ---------------------------------------------- -------------- --------------- -------------- ---------------- (1) Earnings per share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly earnings per share amounts may not equal the annual amount. This is caused by rounding and the averaging effect of the number of share equivalents utilized throughout the year, which changes with the market price of the common stock.
NOTE P - SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY Summarized financial information for Countrywide Home Loans, Inc., was as follows.
-- ----------------------------------------- ---- ------------------------------------------------- --------- February 28(29), -------------- ----------- -------------- --------- (Dollar amounts in thousands) 1997 1996 -- ---------------------------------------------- ------- -------------- ----------- -------------- --------- Balance Sheets: Mortgage loans and mortgage-backed securities held for sale $2,579,972 $4,740,087 Other assets 4,835,078 3,441,678 ============== ============== Total assets $7,415,050 $8,181,765 ============== ============== Short- and long-term debt $5,220,277 $6,335,538 Other liabilities 742,435 588,446 Equity 1,452,338 1,257,781 ============== ============== Total liabilities and equity $7,415,050 $8,181,765 ============== ============== -- ---------------------------------------------- ------- -------------- ----------- -------------- ---------
NOTE P - SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY (Continued)
--- ----------------------------------------- --- --------------------------------------------------- -------- Year ended February 28(29), --------------- ---------- --------------- --------- (Dollar amounts in thousands) 1997 1996 --- --------------------------------------------- ------- --------------- ---------- --------------- --------- Statements of Earnings: Revenues $1,006,538 $808,589 Expenses 637,518 499,993 Provision for income taxes 143,918 123,438 =============== =============== Net earnings $ 225,102 $185,158 =============== =============== --- --------------------------------------------- ------- --------------- ---------- --------------- ---------
NOTE Q - IMPLEMENTATION OF NEW ACCOUNTING STANDARD In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings per Share, which supersedes APB Opinion No. 15, of the same name. SFAS No. 128 simplifies the standards for computing earnings per share ("EPS") and makes them comparable to international standards. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, with earlier application not permitted. Upon adoption, all prior EPS data will be restated. The following table presents basic and diluted EPS for the years ended February 28(29), 1997, 1996 and 1995, computed under the provisions of SFAS No. 128.
- ------------------------ --------- --------- --------- -- - --------------------------- -- -- --------- -------- ----- Year ended February 28(29), --------- --------- --------- -- - --------------------------- -- -- --------- -------- ----- 1997 1996 1995 --------- --------- --------- ---------- --------- -------- --------- -------- --------- (Dollar amounts in Per-Share Per-Share Per-Share thousands, except per Net Amount Net Amount Net Amount share data) Earnings Shares Earnings Shares Earnings Shares - ------------------------ --------- --------- --------- -------- -------- --------- ========= ========== ========= Net earnings $257,358 $195,720 $88,407 ========= ========== ========= Basic EPS Net earnings available to common shareholders $257,358 103,112 $2.50 $195,720 98,352 $1.99 $88,407 91,240 $0.97 Effect of dilutive stock options - 2,565 - 1,918 - 847 --------- --------- ---------- --------- --------- -------- Diluted EPS Net earnings available to common shareholders $257,358 105,677 $2.44 $195,720 100,270 $1.95 $88,407 92,087 $0.96 ========= ========= ========= ========== ========= ======== ========= ======== --------- - ------------------------ --------- --------- --------- - ---------- --------- -------- -- --------- -------- ---------
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT COUNTRYWIDE CREDIT INDUSTRIES, INC. BALANCE SHEETS (Dollar amounts in thousands) February 28(29), -------------- -- -------------- 1997 1996 -------------- -------------- Assets Cash $ - $ - Other receivables 2,668 5,825 Intercompany receivable 120,126 33,805 Investment in subsidiaries at equity in net assets 1,560,341 1,299,088 Equipment and leasehold improvements 108 106 Other assets 34,266 22,442 -------------- -------------- Total assets $1,717,509 $1,361,266 ============== ============== Liabilities and Shareholders' Equity Intercompany payable $ 44,023 $ 22,684 Accounts payable and accrued liabilities 16,971 11,437 Deferred income taxes 14,439 7,390 -------------- -------------- Total liabilities 75,433 41,511 Common shareholders' equity Common stock 5,305 5,112 Additional paid-in capital 917,942 820,183 Retained earnings 718,829 494,460 -------------- -------------- Total shareholders' equity 1,642,076 1,319,755 -------------- -------------- Total liabilities and shareholders' equity $1,717,509 $1,361,266 ============== ==============
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) COUNTRYWIDE CREDIT INDUSTRIES, INC. STATEMENTS OF EARNINGS (Dollar amounts in thousands) Year ended February 28(29), -------------- -- -------------- -- -------------- 1997 1996 1995 -------------- -------------- -------------- Revenue Interest earned $ 1,148 $ 31 $ 36 Interest charges - (1,952) (2,646) -------------- -------------- -------------- Net interest income 1,148 (1,921) (2,610) Dividend income 1,550 2,332 96 -------------- -------------- -------------- 2,698 411 (2,514) Expenses (3,398) (3,761) (3,200) -------------- -------------- -------------- Loss before income tax benefit and equity in net earnings of subsidiaries (700) (3,350) (5,714) Income tax benefit 273 1,340 2,285 -------------- -------------- -------------- Loss before equity in net earnings of subsidiaries (427) (2,010) (3,429) Equity in net earnings of subsidiaries 257,785 197,730 91,836 -------------- -------------- -------------- NET EARNINGS $257,358 $195,720 $88,407 ============== ============== ==============
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) COUNTRYWIDE CREDIT INDUSTRIES, INC. STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash (Dollar amounts in thousands) Year ended February 28(29), -------------- -- -------------- -- -------------- 1997 1996 1995 -------------- -------------- -------------- Cash flows from operating activities: Net earnings $257,358 $195,720 $88,407 Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Earnings of subsidiaries (257,785) (197,730) (91,836) Depreciation and amortization 24 18 16 Increase in other receivables and other assets (1,644) (8,241) (2,925) Increase in accounts payable and accrued liabilities 5,534 2,488 3,079 -------------- -------------- -------------- Net cash provided (used) by operating activities 3,487 (7,745) (3,259) -------------- -------------- -------------- Cash flows from investing activities: Net change in intercompany receivables and payables (44,901) 76,236 31,458 Investment in subsidiaries (6,832) (239,368) (63) -------------- -------------- -------------- Net cash (used) provided by investing activities (51,733) (163,132) 31,395 -------------- -------------- -------------- Cash flows from financing activities: Repayment of long-term debt - (10,600) (2,150) Issuance of common stock 81,235 212,438 2,273 Cash dividends paid (32,989) (30,961) (28,259) -------------- -------------- -------------- Net cash provided (used) by financing activities 48,246 170,877 (28,136) -------------- -------------- -------------- Net change in cash - - - Cash at beginning of year - - - -------------- -------------- -------------- Cash at end of year $ - $ - $ - ============== ============== ============== Supplemental cash flow information: Cash used to pay interest - $2,744 $ 2,114 Cash refunded from income taxes - - ($ 841) Noncash financing activities - issuance of common stock to acquire subsidiary $16,717 - -
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Three years ended February 28(29), 1997 (Dollar amounts in thousands) Column A Column B Column C Column D Column E - ---------------------------------- -------------- -------------------------------- ----------------- -------------- Additions -------------------------------- Balance at Charged to Charged Balance beginning costs and to other at end of period expenses accounts Deductions (1) of period - ---------------------------------- -------------- -------------- ---------------- ------------------ ------------- Year ended February 28, 1997 Allowance for losses $15,635 $21,064 $ 242 $12,192 $24,749 Year ended February 29, 1996 Allowance for losses $11,183 $8,831 $ 800 $ 5,179 $15,635 Year ended February 28, 1995 Allowance for losses $13,826 $1,808 $3,466 $ 7,917 $11,183 - ---------------------------------- (1) Actual losses charged against reserve, net of recoveries and reclassification.
Exhibit List Exhibit Description Page No. - -------- ----------------------------------------------------------- --------- --- 2.1 Agreement and Plan of Merger Among CWM Mortgage Holdings, Inc., Countrywide Asset Management Corporation and Countrywide Credit Industries, Inc. --- --- 3.1* Certificate of Amendment of Restated Certificate of Incorporation of Countrywide Credit Industries, Inc. (incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q dated August 31, 1987). --- --- 3.2* Restated Certificate of Incorporation of Countrywide Credit Industries, Inc. (incorporated by reference to Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q dated August 31, 1987). --- --- 3.3* Bylaws of Countrywide Credit Industries, Inc., as amended and restated (incorporated by reference to Exhibit 3 to the Company's Current Report on Form 8-K dated February 10, 1988). --- --- 4.1* Rights Agreement, dated as of February 10, 1988, between Countrywide Credit Industries, Inc. and Bank of America NT & SA, as Rights Agent (incorporated by reference to Exhibit 4 to the Company's Form 8-A filed pursuant to Section 12 of the Securities Exchange Act of 1934 on February 12, 1988). --- --- 4.1.1* Amendment No. 1 to Rights Agreement dated as of March 24, 1992 (incorporated by reference to Exhibit 1 to the Company's Form 8 filed with the SEC on March 27, 1992). - --- - --- 4.2* Specimen Certificate of the Company's Common Stock (incorporated by reference to Exhibit 4.2 to the Current Company's Report on Form 8-K dated February 6, 1987). --- --- 4.3* Specimen Debenture Certificate (incorporated by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K dated February 6, 1987). --- --- 4.4* Form of Medium-Term Notes, Series A (fixed-rate) of Countrywide Funding Corporation (now known as Countrywide Home Loans, Inc.) ("CHL") (incorporated by reference to Exhibit 4.2 to the Company's registration statement on Form S-3 (File Nos. 33-44194 and 33-44194-1) filed with the SEC on November 27, 1991). --- --- 4.5* Form of Medium-Term Notes, Series A (floating-rate) of CHL (incorporated by reference to Exhibit 4.3 to the Company's registration statement on Form S-3 (File Nos. 33-44194 and 33-44194-1) filed with the SEC on November 27, 1991). --- --- 4.6* Form of Medium-Term Notes, Series B (fixed-rate) of CHL (incorporated by reference to Exhibit 4.2 to the Company's registration statement on Form S-3 (File No. 33-51816) filed with the SEC on September 9, 1992). --- --- 4.7* Form of Medium-Term Notes, Series B (floating-rate) of CHL (incorporated by reference to Exhibit 4.3 to the Company's registration statement on Form S-3 (File No. 33-51816) filed with the SEC on September 9, 1992). --- --- 4.8* Form of Medium-Term Notes, Series C (fixed-rate) of CHL (incorporated by reference to Exhibit 4.2 to the registration statement on Form S-3 of CHL and the Company (File Nos. 33-50661 and 33-50661-01) filed with the SEC on October 19, 1993). --- --- 4.9* Form of Medium-Term Notes, Series C (floating-rate) of CHL (incorporated by reference to Exhibit 4.3 to the registration statement on Form S-3 of CHL and the Company (File Nos. 33-50661 and 33-50661-01) filed with the SEC on October 19, 1993). --- --- 4.10* Indenture dated as of January 1, 1992 among CHL, the Company and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.1 to the registration statement on Form S-3 of CHL and the Company (File Nos. 33-50661 and 33-50661-01) filed with the SEC on October 19, 1993). --- --- 4.10.1* Form of Supplemental Indenture No. 1 dated as of June 15, 1995, to the Indenture dated as of January 1, 1992, among CHL, the Company, and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.9 to Amendment No. 2 to the registration statement on Form S-3 of the Company and CHL (File Nos. 33-59559 and 33-59559-01) filed with the SEC on June 16, 1995). --- --- 4.11* Form of Medium-Term Notes, Series D (fixed-rate) of CHL (incorporated by reference to Exhibit 4.10 to Amendment No. 2 to the registration statement on Form S-3 of the Company and CHL (File Nos. 33-59559 and 33-59559-01) filed with the SEC on June 16, 1995). --- --- 4.12* Form of Medium-Term Notes, Series D (floating-rate) of CHL (incorporated by reference to Exhibit 4.11 to Amendment No. 2 to the registration statement on Form S-3 of the Company and CHL (File Nos. 33-59559 and 33-59559-01) filed with the SEC on June 16, 1995). --- --- 4.13* Form of Medium-Term Notes, Series E (fixed-rate) of CHL (incorporated by reference to Exhibit 4.3 to Post-Effective Amendment No. 1 to the registration statement on Form S-3 of the Company and CHL (File Nos. 333-3835 and 333-3835-01) filed with the SEC on August 2, 1996). --- --- 4.14* Form of Medium-Term Notes, Series E (floating rate) of CHL (incorporated by reference to Exhibit 4.4 to Post-Effective Amendment No. 1 to the registration statement on Form S-3 of the Company and CHL (File Nos. 333-3835 and 333-3835-01) filed with the SEC on August 2, 1996). --- --- + 10.1* Indemnity Agreements with Directors and Officers of Countrywide Credit Industries, Inc. (incorporated by reference to Exhibit 10.1 to the Company's Report on Form 8-K dated February 6, 1987). --- --- + 10.2* Restated Employment Agreement for David S. Loeb dated March 26, 1996 (incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-Q dated August 31, 1996). --- --- + 10.3* Restated Employment Agreement for Angelo R Mozilo dated March 26, 1996 (incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-Q dated August 31, 1996). --- --- + 10.4* Employment Agreement for Stanford L. Kurland dated May 7, 1996 (incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-Q dated August 31, 1996). --- --- + 10.5* Countrywide Credit Industries, Inc. Deferred Compensation Agreement for Non-Employee Directors (incorporated by reference to Exhibit 5.2 to the Company's Quarterly Report on Form 10-Q dated August 31, 1987). --- --- + 10.6* Countrywide Credit Industries, Inc. Deferred Compensation Plan for Key Management Employees dated April 15, 1992 (incorporated by reference to Exhibit 10.3.1 to the Company's Annual Report on Form 10-K dated February 28, 1993). --- + 10.7* Countrywide Credit Industries, Inc. Deferred Compensation Plan effective August 1, 1993 (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q dated August 31, 1993). --- --- 10.8* Revolving Credit Agreement dated as of May 20, 1996 by and among CFC, First National Bank of Chicago, Bankers Trust Company, The Bank of New York, The Chase Manhattan Bank, N.A., Chase Securities, Inc. and the Lenders Party Thereto (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q dated May 31, 1996). --- --- + 10.9* Severance Plan (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q dated May 31, 1988). --- --- + 10.10* Key Executive Equity Plan (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q dated May 31, 1988). --- --- + 10.11* 1987 Stock Option Plan, as Amended and Restated on May 15, 1989 (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K dated February 28, 1989). --- --- + 10.12* 1986 Non-Qualified Stock Option Plan as amended (incorporated by reference to Exhibit 10.11 to Post-Effective Amendment No. 2 to the Company's registration statement on Form S-8 (File No. 33-9231) filed with the SEC on December 20, 1988). --- --- + 10.13* 1985 Non-Qualified Stock Option Plan as amended (incorporated by reference to Exhibit 10.9 to Post-Effective Amendment No. 2 to the Company's registration statement on Form S-8 (File No. 33-9231) filed with the SEC on December 20, 1988). --- --- + 10.14* 1984 Non-Qualified Stock Option Plan as amended (incorporated by reference to Exhibit 10.7 to Post-Effective Amendment No. 2 to the Company's registration statement on Form S-8 (File No. 33-9231) filed with the SEC on December 20, 1988). --- --- + 10.15* 1982 Incentive Stock Option Plan as amended (incorporated by reference to Exhibits 10.2 - 10.5 to Post-Effective Amendment No. 2 to the Company's registration statement on Form S-8 (File No. 33-9231) filed with the SEC on December 20, 1988). --- --- + 10.16* Amended and Restated Stock Option Financing Plan (incorporated by reference to Exhibit 10.12 to Post-Effective Amendment No. 2 to the Company's registration statement on Form S-8 (File No. 33-9231) filed with the SEC on December 20, 1988). --- --- 10.17* 1995 Amended and Extended Management Agreement, dated as of May 15, 1995, between CWM Mortgage Holdings, Inc. ("CWM") and Countrywide Asset Management Corporation (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q dated August 31, 1995). --- --- 10.18* 1987 Amended and Restated Servicing Agreement, dated as of May 15, 1987, between CWM and CHL (incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K dated February 28, 1990). --- --- 10.19* 1995 Amended and Restated Loan Purchase and Administrative Services Agreement, dated as of May 15, 1995, between CWM and CHL (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q dated August 31, 1995). --- --- + 10.20* 1991 Stock Option Plan (incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K dated February 29, 1992). --- --- + 10.20.1* First Amendment to the 1991 Stock Option Plan (incorporated by reference to Exhibit 10.19.1 to the Company's Annual Report on Form 10-K dated February 28, 1993). --- --- + 10.20.2* Second Amendment to the 1991 Stock Option Plan (incorporated by reference to Exhibit 10.19.2 to the Company's Annual Report on Form 10-K dated February 28, 1993). --- --- + 10.20.3* Third Amendment to the 1991 Stock Option Plan (incorporated by reference to Exhibit 10.19.3 to the Company's Annual Report on Form 10-K dated February 28, 1993). --- --- + 10.20.4* Fourth Amendment to the 1991 Stock Option Plan (incorporated by reference to Exhibit 10.19.4 to the Company's Annual Report on Form 10-K dated February 28, 1993). --- --- + 10.20.5* Fifth Amendment to the 1991 Stock Option Plan (incorporated by reference to Exhibit 10.19.5 to the Company's Annual Report on Form 10-K dated February 28, 1995). --- --- + 10.21* 1992 Stock Option Plan dated as of December 22, 1992 (incorporated by reference to Exhibit 10.19.5 to the Company's Annual Report on Form 10-K dated February 28, 1993). --- --- + 10.22* Amended and Restated 1993 Stock Option Plan (incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q dated August 31, 1996). --- --- + 10.22.1* First Amendment to the Amended and Restated 1993 Stock Option Plan (incorporated by reference to Exhibit 10.5.1 to the Company's Annual Report on Form 10-Q dated August 31, 1996). --- --- + 10.23* Supplemental Executive Retirement Plan effective March 1, 1994 (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q dated May 31, 1994). --- --- + 10.24* Split-Dollar Life Insurance Agreement (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q dated May 31, 1994). --- --- + 10.25* Split-Dollar Collateral Assignment (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q dated May 31, 1994). --- --- + 10.26* Annual Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q dated August 31, 1996). --- --- + 10.27 Change in Control Severance Plan --- --- 11.1 Statement Regarding Computation of Earnings Per Share. --- --- 12.1 Computation of the Ratio of Earnings to Fixed Charges. --- --- 22.1 List of subsidiaries. --- --- 24.1 Consent of Grant Thornton LLP. --- --- 27 Financial Data Schedules (included only with the electronic filing with the SEC) --- ------------------------- *Incorporated by reference. +Constitutes a management contract or compensatory plan or arrangement. EX-2 2 AGREEMENT AND PLAN OF MERGER Exhibit 2.1 APPENDIX A AGREEMENT AND PLAN OF MERGER - -------------------------------------------------------------------------------- AMONG CWM MORTGAGE HOLDINGS, INC., COUNTRYWIDE ASSET MANAGEMENT CORPORATION AND COUNTRYWIDE CREDIT INDUSTRIES, INC. - -------------------------------------------------------------------------------- - ------------------------------------------------------------------------ This Agreement and Plan of Merger (this "Agreement") dated as of January 29, 1997, is by and among CWM Mortgage Holdings, Inc., a Delaware corporation ("CWM REIT"), Countrywide Asset Management Corporation, a Delaware corporation ("CAMC Advisor"), and Countrywide Credit Industries, Inc., a Delaware corporation ("CCR"). - ------------------------------------------------------------------------ WITNESSETH: WHEREAS, the parties hereto wish to merge CAMC Advisor with and into CWM REIT pursuant to Delaware law, with CWM REIT being the surviving entity (the "Merger"); and WHEREAS, Section 251 of the General Corporation Law of the State of Delaware, 8 Del.C. (S) 101, et seq. (the "DGCL"), authorizes the merger of a Delaware corporation with and into another Delaware corporation; and WHEREAS, CWM REIT's Certificate of Incorporation and Bylaws permit, and resolutions adopted by a majority of CWM REIT's independent directors and by the CWM REIT Board of Directors authorize, this Agreement and the consummation of the Merger, and as provided herein, this Agreement will be submitted to the stockholders of CWM REIT for approval; and WHEREAS, CAMC Advisor's Certificate of Incorporation and Bylaws permit, and resolutions adopted by CAMC Advisor's Board of Directors and CCR (as the sole shareholder of CAMC Advisor), respectively, authorize, this Agreement and the consummation of the Merger; and WHEREAS, for federal income tax purposes, it is intended that the Merger qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"); NOW, THEREFORE, for good and valuable consideration, the receipt of which is hereby acknowledged, the parties to this Agreement covenant and agree as follows: TABLE OF CONTENTS Page ---- ARTICLE 1 DEFINITIONS 1.1 Terms Defined in this Section.................................... A-2 1.2 Terms Defined in Section 5.7.................................... A-5 ARTICLE 2 THE MERGER 2.1 The Merger, Surviving Corporation................................ A-5 2.2 Closing.......................................................... A-5 2.3 Effective Time................................................... A-5 2.4 Effect of the Merger............................................. A-5 ARTICLE 3 THE SURVIVING CORPORATION 3.1 Name............................................................. A-5 3.2 Certificate of Incorporation and Bylaws.......................... A-5 3.3 Officers and Directors........................................... A-6 ARTICLE 4 MERGER CONSIDERATION; CONVERSION OR CANCELLATION OF CAMC ADVISOR COMMON STOCK; ADJUSTMENTS 4.1 Share Consideration; Conversion or Cancellation of CAMC Shares... A-6 4.2 Payment for CAMC Shares in the Merger............................ A-6 4.3 Fractional CAMC Shares........................................... A-7 4.4 Transfer of CAMC Shares.......................................... A-7 4.5 Lost, Stolen or Destroyed Certificates........................... A-7 4.6 Indemnification.................................................. A-7 4.7 Further Assurances............................................... A-9 ARTICLE 5 REPRESENTATIONS AND WARRANTIES REGARDING CAMC ADVISOR 5.1 Organization, Etc. of CAMC Advisor............................... A-9 5.2 Partnerships; Subsidiaries....................................... A-9 5.3 Agreement........................................................ A-9 5.4 Capital Stock.................................................... A-9 5.5 Litigation....................................................... A-9 5.6 Compensation and Employee Matters................................ A-9 5.7 Employee Benefit Plans........................................... A-9 5.8 Taxes............................................................ A-13 A-i Page ---- 5.9 Intellectual Property.......................................... A-13 5.10 No Material Adverse Change..................................... A-14 5.11 Financial Statements........................................... A-14 5.12 Books and Records.............................................. A-14 5.13 Proxy Statement................................................ A-14 5.14 Contracts and Leases........................................... A-14 5.15 Real Property.................................................. A-14 ARTICLE 6 - ------------------------------------------------------------------------ REPRESENTATIONS AND WARRANTIES REGARDING CCR - ------------------------------------------------------------------------ 6.1 Power and Authority.................................... A-15 6.2 Agreement.............................................. A-15 6.3 Foreign Person......................................... A-15 6.4 No Withholding......................................... A-15 6.6 Brokers and Finders.................................... A-15 6.7 Securities Act Representations......................... A-15 ARTICLE 7 REPRESENTATIONS AND WARRANTIES OF CWM REIT 7.1 Organization, Etc. of CWM REIT......................... A-16 7.2 Capital Stock.......................................... A-16 7.3 Authorization for CWM Common Stock..................... A-17 7.4 Brokers and Finders.................................... A-17 7.5 SEC Reports and Financial Statements................... A-17 7.6 Information............................................ A-18 7.7 Books and Records...................................... A-18 7.8 Litigation............................................. A-18 7.9 General................................................ A-18 7.10 ARTICLE 8 COVENANTS OF THE PARTIES 8.1 Maintenance of Business, Prohibited Acts............... A-19 8.2 Officers and Employees................................. A-20 8.3 Significant Business Line.............................. A-20 8.4 Meeting of Stockholders................................ A-20 8.5 Proxy Materials........................................ A-20 8.6 Fillings, Other Action................................. A-21 8.7 Access to Information.................................. A-21 8.8 Management Fee Adjustment.............................. A-21 8.9 Intellectual Property Rights........................... A-22 8.10 Tax Matters............................................ A-22 8.11 Covenant Not to Compete, Continuing Arrangements Etc... A-24 8.12 Reorganization......................................... A-24 A-ii Page ---- 8.13 Public Statements..................................................... A-25 8.14 Letter of CAMC Advisor's Accountants.................................. A-25 8.15 Employee Matters...................................................... A-25 8.16 Notice of Certain Events.............................................. A-27 8.17 Director and Officer Indemnification.................................. A-27 8.18 Further Action........................................................ A-28 8.19 Books and Records..................................................... A-28 8.20 Restrictions on Resale of Share Consideration......................... A-28 8.21 CAMC Advisor Shareholder Approval..................................... A-28 8.22 Waiver of Limitations on Percentage Ownership......................... A-28 8.23 Delivery of Certain Financial Statements.............................. A-28 8.24 Distributions......................................................... A-28 8.25 Sales and Use Taxes, Etc.............................................. A-29 ARTICLE 9 CONDITIONS TO THE MERGER 9.1 Conditions to Each Party's Obligations.............................................................. A-29 (a) CWM REIT Stockholder Approval........................................ A-29 (b) HSR Act.............................................................. A-29 (c) No Injunction or Proceedings......................................... A-29 (d) No Suspension of Trading, Etc........................................ A-29 (e) Registration Rights Agreement........................................ A-29 (f) Cooperation Agreement................................................ A-29 (g) Employment Contract.................................................. A-30 (h) Physical Facility.................................................... A-30 9.2 Conditions to Obligations of CCR and CAMC Advisor to Effect the Merger............................................. A-30 9.3 Conditions to Obligation of CWM REIT to Effect the Merger........... A-30 ARTICLE 10 TERMINATION; AMENDMENT; WAIVER 10.1 Termination by Mutual Consent....................................... A-31 10.2 Termination by Either CWM REIT or CAMC Advisor...................... A-31 10.3 Effect of Termination and Abandonment............................... A-32 10.4 Amendment........................................................... A-32 10.5 Waiver.............................................................. A-32 ARTICLE 11 MISCELLANEOUS 11.1 Expenses............................................................ A-32 11.2 Notices, Etc........................................................ A-32 11.3 Survival............................................................ A-33 11.4 No Assignment....................................................... A-34 11.5 Entire Agreement.................................................... A-34 11.6 Specific Performance................................................ A-34 A-iii Page ---- 11.7 Remedies Cumulative............ A-34 11.8 No Waiver...................... A-34 11.9 No Third-Party Beneficiaries... A-34 11.10 Jurisdiction and Venue......... A-34 11.11 Governing Law.................. A-34 11.12 Name, Captions, Etc............ A-34 11.13 Severability................... A-34 11.14 Counterparts................... A-35 11.15 Gender; Number................. A-35 11.16 Ambiguities.................... A-35 A-iv ARTICLE 1 DEFINITIONS 1.1 Terms Defined in this Section. As used in this Agreement, the following terms shall have the respective meanings set forth below: "Affiliate": As defined in Rule 12b-2 under the Exchange Act. "Agreement": As defined in the preamble. "Authorization": Any consent, approval or authorization of, expiration or termination of any waiting period requirement (including pursuant to the HSR Act) by, or filing, registration, qualification, declaration or designation with, any Governmental Body. "Business Combination": As defined in Section 4.1(a). "Business Day": means any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions are authorized or required by law, regulation or executive order to close in The City of New York or in Los Angeles, California. "CAMC Advisor": As defined in the preamble. "CAMC Advisor Common Stock": CAMC Advisor's common stock, $0.10 par value. "CAMC Advisor Disclosure Schedule": As defined in Article 5. - -------------------------------------------------------------------------------- "CAMC Advisor Financial Statements": As defined in Section 5.11. - -------------------------------------------------------------------------------- "CAMC Shares": As defined in Section 4.1(a). "CCR": As defined in the preamble. "CCR DB Plan": As defined in Section 8.15(a). "CWM Common Stock": CWM REIT's common stock, par value $.01 per share. "CWM REIT": As defined in the preamble. "CWM REIT DB Plan": As defined in Section 8.15(a). "CWM REIT E&P Committee": A Committee consisting of no more than six employees of, or advisors to, CWM REIT to be designated by the chief operating officer of CWM REIT. "CWM REIT 401(k) Plan": As defined in Section 8.15(b). "CWM REIT Stockholders Meeting": As defined in Section 8.4. "Certificate of Merger": The certificate of merger with respect to the Merger containing the provisions required by, and executed in accordance with, DGCL Section 251. "Certificates": As defined in Section 4.l(b). "Change of Control": As defined in the CCR 1993 Stock Option Plan, as amended and restated as of March 27, 1996, without reference to any subsequent amendments, modifications or alterations thereof. "Closing": The closing of the Merger. A-2 "Closing Date": The date on which the Closing occurs. "Code": As defined in the Recitals. "Cooperation Agreement": As defined in Section 9.1(f). "DGCL": As defined in the Recitals. "Damages": Any loss, liability, damage, Tax, demand, claim, action, judgment or cause of action, assessment, cost, obligation or expense (including, without limitation, interest, penalties, reasonable costs of investigation, defense and prosecution of litigation and reasonable attorneys' and accountants' fees) incurred by CWM REIT or CCR, as the case may be, subject in all events to Section 4.6(f). "Dean Witter": Dean Witter Reynolds Inc. "Effective Time": As defined in Section 2.3. "Estimated Transfer Amount": As defined in Section 8.15(b). "Exchange": Each national securities exchange (as defined in Section 12(b) of the Exchange Act) upon which the CWM Common Stock is then listed for trading and/or quotation system on which the CWM Common Stock is then quoted, which on the date of this Agreement is the New York Stock Exchange. "Exchange Act": The Securities Exchange Act of 1934, as amended. "February 29 Balance Sheet": The audited balance sheet of CAMC Advisor dated February 29, 1996. "Governmental Body": Any federal, state, municipal, political subdivision or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign. "HSR Act": The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "Indemnified Party": As defined in Section 4.6(c). - -------------------------------------------------------------------------------- "Indemnifying Party": As defined in Section 4.6(c). - -------------------------------------------------------------------------------- "Indy Mac": Independent National Mortgage Corporation. "Indy Mac Charter Amendment": As defined in Section 8.11(e). "Intellectual Property Rights": All intellectual property rights referred to in the letter, dated the date hereof, from CWM REIT to CCR and CAMC Advisor, including patents, patent applications, trademarks, trademark applications and registrations, service marks, service mark applications and registrations, tradenames, tradename applications and registrations, copyrights, copyright applications and registrations, licenses, logos, corporate and partnership names, and customer lists, proprietary processes, formulae, inventions, trade secrets, know-how, development tools and other proprietary rights, and all documentation and media constituting, describing or relating to the above, including, but not limited to, manuals, memoranda, know-how, notebooks, software, records and disclosures. "Knowledge": The terms "knowledge" and "aware" and any derivatives thereof when applied to any party to this Agreement shall refer to the knowledge or awareness, as the case may be, which such party or, if applicable, any director or executive officer thereof has, or reasonably should have had, after due inquiry of the other officers and employees of such party; provided, however, for the purposes of determining whether CCR or CAMC Advisor is in breach of any - -------------------------------------------------------------------------------- awareness of CCR or CAMC Advisor, no such breach shall exist if a director or senior officer of CWM REIT - -------------------------------------------------------------------------------- (other than David S. Loeb or Angelo R. Mozilo) has knowledge or awareness of the facts or circumstances which would otherwise constitute such breach; and provided, further for the purposes of determining whether CWM REIT is in breach of any representation or warranty hereunder which is based on the knowledge or awareness of CWM REIT, no such breach shall exist if a director or senior officer of CCR has knowledge or awareness of the facts or circumstances which would otherwise constitute such breach. "Management Agreement": The Amended and Extended Management Agreement dated as of June 1, 1996 by and between CWM REIT and CAMC Advisor, as amended by the First Amendment to 1996 Amended and Extended Management Agreement dated as of July 25, 1996, by and between such parties. "Material Adverse Effect": As to any Person, a material adverse effect on the business, properties, operations or condition (financial or other) of such Person. "Merger": As defined in the Recitals. "Merrill Lynch": Merrill Lynch, Pierce, Fenner & Smith Incorporated "Person": Any individual or corporation, company, partnership, trust, incorporated or unincorporated association, joint venture or other entity of any kind. "Pre-Closing Market Value": The per-share value of the CWM Common Stock based on the average sale price thereof for the 10 Business Days next preceding the Closing Date, using for each such Business Day the last reported sale price on the New York Stock Exchange. "Proxy Statement": As defined in Section 8.5. "Quarterly Financial Statements": As defined in Section 7.6(c). "Registration Rights Agreement": That certain agreement between CCR and CWM REIT to be entered pursuant to and in accordance with Section 9.1(e) hereof. "Savings Participants": As defined in Section 8.15(b). - -------------------------------------------------------------------------------- "SEC": The Securities and Exchange Commission. - -------------------------------------------------------------------------------- "SEC Reports": As defined in Section 7.6. "Securities Act": The Securities Act of 1933, as amended. "Share Consideration": As defined in Section 4.1(a). "Special Committee": The Special Committee of the three independent members of the Board of Directors of CWM REIT, appointed specifically for the purpose of negotiating the terms of any proposed merger with CAMC Advisor and any alternatives to such transaction and to make recommendations to the CWM REIT Board of Directors and stockholders with respect to same. "Special Purchase Rights": As defined in the Registration Rights Agreement. "Stock": As defined in Section 8.15(b). "Subsidiary": As to any Person, any other Person of which at the time of determination the first Person owns or controls directly or indirectly more than 50% of the outstanding common stock; provided, however, that for purposes of this term whenever used in this Agreement, Indy Mac shall be deemed to be a Subsidiary of CWM REIT and not a Subsidiary of CCR. "Tax" or "Taxes": All federal, state, local, non-U.S. and other taxes imposed by or on behalf of any Governmental Body, including, without limitation: (i) - -------------------------------------------------------------------------------- net income, gross income, gross receipts, sales, use, ad A-4 - -------------------------------------------------------------------------------- valorem, transfer, franchise, profits, license, lease, service, service use, withholding, payroll, employment, unemployment, excise, severance, stamp, occupation, premium, real and personal property, gift or windfall profits taxes, (ii) customs or duties and (iii) all other taxes, fees, assessments or charges of any kind whatever, together with any interest and any penalties, additions to tax, supplemental or retroactive assessments or additional amounts with respect thereto. "Tax Matter": As defined in Section 8.10(c). "Tax Return": Any return, declaration of estimated tax, tax report, customs declaration, claim for refund or information return or statement relating to Taxes, including any amendment thereto. "Transfer Amount": As defined in Section 8.15(b). "Transferring Employees": As defined in Section 8.15(a). 1.2 Terms Defined in Section 5.7. Capitalized terms defined in Section 5.7 shall have the respective meanings set forth therein whenever such capitalized terms appear in this Agreement. ARTICLE 2 THE MERGER 2.1 The Merger, Surviving Corporation. Subject to the terms and conditions set forth in this Agreement, at the Effective Time CAMC Advisor shall be merged with and into CWM REIT pursuant to Section 251 of the DGCL, and the separate existence of CAMC Advisor shall cease. CWM REIT shall be the surviving corporation in the Merger and shall continue to be governed by the DGCL. 2.2 Closing. Subject to Article 10 hereof and the fulfillment or waiver of the conditions set forth in Article 9, the Closing shall take place at (i) the offices of Brown & Wood LLP, One World Trade Center, New York, New York, at 10:00 a.m. New York City time, on the second business day following the fulfillment or waiver of the conditions set forth in Article 9 (other than conditions which by their nature are intended to be fulfilled at the Closing) or (ii) such other place or time or on such other date as CWM REIT and CCR may agree or as may be necessary to permit the fulfillment or waiver of the conditions set forth in Article 9. 2.3 Effective Time. In accordance with Sections 251 and 103 of the DGCL, the Merger shall become effective (the "Effective Time") upon the filing of a Certificate of Merger with the Secretary of State of the State of Delaware, or at such later time, not later than five business days thereafter, as may be specified in the Certificate of Merger. For Tax purposes, the parties agree that the Effective Time shall be deemed to occur after the close of business on the date on which the Effective Time occurs, and neither party shall take a position inconsistent therewith, except as may be required by law. All other filings or recordings required by Delaware law in connection with the Merger shall also be made. ARTICLE 3 THE SURVIVING CORPORATION 3.1 Name. The name of the surviving corporation shall be CWM Mortgage Holdings, Inc. or such other name as may be approved by the stockholders of CWM REIT. 3.2 Certificate of Incorporation and Bylaws. The Certificate of Incorporation - -------------------------------------------------------------------------------- and Bylaws of CWM REIT as in effect immediately prior to the Effective Time shall be the Certificate of Incorporation and Bylaws of CWM REIT unless and until amended in accordance with their terms and applicable law. - -------------------------------------------------------------------------------- A-5 3.3 Officers and Directors. Except as otherwise contemplated by this Agreement, the officers of CWM REIT immediately prior to the Effective Time shall continue as officers of CWM REIT and remain officers until their successors are duly appointed or their prior resignation, removal or death. The directors of CWM REIT immediately prior to the Effective Time shall continue as directors of CWM REIT and shall remain directors until their successors are duly elected and qualified or their prior resignation, removal or death. ARTICLE 4 MERGER CONSIDERATION; CONVERSION OR CANCELLATION OF CAMC ADVISOR COMMON STOCK; ADJUSTMENTS 4.1 Share Consideration; Conversion or Cancellation of CAMC Shares. (a) Subject to the provisions of this Article 4, at the Effective Time, by virtue of the Merger and without any action by holders thereof, all of the shares of CAMC Advisor Common Stock issued and outstanding immediately prior to the Effective Time (collectively, the "CAMC Shares") shall be converted into an aggregate of 3,597,122 shares of CWM Common Stock, subject to adjustment in accordance with Section 4.1(c) (the "Share Consideration"). Prior to the Effective Time, CWM REIT will not split or combine the CWM Common Stock, or pay a stock dividend or other stock distribution in shares of CWM Common Stock, or in rights or securities exchangeable or convertible into or exercisable for CWM Common Stock, or otherwise change the CWM Common Stock into, or exchange the CWM Common Stock for, any other securities (whether pursuant to or as part of a merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation of CWM REIT as a result of which CWM REIT stockholders receive cash, stock or other property in exchange for, or in connection with, their CWM Common Stock (a "Business Combination") or otherwise), or make any other dividend or distribution on or of CWM Common Stock (other than regular monthly or quarterly cash dividends paid on the CWM Common Stock or any distribution pursuant to CWM REIT's dividend reinvestment plan), without the parties hereto having first entered into an amendment to this Agreement pursuant to which the Share Consideration will be adjusted to reflect such split, combination, dividend, distribution, Business Combination or change. (b) All CAMC Shares to be converted into CWM Common Stock pursuant to this Section 4.1 shall cease to be outstanding, shall be canceled and retired and shall cease to exist, and CCR, as the holder of a certificate or certificates representing such CAMC Shares (a "Certificate" or the "Certificates") shall thereafter cease to have any rights with respect to such CAMC Shares, except the right to receive for all of the CAMC Shares, upon the surrender of such Certificates in accordance with Section 4.2, the CWM Common Stock specified above and cash in lieu of fractional shares of CWM Common Stock as contemplated by Section 4.3. (c) The Share Consideration shall be calculated and adjusted as follows: (i) In the event that the Pre-Closing Market Value is less than $19.46, the Share Consideration shall be adjusted and increased to that number of shares of CWM Common Stock that is determined by dividing $70,000,000 by the Pre-Closing Market Value, subject to the termination provisions of Section 10.2(c)(i) hereof. (ii) In the event that the Pre-Closing Market Value is more than $22.24, the Share Consideration shall be adjusted and decreased to that number of shares of CWM Common Stock that is determined by dividing $80,000,000 by the Pre-Closing Market Value, subject to the termination provisions of Section 10.2(c)(i) hereof. (d) At the Effective Time, by virtue of the Merger and without any action by holders thereof, all of the shares of CWM REIT Common Stock issued and - -------------------------------------------------------------------------------- outstanding immediately prior to the Effective Time shall remain issued and outstanding. - -------------------------------------------------------------------------------- 4.2 Payment for CAMC Shares in the Merger. At or after the Effective Time, upon surrender by CCR of its Certificates for cancellation to CWM REIT, together with any other required documents, CCR shall receive A-6 for the CAMC Shares represented by such Certificates (i) the Share Consideration and (ii) cash in lieu of fractional shares of CWM Common Stock as contemplated by Section 4.3, and the Certificates so surrendered shall forthwith be canceled. Until surrendered, the outstanding Certificates shall, upon and after the Effective Time, be deemed for all purposes (other than to the extent provided in the following sentence) to evidence ownership of the number of shares of CWM Common Stock into which such CAMC Shares have been converted pursuant to Section 4.1 hereof and the other rights contemplated in the preceding sentence. 4.3 Fractional CAMC Shares. No fractional shares of CWM Common Stock shall be issued in the Merger. In lieu of any such fractional securities, CCR will be paid an amount in cash (without interest) equal to the Pre-Closing Market Value of one share of CWM Common Stock, multiplied by such fraction. 4.4 Transfer of CAMC Shares. (a) No transfers of CAMC Shares shall be made on the stock transfer books of CAMC Advisor after the date of this Agreement, and (b) CCR agrees not to transfer any CAMC Shares after the date of this Agreement and before the Closing Date. 4.5 Lost, Stolen or Destroyed Certificates. In the event any Certificate shall have been lost, stolen or destroyed, upon receipt of an affidavit of that fact from CCR and if reasonably satisfied that adequate provision for indemnification has been made, CWM REIT will issue in exchange for such lost, stolen or destroyed Certificate shares of CWM Common Stock, cash in lieu of fractional shares, and unpaid dividends and distributions on shares of CWM Common Stock as provided in Section 4.2, deliverable in respect thereof pursuant to this Agreement. 4.6 Indemnification. (a) Subject to Section 11.3, CCR agrees to indemnify and hold harmless CWM REIT and its directors, officers, employees, affiliates, agents and permitted assigns, without duplication, from and against: (i) any and all Damages (excluding those items referred to in subsection (ii) of this Section 4.6(a)) asserted against, imposed upon or incurred or suffered by any of them, directly or indirectly, as a result of, or based upon or arising from any inaccuracy in or breach or non-fulfillment of any of the representations, warranties or covenants or agreements made by CAMC Advisor or CCR in this Agreement; (ii) (A) any Taxes payable by or on behalf of CAMC Advisor for any taxable period ending on or prior to the Effective Time, including Taxes of any member of a consolidated or combined tax group of which CAMC Advisor is, or was at any time, part, for which CAMC Advisor is jointly or severally liable as a result of its inclusion in such group prior to the Effective Time, (B) any claim or demand for reimbursement or indemnification resulting from any transfer of tax benefits or credits by CAMC Advisor to any other person, and (C) any Taxes payable by CWM REIT as a result of any breach of any representation or warranty contained in Section 5.8; and (iii)(A) except for liabilities (including liabilities arising under Title IV of ERISA or Section 412 of the Code) assumed by CWM REIT pursuant to Section 8.15, any Damages arising out of or relating to any Employee Plan maintained or sponsored by CCR or any ERISA Affiliate and (B) any Damages (including liabilities arising under Title IV of ERISA or Section 412 of the Code) relating to or arising out of any employee benefit plan maintained by CCR or any ERISA Affiliate which is not an Employee Plan. (b) Subject to Section 11.3, CWM REIT agrees to indemnify and hold harmless CCR and its directors, officers, employees, affiliates, agents and permitted assigns, without duplication, from and against any and all Damages asserted against, imposed upon or incurred or suffered by any of them, directly or indirectly, as a result of, or based upon or arising from (i) any inaccuracy in or breach or non-fulfillment of any of the representations, warranties or covenants or agreements made by CWM REIT in this Agreement or (ii) termination or any change in employment status, compensation or benefits by CWM REIT of any employees employed by CAMC Advisor at the time of Closing. (c) Except with respect to matters addressed in Section 8.10(c), which matters shall be governed solely by such Section, if any action or proceeding (including any governmental investigation) shall be brought or asserted against a party hereto (or its officers, directors, trustees or agents) or any person controlling such party in respect of which indemnity is required from the other party hereunder (such party to whom indemnification is required A-7 is referred to herein as the "Indemnified Party;" the party from whom such indemnification is required is referred to herein as the "Indemnifying Party"), the Indemnifying Party shall assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Party, and shall assume the payment of all expenses. The Indemnified Party or any such officer, director, trustee, agent or controlling person shall have the right to employ separate counsel (approved by the Indemnified Party) in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of the Indemnified Party or such officer, director, trustee, agent or controlling person unless (i) the Indemnifying Party shall have failed to assume the defense of such action or proceeding and employ counsel reasonably satisfactory to the Indemnified Party in any such action or proceeding or (ii) the named parties to any such action or proceeding (including any impleaded parties) include both the Indemnified Party or such officer, director, trustee, agent or controlling person and the Indemnifying Party, and the Indemnified Party or such officer, director, trustee, agent or controlling person shall have been advised by counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the Indemnifying Party (in which case, if the Indemnified Party or such officer, director, trustee, agent or controlling person notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense of such action or proceeding on behalf of the Indemnified Party or such officer, director, trustee, agent or controlling person, it being understood, however, that the Indemnifying Party shall not, in connection with any one such action or proceeding or separate but substantially similar or related actions or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (together with local counsel) at any time for the Indemnified Party and its officers, directors, trustees, agents and controlling persons, which firm shall be designated in writing by the Indemnified Party). The Indemnifying Party shall not be liable for any settlement of any such action or proceeding effected without the Indemnifying Party's written consent, but if settled with its written consent, or if there be a final judgment for the plaintiff in any such action or proceeding, the Indemnifying Party agrees to indemnify and hold harmless the Indemnified Party and its officers, directors, trustees, agents and controlling person from and against any loss or liability (to the extent stated above) by reason of such settlement or judgment. (d) (i) The obligations of CCR pursuant to Section 4.6 (a)(i) shall survive the Closing if and to the extent that the related representation, warranty, covenant or agreement survives the Closing as provided in Section 11.3. The obligations of CCR pursuant to Section 4.6 (a)(ii) and (iii) shall survive the Closing, but shall terminate upon the expiration of the applicable statute of limitations with respect to the matters covered thereby. (ii) The obligations of CWM REIT pursuant to Section 4.6(b)(i) shall survive the Closing if and to the extent that the related representation, warranty, covenant or agreement survives the Closing as provided in Section 11.3. The obligations of CWM REIT pursuant to Section 4.6(b)(ii) shall survive the Closing, but shall terminate upon the expiration of the applicable statute of limitations with respect to the matters covered thereby. (e) (i) Notwithstanding anything in this Section 4.6 to the contrary, to the extent indemnification for any inaccuracy in or breach of any representation or warranty in Section 5, 6 or 7, as the case may be, is sought under Section 4.6(a)(i) or Section 4.6(b) hereof, CCR or CWM REIT, as the case may be, shall be required to provide indemnification only to the extent the aggregate amount of Damages arising under Section 4.6(a)(i) or 4.6(b), as the case may be, exceeds $500,000. (ii) Notwithstanding anything in Section 4.6(a)(i) to the contrary, the aggregate amount payable by CCR with respect to any Damages under Section 4.6(a)(i) for any inaccuracy in or breach of any representation or warranty in - -------------------------------------------------------------------------------- Section 5 or 6 shall not exceed $15,000,000 (excluding for such purposes, however, any Damages arising out of the breach of any of the representations and warranties contained in Sections 5.7, 5.8 and 5.13). - -------------------------------------------------------------------------------- (iii) Notwithstanding anything in Section 4.6(b) to the contrary, the aggregate amount of Damages payable by CWM REIT with respect to Damages under Section 4.6(b) for any inaccuracy in or breach of any representation or warranty in Section 7 shall not exceed $15,000,000 (excluding for such purposes, however, any Damages with respect to the representations and warranties contained in Sections 7.7 and 7.10). A-8 (f) In case any event shall occur which would otherwise entitle any party to assert any claim for indemnification hereunder, no Damages shall be deemed to have been sustained by such party to the extent of (i) the value of any tax savings actually realized or to be realized (including savings attributable to an increase in the tax basis of an asset held by such party) by such party with respect thereto or (ii) any proceeds received by such party from any insurance policies with respect thereto, net of any increase in premiums or other costs associated with such insurance recovery. (g) The indemnification provisions of this Section 4.6 shall be the sole and exclusive remedy of the parties against one another with respect to any money damages under this Agreement. (h) Anything to the contrary contained in this Agreement notwithstanding, (i) CCR shall have no obligation to indemnify CWM REIT for any Damages as a result of CWM REIT failing to be treated as a real estate investment trust under the Code, unless such failure was solely a result of the breach by CCR of any of its obligations under Section 8.10(c) of this Agreement and the remedy of specific performance with respect thereto would not provide adequate relief to CWM REIT, and (ii) CWM REIT shall have no obligation to indemnify CCR for any Damages as a result of the Merger failing to qualify as a reorganization under Code Section 368(a), unless such failure was solely a result of the breach by CWM REIT of any of its obligations under Sections 7.10 and 8.3 of this Agreement. 4.7 Further Assurances. If at any time CWM REIT shall consider or be advised that any further assignment, conveyance or assurance is necessary or advisable to vest, perfect or confirm of record in CWM REIT the title to any property or right of CAMC Advisor, or otherwise to carry out the provisions hereof, the proper representatives of CCR or CAMC Advisor as of the Effective Time shall execute and deliver any and all proper deeds, assignments and assurances, and do all things necessary and proper to vest, perfect or convey title to such property or right in CWM REIT and otherwise to carry out the provisions hereof. ARTICLE 5 REPRESENTATIONS AND WARRANTIES REGARDING CAMC ADVISOR CAMC Advisor and CCR hereby jointly and severally represent and warrant to CWM REIT that, except as set forth in the disclosure schedule delivered by CAMC Advisor and CCR to CWM REIT on the date hereof (the "CAMC Advisor Disclosure Schedule") as of the date hereof: 5.1 Organization, Etc. of CAMC Advisor. CAMC Advisor is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own, lease and operate its properties, to carry on its business as now conducted by CAMC Advisor, to enter into this Agreement and to carry out the provisions of this Agreement and consummate the transactions contemplated hereby. CAMC Advisor is duly qualified and in good standing in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification necessary, except where the failure to so qualify or to be in good standing has not had or would not have a Material Adverse Effect on CAMC Advisor. True and correct copies of CAMC Advisor's Certificate of Incorporation and Bylaws have been made available to CWM REIT. 5.2 Partnerships; Subsidiaries. CAMC Advisor is not, directly or indirectly, a partner in any partnership. CAMC Advisor does not have, directly or indirectly, any Subsidiaries. 5.3 Agreement. This Agreement and the consummation of the transactions contemplated hereby have been approved by the Board of Directors of CAMC Advisor and have been duly authorized by all other necessary corporate action on the part of CAMC Advisor including the written consent of CCR, as sole - -------------------------------------------------------------------------------- stockholder. This Agreement has been duly executed and delivered by a duly authorized officer of CAMC Advisor and constitutes a valid and binding agreement of CAMC Advisor, enforceable against CAMC Advisor in accordance with its terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium and other similar laws of general application that may affect the enforcement of creditors' rights generally and by general - -------------------------------------------------------------------------------- A-9 equitable principles and except to the extent that public policy considerations may limit the enforcement of indemnification of obligations. CAMC Advisor has delivered to CWM REIT true and correct copies of resolutions adopted by the Board of Directors of CAMC Advisor and CCR, respectively, approving this Agreement and the transactions contemplated hereby. 5.4 Capital Stock. The authorized capital stock of CAMC Advisor consists of 10,000 shares of common stock, of which 10,000 shares are outstanding as of the date hereof. All outstanding shares of such common stock are duly authorized, validly issued, fully paid and nonassessable, and no class of capital stock of CAMC Advisor is entitled to preemptive or similar rights. There are outstanding on the date hereof no options, warrants, calls, rights, commitments or any other agreements of any character to which CAMC Advisor is a party or by which it may be bound, requiring it to issue, transfer, sell, purchase, redeem or acquire any shares of capital stock or any securities or rights convertible into, exchangeable for or evidencing the right to subscribe for or acquire any shares of its capital stock. 5.5 Litigation. Except as set forth in Section 5.5 of the CAMC Advisor Disclosure Schedule, there are no actions, suits, investigations or legal proceedings pending or, to the knowledge of CAMC Advisor and CCR, threatened against CAMC Advisor or any property of CAMC Advisor (including the Intellectual Property Rights) in any court or before any arbitrator of any kind or before or by any Governmental Body or before any arbitrator of any kind except for such actions, suits, investigations or legal proceedings that would not have a Material Adverse Effect on CAMC Advisor. Except as set forth in Section 5.5 of the CAMC Advisor Disclosure Schedule, CAMC Advisor is not in default with respect to any judgment, order, writ, injunction or decree of any arbitrator, court or Governmental Body, and there are no unsatisfied judgments against CAMC Advisor except for such defaults or unsatisfied judgments as would not have a Material Adverse Effect on CAMC Advisor. 5.6 Compensation and Employee Matters. A true, correct and complete list of all directors, officers and personnel of CAMC Advisor, and the annual salary, bonuses paid or accrued for the year ending February 29, 1996, and for the period from March 1, 1996 through November 30, 1996, and any commitments by CAMC Advisor entered into on or prior to the date hereof to pay any further bonuses for or increase the salary of each such person is set forth in Section 5.6 of the CAMC Advisor Disclosure Schedule. 5.7 Employee Benefit Plans. (a) Definitions. The following terms, when used in this Section 5.7 or elsewhere in this Agreement, shall have the following meanings. Any of these terms may, unless the context otherwise requires, be used in the singular or the plural depending on the reference. (i) Benefit Arrangement. Any employment, consulting, severance or other similar contract, arrangement (written or oral), program, policy, plan, agreement or commitment providing for insurance coverage (including any self-insured arrangements), workers' compensation, disability benefits, supplemental unemployment benefits, vacation benefits, retirement benefits, life, health, disability or accident benefits (including, without limitation, any "voluntary employees' beneficiary association" as defined in Section 501(c)(9) of the Code, providing for the same or other benefits) or for deferred compensation, profit sharing bonuses, stock options, stock appreciation rights, stock purchases or other forms of incentive compensation or post-retirement insurance, compensation or benefit which (A) is not a Welfare Plan, Pension Plan or Multiemployer Plan, (B) is entered into, maintained, contributed to or required to be contributed to, as the case may be, by CAMC Advisor or under which CAMC Advisor may incur any liability, and (C) covers any CAMC Employee (with respect to his or her relationship with CAMC Advisor). (ii) CAMC Employee. Any employee or former employee of CAMC Advisor. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (iii) Employee Plans. All Benefit Arrangements, Multiemployer Plans, Pension Plans and Welfare Plans. (iv) ERISA. The Employee Retirement Income Security Act of 1974, as amended. A-10 (v) ERISA Affiliate. "ERISA Affiliate" shall mean any entity which is (or at any relevant time was) a member of a "controlled group of corporations" with, under "common control" with or a member of an affiliated service group with CAMC Advisor as defined in Section 414(b), (c) or (m) of the Code. (vi) IRS. The Internal Revenue Service. (vii) Multiemployer Plan. Any "multiemployer plan," as defined in Section 4001(a)(3) of ERISA, (A) which CAMC Advisor or any ERISA Affiliate maintains, administers, contributes to or is required to contribute to, or, after September 25, 1980, maintained, administered, contributed to or was required to contribute to, or under which CAMC Advisor or any ERISA Affiliate may incur any liability and (B) which covers any CAMC Employee (with respect to his or her relationship with CAMC Advisor). (viii) PBGC. The Pension Benefit Guaranty Corporation. (ix) Pension Plan. Any "employee pension benefit plan" as defined in Section 3(2) of ERISA (other than a Multiemployer Plan) (A) which CAMC Advisor or any ERISA Affiliate maintains, administers, contributes to or is required to contribute to, or, within the five years prior to the date hereof, maintained, administered, contributed to or was required to contribute to, or under which CAMC Advisor or any ERISA Affiliate may incur any liability and (B) which covers any CAMC Employee (with respect to his or her relationship with CAMC Advisor). (x) Welfare Plan. Any "employee welfare benefit plan" as defined in Section 3(1) of ERISA, (A) which CAMC Advisor or any ERISA Affiliate maintains, administers, contributes to or is required to contribute to, or under which CAMC Advisor or any ERISA Affiliate may incur any liability and (B) which covers any CAMC Employee (with respect to his or her relationship with CAMC Advisor). (b) Disclosure; Delivery of Copies of Relevant Documents and Other Information. Section 5.7(b) of the CAMC Advisor Disclosure Schedule contains a complete list of Employee Plans which cover or have covered CAMC Employees (with respect to their relationship with CAMC Advisor). True and complete copies of each of the following documents have been delivered to CWM REIT: (i) each Welfare Plan, Pension Plan and Multiemployer Plan (and, if applicable, related trust agreements, annuity contracts or other funding instruments) which covers or has covered CAMC Employees (with respect to their relationship with CAMC Advisor) and all amendments thereto, and all annuity contracts or other funding instruments, (ii) each Benefit Arrangement which covers or has covered CAMC Employees (with respect to their relationship with CAMC Advisor), (iii) the most recent determination letter issued by the IRS, with respect to each Pension Plan which covers or has covered CAMC Employees (with respect to their relationship with CAMC Advisor) and any outstanding request for a determination letter, (iv) any ruling letter or interpretive letter issued by the Department of Labor, the IRS, or any other governmental agency with respect to each Employee Plan which covers or has covered CAMC Employees (with respect to their relationship with CAMC Advisor), (v) for the most recent plan year (or, in the case of a defined benefit pension plan the two most recent plan years) annual reports on Form 5500 Series required to be filed with any governmental agency for each Pension Plan which covers or has covered CAMC Employees (with respect to their relationship with CAMC Advisor), (vi) all actuarial reports prepared for the last two plan years for each Pension Plan which covers or has covered CAMC Employees (with respect to their relationship with CAMC Advisor), (vii) a description of complete age, salary, service and related data as of the last day of the last plan year for CAMC Employees, and (viii) a description setting forth the amount of any liability of CAMC Advisor as of the date of this Agreement for payments more than thirty days past due with respect to each Welfare Plan which covers or has covered CAMC Employees. (c) Representations. (i) All material Employee Plans are maintained and sponsored by CCR. CAMC Advisor is not the sponsor of and does not maintain any material Employee Plan. (ii) Pension Plans (A) The funding method used in connection with each Pension Plan which is subject to the minimum funding requirements of ERISA complies in all material respects with applicable law and the actuarial A-11 assumptions used in connection with funding each such plan are reasonable. No "accumulated funding deficiency" (for which an excise tax is due or would be due in the absence of a waiver) as defined in Section 412 of the Code or as defined in Section 302(a)(2) of ERISA, whichever may apply, has been incurred with respect to any Pension Plan with respect to any plan year, whether or not waived. CAMC Advisor does not have any liability for past due contributions with respect to any Pension Plan that has not been accrued for on the February 29 Balance Sheet and as of the date hereof. (B) The CCR DB Plan (as defined in Section 8.15(a)) and the CCR 401(k) Plan are each the subject of a favorable determination letter received from the IRS with respect to their qualified status under the provisions of Code Section 401(a), and CCR is not aware of any circumstance that would adversely affect that determination and which could not be corrected without material liability to CAMC Advisor. (C) Each of the plans described in paragraph (c) (ii) (B) above or Section 8.15(d) presently complies and has been maintained in all material respects in compliance with its terms during the period from its adoption to date and, both as to form and in operation, in all material respects with the requirements prescribed by any and all statutes, orders, rules and regulations which are applicable to such plans, including but not limited to ERISA and the Code. (D) CAMC Advisor has paid all premiums (and interest charges and penalties for late payment, if applicable) due the PBGC with respect to each Pension Plan for each plan year thereof for which such premiums are required. There has been no "reportable event" (as defined in Section 4043(b) of ERISA and the PBGC regulations under such Section) with respect to any Pension Plan (other than reportable events with respect to which the PBGC has waived the reporting requirement). No proceeding has been commenced by the PBGC to terminate any Pension Plan. No material liability to the PBGC has been incurred by CAMC Advisor or any ERISA Affiliate on account of the termination of any Pension Plan. Neither CAMC Advisor nor any ERISA Affiliate has, at any time, (x) ceased operations at a facility so as to become subject to the provisions of Section 4068(f) of ERISA, (y) withdrawn as a substantial employer so as to become subject to the provisions of Section 4063 of ERISA, or (z) ceased making contributions on or before the Closing Date to any Pension Plan subject to Section 4064(a) of ERISA to which CAMC Advisor or any ERISA Affiliate made contributions during the five years prior to the Closing Date. (iii) Multiemployer Plans. There are no Multiemployer Plans covering any CAMC Employees. Neither CAMC Advisor nor any ERISA Affiliate has engaged in, or is a successor or parent corporation to an entity that has engaged in, a transaction described in Section 4212(c) of ERISA. (iv) Welfare Plans. (A) Each Welfare Plan which is maintained or sponsored by CAMC Advisor and which covers or has covered CAMC Employees (with respect to their relationship with CAMC Advisor) has been maintained in all material respects in compliance with its terms and, both as to form and operation in all material respects, with the requirements prescribed by any and all statutes, orders, rules and regulations which are applicable to such Welfare Plan, including but not limited to ERISA and the Code. (B) Except as may be required by applicable law, CAMC Advisor has no obligation to make any payment to or with respect to any CAMC Employee pursuant to any retiree medical benefit plan, or other retiree Welfare Plan. (C) Each Welfare Plan which covers or has covered CAMC Employees and which is a "group health plan," as defined in Section 607(1) of ERISA, has been operated in all material respects in compliance with provisions of Part 6 of Title I of ERISA and Section 4980B of the Code at all times except where any failure to comply would not result in material liability to CAMC Advisor. (v) Benefit Arrangements. Each Benefit Arrangement which is sponsored or maintained by CAMC Advisor and which covers or has covered CAMC Employees has been maintained in compliance in all material respects with its terms and with the requirements prescribed by any and all statutes, orders, rules and regulations which are applicable to such Benefit Arrangement, including but not limited to the Code. A-12 (vi) Payments. CAMC Advisor has made all contributions, paid all premiums and satisfied all liabilities with respect to each Employee Plan which have accrued and become due and payable. (vii) Litigation. There is no action, order, writ, injunction, judgment or decree outstanding or claim, suit, litigation, proceeding, arbitral action, governmental audit or governmental investigation relating to or seeking benefits under any Employee Plan that is pending or, to the knowledge of CAMC Advisor, threatened or anticipated, against CAMC Advisor, CCR or, to the knowledge of CAMC Advisor or CCR, any ERISA Affiliate or any Employee Plan that would result in material liability to CAMC Advisor. (viii) No Amendments. Except as may be required by law, neither CCR nor CAMC Advisor has any announced plan or legally binding commitment to create any additional Employee Plans which are intended to cover CAMC Employees (with respect to their relationship with CAMC Advisor) or to amend or modify any existing Employee Plan which covers or has covered CAMC Employees (with respect to their relationship with CAMC Advisor), in either case in a manner that would result in material liability to CAMC Advisor. (ix) No Acceleration or Creation of Rights. Except as the parties may otherwise provide pursuant to Section 8.15, neither the execution and delivery of this Agreement by CAMC Advisor nor the consummation of the transactions contemplated hereby will result in the acceleration or creation of any rights of any person to benefits under any Pension Plan or Welfare Plan (including, without limitation, the acceleration of the accrual or vesting of any benefits under any Pension Plan or the acceleration or creation of any rights under any severance, parachute or change in control agreement). 5.8 Taxes. (a) Neither CAMC Advisor nor any consolidated or combined group of which it is a member or required to be included as a member has filed a consent, binding on CAMC Advisor, under Section 341(f) of the Code concerning collapsible corporations. (b) CAMC Advisor operates at least one significant historic business line, or owns at least a significant portion of its historic business assets, in each case within the meaning of Treasury Regulation Section 1.368-1(d). (c) CAMC Advisor will not own as of the Effective Time any equity interest or other security in another partnership, corporation or other entity or a fee interest in less than 100% of any property (for example as a tenant-in-common), unless such equity interest or other security (i) would be classified as cash or a cash item within the meaning of Section 856(c)(5)(A) of the Code and does not represent more than 10% of the voting securities of any issuer or (ii) is CWM Common Stock. (d) CAMC Advisor is not an "investment company" as defined in Section 368(a)(2)(F) of the Code and the regulations thereunder. (e) The liabilities of CAMC Advisor to be assumed by CWM REIT in the Merger, and the liabilities to which the assets of CAMC Advisor to be transferred to CWM REIT in the Merger are subject, were incurred by CAMC Advisor in the ordinary course of its business. (f) CAMC Advisor is not under the jurisdiction of a court in a Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code. (g) The fair market value of the assets of CAMC Advisor to be transferred to CWM REIT in the Merger will equal or exceed the sum of the liabilities to be assumed by CWM REIT plus the amount of liabilities, if any, to which the transferred assets are subject. - -------------------------------------------------------------------------------- 5.9 Intellectual Property. To the knowledge of CCR and CAMC Advisor, none of - -------------------------------------------------------------------------------- the Intellectual Property Rights is subject to any lien, encumbrance or claim of infringement (except liens and encumbrances in favor of the licensor, sublicensor or other owner of such Intellectual Property Rights), nor requires any consent, approval or waiver to be transferred to CWM REIT by way of the Merger. A-13 5.10 No Material Adverse Change. Since August 31, 1996, there have not been any changes in the business, operations, properties, assets or condition, financial or otherwise, of CAMC Advisor that would, individually or in the aggregate, have a Material Adverse Effect except for changes resulting from (i) fees or other amounts earned by CAMC Advisor under the Management Agreement or (ii) any transactions contemplated by this Agreement, including Section 8.8. 5.11 Financial Statements. CAMC Advisor has provided to CWM REIT true and correct copies of its audited balance sheet as of February 29, 1996 and unaudited balance sheets as of February 28, 1995 and November 30, 1996, and related audited statements of income and cash flows for the year ended February 29, 1996 and unaudited statements of income and cash flows for the fiscal years ended February 28, 1994 and February 28, 1995 and the nine-month period ended November 30, 1996 (collectively, the "CAMC Advisor Financial Statements"). Each of such balance sheets (including the related notes) presents fairly, in all material respects, the financial position of CAMC Advisor as of the respective dates thereof, and such related statements (including the related notes) present fairly, in all material respects, the results of its operations and cash flows for the respective periods or as of the respective dates set forth therein, all in conformity with generally accepted accounting principles consistently applied during the periods involved, except as otherwise noted in the auditors' report or in the notes thereto, subject, in the case of interim financial statements, to normal year-end adjustments. 5.12 Books and Records. (a) The books of account and other financial records of CAMC Advisor are in all material respects true and correct. (b) The minute books and other similar records of CAMC Advisor have been made available to CWM REIT and contain in all material respects accurate records of the minutes of all meetings and all corporate action taken by written consent of the stockholders and Board of Directors of CAMC Advisor, in each case prior to April 6, 1994. 5.13 Proxy Statement. None of the information supplied or to be supplied in writing by CCR or CAMC Advisor for inclusion in the Proxy Statement will, at the time of filing the Proxy Statement with the SEC, at the time of mailing the Proxy Statement to the Stockholders of CWM REIT, at the time of the CWM REIT Stockholders Meeting or at the Effective Time, contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. 5.14 Contracts and Leases. To the knowledge of CAMC Advisor, the letter dated the date hereof from CWM REIT to CCR and CAMC Advisor contains an accurate and complete listing of all material contracts, leases, agreements or understandings, whether written or oral, of CAMC Advisor (the "Material Agreements"). A contract, lease, agreement or understanding is "material" if it involves (i) obligations (contingent or otherwise) of, or payments to, CAMC Advisor in excess of $25,000 per annum, (ii) management or advisory agreements providing for payments to or by CAMC Advisor in excess of $25,000 per annum, or (iii) the license of any patent, copyright, trade secret or other proprietary right (A) to CAMC Advisor which is necessary to carry on its business, other than any software license or similar agreement which is generally available to the public or businesses or (B) from CAMC Advisor which materially limits the ability of CAMC Advisor to carry on its business. Neither CAMC Advisor nor, to the knowledge of CAMC Advisor and CCR, any other party thereto has materially breached any Material Agreement or is in material default thereunder, no event has occurred which, with the passage of time or the giving of notice, or both, would constitute such a material breach or material default by CAMC Advisor, or to the knowledge of CAMC Advisor and CCR, any other party thereto, no claim of material default thereunder has been asserted or threatened by CAMC Advisor against any such party thereto or, to the knowledge of CAMC Advisor and CCR, asserted or threatened against CAMC Advisor by any other party thereto, and neither CAMC Advisor nor, to the knowledge of CAMC Advisor and CCR, any other - -------------------------------------------------------------------------------- party thereto is seeking the renegotiation thereof or substitute performance thereunder. - -------------------------------------------------------------------------------- 5.15 Real Property. CAMC Advisor does not own or lease (as lessee) and has not at any time owned or leased, in whole or in part, any real property. A-14 ARTICLE 6 REPRESENTATIONS AND WARRANTIES REGARDING CCR CCR hereby represents and warrants to CWM REIT that as of the date hereof: 6.1 Power and Authority. CCR has all requisite corporate power and authority, as applicable, to enter into this Agreement, the Cooperation Agreement, and the Registration Rights Agreement and to carry out the provisions hereof and thereof and consummate the transactions contemplated hereby and thereby. 6.2 Agreement. CCR has taken all corporate action necessary to authorize this Agreement, the Cooperation Agreement and the Registration Rights Agreement and the consummation of the transactions contemplated hereby and thereby. This Agreement has been duly executed and delivered by CCR and constitutes, and each of the Registration Rights Agreement and Cooperation Agreement when duly executed and delivered by a duly authorized officer of CCR will constitute, a valid and binding agreement of CCR, enforceable against CCR in accordance with its terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium and other similar laws of general application that may affect the enforcement of creditors' rights generally and by general equitable principles and except to the extent that public policy considerations may limit the enforcement of indemnification of obligations. 6.3 Foreign Person. CCR is a United States person within the meaning of Section 7701(a) of the Code. 6.4 No Withholding. The transaction contemplated hereby is not, insofar as concerns CCR, subject to the tax withholding provisions of Section 3406 of the Code, or of Subchapter A of Chapter 3 of the Code or of any other provision of law. 6.5 No Intention to Dispose. There is not, and as of the date of the Merger will not be, any plan or intention by CCR to sell, exchange, or otherwise dispose of the shares of CWM REIT that CCR receives in the Merger such that the value of its stock interest in CWM REIT would be reduced to an amount less than 50% of CAMC Advisor's value as of the date of the Merger. 6.6 Brokers and Finders. Neither CCR nor CAMC Advisor has entered into any contract, arrangement or understanding with any person or firm which may result in the obligation of CAMC Advisor or CWM REIT to pay any investment banking fees, finder's fees, brokerage or agent's commissions or other like payments in connection with the negotiations leading to this Agreement or the consummation of the transactions contemplated hereby. The fees and expenses paid or payable to Merrill Lynch and any claims by Merrill Lynch arising in connection therewith are the sole obligation of CCR. 6.7 Securities Act Representations. (a) CCR represents that it understands that the CWM Common Stock to be issued and delivered to it at Closing pursuant to this Agreement will not have been registered pursuant to the registration requirements of the Securities Act and that the resale of all shares of CWM Common Stock is subject to Rule 144 of the rules and regulations thereunder or registration under the Securities Act. CCR represents that it is acquiring the CWM Common Stock for its own account, not as a nominee or agent, and not with a view to the distribution thereof in violation of applicable securities laws. CCR further represents that it has been advised and understands that since the CWM Common Stock has not been registered under the Securities Act, the CWM Common Stock must be held indefinitely unless (A) the distribution of the CWM Common Stock has been registered under the Securities Act, (B) a sale of the CWM Common Stock is made in conformity with the holding period, volume and other limitations of Rule 144 promulgated by the SEC under the Securities Act, or (C) in the opinion of counsel reasonably acceptable to CWM REIT, some other exemption from - -------------------------------------------------------------------------------- registration is available with respect to any proposed sale, transfer or other disposition of the CWM Common Stock. - -------------------------------------------------------------------------------- (b) CCR represents that it has been advised and understands that, subject to applicable securities laws, stop transfer instructions will be given to CWM REIT's transfer agents with respect to the CWM Common Stock A-15 constituting the Share Consideration and that a legend setting forth the following restrictions on transfer will be set forth on the certificates for the CWM Common Stock issuable under Article 4, or any substitutions therefor: "THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE 'ACT'), AS AMENDED, OR UNDER THE SECURITIES LAWS OF ANY STATE. NEITHER THE SHARES EVIDENCED BY THIS CERTIFICATE NOR ANY INTEREST THEREIN MAY BE SOLD OR OTHERWISE PLEDGED, HYPOTHECATED OR TRANSFERRED IN THE ABSENCE OF (i) REGISTRATION UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES OR BLUE SKY LAWS OR (ii) A VALID EXEMPTION THEREFROM." (c) CCR represents that it has such knowledge and experience in financial and business affairs that it is capable of evaluating, alone, the merits and risks of an investment in CWM REIT. CCR represents that it has received and reviewed copies of (i) the most recent annual report on Form 10-K, (ii) the three most recent quarterly reports on Form 10-Q, (iii) any current reports on Form 8-K since December 31, 1995, in each case as filed by CWM REIT under the Exchange Act, and (iv) the most recent annual report to stockholders of CWM REIT. CCR represents that it has had an opportunity to ask questions and receive answers concerning the terms of this Agreement, the Cooperation Agreement and the Registration Rights Agreement and the foregoing information provided by CWM REIT and to obtain any other information from CWM REIT as CCR deems necessary or appropriate in connection with evaluating the merits of an investment in CWM REIT. ARTICLE 7 REPRESENTATIONS AND WARRANTIES OF CWM REIT CWM REIT herein represents and warrants to CAMC Advisor and CCR that as of the date hereof: 7.1 Organization, Etc. of CWM REIT. CWM REIT is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own, lease and operate its properties, to carry on its business as now conducted and proposed by CWM REIT to be conducted, to enter into this Agreement, the Cooperation Agreement and the Registration Rights Agreement and to carry out the provisions thereof and consummate the transactions contemplated hereby and thereby. CWM REIT is duly qualified and in good standing in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification necessary, except where the failure to be so qualified or in good standing has not had or would not have a Material Adverse Effect on CWM REIT and its Subsidiaries taken as a whole. True and correct copies of CWM REIT's Certificate of Incorporation and Bylaws have been made available to CAMC Advisor. 7.2 Capital Stock. The authorized capital stock of CWM REIT consists of 100,000,000 shares of CWM Common Stock, of which 50,200,176 shares are outstanding as of December 31, 1996. Since December 31, 1996, CWM REIT has not issued any shares of capital stock except pursuant to the exercise of options to purchase shares of CWM Common Stock outstanding on such date or pursuant to CWM REIT's dividend reinvestment plan. All outstanding shares of CWM Common Stock are, and all shares of CWM Common Stock issuable under stock option plans of CWM REIT, pursuant to CWM REIT's dividend reinvestment plan or pursuant to the Special Purchase Rights will be when issued in accordance with the terms thereof, duly authorized, validly issued, fully paid and nonassessable. Except for the 3,869,353 shares of CWM Common Stock reserved for issuance pursuant to stock option plans of CWM REIT, CWM REIT's dividend reinvestment plan or for purposes of the Special Purchase Rights, there are outstanding on the date hereof no options, warrants, calls, rights, commitments or any other agreements of any character to which CWM REIT is a party or by which it may be bound, requiring it to issue, transfer, sell, purchase, register, redeem or acquire any shares of capital stock or any securities or rights convertible into, exchangeable for or evidencing the right to subscribe for or acquire any shares - -------------------------------------------------------------------------------- of its capital stock. - -------------------------------------------------------------------------------- A-16 7.3 Agreement. This Agreement, the Cooperation Agreement and the Registration Rights Agreement and the consummation of the transactions contemplated hereby and thereby have been approved by the Board of Directors of CWM REIT and have been duly authorized by all other necessary corporate action on the part of CWM REIT (except for the approval of CWM REIT's stockholders contemplated by Section 8.4), including without limitation, the approval of the Special Committee. This Agreement has been duly executed and delivered by a duly authorized officer of CWM REIT and, subject to CWM REIT stockholder approval, constitutes, and each of the Cooperation Agreement and the Registration Rights Agreement when duly executed and delivered by a duly authorized officer of CWM REIT will constitute, valid and binding agreements of CWM REIT, enforceable against CWM REIT in accordance with their terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium and other similar laws of general application that may affect the enforcement of creditors' rights generally and by general equitable principles and except to the extent that public policy considerations may limit the enforcement of indemnification of obligations. CWM REIT has delivered to CAMC Advisor true and correct copies of resolutions adopted by the Board of Directors of CWM REIT approving this Agreement and the transactions contemplated hereby and, prior to the Closing Date, will deliver to CAMC Advisor true and correct copies of resolutions adopted by the stockholders of CWM REIT approving this Agreement and the transactions contemplated hereby. 7.4 Authorization for CWM Common Stock. The Share Consideration will, when issued, be duly authorized, validly issued, fully paid and nonassessable, and no stockholder of CWM REIT will have any preemptive right or similar rights of subscription or purchase in respect thereof. The Share Consideration will, subject to the accuracy of CCR's representations in Section 6.7 hereof, be exempt from registration under the Securities Act and will be registered or exempt from registration under all applicable state securities laws. 7.5 Brokers and Finders. Except for the fees and expenses paid to Dean Witter with respect to the delivery of a fairness opinion to the Special Committee and as financial advisor to the Special Committee, which fees are reflected in its agreement with the Special Committee and CWM REIT (a copy of which has been delivered to CAMC Advisor), CWM REIT has not entered into any contract, arrangement or understanding with any person or firm that may result in the obligation of CCR or CAMC Advisor to pay any finder's fees, brokerage or agent's commissions or other like payments in connection with the negotiations leading to this Agreement or the consummation of the transactions contemplated hereby. Except for the fees and expenses paid to Dean Witter by CWM REIT, there is no claim for payment by CWM REIT of any investment banking fees, finder's fees, brokerage or agent's commissions or other like payments in connection with the negotiations leading to this Agreement or the consummation of the transactions contemplated hereby. The fees and expenses paid or payable to Dean Witter and any claims by Dean Witter arising in connection therewith are the sole obligation of CWM REIT. 7.6 SEC Reports and Financial Statements. (a) CWM REIT has timely filed with the SEC all reports, definitive proxy statements or other documents required to be filed by CWM REIT with the SEC under Section 13(a), 14 or 15(d) of the Exchange Act since January 1, 1996 (collectively, and in each case including all exhibits and schedules thereto and all documents incorporated by reference therein, the "SEC Reports"). As of their respective dates, the SEC Reports complied in all material respects with the requirements of the Exchange Act and the rules and regulations of the SEC promulgated thereunder applicable, as the case may be, to such SEC Reports, and none of the SEC Reports contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading. (b) The consolidated balance sheets as of December 31, 1995 and December 31, 1994 and the related consolidated statements of earnings, shareholders' equity - -------------------------------------------------------------------------------- and cash flows for each of the three years in the period ended December 31, 1995 (including the related notes and schedules thereto) of CWM REIT contained in its Form 10-K for the year ended December 31, 1995 included in the SEC Reports complied in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto - -------------------------------------------------------------------------------- A-17 and present fairly, in all material respects, the consolidated financial position, results of operations and cash flows of CWM REIT, its consolidated subsidiaries and Indy Mac as of the dates or for the periods presented therein in conformity with generally accepted accounting principles consistently applied during the periods involved, except as otherwise noted in the auditors' report or in the notes thereto. (c) The consolidated balance sheets and the related statements of earnings and cash flows (including the related notes thereto) of CWM REIT contained in its Forms 10-Q for the periods ended September 30, 1996, June 30, 1996 and March 31, 1996 included in the SEC Reports (collectively, the "Quarterly Financial Statements") have been prepared in accordance with the requirements for interim financial statements contained in Regulation S-X. The Quarterly Financial Statements present fairly, in all material respects, the consolidated financial position, results of operations and cash flows of CWM REIT, its consolidated subsidiaries and Indy Mac as of the dates or for the periods presented therein in conformity with GAAP consistently applied during the periods involved except as otherwise noted in the notes thereto, and reflect all adjustments, which include only normal recurring adjustments, necessary to such fair presentation. (d) Since September 30, 1996, there have not been any changes in the business, operations, properties, assets or conditions, financial or otherwise, of CWM REIT that would, individually or in the aggregate, have a Material Adverse Effect on CWM REIT. 7.7 Information. The Proxy Statement will not at the time filed with the SEC, at the time of mailing the Proxy Statement to the stockholders of CWM REIT, at the time of the CWM REIT Stockholders Meeting or at the Effective Time contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading, except that no representation is made by CWM with respect to statements made therein based on information supplied by CCR or CAMC Advisor in writing for inclusion in the Proxy Statement. The Proxy Statement will comply as to form in all material respects with the provisions of the Exchange Act and the rules and regulations promulgated thereunder. 7.8 Books and Records. (a) The books of account and the financial records of CWM REIT are in all material respects true and correct. (b) The minute books and other similar records of CWM REIT have been made available to CCR and CAMC Advisor and contain in all material respects accurate records of the minutes of all meetings and all corporate action taken by written consent of the stockholders and Board of Directors of CWM REIT, in each case on and after April 6, 1994. 7.9 Litigation. There are no actions, suits, investigations or legal proceedings, pending or, to the knowledge of CWM REIT, threatened against CWM REIT or any property of CWM REIT in any court or before any arbitrator of any kind or before or by any Governmental Body or before any arbitrator of any kind except for such actions, suits, investigations or legal proceedings that would not have a Material Adverse Effect on CWM REIT. CWM REIT is not in default with respect to any judgment, order, writ, injunction or decree of any arbitrator, court or Governmental Body, and there are no unsatisfied judgments against CWM REIT except for such defaults or unsatisfied judgments as would not have a Material Adverse Effect on CWM REIT. 7.10 General. (a) CWM REIT has no plan or intention to reacquire any of its stock issued in the Merger. (b) CWM REIT has no plan or intention to sell or otherwise dispose of any of the assets of CAMC Advisor acquired in the Merger, except for dispositions made in the ordinary course of business. (c) CWM REIT has made or will make a valid and effective election under Notice 88-19, 1988-1 C.B. 486, to be subject to rules similar to those set forth in Section 1374 of the Code with respect to assets acquired from CAMC Advisor in connection with the Merger. A-18 ARTICLE 8 COVENANTS OF THE PARTIES 8.1 Maintenance of Business, Prohibited Acts. During the period from the date of this Agreement to the Effective Time, CCR will not, and will not cause CAMC Advisor to, take any action that adversely affects the ability of CAMC Advisor (i) to pursue its business in the ordinary course, (ii) to seek to preserve intact its current business organization, (iii) to keep available the service of its current officers and employees and (iv) preserve its relationships with customers, suppliers and others having business dealings with it; and CCR will not allow CAMC Advisor to, without CWM REIT's prior written consent: (a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or authorize or propose the issuance, delivery, sale, disposition or pledge or other encumbrances of (i) any additional shares of its capital stock of any class (including the CAMC Shares), or any securities or rights convertible into, exchangeable for or evidencing the right to subscribe for any shares of its capital stock, or any rights, warrants, options, calls, commitments or any other agreements of any character to purchase or acquire any shares of its capital stock or any securities or rights convertible into, exchangeable for or evidencing the right to subscribe for any shares of its capital stock, or (ii) any other securities in respect of, in lieu of or in substitution for CAMC Shares outstanding on the date hereof; (b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or otherwise acquire, any of its outstanding securities (including the CAMC Shares); (c) split, combine, subdivide or reclassify any shares of its capital stock or otherwise make any payments to CCR in its capacity as sole stockholder; provided, however, that nothing shall prohibit: (i) the payment of any ordinary distribution or dividend in respect of its capital stock at such times and in such manner and amount as may be consistent with CAMC Advisor's past practice (which in any event shall include any and all compensation paid or payable or expenses reimbursed or reimbursable for the period from January 1, 1996 through the Effective Time, to the extent not otherwise paid or distributed to CCR), (ii) the payment of any dividend as shall be required to be paid by CAMC Advisor in order to permit Price Waterhouse LLP to issue the letter required by Section 9.3(e), (iii) any distribution of property necessary for the representation and warranty set forth in Section 5.8(c) to be true and correct or (iv) the distributions referred to in Section 8.24. (d) (i) grant any increases in the compensation of any of its directors, officers or employees, except in the ordinary course of business consistent with past practice (except within the parameters noted in Section 5.6 of the CAMC Advisor Disclosure Schedule or as approved by the Special Committee), (ii) pay or agree to pay any pension retirement allowance or other employee benefit not required or contemplated by any Employee Plan or Benefit Arrangement as in effect on the date hereof to any such director, officer or employee, whether past or present, (iii) enter into any new or amend any existing employment or severance agreement with any such director, officer or employee, except as approved by CWM REIT in its sole discretion, (iv) pay or agree to pay any bonus to any director, officer or employee (whether in the form of cash, capital stock or otherwise) except as approved by the Special Committee, or (v) except as may be required to comply with applicable law, amend any existing, or become obligated under any new Employee Plan or Benefit Arrangement, except in the case of (i) through (v), inclusive, under and pursuant to the employment agreement referred to in Section 9.1(g); (e) adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization (other than the Merger); - -------------------------------------------------------------------------------- (f) make any acquisition, by means of merger, consolidation or otherwise, of any direct or indirect ownership interest in or assets comprising any business enterprise or operation; - -------------------------------------------------------------------------------- (g) adopt any amendments to its Certificate of Incorporation or Bylaws; (h) incur any indebtedness for borrowed money or guarantee such indebtedness or agree to become contingently liable, by guaranty or otherwise, for the obligations or indebtedness of any other person or A-19 make any loans, advances or capital contributions to, or investments in, any other corporation, any partnership or other legal entity or to any other persons, except for bank deposits and other investments in marketable securities and cash equivalents made in the ordinary course of its business; (i) engage in the conduct of any business the nature of which is materially different from the business in which CAMC Advisor is currently engaged; (j) enter into any agreement providing for acceleration of payment or performance or other consequence as a result of a change of control of CAMC Advisor except under the employment agreement referred to in Section 9.1(g); (k) enter into any contract, arrangement or understanding requiring the purchase of equipment, materials, supplies or services over a period greater than 12 months which is not cancelable without penalty on 30 or fewer days' notice, except in the ordinary course of business; (l) forgive any indebtedness owed to CAMC Advisor or convert or contribute by way of capital contribution any such indebtedness owed; (m) authorize or enter into any agreement providing for management services to be provided by CAMC Advisor to any third-party or an increase in management fees paid by any third-party under existing management agreements; (n) mortgage, pledge, encumber, sell, lease or transfer any material assets of CAMC Advisor except with the prior written consent of CWM REIT or as contemplated by this Agreement; (o) authorize or announce an intention to do any of the foregoing, or entering any contract, agreement, commitment or arrangement to do any of the foregoing; or (p) perform any act or omit to take any action that would make any of the representations made above inaccurate or materially misleading as of the Effective Time. 8.2 Officers and Employees. Each of CAMC Advisor and CCR severally agree that prior to the Effective Time it will use its reasonable efforts to encourage the officers and employees of CAMC Advisor, to the extent they are in good standing, to become employees of CWM REIT or Indy Mac, as determined by CWM REIT in its sole discretion. 8.3 Significant Business Line. Except for the management of Indy Mac's business, for a period of at least one year following the Effective Time, CWM REIT shall continue the historic business that was managed by CAMC Advisor prior to the Merger and shall use a significant portion of the business assets of CAMC Advisor that are received by CWM REIT in the Merger in CWM REIT's historic business. 8.4 Meeting of Stockholders. CWM REIT will take all action necessary in accordance with applicable law and CWM REIT's Certificate of Incorporation and Bylaws to arrange for its stockholders to consider and vote upon the approval of the Merger and the issuance of shares of CWM Common Stock in the Merger at the annual or special stockholders' meeting (the "CWM REIT Stockholders Meeting") to be held in connection with the transactions contemplated by this Agreement. Subject to the fiduciary duties of CWM REIT's Board of Directors under applicable law as advised by counsel, the Board of Directors of CWM REIT shall recommend and declare advisable such approval and CWM REIT shall take all lawful action to solicit, and use all reasonable efforts to obtain, such approval, including, without limitation, the inclusion of the recommendation of the CWM REIT Board of Directors and of the Special Committee in the Proxy Statement that the stockholders of CWM REIT vote in favor of the approval of the Merger and the adoption of this Agreement. 8.5 Proxy Materials. After the date hereof, CWM REIT shall promptly prepare, - -------------------------------------------------------------------------------- and CAMC Advisor and CCR shall cooperate in the preparation of, and CWM REIT shall file with the SEC as soon as practicable a proxy statement and a form of proxy, in connection with the vote of CWM REIT's stockholders with respect to the Merger (such proxy statement, together with any amendments thereof or supplements thereto, in each case in the form or forms mailed to CWM REIT's stockholders, is herein called the "Proxy Statement"). CWM REIT will - -------------------------------------------------------------------------------- A-20 use all reasonable efforts to cause the Proxy Statement to be mailed to stockholders of CWM REIT at the earliest practicable date as permitted by the SEC and will take all such action as may be necessary to qualify the Share Consideration for offering and sale under state securities or blue sky laws. If at any time prior to the Effective Time any event relating to or affecting CAMC Advisor, CCR or CWM REIT shall occur as a result of which it is necessary, in the opinion of counsel for CAMC Advisor and CCR or of counsel for CWM REIT, to supplement or amend the Proxy Statement in order to make such document not misleading in light of the circumstances existing at the time approval of the stockholders of CWM REIT is sought, CAMC Advisor, CCR and CWM REIT, respectively, will notify the others thereof and, in the case of CAMC Advisor or CCR, it will cooperate with CWM REIT in preparing, and, in the case of CWM REIT, it will prepare and file, an amendment or supplement with the SEC and, if required by law or Exchange rule, applicable state securities authorities and each Exchange such that such document, as so supplemented or amended, will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances existing at such time, not misleading, and CWM REIT will, as required by law, disseminate to its stockholders such amendment or supplement. 8.6 Filings, Other Action. CAMC Advisor, CCR and CWM REIT shall: (a) to the extent required, promptly make all filings and thereafter make any other required submissions under the HSR Act with respect to the Merger; (b) use all reasonable efforts to cooperate with one another to (i) determine which Authorizations are required to be made or obtained prior to the Effective Time in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby and (ii) timely make and seek all such Authorizations; (c) use all reasonable efforts to obtain in writing any consents required from third parties in form reasonably satisfactory to CWM REIT and CCR necessary to effectuate the Merger; (d) use all reasonable efforts to promptly take, or cause to be taken, all other actions and do, or cause to be done, all other things necessary, proper or appropriate to satisfy the conditions set forth in Article 9 and to consummate and make effective the transactions contemplated by this Agreement on the terms and conditions set forth herein as soon as practicable (including seeking to remove promptly any injunction or other legal barrier that may prevent such consummation); and (e) not take any action which might reasonably be expected to impair the ability of the parties to consummate the Merger at the earliest possible time. 8.7 Access to Information. (a) From the date hereof until the Effective Time, CAMC Advisor and CCR (i) will give CWM REIT, its counsel, financial advisors, auditors and other authorized representatives full access to the offices, properties, books and records of CAMC Advisor during reasonable business hours, (ii) will furnish copies to CWM REIT, its counsel, financial advisors, auditors and other authorized representatives such financial and operating data and other information as such persons may reasonably request, and which is in the possession of or can be obtained by CAMC Advisor or CCR without undue expense and (iii) will instruct CAMC Advisor's or CCR'S, as the case may be, employees, counsel and financial advisors to cooperate with CWM REIT in its investigation of the business of CAMC Advisor. (b) From the date hereof until the Effective Time, CWM REIT (i) will give CCR, its counsel, financial advisors, auditors and other authorized representatives full access to the offices, properties, books and records of CWM REIT during reasonable business hours, (ii) will furnish copies to CCR, its counsel, financial advisors, auditors and other authorized representatives such financial and operating data and other information as such persons may reasonably request, and which is in the possession of or can be obtained by CWM REIT without undue expense, and (iii) will instruct CWM REIT's employees, counsel and financial advisors to cooperate with CCR in its investigation of the business of CWM REIT. 8.8 Management Fee Adjustment. CWM REIT shall pay to CAMC Advisor all fees accrued and unpaid and reimbursable expenses payable to CAMC Advisor under the Management Agreement in respect of periods up to the Effective Time (as if the Management Agreement had been terminated as of the Effective Time and payment was to be made under Section 17 thereof, without giving effect for such purposes to Section 10(d) of the Management Agreement); provided that, in the event that the Effective Time occurs prior to the record date for the regular quarterly dividend of CWM REIT in respect of the quarter in which the Effective Time occurs, CAMC Advisor hereby irrevocably waives that portion of CAMC Advisor's compensation attributable to the A-21 incentive fee under Section 10(c) of the Management Agreement for the quarterly period during which the Effective Time occurs. 8.9 Intellectual Property Rights. Prior to the Closing, CAMC Advisor shall use all reasonable efforts to cooperate with CWM REIT in obtaining all assignments or other consents necessary with respect to the Intellectual Property Rights, to the extent not already owned by CAMC Advisor, including all interests that may hereafter become Intellectual Property Rights prior to Closing. CCR acknowledges that upon Closing, it will have no right, title or interest in or to the names "Indy Mac" and "Independent National Mortgage Corporation" (including derivations and abbreviations thereof). 8.10 Tax Matters. (a) Each of CCR, CAMC Advisor and CWM REIT agrees to report the Merger on all Tax Returns and, if applicable, other filings as a reorganization under Section 368(a) of the Code to the extent permitted by law. (b) CCR shall prepare or cause to be prepared and filed on behalf of CAMC Advisor, at its sole cost and expense, any federal, state, and local Tax Returns required to be filed with respect to any short taxable year of CAMC Advisor ending as of the Closing Date. (c) If the U.S. Internal Revenue Service (the "IRS") or any other taxing authority initiates an audit or examination of any Tax Return of CAMC Advisor or any consolidated or combined group of which it was a member or required to be included as a member (a "Tax Matter"), CCR shall- (i) promptly, but not less frequently than quarterly, provide CWM REIT with a summary of each issue raised in each unresolved Tax Matter, and if in the course of reviewing such Tax Matters CCR becomes aware that such Tax Matters could affect the amount of the current or accumulated earnings and profits of CAMC Advisor as of the close of business on the date of the Effective Time, CCR shall so advise CWM (ii) as requested by CWM REIT, provide additional information sufficient (A) to inform CWM REIT as to the nature of each such issue, and (B) to permit CWM REIT to exercise its rights described in this Section 8.10(c); (iii) keep CWM REIT regularly and promptly advised of the course of each such issue which has been reasonably determined by CWM REIT to be a CAMC Tax Issue (as defined below in this Section) pursuant to the procedure described in this Section 8.10(c); (iv) provide CWM REIT (not later than 10 Business Days prior to the anticipated date of delivery or filing, or promptly after receipt as applicable) with a copy of all pleadings or other documents to be delivered to, received from, or filed with, any court or other tribunal, the IRS or other taxing authority with respect to (A) any CAMC Tax Issue (which may be redacted to eliminate all information not germane to any CAMC Tax Issue), and (B) any Tax Matter which had not previously been summarized for CWM REIT or with respect to which CWM REIT had requested and not received additional information (excluding from clause (B) documents or pleadings not filed by or on behalf of CCR or any consolidated or combined group of which it is a member); (v) cooperate with CWM REIT and its counsel, accountants and other advisors in connection with each such CAMC Tax Issue; (vi) in connection with each such CAMC Tax Issue, not submit to the IRS, any taxing authority or any court or other tribunal any pleading or other document without the written consent of CWM REIT (provided, however, that CWM REIT (A) shall be deemed to so consent if it has not communicated written notice of its non-consent to CCR before the close of business on the 10th business day following its receipt of such pleading or other document and (B) shall so consent unless it reasonably determines that any position taken in such - -------------------------------------------------------------------------------- pleading or other document, if accepted, could jeopardize CWM REIT's status as a real estate investment trust under the Code. The determination of CWM REIT that a position taken in a pleading or other document could jeopardize its status as a real estate investment trust shall be deemed - -------------------------------------------------------------------------------- A-22 reasonable for this purpose if such determination is based on the advice of its counsel or accountants, which advice shall be presented to CCR in writing within five Business Days after CWM REIT communicates its notice of non-consent to CCR (or such earlier time not sooner than the second Business Day thereafter as CCR shall reasonably determine to be necessary) unless CCR agrees to waive its right to see such advice in writing, to the effect that the position taken, if accepted, would give the IRS a reasonable basis for asserting that CWM REIT failed to continue to qualify as a real estate investment trust under the Code as a consequence of its acquisition of CAMC Advisor; and (vii) not settle, compromise or consent to the entry of any order, decree or judgment with respect to any CAMC Tax Issue or fail to pursue an available appeal of any such CAMC Tax Issue (a "Resolution") without the written consent of CWM REIT (provided, however, that CWM REIT (A) shall be deemed to so consent if it has not communicated written notice of its non-consent to CCR before the close of business on the 10th business day following its receipt of notice of such proposed settlement, compromise or consent and (B) shall so consent unless it reasonably determines that such Resolution would jeopardize CWM REIT's status as a real estate investment trust under the Code. The determination of CWM REIT that a Resolution would jeopardize its status as a real estate investment trust shall be deemed reasonable for this purpose if such determination is based on the advice of its counsel or accountants, which advice shall be delivered to CCR in writing within five Business Days after CWM REIT communicates its notice of non-consent to CCR (or such earlier time not sooner than the second Business Day thereafter as CCR shall reasonably determine to be necessary) unless CCR agrees to waive its right to see such advice in writing, to the effect that the Resolution would give the IRS a reasonable basis for asserting that CWM REIT failed to continue to qualify as a real estate investment trust under the Code as a consequence of its acquisition of CAMC Advisor. An issue raised in a Tax Matter shall be identified as a "CAMC Tax Issue" if CWM REIT communicates written notice to CCR that it has determined, with respect to a particular issue, that it is possible that the resolution of such issue could jeopardize its status as a real estate investment trust under the Code. The determination of CWM REIT that a possible resolution of a Tax Matter could jeopardize its status as a real estate investment trust shall be deemed reasonable for this purpose if such determination is based on the advice of its counsel or accountants, which advice shall be delivered to CCR in writing within five Business Days after CWM REIT communicates its determination to CCR (or such earlier time not sooner than the second Business Day thereafter as CCR shall reasonably determine to be necessary) unless CCR agrees to waive its right to see such advice in writing, to the effect that a possible resolution, would give the IRS a reasonable basis for asserting that CWM REIT failed to continue to qualify as a real estate investment trust under the Code as a consequence of its acquisition of CAMC Advisor. In any such CAMC Tax Issue, CWM REIT may at its expense engage counsel, accountants, or other advisors. Any CCR tax or financial information revealed to CWM REIT, its employees or any of its advisors in connection with matters described in this Section 8.10(c) shall be treated as strictly confidential by CWM REIT, its employees and such advisors. (d) Any refunds or credits of Taxes (including any interest thereon) due to or on behalf of CAMC Advisor received by or credited to CWM REIT shall be for the benefit of CCR, and CWM REIT shall use its best efforts to obtain any such refunds and shall pay over to CCR any such refunds immediately upon receipt thereof. (e) After the Effective Time, CWM REIT shall make available to CCR, as reasonably requested, all information, records or documents relating to tax liabilities or potential tax liabilities of CAMC Advisor and shall preserve all such information, records and documents until the expiration of any applicable statute of limitations or extensions thereof. CWM REIT shall prepare and provide to CCR such federal, state, local and foreign tax information packages as CCR shall request for the use of CCR in preparing any Tax Return that relates to CAMC Advisor. Such tax information packages shall be completed by - -------------------------------------------------------------------------------- CWM REIT and provided to CCR within 45 days after CCR's request therefor. - -------------------------------------------------------------------------------- (f) Other than pursuant to this Agreement, CWM REIT shall have no rights or obligations under any tax sharing agreement among CAMC Advisor and CCR and/or any of its affiliates. A-23 (g) CAMC Advisor and CCR shall make available, or shall cause to be made available to Price Waterhouse LLP or the CWM REIT E&P Committee, on a strictly confidential basis, as reasonably requested by Price Waterhouse LLP or the CWM REIT E&P Committee, all information, records or documents of CAMC Advisor, or of any consolidated or combined group of which CAMC Advisor was a member, which (i) is reasonably available to CCR, and (ii) Price Waterhouse LLP or the CWM REIT E&P Committee reasonably deems relevant to the preparation and delivery (by Price Waterhouse LLP) or review (by the CWM REIT E&P Committee) of the written comfort described in Section 9.3(e). 8.11 Covenant Not to Compete, Continuing Arrangements Etc. (a) During the two-year period commencing on the Closing Date, CCR will not, without the written prior consent of CWM REIT, form, manage, sponsor or own any interest in, or in any other manner directly or indirectly including through any other Person participate in, a real estate investment trust (the parties hereto acknowledge and agree that the foregoing covenant is provided in connection with the Merger and the issuance of the CWM Common Stock and is intended to preserve the value of the goodwill and other intangible assets being acquired by CWM REIT in the Merger). (b) During the four-year period commencing on the Closing Date, (i) CCR will not employ, seek to employ, recruit, hire, or otherwise retain the services of any employee of CWM REIT without having obtained prior approval of CWM's Board of Directors, and (ii) CWM REIT will not employ, seek to employ, recruit, hire or otherwise retain the services of any employee of CCR without prior approval of the Chairman, Vice Chairman or a Senior Managing Director of (c) As long as CCR beneficially owns more than 5.0% of the issued and outstanding Common Stock of CWM REIT, or any director, officer or other employee or designee of CCR is also a member of the Board of Directors of CWM REIT, CCR will continue to make available to Indy Mac the CWMBS, Inc. REMIC shelf registration statement on a basis, and at a cost, substantially consistent with past practices. (d) As long as CCR beneficially owns more than 5.0% of the issued and outstanding Common Stock of CWM REIT, (i) if either of Messrs. David S. Loeb or Angelo R. Mozilo shall not be serving as a director of CWM REIT, CWM REIT shall cause one other person designated by CCR to be nominated to serve as a member of CWM REIT's Board of Directors in lieu of Mr. Loeb or Mr. Mozilo, as the case may be, and (ii) if neither Mr. Loeb nor Mr. Mozilo is serving as a director of CWM REIT, CWM REIT shall cause one person designated by CCR to be nominated to serve as a member of CWM REIT's Board of Directors; provided, however, that no person shall be nominated to serve as a director of CWM REIT pursuant to this Section 8.11(d) whose nomination to or service on CWM REIT's Board of Directors would require disclosure pursuant to Item 401(f) of Regulation S-K under the Securities Act. (e) At the Effective Time, CCR shall cause the Certificate of Indy Mac to be amended (the "Indy Mac Charter Amendment") to the effect that if (i) CCR shall cease to beneficially own more than 5.0% of the issued and outstanding Common Stock of CWM REIT, (ii) neither Mr. Loeb nor Mr. Mozilo is a director of CWM REIT, or (iii) there shall occur a Change of Control, CWM REIT shall be entitled, in its sole discretion, to compel the dissolution of Indy Mac and to receive in the related distribution all assets thereof other than an amount of cash, which shall be payable to CCR or its assignee, equal to three percent (3%) of the book value of Indy Mac (with each share of capital stock of Indy Mac, whether common, preferred or other, representing an equal economic interest without regard to any control premium) unless CCR, in its sole discretion, shall request an independent appraisal thereof and an appraiser mutually acceptable to CWM REIT and CCR determines that one percent (1%) of the fair market value of Indy Mac's assets either exceeds or is less than three percent (3%) of Indy Mac's book value, in which event CCR or its assignee shall receive such higher or lower value, as the case may be. The cost of such appraisal shall be borne by CCR. Additionally, the Indy Mac Charter Amendment - -------------------------------------------------------------------------------- shall prohibit the holder or holders of Indy Mac common stock, or any security into which it may be converted or for which it may be exchanged, from causing any assets, whether tangible or intangible, of Indy Mac to be used for any purpose other than in furtherance of Indy Mac's business. - -------------------------------------------------------------------------------- A-24 (f) In the event CWM REIT (i) establishes or acquires a majority ownership interest in an entity the business activities of which are substantially the same as all of the business activities then being conducted by Indy Mac or (ii) transfers to such other entity substantially all of the assets of Indy Mac, then CWM REIT shall be required, at CCR's option, to purchase CCR's interest in Indy Mac at a purchase price equal to the amount required to be paid to CCR or its assignee in the event of a liquidation of Indy Mac pursuant to paragraph (e) above. 8.12 Reorganization. From and after the date hereof and prior to the Effective Time, except for the transactions contemplated or permitted herein, none of CAMC Advisor, CCR or CWM REIT shall knowingly take any action that would be inconsistent with the representations and warranties made by it herein, including, but not limited to, knowingly taking any action, or knowingly failing to take any action, that is known to cause disqualification of the Merger as a reorganization within the meaning of Section 368(a) of the Code. Furthermore, from and after the date hereof and prior to the Effective Time, except for the transactions contemplated or permitted herein, each of CWM REIT, CCR and CAMC Advisor shall use reasonable efforts to conduct its business and file Tax Returns in a manner that would not jeopardize the qualification of CWM REIT after the Effective Time as a real estate investment trust as defined within Section 856 of the Code. 8.13 Public Statements. The parties shall consult with each other prior to issuing any public announcement or statement with respect to this Agreement or the transactions contemplated hereby and shall not issue any such public announcement or statement prior to such consultation, except as may be required by law or by the rules of the Exchange. 8.14 Letter of CAMC Advisor's Accountants. CAMC Advisor shall use reasonable efforts to cause to be delivered to CWM REIT an "agreed-upon procedures" report of Grant Thornton LLP covering the financial statements and other financial and statistical information of CAMC Advisor set forth in the Proxy Statement and dated a date within five business days before the date on which the Proxy Statement shall be mailed to the stockholders of CWM REIT and addressed to CWM REIT, in form and substance reasonably satisfactory to CWM REIT and customary in scope and substance for reports delivered by independent public accountants in connection with proxy statements relating to mergers where the consideration paid is registered on Form S-4 under the Securities Act. 8.15 Employee Matters. (a) As of the Closing Date or as soon as practicable thereafter but effective as of the Closing Date, CWM REIT shall establish a defined benefit pension plan (the "CWM REIT DB Plan") providing comparable benefits to the employees currently employed by CAMC Advisor who become employees of CWM REIT ("Transferring Employees") and who were as of the Closing Date covered by CCR's defined benefit pension plan (the "CCR DB Plan"). Following the date hereof, the parties shall negotiate in good faith the terms of a transfer of assets and liabilities from the CCR DB Plan to the CWM REIT DB Plan in respect of the CAMC Employees and CCR will provide the information required by one or more actuarial firms acceptable to the parties to make the actuarial determinations concerning such a transfer. If such an agreement cannot be reached, there will be no transfer of assets and liabilities from the CCR DB Plan, the CCR DB Plan shall retain the liability for all benefits accrued under such plan through the Closing Date in respect of the CAMC Employees and CCR will amend the CCR DB Plan, effective as of the Closing Date, to provide that the service of Transferring Employees for CWM REIT and its affiliates will be counted solely for vesting purposes under the CCR DB Plan with respect to benefits accrued as of the Closing Date by the Transferring Employees. CCR acknowledges that if assets are transferred (representing the cost of the accrued benefits) from the CCR DB Plan to the CWM REIT DB Plan, they shall be considered to have been attributable to amounts paid by CWM REIT pursuant to the provisions of the Management Agreement. All reasonable expenses of any actuaries, consultants and mechanics of the Transferring Employees and the accrued benefits (except the - -------------------------------------------------------------------------------- direct costs thereof referred to above) shall be borne by CWM REIT. - -------------------------------------------------------------------------------- A-25 (b) (1) Effective as of the Closing Date, all CAMC Employees who participated in the CCR 401(k) Plan immediately prior to the Closing Date and who are Transferring Employees (the "Savings Participants") shall become participants under a defined contribution plan meeting the requirements of Section 401(k) of the Code established by CWM REIT or maintained by CWM REIT or an Affiliate of the CWM REIT (the "CWM REIT 401(k) Plan"). The CWM REIT 401(k) Plan shall (i) provide for the transfer to the trust under the CWM REIT 401(k) Plan of the assets attributable to the accounts of the Savings Participants under the CCR 401(k) Plan and the crediting and maintenance of such accounts under the CWM REIT 401(k) Plan, (ii) preserve for the Savings Participants all benefits required to be preserved under Section 411(d)(6) of the Code with respect to their accounts transferred to CWM REIT 401(k) Plan, and (iii) provide that periods of employment with CAMC Advisor, its Affiliates or other predecessor employers, to the extent recognized under the CCR 401(k) Plan immediately prior to the Closing Date, shall be taken into account for purposes of determining, as applicable, eligibility for participation, distributions, vesting and amount of employer contributions of any Savings Participant under the CWM REIT 401(k) Plan. Without limiting the foregoing, the CWM REIT 401(k) Plan shall (i) accept the transfer of participant loans from the CCR 401(k) Plan and shall provide for the continued administration of such transferred participant loans for the remainder of their terms in accordance with the provisions thereof and (ii) accept the transfer of shares of CCR common stock ("Stock") in respect of Savings Participants' interest in the CCR Stock Fund maintained under the CCR 401(k) Plan. (2) As promptly as practicable after the Closing, CWM REIT shall provide to CCR documentation satisfactory to CCR regarding the qualified status of the CWM REIT 401(k) Plan under Section 401(a) of the Code either in the form of a favorable determination letter issued by the IRS or an opinion of outside counsel to CWM REIT. CWM REIT covenants and agrees to take all such action as may be necessary to establish and maintain the qualified status of the CWM REIT 401(k) Plan through the asset transfer date referred to in paragraph (b)(1) above. (3) Provided that CWM REIT has complied with the foregoing requirements of this Section 8.15, CCR shall cause the trustee of the CCR 401(k) Plan to transfer to the trustee of CWM REIT 401(k) Plan, and CWM REIT shall cause the trustee of CWM REIT 401(k) Plan to accept such transfer, an amount equal to the fair market value of the aggregate account balances of the Savings Participants determined as of the Valuation Date (the "Transfer Amount"); provided, however, that such transfer shall be made in two tranches as follows: the first tranche shall be transferred on the Valuation Date and shall be an amount equal to not less than 90% of the amount which CCR in good faith reasonably estimates to be the Transfer Amount (the "Estimated Transfer Amount") and the second tranche shall be transferred not more than 30 days after the Valuation Date and shall be an amount equal to the difference between the Transfer Amount and the Estimated Transfer Amount; and provided, further, however, that such transfer shall consist only of cash, participant loans (including any promissory notes or other documents evidencing such participant loans) and shares of Stock. (c) Effective as of the Closing Date, CWM REIT shall offer to cover all salaried CAMC Employees who are Transferring Employees under replacement vacation, health, dental, prescription drug, life insurance, disability and other health and welfare benefit plans as it may determine in its sole discretion to be appropriate; provided, however, that in any event CWM REIT shall (1) waive any limitation of coverage of such CAMC Employees (and their eligible dependents) due to pre-existing conditions which were covered under CCR's Welfare Benefit Plans, (2) credit each such CAMC Employee with all deductible payments and co-payments paid by such CAMC Employee under CCR's Welfare Benefit Plans during the year in which the Closing occurs for the purpose of determining the extent to which any such CAMC Employee has satisfied his or her deductible and whether he or she has reached the out-of-pocket maximum under CWM REIT's health and welfare benefit plans for such year and (3) credit each such CAMC Employee for all service with CCR and its Affiliates with their respective predecessors prior to the closing for all purposes for which - -------------------------------------------------------------------------------- such service was recognized by CCR. Except with respect to liabilities arising under plans described in Sections 8.15(a), (b) and (d) (the treatment of which is provided for in those Sections), (i) CWM REIT shall be liable for all benefits accrued and claims incurred on and after the Closing Date by or in respect of Transferring Employees (including in the case of claims for medical or dental benefits, all medical and dental expenses incurred on and after the Closing Date) and (ii) - -------------------------------------------------------------------------------- A-26 CCR shall have no liability with respect thereto; and CCR shall be liable for all benefits accrued and claims incurred prior to the Closing Date (including in the case of medical or dental benefits, all medical and dental expenses incurred prior to the Closing Date) and CWM REIT shall have no liability with respect thereto (other than its obligations relating thereto pursuant to the Management Agreement for periods through the Closing Date). (d) Following the date hereof, the parties shall negotiate in good faith the terms of a transfer of assets and liabilities from CCR's deferred compensation plan and supplemental executive retirement plan to such plans of CWM REIT as CWM REIT may reasonably establish in respect of the CAMC Employees and CCR will provide the information required by one or more actuarial firms acceptable to the parties to make the actuarial determinations concerning such a transfer. If such an agreement cannot be reached, there will be no transfer of assets and liabilities from its deferred compensation plan and supplemental executive retirement plan, CCR's deferred compensation plan and supplemental executive retirement plan shall retain the liability for all benefits accrued under such plan through the Closing Date in respect of the CAMC Employees and CCR will amend CCR's deferred compensation plan and supplemental executive retirement plan, effective as of the Closing Date, to provide that the service of Transferring Employees for CWM REIT and its affiliates will be counted solely for vesting purposes under such plans with respect to benefits accrued as of the Closing Date by the Transferring Employees. CCR acknowledges that if assets are transferred (representing the cost of the accrued benefits) from CCR's deferred compensation plan and supplemental executive retirement plan to such plans of CWM REIT, they shall be considered to have been attributable to amounts paid by CWM REIT pursuant to the provisions of the Management Agreement. All reasonable expenses of any actuaries, consultants and mechanics of the Transferring Employees and the accrued benefits (except the direct costs thereof referred to above) shall be borne by CWM REIT. 8.16 Notice of Certain Events. Each party hereto shall promptly notify the other party of (i) any notice or other communication from any Person alleging that the consent of such Person is or may be required in connection with the transactions contemplated by this Agreement; (ii) any notice or other communication from any Governmental Body in connection with the transactions contemplated by this Agreement; and (iii) any actions, suits, claims, investigations or proceedings commenced or, to its knowledge, threatened against, relating to or involving or otherwise affecting either such party or any of its Subsidiaries which, if pending on the date of this Agreement, would have been required to have been disclosed on Section 5.5 of the CAMC Advisor Disclosure Schedule or which relate to the consummation of the transactions contemplated by this Agreement. 8.17 Director and Officer Indemnification. From and after the Effective Date, CCR shall not amend, repeal or otherwise modify the current provisions in its Certificate of Incorporation or Bylaws providing for limitation of director liability and indemnification of directors, officers, employees and agents in any manner that would adversely affect the rights thereunder of individuals who at any time prior to the Effective Time were directors, officers, employees or agents of CAMC Advisor in respect of actions or omissions occurring at or prior to the Effective Time (including, without limitation, the transactions contemplated by this Agreement), unless such modification is required by law. CCR shall also cause to be maintained in effect for not fewer than 60 months from the Effective Time policies of directors' and officers' liability insurance currently in force for its own officers and directors to cover those persons who are or were directors and/or officers of CAMC Advisor (provided that CCR may substitute therefor policies providing coverage in an aggregate amount of $20 million, the other terms and conditions of which are no less advantageous than those contained in the policies currently in force) with respect to matters occurring prior to the Effective Time, unless it can be shown that such policies cannot be obtained or maintained, as the case may be, by CCR on terms that are commercially reasonable at such time; provided, that, in the event any claim or claims are asserted or made within such 60 months, such coverage in respect thereof shall not be terminated until final - -------------------------------------------------------------------------------- disposition of all such claims. CWM REIT shall reimburse CCR for the cost of obtaining or maintaining, as the case may be, such policies to the extent that such cost is reasonably allocable to $20 million of coverage in respect of actions or omissions of directors, officers, employees or agents of CAMC Advisor prior to the Effective Time, provided that the amount of such reimbursement shall not exceed $50,000 in the aggregate. This Section 8.17 which shall survive the - -------------------------------------------------------------------------------- A-27 consummation of the Merger and the Effective Time, and except as set forth herein, shall continue without limit, is intended to benefit each present and former director and officer of CAMC Advisor and their heirs and legal representatives (who shall be entitled to enforce the provisions hereof) and shall be binding on all successors and assigns of CAMC Advisor and CCR. In the event that CCR or any of its successors or assigns (i) consolidates with or merges into any other Person and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers all or substantially all of its properties and assets to any person, then and in such case, proper provisions shall be made so that the successors and assigns of CCR assume the obligations set forth in this Section 8.17. 8.18 Further Action. Each party hereto shall, subject to the fulfillment or waiver at or before the Effective Time of each of the conditions of performance set forth herein, perform such further acts and execute such documents as may reasonably be required to effect the Merger. 8.19 Books and Records. Unless otherwise consented to in writing by CCR, CWM REIT will not, and will not cause or permit any of its Affiliates or Subsidiaries to, destroy or otherwise dispose of any of the books and records of CAMC Advisor prior to the tenth anniversary of the Closing Date, and CWM REIT will, and will cause its Affiliates and Subsidiaries to, grant CCR and its representatives reasonable access thereto during normal business hours and permit them to make copies thereof and, prior to destroying or discarding any of such party's books and records, shall provide the other party hereto the opportunity to retain copies of such records. 8.20 Restrictions on Resale of Share Consideration. Without the prior written consent of CWM REIT or except pursuant to Section 2.2 of the Registration Rights Agreement (a) CCR will neither sell, pledge nor otherwise transfer any of the CAMC Share Consideration or shares of the CWM Common Stock acquired in the exercise of its Special Purchase Rights for a two-year period commencing upon the Closing Date and (b) during the 12 month period following such two-year period, CCR may transfer up to 50% of all of such shares. Thereafter, CCR may transfer up to 100% of any of such shares not previously so transferred. 8.21 CAMC Advisor Shareholder Approval. CCR hereby agrees to vote the shares of CWM Common Stock owned by CCR, and CAMC Advisor hereby agrees to vote the shares of CWM Common Stock owned by CAMC Advisor, in favor of the Agreement and the transactions contemplated hereby. 8.22 Waiver of Limitations on Percentage Ownership. In the event that CWM REIT shall waive the application of the limitation on percentage ownership of shares of CWM Common Stock set forth in Section 3 of CWM REIT's Certificate of Incorporation with respect to any Person, CWM REIT shall waive the application of such limitation in the same manner and to the same extent with respect to 8.23 Delivery of Certain Financial Statements. Promptly after they are available, and in any event not later than the tenth business day prior to the Closing Date, CAMC Advisor shall provide to CWM REIT (i) true and correct copies of its unaudited consolidated balance sheet as of February 28, 1997, and related unaudited statements of income and cash flows for the fiscal year ended on February 28, 1996 and 1997 and (ii) true and correct copies of its unaudited balance sheet as of the last day of each month occurring after the date hereof and prior to the Closing Date and the related unaudited statements of income and cash flows for the year to date ending on the last day of each such month. Delivery of such financial statements shall be deemed to be a representation by CAMC Advisor that to its knowledge such balance sheet (including the related notes, if any) presents fairly, in all material respects, the financial position of CAMC Advisor as of the specified date, and the other related statements (including the related notes, if any) included therein present fairly, in all material respects, the results of its operations and cash flows for the respective periods or as of the respective dates set forth therein, all in conformity with generally accepted accounting principles consistently - -------------------------------------------------------------------------------- applied during the periods involved, except as otherwise stated in the notes thereto, subject to normal year-end audit adjustments. - -------------------------------------------------------------------------------- 8.24 Distributions. CAMC Advisor shall declare and pay a dividend payable to CCR immediately prior to the Effective Time in an amount equal to the amount (i) determined by Price Waterhouse LLP to enable it to express the written comfort required by Section 9.3(e) and (ii) timely communicated to CCR. CAMC Advisor A-28 shall also declare a dividend payable to CCR and payable immediately prior to the Effective Time of any property, known or unknown, owned by CAMC Advisor that, in the absence of such distribution, would result in the breach of the representation and warranty contained in Section 5.8(c). 8.25 Sales and Use Taxes, Etc. All sales, use, transfer, recording and similar Taxes imposed on and payable by CWM REIT, CCR, or CAMC Advisor arising out of or in connection with the transactions effected pursuant to this Agreement shall be borne equally by CCR and CWM REIT. ARTICLE 9 CONDITIONS TO THE MERGER 9.1 Conditions to Each Party's Obligations. The respective obligations of CWM REIT, CAMC Advisor and CCR to consummate the transactions contemplated by this Agreement are subject to the fulfillment at or prior to the Closing Date of each of the following conditions, which conditions may be waived only with the consent of CCR and CWM REIT: (a) CWM REIT Stockholder Approval. The Agreement, the transactions contemplated hereby and any proposed amendments to or waivers in respect of CWM REIT's Certificate of Incorporation and Bylaws necessary to carry out the transactions contemplated hereby as to which stockholder approval is being sought in the Proxy Statement shall have been duly approved, in each case by the requisite holders of CWM Common Stock in accordance with applicable provisions of the Exchange, the DGCL, and CWM REIT's Certificate of Incorporation and Bylaws. (b) HSR Act. The waiting period applicable to the consummation of the Merger under the HSR Act, if applicable, shall have expired or been terminated. (c) No Injunction or Proceedings. There shall not be in effect any judgment, writ, order, injunction or decree of any court or Governmental Body of competent jurisdiction restraining, enjoining or otherwise preventing consummation of the transactions contemplated by this Agreement or permitting such consummation only subject to any condition or restriction unacceptable to either of CWM REIT or CAMC Advisor, each in its reasonable judgment, nor shall there be pending or threatened by any Governmental Body any suit, action or proceeding seeking to restrain or restrict the consummation of the transactions contemplated hereby or seeking damages in connection therewith, which, in the reasonable judgment of either CWM REIT or CAMC Advisor could have (i) a Material Adverse Effect on CWM REIT or CAMC Advisor, or (ii) a material adverse effect on the ability, of CWM REIT, CCR or CAMC Advisor to perform its respective obligations under this Agreement, the Cooperation Agreement or the Registration Rights Agreement. (d) No Suspension of Trading, Etc. At the Effective Time, there shall be no suspension of trading in, or limitation on prices for, securities generally on the Exchange, declaration of a banking moratorium by federal or state authorities or any suspension of payments by banks in the United States (whether mandatory or not) or of the extension of credit by lending institutions in the United States, or commencement of war, armed hostility, or other international or national calamity directly or indirectly involving the United States, which war, hostility or calamity (or any material acceleration or worsening thereof), in the sole judgment of CWM REIT, would have a Material Adverse Effect on CAMC Advisor or, in the sole judgment of CCR, would have a Material Adverse Effect on CWM REIT. (e) Registration Rights Agreement. The Registration Rights Agreement, in substantially the form of Exhibit A attached hereto, except for such changes therein as may be agreed upon by CCR and CWM REIT, shall have been executed and delivered by the parties thereto. (f) Cooperation Agreement. An agreement between CCR and CWM REIT relating to certain interim sharing and service arrangements (the "Cooperation Agreement"), in form and substance reasonably satisfactory to the parties thereto, shall have been executed and delivered by each such party. A-29 (g) Employment Contract. Michael W. Perry, the Executive Vice President and Chief Operating Officer of CAMC Advisor, shall have entered into a long-term employment contract with CAMC Advisor, and CWM REIT shall have assumed such contract. (h) Physical Facility. A new long-term lease or sublease agreement (or other satisfactory arrangement) relating to space at 35 North Lake Avenue or 155 North Lake Avenue, in form and substance reasonably satisfactory to each party to the lease or sublease agreement, shall have been executed and delivered by each such party. 9.2 Conditions to Obligations of CCR and CAMC Advisor to Effect the Merger. The obligations of CCR and CAMC Advisor to effect the Merger shall be subject to the fulfillment at or prior to the Closing Date of the following conditions, unless waived in writing by CCR and CAMC Advisor: (a) CWM REIT shall have performed in all material respects its obligations and agreements contained in this Agreement required to be performed on or prior to the Closing Date and the representations and warranties of CWM REIT contained in this Agreement shall be true and correct in all material respects as of the Closing Date as if made on the Closing Date (except for changes therein contemplated or permitted by this Agreement), and CAMC Advisor shall have received a certificate of the Executive Vice President and Chief Operating Officer of CWM REIT, dated the Closing Date, certifying to such effect. (b) Since September 30, 1996, there shall not have occurred or been threatened any material adverse changes in the business, properties, operations or condition (financial or other) of CWM REIT. (c) The limitation on percentage ownership of shares of CWM Common Stock set forth in Section 3 of CWM REIT's Certificate of Incorporation, if applicable, shall have been duly waived for CCR for the purposes of the Merger and such waiver shall be valid and in full force and effect. Such waiver shall also apply to the exercise of the Special Purchase Rights of CCR. (d) CAMC Advisor and CCR shall have received the favorable opinion of Brown & Wood LLP, in form and substance satisfactory to CCR, as to (i) the corporate existence and authority of CWM REIT, (ii) the due authorization, execution and delivery of this Agreement and the Registration Rights Agreement by CWM REIT, (iii) the enforceability of each of this Agreement and the Registration Rights Agreement and (iv) the due authorization, issuance, delivery, validity and nonassessability of the Share Consideration. (e) CCR shall have received an opinion of Fried, Frank, Harris, Shriver & Jacobson, to the effect that the Merger will be treated for federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Code. 9.3 Conditions to Obligation of CWM REIT to Effect the Merger. The obligations of CWM REIT to effect the Merger shall be subject to the fulfillment at or prior to the Closing Date of the following conditions, unless waived in writing by CWM REIT: (a) CAMC Advisor and CCR shall have performed in all material respects their respective obligations and agreements contained in this Agreement required to be performed on or prior to the Closing Date and the representations and warranties of CAMC Advisor and CCR contained in this Agreement shall be true and correct in all material respects as of the Closing Date as if made on the Closing Date (except for changes therein contemplated or permitted by this Agreement), and CWM REIT shall have received a certificate of the Chairman, Vice Chairman, or a Senior Managing Director of CCR and of the President of CAMC Advisor, respectively, dated the Closing Date, certifying to such effect. (b) Since August 31, 1996, there shall not have occurred or been threatened any material adverse changes in the business, properties, operations or condition (financial or other) of CAMC Advisor, except for changes resulting - -------------------------------------------------------------------------------- from (i) fees or other amounts earned by CAMC Advisor under the Management Agreement or (ii) any transactions contemplated by this Agreement, including Section 8.8. - -------------------------------------------------------------------------------- A-30 (c) If required by the Special Committee, Dean Witter shall have delivered to the Special Committee prior to the date that the Proxy Statement is mailed to the Stockholders of CWM REIT its opinion that the consideration to be paid to CCR is fair, from a financial point of view. (d) CWM REIT shall have received an appropriate affidavit from CCR stating CCR's United States taxpayer identification number and that the CCR is not a foreign person within the meaning of Section 1445(b)(2) of the Code. (e) CWM REIT shall have received written comfort in form and substance reasonably satisfactory to it from Price Waterhouse LLP that CAMC Advisor will not have any accumulated or current earnings and profits within the meaning of Section 312 of the Code as of the Effective Time. CCR shall provide to the CWM REIT E&P Committee and Price Waterhouse LLP all information reasonably available to CCR that is necessary to calculate the accumulated and current earnings and profits of CAMC Advisor as of the Effective Time, including but not limited to all federal income Tax Returns of CAMC Advisor and any consolidated group of which CAMC Advisor and CCR are or have been members, working papers created with respect to such Tax Returns, and information with respect to any federal income Tax controversy, either pending or resolved, with respect to such returns. Any such information shall be treated as strictly confidential by the CWM REIT E&P Committee, Price Waterhouse LLP and every employee of, and advisor to, CWM REIT and Price Waterhouse LLP. (f) CWM REIT shall have received the favorable opinion of (i) Fried, Frank, Harris, Shriver & Jacobson, in form and substance satisfactory to CWM REIT, as to (A) the corporate existence and authority of each of CCR and CAMC Advisor, (B) the due authorization, execution and delivery of this Agreement by each of CCR and CAMC Advisor, (C) the due authorization, execution and delivery of the Registration Rights Agreement by CCR, and (D) the enforceability of each of this Agreement and the Registration Rights Agreement and (ii) Sandor E. Samuels, General Counsel to CCR, in form and substance satisfactory to CWM REIT, as to the due authorization, issuance, validity, nonassessability and ownership of the CAMC Shares. (g) CWM REIT shall have received from each of Messrs. David S. Loeb and Angelo R. Mozilo an expression of his current intention to continue to serve as Chairman and Vice Chairman, respectively, of the Board of Directors of CWM REIT, subject to (i) CCR's maintaining beneficial ownership of in excess of 5.0% of the issued and outstanding CWM Common Stock, (ii) his death or disability, and (iii) the wishes of CWM REIT's Board of Directors and stockholders. (h) CWM REIT shall have received from Mr. Angelo R. Mozilo an expression of his current intention to continue to serve as of Chief Executive Officer of CWM REIT for at least two years following the Closing Date, subject to (i) CCR's maintaining beneficial ownership of in excess of 5.0% of the issued and outstanding CWM Common Stock, (ii) his death or disability, and (iii) the wishes of CWM REIT's Board of Directors and stockholders. (i) The Indy Mac Charter Amendment, in form and substance satisfactory to CWM REIT, shall have been filed with the Secretary of State of the State of Delaware and shall be in effect. ARTICLE 10 TERMINATION; AMENDMENT; WAIVER 10.1 Termination by Mutual Consent. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time, before or after the approval by CCR or the stockholders of CWM REIT, respectively, either by the mutual written consent of CWM REIT and CCR or by mutual action of the Board of Directors of CCR and the Special Committee of CWM REIT. - -------------------------------------------------------------------------------- 10.2 Termination by Either CWM REIT or CAMC Advisor. This Agreement may be - -------------------------------------------------------------------------------- terminated and the Merger may be abandoned (a) by action of the Special Committee in the event of a failure of a condition to the A-31 obligations of CWM REIT set forth in Article 9 of this Agreement; (b) by action of the Board of Directors of CCR in the event of a failure of a condition to the obligations of CCR or CAMC Advisor set forth in Article 9 of this Agreement; or (c) by action of the Board of Directors of CCR or the Special Committee if (i) the Pre-Closing Market Value is greater than $26.16 or less than $16.92 or (ii) a United States federal or state court of competent jurisdiction or United States federal or state Governmental Body shall have issued an order, decree or ruling or taken any other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement and such order, decree, ruling or other action shall have become final and non-appealable, provided, that the party seeking to terminate this Agreement pursuant to this clause (c)(ii) shall have used all reasonable efforts to remove such order, decree, ruling or injunction; and provided, in the case of a termination pursuant to clause (a) or (b) above, that the terminating party shall not have breached in any material respect its obligations under this Agreement in any manner that shall have approximately contributed to the occurrence of the failure referred to in said clause. 10.3 Effect of Termination and Abandonment. In the event of termination of this Agreement and abandonment of the Merger pursuant to this Article 10, no party hereto (or any of its directors or officers) shall have any liability or further obligation to any other party to this Agreement, except that nothing herein will relieve any party from liability for any breach of this Agreement. 10.4 Amendment. This Agreement, the Cooperation Agreement and the Registration Rights Agreement may be amended at any time by written agreement signed by CWM REIT, CAMC Advisor (provided that the signature of CAMC Advisor signed by CWM REIT, CAMC Advisor (provided that the signature of CAMC Advisor shall only be required for amendments prior to the Effective Time) and CCR; provided, however, that an amendment to this Agreement made subsequent to the adoption by the stockholders of CWM REIT of this Agreement shall not alter or change (i) the amount or kind of consideration to be received in exchange for or on conversion of all or any of the shares of CAMC Advisor, (ii) any term of the Certificate of Incorporation of CWM REIT, or (iii) any of the terms and conditions of this Agreement if such alteration or change would adversely affect the stockholders of CWM REIT. 10.5 Waiver. Any party to this Agreement, the Cooperation Agreement or the Registration Rights Agreement may extend the time for the performance of any of the obligations or other acts of any other party hereto, or waive compliance with any of the agreements of any other party or with any condition to the obligations hereunder, in any case only to the extent that such obligations, agreements and conditions are intended for its benefit. ARTICLE 11 MISCELLANEOUS 11.1 Expenses. Except as otherwise expressly provided herein, each party shall bear its own expenses, including the fees and expenses of any attorneys, accountants, investment bankers, brokers, finders or other intermediaries or other Persons engaged by it, incurred in connection with this Agreement and the transactions contemplated hereby; provided, however, that in the event that the Merger occurs, CWM REIT shall bear all out-of-pocket fees and expenses of CAMC Advisor and CCR arising out of or incurred in connection with (a) the transfer of the CAMC Employees to CWM REIT and compliance by CAMC Advisor and CCR with the provisions of Sections 8.15 and 8.17 hereof, including, without limitation, all actuarial, consulting and other fees and expenses, (b) the audit of the CAMC financial statements referred to in Section 5.11, (c) the letter of Grant Thornton LLP referred to in Section 8.14 (including the fees and expenses of Grant Thornton LLP related thereto), (d) any of the matters described in Section 8.17 and (e) the Proxy Statement and the CWM REIT Stockholders Meeting, including all printing, mailing, solicitation, legal, accounting and other fees and expenses. 11.2 Notices, Etc. All notices, requests, demands or other communications required by or otherwise with respect to this Agreement shall be in writing and shall be deemed to have been duly given to any party when delivered personally (by courier service or otherwise), when delivered by facsimile and confirmed by return A-32 facsimile, or seven days after being mailed by first-class mail, postage prepaid and return receipt requested in each case to the applicable addresses set forth below: If to CAMC Advisor or to CCR: c/o Countrywide Credit Industries, Inc. 155 North Lake Avenue - ----------------------------------------- Pasadena, CA 91101 Attention: General Counsel Facsimile: (818) 584-2397 - ----------------------------------------- with a copy to: - ------------------------------------------------ Fried, Frank, Harris, Shriver & Jacobson One New York Plaza - ------------------------------------------------ New York, NY 10004 Attention: Kenneth R. Blackman Facsimile: (212) 859-4000 If to CWM REIT: CWM Mortgage Holdings, Inc. 35 North Lake Avenue - ----------------------------------------- Pasadena, CA 91101 Attention: General Counsel Facsimile: (818) 304-7575 - ----------------------------------------- with a copy to: Brown & Wood LLP One World Trade Center - -------------------------------------------------------------------------------- New York, NY 10048-0557 Attention: Edward J. Fine Facsimile: (212) 839-5599 - -------------------------------------------------------------------------------- or to such other address as such party shall have designated by notice so given to each other party. 11.3 Survival. The representations and warranties of the parties hereto contained in this Agreement or in any certificate delivered pursuant hereto or in connection herewith shall survive the Closing, but shall terminate on the first anniversary of the Closing Date, except that those contained in Sections 5.7, 5.8 and 5.13 shall terminate upon expiration of the applicable statute of limitations with respect to the matters covered thereby. The covenants and agreements set forth in this Agreement shall not survive the Closing except in such cases where such covenants and agreements by their terms contemplate performance after the Closing Date. Notwithstanding the preceding sentences, any covenant, agreement, representation or warranty in respect of which indemnity may be sought pursuant to Section 4.6 shall survive the time at which it would otherwise terminate pursuant to the preceding provisions of this Section 11.3, if written notice of the inaccuracy or breach thereof, specifying Damages (including the amount thereof) giving rise to such right to indemnity shall have been given to the party against whom such indemnity may be sought. If any governmental taxing authority asserts a deficiency with respect to a tax matter which, if conceded, could result in a claim for which indemnity could be sought pursuant to Section 4.6, CWM REIT shall be permitted to give notice of the breach of a representation, warranty, covenant, or agreement and specify Damages in the amount so asserted (including applicable interest and penalties), notwithstanding CWM REIT's intent to dispute such claims. The amount of the claim shall be deemed to be the amount of the settlement or adjudicated damages. A-33 11.4 No Assignment. This Agreement shall be binding upon and shall inure to the benefit of and be enforceable by the parties and their respective successors and assigns; provided that, except as otherwise expressly set forth in this Agreement, neither the rights nor the obligations of any party may be assigned or delegated without the prior written consent of the other party. 11.5 Entire Agreement. Except as otherwise provided herein, this Agreement ,the Cooperation Agreement and the Registration Rights Agreement embody the entire agreement and understanding among the parties relating to the subject matter hereof and supersede all prior agreements and understandings relating to such subject matter, and there are no representations, warranties or covenants by the parties hereto relating to such matter other than those expressly set forth herein (including the CAMC Advisor Disclosure Schedule) or therein and any writings expressly required hereby or thereby. 11.6 Specific Performance. The parties acknowledge that, except for breaches of Sections 4.6 and 8.20 as to which the sole remedy shall be money damages, money damages are not an adequate remedy for violations of this Agreement and that any party may, in its sole discretion, apply to a court of competent jurisdiction for specific performance or injunctive or such other relief as such court may deem just and proper to enforce this Agreement or to prevent any violation hereof. 11.7 Remedies Cumulative. All rights, powers and remedies provided under this Agreement or otherwise available in respect hereof at law or in equity shall be cumulative and not alternative, and the exercise or beginning of the exercise of any thereof by any party shall not preclude the simultaneous or later exercise of any other such right, power or remedy by such party. 11.8 No Waiver. The failure of any party hereto to exercise any right, power or remedy provided under this Agreement or otherwise available in respect hereof at law or in equity or to insist upon compliance by any other party hereto with its obligations hereunder, and any custom or practice of the parties at variance with the terms hereof, shall not constitute a waiver by such party of its right to exercise any such or other right, power or remedy or to demand such compliance. 11.9 No Third-Party Beneficiaries. Except for the successors and assigns referred to in Section 11.4 and the directors, officers, employees, affiliates, agents and assigns referred to in Section 4.6, and in each such section, only to the extent of the rights and benefits set forth therein, this Agreement is not intended to be for the benefit of and shall not be enforceable by any Person or entity who or which is not a party hereto. 11.10 Jurisdiction and Venue. Each party hereby irrevocably submits to the exclusive jurisdiction of the United States District Court for the Central District of California or any court of the State of California located in the City of Los Angeles in any action suit or proceeding arising in connection with this Agreement, and agrees that any such action, suit or proceeding shall be brought only in such court (and waives any objection based on forum non conveniens or any other objection to venue therein); provided, however, that such consent to jurisdiction is solely for the purpose referred to in this Section 11.10 and shall not be deemed to be a general submission to the jurisdiction of said courts or in the State of California other than for such purpose. 11.11 Governing Law. This Agreement and all disputes hereunder shall be governed by and construed and enforced in accordance with the internal laws of the State of Delaware, without regard to principles of conflict of laws. 11.12 Name, Captions, Etc. The name assigned to this Agreement and the section captions used herein are for convenience of reference only and shall not affect the interpretation or construction hereof. Unless otherwise specified (a) the terms "hereof," "herein" and similar terms refer to this Agreement as a whole and (b) references herein to Articles or Sections refer to - ------------------------------------------------------------------------------- articles or sections of this Agreement. - ------------------------------------------------------------------------------- 11.13 Severability. If any term of this Agreement or the application thereof to any party or circumstance shall be held invalid or unenforceable to any extent, the remainder of this Agreement and the application of such A-34 term to the other parties or circumstances shall not be affected thereby and shall be enforced to the fullest extent permitted by applicable law, provided that in such event the parties shall negotiate in good faith in an attempt to agree to another provision (in lieu of the term or application held to be invalid or unenforceable) that will be valid and enforceable and will carry out the parties' intentions hereunder. 11.14 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one instrument. Each counterpart may consist of a number of copies, each signed by less than all, but together signed by all, the parties hereto. 11.15 Gender; Number. All references to gender or number in this Agreement shall be deemed interchangeably to have a masculine, feminine, neuter, singular or plural meaning, as the context requires. 11.16 Ambiguities. Notwithstanding any rules or canons of construction to the contrary, the parties hereto agree that the terms and provisions contained herein shall be construed as if each party hereto participated equally in the drafting and preparation of this Agreement. IN WITNESS WHEREOF, the undersigned have caused this Agreement to be executed by an officer duly authorized to do so, all as of the day and year first above written. CWM MORTGAGE HOLDINGS, INC., a Delaware corporation By: /s/ Michael W. Perry - -------------------------------------------------------------- - ------------------------ - -------------------------------------------------------------- COUNTRYWIDE ASSET MANAGEMENT CORPORATION, a Delaware corporation By: /s/ James P. Gross ------------------------ COUNTRYWIDE CREDIT INDUSTRIES, INC., a Delaware corporation By: /s/ Stanford L. Kurland ------------------------ - -------------------------------------------------------------------------------- A-35 - -------------------------------------------------------------------------------- EXHIBIT A REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement dated as of , 1997, is made and entered into by and between CWM Mortgage Holdings, Inc., a Delaware corporation ("CWM REIT" or the "Company"), and Countrywide Credit Industries, Inc. ("CCR") in connection with the issuance by CWM REIT of shares of common stock, par value $0.01 per share ("Common Stock"), pursuant to the Agreement and Plan of Merger, dated as of January 29, 1997 (the "Merger Agreement"), among CWM REIT, Countrywide Asset Management Corporation, a Delaware corporation ("CAMC Advisor"), and CCR, as sole stockholder of CAMC Advisor. Capitalized terms used herein without definition shall have the meanings ascribed to them in the Merger Agreement. WHEREAS, the execution and delivery of this Registration Rights Agreement is a condition to the closing of the transactions contemplated by the Merger Agreement; and WHEREAS, to induce CWM REIT to provide certain registration rights to CCR and to perform its obligations hereunder and under the Merger Agreement, on the one hand, and in order to induce CCR to enter into the Merger Agreement and to perform its obligations hereunder and under the Merger Agreement, on the other hand, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, CWM REIT and CCR hereby agree as follows: Section 1.1 Definitions "Act" means the Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder. "Commission" means the Securities and Exchange Commission. "Exchange Act" means the Securities Exchange Act of 1934, and the rules and regulations of the Commission promulgated thereunder. "Registrable Security" means each of the shares of Common Stock acquired by CCR pursuant to the Merger Agreement upon original issue thereof and at all times subsequent thereto (including through the exercise of the Special Purchase Rights granted pursuant to Section 2.4 of this Agreement), until (i) it has been disposed of pursuant to an effective registration statement under the Act covering it, (ii) it is distributed to the public pursuant to Rule 144 under the Act, as such Rule may be amended from time to time (or any similar provision then in effect) ("Rule 144"), or (iii) it is sold, assigned or otherwise transferred in any other transaction not requiring registration under the Act. "Special Purchase Rights" as defined in Section 2.4. "Triggering Date" means the second anniversary of the Effective Time. Section 2.1 Demand Registration (a) Request for Registration. At any time and from time to time on and after the Triggering Date and subject to the terms and conditions hereof, CCR may make a written request to CWM REIT to file with the Commission a registration statement ("Demand Registration Statement") and such other documents, including a prospectus, as may be necessary in order to comply with the provisions of the Act so as to permit a public offering and sale of up to all of the Registrable Securities (subject to the limitations set forth in Section 8.20 of the Merger Agreement). Any registration effected under this paragraph (a) is hereinafter referred to as a "Demand Registration." CCR may make, in the aggregate, not more than two (2) requests for a Demand Registration. CCR shall have the right to withdraw any such request by giving written notice to CWM REIT of its - -------------------------------------------------------------------------------- request to withdraw at any time prior to effectiveness of the registration statement therefor; provided that in - -------------------------------------------------------------------------------- 1 the event of such withdrawal, CCR shall be responsible for all fees and expenses (including fees and expenses of counsel) incurred by CWM REIT prior to such withdrawal and provided further that such requested registration shall not count toward the two Demand Registration requests permitted pursuant to this Section 2.1(a). Any request to effect a Demand Registration shall specify the number of shares of Registrable Securities proposed to be sold and shall also specify the intended method of disposition thereof. There shall be permitted hereunder only one Demand Registration during any nine (9) month period, measured in each case from the effective date of the most recent Demand Registration. The minimum aggregate number of Registrable Securities that must be covered by any Demand Registration Statement request shall be the lesser of (i) 1,250,000 shares of Common Stock and (ii) Registrable Securities having a market value of $20,000,000. (b) Effective Registration. A registration will not be deemed to have been effected as a Demand Registration unless and until it has been declared effective by the Commission and CWM REIT has complied in all material respects with its obligations under this Registration Rights Agreement with respect thereto; provided that if, after it has become effective, the offering of securities pursuant to such registration is or becomes the subject of any stop order, injunction or other order or requirement of the Commission or any other governmental or administrative agency, or if any court prevents or otherwise limits the sale of such securities pursuant to the registration, such registration will be deemed not to have been effected as to the shares subject to such stop order, injunction, other order, requirement or limitation unless such stop order, injunction, other order, requirement or limitation is rescinded or the issuance of such stop order, injunction, other order, requirement or limitation is imposed in response to an act or omission on the part of CCR. If a registration requested pursuant to this Section 2.1 is deemed not to have been effected and such failure to have been effected is not the result of any act or omission of CCR (other than a withdrawal of such request by CCR prior to the effectiveness of the registration statement therefor), then CWM REIT shall continue to be obligated to effect such registration pursuant to this Section 2.1 (and such registration shall not count toward the two Demand Registration requests permitted pursuant to Section 2.1(a)). (c) Selection of Underwriters. If CCR so elects, the offering of Registrable Securities pursuant to a Demand Registration shall be in the form of an underwritten offering, in which case CWM REIT and CCR shall jointly select one or more nationally recognized firms of investment bankers to act as the managing underwriters (the "Underwriters") in connection with such offering. (d) Deferral. Notwithstanding the foregoing, if CWM REIT shall furnish to CCR a certificate signed by a duly authorized officer of CWM REIT stating that the Board of Directors of CWM REIT has, by duly authorized resolution, determined in good faith that, in light of the pendency of a Material Transaction (as defined below), it would be materially detrimental to CWM REIT and its shareholders for such registration statement to be filed and it is therefore in the best interest of CWM REIT to defer the filing of such registration statement, CWM REIT shall have the right to defer such filing for a period of not more than ninety (90) days after receipt of the request for a Demand Registration. CCR acknowledges that it would be materially detrimental to CWM REIT and its shareholders for such registration statement to be filed and therefore in the best interest of CWM REIT to defer such filing if such filing would impose an undue burden upon the ability of CWM REIT to proceed with any reorganization, merger, consolidation or acquisition of the securities or assets of another firm or corporation or disposition of the securities or assets of CWM REIT or a public offering by CWM REIT of common stock or other securities of CWM REIT registered under the Act which, in each case, is material to CWM REIT (a "Material Transaction"). If CWM REIT shall have delivered the certificate referred to above and thereafter (if applicable) shall have entered into a definitive agreement or filed a registration statement or a proxy statement in connection with a Material Transaction, CWM REIT shall, upon written notice to CCR, have the right to defer the filing of the registration statement requested to be filed by CCR but in no event for longer than sixty (60) days from the expiration of the initial ninety (90) day extension period referred to above as is reasonably necessary to enable CWM REIT to satisfy its disclosure obligations under the Act in such registration statement with respect to the Material Transaction. (e) Reduction of Offering. CWM REIT may include in a Demand Registration pursuant to this Section 2.1 shares of Common Stock for the account of CWM REIT and for the account of any other person or entity 2 who holds shares of Common Stock; provided, however, that if the lead managing Underwriter of any underwritten offering described in this Section 2.1 shall have informed CWM REIT in writing that in its opinion the total number of shares of Common Stock that CCR, CWM REIT and any other persons or entities desiring to participate in such registration intend to include in such offering is such as to materially and adversely affect the success of such offering, then CWM REIT shall include in such Demand Registration all Registrable Securities requested to be included in such registration by CCR up to such number of shares of Common Stock that the lead managing Underwriter has informed CWM REIT may be included in such registration without adversely affecting the success of such offering; provided that, if the number of such Registrable Securities requested to be included by CCR is less than the number of shares that the lead managing Underwriter has informed CWM REIT may be included in such registration without adversely affecting the success of such offering, then CWM REIT shall include in such Demand Registration the shares of Common Stock that CWM REIT and any other persons or entities desiring to participate in such registration desire to include in such registration; provided further that the number of shares of Common Stock to be offered for the account of CWM REIT and all such other persons and entities participating in such registration shall be reduced or limited pro rata in proportion to the respective number of shares of Common Stock requested to be registered by such persons and entities to the extent necessary to reduce the respective total number of shares of Common Stock requested to be included in such offering to the number of shares of Common Stock recommended by such lead managing Underwriter. (f) Filings. Whenever CWM REIT is required to effect or cause the registration of Registrable Securities pursuant to this Section 2.1, CWM REIT will use its reasonable efforts to effect the registration of such Registrable Securities in accordance with the intended method of disposition thereof as promptly as practicable, and in connection with any such request CWM REIT will as expeditiously as possible (and in no event more than forty-five (45) days from the date of receipt of written request from CCR pursuant to Section 2.1(a) to register Registrable Securities) prepare and file with the Commission a registration statement as described in Section 4.1 hereof. (g) Registration Rights of Other Parties. CWM REIT will not grant registration rights superior to or inconsistent with the registration rights granted to CCR under this Registration Rights Agreement. Section 2.2 Incidental Offerings If CWM REIT at any time proposes to file a registration statement covering any of its Common Stock under the Act (other than any registration by CWM REIT (A) on Form S-8 or a successor or substantially similar form of an employee share option, share purchase or compensation plan or of Common Stock issued or issuable pursuant to any such plan, (B) of a dividend reinvestment plan or (C) on Form S-4 or a successor or substantially similar form of shares issuable in connection with any acquisition, merger, exchange or similar transaction), CWM REIT will give prompt notice to CCR of its intention to do so. Upon the written request of CCR made within fifteen (15) days after the receipt of any such notice (which request shall specify the number of Registrable Securities intended to be disposed of by CCR), CWM REIT will use its best efforts to arrange to include all the Registrable Securities as to which it has received such requests, provided that if the registration statement relates to an underwritten offering of Common Stock and if the lead managing Underwriter of such underwritten offering shall by letter inform CWM REIT that in its opinion the inclusion in such underwritten distribution of all or a specified number of such Registrable Securities or of any other shares of Common Stock requested to be included would interfere with the successful marketing of the Common Stock in such distribution by the Underwriters, then CWM REIT may, upon written notice to CCR, exclude from such underwritten offering (i) in the event the registration statement relates to an offering for the account of CWM REIT, shares of Common Stock requested to be included by any persons or entities other than CWM REIT, pro rata in proportion to the respective number of shares - -------------------------------------------------------------------------------- of Common Stock requested to be included by such persons and entities, to the extent necessary to reduce the respective total number of shares of Common Stock requested to be included in such offering to the number of shares of Common Stock recommended by such Underwriter and (ii) in the event - -------------------------------------------------------------------------------- 3 the registration statements relates to an offering for the account of any person or entity other than CWM REIT, (A) first, shares of Common Stock requested to be registered by CWM REIT, (B) second, to the extent reduction as a result of clause (A) is insufficient, shares of Common Stock requested to be registered for the account of any persons or entities other than the person or entity making the initial request for such registration (the "Requesting Party"), pro rata in proportion to the respective number of shares of Common Stock requested to be registered by such other persons and entities to the extent necessary to reduce the respective total number of shares of Common Stock requested to be included in such offering to the number of shares of Common Stock recommended by such Underwriter and (C) third, to the extent reduction as a result of clauses (A) and (B) is insufficient, shares of Common Stock requested to be registered for the account of the Requesting Party. The Company may decline to file a registration statement referred to in this Section 2.2 after giving notice to CCR, or withdraw such a registration statement after filing, or otherwise abandon any such proposed underwritten offering, provided that the Company shall promptly notify CCR in writing of any such action. Section 2.3 CCR's Rights and Obligations CCR may not participate in any underwritten offering under Section 2.1 or Section 2.2 hereof unless it completes and executes all customary questionnaires, powers of attorney, custody agreements, underwriting agreements, and other customary documents required under the terms of such underwriting arrangements. In connection with any underwritten offering under Section 2.1 or 2.2, each of CCR and CWM REIT shall be a party to the underwriting agreement with the Underwriters and may be required to make certain customary representations and warranties (in the case of CCR as to the Registrable Securities being sold by CCR in such underwritten offering) and provide certain customary indemnifications for the benefit of the Underwriters. Section 2.4 Special Purchase Rights (a) Prior to the offering of any voting capital stock of CWM REIT (or security convertible or exchangeable into or exercisable for voting capital stock), other than shares of Common Stock (or securities convertible or exchangeable into or exercisable for Common Stock) issued (i) pursuant to any employee stock option plan or employee stock purchase plan, (ii) as consideration in making acquisitions or (iii) pursuant to the existing CWM REIT dividend reinvestment plan or any successor thereto (the "DRIP"), (an "Offering") CCR may offer and shall have the right (the "Right of First Offer") to purchase from CWM REIT such number of shares of such capital stock or securities as may be required to maintain its proportional voting interest (based on the total voting interest of the Company's capital stock outstanding immediately prior to such Offering). CWM REIT shall provide CCR notice of any Offering within 30 days prior to the commencement thereof, and within 10 Business Days following receipt of such notice, CCR shall advise CWM REIT in writing that it intends to purchase all or a portion of its proportional percentage of the shares proposed to be issued in the Offering. Any purchase by CCR pursuant hereto shall be made on the terms and be subject to the conditions applicable to other purchasers in the Offering. Subject to Section 2.4(e), this Right of First Offer shall expire on the earlier of (i) the 20th anniversary of the Effective Time, (ii) the date on which CCR ceases to beneficially own 5% or more of the outstanding shares of Common Stock (excluding from the number of shares of Common Stock outstanding for purposes of such calculation all outstanding shares of Common Stock issued after the effective time pursuant to any employee stock option, employee stock purchase or compensation plan and all shares of Common Stock issued after the effective time as consideration in making acquisitions), (iii) the date on which CCR ceases to beneficially own 2% or more of the outstanding shares of Common Stock, and (iv) the date of a Change of Control. (b) CCR shall be entitled to participate (the "Right to Participate" and - ------------------------------------------------------------------------------- together with the Right of First Offer, the "Special Purchase Rights") in the DRIP on the same terms and subject to the same conditions and procedures applicable to other participants, subject to and in accordance with the following additional provisions: - ------------------------------------------------------------------------------- (i) With respect to Common Stock to be issued pursuant to the optional cash payment feature of the DRIP, CWM REIT shall notify CCR, at least four (4) Business Days prior to the applicable "Threshold 4 Price and Waiver Discount Set Date" (as defined in the existing DRIP), of (x) the dollar amount of shares of Common Stock (expressed as an aggregate cash price) which CWM REIT desires to accept from its shareholders on the next occurring "Investment Date" (as defined in the DRIP or the comparable date under any successor plan) (such aggregate desired dollar amount being referred to herein as the "Maximum Investment Amount") and (y) the aggregate number of shares of Common Stock of CWM REIT outstanding as of the last day of the immediately preceding month. For any Investment Date under the optional cash payment feature of the DRIP, the maximum dollar amount permitted to be invested by CCR pursuant to the Right to Participate shall be calculated as (x) CCR's "Participation Percentage" (as defined below), multiplied by (y) the Maximum Investment Amount (such product being referred to herein as the "Maximum CCR Investment"). No later than two (2) Business Days following receipt of such notice from CWM REIT, CCR shall specify in writing to CWM REIT (1) the number of shares of Common Stock beneficially owned by CCR on such date, and (2) whether, with respect to the Common Stock to be issued on the next occurring Investment Date, CCR wishes to make any optional cash payment and the actual dollar amount thereof, which may be any dollar amount up to and including the Maximum CCR Investment for such month (such actual dollar amount being referred to herein as the "Requested CCR Investment"). Any election by CCR to participate in the optional cash payment feature of the DRIP hereunder (and the related election of the Requested CCR Investment) shall be irrevocable for the applicable Investment Date, and any failure by CCR to make such election shall be deemed to be an election not to participate for the applicable Investment Date. In the event CWM REIT elects to increase the Maximum Investment Amount for the applicable Investment Date, CCR shall be provided with notice of such increase and an opportunity to increase the Requested CCR Investment on a pro rata basis. In the event CWM REIT elects to reduce the Maximum Investment Amount for the applicable Investment Date, and/or the Maximum Investment Amount is subject to reduction under the terms of the DRIP (such reduced amount, in either case, being referred to herein as the "Actual Investment Amount"), CWM REIT shall so notify CCR, and the Requested CCR Investment shall in such event be reduced on a pro rata basis. In administering the optional cash investment feature of the DRIP, CWM REIT shall include the Requested CCR Investment as a portion of the Maximum Investment Amount proposed to be raised, and in the event that for any Investment Date, the Maximum Investment Amount is reduced to the Actual Investment Amount, the Requested CCR Investment (as reduced pro rata) shall be included as a portion of said Actual Investment Amount. Subject to the limitations and adjustments applicable to the Requested CCR Investment provided herein, CCR shall be entitled to make such Requested CCR Investment. For purposes of this Section 2.4(b), CCR's Participation Percentage shall be defined as a percentage (expressed as a decimal) calculated as (x) the outstanding shares of the Common Stock beneficially owned by CCR at any date of determination, divided by (y) the aggregate shares of Common Stock of CWM REIT outstanding at such date of determination. (ii) With respect to the dividend reinvestment feature of the DRIP, CWM REIT shall notify CCR, within ten (10) days after the "Record Date" (as defined in the DRIP) for the payment of the applicable dividend for the applicable fiscal quarter of CWM REIT, of the percentage of the outstanding shares of Common Stock (expressed as a decimal and without giving effect to any shares of Common Stock beneficially owned by CCR) which have theretofore validly elected to participate in the DRIP with respect to the next occurring dividend payment (the "Maximum Reinvestment Percentage"). No later than two (2) Business Days following receipt of such notice from CWM REIT, CCR shall pursuant to the Right to Participate specify in writing to CWM REIT whether (x) CCR wishes to elect for its outstanding beneficially owned shares of Common Stock to participate in the dividend reinvestment feature of the DRIP for the next occurring Investment Date, and (y) the actual percentage (expressed as a decimal) of CCR's outstanding beneficially owned Common Stock which CCR elects to participate on such Investment Date, which may be any percentage up to and including the Maximum Reinvestment Percentage for such Investment Date (such actual percentage being referred to herein as the "CCR Reinvestment Percentage"). Any election by CCR to participate in the dividend reinvestment feature of the DRIP hereunder (and the related election of the CCR Reinvestment Percentage) shall be irrevocable for the applicable Investment Date, and any failure by CCR to make such election shall be deemed to be an election not to participate for the applicable Investment Date. 5 (iii) The Right to Participate shall expire on the earlier of (A) the 20th anniversary of the Effective Time, (B) the date on which CCR ceases to beneficially own 5% or more of the outstanding shares of Common Stock (excluding from the number of shares of Common Stock outstanding for purposes of such calculation all outstanding shares of Common Stock issued after the effective time pursuant to any employee stock option, employee stock purchase or compensation plan and all shares of Common Stock issued after the Effective Time as consideration in making acquisitions), (C) the date on which CCR ceases to beneficially own 2% or more of the outstanding shares of Common Stock and (D) the date of a Change of Control. (iv) Under the Right to Participate, CCR may elect, in respect of the Common Stock, to participate in the optional cash payment feature of the DRIP, and/or to participate in the dividend reinvestment feature of the DRIP, only to the extent that such optional cash payment and/or such dividend reinvestment, together with all other shares of Common Stock beneficially owned by CCR, would not cause the percentage of shares of Common Stock beneficially owned by CCR in the aggregate to exceed the then-current Participation Percentage. (v) Except as otherwise specified in this Section 2.4(b) the Right to Participate may be exercised only in accordance with and subject to the terms of the DRIP in effect for CWM REIT at the time of any such exercise. Nothing in this Section 2.4 or in this Agreement shall be deemed or construed to require CWM REIT to create, maintain or renew any DRIP or similar plan or program; provided, however, that CWM REIT may amend or modify the DRIP so long as such amendments or modifications would not have a material adverse effect on CCR's Right to Participate in the manner, and subject to the limitations, set forth in Section 2.4(b). (c) Neither the Right of First Offer nor the Right to Participate may be assigned or otherwise transferred, but nothing herein shall preclude any transferee of Common Stock owned by CCR from participating in the DRIP. (d) Neither the Right of First Offer nor the Right to Participate may be exercised in connection with any issuance of Common Stock pursuant to any employee stock option, employee stock purchase or compensation plan of CWM REIT or as consideration in making acquisitions. (e) Notwithstanding any other provision of this Section 2.4 (i) the Special Purchase Rights shall be subject to, and become effective only upon, the approval of the holders of at least a majority of the shares of Common Stock CWM REIT present and entitled to vote on the matter (the "Approval") and (ii) the Special Purchase Rights shall be subject to the subsequent re-approval of the holders of at least a majority of the shares of the Common Stock present and entitled to vote on the matter upon each of the fifth, tenth and fifteenth anniversary of the date immediately succeeding the fifth, tenth or fifteenth anniversary of the date of the Approval. In the event that any subsequent re-approval of the holders of Common Stock shall not be obtained, the Special Purchase Rights shall terminate upon the date immediately succeeding the fifth, tenth or fifteenth anniversary of the Approval, as the case may be. In furtherance of the foregoing, in connection with the annual meetings of stockholders of CWM REIT corresponding with the fifth, tenth and fifteenth anniversary of the date of the Approval, subject to the fiduciary duties of CWM REIT's Board of Directors under applicable law as advised by counsel, the Board of Directors of CWM REIT shall recommend and declare advisable the re-approval of the Special Purchase Rights and CWM REIT shall take all lawful action to solicit, and use all reasonable efforts to obtain, such re-approvals, including in each case, the inclusion of the recommendation of the CWM REIT Board of Directors in the related proxy statement that the stockholders of CWM REIT vote in favor of the re-approval of the Special Purchase Rights. Section 3.1 Holdback Agreement In the case of the registration of any underwritten primary offering of Common Stock or Convertible Securities by CWM REIT and in which CCR will not be participating in accordance with Section 2.2 hereof, CCR agrees, if requested in writing by the lead managing Underwriter administering such offering, not to effect 6 any offer, sale or distribution of Registrable Securities (or any option or right to acquire Registrable Securities) during the period (not to exceed forty (40) days) commencing on the tenth day prior to the effective date of the registration statement covering such underwritten primary equity offering and ending on the date specified by such managing Underwriter or Underwriters in such written request to CCR. Section 4.1 Registration Procedures In connection with CWM REIT's obligations under this Registration Rights Agreement, CWM REIT shall: (a) Prepare and file a Demand Registration Statement pursuant to Section 2.1 on the appropriate form available for the sale of the Registrable Securities in accordance with the intended method or methods of distribution thereof, and use its reasonable efforts to cause such Demand Registration Statement to become effective and remain effective; and no fewer than five days prior to the filing of any Registration Statement (as defined below) or any amendment thereto (including, without limitation, any document incorporated or deemed to be incorporated by reference therein and any post-effective amendment), and not fewer than five days prior to the filing or (if not filed) the first day of public availability of any related preliminary prospectus or prospectus or any amendments or supplements thereto (including any document incorporated or deemed to be incorporated therein by reference), CWM REIT shall furnish to CCR copies of all such documents, and shall cause the officers and directors of CWM REIT, counsel to CWM REIT, and independent certified public accountants to CWM REIT to respond to such inquiries as shall be necessary, in the opinion of CCR's counsel, to conduct a reasonable investigation within the meaning of the Act. CWM REIT shall not file the Demand Registration Statement or any related prospectus or any amendments or supplements thereto to which CCR shall reasonably object on a timely basis; (b) Prepare and file with the Commission such amendments, including post-effective amendments, to any Demand Registration Statement and any registration statement filed with the Commission in connection with an offering in which CCR is or will be offering or selling Registrable Securities pursuant to Section 2.2 (an "Incidental Registration Statement"; the Demand Registration Statement and Incidental Registration Statement are hereinafter called, collectively, "Registration Statements" and, individually, a "Registration Statement" (including documents incorporated or deemed to be incorporated by reference therein)) as may be required by law; cause the related prospectus to be supplemented by any required prospectus supplement, and as so supplemented to be filed if, as and when required pursuant to Rule 424 (or any similar provisions then in effect) under the Act; and comply with the provisions of the Act and the Exchange Act with respect to the disposition of all Registrable Securities covered by such Registration Statement; (c) Notify CCR promptly (i) with respect to any Registration Statement or any post-effective amendment thereto, when the same has become effective; (ii) of any request by the Commission or any other federal or state governmental authority for amendments or supplements to any Registration Statement (including, without limitation, any documents incorporated or deemed to be incorporated by reference therein) or a related prospectus or for additional information, or of the receipt from the Commission or any other federal or state governmental authority of any comment letter with respect to any of the foregoing; (iii) of the issuance by the Commission of any stop order suspending the effectiveness of any Registration Statement or the initiation of any proceedings for that purpose; (iv) of the receipt by CWM REIT of any notification with respect to the suspension of the qualification of any of the Registrable Securities for offer or sale in any jurisdiction within the United States, or the initiation or threatening of any proceeding for such purpose; and (v) upon the occurrence of any event which makes any statement in (or incorporated or deemed to be incorporated in) any Registration Statement or any related prospectus or any amendments or supplements thereto untrue in any material respect; - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (d) Furnish to CCR without charge, such number of conformed copies as it may reasonably request, of each Registration Statement and each amendment or supplement thereto, including exhibits, financial statements and schedules; 7 (e) Deliver to CCR without charge, as many copies of the preliminary prospectus or prospectuses and the prospectus or prospectuses related to each Registration Statement and each amendment or supplement thereto as it may reasonably request; (f) Prior to any public offering of Registrable Securities, use its best efforts to register or qualify (or to obtain an exemption from registration or qualification) of such Registrable Securities for offer and sale under the securities or Blue Sky laws of all jurisdictions within the United States; keep each such registration or qualification (or exemption therefrom) effective until such time as such distribution has been completed, and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities; provided, however, that CWM REIT shall not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action that would subject it to general service of process in any such jurisdiction where it is not then so subject or subject CWM REIT to any tax in any such jurisdiction where it is not then so subject; (g) Promptly file all documents required to be filed under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act during any period when the prospectus related to a Registration Statement is required to be delivered under the Act: (h) If any prospectus relating to Registrable Securities contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, prepare and, if required, file with the Commission, a supplement or amendment to such prospectus or any document incorporated or deemed to be incorporated therein by reference, and file any other required document so that, as thereafter delivered, such prospectus will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (i) Use its best efforts to cause all Registrable Securities to be listed on each Exchange on which the shares of Common Stock are then listed and make all other necessary or appropriate filings with each such Exchange; (j) In connection with any underwritten offering in which CCR shall participate, (i) cause each opinion delivered to CWM REIT (and any updates thereof) also to be addressed to CCR (or expressly to provide therein or in a separate letter that CCR may rely thereon); and (ii) (to the extent that the independent public accountants are entitled to do so under Statement on Auditing Standards No. 72 or any other applicable accounting standards) cause each comfort letter from any independent certified public accountants that is delivered to the Underwriters (and any update thereof) also to be addressed to CCR (or expressly to provide therein or in a separate letter that CCR may rely thereon); and (k) Make reasonably available to CCR and its counsel and any accountant, auditor or investment advisor retained by CCR, that information which such parties would customarily require to satisfy their due diligence obligations with respect to the offering and sale of the Registrable Securities and cause CWM REIT's officers, directors and employees to supply all information reasonably requested by any such person in connection with such due diligence investigation; provided, however, that any information that is designated by CWM REIT in writing as confidential at the time of delivery of such information shall be kept confidential by such persons, unless (i) disclosure of such information is required by court or administrative order or is necessary to respond to inquiries of regulatory authorities or self-regulatory organizations, or is necessary or advisable in connection with any litigation (commenced or threatened), or any investigation or proceeding (commenced or threatened) by any governmental agency or body, relating to the offer or sale of Registrable Securities, or (ii) disclosure of such information, in the - ------------------------------------------------------------------------------- opinion of counsel to such person, is required by law or pursuant to this Registration Rights Agreement. - ------------------------------------------------------------------------------ CWM REIT may require CCR to furnish to CWM REIT such information regarding CCR and the distribution of such Registrable Securities as is required by law to be disclosed in the relevant Registration 8 Statement, and CWM REIT may exclude from such registration or offering the Registrable Securities if CCR unreasonably fails to furnish such information within a reasonable time after receiving such request. Section 5.1 Registration Expenses Except as provided in Section 2.1(a) hereof, all expenses incident to CWM REIT's performance of or compliance with this Registration Rights Agreement, including, without limitation, all registration and filing fees, fees and expenses of compliance with securities or Blue Sky laws (including reasonable fees and disbursements of counsel in connection with Blue Sky qualifications of the Registrable Securities), printing expenses, messenger and delivery expenses, fees and expenses incurred in connection with the listing of the securities to be registered on each Exchange, and fees and disbursements of counsel for CWM REIT and its independent certified public accountants (including the expenses of any special audit or comfort letters required by or incident to such performance), the reasonable fees and expenses of any special experts retained by CWM REIT in connection with such registration, and fees and expenses of other Persons retained by CWM REIT (but not including any underwriting or brokerage discounts or commissions attributable to the sale of Registrable Securities) (all such included expenses being herein referred to as the "Registration Expenses"), shall be borne by CWM REIT. Section 6.1 Indemnification; Contribution (a) Indemnification by CWM REIT. CWM REIT agrees to indemnify and hold harmless CCR, its officers, directors, trustees and agents and each person, if any, who controls CCR within the meaning of either Section 15 of the Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation), as incurred, arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in (or incorporated or deemed to be incorporated in) any Registration Statement or any related prospectus or preliminary prospectus or in (or incorporated in or deemed to be incorporated in) any amendment or supplement to any of the foregoing, or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or expenses arise out of, or are based upon, any such untrue statement or omission or allegation thereof based upon and in conformity with information furnished in writing to CWM REIT by CCR expressly for use therein. (b) Conduct of Indemnification Proceedings. If any action or proceeding (including any governmental investigation) shall be brought or asserted against CCR (or its officers, directors, trustees or agents) or any person controlling CCR in respect of which indemnity is required from CWM REIT hereunder, CWM REIT shall assume the defense thereof, including the employment of counsel reasonably satisfactory to CCR, and shall assume the payment of all expenses. CCR or any such officer, director, trustee, agent or controlling person shall have the right to employ separate counsel (approved by CCR) in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of CCR or such officer, director, trustee, agent or controlling person unless (i) CWM REIT shall have failed to assume the defense of such action or proceeding and employ counsel reasonably satisfactory to CCR in any such action or proceeding or (ii) the named parties to any such action or proceeding (including any impleaded parties) include both CCR or such officer, director, trustee, agent or controlling person and CWM REIT, and CCR or such officer, director, trustee, agent or controlling person shall have been advised by counsel that there is an actual conflict of interest that would prevent one law firm from representing all such persons in the same action (in which case, if CCR or such officer, director, trustee, agent or controlling person notifies CWM REIT in writing that it elects to employ separate counsel at the expense of CWM REIT, CWM REIT shall not have the right to assume the defense of such action or proceeding on behalf of CCR or such officer, director, trustee, agent or controlling person, it being understood, however, that CWM REIT shall not, in connection with any one such action or proceeding or separate but substantially similar or related actions or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (together with local counsel) at any time for CCR and its officers, directors, trustees, agents and controlling persons, which firm shall be designated in writing by CCR). CWM REIT shall not be liable for any 9 settlement of any such action or proceeding effected without CWM REIT's written consent, but if settled with its written consent, or if there be a final judgment for the plaintiff in any such action or proceeding, CWM REIT agrees to indemnify and hold harmless CCR and its officers, directors, trustees, agents and controlling person from and against any loss or liability (to the extent stated above) by reason of such settlement or judgment. (c) Indemnification by CCR of Registrable Securities. CCR agrees to indemnify and hold harmless CWM REIT, its directors, each officer of CWM REIT who signed a Registration Statement and each person, if any, who controls CWM REIT within the meaning of either Section 15 of the Act or Section 20 of the Exchange Act, to the same extent as the foregoing indemnity from CWM REIT to CCR, but only with respect to untrue statements or omissions or alleged untrue statements or omissions made in the Registration Statement pursuant to which Registrable Securities of CCR have been registered under the Act, or in any related prospectus or amendment or supplement thereto or any related preliminary prospectus, in each case based upon and in conformity with information furnished in writing by CCR for use therein. In case any action or proceeding shall be brought against CWM REIT or its directors or any such officers or controlling person, in respect of which indemnity may be sought against CCR, CCR shall have the rights and duties given to CWM REIT, and CWM REIT or its directors or such officers or controlling person shall have the rights and duties given to CCR, by the preceding paragraph. (d) Contribution. If the indemnification provided for in this Section 6.1 is unavailable or insufficient to hold an indemnified party for any reason harmless in respect of any losses, claims, damages, liabilities or judgments referred to herein, then the indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities and judgments, as incurred, in such proportion as is appropriate to reflect the relative fault of such indemnifying party, on the one hand, and such indemnified party on the other, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or judgments, as well as any other relevant equitable considerations. The relative fault of CWM REIT on the one hand and of CCR and its officers, directors, agents, trustees and controlling persons on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by such party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission; provided, however, that CCR shall not be liable for contribution under this Section 6.1(d) in an aggregate amount which exceeds the total net proceeds received by CCR from the sale of its Registrable Securities under the relevant Registration Statement. CWM REIT and CCR agree that it would not be just and equitable if contribution pursuant to this Section 6.1(d) were determined by pro rata allocation or by any other method of allocation which does not take into account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities, or judgments referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Section 7.1 Rule 144 CWM REIT shall timely file the reports required to be filed by it under the Act and the Exchange Act and shall take such further action as CCR may reasonably request, all to the extent required from time to time to enable CCR to sell Registrable Securities without registration under the Act within the applicable limitations of Rule 144 (or any successor thereto). Section 8.1 Termination The parties hereto agree that this Registration Rights Agreement shall terminate and the obligations of the parties hereto contained herein shall be released without further action by any party if all of the Registrable Securities have been (A) disposed of pursuant to an effective Registration Statement or Registration Statements under the Act covering them, (B) distributed to the public pursuant to Rule 144 under the Act, or (C) sold, assigned or otherwise transferred in any other transaction not requiring registration under the Act. Section 9.1 Miscellaneous (a) Amendments and Waivers. The provisions of this Registration Rights Agreement may be amended, modified or supplemented by written instrument executed by CWM REIT and CCR. Any party to this Registration Rights Agreement may extend the time for the performance of any of the obligations or other acts of any other party hereto, or waive compliance with any of the agreements or obligations of any other party or with any condition, in each case to the extent that such obligations, agreements and conditions are intended for its benefit; provided that each such extension or waiver shall be in writing. (b) Notices. All notices and other communications provided for or permitted hereunder shall be made by hand-delivery or registered first-class mail: (i) if to CCR, at Countrywide Credit Industries, Inc., 155 North Lake Avenue, Pasadena, California 91101-7211, Attention: General Counsel; (ii) if to CWM REIT, at CWM Mortgage Holdings, Inc., 35 North Lake Avenue, Pasadena, California 91101-7211, Attention: General Counsel. All such notices and communications shall be deemed to have been duly given when delivered by hand or air or similar courier or, if sent by mail, seven days after being deposited in the mail, postage prepaid. (c) Counterparts. This Registration Rights Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original, and all of which taken together shall constitute one and the same agreement. (d) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF DELAWARE, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. (e) Severability. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. If any term, provision, covenant or restriction of this Registration Rights Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. (f) Headings. The headings in this Registration Rights Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (g) Further Assurances. From and after the date hereof, CWM REIT and CCR each covenants and agrees to execute and deliver all such agreements, instruments and documents and to take all such further actions as any such respective party may reasonably deem necessary from time to time (at the requesting party's expense) to carry out the intent and purposes of this Registration Rights Agreement and to consummate and fully effect the transactions contemplated hereby. (h) Entire Agreement; Integration. This Registration Rights Agreement contains the entire agreement of the parties hereto with respect to its subject matter and there are no promises or undertakings with respect thereto relative to the subject matter hereof not expressly set forth or referred to herein. (i) Successor Entity. In the event of any merger or consolidation of CWM REIT with or into any other entity in which CWM REIT is not the surviving entity, or in the event of any sale, lease or other disposition of all or substantially all of the assets of CWM REIT to any other entity in a transaction in which Registrable Securities are converted into securities of such other entity, appropriate provision shall be made so that the successor or transferee entity, as the case may be, shall assume the obligations of CWM REIT set forth in this Agreement. (j) Ambiguities. Notwithstanding any rules or canons of construction to the contrary, the parties hereto agree that the terms and provisions contained herein shall be construed as if each party hereto participated equally in the drafting and preparation of this Agreement. IN WITNESS WHEREOF, each of the parties hereto has executed this Registration Rights Agreement on the day of , 1997. CWM MORTGAGE HOLDINGS, INC. By: Michael W. Perry Executive Vice President and 20 COUNTRYWIDE CREDIT INDUSTRIES, INC. By: 12 EX-10 3 CHANGE IN CONTROL SEVERANCE PLAN Exhibit 10.27 COUNTRYWIDE CREDIT INDUSTRIES, INC. CHANGE IN CONTROL SEVERANCE PLAN WHEREAS, the Board of Directors (the "Board") of Countrywide Credit Industries, Inc., a Delaware corporation (the "Company"), recognizes that the threat of an unsolicited takeover or other change in control of the Company may occur which can result in significant distractions of its key personnel because of the uncertainties inherent in such a situation; and WHEREAS, the Board has determined that it is essential and in the best interest of the Company and its stockholders to be able to retain the services of its key personnel in the event of a threat of a change in control of the Company, and following any change in control, to ensure their continued dedication and efforts in any such event without undue concern for their personal financial and employment security. NOW, THEREFORE, in order to fulfill the above objectives, the following plan has been developed and is hereby adopted. 1. Purpose It is the purpose of the Company, through this Plan, to provide a salary continuation payment and certain other benefits for each of its employees who is a Participant in the Plan and (a) who separates from service with the Company for Good Reason or (b) whose employment with the Company is involuntarily terminated (other than for Cause, Disability, death or an Excluded Termination), in either case, on or after the date on which a Change in Control occurs and within the time limits specified in Section 5.1. 2. Contractual Right Upon and after a Change in Control, each Participant shall have a fully vested, nonforfeitable contractual right, enforceable against the Company, to the benefits provided for under Section 6 of this Plan upon the conditions specified in Section 5.1. Such contractual right to receive such benefits if the conditions specified in Section 5.1 are fulfilled shall arise on the date on which the Change in Control occurs. 3. Duration This Plan shall be effective as of the date the Plan is approved by the Board or such other date as the Board shall designate in its resolution approving the Plan. The Plan shall continue in effect until terminated in accordance with Section 9. 4. Definitions. For purposes of this Plan, the following definitions shall apply: 4.1 Affiliate: "Affiliate" shall mean with respect to any person or entity, any entity, directly or indirectly, controlled by, controlling or under common control with such person or entity. 4.2 Board: "Board" shall mean the Board of Directors of Countrywide Credit Industries, Inc. 4.3 Cause: "Cause" shall exist where the Participant (a) intentionally failed to perform reasonably assigned duties, (b) acted dishonestly or engaged in willful misconduct in the performance of his or her duties, (c) engaged in a transaction in connection with the performance of his or her duties to the Company for personal profit to himself or herself or (d) willfully violated any law, rule or regulation in connection with the performance of his or her duties (other than traffic violations or similar offenses). 4.4 Change in Control: A "Change in Control" shall mean the occurrence during the term of this Plan, of any one of the following events: (a) An acquisition (other than directly from Company) of any common stock or other "Voting Securities" (as hereinafter defined) of Company by any "Person" (as the term person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of twenty five percent (25%) or more of the then outstanding shares of Company's common stock or the combined voting power of Company's then outstanding Voting Securities; provided, however, in determining whether a Change in Control has occurred, Voting Securities which are acquired in a "Non-Control Acquisition" (as hereinafter defined) shall not constitute an acquisition which would cause a Change in Control. For purposes of this Plan, (1) "Voting Securities" shall mean Company's outstanding voting securities entitled to vote generally in the election of directors and (2) a "Non-Control Acquisition" shall mean an acquisition by (i) an employee benefit plan (or a trust forming a part thereof) maintained by (A) the Company or (B) any corporation or other Person of which a majority of its voting power or its voting equity securities or equity interest is owned, directly or indirectly, by the Company (for purposes of this definition, a "Subsidiary"), (ii) the Company or any of its Subsidiaries, or (iii) any Person in connection with a "Non-Control Transaction" (as hereinafter defined); (b) The individuals who, as of May 6, 1996 are members of the Board (the "Incumbent Board"), cease for any reason to constitute at least two-thirds of the members of the Board; provided, however, that if the election, or nomination for election by the Company's common stockholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Plan, be considered as a member of the Incumbent Board; provided, further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest; or (c) The consummation of: (i) A merger, consolidation or reorganization involving the Company, unless such merger, consolidation or reorganization is a "Non-Control Transaction." A "Non-Control Transaction" shall mean a merger, consolidation or reorganization of the Company where: (A) the Company's stockholders, immediately before such merger, consolidation or reorganization, own directly or indirectly immediately following such merger, consolidation or reorganization, at least seventy percent (70%) of the combined voting power of the outstanding Voting Securities of the corporation resulting from such merger, consolidation or reorganization (the "Surviving Corporation") in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation or reorganization; (B) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation or reorganization constitute at least two-thirds of the members of the board of directors of the Surviving Corporation, or in the event that, immediately following the consummation of such transaction, a corporation beneficially owns, directly or indirectly, a majority of the Voting Securities of the Surviving Corporation, the board of directors of such corporation; and (C) no Person other than (i) the Company, (ii) any Subsidiary, (iii) any employee benefit plan (or any trust forming a part thereof) maintained by the Company, the Surviving Corporation, or any Subsidiary, or (iv) any Person who, immediately prior to such merger, consolidation or reorganization had Beneficial Ownership of twenty five percent (25%) or more of the then outstanding Voting Securities or common stock of the Company, has Beneficial Ownership of twenty five percent (25%) or more of the combined voting power of the Surviving Corporation's then outstanding Voting Securities or its common stock; (ii) A complete liquidation or dissolution of the Company; or (iii) The sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Subsidiary). Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the "Subject Person") acquired Beneficial Ownership of more than the permitted amount of the then outstanding common stock or Voting Securities as a result of the acquisition of common stock or Voting Securities by the Company which, by reducing the number of shares of common stock or Voting Securities then outstanding, increases the proportional number of shares Beneficially Owned by the Subject Person; provided, however, that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of common stock or Voting Securities by the Company, and after such share acquisition by the Company, the Subject Person becomes the Beneficial Owner of any additional common stock or Voting Securities which increases the percentage of the then outstanding common stock or Voting Securities Beneficially Owned by the Subject Person, then a Change in Control shall occur. Notwithstanding anything to the contrary contained herein, if the employment of a Participant is terminated (i) at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change in Control and who effectuates a Change in Control or (ii) otherwise in connection with, or in anticipation of, a Change in Control which actually occurs, then for purposes of this Plan the date of a Change in Control with respect to that Participant shall be deemed to be the date immediately prior to the date of the Participant's termination. 4.5 Company: "Company" shall mean Countrywide Credit Industries, Inc. and any successor thereto, including, without limitation, any person (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended), partnership(s) or corporation(s) acquiring directly or indirectly all or substantially all of the business or assets of the Company. 4.6 Disability: "Disability" shall mean physical or mental infirmity which impairs the Participant's ability to substantially perform his or her duties (as they existed immediately prior to the illness or injury) on a full-time basis for four (4) consecutive calendar months or for shorter periods aggregating eighty (80) or more business days in any twelve (12) month period. 4.7 Excluded Termination: "Excluded Termination" shall have the meaning as set forth in Section 5.2 of this Plan. 4.8 Good Reason: A Participant shall have "Good Reason" for terminating employment with the Company only if one or more of the following occurs, within one year after a Change in Control, without the Participant's express written consent: (a) a reduction by the Company in the Participant's base salary by at least five percent (5%) or the termination or reduction of award opportunities under any bonus or incentive award plan, practice or formula in which the Participant participates unless a comparable arrangement (embodied in an ongoing substitute or alternative plan, practice or formula) has been made with respect to the Participant's participation in such bonus or incentive award plan, practice or formula; or (b) for any Participant who immediately prior to the Change in Control is a member of employee classification A or B (as set forth in Appendix A), a change in the Participant's title, position or responsibilities which represents an adverse change from his or her title, position or responsibilities as in effect immediately prior to such change; or (c) the relocation of the Company's office at which the Participant is located at the time of the Change in Control to a location more than fifty (50) miles from the location at which the Participant performed his or her duties immediately prior to the Change in Control. Any event described in Section 4.8(a), (b) or (c) which occurs prior to a Change in Control but which the Executive reasonably demonstrates (1) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change in Control or (2) otherwise arose in connection with, or in anticipation of, a Change in Control, shall constitute Good Reason for purposes of this Agreement notwithstanding that it occurred prior to a Change in Control. Notwithstanding the foregoing, no action by the Company shall give rise to Good Reason if it results from the Participant's termination for Cause, Disability, death or an Excluded Termination. 4.9 Operating Unit: "Operating Unit" shall mean any subsidiary, division or other business unit of Company or any Affiliate. 4.10 Participant: "Participant" shall mean an active, full-time employee of the Company or any of its subsidiaries who, on the date immediately preceding the date of a Change in Control, is (a) not covered under an individual employment or severance agreement (as distinguished from a plan or program which is applicable to groups of salaried employees generally) which provides for compensation and/or benefits upon termination of employment and (b) employed in one of the employee classifications set forth in Appendix A. 4.11 Plan: "Plan" shall mean the Countrywide Credit Industries, Inc. Change in Control Severance Plan. 4.12 "Post-Transaction Good Reason" means with respect to offered employment or the continued employment, as the case may be, with a Post-Transaction Employer (as defined in Section 5.2) following a Transaction (as defined in Section 5.2): (a) a reduction in the Participant's annual base salary by at least five percent (5%) below the greater of the rate in effect (i) as of the date of the Transaction or (ii) on any date following the Transaction; (b) for any Participant who immediately prior to the Change in Control is a member of employee classification A or B (as set forth in Appendix A), a change in the Participant's title, position or responsibilities which represents an adverse change from his or her title, position or responsibilities as in effect immediately prior to such change; or (c) the relocation of the offices at which the Participant is principally employed to a location more than fifty (50) miles from the location of such offices immediately prior to the Transaction, or the Participant being required to be based anywhere other than such offices, except to the extent the Participant was not previously assigned to a principal location and except for required travel on the Company's business to an extent substantially consistent with the Participant's business travel obligations at the time of the Transaction; 4.13 Severance Benefit: "Severance Benefit" shall mean the benefits payable in accordance with Section 6 of this Plan. 5. When Provisions Apply 5.1 The benefits provided for under Section 6 shall be provided to each Participant who incurs a "Qualifying Termination." For purposes of this Plan, a "Qualifying Termination" shall occur only if a Change in Control occurs and (a) within one year after the Change in Control occurs, the Company terminates the Participant's employment other than for Cause; or (b) (i) within one year after the Change in Control occurs, Good Reason occurs, and (ii) the Participant terminates employment with the Company within six months after the Good Reason occurs; provided, however, that a Qualifying Termination shall not occur if the Participant's employment with the Company terminates by reason of Cause, the Participant's Disability or death, or an Excluded Termination (as defined in Section 5.2). 5.2 Sale of Business or Assets. If, following a Change in Control, a Participant's employment with the Company and its Affiliates terminates in connection with the sale, divestiture or other disposition of any Operating Unit (or part thereof) (a "Transaction"), such termination shall not be a termination of employment of the Participant for purposes of the Plan, and (notwithstanding the rights provided to the Participant by Section 5.1) the Participant shall not be entitled to a Severance Benefit as a result of such termination of employment if (i) the Participant is offered continued employment, or continues in employment, with the divested Operating Unit or the purchaser of the assets of the Operating Unit, as the case may be, (the "Post-Transaction Employer") or their respective Affiliates on terms and conditions that would not constitute Post-Transaction Good Reason and (ii) the Company obtains an agreement from the acquiror of the stock or assets of the divested Operating Unit, enforceable by the Participant, to provide or cause the Post-Transaction Employer to provide severance pay and benefits, if the Participant accepts the offered employment or continues in employment with the Post-Transaction Employer or its Affiliates following the Transaction, (A) at least equal to the Severance Benefit and (B) payable upon a termination of the Participant's employment with the Post-Transaction Employer and its Affiliates within the one year period described in Section 5.1 (or such part of it as is then remaining) for any reason other than Cause, Disability, the Participant's death or a termination by the Participant without Post-Transaction Good Reason. For purposes of this Section 5.2, the terms Cause and Disability shall have the meanings ascribed to them in Sections 4.3 and 4.6, respectively, but the term Company as it is used in Section 4.3 shall be deemed to refer to the entity employing the Participant after the Transaction. A termination of employment described in this Section 5.2 is herein referred to as an "Excluded Termination." In the circumstances described in this Section 5.2, the Participant shall not be entitled to receive any Severance Benefit under this Plan whether or not the Participant accepts the offered employment or continues in employment. The provisions of this Section 5.2 do not create any entitlement to any Severance Benefit from the Company and its Affiliates in any circumstances whatsoever and are to be construed solely as a limitation on such entitlement in the circumstances herein set forth. 5.3 The fact that a Participant is eligible to immediately receive retirement benefits under the Countrywide Credit Industries, Inc. Defined Benefit Pension Plan or any other Company employee benefit plan, practice or policy shall not render him or her ineligible for the benefits under this Plan. 6. Severance Benefits 6.1 Severance Payment (a) Each Participant entitled to benefits under this Plan shall receive within fifteen (15) days after the Participant's Qualifying Termination a lump sum payment in cash equal to the amount as determined in accordance with Appendix A (the "Salary Separation Payment"). For purposes of calculating the Salary Separation Payment, (1) the Participant's "Base Pay" shall be the Participant's base annual salary as of the date of his or her termination of employment or, if greater, as of the date on which the Change in Control occurs and (2) the Participant's "Average Bonus" shall be the average of the aggregate bonus and/or incentive award, if any, paid or payable to the Participant for each of the two (2) fiscal years preceding the fiscal year in which the Participant's termination of employment occurs (or such fewer number of fiscal years for which the Participant was eligible to receive a bonus and/or incentive award). (b) Except as required by Section 7, the Salary Separation Payment provided for in Section 6.1(a) shall be payable in addition to, and not in lieu of, all other accrued, vested, earned, or deferred compensation rights, options, or other benefits (other than severance pay or similar benefits) which may be payable or owing to a Participant following termination of his or her employment under any plan, including but not limited to retirement and supplemental retirement benefits, accrued vacation or sick pay, compensation, or benefits payable under any of the Company's employee benefit plans, practices or policies. (c) The Salary Separation Payment shall not be offset or reduced by any unemployment insurance benefit or income from subsequent employment that the Participant may receive. 6.2 The period used in computing the Salary Separation Payment pursuant to Section 6.1(a) (the "Salary Separation Pay Period") shall be included as accredited service for the purpose of receiving or accruing benefits under all employee benefit plans of the Company, including, but not limited to, group health and life insurance, long-term disability, the Countrywide Credit Industries, Inc. Defined Benefit Pension Plan, the Countrywide Credit Industries, Inc. Tax Deferred Savings and Investment Plan, the Countrywide Credit Industries, Inc. Supplemental Executive Retirement Plan and the Countrywide Credit Industries, Inc. Deferred Compensation Plan. 6.3 For the period equal to the Salary Separation Pay Period and commencing on the date of Participant's termination of employment (the "Continuation Period"), the Company shall at its expense (and without contribution by the Participant) continue on behalf of the Participant and his or her dependents and beneficiaries (a) medical, health, dental and prescription drug benefits, (b) long-term disability coverage and (c) life insurance and other death benefits coverage. The coverages and benefits (including deductibles, if any) provided under this Section 6.3 during the Continuation Period shall be no less favorable to the Participant and his or her beneficiaries than the most favorable of such coverages and benefits provided the Participant and his or her dependents during the 90-day period immediately preceding the Change in Control or as of any date following the Change in Control but preceding the date of Participant's termination. The obligation under this Section 6.3 with respect to the foregoing benefits shall be limited if the Participant obtains any such benefits pursuant to a subsequent employer's benefit plans, in which case the Company may reduce or eliminate the coverage and benefits it is required to provide the Participant hereunder as long as the aggregate coverages and benefits of the combined benefit plans are no less favorable to the Participant than the coverages and benefits required to be provided hereunder. Any period during which benefits are continued pursuant to this Section 6.3 shall be considered to be in satisfaction of the Company's obligation to provide "continuation coverage" pursuant to Section 4980B of the Internal Revenue Code of 1986, as amended, and the period of coverage required under said Section 4980B shall be reduced by the period during which benefits were provided pursuant to this Section 6.3. 6.4 Any termination of employment following a Change in Control by the Company or by the Participant shall be communicated by a Notice of Termination to the other party herein in accordance with Section 11. For purposes of this Plan, a "Notice of Termination" shall mean a written notice which shall indicate the specific Qualifying Termination provision in this Plan, if any, relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Participant's employment under the provision so indicated and shall specify the effective date of the Qualifying Termination which shall not be less than thirty (30) days nor more than sixty (60) days from the date such Notice of Termination is given or such shorter or longer period as may be mutually agreed between the Company and the Participant. For purposes of this Plan, no such purported Qualifying Termination shall be effective without such Notice of Termination. 6.5 If a Participant who is entitled to Severance Benefits under this Plan dies before receiving the Salary Separation Payment, such Payment shall be made to the Participant's surviving spouse, or, if there is no surviving spouse, to the Participant's estate. If a Participant who is entitled to Severance Benefits under this Plan dies before the end of the Continuation Period, then for the balance of the Continuation Period, the Company shall be required to continue the benefits provided for under Section 6.3 to the Participant's spouse and dependents. 6.6 A Participant who is entitled to benefits under this Plan shall not be required to accept or to seek other employment as a condition of receiving such benefits, and a Participant's benefits provided under this Plan shall not be offset by any future compensation received by the Participant. 7. Excise Tax Limitation (a) Notwithstanding anything contained in this Plan to the contrary, to the extent that the payments and benefits provided under this Plan and benefits provided to, or for the benefit of, the Participant under any other Company plan or agreement (such payments or benefits are collectively referred to as the "Payments") would be subject to the excise tax (the "Excise Tax") imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), the Severance Benefits shall be reduced (but not below zero) to the extent necessary so that no Payment to be made or benefit to be provided to the Participant shall be subject to the Excise Tax (such reduced amount is hereinafter referred to as the "Limited Payment Amount"). Unless the Participant shall have given prior written notice specifying a different order to the Company to effectuate the Limited Payment Amount, the Company shall reduce or eliminate the Payments, by first reducing or eliminating those payments or benefits which are not payable in cash and then by reducing or eliminating cash payments, in each case in reverse order beginning with payments or benefits which are to be paid the farthest in time from the Determination (as hereinafter defined). Any notice given by the Participant pursuant to the preceding sentence shall take precedence over the provisions of any other plan, arrangement or agreement governing the Participant's rights and entitlements to any benefits or compensation. (b) The determination as to whether the Payments shall be reduced to the Limited Payment Amount pursuant to this Plan and the amount of such Limited Payment Amount shall be made by an accounting firm at the Company's expense selected by the Company which is one of the six largest accounting firms in the United States (the "Accounting Firm"). The Accounting Firm may, at the Company's option, be the accounting firm which audits the financial statements of the Company. The Accounting Firm shall provide its determination (the "Determination"), together with detailed supporting calculations and documentation to the Company and the Participant within five (5) days of the date of Participant's termination if applicable, or such other time as requested by the Company. The Determination, absent manifest error, shall be binding, final and conclusive upon the Company and the Participant. 8. Successor to Company This Plan shall bind any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, in the same manner and to the same extent that the Company would be obligated under this Plan if no succession had taken place. In the case of any transaction in which a successor would not by the foregoing provision or by operation of law be bound by this Plan, the Company shall require such successor expressly and unconditionally to assume and agree to perform the Company's obligations under this Plan, in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. 9. Amendment and Plan Termination 9.1 Amendment and Termination. Prior to a Change in Control, the Plan may be amended or modified in any respect, and may be terminated, by resolution adopted by two-thirds of the Board; provided, however, that no such amendment, modification or termination, which would adversely affect the benefits or protections hereunder of any individual who is a Participant as of the date such amendment, modification or termination is adopted shall be effective as it relates to such individual unless no Change in Control occurs within six (6) months after such adoption, any such attempted amendment, modification or termination adopted within six (6) months prior to a Change in Control being null and void ab initio as it relates to all individuals who were Participants as of the date of such adoption; provided, further, however, that the Plan may not be amended, modified or terminated, (a) at the request of a third party who has indicated an intention or taken steps to effect a Change in Control and who effectuates a Change in Control or (b) otherwise in connection with, or in anticipation of, a Change in Control which actually occurs, if the amendment, modification or termination adversely affects the rights of any Participant under the Plan, any such attempted amendment, modification or termination being null and void ab initio. From and after the occurrence of a Change in Control, the Plan (x) may not be amended or modified in any manner that would in any way adversely affect the benefits or protections provided to any individual hereunder and (y) may not be terminated until the later of (i) eighteen (18) months after the date of the Change in Control or (ii) the date that all Participants who have become entitled to a Severance Benefit hereunder shall have received such payments in full. 9.2 Form of Amendment. Any amendment or termination of the Plan shall be effected by a written instrument signed by a duly authorized officer or officers of the Company, certifying that the amendment or termination has been approved by the Board. 10. Employment Status This Plan does not constitute a contract of employment or impose on the Company any obligation to retain the Participant as an employee, to change the status of the Participant's employment, or to change the Company's policies regarding termination of employment. 11. Notices Any notice provided for in this Plan shall be sent to the Company at 155 North Lake Avenue, Pasadena, California 91109-7137, Attention: Corporate Counsel/Secretary, with a copy to the Chairman of the Compensation Committee of the Board at the same address, or to such other address as the Company may from time to time in writing designate, and to a Participant at such address as he or she may from time to time in writing designate (or his or her business address of record in the absence of such designation). Such notice shall be deemed to have been given two (2) business days after it has been deposited as certified mail, return receipt requested, postage paid and properly addressed to the designated address of the party to receive the notice. 12. Severability If any provision of this Plan is held invalid or unenforceable, the remainder of this Plan shall nevertheless remain in full force and effect, and if any provision is held invalid or unenforceable with respect to particular circumstances, it shall nevertheless remain in full force and effect in all other circumstances. 13. Governing Law The interpretation, construction and performance of this Plan shall in all respects be governed by the laws of the State of California. APPENDIX A Eligible Employee Classifications Members A Managing Directors B Executive Vice Presidents C Senior Vice Presidents D First Vice Presidents, Vice Presidents and Regional Vice Presidents E Branch Managers and all other Exempt Employees F All Non-Exempt Employees Salary Separation Payment The Salary Separation Payment to which a Participant is entitled shall be based on the Participant's employee classification as of the date immediately preceding the date of the Participant's Qualifying Termination or, if greater, as of the date on which the Change in Control occurs, and shall equal the amount described in the table below; provided, however, that the Salary Separation Payment for each Participant who is a member of Employee Classification C, D, E or F shall also include an additional amount equal to one-quarter (1/4) of one month of Base Pay for each full year of service with the Company or Operating Unit in excess of five (5) years; provided, further, however, that such additional amount, if any, when added to the amount of Base Pay provided in the table below, shall not exceed twelve (12) months Base Pay. Employee Classification Salary Separation Payment A Two (2) years Base Pay (as defined in Section 6.1(a)) plus 200% of the Average Bonus (as defined in Section 6.1(a)). B One (1) year Base Pay plus 100% of the Average Bonus. C Six (6) months Base Pay plus 50% of the Average Bonus. D Four (4) months Base Pay plus 33% of the Average Bonus. E Three (3) months Base Pay plus 25% of the Average Bonus. F Two (2) months Base Pay plus 15% of the Average Bonus. EX-11 4 COMPUTATION OF PER SHARE EARNINGS
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES EXHIBIT 11.1 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS Year ended February 28(29), (Dollar amounts in thousands, except per share data) 1997 1996 1995 -------------- -------------- -------------- PRIMARY Net earnings $257,358 $195,720 $88,407 ============== ============== ============== Average shares outstanding 103,112 98,352 91,240 Net effect of dilutive stock options - based on the treasury stock method using average market price 2,565 1,918 847 -------------- -------------- -------------- Total average shares 105,677 100,270 92,087 ============== ============== ============== Per share amount $2.44 $1.95 $0.96 ============== ============== ============== FULLY DILUTED Net earnings $257,358 $195,720 $88,407 ============== ============== ============== Average shares outstanding 103,112 98,352 91,240 Net effect of dilutive stock options -- based on the treasury stock method using the year-end market price, if higher than average market price 3,443 1,918 976 -------------- -------------- -------------- Total average shares 106,555 100,270 92,216 ============== ============== ============== Per share amount $2.42 $1.95 $0.96 ============== ============== ==============
EX-12 5 COMP. OF THE RATIO OF EARNINGS TO FIXED CHARGES
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES EXHIBIT 12.1 - COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES (Dollar amounts in thousands) The following table sets forth the ratio of earnings to fixed charges of the Company for the five fiscal years ended February 28, 1997 computed by dividing net fixed charges (interest expense on all debt plus the interest element (one-third) of operating leases) into earnings (income before income taxes and fixed charges). For Fiscal Years Ended February 28(29), ------------ -- ------------- -- ------------ -- ------------- -- ------------- 1997 1996 1995 1994 1993 ------------ ------------- ------------ ------------- ------------- Net earnings $257,358 $195,720 $88,407 $179,460 $140,073 Income tax expense 164,540 130,480 58,938 119,640 93,382 Interest charges 316,705 281,573 205,464 219,898 128,612 Interest portion of rental expense 7,420 6,803 7,379 6,372 4,350 ------------ ------------- ------------ ------------- ------------- Earnings available to cover fixed charges $746,023 $614,576 $360,188 $525,370 $366,417 ============ ============= ============ ============= ============= Fixed charges Interest charges 316,705 281,573 205,464 219,898 128,612 Interest portion of rental expense 7,420 6,803 7,379 6,372 4,350 ------------ ------------- ------------ ------------- ------------- Total fixed charges $324,125 $288,376 $212,843 $226,270 $132,962 ============ ============= ============ ============= ============= Ratio of earnings to fixed charges 2.30 2.13 1.69 2.32 2.76 ============ ============= ============ ============= =============
EX-22 6 SUBSIDIARIES LISTING
EXHIBIT 22.1 COUNTRYWIDE CREDIT INDUSTRIES, INC. SUBSIDIARIES Charter Reinsurance Corporation Vermont Continental Mobile Home Brokerage Corporation California Countrywide Agency, Inc. New York Countrywide Agency of New York, Inc. New York Countrywide Agency of Ohio, Inc. Ohio Countrywide Aircraft Corporation Oregon Countrywide Asset Management Corporation Delaware Countrywide Capital Markets, Inc. California Countrywide Capital I Delaware Countrywide Capital II Delaware Countrywide Financial Services Corporation California Countrywide Financial Services, Inc. California Countrywide Fund Services, Inc. California Countrywide General Agency of Texas, Inc. Texas Countrywide GP, Inc. Nevada Countrywide Home Loans, Inc. New York Countrywide Home Loans of New Mexico, Inc. New Mexico Countrywide Insurance Services of Texas, Inc. Texas Countrywide Investments, Inc. Delaware Countrywide Lending Corporation California Countrywide LP, Inc. Nevada Countrywide Mortgage Pass-Through Corporation Delaware Countrywide Partnership Investments, Inc. California Countrywide Parks I, Inc. Pecan Plantation California Countrywide Parks V, Inc. Paradise Village California Countrywide Parks VI, Inc. Quail Run California Countrywide Parks VII, Inc. Allison Acres California Countrywide Parks VIII, Inc. Northwest Pines California Countrywide Realty Partners Incorporated Delaware Countrywide Securities Corporation California Countrywide Servicing Exchange California Countrywide Tax Services Corporation California CTC Foreclosure Services Corporation California CWABS, Inc. Delaware CWI, Inc. Delaware CWMBS, Inc. Delaware Full Spectrum Lending, Inc. California HomeSafe, Inc. California LandSafe, Inc. Delaware LandSafe Appraisal Services, Inc. California LandSafe Credit, Inc. California LandSafe Finance, Inc. California LandSafe of Pennsylvania, Inc. Pennsylvania LandSafe Real Estate Partnership Services, Inc. California LandSafe Title Agency, Inc. California LandSafe Title Agency of New York, Inc. New York LandSafe Title of California, Inc. Calfornia LandSafe Title of Florida, Inc. Florida LandSafe Title of Illinois, Inc. Illinois LandSafe Title of Indiana, Inc. Indiana LandSafe Title of Maryland, Inc. Maryland LandSafe Title of Michigan, Inc. Michigan LandSafe Title of Texas, Inc. Texas LandSafe Title of Washington, Inc. Washington Residential Mortgage Source of America, Inc. California Second Charter Reinsurance Corporation Vermont The Countrywide Foundation California
EX-24 7 CONSENT OF INDEPENDENT CPA Exhibit 24.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated April 22, 1997, accompanying the consolidated financial statements and schedules included in the Annual Report of Countrywide Credit Industries, Inc. on Form 10-K for the year ended February 28, 1997. We hereby consent to the incorporation by reference of said report in the Registration Statements of Countrywide Credit Industries, Inc. on From S-3 (File No. 333-06473, effective June 21, 1996; File No. 33-59559 and 33-59559-01, effective June 26, 1995 and as amended on April 23, 1997; File No. 333-3835 and 333-3835-01, effective August 2, 1996; File No. 333-14111, 333-14111-01, 333-14111-02, and 333-14111-03, effective December 10, 1996) and on Form S-8 (File No. 33-9231, effective October 20, 1986, as amended on February 19, 1987, and as amended on December 20, 1988; File No. 33-17271, effective December 20, 1987; File No. 33-42625, effective September 6, 1991; File No. 33-56168, effective December 22, 1992; and File No. 33-69498, effective September 28, 1993; as supplemented on September 28, 1996). GRANT THORNTON LLP Los Angeles, California April 22, 1997 EX-27 8 ART.5 FDS 10-K
5 1,000 YEAR FEB-28-1997 FEB-28-1997 18,269 0 1,451,979 0 0 0 292,363 102,259 8,089,292 0 2,549,319 0 0 5,305 1,606,226 8,089,292 0 1,112,462 0 690,564 0 0 0 421,898 164,540 257,358 0 0 0 257,358 2.44 2.42 Total Revenues includes $316,705 of interest expense related to mortgage loan activities.
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