-----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, BWsfD62o0xrWonGVeRUpjhrToSvqSQ3IbPMTpt9vaOPV8pHU6fO3nsiYjVx/+9bg ++2M2ojaDSRiDqA6D02u2g== /in/edgar/work/20000530/0000025191-00-000012/0000025191-00-000012.txt : 20000919 0000025191-00-000012.hdr.sgml : 20000919 ACCESSION NUMBER: 0000025191-00-000012 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20000229 FILED AS OF DATE: 20000530 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COUNTRYWIDE CREDIT INDUSTRIES INC CENTRAL INDEX KEY: 0000025191 STANDARD INDUSTRIAL CLASSIFICATION: [6162 ] IRS NUMBER: 132641992 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12331-01 FILM NUMBER: 646323 BUSINESS ADDRESS: STREET 1: 4500 PARK GRANADA BLVD CITY: CALABASAS STATE: CA ZIP: 91302 BUSINESS PHONE: 8182253000 MAIL ADDRESS: STREET 1: 4500 PARK GRANADA BLVD CITY: CALABASAS STATE: CA ZIP: 91302 10-K 1 0001.txt 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 For the fiscal year ended February 29, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 1-8422 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) 4500 Park Granada, Calabasas, CA 91302 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (818) 225-3000 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. [ ] As of May 17, 2000, there were 114,090,819 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 $3,442,219,153. For the purposes of the foregoing calculation only, all directors and executive officers of the registrant have been deemed affiliates. 25 PART I ITEM 1. BUSINESS A. General Founded in 1969, 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 credit quality first mortgages"). The Company also offers home equity loans both in conjunction with newly produced prime credit quality first 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. See "Business-Capital Markets Segment, Insurance Segment and Other Operations." Unless the context otherwise requires, references to the "Company" herein shall be deemed to refer to the Company and its consolidated subsidiaries. This Annual Report on Form 10-K may contain forward-looking statements that 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," "should" 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, among others, could cause future results to differ materially from historical results or those anticipated: (1) the level of demand for mortgage credit, insurance and securities products, 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 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, closing services, capital markets and insurance operations; and (5) competition within the mortgage banking industry, capital markets and insurance industries. 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; (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 earned from the custodial balances associated with the Company's servicing portfolio. Loan Production Segment The Company originates and purchases conventional mortgage loans, mortgage loans insured by the Federal Housing Administration ("FHA"), mortgage loans partially guaranteed by the Department of Veterans Affairs ("VA"), home equity loans and sub-prime loans. A majority of the conventional loans are conforming loans that 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 $252,700 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 with original balances of up to $2 million. The following table sets forth the number and dollar amount of the Company's prime credit quality first 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 29(28), ----------- ----------------------------------------------------------------------- ------------------------------- ---- 2000 1999 1998 1997 1996 ------------------------------- ---- ------------- -- ------------- --- ----------- -- ------------ -- ------------ Conventional Loans Number of Loans 359,360 529,345 231,595 190,250 191,534 Volume of Loans $45,412.5 $69,026.1 $29,887.5 $22,676.2 $21,883.4 Percent of Total Volume 68.0% 74.3% 61.3% 60.0% 63.3% FHA/VA Loans Number of Loans 131,679 190,654 162,360 143,587 125,127 Volume of Loans $13,535.5 $19,137.5 $15,869.8 $13,657.1 $12,259.3 Percent of Total Volume 20.3% 20.6% 32.5% 36.1% 35.5% Home Equity Loans Number of Loans 93,812 65,607 45,052 20,053 7,986 Volume of Loans $3,635.6 $2,220.5 $1,462.5 $613.2 $220.8 Percent of Total Volume 5.5% 2.4% 3.0% 1.6% 0.6% Sub-prime Loans Number of Loans 43,392 25,433 16,360 9,161 1,941 Volume of Loans $4,156.1 $2,496.4 $1,551.9 $864.3 $220.2 Percent of Total Volume 6.2% 2.7% 3.2% 2.3% 0.6% Total Loans Number of Loans 628,243 811,039 455,367 363,051 326,588 Volume of Loans $66,739.7 $92,880.5 $48,771.7 $37,810.8 $34,583.7 Average Loan Amount $106,000 $115,000 $107,000 $104,000 $106,000 ------------------------------- ---- ------------- -- ------------- --- ----------- -- ------------ -- ------------
The decrease in the number and dollar amount of loans produced in the year ended February 29, 2000 ("Fiscal 2000") was primarily due to a decrease in the overall mortgage market, driven largely by a reduction in refinances caused by rising mortgage rates. In an environment of increasing interest rates, adjustable-rate mortgage loans ("ARMs") generally increase as a percentage of production while refinance activity decreases. For Fiscal 2000, 1999 and 1998, ARMs represented 14%, 5% and 23%, respectively, of the Company's total volume of mortgage loans produced. In addition, refinances comprised approximately 35%, 57% and 41%, respectively, of the Company's total volume of mortgage loans produced. For Fiscal 2000, 1999 and 1998 jumbo loans represented 22%, 23% and 20%, respectively, of the Company's total volume of mortgage loans produced. The Company produces mortgage loans through three separate divisions of Countrywide Home Loans and through Full Spectrum Lending, Inc. (the "Divisions). Consumer Markets Division The Company's consumer markets division (the "Consumer Markets Division") originates primarily prime credit quality first mortgage and home equity loans through referrals from real estate agents and direct contact with consumers through its nationwide network of retail branch offices and its electronic commerce-based group known as the Home Finance Network. For calendar 1999, the Consumer Markets Division was ranked as the third largest retail lender, in terms of volume, among residential mortgage lenders nationwide. During Fiscal 2000, the Consumer Markets Division added 31 retail branch offices, bringing the total such offices to 446 located in 47 states and the District of Columbia. Each of the Consumer Markets Division's branch offices is typically staffed by four to five employees. They are connected to the Company's central office by a computer network. The Company operates three Home Finance Network centers that solicit potential borrowers and receive contacts from potential borrowers through electronic media. Loan counselors employed in the Home Finance Network centers provide information and process loan applications, which are then made electronically available to branch offices for processing and funding. Business from home construction companies is solicited through a nationwide network of builder account managers. Additionally, business is solicited through advertising, affinity relationships, participation by branch management in local real estate related business functions, and extensive use of direct mailings to borrowers and real estate brokers. The Company believes it offers a superior alternative to its customers through low cost loans, a broad product line which includes one-stop choice, direct access to the lender using the customer's preferred channel (a local branch, telephonically or through the Internet), and local underwriting authority. Consumer Markets Division Branch Managers are not paid a commission on individual loan production; however, they are paid a bonus based on various factors, including branch profitability and loan quality. The Company believes that applying this basic 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 to monitor compliance with the Company's underwriting criteria. The audits are performed by branch management and independent quality control personnel. The following table sets forth the number and dollar amount of the Consumer Markets Division's prime credit quality first 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 29(28), ------------------------------- -- ------------- --- ------------ -- ------------ --- ------------ -- ------------- 2000 1999 1998 1997 1996 ------------------------------- -- ------------- --- ------------ -- ------------ --- ------------ -- ------------- Conventional Loans Number of Loans 102,665 151,845 67,850 43,261 47,260 Volume of Loans $13,156.0 $18,860.2 $8,377.7 $5,145.3 $5,271.8 Percent of Total Volume 65.9% 66.2% 62.8% 63.7% 70.7% FHA/VA Loans Number of Loans 49,247 87,290 43,238 27,746 22,829 Volume of Loans $4,998.2 $8,687.0 $4,114.0 $2,514.3 $2,025.4 Percent of Total Volume 25.0% 30.4% 30.8% 31.2% 27.1% Home Equity Loans Number of Loans 61,256 31,725 27,198 14,028 6,000 Volume of Loans $1,793.3 $947.8 $784.3 $384.7 $160.9 Percent of Total Volume 9.0% 3.3% 5.9% 4.8% 2.2% Sub-prime Loans Number of Loans 208 130 737 303 - Volume of Loans $19.6 $13.1 $62.5 $27.0 - Percent of Total Volume 0.1% 0.1% 0.5% 0.3% - Total Loans Number of Loans 213,376 270,990 139,023 85,338 76,089 Volume of Loans $19,967.1 $28,508.1 $13,338.5 $8,071.3 $7,458.1 Average Loan Amount $94,000 $105,000 $96,000 $95,000 $98,000 ------------------------------- -- ------------- --- ------------ -- ------------ --- ------------ -- -------------
Wholesale Division The Company's wholesale division (the "Wholesale Division") produces prime credit quality first mortgage, home equity and sub-prime loans through mortgage loan brokers and other financial intermediaries. As of February 29, 2000, the Wholesale Division operated 58 loan centers, 10 regional support centers and three sub-prime underwriting centers in various parts of the United States. Each branch is typically staffed by 10-15 employees, comprised of sales and operational personnel. Business is solicited through a broad sales force, the Internet, advertising and participation of branch management and sales personnel in trade associations. Additionally, the Wholesale Division has sales personnel dedicated to serving large builders who have their own mortgage company. Wholesale Division Branch Managers are not paid a commission on individual loan production; however, they are paid a bonus on various factors, including branch profitability and loan quality. Wholesale Division sales personnel are paid a bonus or commission based on loan production. For calendar 1999, the Wholesale Division was ranked as the top wholesale originator, in terms of volume, among residential mortgage lenders nationwide. The Company attributes its success to providing a high level of localized service to loan brokers, a competitive and innovative product array and technology. The Wholesale Division's website, "Countrywide Wholesale Business Channel" ("CWBC"), offers loan origination capability coupled with automated underwriting that will allow a decision to be made within minutes after an application is submitted through the website. Prime credit quality first mortgage loans are approved on the local authority of the Wholesale Division's loan underwriters staffed within each loan center. 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. The Wholesale Division has approximately 15,000 approved mortgage brokers and other third-party originators. All Wholesale Division business partners are subject to ongoing quality control reviews. The following table sets forth the number and dollar amount of the Wholesale Division's prime credit quality first 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 29(28), ------------------------------- --- ------------ -- ------------- -- ------------ -- ------------ -- ----------- 2000 1999 1998 1997 1996 ------------------------------- --- ------------ -- ------------- -- ------------ -- ------------ -- ----------- Conventional Loans Number of Loans 111,935 187,852 87,391 50,570 59,670 Volume of Loans $14,504.6 $25,493.4 $11,860.9 $6,187.8 $6,766.9 Percent of Total Volume 75.9% 82.5% 75.4% 73.4% 84.0% FHA/VA Loans Number of Loans 21,029 33,282 23,641 12,505 10,448 Volume of Loans $2,206.9 $3,436.1 $2,362.3 $1,190.0 $1,016.2 Percent of Total Volume 11.5% 11.1% 15.0% 14.1% 12.6% Home Equity Loans Number of Loans 17,651 18,172 11,073 6,017 1,937 Volume of Loans $799.4 $687.2 $419.4 $227.7 $57.5 Percent of Total Volume 4.2% 2.2% 2.7% 2.7% 0.7% Sub-prime Loans Number of Loans 16,820 13,274 11,721 8,568 1,941 Volume of Loans $1,605.5 $1,300.5 $1,088.1 $823.9 $220.2 Percent of Total Volume 8.4% 4.2% 6.9% 9.8% 2.7% Total Loans Number of Loans 167,435 252,580 133,826 77,660 73,996 Volume of Loans $19,116.4 $30,917.2 $15,730.7 $8,429.4 $8,060.8 Average Loan Amount $114,000 $122,000 $118,000 $109,000 $109,000 ------------------------------- --- ------------ -- ------------- -- ------------ -- ------------ -- -----------
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 ("correspondents"). For calendar 1999, the Correspondent Division was ranked as the third largest correspondent lender, in terms of volume, among residential mortgage lenders nationwide. The Company's correspondent offices are located in Simi Valley, California; Dallas, Texas and Pittsburgh, Pennsylvania. The Correspondent Division has approximately 1,500 approved financial intermediaries serving all 50 states, District of Columbia and Guam. Financial intermediaries are approved after a review of the reputation, financial strength and mortgage lending expertise of such institutions, including a review of their references and financial statements. In addition, all correspondents are reaffirmed annually based upon a review of their current audited financial statements and their historical production volumes and quality. The Company attributes its success to providing superior service in the form of a broad product line and advanced technological systems. The Correspondent Division's website, "Platinum Lender Access" ("Platinum"), offers a reliable and efficient way for approved correspondents to register loans, lock in best effort commitments and get immediate approval for commitments through the Internet. In addition, the website also offers a quick access to the Company's other ancillary services. The Correspondent Division has in place extensive compliance monitoring systems and procedures. These procedures include prior purchase underwriting reviews, reviews performed by contract underwriters whose work CHL is indemnified against, fraud detection, re-verification of employment, income and deposits and other steps as deemed appropriate. In addition, quality control personnel review loans for compliance with the Company's underwriting criteria. To provide additional protection against losses, all correspondent contracts provide the Company with recourse in the event of non-compliance, fraud or misrepresentation in the origination process. The following table sets forth the number and dollar amount of the Correspondent Division's prime credit quality first mortgage, 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 29(28), ------------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- ------------- 2000 1999 1998 1997 1996 ------------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- ------------- Conventional Loans Number of Loans 144,760 189,648 76,354 96,419 84,604 Volume of Loans $17,751.9 $24,672.5 $9,648.9 $11,343.1 $9,844.7 Percent of Total Volume 67.7% 75.3% 49.3% 53.2% 51.7% FHA/VA Loans Number of Loans 61,403 70,082 95,481 103,336 91,850 Volume of Loans $6,330.4 $7,014.4 $9,393.5 $9,952.8 $9,217.7 Percent of Total Volume 24.1% 21.4% 48.0% 46.7% 48.3% Home Equity Loans Number of Loans 14,709 15,597 6,635 8 49 Volume of Loans $1,035.8 $581.0 $252.4 $0.8 $2.4 Percent of Total Volume 3.9% 1.8% 1.3% 0.0% 0.0% Sub-prime Loans Number of Loans 11,418 4,229 2,457 290 - Volume of Loans $1,121.5 $479.9 $267.5 $13.4 - Percent of Total Volume 4.3% 1.5% 1.4% 0.1% - Total Loans Number of Loans 232,290 279,556 180,927 200,053 176,503 Volume of Loans $26,239.6 $32,747.8 $19,562.3 $21,310.1 $19,064.8 Average Loan Amount $113,000 $117,000 $108,000 $107,000 $108,000 ------------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- -------------
Full Spectrum Lending, Inc. Full Spectrum Lending, Inc. ("FSLI"), a wholly-owned subsidiary of the Company, which commenced operations on September 1, 1997, originates sub-prime first mortgages and home equity loans. FSLI operates a nationwide network of 47 retail branch offices located in 27 states in addition to three national sales centers. Each of FSLI's branch offices is typically staffed by five to seven employees. Business is obtained primarily through direct mailings to borrowers, outbound telemarketing, referrals from other Divisions of the Company and other business partners. FSLI Branch Managers are not paid a commission on individual loan production; however, they are paid a bonus based on various factors, including overall branch loan production, loan agent productivity, branch profitability and loan quality. FSLI sales personnel are paid a bonus based on loan production. Each loan approved by FSLI is reviewed by its centralized underwriting unit to ensure that standardized underwriting guidelines are met. In addition, FSLI performs quality control audits of the origination process on a continuous basis. The following table sets forth the number and dollar amount of FSLI's sub-prime home equity and first mortgage production for the periods indicated. ------------------------------- ------------------------------------------------------------------------------- -- Summary of the Full Spectrum Lending's (Dollar amounts in millions, Home Equity and Sub-prime Loan Production Except average loan amount) Year Ended February 29(28), ------------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- ------------- 2000 1999 1998 1997 1996 ------------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- ------------- Home Equity Loans Number of Loans 196 113 146 - - Volume of Loans $7.1 $4.5 $6.4 - - Percent of Total Volume 0.5% 0.6% 4.6% - - Sub-prime Loans Number of Loans 14,946 7,800 1,445 - - Volume of Loans $1,409.5 $702.9 $133.8 - - Percent of Total Volume 99.5% 99.4% 95.4% - - Total Loans Number of Loans 15,142 7,913 1,591 - - Volume of Loans $1,416.6 $707.4 $140.2 - - Average Loan Amount $94,000 $89,000 $88,000 - - ------------------------------- - -------------- -- ------------ --- ------------ -- ------------ -- -------------
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-income, moderate-income and designated minority borrowers. These programs offer more flexible underwriting guidelines (consistent with guidelines adopted by Fannie Mae and Freddie Mac) than historical industry standards, thereby enabling more people to qualify for home loans. These more flexible guidelines lower down payments, income and cash reserve requirements and are more liberal in areas such as credit and employment history. House America(R) is the Company's affordable home loan program for low- and moderate-income borrowers. It offers loans that are eligible for purchase by Fannie Mae and Freddie Mac. During Fiscal 2000 and 1999, the Company produced approximately $221 million and $312 million, respectively, of mortgage loans under this program. The decline in House America production from Fiscal 1999 to Fiscal 2000 was the result of an improvement in the relative attractiveness of other loan products as an alternative means of providing home ownership to low- and moderate-income borrowers. House America personnel work with all of the Company's production Divisions to help properly implement the flexible underwriting guidelines for House America loan programs. A selection of applications from low-income, moderate-income and designated minority borrowers that are initially recommended for denial within the Company's Consumer Markets Division are reviewed at a second level to insure that denial is appropriate. In addition, an integral part of the program is the House America Counseling Center, a free educational service, which can provide consumers with a home buyer's educational program, pre-qualify them for a loan or provide a customized budget plan to help them obtain their goal of home ownership. Many of the credit counselors are bilingual. They work with consumers providing counseling for up to one year. 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 pre-qualifications and distribute credit counseling and homebuyer education videos and workbooks. The Company's affordable housing outreach also includes participation in 195 local mortgage revenue bond programs that are available for first-time homebuyers. Federal law allows state and local government agencies to sell tax-exempt bonds to purchase mortgages securing loans made to first-time, low-income home buyers. These programs provide mortgages with below-market rates. The Company is approved to participate in nearly 500 Community Seconds Programs for first-time homebuyers and low- and moderate-income consumers. These programs are offered by city agencies, municipalities and non-profits to assist with downpayment and closing costs. The use of more flexible underwriting guidelines may carry a risk of increased loan defaults. However, because the loans in the Company's portfolio originated under the House America program are serviced on a non-recourse basis, the exposure to credit loss resulting from increased loan defaults is substantially limited. Loan Underwriting The Company's guidelines for underwriting FHA-insured and VA-guaranteed loans comply with the criteria established by those entities. 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 having a loan to value ratio greater than 80% at origination, which are originated or purchased by the Company, are covered by primary mortgage insurance. The insurance may be paid for by the borrower or 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 borrowers. These programs may allow for more flexible underwriting criteria than historical industry standards. See "Business -Fair Lending Programs". The Company determines loan approval by using the following general underwriting criteria to determine if a conventional loan is a prime credit quality first mortgage loan application. Borrowers who do not qualify for a prime credit quality first mortgage may qualify for a sub-prime loan. See Sub-prime Underwriting section below. Employment and Income Applicants must exhibit the ability to generate income, on a regular ongoing basis, in an amount sufficient to pay the mortgage payment and any other debts the applicant may have. The following sources of income may be included when determining the applicant's ability: salary, wages, bonus, overtime, commissions, retirement benefits, notes receivable, interest, dividends, unemployment benefits, rental income and other verifiable sources of income. The type and level of income verification and supporting documentation required may vary based upon the type of loan program selected by the applicant. For salaried applicants, evidence of employment and income is obtained through written verification of employment with the current and prior employer(s) or by obtaining a recent pay stub and W-2 forms. Self-employed applicants are generally required to provide income tax returns, financial statements or other documentation to verify income. Debt-to-Income Ratios Generally, an applicant's monthly housing expense (loan payment, real estate taxes, hazard insurance and homeowner association dues, if applicable) should be no greater than 25% to 28% of their monthly gross income. Total fixed monthly obligations (housing expense plus other obligations such as car loans, credit card payments, etc.) generally should be no greater than 33% to 36% of monthly gross income. Other areas of financial strength, such as equity in the property, large cash reserves or a history of meeting 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 favorably. Items such as slow payment records, legal actions, judgments, bankruptcy, liens, foreclosure or garnishments are viewed unfavorably. In some instances, extenuating circumstances beyond the applicant's control, may mitigate the effect of such unfavorable items on the credit decision. Property The property's market value is assessed to ensure that the property provides adequate collateral for the loan. Generally, properties are appraised by licensed real estate appraisers. Automated or streamlined appraisal systems may also be used to confirm property values on some loan programs. Maximum Indebtedness to Appraised Value Generally, the maximum amount the Company will lend is 95% of the property value (appraised value or purchase price, which ever is less). However, under certain loan programs this percentage may be exceeded. Loan amounts in excess of 80% of the appraised value generally require primary mortgage insurance to protect against foreclosure loss. Funds for Closing Generally, applicants are required to have sufficient funds of their own to meet the down payment requirement. A portion of the funds may come from a gift or an unsecured loan from a municipality or a non-profit organization. Certain programs may require the applicant to also have cash reserves after closing. Sub-prime Underwriting Generally, the same information is reviewed in the sub-prime underwriting process as in the prime credit quality first mortgage loan underwriting process. Borrowers who qualify generally have payment histories and debt-to-income ratios which would not satisfy Freddie Mac and Fannie Mae underwriting guidelines and may have a record of major derogatory credit items such as outstanding judgements or prior bankruptcies. Countrywide's sub-prime mortgage loan underwriting guidelines establish the maximum permitted loan-to-value ratio for each loan type based upon these and other risk factors, with more risk factors resulting in lower loan-to-value ratios. On a case by case basis, the Company may determine that, based upon compensating factors, a prospective borrower who does not strictly qualify under the underwriting risk category guidelines warrants an underwriting exception. Compensating factors may include low loan-to value ratio, low debt-to-income ratios, stable employment and time in the same residence. Geographic Distribution The following table sets forth the geographic distribution of the Company's prime credit quality first mortgage, home equity and sub-prime loan production for Fiscal 2000. ------------------------------------------------------------------------------------------------------- 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 134,710 $14,428.6 21.6% Michigan 38,429 3,700.9 5.5% Texas 38,137 3,699.8 5.5% Florida 36,348 3,219.9 4.8% Colorado 24,557 3,048.8 4.6% Illinois 24,619 2,694.8 4.0% Arizona 22,423 2,370.6 3.6% Washington 18,358 2,195.6 3.3% Massachusetts 14,161 1,961.0 2.9% Georgia 17,201 1,845.7 2.8% Ohio 19,875 1,797.3 2.7% New Jersey 13,673 1,623.9 2.4% Pennsylvania 17,742 1,561.1 2.3% New York 12,194 1,521.9 2.3% Virginia 12,837 1,407.2 2.1% Maryland 12,712 1,378.1 2.1% Others (1) 170,267 18,284.5 27.5% ------------------ ----------------- ----------------- 628,243 $66,739.7 100.0% ================== ================= ================= ----- ----------------------------- -- ------------------ -- ----------------- -- ----------------- --- (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 Fiscal 2000, 1999 and 1998 was 22%, 25% and 26%, respectively. Loan production within California is geographically dispersed, which minimizes dependence on any individual local economy. As of February 29, 2000, 83% of the Consumer Markets Division branch offices, Wholesale Division loan centers and FSLI branches were located outside of California.
The following table sets forth the distribution by county of the Company's California loan production for Fiscal 2000. ------------------------------------------------------------------------------------------------------- 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 27,173 $3,803.9 26.4% Orange 11,261 1,619.3 11.2% San Diego 9,202 1,287.1 8.9% Riverside 7,111 776.6 5.4% Santa Clara 4,878 771.1 5.3% Others (1) 75,085 6,170.6 42.8% ------------------ ----------------- ------------------ 134,710 $14,428.6 100.0% ================== ================= ================== ----- ----------------------------- -- ------------------ -- ----------------- -- ------------------ -- (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 substantially all loans that it originates or purchases. Substantially all prime credit quality first 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 below. Conforming conventional loans are generally pooled by the Company and exchanged for securities guaranteed by Fannie Mae or Freddie Mac. These securities are then sold to national or regional broker-dealers. Substantially all conventional loans securitized through Fannie Mae or Freddie Mac are sold, subject to certain representations and warranties on the part of the Company, on a non-recourse basis, whereby foreclosure losses are generally a liability of Fannie Mae and Freddie Mac and not the Company. The Company securitizes substantially all of its FHA-insured and VA-guaranteed mortgage loans through the Government National Mortgage Association ("Ginnie Mae"), Fannie Mae, or Freddie Mac. 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). For Fiscal 2000, 1999 and 1998, the aggregate loss experience of the Company on VA loans in excess of the VA guaranty was approximately $8.5 million, $13.2 million and $18.5 million, respectively. The reduction in losses in Fiscal 2000 was due mainly to improved property values nationally. To guarantee timely and full payment of principal and interest on Fannie Mae, Freddie Mac and Ginnie Mae securities and to transfer the credit risk of the loans in the servicing portfolio sold to these entities the Company pays guarantee fees to these agencies. The Company sells its non-conforming conventional loan production on a non-recourse basis. These loans can be sold either on a whole-loan basis or in the form of "private-label" securities which generally have the benefit of some form of credit enhancement, such as insurance, letters of credit, payment guarantees or senior/subordinated structures. Home equity and sub-prime loans may be sold on a whole-loan basis or in the form of securities backed by pools of these loans. In connection with the securitization of its home equity and sub-prime loans, the Company retains a subordinated residual interest. The Company has exposure to credit losses on the underlying loans to the extent of this residual interest. As of February 29, 2000, the Company had investments in such subordinated residual interests amounting to $570.4 million. In connection with the sale and securitization of mortgage loans, the Company makes customary representations and warranties relating to, among other things, compliance with laws and the underwriting rules of the buyer or guarantor. In the event of a breach of such representations and warranties, the Company may be required to repurchase a mortgage loan and any subsequent foreclosure loss on the mortgage loan will be borne by the Company. In order to mitigate the risk that a change in interest rates will result in a decline in the value of the Company's current loan commitments the ("Committed Pipeline") or closed loans and mortgage backed securities held in inventory (the "Inventory"), the Company enters into hedging transactions. The Company's Inventory is hedged with forward contracts for the sale of loans and net sales of mortgage-backed securities ("MBS"), including options to sell MBS where the Company can exercise the option on or prior to the anticipated settlement date of the MBS. Due to the variability of closings in the Company's Committed Pipeline, which is driven primarily by interest rates, the Company's hedging policies require that substantially all of the Committed Pipeline be hedged with a combination of options for the purchase and sale of MBS and treasury futures and forward contracts for the sale of MBS. The correlation between the Inventory and Committed Pipeline and the hedge instruments is very high due to their similarity. The Company is generally not exposed to significant losses nor will it realize significant gains related to its Inventory and Committed Pipeline due to changes in interest rates, net of gains or losses on associated hedge positions. However, the Company is exposed to the risk that the actual closings in the Committed Pipeline may deviate from the estimated closings for a given change in interest rates. Although interest rates are the primary determinant, the actual loan closings from the Committed Pipeline are influenced by many factors, including the composition of the Committed Pipeline and remaining commitment periods. The Company's estimated closings are based on historical data of loan closings as influenced by recent developments. Loan Servicing Segment The Company services on a non-recourse basis substantially all of the mortgage loans that it originates or purchases pursuant to servicing agreements with Fannie Mae, Freddie Mac, Ginnie Mae and various private and public investors. In addition, the Company periodically purchases bulk servicing contracts, also on a non-recourse basis, to service single-family residential mortgage loans and home equity lines of credit originated by other lenders. Servicing contracts acquired through bulk purchases accounted for 8% of the Company's mortgage servicing portfolio as of February 29, 2000. Servicing mortgage loans includes collecting and remitting loan payments, responding to borrower inquires, 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% annually on the declining principal balances of the loans. The Company strives to balance its loan servicing and loan production segments, which are counter-cyclical in nature. In general, earnings from the loan servicing segment increase as interest rates increase and decline as interest rates decline, which is normally the opposite of the loan origination segment. Generally, in an environment of increasing interest rates, the rate of current and projected future loan prepayments decreases, resulting in a decreased rate of amortization of mortgage servicing rights ("MSRs"). Conversely, in an environment of declining interest rates, the rate of current and projected future prepayments increases, resulting in an increased rate of amortization and potential impairment of MSRs. To further mitigate the impact of MSR impairment on earnings, the Company has devoted substantial management expertise and resources to the development and maintenance of a financial hedge (the "Servicing Hedge"). To maximize the value of its investment in MSRs, the Company has endeavored to cross-sell various services and financial products to its portfolio of over 2.4 million borrowers. In particular, the Company has been able to cross-sell homeowners, fire, flood, earthquake, auto, home warranty, life and disability insurance, as well as annuities, through its insurance agency, Countrywide Insurance Services ("CIS"). CIS is a national, full-service, multi-line insurance agency, with over four hundred thousand policies currently in force with both portfolio and non-portfolio customers. In addition, through telemarketing and direct mail solicitations, the Company has offered home equity lines of credit to its existing borrowers. As of February 29, 2000, the Company had 109,235 home equity lines in place, up from 59,710 as of February 28, 1999. The Company has vertically integrated several loan-servicing functions that are commonly out-sourced by other loan servicers. These functions include monitoring and processing property tax bills, tracking and ensuring adequate insurance to protect the investor's interest in the property securing each loan, trustee services, real estate owned ("REO") management and liquidation services, and property field inspection services. The Company believes the integration of these functions give it a competitive edge by lowering costs and enabling the Company to provide an enhanced overall level of service. Through a separate subsidiary, the Company earns a portion of the primary mortgage insurance premiums associated with loans in the servicing portfolio by providing a layer of non-catastrophic reinsurance coverage to the primary mortgage insurance companies. The Company's servicing portfolio is subject to reduction by scheduled principal payments, prepayments and foreclosures. In addition, the Company has elected in the past to sell a portion of its MSRs as well as newly originated loans on a servicing-released basis, and may do so in the future. Nonetheless, the Company's overall strategy is to build and retain its servicing portfolio. Loans are serviced from facilities located in Simi Valley, California and Plano, Texas (see "Properties"). The Company has developed systems and processes that enable it to service mortgage loans efficiently and therefore enhance earnings from its investment in MSRs. Some of these systems and processes are highlighted in the following paragraphs. All data elements pertaining to each individual loan are transferred from the various loan origination systems 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 borrower's account, thus eliminating the need to refer to paper files and shortening the average time per 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 database. Having identified the borrower, 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. The Company also features an Internet site for existing borrowers wherein the borrower can obtain current account status, history, answers to frequently asked questions and a dictionary to help the borrower understand industry terminology. The Company issues monthly statements to its borrowers. This allows the Company to provide personalized home loan information in a more timely manner while simultaneously providing a vehicle for the Company to market other products. Customers have the option of receiving a paper copy or an electronic copy of their monthly statement. For those customers who elect to receive an electronic statement, a notification is sent to the customer via e-mail when the statement is available through the Company's Website, saving the Company the cost of producing and mailing the statement while still marketing other products to the customer and providing the customer with monthly information. The Company's high speed payment processing equipment enables the Company to deposit virtually all checks on the day of receipt, thereby maximizing cash availability. The collection department utilizes its collection management system in conjunction with its predictive dialing system to track and maximize 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 that 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 majority of the Company's insurance tracking and disbursements is processed automatically through MortgageScan which makes use of Optical Character Recognition for forms and interacts with the servicing system. Data is extracted from insurance documents and converted to an electronic file that is processed through a rules engine that automatically requests payments, prepares correspondence and updates the host servicing system. The following table sets forth certain information regarding CHL'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 29(28), ------------------------------------ -- ------------------------------------------------------------------------- Composition of Servicing Portfolio 2000 1999 1998 1997 1996 ----------- -- ------------ -- ----------- -- ----------- -- ------------ At Period End: FHA-Insured Mortgage Loans $ 43,057.1 $ 38,707.0 $ 37,241.3 $ 30,686.3 $ 23,206.5 VA-Guaranteed Mortgage Loans 15,980.2 15,457.7 14,878.7 13,446.4 10,686.2 Conventional Mortgage Loans 178,754.6 155,999.4 127,344.0 112,685.4 102,417.0 Home Equity Loans 5,229.2 2,806.3 1,656.5 689.9 204.5 Sub-prime Loans 7,160.7 2,502.3 1,744.2 1,048.9 289.1 ----------- ------------ ----------- ----------- ------------ Total Servicing Portfolio $250,181.8 $215,472.7 $182,864.7 $158,556.9 $136,803.3 =========== ============ =========== =========== ============ Beginning Servicing Portfolio $215,472.7 $182,864.7 $158,556.9 $136,803.3 $113,071.3 Add: Loan Production 66,739.7 92,880.5 48,771.7 37,810.8 34,583.7 Bulk Servicing and Subservicing 2,658.1 6,644.6 3,761.6 2,808.1 6,428.5 Acquired Less: Servicing Transferred (1) (255.2) (7,398.6) (110.6) (70.8) (53.5) Runoff (2) (34,433.5) (59,518.5) (28,114.9) (18,794.5) (17,226.7) ----------- ------------ ----------- ----------- ------------ Ending Servicing Portfolio $250,181.8 $215,472.7 $182,864.7 $158,556.9 $136,803.3 =========== ============ =========== =========== ============ Delinquent Mortgage Loans and Pending Foreclosures at Period End (3): 30 days 2.74% 2.52% 2.68% 2.26% 2.13% 60 days 0.67% 0.53% 0.58% 0.52% 0.48% 90 days or more 0.56% 0.50% 0.65% 0.66% 0.59% ----------- ----------- ------------ ----------- ------------ Total Delinquencies 3.97% 3.55% 3.91% 3.44% 3.20% =========== =========== ============ =========== ============ Foreclosures Pending 0.39% 0.31% 0.45% 0.71% 0.49% =========== =========== ============ =========== ============ ------------------------------------ -- ----------- -- ----------- -- ------------ -- ----------- -- ------------ (1) When servicing rights are sold from the servicing portfolio, 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) Expressed as a percentage of the total number of loans serviced excluding subserviced loans.
At February 29, 2000, the CHL's servicing portfolio of single-family mortgage loans was stratified by interest rate as follows. ---- -------------------------- -- -------------------------------------------------------------------------------- (Dollar amounts in Total Portfolio at February 29, 2000 millions) ---- -------------------------- -- -------------------------------------------------------------------------------- Weighted Interest Principal Percent Average MSR Rate Balance of Total Maturity (Years) Balance ---- -------------------------- -- --------------- -- -------------- -- --------------------- -- --------------- -- 7% and under $ 84,670.4 33.8% 24.4 $1,781.3 7.01-8% 123,248.3 49.3% 25.9 2,735.1 8.01-9% 31,797.8 12.7% 26.3 689.7 9.01-10% 5,648.5 2.3% 25.2 154.4 over 10% 4,816.8 1.9% 23.8 36.0 --------------- -------------- --------------------- --------------- $250,181.8 100.0% 25.4 $5,396.5 =============== ============== ===================== =============== ---- -------------------------- -- --------------- -- -------------- -- --------------------- -- --------------- -- The weighted average interest rate of the single-family mortgage loans in the Company's servicing portfolio as of February 29(28), 2000 and 1999 was 7.5%. As of February 29, 2000, 89.9% of the loans in the servicing portfolio bore interest at fixed rates and 10.1% bore interest at adjustable rates. The weighted average net service fee of the loans in the portfolio was .383% as of February 29, 2000. The weighted average interest rate of the fixed-rate loans in the servicing portfolio was 7.5%.
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 29, 2000. ----------------------------------------------------------- -- ----------------------------- -------------------- Percentage of Principal Balance Serviced ----------------------------------------------------------- -- ----------------------------- -------------------- California 27.9% Texas 5.3% Florida 4.9% Michigan 4.0% Illinois 3.8% Colorado 3.7% Washington 3.4% Arizona 3.0% Ohio 2.9% New York 2.7% Georgia 2.7% Massachusetts 2.6% Virginia 2.5% New Jersey 2.4% Maryland 2.3% Pennsylvania 2.2% Other (1) 23.7% -------------- 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 its mortgage loan inventory and its investment in MSRs. To meet these needs, the Company currently utilizes commercial paper supported by revolving credit facilities, medium-term notes, senior debt, MBS repurchase agreements, subordinated notes, pre-sale funding facilities, redeemable capital trust pass-through securities, securitization of servicing fee income and cash flow from operations. The Company estimates that it had available committed and uncommitted credit facilities aggregating approximately $9.6 billion as of February 29, 2000. 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 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 "Note F" and "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. 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. Information Technology The Company employs both proprietary and nonproprietary technology throughout the enterprise and continually searches for new and better ways of both providing services to its customers and of maximizing the efficiency of its operations. Technology is viewed as part of the Company's competitive advantage. By implementing highly integrated systems into its lines of business, the Company believes it has been successful in the rapid start-up of new business enterprises. The Company views technology as a key driver to maintaining world-class productivity levels in its operations. The deployment of Internet technologies, integrated client server systems, as well as advanced messaging systems such as Lotus Notes, interactive voice response and call management systems all represent examples where management believes technology has played a role in improving or maintaining productivity and efficiency. 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 which in turn provides improved efficiencies in the Company's overall business processes and in the level of customer service (improved pricing, approval and funding speed) the Company is able to provide to its various constituencies. Other proprietary systems currently in use by the production Divisions are the EDGE (primarily used by the Consumer Markets and Wholesale Divisions and FLSI) and GEMS (primarily used by the Correspondent Division) systems, which are loan processing 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; and (v) generally minimizing manual data input. "AdvantEdge" is an application being developed by the Company. AdvantEdge is an object oriented contact management and loan origination system, which can be used separately or integrated with EDGE or websites. AdvantEdge was designed primarily to assist the telemarketing unit and retail branch network in generating more sales. AdvantEdge provides the telemarketing unit and the retail branch network the ability to (i) manage customer contact efficiently and effectively; (ii) pre-qualify a prospective applicant; (iii) provide "what if" scenarios to help find the appropriate loan product; (iv) obtain on-line price quotes; (v) take applications; (vi) request credit reports electronically through LandSafe, Inc.; (vii) issue a LOCK 'N SHOP (R) certificate; and (viii) transmit a loan pre-application to the appropriate production units for processing. Additionally, the loan origination modules of AdvantEdge provide disclosure document generation capability and access to CLUESTM. Once a loan is ready to be funded, the loan information is seamlessly transferred to EDGE, resulting in time saved and enhanced customer service. The Company believes that AdvantEdge will allow the retail branch network to convert more leads, increase business partner referrals and cross-sell additional products (e.g. mortgage insurance, property insurance, etc.) throughout the loan process. By maintaining a database of customer contact information, real estate agents, individual customers, loan brokers, builders and other business partners, the Company believes it will have the ability to maximize the customer relationship. The Company is a dominant e-commerce home lender, generating 18% of total production through electronic channels in Fiscal 2000 and Fiscal 1999. Electronic originations include our Retail Home Finance Center, which consists of retail internet and telemarketing fundings, as well as third party fundings utilizing the Company's CWBC and Plantium internet sites. The Company believes that the internet provides a unique medium to deliver mortgage services at costs significantly less than the cost incurred in conventional marketing methods. The Company's goal is to allow the customer (direct consumer or business partner) to be able to utilize the Company's various websites in an integrated fashion with its existing infrastructure to provide customers with competitive pricing as well as convenient and efficient services. The Company's websites will continue to evolve in depth and breadth as the Company develops online partnerships. The Company also developed customized, interactive web pages for each of its 400+ retail branches to leverage its local knowledge and expertise to the consumer. The Company believes this strategy provides it with a distinct advantage over other online competitors. A component of the Company's strategy is to integrate services required in the loan process (title, appraisal, home inspection and credit reporting) and offered through its LandSafe subsidiary. This will provide a "one-stop" solution to the individual consumer and to the Company's business partners. The Company's websites links are: (1) "Home Financing - Mortgage and Equity Lines" which provides potential customers with the ability to pre-qualify for a loan, calculate maximum affordable home price, loan amount and monthly payments, review loan products and current rates, submit loan applications on-line, check application status on-line, determine if refinancing is advantageous and obtain answers to frequently asked questions; (2) "Current Customer Benefits" which provides current customers the ability to review their current loan status, account history, insurance information, financial services and subscription services online. This link also includes information on the "Mortgage Pay on the Web" service, an internally developed product that allows the customer to make mortgage payments online; (3) "Insurance Solutions " provides insurance information concerning homeowners, automobile, home warranty, life, disability insurance and annuities. This link provides calculators to help customers determine coverage amounts and premiums including instant on-line quotes. In addition, it provides customers the ability to contact our customer service department to change existing coverage, review terms, conditions and status of existing policies, file a claim, make a complaint, renew an existing policy, make changes to method of billing and update or change personal information; (4) "Corporate Information" which contains information about the Company background, description of products and services offered, a president's letter, available career opportunities, press releases, quarterly earnings and performance report, annual reports and other investor information. The Internet sites that enhance business partner relationships are within the "Countrywide's Partners" site which include the "REALTOR(R) Advantage", "Builders Advantage", CWBC and Platinum sites. The REALTOR (R) Advantage allows realtors to register in the Company's online resource directory, obtain direct access to local branches for up-front approvals, obtain a LOCK N' SHOP (R) and LOCK N' SELL (R) to guarantee rates and offers real estate agents value-added tools for their clients. Builders Advantage is a site that allows builders to register with Countrywide, learn about the Company's builder advantage program and builder services and links to builder industry web sites. CWBC site allows registered brokers to (i) float or lock loans 24 hours, 7 days a week through e-Pipeline; (ii) obtain up-to-the-minute pricing; (iii) customize Broker's rate sheet using CHL's pricing; (iv) track status of all loans in the pipeline (CWBC and branch generated loans); (v) download marketing materials and loan submission forms; (vi) access the Company's ancillary services (appraisal, credit reporting, flood and homeowners insurance); (vii) benefit from the website-creation services offered by the Company through Mortgage.com; and (vii) link to other industry-related sites. Platinum, a site similar to CWBC, offers approved correspondent sellers (i) ability to register loans and lock in commitments; (ii) access to CLUESTM and Freddie Mac Loan Prospector underwriting decision services; (iii) access to the Company's ancillary services (appraisal, credit reporting, flood and home warranty and homeowners insurance); (iv) access to current pricing rate sheets; (v) up-to-the-minute reporting of loans in the pipeline; and (vi) link to other industry-related sites. D. Capital Markets Segment The Company's Capital Markets Segment consists of Countrywide Capital Markets ("CCM"), a wholly-owned subsidiary of the Company, and Countrywide Warehouse Lending ("CWL"). CCM has three principal operating subsidiaries: Countrywide Securities Corporation ("CSC"), Countrywide Servicing Exchange ("CSE") and Countrywide Asset Management Corporation ("CAMC"). CCM's principal offices are located in Calabasas, California with sales offices in New York, New York; Rochester, New York; and Ft. Lauderdale, Florida. CSC is a registered broker-dealer and a member of both the National Association of Securities Dealers, Inc. and the Securities Investor Protection Corporation. CSC primarily trades mortgage-related securities, including pass through certificates issued by Ginnie Mae, Fannie Mae and Freddie Mac, and collateralized mortgage obligations. CSC also trades certificates of deposit issued by banks, the deposits of which are insured by the Bank Insurance Fund (a fund of Federal Depository Insurance Corporation) as well as callable agency debt. CSC participates in the underwriting of securities for CHL and for unrelated entities. CSC also arranges the purchase and sale of mortgage loans for CHL and others. CSC trades with institutional investors, such as investment managers, pension fund companies, insurance companies, depositories, and other broker-dealers. CSC does not maintain retail accounts. CSE is among the leading national mortgage servicing brokerage and consulting firms. CSE, as an agent, facilitates the purchase and sale of bulk servicing contracts and provides loan portfolio evaluation services for prospective investors and servicers of mortgage loans. CAMC purchases distressed loans and other credit sensitive residential mortgage assets, including the related servicing asset from other lenders. The Company services the loans with the intent to sell or securitize loans which become current and liquidate those that do not become current. CAMC contracts with CHL to provide loan servicing activities. CWL provides warehouse lines of credit to mortgage originators to finance their origination or acquisition of residential mortgage loans. Advances under the lines of credit are secured by mortgage loans. The principal financing needs of CCM consist of the financing of its inventory of securities and mortgage loans. Its securities inventory is financed primarily through MBS repurchase agreements. CCM also has access to a $200 million secured bank loan facility and a lending facility with CHL The securities industry is highly competitive and fragmented. CCM competes with large global investment banks and broker-dealers, as well as smaller regional broker-dealers. CCM competes by specializing in mortgage related fixed income securities and through its affiliation with CHL, which allow it to offer information, products and services tailored to the unique needs of participants in the mortgage related debt securities markets. E. Insurance Segment The Company's Insurance Group Segment consists of Countrywide Insurance Group ("CIG"), a wholly owned subsidiary of the Company. Countrywide Insurance Group has three operating subsidiaries, Countrywide Insurance Services ("CIS"), Directnet Insurance Agency, Inc. ("Directnet") and Balboa Life & Casualty ("Balboa"). Countrywide Insurance Services CIS is comprised of Countrywide Insurance Services of California; Countrywide Insurance Services of Arizona; Countrywide General Agency of Texas; Countrywide Insurance Agency of Massachusetts; Countrywide Agency of Ohio; and Countrywide Insurance Agency of Ohio. CIS is an independent insurance agency that provides homeowners insurance, life insurance, disability insurance, automobile insurance, and various other coverages. CIS has been servicing the insurance needs of homeowners, primarily CHL's mortgage customers, since 1969. CIS is headquartered in Simi Valley, California, with sales offices located in Simi Valley, California; Phoenix, Arizona; Plano, Texas; Deerfield, Massachusetts; Columbus, Ohio; and Winterpark, Florida. Directnet Insurance Agency, Inc. Directnet is comprised of Directnet Insurance Agency and Directnet Insurance Agency of Arizona. Directnet provides financial institutions and mortgage brokers with a private label insurance agency solution. Balboa Life & Casualty Balboa is comprised of Balboa Insurance, Balboa Life Insurance, Metriplan Insurance and Newport Insurance companies. Balboa commenced operations in 1949, and was acquired by Countrywide Insurance Group on November 30, 1999. The Company is headquartered in Irvine, California, and has offices in Pasadena, California; Rosemead, California; Seattle, Washington and Pittsburgh, Pennsylvania. "A" rated by A.M. Best Company, Balboa is the leading writer of creditor-placed auto physical damage insurance and a leader in Guaranteed Auto Protection ("GAP") insurance and creditor-placed property/hazard insurance. Balboa is licensed to underwrite property and casualty and life and disability insurance in 49 states. It distributes product and tracking services to 1,500 financial institutions, including 50 of the 100 largest U.S. financial services companies, either directly or through independent agents. It tracks a combined portfolio of over 4 million loans. Balboa is expanding its product line to include retail homeowners insurance and additional credit life and disability insurance products, which are being distributed by Countrywide Insurance Services and other entities. The creditor-placed insurance market is dominated by a few providers, competing on policy terms and conditions, service reputation, technological innovation and broker compensation. The homeowners and life and disability marketplace is dominated by large, brand name providers and is driven by price, service reputation, commissions and the efficiency and effectiveness of marketing and underwriting operations. CIG competes by providing high quality service and pricing its products at competitive rates. The primary cash needs for CIG are to meet short- and long-term obligations to policyholders (payment of policy benefits), costs of acquiring new business (principally commissions) and the purchases of new investments. To meet these needs, CIG currently utilizes cash flow provided from operations as well as maturities and sales of invested assets, F. Other Operations The Company provides various loan-closing services to its loan production divisions and to others through its subsidiary, LandSafe, Inc. Through several subsidiaries, LandSafe, Inc. acts as a title insurance agent and a provider of settlement, escrow, appraisal, credit reporting, flood zone determination and home inspection services. In addition, LandSafe, Inc. provides property profiles to realtors, builders, consumers, mortgage brokers and other financial institutions. G. Segments and Related Information Information regarding the Company's segments appears in the Notes to the Consolidated Financial Statements, and is incorporated herein by this reference. H. Regulation The Company's mortgage banking business is subject to the rules and regulations of, and examination by, HUD, FHA, VA, Fannie Mae, Freddie Mac, Ginnie Mae and state regulatory authorities with respect to originating, processing, selling and servicing mortgage loans. Those rules and regulations, among other things, impose licensing obligations on the Company, establish standards for originating and servicing mortgage loans, prohibit discrimination, provide for inspections and appraisals of property, require credit reports on prospective borrowers and, in some cases, fix maximum interest rates, fees and other 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 to assure compliance with the FHA regulations, policies and procedures. In addition to other federal laws, 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. These laws 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. 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 carrier, insurance agency and title insurance operations are subject to insurance laws of each of the states in which the Company conducts such operations. I. 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 a wide selection of products through multiple channels, by providing consistent, high quality service and by pricing its products at competitive rates. During the 1990's, 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 60% during calendar year 1999. The Company believes that it has benefited from this trend. J. Employees At February 29, 2000, the Company had 10,572 employees, 5,024 of whom were engaged in production activities, 2,108 were engaged in loan administration activities 216 were engaged in Capital Markets activities, 854 were engaged in insurance and 2,370 were engaged in other activities. None of these employees is represented by a collective bargaining agent. K. Year 2000 Compliance A discussion of the Year 2000 issue is included in Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations. ITEM 2. PROPERTIES The primary executive and administrative offices of the Company and its subsidiaries are located in Calabasas, California. The headquarters facility consists of approximately 225,000 square feet and is situated on 20.1 acres of land. In June 1999, the executive and administrative operations of the Company's information technology division and wholesale lending division relocated to a newly constructed 88,000 square foot office building in Calabasas, California which the Company has leased with an option to purchase. In September 1998, the Company entered into a 10-year sublease of a 215,000 square foot facility in Rosemead, California, which houses loan production and certain subsidiary operations. The Company 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. In July 1998, the Company purchased the adjoining 14-acre parcel and converted the existing structure on that parcel to a 206,000 square foot office building for loan servicing operations and the executive and administrative offices of its Correspondent Lending Division. In December 1998, the Company purchased a 200,500 square foot building in Simi Valley, California, which houses the Company's document custodian and collateral documents, as well as the Company's document management operations. The Company also owns a 253,000 square foot building situated on 21.5 acres in Plano, Texas, which houses additional loan servicing, loan production, data processing and subsidiary operations. In order to accommodate its expanding loan servicing and related business operations, the Company constructed two office buildings totaling approximately 500,000 square feet on the 17-acre parcel of land adjacent to the existing Plano facility. Additional space located in Pasadena, Irvine, Moorpark and Simi Valley, California and Dallas, Texas is currently under lease for certain subsidiaries, loan servicing, loan production and data processing operations. These leases provide an additional 375,000 square feet on varying terms. In addition, the Company leases space for its branch offices throughout the country. ITEM 3. LEGAL PROCEEDINGS The Company and certain subsidiaries are defendants in various legal proceedings involving matters generally incidental to their business. Although it is difficult to predict the ultimate outcome of these proceedings, management believes, based on discussions with counsel, that any ultimate liability will not materially affect the 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 29(28), 2000 and 1999. ------- --------------- ------------------------- --- ------------------------- --- -------------------------------- Fiscal 2000 Fiscal 1999 Fiscal 2000 Fiscal 1999 ------- --------------- ------------ ------------ --- ------------ ------------ --- -------------------------------- Quarter High Low High Low Cash Dividends Declared ------- --------------- ------------ ------------ --- ------------ ------------ --- -------------------------------- First $48.00 $36.56 $54.50 $44.25 $0.10 $0.08 Second 45.25 31.63 56.25 37.00 0.10 0.08 Third 35.25 27.75 50.75 28.63 0.10 0.08 Fourth 29.25 23.00 51.44 36.75 0.10 0.08 ------- --------------- ------------ ------------ --- ------------ ------------ --- ---------------- ---------------
The Company has declared and paid cash dividends on its common stock quarterly since 1982. For the fiscal years ended February 29(28), 2000 and 1999, the Company declared quarterly cash dividends aggregating $0.40 and $0.32 per share, respectively. On March 23, 2000, the Company declared a quarterly cash dividend of $0.10 per common share, which was paid on April 28, 2000. 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 guarantee 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 or potential 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 its revolving credit facility). See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources." As of May 17, 2000, there were 2,174 shareholders of record of the Company's common stock, with 114,090,819 common shares outstanding. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA -------------------------------------- ------------------------------------------------------------------------------ Year ended February 29(28), -------------------------------------- -------------------------- ------------ ------------ ------------ ------------- (Dollar amounts in thousands, except per share 2000 1999 1998 1997 1996 data) ------------------------------------------------- --------------- ------------ ------------ ------------ ------------- Statement of Earnings Data (1): Revenues: Loan origination fees $406,458 $623,531 $301,389 $193,079 $199,724 Gain on sale of loans 557,743 699,433 417,427 247,450 92,341 --------------- ------------ ------------ ------------ ------------- Loan production revenue 964,201 1,322,964 718,816 440,529 292,065 Interest earned 998,646 1,029,066 584,076 457,005 364,531 Interest charges (930,294) (983,829) (568,359) (423,447) (337,655) --------------- ------------ ------------ ------------ ------------- Net interest income 68,352 45,237 15,717 33,558 26,876 Loan servicing income 1,192,789 1,023,700 907,674 773,715 620,835 Amortization and impairment/recovery of mortgage servicing rights, net of (445,138) (600,766) (328,845) (226,686) (142,676) servicing hedge --------------- ------------ ------------ ------------ ------------- Net loan administration income 747,651 422,934 578,829 547,029 478,159 138 91,346 Commissions, fees and other income 234,047 187,867 138,217 91,346 63,642 Gain on sale of subsidiary 4,424 - 57,381 - - --------------- ------------ ------------ ------------ ------------- Total revenues 2,018,675 1,979,002 1,508,960 1,112,462 860,742 --------------- ------------ ------------ ------------ ------------- Expenses: Salaries and related expenses 689,768 669,686 424,321 286,884 229,668 Occupancy and other office expenses 276,802 270,483 182,335 129,877 106,298 Guarantee fees 195,928 181,117 172,692 159,360 121,197 Marketing expenses 72,930 64,510 42,320 34,255 27,115 Other operating expenses 152,049 161,401 121,746 80,188 50,264 --------------- ------------ ------------ ------------ ------------- Total expenses 1,387,477 1,347,197 943,414 690,564 534,542 --------------- ------------ ------------ ------------ ------------- 421,898 Earnings before income taxes 631,198 631,805 565,546 421,898 326,200 Provision for income taxes 220,955 246,404 220,563 164,540 130,480 --------------- ------------ ------------ ------------ ------------- --------------- ------------ ------------ ------------ ------------- Net earnings $410,243 $385,401 $344,983 $257,358 $195,720 ================================================= =============== ============ ============ ============ ============= ================================================= =============== ============ ============ ============ ============= Per Share Data (2): Basic (3) $3.63 $3.46 $3.21 $2.50 $1.99 Diluted (3) $3.52 $3.29 $3.09 $2.44 $1.95 Cash dividends per share $0.40 $0.32 $0.32 $0.32 $0.32 Weighted average shares outstanding: Basic 113,083,000 111,414,000 107,491,000 103,112,000 98,352,000 Diluted 116,688,000 117,045,000 111,526,000 105,677,000 100,270,000 ================================================= =============== ============ ============ ============ ============= ================================================= =============== ============ ============ ============ ============= Selected Balance Sheet Data at End of Period (1): Total assets $15,822,328 $15,648,256 $12,183,211 $7,689,090 $8,321,652 Short-term debt 2,911,410 $5,065,934 $4,043,774 $2,567,420 $4,423,738 Long-term debt 7,253,323 $5,953,324 $4,195,732 $2,367,661 $1,911,800 Common shareholders' equity $2,887,879 $2,518,885 $2,087,943 $1,611,531 $1,319,755 ================================================= =============== ============ ============ ============ ============= ================================================= =============== ============ ============ ============ ============= Operating Data (dollar amounts in millions): Loan servicing portfolio (4) $250,192 $215,489 $182,889 $158,585 $136,835 Volume of loans originated $66,740 $92,881 $48,772 $ 37,811 $ 34,584 ================================================= =============== ============ ============ ============ ============= (1) Certain amounts in the Consolidated Financial Statements have been reclassified to conform to current year presentation. (2) Adjusted to reflect subsequent stock dividends and splits. (3) Earnings per share for Fiscal 1998 include a $57.4 million gain on sale of subsidiary. Excluding the non-recurring gain on sale of subsidiary, basic and diluted earnings per share would have been $2.88 and $2.78, respectively. (4) 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 business strategy is primarily focused on five areas: loan production, loan servicing, capital markets, insurance and other businesses ancillary to mortgage lending. Loan production and loan servicing comprise the Company's mortgage banking business. See "Business--Mortgage Banking Operations", "Business--Capital Markets", "Business--Insurance Segment" and "Business--Other Operations." The Company intends to continue its efforts to expand its operations in each of these areas. 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 counter cyclical to their effect on servicing income. The operations of the capital markets segment include trading mortgage-backed securities ("MBS") and other mortgage-related assets as well as brokering service contracts and bulk purchases and sales of whole loans. The operations of the insurance segment includes acting as an agent and carrier in the sale of insurance, including homeowners, fire, flood, earthquake, life and disability and creditor-placed auto and homeowner insurance. Other complementary services offered include title insurance agent and escrow services, appraisal and credit reporting services. The Company's results of operations historically have been influenced primarily by the level of demand for mortgage loans, which is affected by such external factors as the level and direction of interest rates, and the strength of the overall economy and the economy in each of the Company's lending markets. The fiscal year ended February 28, 1998 ("Fiscal 1998") was a then record year for the Company in terms of revenues and net earnings from its ongoing operations. Loan production increased to $48.8 billion, up from $37.8 billion in the prior year. The Company attributed the increase in production to: (i) lower interest rates; (ii) the generally strong economy and home purchase market; (iii) the continued implementation of a national advertising campaign aimed at developing a brand identity for Countrywide and reaching the consumer directly; and (iv) increased expansion of the Consumer Markets and Wholesale branch networks, including the new retail sub-prime branches. For calendar 1997, the Company ranked second in the amount of single-family mortgage originations nationwide. For calendar 1997, the Company's market share increased to approximately 5.1% of the estimated $850 billion single-family mortgage origination market, up from approximately 4.8% of the estimated $800 billion single-family mortgage origination market for 1996. During Fiscal 1998, the Company's loan servicing portfolio grew to $182.9 billion, up from $158.6 billion at the end of Fiscal 1997. This growth resulted from the Company's loan production during the year and bulk servicing acquisitions amounting to $1.0 billion. The increase in the loan servicing portfolio was partially offset by prepayments, partial prepayments and scheduled amortization of $24.3 billion. The prepayment rate in the servicing portfolio was 15%, up from the prior year due to the lower mortgage interest rate environment in Fiscal 1998. During Fiscal 1998, the Company sold the assets, operations and employees of Countrywide Asset Management Corporation ("CAMC"), then a wholly-owned subsidiary of the Company to IndyMac Mortgage Holdings, Inc. (formerly INMC Mortgage Holdings, Inc.) ("INMC"). CAMC was formally the manager of INMC. The Company received 3,440,800 newly issued common shares of INMC as consideration. The fiscal year ended February 28, 1999 ("Fiscal 1999") was another record year for the Company in terms of revenues and net earnings. Loan production increased to $92.9 billion, an all-time Company record, up from $48.8 billion in the prior year. The Company attributed the increase in production to: (i) an increase in the overall mortgage market driven largely by refinances; (ii) the generally strong economy and home purchase market; and (iii) an increase in the Company's market share, driven largely by the expansion of its Consumer Markets Home Finance Network and Consumer Markets and Wholesale branch networks, including the new retail sub-prime branches. For calendar 1998, the Company ranked second in the amount of single-family mortgage originations nationwide. During calendar 1998, the Company's market share increased to approximately 6.1%, up from approximately 5.1% in calendar 1997. During Fiscal 1999, the Company's loan servicing portfolio grew to $215.5 billion, up from $182.9 billion at the end of Fiscal 1998. This growth resulted from the Company's loan production during the year and bulk servicing acquisitions amounting to $4.6 billion. This growth in the loan servicing protfolio was partially offset by prepayments, partial prepayments and scheduled amortization of $53.2 billion and the transfer out of $6.5 billion of subservicing. The prepayment rate in the servicing portfolio was 28%, up from the prior year due to increased refinance activity driven by the lower mortgage interest rate environment in Fiscal 1999. The fiscal year ended February 29, 2000 ("Fiscal 2000") was again a record year for the Company in terms of revenues and net earnings. Loan production decreased to $66.7 billion, down from $92.9 billion in the prior year. The Company attributed the decrease in production primarily to a decrease in the overall mortgage market driven largely by a decrease in refinance activity, combined with a slight decrease in the Company's market share. For calendar 1999 the Company ranked third in the amount of single-family mortgage originations nationwide. During calendar 1999 the Company's market share decreased to approximately 5.9% down from approximately 6.1% in calendar 1998. During Fiscal 2000, the Company's loan servicing portfolio grew to $250.2 billion, up from $215.5 billion at the end of Fiscal 1999. This growth resulted from the Company's strong loan production during the year and bulk servicing acquisitions amounting to $2 billion. This growth in the loan servicing protfolio was partially offset by prepayments, partial prepayments and scheduled amortization of $28.5 billion. The prepayment rate in the servicing portfolio was 13%, down from 28% the prior year due to the higher mortgage interest rate environment in Fiscal 2000. RESULTS OF OPERATIONS Fiscal 2000 Compared with Fiscal 1999 Revenues for Fiscal 2000 increased 2% to $2,018.7 million, up from $1,979.0 million for Fiscal 1999. Net earnings increased 6% to $410.2 million for Fiscal 2000, up from $385.4 million for Fiscal 1999. The slight increase in revenues for Fiscal 2000 compared to Fiscal 1999 was primarily attributed to the loan servicing, capital markets and insurance segments, together with increased production of non traditional loan products (home equity and sub-prime loans). This was largely offset by a decline in traditional prime loan originations, attributable to the market-wide decline in loan refinancings. Included in net earnings in Fiscal 2000 was a nonrecurring tax benefit of $25 million that related primarily to a corporate reorganization. The total volume of loans produced by the Company in Fiscal 2000 decreased 28% to $66.7 billion, down from $92.9 billion for Fiscal 1999. The decrease in loan production was primarily due to a decrease in the mortgage origination market, driven largely by a reduction in refinance activity, combined with a slight decrease in the Company's market share. Total loan production by purpose and by interest rate type is summarized below. (Dollar amounts in millions) Loan Production - ------------------------------- --------------------------------------- -------- Fiscal Fiscal 2000 1999 ------------- ---------------- Purchase $43,594 $39,681 Refinance 23,146 53,200 ------------- ---------------- Total $66,740 $92,881 ============= ================ ------------- ---------------- Fixed Rate $57,178 $88,334 Adjustable Rate 9,562 4,547 ------------- ---------------- Total $66,740 $92,881 ============= ================ - ------------------------------------------------------------------------------- Total loan production by Division is summarized below. - ----------------------------------------------------------------------- -------- (Dollar amounts in millions) Loan Production - ----------------------------------------------------------------------- -------- Fiscal Fiscal 2000 1999 ------------- ------------ Consumer Markets Division $19,967 $28,508 Wholesale Lending Division 19,116 30,917 Correspondent Lending Division 26,240 32,748 Full Spectrum Lending, Inc. 1,417 708 ------------- ------------ Total $66,740 $92,881 ============= ============ - -------------------------------------------------------------------------------- The factors which affect the relative volume of production among the Company's Divisions include the price competitiveness of each Division's various product offerings, the level of mortgage lending activity in each Division's market and the success of each Division's sales and marketing efforts. Non traditional loan production (which is included in the Company's total volume of loans produced) is summarized below. - -------------------------------------------- -------------------------- -------- (Dollar amounts in millions) Non Traditional Loan Production - -------------------------------------------- -------------------------- -------- Fiscal Fiscal 2000 1999 ------------- ------------ Sub-prime $ 4,156 $ 2,496 Home Equity Loans 3,636 2,221 ------------- ------------ Total $7,792 $4,717 ============= ============ - -------------------------------------------------------------------------------- During Fiscal 2000 and Fiscal 1999, the Company received 925,604 and 1,194,833 new loan applications, respectively, at an average daily rate of $383 million and $540 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 2000 as compared to Fiscal 1999 primarily due to lower production and a change in the divisional mix. The Consumer Markets and Wholesale Lending Divisions (which, due to their higher cost structure, charge higher origination fees per dollar loaned) comprised a lower percentage of total production in Fiscal 2000 than in Fiscal 1999. Gain on sale of loans also decreased in Fiscal 2000 as compared to Fiscal 1999 primarily due to lower production volume and reduced margins on prime credit quality mortgages. These declines were partially offset by increased sales during Fiscal 2000 of higher margin home equity and sub-prime loans (which, due in part to their higher cost structure charge a higher price per dollar loaned). The sale of home equity loans contributed $87 million and $65 million to gain on sale of loans in Fiscal 2000 and Fiscal 1999, respectively. Sub-prime loans contributed $186 million to the gain on sale of loans in Fiscal 2000 and $92 million in Fiscal 1999. 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 $68.4 million for Fiscal 2000, up from $45.2 million for Fiscal 1999. Net interest income is principally a function of: (i) net interest income earned from the Company's mortgage loan warehouse ($149.5 million and $118.2 million for Fiscal 2000 and Fiscal 1999, respectively); (ii) interest expense related to the Company's investment in servicing rights ($324.2 million and $351.2 million for Fiscal 2000 and Fiscal 1999, respectively) and (iii) interest income earned from the custodial balances associated with the Company's servicing portfolio ($216.4 million and $270.4 million for Fiscal 2000 and Fiscal 1999, 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 attributable to an increase in inventory levels as a result of a longer warehouse period combined with a higher net earnings rate during Fiscal 2000. The decrease in interest expense on the investment in servicing rights resulted primarily from 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") as a result of lower prepayments. The decline in Interest Cost Incurred on Payoffs was partially offset by additional interest expense from a larger servicing portfolio. The decrease in net interest income earned from the custodial balances was primarily related to a decrease in the average custodial balances caused by decrease in the amount of prepayments. During Fiscal 2000, loan servicing income before amortization increased primarily due to growth of the loan servicing portfolio. As of February 29, 2000, the Company serviced $250.2 billion of loans (including $2.9 billion of loans subserviced for others), compared to $215.5 billion (including $2.2 billion of loans subserviced for others) as of February 28, 1999, a 16% increase. The growth in the Company's servicing portfolio during Fiscal 2000 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. During Fiscal 2000, the annual prepayment rate of the Company's servicing portfolio was 13%, compared to 28% for Fiscal 1999. The prepayment rate is primarily affected by the level of refinance activity, which in turn is driven by the relative level of mortgage interest rates, as well as activity in the resale home market. The weighted average interest rate of the mortgage loans in the Company's servicing portfolio as of February 29(28), 2000 and 1999 was 7.5%. The Company recorded MSR amortization and net impairment recovery for Fiscal 2000 totaling $181.0 million (consisting of amortization amounting to $459.3 million and recovery of previous impairment of $278.3 million), compared to $1,013.6 million of amortization and impairment (consisting of amortization amounting to $556.4 million and impairment of $457.2 million) for Fiscal 1999. The primary factors affecting the amount of amortization and impairment of the MSRs recorded in an accounting period are the level of prepayments during the period and the change, if any, in estimated future prepayments. To mitigate the effect on earnings of MSR 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"). In Fiscal 2000, the Company recognized a net expense of $264.1 million from its Servicing Hedge. The net expense included unrealized net losses of $230.9 million and realized net losses of $33.2 million from the sale of various financial instruments that comprise the Servicing Hedge net of premium amortization. In Fiscal 1999, the Company recognized a net gain of $412.8 million from its Servicing Hedge. The net gain included unrealized net gains of $26.1 million and realized net gains of $386.7 million from the sale of various financial instruments that comprise the Servicing Hedge net of premium amortization. The historical correlation of the Servicing Hedge and the MSRs has been very high. However, given the complexity and uncertainty inherent in hedging MSRs, there can be no assurance that future results will match the historical performance of the Servicing Hedge. The financial instruments that comprised the Servicing Hedge include interest rate floors, principal only securities (P/O Securities"), options on interest rate swaps ("Swaptions"), options on MBS, options on interest rate futures, interest rate futures, interest rate swaps, interest rate swaps with the Company's maximum payment capped ("Capped Swaps") and interest rate caps. With the Capped Swaps, 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 Swaps, the Company receives and pays interest on a specified notional amount. The Company has entered into Swaps in which the rate received is fixed and the rate paid is adjustable and is indexed to LIBOR ("Receiver Swap") as well as Swaps in which the rate paid is fixed and the rate received is adjustable and is indexed to LIBOR ("Payor Swap") The Swaptions consist of options to enter into a receive-fixed, pay-floating interest rate swap ("Receiver Swaption") and options to enter into a pay-fixed, receive-floating interest rate swap ("Payor Swaption") at a future date or to settle the transaction for cash. An option on MBS gives the holder the right to call a mortgage-backed security at a predetermined price. The P/O securities consist of certain tranches of collateralized mortgage securities ("CMOs"), mortgage trust principal-only securities and treasury principal-only strips. These securities have been purchased at deep discounts to their par values. As interest rates decrease, prepayments on the collateral underlying the CMOs and mortgage trust principal-only securities should increase. This results 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 and mortgage trust principal-only securities should decrease. This would result in an increase in the average lives of the P/O Securities and a decrease in the present values of their cashflows. The prices of the treasury principal-only strips are determined by the discount rate used to determine their present value, as interest rates decline the discount rate applied to the maturity principal payment declines, resulting in an increase in the price. 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. 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 floors, options on interest rate futures and MBS, caps, Swaptions and P/O securities, the Company is not exposed to loss beyond its initial outlay to acquire the hedge instruments plus any unrealized gains recognized to date. The Company's exposure to loss on futures is related to changes in the LIBOR rate over the life of the contract. The Company was not a party to any futures contract at February 29, 2000. With respect to the Interest Rate Swaps contracts entered into by the Company as of February 29, 2000, the Company estimates that its maximum exposure to loss over the contractual terms is $1 million. With respect to the Capped Swaps contracts entered into by the Company as of February 29, 2000, the Company estimates that its maximum exposure to loss over the contractual terms is $4 million. Salaries and related expenses are summarized below for Fiscal 2000 and Fiscal 1999. ---- -------------------------------- -- ------ ------ ---------------------------------------------------------- ----- --- (Dollar amounts in thousands) Fiscal 2000 ------ ------ ---------------------------------------------------------- ----- --- ---- ------------------------------- -- Production Loan Corporate Other Activities Administration Administration Activities Total ---- ------------------------------- -- ------------- -- ---------------- --- ---------------- -- ---------- -- ----------- Base Salaries $232,408 $55,219 $103,088 $66,044 $456,759 Incentive Bonus 97,619 509 20,794 27,029 145,951 Payroll Taxes and Benefits 45,785 11,247 20,174 9,852 87,058 ------------- ---------------- ---------------- ---------- ----------- Total Salaries and Related Expenses $375,812 $66,975 $144,056 $102,925 $689,768 ============= ================ ================ ========== =========== Average Number of Employees 5,695 1,985 2,128 1,127 10,935 ---- ------------------------------- -- ------------- -- ---------------- --- ---------------- -- ---------- -- -----------
---- ------------------------------- -- -- ------------------------------------------------- ------ - ---- --------------- (Dollar amounts in thousands) Fiscal 1999 -- ------------------------------------------------- ------ - ---- --------------- ---- ------------------------------- -- Production Loan Corporate Other Activities Administration Administration Activities Total ---- ------------------------------- -- -------------- -- ---------------- -- ---------------- -- ---------- -- ---------- Base Salaries $212,591 $45,412 $90,953 $45,383 $394,339 Incentive Bonus 147,695 601 20,706 20,357 189,359 Payroll Taxes and Benefits 52,821 10,429 15,170 7,568 85,988 -------------- ---------------- ---------------- ---------- ---------- Total Salaries and Related Expenses $413,107 $56,442 $126,829 $73,308 $669,686 ============== ================ ================ ========== ========== Average Number of Employees 5,512 1,740 1,823 872 9,947 ---- ------------------------------- -- ------------ -- ------------- -- ---------------- -- ------------- -- ------------
The amount of salaries increased during Fiscal 2000 reflecting growth in the non-mortgage banking subsidiaries, the continued expansion of the consumer branch network, including the retail sub-prime branches and a larger servicing portfolio. These increases were partially offset by a reduction in the processing work force in the production divisions as production declined. The number of production employees declined from 6,365 at February 28, 1999 to 5,039 at February 29, 2000. Incentive bonuses earned during Fiscal 2000 decreased primarily due to the reduction in loan production. Occupancy and other office expenses for Fiscal 2000 increased to $276.8 million from $270.5 million for Fiscal 1999. This was primarily due to: (i) the continued expansion of the consumer branch network; (ii) a larger servicing portfolio; and (iii) growth in the Company's non-mortgage banking activities, partially offset by a reduction in temporary personnel expense as a result of decreased production. Guarantee fees represent fees paid to Fannie Mae and Ginnie Mae ("GSEs") to guarantee timely and full payment of principal and interest on MBS and to transfer the credit risk of the loans in the servicing portfolio sold to these entities. For Fiscal 2000, guarantee fees increased 8% to $195.9 million, up from $181.1 million for Fiscal 1999. The increase resulted from an increase in the servicing portfolio, changes in the mix of the portfolio sold to the GSEs and terms negotiated at the time of loan sales. Marketing expenses for Fiscal 2000 increased 13% to $72.9 million, up from $64.5 million for Fiscal 1999. This increase primarily related to the company's growing non-traditional loan products. Other operating expenses for Fiscal 2000 decreased from Fiscal 1999 by 6%. This decrease was due primarily to a reduction in reserves for bad debts due mainly to improved property values nationally. In Fiscal 2000, the Company initiated a corporate reorganization related to its servicing operations. As a result of the reorganization, future state income tax liabilities are expected to be less than the amounts that were previously recorded as deferred income tax expense and liability in the Company's financial statements. The expected reduction in tax liabilities was reflected as a reduction in deferred state income tax expense in Fiscal 2000. The Company's pre-tax earnings by segment are summarized below. - -------------------------------------------- ----------------------------------- (Dollar amounts in thousands) Pre-Tax Earnings - -------------------------------------------- ----------------------------------- Fiscal Fiscal 2000 1999 ------------- ------------ Loan Production $259,869 $556,213 Loan Servicing 312,182 20,130 Capital Markets 32,124 26,529 Insurance 13,485 3,325 Other Activities 13,538 25,608 ------------- ------------ Pre-tax Earnings $631,198 $631,805 ============= ============ - -------------------------------------------------------------------------------- Profitability of Loan Production Segment Loan production segment activities include loan origination and purchases, warehousing and sales. The decrease in pre-tax earnings of $296.3 million in Fiscal 2000 as compared to Fiscal 1999 was primarily attributable to lower production and reduced margins on prime credit quality first mortgages driven by a significant reduction in refinances. These factors were partially offset by increased production and sales of higher margin home equity and sub-prime loans. Profitability of Servicing Segment Loan servicing segment activities include administering the loans in the servicing portfolio, acting as tax payment agent, marketing foreclosed properties and acting as reinsurer. The increase in pre-tax earnings of $292.1 million in Fiscal 2000 as compared to Fiscal 1999 was primarily due to an increase in servicing revenues resulting from servicing portfolio growth combined with a reduction in the MSR amortization and recovery of previous MSR impairment attributable to the decline in refinance activity. These positive factors were partially offset by higher servicing costs driven by the increase in the servicing portfolio. Profitability of Capital Markets Segment Capital Markets segment activities include primarily the operations of CSC, a registered broker dealer specializing in the secondary mortgage market. The increase in pre-tax earnings of $5.6 million in Fiscal 2000 as compared to Fiscal 1999 was primarily due to increased trading volumes. Profitability of Insurance Segment Insurance segment activities include the operations of an insurance agency, Countrywide Insurance Services ("CIS"), that provides homeowners, life, disability, automobile as well as other forms of insurance. In addition, this segment includes the activities of Balboa Life and Casualty ("Balboa"), an insurance carrier that specializes in creditor-placed automobile and homeowner insurance. The increase in pre-tax earnings of $10.2 million in Fiscal 2000 as compared to Fiscal 1999 was primarily due to the acquisition of Balboa on November 30, 1999. Profitability of Other Activities In addition to loan production, loan servicing, capital markets and insurance, the Company offers other ancillary products and services related to its mortgage banking activities, primarily through its subsidiary, LandSafe, Inc. Through several subsidiaries, LandSafe, Inc. acts as a title insurance agent and a provider of settlement, escrow, appraisal and credit reporting, and home inspection and flood zone determination services. In addition, through its subsidiaries, LandSafe, Inc. provides property profiles to realtors, builders, consumers, mortgage brokers and other financial institutions. For Fiscal 2000, Landsafe Inc. contributed $13.2 million to the Company's pre-tax income compared to $25.2 million for Fiscal 1999. The decrease in the profitability of LandSafe Inc. resulted primarily from decreased title business attributable to the decline in refinance activity. During Fiscal 2000, the Company sold Countrywide Financial Services, Inc. which resulted in a $4.4 million pre-tax gain. Fiscal 1999 Compared with Fiscal 1998 Revenues from ongoing operations for Fiscal 1999 increased 36% to $1,979.0 million, up from $1,451.6 million for Fiscal 1998. Net earnings from ongoing operations increased 24% to $385.4 million for Fiscal 1999, up from $310.0 million for Fiscal 1998. Revenues and net earnings from ongoing operations for Fiscal 1998 exclude a nonrecurring pre-tax gain of $57.4 million on the sale of CAMC. The increase in revenues and net earnings from ongoing operations for Fiscal 1999 compared to Fiscal 1998 was primarily attributed to higher loan production volume, an increase in the size of the Company's servicing portfolio as well as continued growth in the Company's non-mortgage banking subsidiaries. These positive factors were partially offset by an increase in amortization of the servicing asset and an increase in expenses in Fiscal 1999 over Fiscal 1998. The total volume of loans produced by the Company in Fiscal 1999 increased 90% to $92.9 billion, up from $48.8 billion for Fiscal 1998. The increase in loan production was primarily due to an increase in the Company's market share, driven largely by the expansion of the Company's Consumer Markets Home Finance Network and Consumer Markets and Wholesale branch networks, including the retail sub-prime branches, combined with an increase in the overall mortgage market driven largely by refinances. Total loan production by purpose and by interest rate type is summarized below. - -------------------------------------------- -------------------------- -------- (Dollar amounts in millions) Loan Production - -------------------------------------------- -------------------------- -------- Fiscal Fiscal 1999 1998 ------------- ------------ Purchase $ 39,681 $ 28,990 Refinance 53,200 19,782 ------------- ------------ Total $92,881 $48,772 ============= ============ ------------- ------------ Fixed Rate $ 88,334 $ 37,486 Adjustable Rate 4,547 11,286 ------------- ----------- Total $92,881 $48,772 ============= ============ - -------------------------------------------------------------------------------- Total loan production by Division is summarized below. - -------------------------------------------- ----------------------------------- (Dollar amounts in millions) Loan Production - -------------------------------------------- ----------------------------------- Fiscal Fiscal 1999 1998 ------------- ------------ Consumer Markets Division $28,508 $13,339 Wholesale Lending Division 30,917 15,731 Correspondent Lending Division 32,748 19,562 Full Spectrum Lending, Inc. 708 140 ------------- ------------ Total $92,881 $48,772 ============= ============ - -------------------------------------------------------------------------------- The factors which affect the relative volume of production among the Company's 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. Non-traditional loan production (which is included in the Company's total volume of loans produced) is summarized below. - -------------------------------------------- ----------------------------------- (Dollar amounts in millions) Non-Traditional Loan Production - -------------------------------------------- ----------------------------------- Fiscal Fiscal 1999 1998 ------------- ------------ Sub-prime $ 2,496 $ 1,552 Home Equity Loans 2,221 1,463 ------------- ------------ Total $4,717 $3,015 ============= ============ - -------------------------------------------------------------------------------- During Fiscal 1999 and Fiscal 1998, the Company received 1,194,833 and 714,668 new loan applications, respectively, at an average daily rate of $540 million and $306 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 increased in Fiscal 1999 as compared to Fiscal 1998 primarily due to higher production. In addition, the Consumer Markets and Wholesale Lending Divisions (which, due to their higher cost structure, charge higher origination fees per dollar loaned) comprised a greater percentage of total production in Fiscal 1999 than in Fiscal 1998. Gain on sale of loans also increased in Fiscal 1999 as compared to Fiscal 1998 primarily due to higher production volume. This positive factor was partially offset by reduced margins on home equity and sub-prime loans. The sale of home equity loans contributed $65 million and $62 million to gain on sale of loans in Fiscal 1999 and Fiscal 1998, respectively. Sub-prime loans contributed $92 million to the gain on sale of loans in Fiscal 1999 and $70 million in Fiscal 1998. 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 $45.2 million for Fiscal 1999, up from $15.7 million for Fiscal 1998. Net interest income is principally a function of: (i) net interest income earned from the Company's mortgage loan warehouse ($118.2 million and $74.5 million for Fiscal 1999 and Fiscal 1998, respectively); (ii) interest expense related to the Company's investment in servicing rights ($351.2 million and $219.4 million for Fiscal 1999 and Fiscal 1998, respectively) and (iii) interest income earned from the custodial balances associated with the Company's servicing portfolio ($270.4 million and $151.0 million for Fiscal 1999 and Fiscal 1998, 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 attributable to higher production levels. 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 average custodial balances caused by growth of the servicing portfolio and an increase in the amount of prepayments. During Fiscal 1999, loan servicing income before amortization increased primarily due to growth of the loan servicing portfolio. As of February 28, 1999, the Company serviced $215.5 billion of loans (including $2.2 billion of loans subserviced for others), compared to $182.9 billion (including $6.7 billion of loans subserviced for others) as of February 28, 1998, an 18% increase. The growth in the Company's servicing portfolio during Fiscal 1999 was the result of increased loan production volume and the acquisition of bulk servicing rights. This was partially offset by prepayments, partial prepayments, scheduled amortization of mortgage loans and the transfer back to INMC of $6.5 billion of subservicing. During Fiscal 1999, the annual prepayment rate of the Company's servicing portfolio was 28%, compared to 15% for Fiscal 1998. The prepayment rate is primarily affected by the level of refinance activity, which in turn is driven by the relative level of mortgage interest rates, as well as activity in the resale home market. The weighted average interest rate of the mortgage loans in the Company's servicing portfolio as of February 28, 1999 was 7.5% compared to 7.8% as of February 28, 1998. The Company recorded amortization and net impairment of its MSRs for Fiscal 1999 totaling $1,013.6 million (consisting of amortization amounting to $556.4 million and impairment of $457.2 million), compared to $561.8 million of amortization and impairment (consisting of amortization amounting to $300.3 million and impairment of $261.5 million) for Fiscal 1998. The factors affecting the amount of amortization and impairment 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. In Fiscal 1999, the Company recognized a net gain of $412.8 million from its Servicing Hedge. The net gain included unrealized net gains of $26.1 million and realized net gains of $386.7 million from the sale of various financial instruments that comprise the Servicing Hedge net of premium amortization. In Fiscal 1998, the Company recognized a net gain of $233.0 million from its Servicing Hedge. The net gain included unrealized gains of $182.2 million and net realized gains of $50.8 million from the sale of various financial instruments that comprise the Servicing Hedge net of premium amortization. The historical correlation of the Servicing Hedge and the MSRs has been very high. However, given the complexity and uncertainty inherent in hedging MSRs, there can be no assurance that future results will match the historical performance of the Servicing Hedge. During Fiscal 1999, the Company acquired bulk servicing rights for loans with principal balances aggregating $4.6 billion at a price of 1.21% of the aggregate outstanding principal balances. During Fiscal 1998, the Company acquired bulk servicing rights for loans with principal balances aggregating $1.0 billion at a price of 1.13% of the aggregate outstanding principal balances. Salaries and related expenses are summarized below for Fiscal 1999 and Fiscal 1998. ---- ------------------------------- -- -- ------------------------------------------------- ------ - ---- --------------- (Dollar amounts in thousands) Fiscal 1999 -- ------------------------------------------------- ------ - ---- --------------- ---- ------------------------------- -- Production Loan Corporate Other Activities Administration Administration Activities Total ---- ------------------------------- -- -------------- -- ---------------- -- ---------------- -- ---------- -- ---------- Base Salaries $212,591 $45,412 $90,953 $45,383 $394,339 Incentive Bonus 147,695 601 20,706 20,357 189,359 Payroll Taxes and Benefits 52,821 10,429 15,170 7,568 85,988 -------------- ---------------- ---------------- ---------- ---------- Total Salaries and Related Expenses $413,107 $56,442 $126,829 $73,308 $669,686 ============== ================ ================ ========== ========== Average Number of Employees 5,512 1,740 1,823 872 9,947 ---- ------------------------------- -- ------------ -- ------------- -- ---------------- -- ------------- -- ------------ ---- ------------------------------ -- ------------- -- -------------- ------------------ -- -- ---------- -- ----------- (Dollar amounts in thousands) Fiscal 1998 ---- ------------------------------ -- ------------- -- -------------- ------------------ -- -- ---------- -- ----------- ---- ------------------------------ -- Production Loan Corporate Other Activities Administration Administration Activities Total ---- ------------------------------ -- ------------- -- ---------------- -- ---------------- -- ---------- -- ----------- Base Salaries $134,776 $39,987 $70,305 $29,436 $274,504 Incentive Bonus 76,854 251 16,570 11,306 104,981 Payroll Taxes and Benefits 22,956 7,518 10,581 3,781 44,836 ------------- ---------------- ---------------- ---------- ----------- Total Salaries and Related Expenses $234,586 $47,756 $97,456 $44,523 $424,321 ============= ================ ================ ========== =========== Average Number of Employees 3,329 1,518 1,404 682 6,933 ---- ------------------------------ -- ------------- -- ---------------- -- ---------------- -- ---------- -- -----------
The amount of salaries increased during Fiscal 1999 reflecting the Company's strategy of expanding and enhancing its Consumer Markets and Wholesale branch networks, including new retail sub-prime branches. In addition, a larger servicing portfolio and growth in the Company's non-mortgage banking subsidiaries also contributed to the increase. Incentive bonuses earned during Fiscal 1999 increased primarily due to higher production and a change in divisional production mix. Occupancy and other office expenses for Fiscal 1999 increased to $270.5 million from $182.3 million for Fiscal 1998. This was primarily due to: (i) the continued effort by the Company to expand its Consumer Markets and Wholesale branch networks, including new retail sub-prime branches; (ii) higher loan production; (iii) a larger servicing portfolio; and (iv) growth in the Company's non-mortgage banking activities. Guarantee fees represent fees paid to Fannie Mae and Ginnie Mae in order for these Government Sponsored Entities ("GSEs") to agree to guarantee timely and full payment of principal and interest on MBS and to transfer the credit risk of the loans in the servicing portfolio sold to these entities. For Fiscal 1999, guarantee fees increased 5% to $181.1 million, up from $172.7 million for Fiscal 1998. The increase resulted from an increase in the servicing portfolio, changes in the mix of the portfolio sold to the GSEs and terms negotiated at the time of loan sales. Marketing expenses for Fiscal 1999 increased 52% to $64.5 million, up from $42.3 million for Fiscal 1998, reflecting the increased mortgage market and the Company's continued implementation of a marketing plan to increase its consumer brand awareness. Other operating expenses for Fiscal 1999 increased from Fiscal 1998 by $39.7 million, or 33%. This increase was due primarily to higher loan production, a larger servicing portfolio, increased systems development and growth in the Company's non-mortgage banking subsidiaries. The Company's pre-tax earnings by segment are summarized below. - ------------------------------------------- ----------------------------------- (Dollar amounts in thousands) Pre-Tax Earnings - ------------------------------------------- ------------------------------------ Fiscal Fiscal 1999 1998 -------------- ----------- Loan Production $556,213 $245,121 Loan Servicing 20,130 207,487 Capital Markets 26,529 19,287 Insurance 3,325 7,522 Sale of Subsidiary - 57,381 Other Activities 25,608 28,748 -------------- ------------ Total $631,805 $565,546 ============== ============ - -------------------------------------------------------------------------------- Profitability of Loan Production Segment Loan production segment activities include loan origination and purchases, warehousing and sales. The increase in pre-tax earnings of $311.1 million in Fiscal 1999 as compared to Fiscal 1998 was primarily attributable to increased production volume and margins and a shift in production towards the Consumer Markets and Wholesale Divisions. These positive results were partially offset by higher production costs. Profitability of Servicing Segment Loan servicing segment activities include administering the loans in the servicing portfolio, acting as tax payment agent, marketing foreclosed properties and acting as reinsurer. The decrease in pre-tax earnings of $187.4 million in Fiscal 1999 as compared to Fiscal 1998 was primarily attributed to increased amortization of MSRs, increased Interest Costs Incurred on Payoffs and a reduction in the performance of residuals and other interests retained in securitization. These negative factors were partially offset by the increase in servicing fees, miscellaneous income and interest earned on escrow balances derived by the larger servicing portfolio. Profitability of Capital Markets Segment Capital Markets segment activities include primarily the operations of CSC, a registered broker dealer specializing in the secondary mortgage market. The increase in pre-tax earnings of $7.2 million in Fiscal 1999 as compare to Fiscal 1998 was primarily due to increased trading volumes driven largely by CHL's increased loan originations and sales. Profitability of Insurance Segment Insurance segment activities include the operations of CIS, an insurance agency that provides homeowners, life, disability, automobile insurance and various other coverage. The decrease in pre-tax earnings of $4.2 million occurred despite an increase in policies sold and was primarily due to an increase in advertising and salaries reflecting as aggressive expansion efforts. Profitability of Other Activities In addition to loan production, loan servicing, capital markets and insurance segment, the Company offers ancillary products and services related to its mortgage banking activities, primarily through its subsidiary, LandSafe, Inc. Through several subsidiaries, LandSafe, Inc. acts as a title insurance agent and a provider of settlement, escrow, appraisal and credit reporting and home inspection services. During Fiscal 1999, LandSafe, Inc., through a subsidiary, began providing flood zone determination services. In addition, LandSafe, Inc. provides property profiles to realtors, builders, consumers, mortgage brokers and other financial institutions. For Fiscal 1999, LandSafe Inc. contributed $25.2 million to the Company's pre-tax income compared to $10.1 million for Fiscal 1998. The increase in the profitability of LandSafe Inc. resulted primarily from expanded services and the Company's increased loan production. The Company's other activities also include the operations of its holding company, Countrywide Credit Industries, Inc. ("CCI") and Countrywide Financial Services, Inc.. The operations of other activities, excluding LandSafe Inc., incurred pre-tax income of $0.4 million during Fiscal 1999 compared to pre-tax income of $18.6 million during Fiscal 1998. This decrease in pre-tax income primarily resulted from: (i) a decrease in CCI net interest income related to a receivable from CHL that was eliminated by a capital contribution during Fiscal 1999 and (ii) the discontinuance of management fees received prior to the sale of Countrywide Asset Management Corporation ("CAMC"). During Fiscal 1998, CAMC, a subsidiary of the Company, was sold to INMC Mortgage Holdings, Inc., (INMC) a publicly traded real estate investment trust for 3,440,800 newly issued common shares of INMC stock. These shares are subject to resale restrictions which apply to the shares from the date of issuance through July 2000. The sale resulted in a $57.4 million pre-tax gain. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The primary market risk facing the Company is interest rate risk. From an enterprise perspective, the Company manages this risk by striving to balance its loan origination and loan servicing business segments, which are counter cyclical in nature. In addition, the Company utilizes various financial instruments, including derivatives contracts, to manage the interest rate risk related specifically to its committed pipeline, mortgage loan inventory and MBS held for sale, MSRs, mortgage-backed securities retained in securitizations, trading securities and debt securities. The overall objective of the Company's interest rate risk management policies is to offset changes in the values of these items resulting from changes in interest rates. The Company does not speculate on the direction of interest rates in its management of interest rate risk. As part of its interest rate risk management process, the Company performs various sensitivity analyses that quantify the net financial impact of changes in interest rates on its interest rate-sensitive assets, liabilities and commitments. These analyses incorporate scenarios including selected hypothetical (instantaneous) parallel shifts in the yield curve. Various modeling techniques are employed to value the financial instruments. For mortgages, MBS and MBS forward contracts and CMOs, an option-adjusted spread ("OAS") model is used. The primary assumptions used in this model are the implied market volatility of interest rates and prepayment speeds. For options and interest rate floors, an option-pricing model is used. The primary assumption used in this model is implied market volatility of interest rates. MSRs and residual interests are valued using discounted cash flow models. The primary assumptions used in these models are prepayment rates, discount rates and credit losses. Utilizing the sensitivity analyses described above, as of February 29, 2000, the Company estimates that a permanent 0.50% reduction in interest rates, all else being constant, would result in a $1.4 million after-tax loss related to its trading securities and there would be no loss related to its other financial instruments. As of February 29, 2000, the Company estimates that this combined after-tax loss of $1.4 million is the largest such loss that would occur within the range of reasonably possible interest rate changes. These sensitivity analyses are limited by the fact that they are performed at a particular point in time, are subject to the accuracy of various assumptions used including prepayment forecasts, and do not incorporate other factors that would impact the Company's overall financial performance in such a scenario. Consequently, the preceding estimates should not be viewed as a forecast. An additional, albeit less significant, market risk facing the Company is foreign currency risk. The Company has issued foreign currency denominated medium-term notes (See Note F). The Company manages the foreign currency risk associated with such medium-term notes by entering into currency swaps. The terms of the currency swaps effectively translate the foreign currency denominated medium-term notes into U.S. dollars, thereby eliminating the associated foreign currency risk (subject to the performance of the various counterparties to the currency swaps). As a result, hypothetical changes in the exchange rates of foreign currencies denominating such medium-term notes would not have a net financial impact on future earnings, fair values or cash flows. INFLATION Inflation affects the Company most significantly 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 decreases, particularly from loan refinancings. Although in an environment of gradual interest rate increases, purchase activity may actually be stimulated by an improving economy or the anticipation of increasing real estate values. In such periods of reduced loan production, production margins may decline due to increased competition resulting from overcapacity in the market. In a higher interest rate environment, servicing-related earnings are enhanced because prepayment rates tend to slow down thereby extending the average life of the Company's servicing portfolio and reducing amortization and impairment of the MSRs, as well as 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 Servicing Hedge is designed to mitigate the impact of changing interest rates on servicing-related earnings. 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 its mortgage loan inventory, investment in MSRs and the trading securities of its broker-dealer subsidiary. To meet these needs, the Company currently utilizes commercial paper supported by the revolving credit facility, medium-term notes, senior debt, MBS repurchase agreements, subordinated notes, pre-sale funding facilities, redeemable capital trust pass-through securities, securitization of servicing fee income 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 common and preferred stock. The Company strives to maintain sufficient liquidity in the form of unused, committed lines of credit, to meet anticipated short-term cash requirements as well as to provide for potential sudden increases in business activity driven by changes in the market environment. 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 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 principal financing needs of CCM consist of the financing of its inventory of securities and mortgage loans. Its securities inventory is financed primarily through MBS repurchase agreements. CCM also has access to a $200 million secured bank loan facility and a lending facility with CHL The securities industry is highly competitive and fragmented. CCM competes with large global investment banks and broker-dealers, as well as smaller regional broker-dealers. CCM competes by specializing in mortgage related fixed income securities and through its affiliation with CHL, which allow it to offer information, products and services tailored to the unique needs of participants in the mortgage related debt securities markets. The primary cash needs for CIG are to meet short-term and long-term obligations to policyholders (payment of policy benefits), costs of acquiring new business (principally commissions) and the purchases of new investments. To meet these needs, CIG currently utilizes cash flow provided from operations as well as maturities and sales of invested assets. The lender-placed collateral protection insurance market is dominated by a few providers competing on overall financial strength of the insurer, premium rates, policy terms and conditions, services offered, reputation and broker compensation. The voluntary property and casualty and life and disability marketplace is dominated by large, brand name providers and is driven mostly by price and name recognition. GIC competes by providing high quality service and pricing its products at competitive rates. 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 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 the mortgage loans it originates and purchases to investors but generally retains the right to service the loans, thereby increasing the Company's investment in MSRs. 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 2000, the Company's operating activities provided cash of approximately $2.4 billion on a short-term basis primarily as a result of a decrease in its mortgage loans and MBS held for sale. In Fiscal 1999, operating activities used approximately $1.0 billion on a short-term basis primarily to support the increase in its mortgage loans and MBS held for sale. In Fiscal 1998, the Company's operating activities used cash of approximately $2.5 billion. Investing Activities The primary investing activities for which cash was used by the Company was the investment in MSRs and the acquisition of Balboa. Net cash used by investing activities was $1.6 billion for Fiscal 2000, $1.8 billion for Fiscal 1999 and $1.1 billion for Fiscal 1998. Financing Activities Net cash used by financing activities amounted to $0.9 billion for Fiscal 2000. Net cash provided by financing activities amounted to $2.8 billion for Fiscal 1999. Net cash used by financing activities amounted to $3.6 billion for Fiscal 1998. The increase or decrease in cash flow from financing activities was primarily the result of the change in the Company's mortgage loan inventory and investment in MSRs. Prospective Trends Applications and Pipeline of Loans in Process For the month ended March 31, 2000, the Company received new loan applications at an average daily rate of $353 million. As of March 31, 2000, the Company's pipeline of loans in process was $9.0 billion. This compares to a daily application rate for the month ended in March 31, 1999 of $537 million and a pipeline of loans in process as of March 31, 1999 of $14.2 billion. The size of the pipeline is generally an indication of the level of future fundings, as historically 37% to 77% of the pipeline of loans in process has funded. In addition, the Company's LOCK `N SHOP(R) Pipeline as of March 31, 2000 was $3.1 billion and as of March 31, 1999 was $2.5 billion. Future application levels and loan fundings are dependent on numerous factors, including the level of demand for mortgage loans, the level of competition in the market, the direction of interest rates, seasonal factors and general economic conditions. Market Factors Loan production decreased 28% from Fiscal 1999 to Fiscal 2000. This decrease was primarily due to a smaller mortgage origination market, driven by reduced refinances, combined with a slight decrease in the Company's market share. Home purchase related loan production increased during the same period. The prepayment rate in the servicing portfolio decreased from 28% in Fiscal 1999 to 13% in Fiscal 2000. This was due primarily to a smaller mortgage origination refinance market. The Company's California mortgage loan production (as measured by principal balance) constituted 22% of its total production during Fiscal 2000 and 25% during Fiscal 1999. 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 impacted negatively. The Company has striven to diversify its mortgage banking activities geographically to mitigate such effects. The delinquency rate in the Company's servicing portfolio, excluding sub-servicing, increased to 3.97% at February 29, 2000 from 3.55% as of February 28, 1999. The Company believes that this increase was primarily the result of changes in portfolio mix and aging. Sub-prime loans (which tend to experience higher delinquency rates than prime loans) represented approximately 3% of the total portfolio as of February 29, 2000, up from 1% as of February 28, 1999. In addition, the weighted average age of the prime credit quality loans in the portfolio increased to 29 months at February 29, 2000 from 26 months in February 28, 1999. 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. Furthermore, 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 servicing portfolio, excluding sub-servicing, that are in foreclosure increased to 0.39% as of February 29, 2000 from 0.31% as of February 28, 1999. 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. While the Company does not generally retain credit risk with respect to the conventional prime credit quality first 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 these 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. Similarly, government loans serviced by the Company (24% of the Company's servicing portfolio as of February 29, 2000) are insured by the Federal Housing Administration or partially guaranteed against loss by the Department of Veterans Administration. The Company is exposed to credit losses to the extent that the partial guarantee provided by the Department of Veterans Administration is inadequate to cover the total credit losses incurred. The Company retains credit risk on the home equity and sub-prime loans it securitizes, through retention of a subordinated interest. As of February 29, 2000, the Company had investments in such subordinated interests amounting to $570.4 million. The Company incurred bad debt expenses totaling $15.4 million and $23.6 million in Fiscal 2000 and Fiscal 1999, respectively, related to the credit risk described above. Servicing Hedge As previously discussed, the Company's Servicing Hedge is designed to protect the value of its investment in MSRs 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. The historical correlation of the Servicing Hedge and the MSRs has been very high. However, given the complexity and uncertainty inherent in hedging MSRs, there can be no assurance that future results will match the historical performance of the Servicing Hedge. Implementation of New Accounting Standards In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize the fair value of all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. This statement will become effective in the fiscal year ended February 28, 2002. The Company has not yet determined the impact upon adoption of this standard on the Consolidated Financial Statements. In October 1998, the Financial Accounting Standards Board issued SFAS No. 134, Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise ("SFAS No. 134"). SFAS No. 134 is an amendment of SFAS No. 65, Accounting for Certain Mortgage Banking Activities. It requires that after the securitization of mortgage loans held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed securities and other retained interests based on its ability and intent to sell or hold those instruments. The Company adopted this statement in October 1998 and, accordingly, reclassified mortgage-backed securities retained in securitization as available for sale securities. Year 2000 Update Reflecting the work completed on the Company's Year 2000 program, the Company's computer systems and business processes successfully handled the date change from December 31, 1999 to January 1, 2000. The Company is not aware of any significant year 2000 problems encountered internally or with third parties with which it does business, including customers, counterparties and others, the global financial market infrastructure, and the utility infrastructure on which all corporations rely. Based on operations since January 1, 2000, the Company does not expect any significant impact to its ongoing operations as a result of the year 2000 issue. However, although remote, it is possible that the full impact of year 2000 issues has not been fully recognized and no assurances can be given that year 2000 problems will not emerge. To the extent any Year 2000 issues arise, that could expose the Company to certain risks, such as the nonperformance by third parties of obligations to the Company. The pre-tax cost associated with the required systems modifications and conversions totaled approximately $32.3 million of which all had been incurred through February 29, 2000. The Company had previously estimated the cost at approximately $36 million. Management believes a significant amount of the work incurred in connection with the year 2000 issue will have ongoing utility by way of improved software coding and systems documentation. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In response to this Item, the information set forth on page 34 and Note A of this Form 10-K is incorporated herein by reference. 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. (incorporated by reference to Exhibit 2.1 to the Company's Annual Report on Form 10-K dated February 28, 1997). 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). 3.3.1* Amendment to Bylaws of Countrywide Credit Industries, Inc. dated January 28, 1998 (incorporated by reference to Exhibit 3.3.1 to the Company's Annual Report on Form 10-K dated February 28, 1998). 3.3.2* Amendment to Bylaws of Countrywide Credit Industries, Inc. dated February 3, 1998 (incorporated by reference to Exhibit 3.3.1 to the Company's Annual Report on Form 10-K dated February 28, 1998). 3.3.3 Amendment to Bylaws of Countrywide Credit Industries, Inc. dated March 24, 2000. 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 onForm 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). 4.15* Trust Deed dated 1st May, 1998 among CHL, the Company and Bankers Trustee Company Limited, as Trustee for Euro Medium Notes of CHL (incorporated by reference to Exhibit 4.15 to the Company's Quarterly Report on Form 10-Q dated May 31, 1998). 4.16* First Supplemental Trust Deed dated 16th December, 1998, modifying the provisions of a Trust Deed dated 1st May, 1998 among CHL, the Company and Bankers Trustee Company Limited, as Trustee for Euro Medium Notes of CHL (incorporated by reference to Exhibit 4.16 to the Company's Annual Report on Form 10-K dated February 28, 1999). 4.16.1* Form of Medium-Term Notes, Series F (fixed-rate) of CHL (incorporated by reference to Exhibit 4.3 to the registration statement on Form S-3 of the Company and CHL (File Nos. 333-31529 and 333-31529-01) filed with the SEC on July 29, 1997). 4.16.2* Form of Medium-Term Notes, Series F (floating-rate) of CHL (incorporated by reference to Exhibit 4.4 to the registration statement on Form S-3 of the Company and CHL (File Nos. 333-31529 and 333-31529-01) filed with the SEC on July 29, 1997). 4.17* Form of Medium-Term Notes,Series G (fixed-rate) of CHL (incorporated by reference to Exhibit 4.10 to the registration statement on Form S-3 of the Company and CHL (File Nos. 333-58125 and 333-58125-01) filed with the SEC on June 30, 1998). 4.18* Form of Medium-Term Notes,Series G (floating-rate) of CHL (incorporated by reference to Exhibit 4.11 to the registration statement on Form S-3 of the Company and CHL (File Nos. 333-58125 and 333-58125-01)filed with the SEC on June 30, 1998). 4.19* Form of Medium-Term Notes, Series H(fixed-rate) of CHL (incorporated by reference to Exhibit4.3 to the registration statement on Form S-3 of the Company and CHL (File Nos. 333-66467 and 333-66467-01)filed with the SEC on October 30,1998). 4.20* Form of Medium-Term Notes,Series H (floating-rate) of CHL (incorporated by reference to Exhibit 4.4 to the registration statement on Form S-3 of the Company and CHL (File Nos. 333-66467 and 333-66467-01) filed with the SEC on October 30, 1998). 4.21* Form of 6.85% Note due 2004 of CHL (incorporated by reference to Exhibit 2 to the Company's Current Report on Form 8-K dated June 21, 1999. + 10.2.2 Part-Time Employment Agreement between named executive officer and the Company dated as of February 28, 2000. + 10.2.3 Letter Agreement between David S. Loeb and the Company dated February 28, 2000. + 10.3* Restated Employment Agreement for Angelo R Mozilo dated March 26, 1996 (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q dated August 31, 1996). + 10.3.1* Amendment Number One to Restated Employment Agreement for Angelo R. Mozilo (incorporated by reference to Exhibit 10.3.1 to the Company's Annual Report on Form 10-K dated February 28, 1998) + 10.3.2* Amendment Number Two to Restated Employment Agreement for Angelo R. Mozilo (incorporated by reference to Exhibit 10.3.2 to the Company's Annual Report on Form 10-K dated February 28, 1998) + 10.3.3 Third Restated Employment Agreement by and between the Company and Angelo R. Mozilo in effect as of March 1, 2000. + 10.4.1* Employment Agreement by and between the Company and Stanford L. Kurland, dated as of March 1, 1999 (incorporated by reference to Exhibit 10.4.1 to the Company's Annual Report on Form 10-K dated February 28, 1999. + 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). + 10.5.1* Supplemental Form of Countrywide Credit Industries, Inc. Deferred Compensation Agreement for Non-Employee Directors (incorporated by reference to Exhibit 10.5.1 to the Company's Quarterly Report on Form 10-Q dated May 31, 1998). + 10.7* Countrywide Credit Industries, Inc. Deferred Compensation Plan Amended and Restated Effective January 1, 1998 (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K dated February 28, 1998). + 10.7.1* First Amendment to Countrywide Credit Industries, Inc. Deferred Compensation Plan Amended and Restated effective January 1, 1999. + 10.7.2* Second Amendment, effective as of June 30, 1999, to the Company's Deferred Compensation Plan Amended and Restated (incorporated by reference to Exhibit 10.7.2 to the Company's Quarterly Report on Form 10-Q dated August 31, 1999). 10.8* Revolving Credit Agreement dated as of the 24th day of September, 1997, by and among Countrywide Home Loans, Inc., Bankers Trust Company,The First National Bank of Chicago, The Bank of New York, Chase Securities Inc., The Chase Manhattan Bank and the Lenders Party thereto. (incorporated by reference to Exhibit 10.8 to the Company's Quarterly report on Form 10-Q dated August 31, 1997). 10.8.3* Amendment to Revolving Credit Agreement dated as of the 25th day of November, 1998 by and among CHL, the Lenders under (as that term is defined in) the Revolving Credit Agreement dated as of September 24, 1997, and Bankers Trust Company as Credit Agent (incorporated by reference to Exhibit 10.8.3 to the Company's Quarterly Report on Form 10-Q dated November 30, 1998). 10.8.6* Short Term Facility Extension Amendment dated as of the 22nd day of September 1999 by and among CHL, the Short Term Lenders under the Revolving Credit Agreement dated as of September 24, 1997, and Bankers Trust Company, as Credit Agent (incorporated by reference to Exhibit 10.8.6 to the Company's Quarterly Report on Form 10-Q dated August 31, 1999). 10.8.7 Credit Agreement as of the 12th day of April, 2000, by and among CHL, Royal Bank of Canada, ABN AMRO Bank, N.V., Credit Lyonnais New York Branch, Commerzbank AG, New York branch, and the Lenders Party thereto. + 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). + 10.11* 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). + 10.11.1* First Amendment to the 1987 Stock Option Plan as Amended and Restated.(incorporated by reference to Exhibit 10.11.1 to the Company's Quarterly Report on Form 10-Q dated November 30, 1997). + 10.11.2* Second Amendment to the 1987 Stock Option Plan as Amended and Restated.(incorporated by reference to Exhibit 10.11.2 to the Company's Quarterly Report on Form 10-Q dated November 30, 1997). + 10.11.3* Third Amendment to the 1987 Stock Option Plan as Amended and Restated (incorporated by reference to Exhibit 10.11.3 to the Company's Quarterly Report on Form 10-Q dated November 30, 1997). + 10.11.4* Fourth Amendment to the 1987 Stock Option Plan as Amended and Restated (incorporated by reference to Exhibit 10.11.4 to the Company's Quarterly Report on Form 10-Q dated May 31, 1998). + 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). + 10.15* 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). + 10.20* 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). + 10.20.6* Sixth Amendment to the 1991 Stock Option Plan (incorporated by reference to Exhibit 10.20.6 to the Company's Annual Report on Form 10-Q dated November 30, 1997). + 10.20.7* Seventh Amendment to the 1991 Stock Option Plan (incorporated by reference to Exhibit 10.20.7 to the Company's Annual Report on Form 10-Q dated November 30, 1997). + 10.20.8* Eighth Amendment to the 1991 Stock Option Plan (incorporated by reference to Exhibit 10.20.8 to the Company's Quarterly Report on Form 10-Q dated May 31, 1998). + 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). + 10.21.1* First Amendment to the 1992 Stock Option Plan (incorporated by reference to Exhibit 10.21.1 to the Company's Quarterly Report on Form 10-Q dated November 30, 1997). + 10.21.2* Second Amendment to the 1992 Stock Option Plan (incorporated by reference to Exhibit 10.21.2 to the Company's Quarterly Report on Form 10-Q dated November 30, 1997). + 10.21.3* Third Amendment to the 1992 Stock Option Plan (incorporated by reference to Exhibit 10.21.3 to the Company's Quarterly Report on Form 10-Q dated May 31, 1998). + 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 Quarterly Report on Form 10-Q dated August 31, 1996). + 10.22.2* Second Amendment to the Amended and Restated 1993 Stock Option Plan. (incorporated by reference to Exhibit 10.22.2 to the Company's Quarterly Report on Form 10-Q dated November 30,1997). + 10.22.3* Third Amendment to the Amended and Restated 1993 Stock Option Plan (incorporated by reference to Exhibit 10.22.3 to the Company's Annual Report on Form 10-K dated February 28, 1998). + 10.22.4* Fourth Amendment to the Amended and Restated 1993 Stock Option Plan (incorporated by reference to Exhibit 10.22.4 to the Company's Quarterly Report on Form 10-Q dated May 31, 1998). + 10.22.5* Fifth Amendment to the Amended and Restated 1993 Stock Option Plan (incorporated by reference to Exhibit 10.22.5 to the Company's Quarterly Report on Form 10-Q dated August 31, 1998). + 10.23.1* Amended and Restated Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.23.1 to the Company's Annual Report on Form 10-K dated February 28, 1998). + 10.23.2* First Amendment, effective January 1, 1999, to the Company's Supplemental Executive Retirement Plan 1998 Amendment and Restatement (incorporated by reference to Exhibit 10.23.2 to the Company's Annual Report on Form 10-K dated February 28, 1999). + 10.23.3* Second Amendment, effective as of June 30, 1999, to the Company's Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.23.3 to the Company's Quarterly Report on Form 10-Q dated August 31, 1999). + 10.24.1* Amended and Restated Split-Dollar Life Insurance Agreement (incorporated by reference to Exhibit 10.24.1 to the Company's Quarterly Report on Form 10-Q dated November 30, 1998). + 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. + 10.27.1* First Amendment to Change in Control Severance Plan (incorporated by reference to Exhibit 10.27.1 to the Company's Quarterly Report on Form 10-Q dated November 30, 1998). 11.1 Statement Regarding Computation of Earnings Per Share. 12.1 Computation of the Ratio of Earnings to Fixed Charges. 21 List of subsidiaries. 23 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/ Angelo R. Mozilo ------------------------------------------------ Angelo R. Mozilo, Chief Executive Officer, President and Chairman of the Board of Directors (Principal Executive Officer) Dated: May 10, 2000 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/Angelo R. MoziloChief Executive Officer, President and May 10, 2000 --------------------------------------- --------------------------------------- Angelo R. Mozilo Chairman of the Board of Directors (Principal Executive Officer) /s/ Stanford L. Kurland Senior Managing Director, Chief May 10, 2000 --------------------------------------- --------------------------------------- Stanford L. Kurland Operating Officer and Director /s/ Carlos M. Garcia Managing Director; Chief Financial May 10, 2000 --------------------------------------- Carlos M. Garcia Officer and Chief Accounting Officer (Principal Financial Officer and Principal Accounting Officer) /s/ Jeffrey M. Cunningham Director May 10, 2000 --------------------------------------- Jeffrey M. Cunningham /s/ Robert J. Donato Director May 10, 2000 --------------------------------------- Robert J. Donato /s/ Michael E. Dougherty Director May 10, 2000 --------------------------------------- --------------------------------------- Michael E. Dougherty /s/ Ben M. Enis Director May 10, 2000 --------------------------------------- Ben M. Enis /s/ Edwin Heller Director May 10, 2000 --------------------------------------- Edwin Heller /s/ Harley W. Snyder Director May 10, 2000 --------------------------------------- Harley W. Snyder /s/ Oscar P. Robertson Director May 10, 2000 --------------------------------------- Oscar P. Robertson F-1 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 29, 2000 F-9 COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND SCHEDULES February 29, 2000 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 Consolidated Statements of Comprehensive Income.................... F-8 Notes to Consolidated Financial Statements......................... F-9 Schedules Schedule I - Condensed Financial Information of Registrant......... F-35 Schedule II - Valuation and Qualifying Accounts.................... F-39 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 29, 2000 and February 28, 1999, and the related consolidated statements of earnings, common shareholders' equity, cash flows and comprehensive income for each of the three years in the period ended February 29, 2000. 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 auditing standards generally accepted in the United States. 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 29, 2000 and February 28, 1999, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended February 29, 2000, in conformity with accounting principles generally accepted in the United States. In October 1998, the Company adopted Financial Accounting Standards Board Statement No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." This change is discussed in Note S of the Notes to Consolidated Financial Statements. We have also audited Schedules I and II for each of the three years in the period ended February 29, 2000. In our opinion, such schedules present fairly, in all material respects, the information required to be set forth therein. GRANT THORNTON LLP Los Angeles, California April 28, 2000 COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS February 29(28), (Dollar amounts in thousands, except per share data) A S S E T S 2000 1999 ------------------- ------------------- Cash $ 59,890 $ 58,748 Mortgage loans and mortgage-backed securities held for sale 2,653,183 6,231,220 Trading securities, at market value 1,984,031 1,460,446 Mortgage servicing rights, net 5,396,477 4,496,439 Investments in other financial instruments 3,562,458 1,628,153 Property, equipment and leasehold improvements, at cost - net of accumulated depreciation and amortization 410,899 311,741 Other assets 1,755,390 1,461,509 ------------------- ------------------- Total assets $15,822,328 $15,648,256 =================== =================== Borrower and investor custodial accounts (segregated in special accounts - excluded from corporate assets) $2,852,738 $4,020,998 =================== =================== LIABILITIES AND SHAREHOLDERS' EQUITY Notes payable $ 9,782,625 $ 9,935,759 Drafts payable issued in connection with mortgage loan closings 382,108 1,083,499 Accounts payable, accrued liabilities and other 997,405 517,937 Deferred income taxes 1,272,311 1,092,176 ------------------- ------------------- Total liabilities 12,434,449 12,629,371 Commitments and contingencies - - Company-obligated mandatorily redeemable capital trust pass- through securities of subsidiary trusts holding solely Company guaranteed related subordinated debt 500,000 500,000 Shareholders' equity Preferred stock - authorized, 2,500,000 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, 113,463,424 shares in 2000 and 112,619,313 shares in 1999 5,673 5,631 Additional paid-in capital 1,171,238 1,153,673 Accumulated other comprehensive loss (33,234) (19,593) Retained earnings 1,744,202 1,379,174 ------------------- ------------------- Total shareholders' equity 2,887,879 2,518,885 ------------------- ------------------- Total liabilities and shareholders' equity $15,822,328 $15,648,256 =================== =================== Borrower and investor custodial accounts $2,852,738 $4,020,998 =================== =================== The accompanying notes are an integral part of these statements.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Year ended February 29(28), (Dollar amounts in thousands, except per share data) 2000 1999 1998 --------------- -------------- -------------- Revenues Loan origination fees $406,458 $ 623,531 $ 301,389 Gain on sale of loans, net of commitment fees 557,743 699,433 417,427 --------------- -------------- -------------- Loan production revenue 964,201 1,322,964 718,816 Interest earned 998,646 1,029,066 584,076 Interest charges (930,294) (983,829) (568,359) --------------- -------------- -------------- Net interest income 68,352 45,237 15,717 Loan servicing income 1,192,789 1,023,700 907,674 Amortization and impairment/recovery of mortgage servicing rights, net of servicing hedge (445,138) (600,766) (328,845) --------------- -------------- -------------- Net loan administration income 747,651 422,934 578,829 Commissions, fees and other income 234,047 187,867 138,217 Gain on sale of subsidiary 4,424 - 57,381 --------------- -------------- -------------- Total revenues 2,018,675 1,979,002 1,508,960 Expenses Salaries and related expenses 689,768 669,686 424,321 Occupancy and other office expenses 276,802 270,483 182,335 Guarantee fees 195,928 181,117 172,692 Marketing expenses 72,930 64,510 42,320 Other operating expenses 152,049 161,401 121,746 --------------- -------------- -------------- Total expenses 1,387,477 1,347,197 943,414 --------------- -------------- -------------- Earnings before income taxes 631,198 631,805 565,546 Provision for income taxes 220,955 246,404 220,563 --------------- -------------- -------------- NET EARNINGS $410,243 $385,401 $ 344,983 =============== ============== ============== Earnings per share Basic $3.63 $3.46 $3.21 Diluted $3.52 $3.29 $3.09 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 29(28), (Dollar amounts in thousands) Accumulated Additional Other Number Common Paid-in- Comprehensive Retained of Shares Stock Capital Income (Loss) Earnings Total -------------- ----------- ----------------------------------------------------------- Balance at February 28, 1997 106,095,558 $5,305 $917,942 ($30,545) $718,829 $1,611,531 Cash dividends paid - common - - - - (34,391) (34,391) Stock options exercised 839,479 42 14,645 - - 14,687 Tax benefit of stock options exercised - - 5,378 - - 5,378 Dividend reinvestment plan 2,179,939 109 108,511 - - 108,620 401(k) Plan contribution 90,603 4 2,889 - - 2,893 Other comprehensive income, net of tax - - - 34,242 - 34,242 Net earnings for the year - - - - 344,983 344,983 --- -- - ------------------------------------------------------------------- ----------------------------------------------------------- Balance at February 28, 1998 109,205,579 5,460 1,049,365 3,697 1,029,421 2,087,943 Cash dividends paid - common - - - - (35,648) (35,648) Stock options exercised 1,239,662 62 20,047 - - 20,109 Tax benefit of stock options exercised - - 11,456 - - 11,456 Dividend reinvestment plan 2,048,062 103 66,669 - - 66,772 401(k) Plan contribution 126,010 6 6,136 - - 6,142 Other comprehensive loss, net of tax - - - (23,290) - (23,290) Net earnings for the year - - - - 385,401 385,401 - ------------------------------------------------------------------------------------------------------------------------------- Balance at February 28, 1999 112,619,313 5,631 1,153,673 (19,593) 1,379,174 2,518,885 Cash dividends paid - common - - - - (45,215) (45,215) Stock options exercised 602,021 31 6,709 - - 6,740 Tax benefit of stock options exercised - - 1,883 - - 1,883 Dividend reinvestment plan 61,869 2 1,986 - - 1,988 401(k) Plan contribution 180,221 9 6,987 - - 6,996 Other comprehensive loss, net of tax - - - (13,641) - (13,641) Net earnings for the year - - - - 410,243 410,243 - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------- ----------------------------------------------------------- Balance at February 29, 2000 113,463,424 $5,673 $1,171,238 ($33,234) $1,744,202 $2,887,879 =============================================================================================================================== 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 29(28), (Dollar amounts in thousands) 2000 1999 1998 ---------------- ----------------- ---------------- Cash flows from operating activities: Net earnings $410,243 $385,401 $344,983 Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Gain on sale of available-for-sale securities (12,332) (56,801) (16,749) Gain on sale of subsidiary (4,424) - (57,381) Gain on sale of securitized service fees (2,650) - - Amortization and impairment/recovery of mortgage servicing rights 181,101 1,013,578 561,804 Depreciation and other amortization 65,947 49,210 44,930 Deferred income taxes 220,955 246,404 220,563 Origination and purchase of loans held for sale (66,739,744) (92,880,538) (48,771,673) Principal repayments and sale of loans 70,317,781 91,941,509 46,059,454 ---------------- ----------------- ---------------- Decrease (increase) in mortgage loans and mortgage- backed securities held for sale 3,578,037 (939,029) (2,712,219) Increase in other financial instruments (1,393,493) (423,807) (685,119) Increase in trading securities (523,585) (1,216,499) (113,032) Increase in other assets (81,052) (97,181) (345,952) Increase in accounts payable and accrued liabilities 6,263 35,259 302,404 ---------------- ----------------- ---------------- Net cash provided (used) by operating activities 2,445,010 (1,003,465) (2,455,768) ---------------- ----------------- ---------------- Cash flows from investing activities: Additions to mortgage servicing rights, net (1,299,909) (1,898,007) (1,149,988) Proceeds from sale of securitized service fees 197,616 - - Acquisition of insurance company (425,000) - - Purchase of property, equipment and leasehold improvements, net (150,537) (119,507) (70,896) Proceeds from sale of available-for-sale securities 96,200 231,555 72,747 Proceeds from sale of subsidiary 21,053 - - ---------------- ----------------- ---------------- Net cash used by investing activities (1,560,577) (1,785,959) (1,148,137) ---------------- ----------------- ---------------- Cash flows from financing activities: Net (decrease) increase in warehouse debt and other short-term borrowings (790,117) (1,122,273) 1,513,974 Issuance of long-term debt 2,224,354 4,044,121 1,973,198 Repayment of long-term debt (2,288,762) (142,096) (182,747) Issuance of Company - obligated mandatorily redeemable capital trust pass-through securities of subsidiary trust holding solely a Company guaranteed related subordinated debt - - 200,000 Issuance of common stock 16,449 93,361 126,309 Cash dividends paid (45,215) (35,648) (34,391) ---------------- ----------------- ---------------- Net cash (used) provided by financing activities (883,291) 2,837,465 3,596,343 ---------------- ----------------- ---------------- Net increase (decrease) in cash 1,142 48,041 (7,562) Cash at beginning of period 58,748 10,707 18,269 ---------------- ----------------- ---------------- Cash at end of period $ 59,890 $ 58,748 $ 10,707 ================ ================= ================ Supplemental cash flow information: Cash used to pay interest $ 902,491 $ 876,236 $ 422,969 Cash used to pay (refund from) income taxes $ 7,084 $ 1,407 $ (1,645) Noncash financing activities: Unrealized gain (loss) on available-for-sale securities, net of tax $ (13,641) $ (23,290) $ 34,242 The accompanying notes are an integral part of these statements.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year Ended February 29(28), (Dollar amounts in thousands) 2000 1999 1998 --------------- ----------------- --------------- NET EARNINGS $410,243 $385,401 $344,983 Other comprehensive income, net of tax: Unrealized gains (losses) on available for sale securities: Unrealized holding gains (losses) arising during the period, before tax (9,356) 18,556 72,883 Income tax benefit (expense) 3,331 (7,237) (28,424) --------------- ----------------- --------------- Unrealized holding gains (losses) arising during the period, net of tax (6,025) 11,319 44,459 Less: reclassification adjustment for gains included in net earnings, (12,332) (56,801) (16,749) before tax Income tax expense 4,716 22,192 6,532 --------------- ----------------- --------------- Reclassification adjustment for gains included in net earnings, net of tax (7,616) (34,609) (10,217) --------------- ----------------- --------------- Other comprehensive (loss) income (13,641) (23,290) 34,242 --------------- ----------------- --------------- COMPREHENSIVE INCOME $396,602 $362,111 $379,225 =============== === ===============
The accompanying notes are an integral part of these statements. COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Countrywide Credit Industries, Inc. (the "Company") 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 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. Principles of Consolidation The consolidated financial statements include the accounts of the parent and all wholly-owned subsidiaries that are required to be consolidated under generally accepted accounting principles. All material intercompany accounts and transactions have been eliminated. Mortgage Loans and Mortgage-Backed Securities 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 hedging transactions entered into to protect the value of the mortgage loans and MBS held for sale from increases in interest rates. Hedging transactions also are entered into to protect the value of the Company's short-term rate and point commitments to fund mortgage loan applications in process (the "Committed Pipeline") from increases in interest rates. Gains and losses generated from such hedging transactions are deferred. Hedging losses are recognized currently if deferring such losses would result in mortgage loans and MBS held for sale and the Committed Pipeline being effectively valued in excess of their estimated net realizable value. The Company's MBS held for sale in the near term are classified as trading. Trading securities are recorded at fair value, with the change in fair value during the period included in earnings. The fair value of MBS held for sale in the near term is based on quoted market prices. Property, Equipment and Leasehold Improvements Property, equipment and leasehold improvements are stated at cost, less accumulated depreciation and amortization. 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. COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 35 F- Mortgage Servicing Rights, Amortization and Impairment The Company recognizes as separate assets the rights to service mortgage loans for others, whether the servicing rights are acquired through a separate purchase or through loan origination by allocating total costs incurred between the loan, the servicing rights retained and other assets retained based on their relative fair values. Amortization of mortgage servicing rights ("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 by 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, note rate stratification and recent prepayment experience. NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) MSRs are periodically evaluated for impairment, which is recognized in the statement of earnings during the applicable period through additions to an impairment reserve. For purposes of performing its impairment evaluation, the Company stratifies its servicing portfolio on the basis of certain risk characteristics including loan type (fixed or adjustable) and note rate. Servicing Hedge To mitigate the effect on earnings of MSR impairment that may result from increased current and projected prepayment activity that generally occurs when interest rates decline, the Company acquires financial instruments, including derivatives, that increase in aggregate value when interest rates decline (the "Servicing Hedge"). These financial instruments include interest rate floors, principle-only securities ("P/O Securities"), options on interest rate Swaps ("Swaptions"), options on MBS, options on interest rate futures, interest rate futures, interest rate swaps with the Company's maximum payment capped ("Capped Swaps"), interest rate swaps and interest rate caps. The value of the interest rate floors, options on interest rate futures and MBS, Capped Swaps, interest rate caps and Swaptions, is derived from an underlying instrument or index; however, the notional or contractual amount is not recognized on the balance sheet. The cost of these instruments is charged to expense (and deducted from net loan administration income) over the life of the contract. Unamortized costs are included in Investments in Other Financial Instruments on the balance sheet. The basis of the MSRs is adjusted for realized and unrealized gains and losses in the derivative financial instruments that qualify for hedge accounting. Qualitative Disclosures About Market Risk The primary market risk facing the Company is interest rate risk. From an enterprise perspective, the Company manages this risk by striving to balance its loan origination and loan servicing business segments, which are counter-cyclical in nature. In addition, the Company utilizes various financial instruments, including derivatives contracts, to manage the interest rate risk related specifically to its Committed Pipeline, mortgage loan inventory and MBS held for sale, MSRs, mortgage-backed securities retained in securitizations, trading securities and debt securities. The overall objective of the Company's interest rate risk management policies is to offset changes in the values of these items resulting from changes in interest rates. The Company does not speculate on the direction of interest rates in its management of interest rate risk. To qualify for hedge accounting, the derivative contract positions must be designated as a hedge and be effective in reducing the market risk of an existing asset, liability or the Committed Pipeline. The effectiveness of the derivative contracts is evaluated on an initial and ongoing basis using quantitative measures of correlation. If a derivative contract no longer qualifies as a hedge, any subsequent changes in fair value are recognized currently in earnings. If a derivative contract that qualifies as a hedge is sold, matures or is terminated, any resulting intrinsic gain or loss adjusts the basis of the underlying item. Unamortized premiums associated with the time value of such contracts are recognized in income. If a designated underlying item is no longer held, any previously unrecognized gain or loss on the related derivative is recognized in earnings and the derivative contract is subsequently accounted for at fair value. Trading Securities Trading securities consists of financial instruments held by the Company's broker-dealer subsidiary. These financial instruments, including derivative contracts, are recorded at fair value on a trade date basis, and gains and losses, both realized and unrealized, are included in Gain on Sale of Loans. NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Available-for-Sale-Securities The Company has designated its investments in P/O Securities, certain other equity securities, mortgage-backed securities retained in the Company's securitizations and insurance company investment portfolio as available for sale securities, which are included in Investments in Other Financial Instruments. Mortgage-backed securities retained in the Company's securtizations consist of sub-prime and home equity residual interests ("Residuals") and interest-only and principal-only certificates related to the Company's non-conforming private label mortgage-backed securities. The timing and amount of cash flows on these securities are significantly influenced by prepayments on the underlying loans and estimated foreclosure losses to the extent the Company has retained the risk of such losses. The fair value of these securities is determined by discounting future cash flows using discount rates that approximate current market rates. As of February 29, 2000, the Company used discount rates for sub-prime and home equity mortgage-backed residuals of 20% and 15%, respectively; annual prepayment estimates of 19% to 37% and 25%, respectively; and lifetime credit loss estimates of 1.0% to 9.0% and 2.3% of the original principal balances of the underlying loans, respectively. The insurance company investment portfolio, includes primarily fixed income securities, as well as stocks and other short-term securities. The available for sale securities are measured at fair value. Unrealized gains or losses, net of deferred income taxes, are excluded from earnings and reported as a separate component of shareholders' equity until realized. Realized gains and losses on sales of securities are computed by the specific identification method at the time of disposition and are recorded in earnings. Unrealized losses that are other than temporary are recognized in earnings. Loan Origination Fees Loan fees, discount points and certain direct origination costs are recorded as an adjustment of the cost of the loan and are recorded in earnings when the loan is sold. Option Fees Option fees, included in Other Assets, primarily consist of unamortized put and call option fees on MBS. 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. Investment In Non-Consolidated Subsidiaries The Company has an investment in CWHL Funding, Inc., a bankruptcy remote, wholly-owned subsidiary. This subsidiary was established to facilitate the sale of certain defaulted mortgage loans repurchased in the ordinary course of business from Ginnie Mae MBS serviced by the Company. The Company's investment in CWHL Funding, Inc. was $63.0 million and $73.7 million as of February 29, 2000 and February 28, 1999, respectively. Interest Income Recognition Interest income is accrued as earned. Loans are placed on non-accrual status when any portion of principal or interest is ninety days past due or earlier when concern exists as to the ultimate collectibility of principal or interest. Loans return to accrual status when principal and interest become current and are anticipated to be fully collectible. Loan Servicing Income Loan servicing income represents fees earned for servicing residential mortgage loans for investors and related ancillary income, including late charges. Servicing income is recognized as earned, unless collection is doubtful. NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Interest Rate Swap Agreements The amount 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. Advertising Costs The Company generally 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 $53.5 million, $46.0 million and $32.6 million for the years ended February 29(28), 2000, 1999 and 1998, respectively. 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 recognizes compensation cost related to its stock option plans only to the extent that the fair value of the shares at the grant date exceeds the exercise price. 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 and tax basis carrying amounts of assets and liabilities. Earnings Per Share Basic earnings per share ("EPS") is determined using net income divided by the weighted average shares outstanding during the period. Diluted EPS is computed by dividing net income by the weighted average shares outstanding, assuming all dilutive potential common shares were issued. The following table presents basic and diluted EPS for the years ended February 29(28), 2000, 1999 and 1998. - ------------------------ --------- --------- --------- -- - ----------------------------- -- -- ------- ---------- ----- Year ended February 29(28), --------- --------- --------- -- - ----------------------------- -- -- ------- ---------- ----- 2000 1999 1998 --------- --------- --------- ---------- --------- --------- --------- --------- --------- Per-Share Per-Share Per-Share (Amounts in thousands, Net Amount Net Amount Net Amount except per share data) Earnings Shares Earnings Shares Earnings Shares - ------------------------ --------- --------- --------- --------- --------- --------- --------- ---------- --------- Net earnings $410,243 $385,401 $344,983 ========= ========== ========= Basic EPS Net earnings available to common shareholders $410,243 113,083 $3.63 $385,401 111,414 $3.46 $344,983 107,491 $3.21 Effect of Dilutive Stock Options 3,605 - 5,631 - 4,035 --------- --------- ---------- --------- --------- --------- Diluted EPS Net earnings available to common shareholders $410,243 116,688 $3.52 $385,401 117,045 $3.29 $344,983 111,526 $3.09 ========= ========= ========== ========= ========= ========= - ------------------------ --------- --------- --------- - ---------- --------- --------- -- --------- --------- --------- During the years ended February 29 (28), 2000 and 1999, options to purchase 3.2 million shares and 1.2 million shares, respectively, were outstanding but not included in the computation of EPS because they were antidilutive.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Financial Statement Reclassifications and Restatement Certain amounts reflected in the Consolidated Financial Statements for the years ended February 28, 1999 and 1998 have been reclassified to conform to the presentation for the year ended February 29, 2000. NOTE B - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Property, equipment and leasehold improvements consisted of the following. --------------------------------------------- -------------------------------------------------------------------- February 29(28), ----------------- -- -------------- ----- (Dollar amounts in thousands) 2000 1999 --------------------------------------------------------------------- -- ----------------- -- -------------- ----- Buildings $183,134 $ 97,339 Office equipment 362,346 305,092 Leasehold improvements 55,281 42,578 ----------------- -------------- 600,761 445,009 Less: accumulated depreciation and amortization (218,828) (167,449) ----------------- -------------- 381,933 277,560 Land 28,966 34,181 ----------------- -------------- $410,899 $311,741 ================= ============== --------------------------------------------------------------------- -- ----------------- -- -------------- ----- Depreciation and amortization expense amounted to $48.8 million, $40.3 million and $31.8 million for the years ended February 29(28), 2000, 1999 and 1998, respectively.
NOTE C - MORTGAGE SERVICING RIGHTS Entries to mortgage servicing rights for the years ended February 29(28), 2000, 1999 and 1998 were as follows. ----------------------------------------------- -- ------------------------------------------------------------- February 29(28), ---------------- --- ---------------- --- ---------------- -- (Dollar amounts in thousands) 2000 1999 1998 ----------------------------------------------- -- ---------------- --- ---------------- --- ---------------- -- Mortgage Servicing Rights Balance at beginning of period $4,591,191 $3,653,318 $3,026,494 Additions, net 1,299,909 1,898,007 1,149,988 Securitization of service fees (218,770) - - Scheduled amortization (459,308) (556,373) (300,312) Hedge losses (gains) applied 207,217 (403,761) (222,852) ---------------- ---------------- ---------------- Balance before valuation reserve at end of period 5,420,239 4,591,191 3,653,318 ---------------- ---------------- ---------------- Reserve for Impairment of Mortgage Servicing Rights Balance at beginning of period (94,752) (41,308) (2,668) Reductions (additions) 70,990 (53,444) (38,640) ---------------- ---------------- ---------------- Balance at end of period (23,762) (94,752) (41,308) ---------------- ---------------- ---------------- Mortgage Servicing Rights, net $5,396,477 $4,496,439 $3,612,010 ================ ================ ================ ----------------------------------------------- -- ---------------- --- ---------------- --- ---------------- -- The estimated fair value of mortgage servicing rights was $5.7 billion and $4.7 billion as of February 29(28), 2000 and 1999, respectively. The fair value was determined by discounting estimated net future cash flows from mortgage servicing activities using discount and prepayment rates that approximate current market rates.
NOTE D - INVESTMENTS IN OTHER FINANCIAL INSTRUMENTS Investments in other financial instruments as of February 29(28), 2000 and 1999 included the following. ------------------------------------------------------------ ----------------------------------------------------- February 29(28), ----------------- --- ---------------- --- (Dollar amounts in thousands) 2000 1999 ------------------------------------------------------------------- --- ----------------- --- ---------------- --- Servicing hedge instruments $1,784,315 $ 991,401 Mortgage-backed securities retained in securitization 775,867 500,631 Insurance company investment portfolio 520,490 - Securities purchased under agreements to resell 435,593 76,246 Equity securities, restricted and unrestricted 46,193 59,875 ----------------- ---------------- $3,562,458 $1,628,153 ================= ================ ------------------------------------------------------------------- --- ----------------- --- ---------------- ---
NOTE E - AVAILABLE FOR SALE SECURITIES Amortized cost and fair value of available for sale securities as of February 29(28), 2000 and 1999 were as follows. (In October 1998, mortgage-backed securities retained in securitization were reclassified as available for sale securities; see note S.) ---------------------------------- ---------------- - ------------------------------------ -- ---------------- --- February 29, 2000 ---------------- - ------------------------------------ -- ---------------- --- Gross Gross Amortized Unrealized Unrealized Fair (Dollar amounts in thousands) Cost Gains Losses Value ---------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- --- Mortgage-backed securities retained in securitization $760,619 $39,411 ($24,163) $775,867 Principal only securities 1,002,496 2,372 (52,028) 952,840 Insurance company investment portfolio 523,012 483 520,490 (3,005) Equity securities 63,136 3,193 (20,136) 46,193 ---------------- ----------------- ---------------- ---------------- $2,349,263 $45,459 ($99,332) $2,295,390 ================ ================= ================ ================ ---------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- ---
NOTE E - AVAILABLE FOR SALE SECURITIES (Continued) ---------------------------------- ---------------- - ------------------------------------ -- ---------------- --- February 28, 1999 ---------------- - ------------------------------------ -- ---------------- --- Gross Gross Amortized Unrealized Unrealized Fair (Dollar amounts in thousands) Cost Gains Losses Value ---------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- --- Mortgage-backed securities retained in securitization $519,321 - ($18,690) $500,631 Principal only securities 32,514 312 - 32,826 Equity securities 42,498 3,098 (16,904) 28,692 ---------------- ----------------- ---------------- ---------------- $594,333 $3,410 ($35,594) $562,149 ================ ================= ================ ================ ---------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- ---
NOTE F - NOTES PAYABLE Notes payable consisted of the following. ------------------------------------------------------------ ----------------------------------------------------- February 29(28), ----------------- --- ---------------- --- (Dollar amounts in thousands) 2000 1999 -------------------------------------------------------------------- -- ----------------- --- ---------------- --- Commercial paper $ 103,829 $ 176,559 Medium-term notes, Series A, B, C, D, E, F, G, H and Euro Notes 7,975,324 8,039,824 Repurchase agreements 1,501,409 1,517,405 Subordinated notes 200,000 200,000 Other notes payable 2,063 1,971 ----------------- ---------------- $9,782,625 $9,935,759 ================= ================ -------------------------------------------------------------------- -- ----------------- --- ---------------- ---
Commercial Paper and Backup Credit Facilities As of February 29, 2000, CHL, the Company's mortgage banking subsidiary, had unsecured credit agreements (revolving credit facilities) with consortiums of commercial banks permitting CHL to borrow an aggregate maximum amount of $5.0 billion. The facilities included a $4.0 billion revolving credit facility with forty-four commercial banks consisting of: (i) a five-year facility of $3.0 billion, which expires on September 24, 2002, and (ii) a one-year facility of $1.0 billion which expires on September 20, 2000. As consideration for the facility, CHL pays annual commitment fees of $3.8 million. There is an additional one-year facility, which expired April 12, 2000, with eleven of the forty-four banks referenced above for total commitments of $1.0 billion. As consideration for the facility, CHL pays annual commitment fees of $0.8 million. CHL renewed this facility. (See Note O - "Subsequent Events".) The purpose of these credit facilities is to provide liquidity backup for CHL's commercial paper program. No amount was outstanding under these revolving credit facilities at February 29, 2000. The weighted average borrowing rate on commercial paper borrowings for the year ended February 29, 2000 was 5.31%. The weighted average borrowing rate on commercial paper outstanding as of February 29, 2000 was 5.92%. In addition, CHL has entered into a $1.1 billion asset-backed commercial paper conduit facility with four commercial banks. This facility has a maturity date of November 21, 2000. As consideration for this facility, CHL pays annual commitment fees of $1.4 million. Loans made under this facility are secured by conforming and non-conforming mortgage loans. All of the facilities contain various financial covenants and restrictions, certain of which limit the amount of dividends that can be paid by the Company or CHL. NOTE F - NOTES PAYABLE (Continued) Medium-Term Notes As of February 29, 2000, outstanding medium-term notes issued by CHL under various shelf registrations filed with the Securities and Exchange Commission or issued by CHL pursuant to its Euro medium-term note program were as follows. - --------------------------------------------------------------------------------------------------------------------------- (Dollar amounts in thousands) Outstanding Balance Interest Rate Maturity Date ---------------------- ---------------------------- ------------------------------------------- Floating-Rate Fixed-Rate Total From To From To ------------------------------------------- ----------- ---------- -------------- ------------- Series A - $ 143,500 $143,500 7.29% 8.79% Aug. 2000 Mar. 2002 Series B - 301,000 301,000 6.53% 6.98% Apr. 2000 Aug. 2005 Series C 130,000 127,000 257,000 5.74% 7.75% Mar. 2000 Mar. 2004 Series D 75,000 385,000 460,000 6.05% 6.88% Aug. 2000 Sep. 2005 Series E 210,000 690,000 900,000 6.31% 7.45% Aug. 2000 Oct. 2008 Series F 311,000 1,344,000 1,655,000 6.13% 7.00% Oct. 2000 May 2013 Series G 5,000 581,000 586,000 5.35% 7.00% Oct. 2000 Nov. 2018 Series H - 1,889,000 1,889,000 6.25% 8.25% Jun. 2004 Oct. 2019 Euro Notes 659,600 1,124,224 1,783,824 6.10% 7.42% Jul. 2000 Jan. 2009 ------------------------------------------- Total $1,390,600 $6,584,724 $7,975,324 =========================================== - --------------------------------------------------------------------------------------------------------------------------- As of February 29, 2000 substantially all of the outstanding fixed-rate notes had been effectively converted through interest rate swap agreements to floating-rate notes. The weighted average rate on medium-term notes for the year ended February 29, 2000, including the effect of the interest rate swap agreements, was 5.88%. As of February 29, 2000 $1,074 million foreign currency-denominated medium-term notes were outstanding. Such notes are denominated in Deutsche Marks, French Francs, Portuguese Escudos and Euros. The Company manages the associated foreign currency risk by entering into currency swaps. The terms of the currency swaps effectively translate the foreign currency denominated medium-term notes into U.S. dollars.
Repurchase Agreements The Company routinely enters into short-term financing arrangements to sell MBS under agreements to repurchase. The weighted average borrowing rate for the year ended February 29, 2000 was 5.16%. The weighted average borrowing rate on repurchase agreements outstanding as of February 29, 2000 was 5.86%. The repurchase agreements were collateralized by MBS. All MBS underlying repurchase agreements are held in safekeeping by broker-dealers or banks. All agreements are to repurchase the same or substantially identical MBS. NOTE F - NOTES PAYABLE (Continued) Pre-Sale Funding Facilities As of February 29, 2000, CHL had uncommitted revolving credit facilities with the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"). The credit facilities are secured by conforming mortgage loans which are in the process of being pooled into MBS. As of February 29, 2000, the Company had no outstanding borrowings under any of these facilities. Maturities of notes payable are as follows. ------------------ ------------------------------------------- ---------------------------------------------- Year ending February 29(28), (Dollar amounts in thousands) ------------------ ------------------------------------------- ---------------------------------------------- 2001 $2,529,302 2002 727,000 2003 1,146,500 2004 863,000 2005 1,528,685 Thereafter 2,988,138 ----------------- $9,782,625 ================= ------------------ ------------------------------------------- -------- ------------------- -----------------
NOTE G - COMPANY-OBLIGATED CAPITAL SECURITIES OF SUBSIDIARY TRUSTS In December 1996, Countrywide Capital I (the "Subsidiary Trust I"), a subsidiary of the Company, issued $300 million of 8% Capital Trust Pass-through Securities (the "8% Capital Securities"). In connection with the Subsidiary Trust I issuance of the 8% Capital Securities, CHL issued to the Subsidiary Trust I, $309 million of its 8% Junior Subordinated Deferrable Interest Debentures (the "Subordinated Debt Securities I"). The Subordinated Debt Securities I are due on December 15, 2026 with interest payable semi-annually on June 15 and December 15 of each year. The Company has the right to redeem at par, plus accrued interest, the 8% Capital Securities any time on or after December 15, 2006. The sole assets of the Subsidiary Trust I are, and will be, the Subordinated Debt Securities I. In June 1997, Countrywide Capital III (the "Subsidiary Trust III"), a subsidiary of the Company, issued $200 million of 8.05% Subordinated Capital Income Securities, Series A (the "8.05% Capital Securities"). In connection with the Subsidiary Trust III issuance of 8.05% Capital Securities, CHL issued to the Subsidiary Trust III, $206 million of its 8.05% Junior Subordinated Deferrable Interest Debentures (the "Subordinated Debt Securities III"). The Subordinated Debt Securities III are due on June 15, 2027 with interest payable semi-annually on June 15 and December 15 of each year. The sole assets of the Subsidiary Trust III are, and will be, the Subordinated Debt Securities III. In December 1997, Subsidiary Trust III completed an exchange offer pursuant to which newly issued capital securities (the "New 8.05% Capital Securities") were exchanged for all of the outstanding 8.05% Capital Securities. The New 8.05% Capital Securities are identical in all material respects to the 8.05% Capital Securities, except that the New 8.05% Capital Securities have been registered under the Securities Act of 1933, as amended. In relation to Subsidiary Trusts I and III, CHL has the right to defer payment of interest by extending the interest payment period, from time to time, for up to 10 consecutive semi-annual periods. If interest payments on the Debentures are so deferred, the Company and CHL may not declare or pay dividends on, or make a distribution with respect to, or redeem, purchase or acquire, or make a liquidation payment with respect to, any of its capital stock. NOTE H - INCOME TAXES Components of the provision for income taxes were as follows. ---- ------------------------------ ------------------------------------------------------------ -------- Year ended February29(28), ---------------- -- ------------- -- ------------- --- (Dollar amounts in thousands) 2000 1999 1998 ---- ----------------------------------------- --- ---------------- -- ------------- -- ------------- --- Federal expense - deferred $220,955 $204,186 $181,228 State expense - deferred - 42,218 39,335 ---------------- ------------- ------------- $220,955 $246,404 $220,563 ================ ============= ============= ---- ----------------------------------------- --- ---------------- -- ------------- -- ------------- --- 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 29(28), --------------- -- -------------- --- ------------ --- 2000 1999 1998 ---- ----------------------------------------- --- --------------- -- -------------- --- ------------ --- Statutory federal income tax rate 35.0% 35.0% 35.0% State income and franchise taxes, net of federal tax effect 4.0 4.0 4.0 Change in expected state tax rate (4.0) - - --------------- -------------- ------------ Effective income tax rate 35.0% 39.0% 39.0% =============== ============== ============ ---- ----------------------------------------- --- --------------- -- -------------- --- ------------ ---
In Fiscal 2000, the Company initiated a corporate reorganization related to its servicing operations. As a result of the reorganization, future state income tax liabilities are expected to be less than the amounts that were previously recorded as deferred income tax expense and liability in the Company's financial statements. The expected reduction in tax liabilities was reflected as a reduction in deferred state income tax expense in Fiscal 2000. The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities are presented below. ----- ------------------------------------------- -------------------------------------------------- ----- February 29(28), -------------------------------------------------- ----- (Dollar amounts in thousands) 2000 1999 ---------------------------------------------------------------------------------------------------------- Deferred income tax assets: Net operating losses $ 157,606 $ 198,204 State income and franchise taxes 53,625 59,752 Reserves, accrued expenses and other 38,366 41,898 --------------- --------------- Total deferred income tax assets 249,597 299,854 --------------- --------------- Deferred income tax liabilities: Mortgage servicing rights 1,500,495 1,368,349 Gain on sale of subsidiary 21,413 23,681 --------------- --------------- Total deferred income tax liabilities 1,521,908 1,392,030 --------------- --------------- Deferred income taxes $1,272,311 $1,092,176 =============== =============== ----------------------------------------------------------------------------------------------------------
As of February 29, 2000, the Company had net operating loss carryforwards for federal income tax purposes totaling $443.3 million that expire as follows: $74.3 million in 2009, $74.3 million in 2010, $41.3 million in 2011, $84.7 million in 2012, and $72.8 million in 2013, and $95.9 million in 2019. NOTE I - FINANCIAL INSTRUMENTS Derivative Financial Instruments The Company utilizes a variety of derivative financial instruments to manage interest-rate risk. These instruments include interest rate floors, MBS mandatory forward sale and purchase commitments, options to sell or buy MBS, treasury futures and interest rate futures, interest rate caps, Capped Swaps, Swaptions, interest rate futures and interest rate swaps. These instruments involve, to varying degrees, elements of interest-rate and credit risk. In addition, the Company manages foreign currency exchange rate risk with foreign currency swaps. The Company has potential exposure to credit loss in the event of nonperformance by the counterparties to the various over-the-counter instruments. The Company manages this credit risk by selecting only well established, financially strong counterparties, spreading the credit risk amongst many such counterparties, and by placing contractual limits on the amount of unsecured credit risk from any one counterparty. The Company's exposure to credit risk in the event of default by a counterparty is the current cost of replacing the contracts net of any available margins retained by the Company, a custodian or the Mortgage-Backed Securities Clearing Corporation (the "MBSCC"), which is an independent clearing agent. The total amount of counterparty credit exposure as of February 29, 2000, before and after applicable margin accounts held, was as follows: - --------------------------------------------------------------- ------------------------------------------ (Dollar amounts in millions) As of February 29, 2000 - --------------------------------------------------------------- ------------------------------------------ Total credit exposure before margin accounts held $218.7 Less: Margin accounts held (89.5) ------------------ Net unsecured credit exposure $129.2 ================== - ---------------------------------------------------------------------- ------------------ ----------------
Hedge of Committed Pipeline and Mortgage Loan Inventory As of February 29, 2000, the Company had $2.7 billion of closed mortgage loans and MBS held in inventory, including $2.1 billion fixed-rate and $0.6 billion adjustable-rate (the "Inventory"). In addition, as of February 29, 2000, the Company had short-term rate and point commitments amounting to approximately $4.2 billion (including $2.8 billion fixed-rate and $1.4 billion adjustable-rate) to fund mortgage loan applications in process and an additional $3.1 billion (including $2.8 billion fixed-rate and $0.3 billion adjustable-rate) like commitments subject to property identification and borrower qualification (together the "Committed Pipeline"). 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 J). In order to mitigate the risk that a change in interest rates will result in a decline in the value of the Company's Committed Pipeline or Inventory, the Company enters into hedging transactions. The Inventory is hedged with forward contracts for the sale of loans and net sales of MBS, including options to sell MBS where the Company can exercise the option on or prior to the anticipated settlement date of the MBS. Due to the variability of closings in the Company's Committed Pipeline, which is driven primarily by interest rates, the Company's hedging policies require that substantially all of the Committed Pipeline be hedged with a combination of options for the purchase and sale of MBS and treasury futures in addition to forward contracts for the sale of MBS. As of February 29, 2000, the notional amount of options to purchase and sell MBS aggregated $3.1 billion and $1.3 billion, respectively. There were no treasury futures options in place at February 29, 2000. The Company had net forward contracts to sell MBS that amounted to $4.8 billion (including forward contracts to sell MBS of $9.1 billion and to purchase MBS of $4.3 billion). The MBS that are to be delivered under these contracts and options are either fixed or adjustable-rate, and generally correspond with the composition of the Company's Inventory and Committed Pipeline. NOTE I - FINANCIAL INSTRUMENTS (Continued) The Company is generally not exposed to significant losses nor will it realize significant gains related to its Inventory or Committed Pipeline due to changes in interest rates, net of gains or losses on associated hedge positions. The correlation between the Inventory, the Committed Pipeline and the associated hedge instruments is very high due to their similarity. However, the Company is exposed to the risk that the actual closings in the Committed Pipeline may deviate from the estimated closings for a given change in interest rates. Although interest rates are the primary determinant, the actual loan closings from the Committed Pipeline are influenced by many factors, including the composition of the Committed Pipeline and remaining commitment periods. The Company's estimated closings are based on historical data of loan closings as influenced by recent developments. Servicing Hedge The Company manages its exposure to interest rate risk primarily through balancing its loan production and loan servicing operations which are counter cyclical in nature. In order to further mitigate the effect on earnings of MSR impairment that may result from increased current and projected prepayment activity that generally occur when interest rates decline, the Company maintains a portfolio of financial instruments, including derivative contracts, that increase in aggregate value when interest rates decline (the "Servicing Hedge"). The financial instruments that form the Servicing Hedge include interest rate floors, options on interest rate futures, Capped Swaps, interest rate swaps, interest rate caps, Capped Swaps, Swaptions, options on MBS, interest rate futures and P/O securities. NOTE I - FINANCIAL INSTRUMENTS (Continued) The following table summarizes the notional amounts of derivative contracts included in the Servicing Hedge. - -------------------------------------- -------------------- -------------------- ------------------ --------------------- (Dollar amounts in millions) Balance, Dispositions/ Balance, February 28, 1999 Additions Expirations February 29, 2000 - -------------------------------------- -------------------- -------------------- ------------------ --------------------- Interest Rate Floors $33,000 18,000 (500) $50,500 Long Call Options on Interest Rate Futures $32,000 18,750 (35,750) $15,000 Long Put Options on Interest Rate Futures $54,600 5,250 (58,100) $1,750 Short Call Options on Interest Rate Futures $22,000 2,000 (24,000) - Short Put Options on Interest Rate Futures $720 - (720) - Long Call Options on MBS $4,561 4,000 - $8,561 Interest Rate Futures $22,500 - (22,500) - Capped Swaps $1,000 - - $1,000 Interest Rate Swaps $15,150 1,050 (14,700) $1,500 Interest Rate Cap $4,500 - (2,000) $2,500 Swaptions $32,550 20,500 (16,800) $36,250 - -------------------------------------- -------------------- -------------------- ------------------ ---------------------
The Servicing Hedge is intended to protect the value of the investment in MSRs from the effects of increased prepayment activity that generally results from declining interest rates. Should interest rates increase, the value of the MSRs generally will increase while the value of the Servicing Hedge will decline. With respect to the options on interest rate futures and MBS, Swaptions, floors, caps and P/O Securities included in the Servicing Hedge, the Company is not exposed to loss beyond its initial outlay to acquire the instruments plus any unrealized gains recognized to date. With respect to the Capped Swaps contracts entered into by the Company as of February 29, 2000, the Company estimates that its maximum exposure to loss over the contractual term is $4 million. With respect to the Swap contracts entered into by the Company as of February 29, 2000, the Company estimates that its maximum exposure to loss over the contractual term is $1 million. Interest Rate Swaps As of February 29, 2000, CHL had interest rate swap contracts, in addition to those included in the Servicing Hedge, with certain financial institutions having notional principal amounts totaling $6.8 billion. The effect of these contracts is to enable CHL to convert its fixed-rate long term debt borrowings to LIBOR-based floating-rate cost borrowings (notional amount $5.6 billion), to convert its foreign currency denominated fixed rate medium-term notes to U.S. dollar LIBOR-based floating-rate cost borrowings (notional amount $1.1 billion) and to convert a portion of its medium-term note borrowings from one floating-rate index to another (notional amount $0.1 billion). Payments are due periodically through the termination date of each contract. The agreements expire between April 2000 and June 2027. NOTE I - FINANCIAL INSTRUMENTS (Continued) The interest rate swap agreements related to debt had an average fixed rate (receive rate) of 6.23% and an average floating rate indexed to 3-month LIBOR (pay rate) of 6.30% on February 29, 2000. Broker-Dealer Financial Instruments Countrywide Securities Corporation ("CSC") utilizes a variety of financial instruments for trading purposes and to manage interest-rate risk. These instruments include MBS mandatory forward sale and purchase commitments as well as short sales of cash market U.S. Treasury securities. At February 29, 2000, CSC had forward contracts to sell MBS that amounted to $3.1 billion and forward contracts to purchase MBS that amounted to $1.3 billion. During the year ended February 29, 2000, the average fair value of the forward contracts to sell MBS amounted to a loss on $4.3 million and the average fair value of forward contracts to purchase MBS amounted to a loss of $2.8 million. Fair Value of Financial Instruments The following disclosure of the estimated fair value of financial instruments as of February 29(28), 2000 and 1999 is made by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is 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. NOTE I - FINANCIAL INSTRUMENTS (Continued) ---- ------------------------------------------------ ---------------------------------- --- ---------------------------- February 29, 2000 February 28, 1999 Carrying Estimated Carrying Estimated (Dollar amounts in thousands) Amount fair value amount fair value Assets: Mortgage loans and mortgage-backed securities held for sale $2,653,183 $2,653,183 $6,231,220 $6,231,220 Trading securities 1,984,031 1,984,031 1,460,446 1,460,446 Items included in investments in other financial instruments: Principal only securities purchased 952,840 952,840 32,826 32,826 Mortgage-backed securities retained in securitizations 775,867 775,867 500,631 500,631 Insurance Company investment portfolio 520,490 520,490 - - Securities purchased with agreements 435,593 435,593 76,246 76,246 resell Equity Securities - restricte46,193 46,193 59,875 46,971 and unrestricted Items included in other assets: Rewarehoused FHA and VA loans 336,273 336,273 216,598 216,598 Loans held for investment 177,330 177,330 125,236 125,236 Receivables related to broker-dealer activities22,612 22,612 401,232 401,232 Liabilities: Notes payable 9,782,625 9,459,011 9,935,759 9,883,859 Securities sold not yet purchased 181,903 181,903 84,775 84,775 Derivatives: Interest rate floors 411,278 180,360 426,838 402,061 Forward contracts on MBS (11,080) (13,511) 12,775 120,709 Options on MBS 75,950 32,415 90,476 98,935 Options on interest rate futures 8,921 6,032 18,261 15,729 Interest rate caps 47,348 39,088 77,508 40,437 Capped Swaps (5,619) (8,040) 8,470 3,092 Swaptions 341,039 76,254 337,703 271,073 Interest rate futures - - 57,280 57,280 Interest rate swaps (23,228) (457,051) 43,570 93,205 Short-term commitments to extend credit - 52,500 - 26,400 ---- ------------------------------------------------ --------------- -- ------------- -- ------------- --- -------------
The fair value estimates as of February 29(28), 2000 and 1999 are based on pertinent information that was 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. NOTE I - FINANCIAL INSTRUMENTS (Continued) Trading Securities Fair value is estimated using quoted market prices. 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 securitization Fair value is estimated by discounting future cash flows using discount rates that approximate current market rates, market consensus and internally developed prepayment rates. Insurance Company investment portfolio Fair value is estimated using quoted market prices. Derivatives Fair value is defined as the amount that the Company would receive or pay to terminate the contracts at the report date. Market or dealer quotes are available for many derivatives; otherwise, pricing or valuation models are applied to utilizing 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 J - COMMITMENTS AND CONTINGENCIES Legal Proceedings The Company and certain subsidiaries are defendants in various legal proceedings involving matters generally incidental to their business. Although it is difficult to predict the ultimate outcome of these proceedings, management believes, based on discussions with counsel, that any ultimate liability will not materially affect the consolidated financial position or results of operations of the Company and its subsidiaries. Commitments to Buy or Sell Mortgage-Backed Securities and Other Derivatives Contracts In connection with its open commitments to buy or sell MBS and other derivative contracts, 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. With respect to other derivative contracts, margin requirements are generally greatest during periods of increasing interest rates. NOTE J - COMMITMENTS AND CONTINGENCIES (Continued) Lease Commitments The Company leases office facilities under lease agreements extending through December 2011. Future minimum annual rental commitments under these non-cancelable operating leases with initial or remaining terms of one year or more are as follows. ----- ------------------------------------------ ----------------------------------- Year ending February 29(28), (Dollar amounts in thousands) ----- ------------------------------- -------------------- -------------- ---------- 2001 $ 38,355 2002 33,336 2003 27,747 2004 19,033 2005 9,347 Thereafter 42,045 -------------- $169,863 ============== ----- ------------------------------- -------------------- -------------- ----------
Rent expense was $57.2 million, $44.7 million and $30.2 million for the years ended February 29(28), 2000, 1999 and 1998, respectively. 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 facilities as of February 29, 2000, the Company is required to maintain $1.3 billion in consolidated net worth and CHL is required to maintain $1.2 billion of net worth, as defined in the credit agreement. Loan Servicing As of February 29(28), 2000, 1999 and 1998, the Company serviced loans totaling approximately $250.2 billion, $215.5 billion and $182.9 billion, respectively. Included in the loans serviced as of February 29(28), 2000, 1999 and 1998 were loans being serviced under subservicing agreements with total principal balances of $2.9 billion, $2.2 billion and $6.7 billion, respectively. The loans are serviced under a variety of servicing contracts. In general, these contracts include guidelines and procedures for servicing the loans, remittance requirements and reporting requirements, among other provisions. Conforming conventional loans serviced by the Company (56% of the servicing portfolio as of February 29, 2000) are primarily included in either Fannie Mae MBS or Freddie Mac participation certificates ("PCs"). Such servicing is done on a non-recourse basis, whereby credit losses are generally borne by Fannie Mae or Freddie Mac and not the Company. The government loans serviced by the Company are included in either Ginnie Mae MBS, Fannie Mae MBS, or Freddie Mac PCs. The government loans are either insured against loss by the Federal Housing Administration (17% of the servicing portfolio as of February 29, 2000) or partially guaranteed against loss by the Department of Veterans Affairs (7% of the servicing portfolio as of February 29, 2000). In addition, non-conforming mortgage loans (20% of the servicing portfolio as of February 29, 2000) are primarily included in "private label" MBS and 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 29, 2000, approximately 28% and 5% of the mortgage loans (measured by unpaid principal balance) in the Company's servicing portfolio are secured by properties located in California and Texas, respectively. No other state contains more than 5% of the properties securing mortgage loans. NOTE J - COMMITMENTS AND CONTINGENCIES (Continued) Generally, the Company is not exposed to credit risk. Because the Company services substantially all conventional loans on a non-recourse basis, credit losses are normally borne by the investor or insurer and not the Company. The Company retains primary credit risk on the home equity and sub-prime loans it securitizes through retention of a subordinated interest. As of February 29, 2000, the Company had investments in such subordinated interests that amounted to $570.4 million. While the Company generally does not retain credit risk with respect to the conventional prime credit quality first 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. Similarly, government loans serviced by the Company (24% of the Company's servicing portfolio as of February 29, 2000) are insured by the Federal Housing Administration or partially guaranteed against loss by the Department of Veterans Affairs. The Company is exposed to credit losses to the extent that the partial guarantee provided by the Department of Veterans Affairs is inadequate to cover the total credit losses incurred. NOTE K - EMPLOYEE BENEFITS Stock Option Plans The Company has stock option plans (the "Plans") that provide for the granting of both qualified and non-qualified options to employees and directors. Options are generally granted at the average market price of the Company's common stock on the date of grant and are exercisable beginning one year from the date of grant and expire up to ten years from the date of grant. Stock options transactions under the Plans were as follows. - ---------------------------------------------------------------------------------------------------------------- Year ended February 29(28), ------------------------------------------------------ 2000 1999 1998 - ----- ------------------------------------------------- -- -------------- -- -------------- -- -------------- -- Number of Shares: Outstanding options at beginning of year 11,497,044 11,151,799 10,241,862 Options granted 3,643,111 1,648,647 1,836,169 Options exercised (602,021) (1,239,662) (839,479) Options expired or cancelled (478,619) (63,740) (86,753) -------------- -------------- -------------- Outstanding options at end of year 14,059,515 11,497,044 11,151,799 ============== ============== ============== Weighted Average Exercise Price: Outstanding options at beginning of year $24.81 $20.57 $19.03 Options granted 35.27 46.71 27.09 Options exercised 13.45 15.90 16.07 Options expired or canceled 37.64 25.11 21.17 -------------- -------------- -------------- Outstanding options at end of year $27.44 $24.81 $20.57 Options exercisable at end of year 8,299,892 6,514,039 5,407,177 Options available for future grant 2,673,480 5,840,713 1,920,487 - ----- ------------------------------------------------- -- -------------- -- -------------- -- -------------- --
NOTE K - EMPLOYEE BENEFITS (Continued) Status of the outstanding stock options under the Plans as of February 29, 2000 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 ------------------- --------------- -------------- ------------- ------------- ------------- $2.80 - $15.90 2.8 years 878,123 $14.29 878,123 $14.29 $15.91 - $21.20 4.2 2,172,720 17.51 2,172,720 17.51 $21.21 - $26.50 5.7 5,889,217 23.43 4,056,366 22.94 $26.51 - $31.80 7.1 1,513,094 27.07 751,018 27.06 $31.81 - $42.40 4.5 2,126,681 40.98 8,751 39.46 $42.41 - $53.00 8.1 1,479,680 46.73 432,914 46.73 ------------------- --------------- -------------- ------------- ------------- ------------- $2.80 - $53.00 5.5 years 14,059,515 $27.44 8,299,892 $22.23 =================== =============== ============== ============= ============= ============= - ----- ------------------- - --------------- - -------------- -- ------------- -- ------------- -- -------------
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 29(28), ---------------------------------------------------- except per share data) 2000 1999 1998 - ------------------------------------------- ----------------- ---------------- ----------------- Net Earnings As reported $410,243 $385,401 $344,983 Pro forma $379,632 $366,118 $335,043 Basic Earnings Per Share As reported $3.63 $3.46 $3.21 Pro forma $3.36 $3.29 $3.12 Diluted Earnings Per Share As reported $3.52 $3.29 $3.09 Pro forma $3.25 $3.13 $3.00 - ------------------------------------------- ----------------- ---------------- -----------------
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model that has been modified to consider cash dividends to be paid. The following weighted-average assumptions were used for grants in Fiscal 2000, 1999 and 1998, respectively: dividend yield of 1.29%, 0.72% and 1.18%; expected volatility of 34%, 40% and 28%; risk-free interest rates of 6.0%, 5.5% and 6.5% and expected lives of five years for options granted in all three years. The average fair value of options granted during Fiscal 2000, 1999 and 1998 was $13.66, $19.20 and $8.89, respectively. 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. NOTE K - EMPLOYEE BENEFITS (Continued) The following table sets forth the Plan's funded status and amounts recognized in the Company's financial statements. ---- ----------------------------------------- ---- ------------------------------------------------------ --- Year ended February 29(28), ---- ----------------------------------------- ---- ------------------------------------------------------ --- -- ------------- --- ------------ (Dollar amounts in thousands) 2000 1999 ---- ------------------------------------------------------------------- -- ------------- --- ------------ --- Change in benefit obligation Benefit obligation at beginning of year $29,777 $23,933 Service cost 5,535 4,715 Interest cost 2,204 1,772 Transfer of plan assets (453) - Actuarial loss (gain) (41) 549 Benefits paid (401) (364) Change in discount rate (4,028) (828) ------------- ------------ Benefit obligation at end of year $32,593 $29,777 ============= ============ Change in plan assets Fair value of plan assets at beginning of year $22,775 $18,152 Actual return on plan assets 3,110 1,948 Employer contribution 5,846 3,039 Transfer of plan assets (453) - Benefits paid (401) (364) ------------- ------------ Fair value of plan assets at end of year $30,877 $22,775 ============= ============ Funded status at end of year ($1,716) ($ 7,002) Unrecognized net actuarial (gain) loss (4,977) 151 Unrecognized prior service cost 924 1,024 Unrecognized transaction asset (142) (212) ------------- ------------ Net amount recognized ($5,911) ($ 6,039) ============= ============ ---- ------------------------------------------------------------------- -- ------------- --- ------------ ---
The following table sets forth the components of net periodic benefit cost for 2000 and 1999. -------------------------------------------------------------------------------------------------------------- Year ended February 29(28), -------------------------------------------------------------------------------------------------------------- (Dollar amounts in thousands) 2000 1999 --- ------------------------------------------------- -- -------------- -- --------------- -- ------------- -- Service cost $5,535 $4,715 Interest cost 2,204 1,772 Expected return on plan assets (2,051) (1,569) Amortization of prior service cost 99 99 Amortization of unrecognized transition asset (70) (70) --------------- ------------- Net periodic benefit cost $5,717 $4,947 =============== ============= --- ------------------------------------------------- -- -------------- -- --------------- -- ------------- -- The weighted-average assumptions used in calculating the amounts above were:
---- ----------------------------------------- ---- ------------------------------------------------------ --- Year ended February 29(28), ---- ----------------------------------------- ---- ------------------------------------------------------ --- -- ------------- --- ------------ 2000 1999 ---- ------------------------------------------------------------------- -- ------------- --- ------------ --- Discount rate 8.00% 7.40% Expected return on plan assets 8.00% 8.00% Rate of compensation increase 4.00% 4.00% ---- ------------------------------------------------------------------- -- ------------- --- ------------ ---
NOTE K - EMPLOYEE BENEFITS (Continued) Pension expense for the years ended February 29(28), 2000, 1999 and 1998 was $5.7 million, $4.9 million and $3.4 million, respectively. The Company makes contributions to the Plan in amounts that are deductible in accordance with federal income tax regulations. Defined Contribution Plan The Company has a defined contribution plan covering all full-time employees of the Company who have at least one year of service and are age 21 or older. Participants may contribute up to 16 percent of pretax annual compensation, as defined in the plan agreement. Participants may also contribute, at the discretion of the plan administrator, amounts representing distributions from other qualified defined benefit or contribution plans. The Company makes a discretionary matching contribution equal to 50 percent of the participant contributions up to a maximum of 6 percent of the participants' base compensation, as defined in the plan agreement. The defined contribution plan is subject to the provisions of ERISA. NOTE L - SHAREHOLDERS' EQUITY In January, 2000, the Company entered into a three year equity put option agreement with National Indemnity Company ("National Indemnity"), a property casualty insurance company which is a subsidiary of Berkshire Hathaway, Inc. The purpose of the agreement is to provide up to $100 million of additional capital and surplus in the event that property and casualty insurance companies of Balboa Life and Casualty ("Balboa") incur a certain level of catastrophic property and casualty losses. Upon the occurrence of one or more catastrophic events and two trigger events, the Company will have the option to require National Indemnity to purchase up to one million shares of non voting Series B Cumulative Preferred Stock, par value $0.05 per share, of the Company (the "Series B Preferred Stock"), at a price of $100 per share, with a dividend rate to be determined in accordance with the agreement, resetting annually. The Series B Preferred Stock is convertible into shares of common stock of the Company at a price which is 20% above the average price of the common stock in the 30 day period prior to the issuance of the Series B Preferred Stock. Upon issuance of the Series B Preferred Stock and for so long as National Indemnity owns at least 50% of the outstanding Series B Preferred Stock, the Company will not be able to increase quarterly dividends on its common stock. If issued, the Series B Preferred Stock will pay an annual dividend rate determined at the time of issuance, and such rate would increase by 50 basis points each year if the Series B Preferred Stock remained outstanding for more than three years. The Series B Preferred Stock is redeemable by the Company at the purchase price plus any then unpaid dividend yield. A catastrophic event that would trigger the option is one which results in Balboa sustaining losses in excess of $97 million, net of reinsurance recoverable, or the occurrence in any calendar year of multiple catastrophic events which results Balboa sustaining losses in excess of $194 million, net of reinsurance recoverable. In addition, for the option to be triggered the consolidated net loss ratio of the Balboa property and casualty operations must exceed 60% for the applicable calendar year and Balboa property and casualty operations must have a net loss for such year. In the event of a default in the payment of dividends on Series B Preferred Stock, National Indemnity has the right to purchase shares of the Company's common stock having a market value of $1 million at a price per share of 10% below the closing price of the Company's common stock on the business day prior to such purchase. This purchase option may be exercised quarterly until all unpaid dividends and interest are paid. 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 L - 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 M - RELATED PARTY TRANSACTIONS In July 1997, the Company sold the assets, operations and employees of Countrywide Asset Management Corporation ("CAMC"), a then wholly-owned subsidiary of the Company, to IndyMac Mortgage Holdings, Inc. (formerly INMC Mortgage Holdings, Inc.) ("INMC"). CAMC was formerly the manager of INMC. As consideration, the Company received 3,440,800 newly issued common shares of INMC. These shares are subject to resale restrictions which apply to the shares from the date of issuance through July 2000. Prior to the sale, CAMC received certain management fees and incentive compensation. During the year ended February 28, 1998, CAMC earned $0.6 million in base management fees from INMC and its subsidiaries. In addition, during the year ended February 28, 1998, CAMC received $3.1 million in incentive compensation. In addition, CAMC incurred many of the expenses related to the operations of INMC and its subsidiaries, including personnel and related expenses, subject to reimbursement by INMC. During the year ended February 28, 1998, the amount of expenses incurred by CHL which were allocated to CAMC and reimbursed by INMC totaled $16.0 million. Subsequent to the sale, the Company entered into an agreement with INMC whereby the Company and certain affiliates agreed to provide certain services to INMC during a transition period. During the years ended February 29(28), 2000 and 1999, CHL received $3.9 million and $2.6 million, respectively, from INMC related to services provided in accordance with the agreement. Additionally, during the years ended February 29(28), 2000 and 1999 the Company received $4.1 million and $3.0 million, respectively, of net sublease income from INMC. INMC held an option to purchase conventional loans from CHL at the prevailing market price. This option was not utilized in the year ended February 29, 2000. During the years ended February 28, 1999 and 1998, INMC purchased $460.2 million and $2.9 million, respectively, of conventional non-conforming mortgage loans from CHL pursuant to this option. During the year ended February 28, 1999, CHL entered into an agreement pursuant to which CHL assumed certain INMC recourse obligations with respect to certain mortgage loans that INMC had previously sold to Freddie Mac. In consideration of CHL's assumption of these recourse obligations, CHL received $6.0 million, which Management believes will exceed the actual loss experience. A portion of the $6.0 million is subject to reimbursement to INMC based upon actual loss experience on the loans. NOTE M - RELATED PARTY TRANSACTIONS (Continued) During the year ended February 28, 1999, CHL purchased servicing rights from INMC for $35.5 million, related to a $2.7 billion portfolio of loans. During the year ended February 29, 2000, the Company sold 780,000 shares of INMC common stock, which resulted in a pre-tax gain of $0.4 million. Prior to August 1998, CHL sub-serviced mortgage loans issued by subsidiaries of INMC, for which CHL received $1.7 million and $1.9 million in subservicing fees for the years ended February 28, 1999 and 1998, respectively. During the year ended February 29, 2000, the Company's broker-dealer subsidiary purchased $872.6 million of MBS from INMC and sold $100.0 million MBS to INMC. In January 2000, CHL sold their entire investment in IndyMac, Inc., which consisted of all of the outstanding common stock and 1% of the economic interest in IndyMac, Inc., to INMC for $1.8 million. NOTE N - SEGMENTS AND RELATED INFORMATION The Company has four major segments: Loan Production, Loan Servicing, Capital Markets and Insurance. The Production segment is comprised of the Consumer Markets, Wholesale and Correspondent Divisions and Full Spectrum Lending, Inc. ("the Divisions"). The Loan Production segment originates and purchases conventional mortgage loans, mortgage loans insured by the FHA and VA, home equity and sub-prime loans and sells those loans to permanent investors. The Loan Servicing segment services on a primarily non-recourse basis substantially all of the mortgage loans originated and purchased by the Loan Production segment. In addition, the Loan Servicing segment purchases bulk servicing contracts, also on a non-recourse basis, to service single-family residential mortgage loans originated by other lenders. The Capital Markets segment trades securities, primarily mortgage-related securities, with broker-dealers and institutional investors and, as an agent, facilitates the purchase and sale of bulk servicing contracts. The Insurance segment is an agent and carrier that provides homeowners insurance, life insurance, disability insurance, automobile insurance, credit-related insurance and various other coverages. Included in the tables below labeled "Other" are the operating segments that provide other complimentary services and certain reclassifications to conform management reporting to the consolidated financial statements. In addition, for Fiscal Year 1998, "Other" includes a $57.4 million pre-tax gain on the sale of a CAMC. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (See Note A). - ---------------------------------------------------------------------------------------------------------------------------- For the fiscal year ended February 29, 2000 - ------------------------------- ------------ -- ----------- -- ----------- -- ----------- -- ------------ -- ------------ -- (Dollars in thousands) Loan Loan Capital Consolidated Production Servicing Markets Insurance Other Total - ------------------------------- ------------ -- ----------- -- ----------- -- ----------- -- ------------ -- ------------ -- Non-interest revenues $904,634 $847,934 $64,090 $45,249 $88,416 $1,950,323 Interest earned 667,933 234,482 106,898 10,800 (21,467) 998,646 Interest charges (518,458) (342,250) (84,021) (4,988) 19,423 (930,294) ------------ ----------- ----------- ----------- ------------ ------------ Net interest income (expense)149,475 (107,768) 22,877 5,812 (2,044) 68,352 ------------ ----------- ----------- ----------- ------------ ------------ Total revenue $1,054,109 $740,166 $86,967 $51,061 $86,372 $2,018,675 ============ =========== =========== =========== ============ ============ Segment earnings (pre-tax) $259,869 $312,182 $32,124 $13,485 $13,538 $631,198 Segment assets $3,795,339 $8,963,785 $2,409,714 $568,314 $85,176 $15,822,328 - ------------------------------- ------------ -- ----------- -- ----------- -- ----------- -- ------------ -- ------------ --
NOTE N - SEGMENT AND RELATED INFORMATION (Continued) - ---------------------------------------------------------------------------------------------------------------------------- For the fiscal year ended February 28, 1999 - ------------------------------ ------------ -- ----------- -- ------------ - ------------ -- ------------ -- ------------- - (Dollars in thousands) Loan Loan Capital Consolidated Production Servicing Markets Insurance Other Total - ------------------------------ ------------ -- ----------- -- ------------ - ------------ -- ------------ -- ------------- - Non-interest revenues $1,271,934 $483,933 $54,594 $22,711 $100,593 $1,933,765 Interest earned 721,289 270,355 40,051 492 (3,121) 1,029,066 Interest charges (603,093) (351,199) (30,689) (419) 1,571 (983,829) ------------ ----------- ------------ ------------ ------------- ------------ ----------- ------------ ------------ ------------ ------------- Net interest income (expense118,196 (80,844) 9,362 73 (1,550) 45,237 ------------ ----------- ------------ ------------ ------------ ------------- ------------ ----------- ------------ ------------ ------------- Total revenue $1,390,130 $403,089 $63,956 $22,784 $99,043 $1,979,002 ============ =========== ============ ============ ============ ============= ============ =========== ============ ============ ============= Segment earnings (pre-tax) $556,213 $20,130 $26,529 $3,325 $25,608 $631,805 Segment assets $7,093,817 $6,626,097 $1,858,357 $6,503 $63,482 $15,648,256 - ------------------------------ ------------ -- ----------- -- ------------ - ------------ -- ------------ -- ------------- -
- ---------------------------------------------------------------------------------------------------------------------------- For the fiscal year ended February 28, 1998 - ------------------------------ ------------ -- ----------- -- ------------ - ------------ -- ------------ -- ------------- - (Dollars in thousands) Loan Loan Capital Consolidated Production Servicing Markets Insurance Other Total - ------------------------------ ------------ -- ----------- -- ------------ - ------------ -- ------------ -- ------------- - Non-interest revenues $685,160 $620,964 $39,581 $20,752 $126,786 $1,493,243 Interest earned 421,714 150,997 3,909 344 7,112 584,076 Interest charges (347,240) (219,359) (608) (99) (1,053) (568,359) ------------ ----------- ------------ ------------ ------------- ------------ ----------- ------------ ------------ ------------ ------------- Net interest income (expense)74,474 (68,362) 3,301 245 6,059 15,717 ------------ ----------- ------------ ------------ ------------ ------------- ------------ ----------- ------------ ------------ ------------- Total revenue $759,634 $552,602 $42,882 $20,997 $132,845 $1,508,960 ============ =========== ============ ============ ============ ============= ============ =========== ============ ============ ============= Segment earnings (pre-tax) $245,121 $207,487 $19,287 $7,522 $86,129 $565,546 Segment assets $5,969,661 $5,588,454 $532,927 $5,718 $86,451 $12,183,211 - ------------------------------ ------------ -- ----------- -- ------------ - ------------ -- ------------ -- ------------- -
NOTE O - SUBSEQUENT EVENTS On March 23, 2000, the Company declared a cash dividend of $.10 per common share payable April 28, 2000 to shareholders of record on April 11, 2000. On April 12, 2000, CHL renewed its one-year revolving credit facility with a revised limit of $1.0 billion. The new facility expires on April 13, 2001. NOTE P - 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 29(28) -------------- --------------- -------------- ---------------- ----------------------------------------------- -------------- --------------- -------------- ---------------- Year ended February 29, 2000 Revenue $537,003 $537,015 $491,779 $452,878 Expenses 367,529 362,420 327,039 330,489 Provision for income taxes 66,095 68,092 64,176 22,592 Net earnings 103,379 106,503 100,564 99,797 Earnings per share(1) Basic $0.92 $0.94 $0.89 $0.88 Diluted $0.88 $0.91 $0.87 $0.87 Year ended February 28, 1999 Revenue $450,265 $482,157 $514,197 $532,383 Expenses 301,488 326,293 353,589 365,827 Provision for income taxes 58,023 60,787 62,637 64,957 Net earnings 90,754 95,077 97,971 101,599 Earnings per share(1) Basic $0.82 $0.86 $0.88 $0.90 Diluted $0.78 $0.81 $0.84 $0.86 ----------------------------------------------- -------------- --------------- -------------- ---------------- (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 Q - SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY Summarized financial information for Countrywide Home Loans, Inc. was as follows. ---- ----------------------------------------- ---- ------------------------------------------------- --------- February 29(28), -------------- ----------- -------------- --------- (Dollar amounts in thousands) 2000 1999 ---- ---------------------------------------------- ------- -------------- ----------- -------------- --------- Balance Sheets: Mortgage loans and mortgage-backed securities held for sale $ 2,653,183 $ 6,231,220 Mortgage servicing rights, net 5,396,477 4,496,439 Other assets 5,240,247 3,149,382 -------------- -------------- Total assets $13,289,907 $13,877,041 ============== ============== Short- and long-term debt $ 9,224,956 $ 9,910,966 Other liabilities 1,632,106 1,434,727 Equity 2,432,845 2,531,348 -------------- -------------- Total liabilities and equity $13,289,907 $13,877,041 ============== ============== ---- ---------------------------------------------- ------- -------------- ----------- -------------- ---------
----- ----------------------------------------- --- --------------------------------------------------- -------- Year ended February 29(28), --------------- ---------- --------------- --------- (Dollar amounts in thousands) 2000 1999 ----- --------------------------------------------- ------- --------------- ---------- --------------- --------- Statements of Earnings: Revenues $1,597,691 $1,668,627 Expenses 1,111,278 1,149,886 Provision for income taxes 168,729 202,308 --------------- --------------- Net earnings $ 317,684 $ 316,433 =============== =============== ----- --------------------------------------------- ------- --------------- ---------- --------------- ---------
NOTE R - Business Acquisitions On November 30, 1999, the Company acquired all of the outstanding common stock of Balboa Life & Casualty, Inc. ("Balboa") for a cash price of $435 million. The purchase price is subject to adjustment based upon completion of a post-closing audit. Balboa is a leading writer of credit-related insurance, specializing in creditor-placed auto and homeowner insurance. Balboa is licensed to underwrite in all 50 states. The acquisition of Balboa was accounted for using the purchase method of accounting. Accordingly, a portion of the purchase price was allocated to assets acquired and liabilities assumed based on their estimated fair market value at the date of acquisition. The fair value of identifiable assets acquired and liabilities assumed was $898 million and $473 million, respectively. Goodwill of $10 million will be amortized over a period of 25 years. NOTE R - Business Acquisitions (Continued) The unaudited results of operations for Balboa are included in the Company's consolidated results of operations from December 1, 1999. The following table sets forth certain consolidated earnings data for the years ended February 29, 2000, and February 28, 1999, as if the acquisition of Balboa had been consummated March 1, 1998. ----- ----------------------------------------- --- --------------------------------------------------- -------- Year ended February 29(28), --------------- ---------- --------------- --------- (Dollar amounts in millions) 2000 1999 ----- --------------------------------------------- ------- --------------- ---------- --------------- --------- Statements of Earnings: (Unaudited) Revenues $2,193,550 $2,245,253 Net Earnings $ 422,309 $ 404,717 Per Share Basic $3.73 $3.63 Diluted $3.62 $3.46 ----- --------------------------------------------- ------- --------------- ---------- --------------- ---------
In management's opinion, these unaudited pro forma amounts are not necessarily indicative of what the actual consolidated results of operations might have been if the acquisition had been effective at March 1, 1998. NOTE S - IMPLEMENTATION OF NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"). It requires that an entity recognizes all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. This statement will be effective for the Company in fiscal year ending February 28, 2002. The Company has not yet determined the impact upon adoption of this standard on the Consolidated Financial Statements. In October 1998, the Financial Accounting Standards Board issued SFAS No. 134, Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise ("SFAS No. 134"). SFAS No. 134 is an amendment of SFAS No. 65, Accounting for Certain Mortgage Banking Activities. It requires that after the securitization of mortgage loans held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed securities and other retained interests based on its ability and intent to sell or hold those instruments. The Company adopted this statement in October 1998, accordingly, and reclassified mortgage-backed securities retained in securitization as available for sale securities. F-40 - COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT COUNTRYWIDE CREDIT INDUSTRIES, INC. BALANCE SHEETS (Dollar amounts in thousands) February 29(28), -------------- -- -------------- 2000 1999 -------------- -------------- Assets Cash $ 0 $ 852 Intercompany receivable 428,298 225,333 Investment in subsidiaries at equity in net assets 3,120,766 2,504,443 Equipment and leasehold improvements 55 79 Other assets 168,651 190,178 -------------- -------------- Total assets $3,717,770 $2,920,885 ============== ============== Liabilities and Shareholders' Equity Intercompany payable $ 766,697 $ 347,416 Accounts payable and accrued liabilities 39,513 30,903 Deferred income taxes 23,681 23,681 -------------- -------------- Total liabilities 829,891 402,000 Common shareholders' equity Common stock 5,673 5,631 Additional paid-in capital 1,171,238 1,153,673 Accumulated other comprehensive loss (33,234) (19,593) Retained earnings 1,744,202 1,379,174 -------------- -------------- Total shareholders' equity 2,887,879 2,518,885 -------------- -------------- Total liabilities and shareholders' equity $3,717,770 $2,920,885 ============== ==============
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 29(28), -------------- -- -------------- -- -------------- 2000 1999 1998 -------------- -------------- -------------- Revenue Interest earned $ 1,281 $ 1,261 $ 6,421 Interest charges (8,680) (4,151) - -------------- -------------- -------------- Net interest income (7,399) (2,890) 6,421 Gain on sale of subsidiary 4,424 - 57,381 Dividend and other income 4,420 8,287 10,350 -------------- -------------- -------------- 1,445 5,397 74,152 Expenses (3,614) (3,772) (3,414) -------------- -------------- -------------- Earnings (loss) before income tax (provision) benefit and equity in net earnings of subsidiaries (2,169) 1,625 70,738 Income tax (provision) benefit 127 (634) (27,588) -------------- -------------- -------------- Earnings (loss) before equity in net earnings of subsidiaries (2,042) 991 43,150 Equity in net earnings of subsidiaries 412,285 384,410 301,833 -------------- -------------- -------------- NET EARNINGS $410,243 $385,401 $344,983 ============== ============== ==============
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 29(28), -------------- -- -------------- -- -------------- 2000 1999 1998 -------------- -------------- -------------- Cash flows from operating activities: Net earnings $410,243 $385,401 $344,983 Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Earnings of subsidiaries (412,285) (384,410) (301,833) Depreciation and amortization 5 28 26 Decrease (increase) in other receivables and other assets (18,110) (1,801) (93,217) (Decrease) increase in accounts payable and accrued liabilities 8,610 (50,154) 44,039 Gain on sale of subsidiary - (57,381) (4,424) Gain on sale of available-for-sale securities (433) - (2,593) -------------- -------------- -------------- Net cash provided (used) by operating activities (16,394) (50,936) (65,976) -------------- -------------- -------------- Cash flows from investing activities: Net change in intercompany receivables and payables 216,316 267,809 (53,066) Investment in subsidiaries (204,038) (273,735) 23,446 Proceeds from sales of subsidiary 21,053 - - Proceeds from available-for-sale securities 10,977 - 3,678 -------------- -------------- -------------- Net cash (used) provided by investing activities 44,308 (5,926) (25,942) -------------- -------------- -------------- Cash flows from financing activities: Issuance of common stock 16,449 93,362 126,309 Cash dividends paid (45,215) (35,648) (34,391) -------------- -------------- -------------- Net cash provided (used) by financing activities (28,766) 57,714 91,918 -------------- -------------- -------------- Net change in cash (852) 852 - Cash at beginning of year 852 - - -------------- -------------- -------------- Cash at end of year $ - $ 852 $ - ============== ============== ============== Supplemental cash flow information: Cash used to pay interest $ 5,015 $ 97 - Unrealized gain (loss) on available-for-sale securities, net of tax $ (13,641) $ (23,290) $ 34,242
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) COUNTRYWIDE CREDIT INDUSTRIES, INC. STATEMENTS OF COMPREHENSIVE INCOME Year Ended February 29(28), (Dollar amounts in thousands) 2000 1999 1998 --------------- ----------------- --------------- NET EARNINGS $410,243 $385,401 $344,983 Other comprehensive income, net of tax: Unrealized gains (losses) on available for sale securities: Unrealized holding gains (losses) arising during the period, before tax (9,356) 18,556 72,883 Income tax benefit (expense) 3,331 (7,237) (28,424) --------------- ----------------- --------------- Unrealized holding gains (losses) arising during the period, net of tax (6,025) 11,319 44,459 Less: reclassification adjustment for gains included in net earnings, (12,332) (56,801) (16,749) before tax Income tax expense 4,716 22,192 6,532 --------------- ----------------- --------------- Reclassification adjustment for gains included in net earnings, net of tax (7,616) (34,609) (10,217) --------------- ----------------- --------------- Other comprehensive (loss) income (13,641) (23,290) 34,242 --------------- ----------------- --------------- COMPREHENSIVE INCOME $396,602 $362,111 $379,225 =============== ================= ===============
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Three years ended February 29(28), (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 (2) Deductions (1) of period - ----------------------------------- -------------- --------------- ---------------- ------------------ ------------- Year ended February 29, 2000 Allowance for losses $49,366 $17,143 $ - $18,137 $48,372 Year ended February 28, 1999 Allowance for losses $41,094 $30,556 $2,997 $25,281 $49,366 Year ended February 28, 1998 Allowance for losses $24,749 $31,456 $6,711 $21,822 $41,094 - ----------------------------------- (1) Actual losses charged against reserve, net of recoveries and reclassification. (2) Primarily represents loss indemnification proceeds received.
Exhibit List Exhibit No. Description ---------- ------------------------------------------------------------ 3.3.3 Amendment to Bylaws of Countrywide Credit Industries, Inc. dated March 24, 2000. + 10.2.2 Part-Time Employment Agreement between named executive officer and the Company dated as of February 28, 2000. + 10.2.3 Letter Agreement between David S. Loeb and the Company dated February 28, 2000. + 10.3.3 Third Restated Employment Agreement by and between the Company and Angelo R.Mozilo in effect as of March 1, 2000. 10.8.7 Credit Agreement as of the 12th day of April, 2000, by and among CHL, Royal Bank of Canada, ABN AMRO Bank, N.V., Credit Lyonnais New York Branch, Commerzbank AG, New York Branch, and the Lenders Party thereto. 11.1 Statement Regarding Computation of Earnings Per Share. 12.1 Computation of the Ratio of Earnings to Fixed Charges. 21 List of subsidiaries 23 Consent of Grant Thornton LLP. 27 Financial Data Schedules (included only with the electronic filing with the SEC). +Constitutes a management contract or compensatory plan or arrangement. EX-3.(II) 2 0002.txt AMENDMENT TO BY-LAWS RESOLUTIONS OF THE BOARD OF DIRECTORS OF COUNTRYWIDE CREDIT INDUSTRIES, INC. AMENDMENT TO BYLAWS MARCH 24, 2000 AMENDMENT TO BYLAWS WHEREAS, this Board of Directors deems it to be in the best interests of Countrywide Credit Industries, Inc. (the "Corporation") to amend its bylaws as set forth below; NOW THEREFORE, BE IT RESOLVED, That Article II, Section 4 of the Bylaws of the Corporation be and hereby is amended by adding a new sentence to the end of the Section, the section thereby reading in its entirety as follows: Section 4: Notice of Meetings Except as otherwise required or permitted by law, whenever the shareholders are required or permitted to take any action at a meeting, written notice thereof shall be given, stating the place, date and time of the meeting and, unless it is the annual meeting, by or at whose direction it is being issued. Notice of a special meeting shall also state the purpose or purposes for which the meeting is called. A copy of the notice of any meeting shall be delivered personally or shall be mailed to each shareholder of record entitled to vote at such meeting, not less than ten (10) nor more than sixty (60) days before the date of such meeting. If mailed, the notice shall be given when deposited in the United States mail, postage prepaid and shall be directed to each shareholder at his address as it appears on the record of shareholders, unless he shall have filed with the Secretary of the Corporation a written request that notices to him be mailed to some other address, in which case it shall be directed to him at such other address. Notice of any meeting of shareholders shall not be required to be given to any shareholder who shall attend such meeting in person or by proxy and shall not protest, prior to the conclusion of such meeting, the lack of notice thereof, or who shall submit, either before or after the meeting, a signed waiver of notice, in person or by proxy. Unless the Board shall fix a new record date for an adjourned meeting or the adjournment is for more than thirty days, notice of such adjourned meeting need not be given if the place, date and time to which the meeting shall be adjourned is announced at the meeting at which the adjournment is taken. Any previously scheduled meeting of the stockholders may be postponed, and (unless the Certificate of Incorporation otherwise provides) any special meeting of the stockholders may be canceled, by resolution of the Board upon public notice given prior to the date previously scheduled for such meeting of stockholders. EX-10.2.2 3 0003.txt PART-TIME EMPLOYMENT AGREEMENT PART-TIME EMPLOYMENT AGREEMENT This Part-Time Employment Agreement ("Agreement") is made and entered into between David S. Loeb ("Employee") and Countrywide Credit Industries, Inc. ("Countrywide") as of February 28, 2000. 1. In exchange for a salary of $500 per month, subject to applicable Federal and State payroll tax and other required withholdings, Employee shall provide to Countrywide, on no less than a quarterly basis, a summary of his economic forecast for the United States and global economies. This forecast shall be provided to Countrywide's General Counsel no later than thirty days following the end of each calendar quarter during the term of this Agreement, commencing on June 30, 2000. Employee and Countrywide further agree that this position shall require no more than 10 hours per month of Employee's time. Employee and Countrywide further agree that Employee is not entitled to any benefits of employment other than what is specifically agreed to by the parties in the letter agreement from Sandor E. Samuels dated February 28, 2000. 2. This Agreement shall be effective until July 31, 2005 unless terminated, and it may be terminated by either party at any time, with or without notice or cause. In the event this Agreement is terminated by Countrywide other than a) for "Cause" (as defined in Employee's Third Restated Employment Agreement dated March 1, 1999), or b) as a result of Employee's death, Countrywide shall cause all the remaining outstanding option agreements covering the options listed on Exhibit "A" (attached hereto) which are outstanding as of the date of such employment termination to be amended to provide that the options shall expire at the termination of the respective terms without regard to any accelerated expiration by reason of retirement or other termination of employment. In addition, upon employment termination as described in the previous sentence, any options contained in Exhibit A which are not exercisable shall become immediately exercisable. 3. This Agreement may not be amended without the express written consent of both parties hereto. IN WITNESS HEREOF, the parties have executed this Agreement as of the date first above written. COUNTRYWIDE CREDIT INDUSTRIES, INC. By:__________________________________ Title:_________________________________ ------------------------------------ David S. Loeb, in his individual capacity Exhibit A David S. Loeb Option Agreements - ------------------------------------- ----------------------------------- ----------------------------------- Grant Date Expiration Date Number of Option Shares - ------------------------------------- ----------------------------------- ----------------------------------- - ------------------------------------- ----------------------------------- ----------------------------------- 03/24/1992 03/24/2002 2,675 - ------------------------------------- ----------------------------------- ----------------------------------- - ------------------------------------- ----------------------------------- ----------------------------------- 03/24/1992 03/24/2002 109,948 - ------------------------------------- ----------------------------------- ----------------------------------- - ------------------------------------- ----------------------------------- ----------------------------------- 04/07/1993 04/07/2003 283,806 - ------------------------------------- ----------------------------------- ----------------------------------- - ------------------------------------- ----------------------------------- ----------------------------------- 06/01/1995 06/01/2005 18,890 - ------------------------------------- ----------------------------------- ----------------------------------- - ------------------------------------- ----------------------------------- ----------------------------------- 06/01/1995 06/01/2005 100,607 - ------------------------------------- ----------------------------------- ----------------------------------- - ------------------------------------- ----------------------------------- ----------------------------------- 06/01/1995 06/01/2005 59,749 - ------------------------------------- ----------------------------------- ----------------------------------- - ------------------------------------- ----------------------------------- ----------------------------------- 06/03/1996* 06/03/2006 358,089 - ------------------------------------- ----------------------------------- ----------------------------------- - ------------------------------------- ----------------------------------- ----------------------------------- 06/03/1996* 06/03/2006 6,004 - ------------------------------------- ----------------------------------- ----------------------------------- - ------------------------------------- ----------------------------------- ----------------------------------- 07/11/1996 07/11/2006 1,000,000 - ------------------------------------- ----------------------------------- ----------------------------------- Total Number of Option Shares: 1,939,768 As of February 28, 2000 * CONTAINS OPTIONS WHICH HAVE NOT VESTED AS OF FEBRUARY 28, 2000
EX-10.2.3 4 0004.txt LETTER AGREEMENT February 28, 2000 Mr. David S. Loeb [Address] Dear Dave, Set forth in this letter are certain agreements between you and Countrywide: 1. As set forth in Angelo's November 22, 1999 memo and confirmed in my January 18, 2000 letter to you, the term of the Third Restated Employment Agreement between you and Countrywide Credit Industries, Inc. (the "3-1-99 Agreement") will expire as of February 28, 2000 and not be renewed by the Board. As we previously discussed, your last day of full-time employment will be February 28, 2000 in order for your entire compensation amount for FY2000 to be deductible under existing tax rules. As we discussed, however, you will be paid through February 29, 2000. Pursuant to the 3-1-99 Agreement, you have been granted 85,000 options effective today, February 28, 2000. Attached is the Stock Option Agreement granting these 85,000 shares. These options will first be exercisable in three increments of 28,333, 28,333 and 28,334, respectively, on the first three anniversaries of the date of grant. The options will expire if they remain unexercised at the expiration of five years from the date of grant. You will receive an incentive compensation award for fiscal year 2000 in an amount equal to 25% of the amount of the incentive compensation award payable to Angelo Mozilo for fiscal year 2000. In addition, in recognition of your service to Countrywide as Chairman for almost thirty years, you will receive an additional $500,000 as part of your incentive compensation award. This award will be paid some time during April or May 2000 in accordance with prior company practice. You will also continue to receive the benefits under the terms of Countrywide's pension, SERP and split dollar life insurance programs in which you currently participate, provided that upon the cessation of your full-time employment, the death benefit payable to your trust under your insurance policy will be reduced from $5.2 million to $2.6 million. Countrywide will continue to pay premiums in the amounts required such that the life insurance policy will have a cash value sufficient to allow the insurance to remain in force up to age 95 and provide a death benefit sufficient to return to Countrywide the premiums paid by it and also to pay to your trust an amount no less than $2.6 million. The documents for the split dollar life insurance program will be amended to our mutual reasonable satisfaction to achieve this result. 2. As a part-time employee, options will continue to vest as described in each relevant option agreement and shall expire pursuant to their terms or as described in the Part Time Employment Agreement dated February 28, 2000, provided that you may not sell or transfer for consideration in any ninety day period, without the prior written consent of the Board of Directors, more than 500,000 of the Countrywide option shares listed or described on Exhibit A attached hereto, provided, however, the foregoing limitation will not apply to any sales of such shares solely for purposes of paying taxes incurred by you upon exercise, but not the sale, of any such options. However, as a part-time employee, you will not be eligible for any future option grant Countrywide will maintain the registration of all your options on SEC Form S-8 until the earlier of their exercise or expiration. 3. Countrywide will transfer to you ownership of those computers currently being provided to you by Countrywide. IndyMac will pay for any continuing subscriptions for software or services in connection with the computers. All Countrywide-related software (e.g. lotus notes) will be replaced by comparable IndyMac-related software. 4. Effective February 28, 2000, you will resign as a member of the Board of Directors of Countrywide Credit Industries, Inc. as well as from the boards of all Countrywide subsidiary companies. In light of the fact that Countrywide's Director Emeritus program applies only to non-employee directors retiring from the Board and in light of the "non-compete" condition to becoming a Director Emeritus, you would not become a Director Emeritus of Countrywide upon your resignation from the Board. Also, in light of your resignation from the Board, you would not receive the honorary title of Chairman Emeritus of Countrywide. It is understood that you will continue as a director, officer and employee of IndyMac. The Investor Relations Department of both Countrywide and IndyMac will collaborate on a press release announcing, among other things, your retirement from Countrywide, a copy of which will be given to you for your review and comment prior to issuance. After February 28, 2000, Countrywide will not treat you as an "affiliate" of Countrywide for purposes of the Securities Act of 1933. 5. You would no longer require the use of an office and secretarial services at the Countrywide Calabasas facility. Also, we are currently holding a large number of your stock certificates in the safe in Countrywide's Treasury Department. Please provide us with instructions as to what to do with these certificates. 6. As part of your employment arrangement with IndyMac, it is anticipated IndyMac would provide you and Heidi with medical coverage and benefits. In the event that IndyMac fails or refuses to provide medical coverage for you and Heidi through the rest of your life comparable to the medical coverage and benefits that Countrywide provides to its executive management, Countrywide will provide medical coverage for you and Heidi through the rest of your life, comparable to the medical coverage and benefits that Countrywide provides to its executive management. "Medical Coverage and benefits" includes all medical, dental, vision and other health coverages. 7. I have enclosed with this letter a letter of resignation, effective February 28, 2000, by which you will resign as an officer and member of the Board of Directors of Countrywide Credit Industries, Inc. and all Countrywide subsidiary companies. Please execute the letter where indicated and arrange to return it to me. 8. Except as expressly set forth above, this letter replaces and supersedes the memo from Angelo Mozilo dated November 22, 1999 and the letter from me to you dated January 18, 2000. 9. This letter constitutes a binding obligation of Countrywide and has been duly authorized by all Compensation Committee, Board of Directors and any other requisite corporate approvals. 10. The provisions of the 3-1-99 Agreement as they relate to the period subsequent to the termination of your employment under the 3-1-99 Agreement will remain in effect as modified by this letter agreement. In this connection, solely for purposes of eliminating any doubt, Countrywide acknowledges that its obligations to indemnify you under your employment agreement and any other written indemnification agreement between you and Countrywide continue and shall survive the termination of your status as a director, officer and employee. I hope that the items set forth in this letter accurately reflect your understanding of these arrangements. If so, please sign where indicated below and arrange to return a copy of this letter as well as the executed Stock Option Agreement covering the new grant of 85,000 options, and the Resignation Letter to me. As always, should you have any questions or comments concerning any of the above, please have Mr. Bonn contact me. Sincerely, Countrywide Credit Industries, Inc. By:_/s/_______________________ --- Sandor E. Samuels Accepted and agreed this 28th day of February, 2000 __/s/________________________ --- David S. Loeb Exhibit A David S. Loeb Option Agreements - ------------------------------------- ----------------------------------- ----------------------------------- Grant Date Expiration Date Number of Option Shares - ------------------------------------- ----------------------------------- ----------------------------------- - ------------------------------------- ----------------------------------- ----------------------------------- 03/24/1992 03/24/2002 2,675 - ------------------------------------- ----------------------------------- ----------------------------------- - ------------------------------------- ----------------------------------- ----------------------------------- 03/24/1992 03/24/2002 109,948 - ------------------------------------- ----------------------------------- ----------------------------------- - ------------------------------------- ----------------------------------- ----------------------------------- 04/07/1993 04/07/2003 283,806 - ------------------------------------- ----------------------------------- ----------------------------------- - ------------------------------------- ----------------------------------- ----------------------------------- 06/01/1995 06/01/2005 18,890 - ------------------------------------- ----------------------------------- ----------------------------------- - ------------------------------------- ----------------------------------- ----------------------------------- 06/01/1995 06/01/2005 100,607 - ------------------------------------- ----------------------------------- ----------------------------------- - ------------------------------------- ----------------------------------- ----------------------------------- 06/01/1995 06/01/2005 59,749 - ------------------------------------- ----------------------------------- ----------------------------------- - ------------------------------------- ----------------------------------- ----------------------------------- 06/03/1996* 06/03/2006 358,089 - ------------------------------------- ----------------------------------- ----------------------------------- - ------------------------------------- ----------------------------------- ----------------------------------- 06/03/1996* 06/03/2006 6,004 - ------------------------------------- ----------------------------------- ----------------------------------- - ------------------------------------- ----------------------------------- ----------------------------------- 07/11/1996 07/11/2006 1,000,000 - ------------------------------------- ----------------------------------- ----------------------------------- Total Number of Option Shares: 1,939,768 As of February 28, 2000 * CONTAINS OPTIONS WHICH HAVE NOT VESTED AS OF FEBRUARY 28, 2000
EX-10.3.3 5 0005.txt THIRD RESTATED EMPLOYMENT AGREEMENT THIRD RESTATED EMPLOYMENT AGREEMENT THIS THIRD RESTATED EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of March 1, 2000 by and between Countrywide Credit Industries, Inc., a Delaware corporation ("Employer"), and Angelo R. Mozilo ("Officer"). W I T N E S S E T H: WHEREAS, Officer currently holds the offices of Chairman of the Board of Directors and Chief Executive Officer of Employer; and WHEREAS, Employer desires to obtain the benefit of continued services of Officer and Officer desires to continue to render services to Employer; and WHEREAS, the Board of Directors of Employer (the "Board") has determined that it is in Employer's best interest and that of its stockholders to recognize the substantial contribution that Officer has made and is expected to continue to make to the Company's business and to retain his services in the future; and WHEREAS, Employer and Officer set forth the terms and conditions of Officer's employment with Employer under an employment agreement entered into as of March 1, 1991 (the "Original Agreement"); and WHEREAS, Employer and Officer entered into Amendment No. 1 to Employment Agreement as of November 5, 1992 ("Amendment No. 1"), entered into Amendment No. 2 to Employment Agreement as of November 10, 1992 ("Amendment No. 2"), entered into a Restated Employment Agreement as of February 2, 1993 (the "First Restated Agreement"), and entered into a Second Restated Employment Agreement as of March 26, 1996, as amended by Amendment No. 1 to Employment Agreement dated as of July 25, 1997 and Amendment No. 2 to Employment Agreement dated as of February 4, 1998 (the "Second Restated Agreement); and WHEREAS, Employer and Officer desire to set forth the continued terms and conditions of Officer's employment with Employer under this Agreement; WHEREAS, the effectiveness of the provisions of Section 4(b) of this Agreement is subject to the approval by Employer's stockholders of said provisions as required under Section 162(m) of the Internal Revenue Code of 1986, as amended; and the effectiveness of the provisions of Section 4(c) of this Agreement is subject to the approval by Employer's stockholders of any amendments to the 1993 Plan (as defined herein) or the adoption of a new stock option plan authorizing the granting of additional stock options to the extent necessary so that the options provided for in Section 4 (c) will qualify as performance based compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended. NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained, the parties hereto agree as follows: 1. Term. Employer agrees to employ Officer and Officer agrees to serve Employer, in accordance with the terms hereof, for a term beginning on the Effective Date (as defined in Section 8(c) hereof) and ending on the expiration of the third Fiscal Year following Officer's receipt of the Notice of Termination (as defined in paragraph 5(g) below) from the Board terminating Officer's employment with Employer, unless earlier terminated in accordance with the provisions hereof. 2. Specific Position; Duties and Responsibilities. Employer and Officer hereby agree that, subject to the provisions of this Agreement, Employer will employ Officer and Officer will serve Employer and its subsidiaries as Chairman of the Board, President and Chief Executive Officer of Employer. Employer agrees that Officer's duties hereunder shall be the usual and customary duties of the offices of Chairman of the Board, President and Chief Executive Officer and such further duties consistent therewith as may be designated from time to time by the Board, and shall not be inconsistent with the provisions of the charter documents of Employer or applicable law. Officer shall have such executive power and authority as shall reasonably be required to enable him to discharge his duties in the offices that he may hold. All compensation paid to Officer by Employer or any of its subsidiaries shall be aggregated in determining whether Officer has received the benefits provided for herein. 3. Scope of this Agreement and Outside Affiliations. During the term of this Agreement, Officer shall devote his full business time and energy, except as expressly provided below, to the business, affairs and interests of Employer and its subsidiaries, and matters related thereto, and shall use his best efforts and abilities to promote its interests. Officer agrees that he will diligently endeavor to promote the business, affairs and interests of Employer and its subsidiaries and perform services contemplated hereby, in accordance with the policies established by the Board, which policies shall be consistent with this Agreement. Officer agrees to serve without additional remuneration in such senior executive capacity not below the rank of Vice President for one or more (direct or indirect) subsidiaries of Employer as the Board may from time to time request, subject to appropriate authorization by the subsidiary or subsidiaries involved and any limitation under applicable law. Officer's failure to discharge an order or perform a function because Officer reasonably and in good faith believes such would violate a law or regulation or be dishonest shall not be deemed a breach by him of his obligations or duties pursuant to any of the provisions of this Agreement, including without limitation pursuant to Section 5(c) hereof. During the course of Officer's employment as a full-time officer hereunder, Officer shall not, without the consent of the Board, compete, directly or indirectly, with Employer in the businesses then conducted by Employer. Officer may serve as a director or in any other capacity of any business enterprise, including an enterprise whose activities may involve or relate to the business of Employer, provided that such service is expressly approved by the Board. Officer may, without seeking or obtaining approval by the Board, (i) make and manage personal business investments of his choice; (ii) serve in any capacity with any civic, educational or charitable organization, or any governmental entity or trade association, and (iii) continue his current activities in connection with IndyMac Mortgage Holdings, Inc. or IndyMac Bancorp, Inc., provided that any such activities or services do not materially interfere or conflict with the performance of his duties hereunder. 4. Compensation and Benefits. ------------------------- (a) Base Salary. Employer shall pay to Officer a base salary in the 2001 Fiscal Year of Employer or portion thereof at the annual rate of $1,650,000. Employer shall pay to Officer a base salary in the 2002 Fiscal Year of Employer or portion thereof at the annual rate of $1,750,000; and on March 1 of each Fiscal Year of Employer or portion thereof during the term of this Agreement following Employer's 2002 Fiscal Year, Officer's base salary shall be increased for such Fiscal Year or portion thereof by an amount determined by the Compensation Committee prior to the beginning of the Fiscal Year as to which the increased base salary is to be paid, provided that such annual increase shall not be less than $200,000. (b) Incentive Compensation. Employer shall pay to Officer for each of the Fiscal Years during the term of this Agreement an incentive compensation award in the amount of the incentive compensation award paid to Officer in the previous Fiscal Year, multiplied by a fraction (the "Performance Ratio") the numerator of which is the earnings per share on a diluted basis of Employer as reported in the audited Financial Statements included in Employer's Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "EPS") during such current Fiscal Year, and the denominator of which is the EPS for the previous Fiscal Year (adjusted proportionately in the event Employer (A) declares a stock dividend on its common stock, (B) subdivides its outstanding common stock, (C) combines the outstanding shares of its capital stock into a smaller number of common stocks or (D) issues any shares of its capital stock in a reclassification of the common stock (including any such reclassification in connection with a consolidation or merger in which Employer is the continuing or surviving corporation)); provided, however, that the Compensation Committee of the Board (the "Compensation Committee") may reduce the amount of any incentive compensation award in the event there is a substantial distortion in EPS for the Fiscal Year in respect of which the award is being paid resulting from an acquisition, a divestiture, or a change in accounting standards. Notwithstanding anything to the contrary contained in this Agreement, in no event shall the Performance Ratio be less than zero. Employer shall pay the incentive compensation award described in this Section 4(b) for each Fiscal Year or portion thereof, as applicable, as early after the end of such Fiscal Year as practicable but in no event more than 90 days after the end of such Fiscal Year. In the event Officer's employment hereunder shall terminate, other than for cause pursuant to Section 5(d) below or as a result of a voluntary resignation pursuant to Section 5(f) below, on or before the last day of any Fiscal Year, Officer or his estate shall be entitled to receive an incentive compensation award for such portion of the Fiscal Year during which Officer was employed hereunder on the same terms as set forth in sub-paragraphs (i) and (ii) above except that it shall be calculated as follows: The compensation award as otherwise calculated pursuant to sub-paragraph (i) above shall be multiplied by a fraction, the numerator of which is the number of days during the Fiscal Year that Officer was employed hereunder, and the denominator of which is 365. Notwithstanding anything to the contrary in this Section 4(b), payment of any incentive compensation award hereunder must follow a decision by the Compensation Committee of the Board of Directors to the effect that the requisite performance levels were achieved. (c) Stock Options. Employer shall grant to Officer a stock option in respect of 500,000 shares of the Employer's common stock on or before June 1, 2000 in respect to Employer's Fiscal Year 2000, such option to become exercisable as to 166,666, 166,667 and 166,667 shares, respectively, on each of the first three (3) anniversaries of the date of grant. On each June 1 thereafter during the term of this Agreement (or on such other date following the expiration of a Fiscal Year of Employer as the Compensation Committee may, from time to time, designate), Employer shall also grant to Officer stock options for such number of shares of Employer's common stock as the Compensation Committee in its sole discretion determines, taking into account Officer's and Employer's performance in each of such Fiscal Years and the competitive practices then prevailing regarding the granting of stock options, provided that any such stock option grant shall not be in an amount less than 350,000 shares of Employer's common stock. All stock options granted in accordance with this Section 4(c) shall be granted pursuant to the Countrywide Credit Industries, Inc. 1993 Stock Option Plan (amended and restated as of March 27, 1996), as amended (the "1993 Plan"), or such other stock option plan or plans as may be or come into effect during the term of this Agreement, shall have a per share exercise price equal to the fair market value (as defined in the 1993 Plan or such other plan or plans) of the common stock at the time of grant, and shall be subject to vesting, expiration and other provisions as determined by the Compensation Committee. The stock options granted pursuant to this Section shall consist of incentive stock options to the extent permitted by law or regulation. Any stock options granted hereunder in respect of any Fiscal Year from and after Fiscal Year 2001 shall occur not later than one hundred days following the Fiscal Year to which the grant relates. In order to qualify for any grant pursuant hereto, Officer must be employed by Employer on the last day of the fiscal year to which such grant relates. (d) Additional Benefits. Officer shall also be entitled to all rights and benefits for which he is otherwise eligible under any bonus plan, stock purchase plan, participation or extra compensation plan, executive compensation plan, pension plan, profit-sharing plan, life and medical insurance policy, or other plans or benefits, which Employer or its subsidiaries may provide for him, or provided he is eligible to participate therein, for senior officers generally or for employees generally, during the term of this Agreement (collectively, "Additional Benefits"). This Agreement shall not affect the provision of any other compensation, retirement or other benefit program or plan of Employer. (e) Continuation of Benefits. If Officer's employment is terminated hereunder, pursuant to Section 5(a), 5(b) or 5(e) hereof, Employer shall continue for the period specified in Section 5(a) or 5(b) hereof or three years in the case of a termination pursuant to Section 5(e) hereof, as the case may be, to provide benefits substantially equivalent to Additional Benefits (other than qualified pension or profit sharing plan benefits and option, equity or stock appreciation or other incentive plan benefits as distinguished from health, disability and welfare type benefits) on behalf of Officer and his dependents and beneficiaries which were being provided to them immediately prior to Officer's Termination Date, but only to the extent that Officer is not entitled to comparable benefits from other employment. (f) Deferral of Amounts Payable Hereunder. In the event Officer should desire to defer receipt of any cash payments to which he would otherwise be entitled hereunder, he may do so in accordance with the terms and conditions of the Countrywide Credit Industries, Inc. Amended and Restated Deferred Compensation Plan (the "Deferred Compensation Plan"), or in the absence of such Deferred Compensation Plan or any successor plan that is substantially similar to the Deferred Compensation Plan, he may present such a written request to the Compensation Committee which, in its sole discretion, may enter into a separate deferred compensation agreement with Officer. 5. Termination. The compensation and benefits provided for herein and the employment of Officer by Employer shall be ----------- terminated only as provided for below in this Section 5: (a) Disability. In the event that Officer shall fail, because of illness, injury or similar incapacity ("Disability"), to render for four (4) consecutive calendar months, or for shorter periods aggregating eighty (80) or more business days in any twelve (12) month period, services contemplated by this Agreement, Officer's full-time employment hereunder may be terminated, by written Notice of Termination from Employer to Officer; and thereafter, Employer shall continue, from the Termination Date until Officer's death or the fifth anniversary of such notice, whichever first occurs (the "Disability Payment Period"), (i) to pay compensation to Officer, in the same manner as in effect immediately prior to the Termination Date, in an amount equal to (1) fifty percent (50%) of the then existing base salary payable immediately prior to the termination, minus (2) the amount of any cash payments to him under the terms of Employer's disability insurance or other disability benefit plans or Employer's tax-qualified Defined Benefit Pension Plan, and any compensation he may receive pursuant to any other employment, and (ii) to provide during the Disability Payment Period the benefits specified in Section 4(e) hereof. The determination of Disability shall be made only after 30 days notice to Officer and only if Officer has not returned to performance of his duties during such 30-day period. In order to determine Disability, both Employer and Officer shall have the right to provide medical evidence to support their respective positions, with the ultimate decision regarding Disability to be made by a majority of Employer's disinterested directors. (b) Death. In the event that Officer shall die during the term of this Agreement, Officer's employment shall terminate subject to the provisions of this Section 5(b). In such event, Employer shall pay Officer's base salary for a period of twelve (12) months following the date of Officer's death and in the manner otherwise payable hereunder, to such person or persons as Officer shall have directed in writing or, in the absence of a designation, to his estate (the "Beneficiary"). Employer shall also provide to the Beneficiary during the twelve-month period following the date of the Officer's death the benefits specified in Section 4(e) hereof. If Officer's death occurs while he is receiving payments for Disability under Section 5(a)(i) above, such payments shall cease and the Beneficiary shall be entitled to the payments and benefits under this Subsection (b), which shall continue for a period of twelve months thereafter at the full rate of compensation in effect immediately prior to the Disability. This Agreement in all other respects will terminate upon the death of Officer; provided, however, that the termination of the Agreement shall not affect Officer's entitlement to all other benefits in which he has become vested or which are otherwise payable in respect of periods ending prior to its termination. (c) Expiration of Term. Officer's employment hereunder shall terminate at the end of the third Fiscal Year of Employer following Officer's receipt of a Notice of Termination (as defined in Section 5(g) hereof) terminating Officer's employment with Employer. Following the expiration of Officer's employment pursuant to this Section 5(c), all of Employer's obligations hereunder shall terminate, provided, however, that the termination of Officer's employment pursuant to this Section 5(c) shall not affect Officer's entitlement to his incentive compensation payable pursuant to Section 4(b) hereof in respect of the final Fiscal Year of Employer during the term hereof and to all other benefits in which he has become vested or which are otherwise payable in respect of periods ending prior to his termination of employment. (d) Cause. Employer may terminate Officer's employment under this Agreement for "Cause." A termination for Cause is a termination by reason of (i) a material breach of this Agreement by Officer (other than as a result of incapacity due to physical or mental illness) which is committed in bad faith or without reasonable belief that such breach is in the best interests of Employer and which is not remedied within a reasonable period of time after receipt of written notice from Employer specifying such breach, or (ii) Officer's conviction by a court of competent jurisdiction of a felony, or (iii) entry of an order duly issued by any federal or state regulatory agency having jurisdiction in the matter removing Officer from office of Employer or its subsidiaries or permanently prohibiting him from participating in the conduct of the affairs of Employer or any of its subsidiaries. If Officer shall be convicted of a felony or shall be removed from office and/or temporarily prohibited from participating in the conduct of Employer's or any of its subsidiaries' affairs by any federal or state regulatory authority having jurisdiction in the matter, Employer's obligations under Sections 4(a), 4(b) and 4(c) hereof shall be automatically suspended; provided, however, that if the charges resulting in such removal or prohibition are finally dismissed or if a final judgment on the merits of such charges is issued in favor of Officer, or if the conviction is overturned on appeal, then Officer shall be reinstated in full with back pay for the removal period plus accrued interest at the rate then payable on judgments. During the period that Employer's obligations under Sections 4(a), 4(b) and 4(c) hereof are suspended, Officer shall continue to be entitled to receive Additional Benefits under Section 4(d) until the conviction of the felony or removal from office has become final and non-appealable. When the conviction of the felony or removal from office has become final and non-appealable, all of Employer's obligations hereunder shall terminate; provided, however, that the termination of Officer's employment pursuant to this Section 5(d) shall not affect Officer's entitlement to all benefits in which he has become vested or which are otherwise payable in respect of periods ending prior to his termination of employment. (e) Good Reason. Officer may terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" shall be deemed to occur if Employer notifies Officer of a termination of his employment other than for Cause or pursuant to Section 5(c) hereof, or if Employer breaches this Agreement in any material respect, or if the Board (i) elects a person other than Officer as Employer's President, Chairman of the Board or Chief Executive Officer without Officer's consent, (ii) reorganizes management so as to require him to report to a person or persons other than the Board, or (iii) takes any other action which, in Officer's reasonable judgment, results in the diminution in Officer's status, title, position and responsibilities other than an insubstantial action not taken in bad faith and which is remedied by Employer promptly after receipt of notice by Officer. Notwithstanding the foregoing, Officer may terminate his employment for any or no reason within one year following a "Change in Control" (as defined in Appendix A to this Agreement) and such termination shall be considered a termination for Good Reason hereunder. If Officer's employment shall be terminated by Employer other than for Cause or by Officer for Good Reason, then Employer shall pay Officer in a single payment, as severance pay and in lieu of any further salary and incentive compensation for periods subsequent to the Termination Date, an amount in cash equal to three times the sum of (A) Officer's annual base salary at the Termination Date and (B) the aggregate bonus and/or incentive compensation paid or payable to Officer in respect of the Fiscal Year preceding the Fiscal Year in which Officer's Termination Date occurs. Notwithstanding anything in this Agreement to the contrary, in the event it shall be determined that any payment or distribution by Employer or any other person or entity to or for the benefit of Officer (within the meaning of Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code")), whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise in connection with, or arising out of, his employment with Employer or a change in ownership or effective control of Employer or a substantial portion of its assets (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), the Payments shall be reduced (but not below zero) if and to the extent that such reduction would result in Officer retaining a larger amount, on an after-tax basis (taking into account federal, state and local income taxes and the imposition of the Excise Tax), than if Officer received all of the Payments. If the application of the preceding sentence should require a reduction in Payments or other "parachute payments" (within the meaning of Section 280G of the Code), unless Officer shall have designated otherwise, such reduction shall be implemented, first, by reducing any non-cash benefits to the extent necessary and, second, by reducing any cash benefits to the extent necessary. In each case, the reductions shall be made starting with the payment or benefit to be made on the latest date following the Termination Date and reducing payments or benefits in reverse chronological order therefrom. All determinations concerning the application of this paragraph shall be made by a nationally recognized firm of independent accountants, selected by Officer and satisfactory to Employer, whose determination shall be conclusive and binding on all parties. The fees and expenses of such accountants shall be borne by Employer. (f) Resignation. Except as provided in Section 5(e) hereof, if during the term of this Agreement, Officer shall resign voluntarily, all of his rights to payment or benefits hereunder shall immediately terminate; provided, however, that the termination of Officer's employment pursuant to this Section 5(f) shall not affect Officer's entitlement to all benefits in which he has become vested or which are otherwise payable in respect of periods ending prior to his termination of employment. (g) Notice of Termination. Any purported termination by Employer or by Officer shall be communicated by a written Notice of Termination to the other party hereto which indicates the specific termination provision in this Agreement, if any, relied upon and which sets forth in reasonable detail the facts and circumstances, if any, claimed to provide a basis for termination of Officer's employment under the provision so indicated. For purposes of this Agreement, no such purported termination shall be effective without such Notice of Termination. The "Termination Date" shall mean the date specified in the Notice of Termination, which, except as provided in Section 5(c) hereof, shall be no less than 30 or more than 60 days from the date of the Notice of Termination. Notwithstanding any other provision of this Agreement, in the event of any termination of Officer's employment hereunder for any reason, in addition to any incentive compensation awards or stock option grants to which Officer may otherwise be entitled pursuant to the express provisions of this Agreement, Employer shall pay Officer his full base salary through the Termination Date, plus any Additional Benefits which have been earned or become payable, but which have not yet been paid as of such Termination Date. (h) Payments. All payments required under this Agreement (other than the Additional Benefits payable pursuant to Section 4(e) hereof) as a result of the termination of Officer's employment hereunder shall be made within 15 days of the Termination Date or, if any portion is not then reasonably determinable, within five (5) days after such portion is so determinable. In the event of a dispute concerning the validity of a purported termination which is maintained in good faith, the Termination Date shall mean the date the dispute is finally resolved and Employer will continue to provide Officer with the compensation and benefits provided for under this Agreement, until the dispute is finally resolved without any obligation by Officer to repay any of such amounts to Employer, notwithstanding the final outcome of the dispute. Payments required to be made by this Section 5(h) are in addition to all other amounts due under Section 5 of this Agreement and shall not be offset against or reduce any other amounts due under Section 5 of this Agreement. Officer shall be required to render services to Employer during the period following his Termination Date but before the dispute concerning the termination is finally determined unless Employer fails to provide Officer with a reasonable opportunity to perform his duties under this Agreement during such period. 6. Reimbursement of Business Expenses. During the term of this Agreement, Employer shall reimburse Officer promptly for all expenditures (including travel, entertainment, parking, business meetings, and the monthly costs (including dues) of maintaining memberships at appropriate clubs) to the extent that such expenditures meet the requirements of the Code for deductibility by Employer for federal income tax purposes or are otherwise in compliance with the rules and policies of Employer and are substantiated by Officer as required by the Internal Revenue Service and rules and policies of Employer. 7. Indemnity. To the extent permitted by applicable law, the Certificate of Incorporation and the By-Laws of Employer (as from time to time in effect) and any indemnity agreements entered into from time to time between Employer and Officer, Employer shall indemnify Officer and hold him harmless for any acts or decisions made by him in good faith while performing services for Employer, and shall use reasonable efforts to obtain coverage for him under liability insurance policies now in force or hereafter obtained during the term of this Agreement covering the other officers or directors of Employer. 8. Miscellaneous. ------------- (a) Succession. This Agreement shall inure to the benefit of and shall be binding upon Employer, its successors and assigns, but without the prior written consent of Officer, this Agreement may not be assigned other than in connection with a merger or sale of substantially all the assets of the Employer or similar transaction. Employer shall not agree to any such transaction unless the successor to or assignee of the Company's business and/or assets in such transaction expressly assumes all obligations of the Employer hereunder. The obligations and duties of Officer hereby shall be personal and not assignable. (b) Notices. Any notices provided for in this Agreement shall be sent to Employer at 4500 Park Granada, Calabasas, CA 91302 Attention: General Counsel/Secretary, with a copy to the Chairman of the Compensation Committee at the same address, or to such other address as Employer may from time to time in writing designate, and to Officer at such address as he may from time to time in writing designate (or his business address of record in the absence of such designation). All notices shall be deemed to have been given two (2) business days after they have been deposited as certified mail, return receipt requested, postage paid and properly addressed to the designated address of the party to receive the notices. (c) Effective Date. This Agreement shall become effective on March 1, 2000 (the "Effective Date"), subject to the condition subsequent that, at the next regular meeting of stockholders, Employer's stockholders vote to approve the provisions of Section 4(b) hereof. If the provisions of Section 4(b) are not approved by Employer's stockholders, Section 4(b) of this Agreement shall be null and void and Section 4(b) of the Second Restated Agreement shall continue in full force and effect in accordance with its terms as in effect prior to the Effective Date. (d) Entire Agreement. This instrument contains the entire agreement of the parties relating to the subject matter hereof, and it replaces and supersedes any prior agreements between the parties relating to said subject matter, including, but not limited to, the Second Restated Agreement; provided, however, that until stockholder approval of Section 4(b) of this Agreement is obtained as contemplated in Section 8(c) above, Section 4(b) of the Second Restated Agreement shall continue in full force and effect in accordance with its terms as in effect prior to the Effective Date. No modifications or amendments of this Agreement (including, but not limited to the provisions of Section 4 hereof) shall be valid unless made in writing and signed by the parties hereto. (e) Waiver. The waiver of the breach of any term or of any condition of this Agreement shall not be deemed to constitute the waiver of any other breach of the same or any other term or condition. (f) California Law. This Agreement shall be construed and interpreted in accordance with the laws of -------------- California. (g) Attorneys' Fees in Action on Contract. If any litigation shall occur between the Officer and Employer, which litigation arises out of or as a result of this Agreement or the acts of the parties hereto pursuant to this Agreement, or which seeks an interpretation of this Agreement, the prevailing party in such litigation, in addition to any other judgment or award, shall be entitled to receive such sums as the arbitrator hearing the matter shall find to be reasonable as and for the attorneys' fees of the prevailing party. (h) Confidentiality. Officer agrees that he will not divulge or otherwise disclose, directly or indirectly, any trade secret or other confidential information concerning the business or policies of Employer or any of its subsidiaries which he may have learned as a result of his employment during the term of this Agreement or prior thereto as an employee, officer or director of or consultant to Employer or any of its subsidiaries, except to the extent such use or disclosure is (i) necessary or appropriate to the performance of this Agreement and in furtherance of Employer's best interests, (ii) required by applicable law, (iii) lawfully obtainable from other sources, or (iv) authorized by Employer. The provisions of this subsection shall survive the expiration, suspension or termination, for any reason, of this Agreement. (i) Remedies of Employer. Officer acknowledges that the services he is obligated to render under the provisions of this Agreement are of a special, unique, unusual, extraordinary and intellectual character, which gives this Agreement peculiar value to Employer. The loss of these services cannot be reasonably or adequately compensated in damages in an action at law and it would be difficult (if not impossible) to replace these services. By reason thereof, Officer agrees and consents that if he violates any of the material provisions of this Agreement, Employer, in addition to any other rights and remedies available under this Agreement or under applicable law, shall be entitled during the remainder of the term to seek injunctive relief, from a tribunal of competent jurisdiction, restraining Officer from committing or continuing any violation of this Agreement, or from the performance of services to any other business entity, or both. (j) Severability. If any provision of this Agreement is held invalid or unenforceable, the remainder of this Agreement 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. (k) No Obligation to Mitigate. Officer shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise and, except as provided in Section 5(a)(i)(2) hereof, no payment hereunder shall be offset or reduced by the amount of any compensation or benefits provided to Officer in any subsequent employment. (l) Arbitration. The parties acknowledge that they have previously entered into a Mutual Agreement to Arbitrate Claims (the "Arbitration Agreement"). The parties hereby incorporate herein by reference the terms of the Arbitration Agreement. Any dispute arising regarding this Agreement and/or any other matter covered by the Arbitration Agreement shall be subject to binding arbitration pursuant to the terms of the Arbitration Agreement, except as expressly provided herein. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COUNTRYWIDE CREDIT INDUSTRIES, INC. ATTEST: By: - ------------------------------------------ Secretary Title: OFFICER: Angelo R. Mozilo, in his individual capacity 116719.03 31 la-364217 18 la-364217 APPENDIX A To Angelo R. Mozilo Employment Agreement A "Change in Control" shall mean the occurrence during the term of the Agreement, of any one of the following events: (a) An acquisition (other than directly from Employer) of any common stock or other "Voting Securities" (as hereinafter defined) of Employer 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 Employer's common stock or the combined voting power of Employer'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 Agreement, (1) "Voting Securities" shall mean Employer'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) Employer 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 Employer (for purposes of this definition, a "Subsidiary"), (ii) Employer 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 the date of the Agreement 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 Employer'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 Agreement, 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 Employer, unless such merger, consolidation or reorganization is a "Non-Control Transaction." A "Non-Control Transaction" shall mean a merger, consolidation or reorganization of Employer where: (A) the stockholders of Employer, 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 otherthan (i) Employer, (ii) any Subsidiary, (iii) any employee benefit plan (or any trust forming a part thereof) maintained by Employer, 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 Employer, 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 Employer; or (iii) The sale or other disposition of all or substantially all of the assets of Employer 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 Employer 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 Persons; 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 Employer, and after such share acquisition by Employer, 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. EX-10.8.7 6 0006.txt CREDIT AGREEMENT CREDIT AGREEMENT THIS CREDIT AGREEMENT (the "Agreement") is made and dated as of the 12th day of April, 2000, by and among the lenders signatory hereto (collectively, the "Lenders"); ROYAL BANK OF CANADA ("RBC"), as lead administrative agent for the Lenders (in such capacity, the "Lead Administrative Agent"); ABN AMRO BANK, N.V. ("ABN"), as co-administrative agent (in such capacity, the "Co-Administrative Agent"); CREDIT LYONNAIS NEW YORK BRANCH ("CL"), as syndication agent (in such capacity, the "Syndication Agent"); COMMERZBANK AG, NEW YORK BRANCH ("CA"), as documentation agent (in such capacity, the "Documentation Agent"); RBC, as arranger (in such capacity, the "Arranger"), ABN, CL and CA, as co-arrangers (in such capacity, the "Co-Arrangers"); the Lenders acting as co-agents, as indicated on the signature pages hereof (in such capacity, the "Co-Agents"); and COUNTRYWIDE HOME LOANS, INC., a New York corporation (the "Company"). RECITALS A. Pursuant to that certain Revolving Credit Agreement dated as of April 15, 1998, by and among the Company, the Lenders party thereto, the Lead Administrative Agent and the Co-Administrative Agent, the Syndication Agent, the Documentation Agent, the Arranger, the Co-Arrangers and the Co-Agents named therein (as amended to date, the "Existing Credit Agreement"), the Lenders party thereto agreed to extend credit to the Company in the form of a short term, unsecured revolving credit facility on the terms and subject to the conditions set forth therein. B. The Company has requested that the Existing Credit Agreement be further amended to, among other things, provide a term facility pursuant to which loans outstanding under the Existing Credit Agreement may (or, following the Effective Date (as that term and capitalized terms used herein are defined in, or the location of such definitions referenced in, the Glossary attached hereto as Annex I), hereunder) under certain circumstances be converted into a term loan. C. The Lenders and the other parties hereto have agreed to so amend the Existing Credit Agreement and, for convenience of reference, to restate the Existing Credit Agreement in its entirety as set forth herein and to replace and supersede the Existing Credit Agreement and the other "Credit Documents" (as that term is used and defined in the Existing Credit Agreement) pursuant to this Agreement and the documents, instruments, and agreements referred to herein. NOW, THEREFORE, in consideration of the above Recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: AGREEMENT 1. Credit Facilities. ----------------- 1(a) Primary Facility. On the terms and subject to the conditions set forth herein, each of the Lenders ---------------- severally agrees that it shall, from time to time to but not including the Revolving Facility Maturity Date (as that term and capitalized terms used herein are defined in, or the location of the definitions of such terms referenced in, the Glossary attached hereto as Annex I), advance its respective Primary Percentage Share of loans (the "Primary Loans" or a "Primary Loan") to the Company in amounts not to exceed in the aggregate at any date outstanding the Aggregate Credit Limit minus the aggregate dollar amount of Swing Loans outstanding on such date (including Swing Loans to be funded on such date but excluding Swing Loans to be repaid on such date). 1(b) Swing Loan Facility. On the terms and subject to the conditions set forth herein, each of the Swing ------------------- Line Lenders severally agrees that it shall, from time to time to but not including the Revolving Facility Maturity Date, advance its respective Swing Line Percentage Share of loans (the "Swing Loans" or a "Swing Loan") to the Company in amounts such that the aggregate amount of Swing Loans outstanding does not exceed at any date the lesser of: (1) The Aggregate Swing Line Commitment; and (2) The Aggregate Credit Limit minus the aggregate dollar amount of Primary Loans outstanding on such date (including Primary Loans to be funded on such date and excluding Primary Loans to be repaid on such date). At the request of any Swing Line Lender, made through the Lead Administrative Agent at any time and from time to time, including, without limitation, following the occurrence of an Event of Default, each Lender (including each of the Swing Line Lenders) absolutely and unconditionally agrees to refund Swing Loans held by the Swing Line Lenders by advancing its Primary Percentage Share thereof to the Lead Administrative Agent for disbursement to the Swing Line Lenders pro rata, in accordance with their respective Swing Line Percentage Shares. Such fundings shall be made no later than 12:00 noon (Los Angeles time) on the date request therefor is made if such request is made on or before 11:00 a.m. (Los Angeles time) on such date, and no later than 12:00 noon (Los Angeles time) on the next succeeding Business Day if request therefor is made after 11:00 a.m. (Los Angeles time). Advances made by the Lenders hereunder for the purpose of refunding Swing Loans shall, for all purposes of the Credit Documents: (i) constitute Primary Loans to the extent of such Lender's Primary Percentage Share thereof, and (ii) be advanced as Alternate Base Rate Loans. In the event, for whatever reason, the Lenders are not able to advance their respective Primary Percentage Shares for the purpose of refunding Swing Loans as required hereunder, then each of the Lenders (including each of the Swing Line Lenders) absolutely and unconditionally agrees to purchase and take from the Swing Line Lenders on demand an undivided participation interest in Swing Loans outstanding in an amount equal to their respective Primary Percentage Shares of such Swing Loans. Notwithstanding anything contained herein, in no event shall any Lender be required to advance its Primary Percentage Share of any Swing Loan or to purchase any undivided participation interest in any Swing Loan: a. unless such Swing Loan was initially made in accordance with the requirements of this Agreement (as such requirements may be amended or waived from time to time as permitted hereunder) or b. if upon such advance or purchase the aggregate dollar amount of Primary Loans and Swing Loans held by such Lender would exceed such Lender's Maximum Commitment. 1(c) Term Loan Facility. In the event the Lead Administrative Agent shall have notified the Company that ------------------ the Majority Lenders shall have elected not to extend the then current Revolving Facility Maturity Date pursuant to Paragraph 5(m) below, then the Company may, no later than ten (10) days prior to the then current Revolving Maturity Date, notify the Lenders in writing, through the Lead Administrative Agent, that it desires to convert the principal balance of Primary Loans outstanding on the then current Revolving Facility Maturity Date to a one year, non-amortizing term loan (the "Term Loan"). Subject to the conditions precedent set forth in Paragraph 7(c) below, on the then current Revolving Facility Maturity Date: (1) all Swing Loans outstanding shall be refunded by the Lenders in accordance with their respective Primary Percentage Shares, and (2) thereafter, the principal balance of Primary Loans outstanding on such date shall be automatically converted into the Term Loan, which Term Loan shall be held by each of the Lenders in accordance with their Primary Percentage Shares. The date of such conversion shall be referred to herein as the "Conversion Date". Following the Conversion Date no further borrowings shall be permitted under this Agreement, it being agreed and understood by the Company that any right of the Company to draw down undrawn portions of the Aggregate Credit Limit shall have terminated on the Conversion Date. 2. Requests for Loans; Funding. --------------------------- 2(a) Requests for Loans. Subject to the advance notice required with respect to Eurodollar Loans pursuant ------------------ to Paragraph 4(a) below, on any Business Day that the Company desires to borrow Primary Loans or Swing Loans, it shall deliver a Loan Request, Interest Rate Election and Payoff Notice to the Lead Administrative Agent no later than: (1) in the case of Primary Loans, 10:00 a.m. (Los Angeles time) on such date, and (2) in the case of Swing Loans, 11:00 a.m. (Los Angeles time) on such date; provided, however, that in the event the Lead Administrative Agent receives a request for a Swing Loan after 11:00 a.m. (Los Angeles time) on a Business Day, the Lead Administrative Agent shall work with the Swing Line Lenders on a best efforts basis with a view toward funding the requested Swing Loans no later than 1:00 p.m. (Los Angeles time) on such date, the Company expressly acknowledging and agreeing that there is no assurance that any such funding can be provided. Only one Loan Request, Interest Rate Election and Payoff Notice requesting Primary Loans and only one Loan Request, Interest Rate Election and Payoff Notice requesting Swing Loans shall be submitted to the Lead Administrative Agent on any date. Any request for Primary Loans shall be in such amount that the aggregate dollar amount of Primary Loans which the Lenders are required to actually newly fund with respect thereto is not less than $5,000,000.00, and any request for Swing Loans shall be in an amount not less than $1,000,000.00. On each Business Day on which a Loan Request, Interest Rate Election and Payoff Notice is delivered to the Lead Administrative Agent, the Lead Administrative Agent shall notify the applicable Lenders (which notification may be telephonic and, if telephonic, shall be promptly confirmed in writing) no later than 11:00 a.m. (Los Angeles time) or in the case of a Swing Loan, 11:30 a.m. (Los Angeles time)) of the aggregate amount of Primary Loans and/or Swing Loans which will be funded on such date. 2(b) Funding of Primary Loans and Swing Loans. Primary Loans and Swing Loans requested pursuant to any ---------------------------------------- Loan Request, Interest Rate Election and Payoff Notice shall be funded as follows: (1) Each Lender shall make its Primary Percentage Share of Primary Loans available by wiring the amount thereof in immediately available same day (including Federal) funds, to the Funding Account no later than 12:30 p.m. (Los Angeles time) on the proposed funding date; and (2) Each Swing Line Lender shall make its Swing Line Percentage Share of each Swing Loan available by wiring the amount thereof in immediately available same day (including Federal) funds to the Funding Account no later than 2:00 p.m. (Los Angeles time) on the proposed funding date. 2(c) Funding Method. Each Lender shall be entitled to fund and maintain all or any portion of its Primary -------------- Percentage Share of Primary Loans and refund and maintain its Primary Percentage Share of Swing Loans, each Swing Lender shall be entitled to fund and maintain all or any portion of its Swing Line Percentage Share of Swing Loans and, following the Conversion Date, each Lender shall be entitled to fund and maintain its Primary Percentage Share of the Term Loan in any manner it may determine in its sole discretion, including, without limitation, in the Grand Cayman inter-bank market, the eurocurrency inter-bank market and within the United States, but all calculations and transactions hereunder shall be conducted as though all Lenders actually fund and maintain Eurodollar Loans funded by them hereunder through the purchase of offshore dollar deposits in such amounts with maturities corresponding to the applicable Interest Periods. 3. Payment of Principal; Prepayments. --------------------------------- 3(a) Required Principal Payments. Subject to the provisions of Paragraph 3(b) below, the Company shall pay --------------------------- to the Lead Administrative Agent for the account of the Lenders the unpaid principal balance of each Primary Loan which is a Eurodollar Loan on the last day of the applicable Eurodollar Interest Period and the unpaid principal balance of each Primary Loan which is an Alternate Base Rate Loan and each Swing Loan on the Revolving Facility Maturity Date. Following the Conversion Date, the Company shall pay to the Lead Administrative Agent for the account of the Lenders the unpaid principal balance of portions of the Term Loan on the Final Maturity Date. 3(b) Prepayments. The Company: ----------- (1) May voluntarily prepay Loans in whole or in part at any time; provided, however, that any prepayment shall be accompanied by accrued but unpaid interest on the Loan or portion thereof being prepaid. (2) Shall pay in connection with any prepayment hereunder any amount payable on account thereof pursuant to Paragraph 4(e) below concurrently with such prepayment. 4. Calculation and Payment of Interest; Related Provisions. ------------------------------------------------------- 4(a) Interest on Primary Loans and the Term Loan. ------------------------------------------- (1) The Company shall pay interest to each Lender on such Lender's Primary Percentage Share of Primary Loans outstanding and, following the Conversion Date, on such Lender's Primary Percentage Share of the Term Loan, calculated, at the election of the Company made from time to time as permitted herein and set forth on a duly executed Loan Request, Interest Rate Election and Payoff Notice, at either: (i) the Alternate Base Rate and/or (ii) the Applicable Eurodollar Rate. Primary Loans and portions of the Term Loan bearing interest at the Alternate Base Rate shall be referred to herein as "Alternate Base Rate Loans" and Primary Loans and portions of the Term Loan bearing interest at the Applicable Eurodollar Rate shall be referred to herein as "Eurodollar Loans". (2) The Company may elect from time to time to have Primary Loans funded as Alternate Base Rate Loans by giving the Lead Administrative Agent irrevocable notice of such election as set forth on a duly executed Loan Request, Interest Rate Election and Payoff Notice delivered on the proposed funding date. The Company may elect from time to time to have Primary Loans funded as Eurodollar Loans by giving the Lead Administrative Agent at least three Eurodollar Business Days' prior irrevocable notice of such election by delivery of a duly executed Loan Request, Interest Rate Election and Payoff Notice. (3) The Company may elect from time to time to convert Eurodollar Loans, including, following the Conversion Date, portions of the Term Loan being maintained as Eurodollar Loans, to Alternate Base Rate Loans by giving the Lead Administrative Agent irrevocable notice of such election as set forth on a duly executed Loan Request, Interest Rate Election and Payoff Notice delivered on the proposed conversion date; provided, however, that any conversion of Eurodollar Loans to Alternate Base Rate may only be made on the last day of the applicable Eurodollar Interest Period. The Company may elect from time to time to convert Alternate Base Rate Loans, including, following the Conversion Date, portions of the Term Loan being maintained as Alternate Base Rate Loans, to Eurodollar Loans by giving the Lead Administrative Agent at least three Eurodollar Business Days' prior irrevocable notice of such election by delivery of a duly executed Loan Request, Interest Rate Election and Payoff Notice. (4) Upon receipt of any Loan Request, Interest Rate Election and Payoff Notice, the Lead Administrative Agent shall promptly notify each of the Lenders thereof. No Primary Loan shall be funded as a Eurodollar Loan and no outstanding Alternate Base Rate Loan shall be converted into a Eurodollar Loan if an Event of Default or Potential Default has occurred and is continuing on the day occurring two Business Days prior to the date of the funding or conversion requested by the Company or on the proposed funding or conversion date. (5) Any Eurodollar Loan may be continued as such upon the expiration of the Interest Period applicable thereto by giving the Lead Administrative Agent (which shall notify the Lenders) at least three Eurodollar Business Days' prior irrevocable notice of such election as set forth on a duly executed Loan Request, Interest Rate Election and Payoff Notice; provided, however, that no Eurodollar Loan may be continued as such when any Event of Default or Potential Default has occurred and is continuing, but shall be automatically converted to an Alternate Base Rate Loan on the last day of the then current Interest Period applicable thereto. The Lead Administrative Agent shall notify the Lenders and the Company promptly that such automatic conversion will occur. If the Company shall fail to give notice as provided above, the Company shall be deemed to have elected to convert the affected Eurodollar Loan to an Alternate Base Rate Loan on the last day of the Interest Period applicable thereto. (6) The Lead Administrative Agent shall give prompt written notice (or notice by telephone immediately confirmed in writing) to the Company and the Lenders of the applicable interest rate determined by the Lead Administrative Agent. (7) Under no circumstances shall the Lenders be required to make or maintain Eurodollar Loans under this Agreement with more than an aggregate number of eight (8) different Eurodollar Interest Periods. 4(b) Interest on Swing Loans. The Company shall pay interest to each Swing Line Lender on such Swing Line ----------------------- Lender's Swing Line Percentage Share of Swing Loans outstanding from the date advanced to but not including the date of payment thereof at the Applicable Fed Funds Rate. 4(c) Payment of Interest. The Company shall pay interest, in each case as more specifically provided in ------------------- Paragraph 5(d) below: (1) On Alternate Base Rate Loans and Swing Loans, monthly, in arrears, on the fifth day of each month for the period from and including the first day of the immediately preceding month to and including the last day of such month; and (2) On Eurodollar Loans on the last day of the applicable Eurodollar Interest Period relating thereto. 4(d) Inability to Determine Rate. In the event that the Lead Administrative Agent shall have determined --------------------------- (which determination shall be conclusive and binding upon the Company) that by reason of circumstances affecting the interbank eurodollar market adequate and reasonable means do not exist for ascertaining the Eurodollar Rate for any given Eurodollar Interest Period, the Lead Administrative Agent shall forthwith give notice (which may be telephonic and promptly confirmed in writing or by facsimile transmission) of such determination to each Lender and to the Company at least two Eurodollar Business Days prior to, as the case may be, the conversion date of an Alternate Base Rate Loan to a Eurodollar Loan, the continuation of a Eurodollar Loan as such or the proposed funding of a Primary Loan as a Eurodollar Loan. If such notice is given: (1) any Alternate Base Rate Loan that was to have been converted to a Eurodollar Loan and any Primary Loan that was to have been funded as a Eurodollar Loan shall, subject to the provisions hereof, be continued or funded as an Alternate Base Rate Loan, and (2) any outstanding Eurodollar Loan shall be converted, on the last day of the then current Interest Period with respect thereto, to an Alternate Base Rate Loan. Until such notice has been withdrawn by the Lead Administrative Agent, the Company shall not have the right to convert an Alternate Base Rate Loan to a Eurodollar Loan, to continue a Eurodollar Loan as such or to fund a Primary Loan as a Eurodollar Loan. 4(e) Funding Indemnification. In addition to all other payment obligations hereunder, in the event: ----------------------- (1) any Eurodollar Loan is prepaid prior to the last day of the applicable Eurodollar Interest Period, whether following acceleration upon the occurrence of an Event of Default or otherwise, including, without limitation, pursuant to Paragraphs 14(a), 14(b) and 14(c) below, or (2) the Company shall fail to make a conversion into or a borrowing as a Eurodollar Loan after the Company has given notice thereof as provided in Paragraph 4(a)(2) above, or (3) the Company shall fail to continue any Eurodollar Loan which it has elected to have continued as a Eurodollar Loan, or (4) the Company shall fail to make any payment of principal or interest on any Loan when due, then the Company shall immediately pay to each of the affected Lenders, through the Lead Administrative Agent, an additional amount compensating such Lender for all losses, costs and expenses incurred by such Lender in connection therewith, including, without limitation, such as may arise out of the re-employment of funds obtained by such Lender or from fees payable to terminate the deposits from which such funds were obtained, such losses, costs and expenses and the method of calculation thereof being set forth in reasonable detail in a statement delivered to the Company by such Lender, such statement to be conclusive in the absence of manifest error. Under no circumstances shall any Lender have any obligation to remit monies to the Company upon prepayment of any Eurodollar Loan, even under circumstances which do not result in the necessity for the payment by the Company of any amount hereunder. The provisions hereof shall survive termination of this Agreement and payment of the outstanding Loans and all other Obligations. 4(f) Illegality; Impracticality. Notwithstanding any other provisions herein, if any law, regulation, -------------------------- treaty or directive or any change therein or in the interpretation or application thereof shall or may in the opinion of any Lender make it unlawful or impractical for such Lender to make or maintain Eurodollar Loans: (1) the commitment of such Lender hereunder to make, continue or convert into Eurodollar Loans shall forthwith be cancelled and (2) such Lender's Primary Percentage Share of Loans outstanding as Eurodollar Loans, if any, shall be converted automatically to Alternate Base Rate Loans at the end of their respective Eurodollar Interest Periods or within such earlier period as required by law. In the event of a conversion of any Eurodollar Loan prior to the end of its applicable Eurodollar Interest Period the Company hereby agrees promptly to pay each Lender, upon its written demand, the amounts required pursuant to Paragraph 4(e) above, it being agreed and understood that such conversion shall constitute a prepayment for all purposes hereof. The provisions hereof shall survive the termination of this Agreement and payment of the outstanding Loans and all other Obligations. 4(g) Requirements of Law; Increased Costs. In the event that a change subsequent to the date hereof in any ------------------------------------ applicable law, regulation, treaty or directive or in the governmental or judicial interpretation or application thereof, or compliance by any Lender with any request or directive (whether or not having the force of law) issued subsequent to the date hereof by any central bank or other governmental authority, agency or instrumentality: (1) Does or shall subject any Lender to any tax of any kind whatsoever with respect to this Agreement or any Loans purchased or made hereunder, or changes the basis of taxation of payments to such Lender of principal, fees, interest or any other amount payable hereunder (except for changes in the rate of tax on the overall net income of such Lender); (2) Does or shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, or deposits or other liabilities in or for the account of, advances or loans by, or other credit extended by, or any other acquisition of funds by, any office of such Lender which are not otherwise included in the determination of the Alternate Base Rate or the Applicable Eurodollar Rate; or (3) Does or shall impose on such Lender any other condition; and the result of any of the foregoing is to increase the cost to such Lender of purchasing, making, agreeing to make, renewing or maintaining or issuing any Loan or to reduce any amount receivable in respect thereof then, in any such case, the Company shall promptly pay to such Lender, upon its written demand, any additional amounts necessary to compensate such Lender for such additional cost or reduced amounts receivable as determined by such Lender with respect to this Agreement or such credit extensions. If a Lender becomes entitled to claim any additional amounts pursuant to this Paragraph 4(g), it shall promptly notify the Company of the event by reason of which it has become so entitled. A certificate as to any additional amounts payable pursuant to the foregoing sentence submitted by a Lender to the Company shall be conclusive in the absence of manifest error. The obligations of the Company under this Paragraph 4(g) shall survive the termination of this Agreement and the payment of all other Obligations. 4(h) Taxes. ----- (1) All payments made by the Company, the Lead Administrative Agent and the Lenders on account of the Obligations shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority, excluding, in the case of the Lenders, net income taxes and franchise taxes (imposed in lieu of net income taxes), imposed on the Lenders, as the case may be, as a result of a present or former connection between the jurisdiction of the government or taxing authority imposing such tax, or any political subdivision or taxing authority thereof or therein, and such Lender (other than a connection arising solely from such Lender having executed, delivered or performed its obligations or received a payment under, or enforced, the Credit Documents) (all such non-excluded taxes, levies, imposts, duties, charges, fees, deductions and withholdings being hereinafter called "Taxes"). If any Taxes are required to be withheld from any amounts payable to any Lender under the Credit Documents, the amounts so payable by the Company to the Lead Administrative Agent for the benefit of such Lender shall be increased to the extent necessary to yield to such Lender (after payment of all Taxes) interest or any such other amounts payable thereunder at the rates or in the amounts specified in the Credit Documents. Whenever any Taxes are payable by the Company or on behalf of the Company, as promptly as possible thereafter the Company shall send to the Lead Administrative Agent for its own account or for the account of such Lender, as the case may be, a certified copy of an original official receipt received by the Company showing payment thereof. If the Company fails to pay any Taxes when due to the appropriate taxing authority or fails to remit to the Lead Administrative Agent the required receipts or other required documentary evidence, the Company shall indemnify the Lead Administrative Agent and such Lender for any incremental taxes, interest or penalties that may become payable by the Lead Administrative Agent and the Lenders as a result of any such failure. The agreements in this subsection shall survive the termination of this Agreement and the payment of all other Obligations. Each Lender by executing this Agreement represents and warrants to the Company and the Lead Administrative Agent that at the date of this Agreement no Taxes are imposed upon such Lender which would result in increased liability of the Company to such Lender pursuant to this Paragraph 4(h)(1). (2) Each Lender that is not incorporated under the laws of the United States of America or a state thereof (each a "Non-U.S. Lender") agrees that it will, on or before the Effective Date or the effective date of any Additional Lender Agreement pursuant to which it becomes a Lender and on the request of the Lead Administrative Agent or the Company, (i) deliver to each of the Company and the Lead Administrative Agent two duly completed copies of United States Internal Revenue Service Form W-8ECI or W-8BEN or any successor form, certifying in either case that such Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes, and (ii) deliver to each of the Company and the Lead Administrative Agent a United States Internal Revenue Service Form W-8 or W-9, as the case may be, and certify that it is entitled to an exemption from United States backup withholding tax. Each Non-U.S. Lender further undertakes to deliver to each of the Company and the Lead Administrative Agent (x) renewals or additional copies of such form (or any successor form) on or before the date that such form expires or becomes obsolete, and (y) after the occurrence of any event requiring a change in the most recent forms so delivered by it, such additional forms or amendments thereto as may be reasonably requested by the Company or the Lead Administrative Agent. All forms or amendments described in the preceding sentence shall certify that such Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes, unless an event (including without limitation any change in treaty, law or regulation) has occurred after the relevant date and prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Lender from duly completing and delivering any such form or amendment with respect to it and such Lender advises the Company and the Lead Administrative Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax. (3) For any period during which a Non-U.S. Lender has failed to provide the Company with an appropriate form pursuant to subparagraph (2) above (unless such failure is due to a change after the relevant date in treaty, law or regulation, or any change in the interpretation or administration thereof by any governmental authority, occurring subsequent to the date on which a form originally was required to be provided), such Non-U.S. Lender shall not be entitled to indemnification under this Paragraph 4(h) with respect to Taxes; provided that, should a Non-U.S. Lender which is otherwise exempt from or subject to a reduced rate of withholding tax become subject to Taxes because of its failure to deliver a form required under subparagraph (2) above, the Company shall take (at the expense of the Non-U.S. Lender) such steps as such Non-U.S. Lender shall reasonably request to assist such Non-U.S. Lender to recover such Taxes. (4) Any Lender that is entitled to an exemption from or reduction of withholding tax with respect to payments under this Agreement or any Note pursuant to the law of any relevant jurisdiction or any treaty shall deliver to the Company (with a copy to the Lead Administrative Agent), at the time or times prescribed by applicable law, such properly completed and executed documentation prescribed by applicable law as will permit such payments to be made without withholding or at a reduced rate. (5) If the U.S. Internal Revenue Service or any other governmental authority of the United States or any other country or any political subdivision thereof asserts a claim that the Lead Administrative Agent did not properly withhold tax from amounts paid to or for the account of any Lender (because the appropriate form was not delivered or properly completed, because such Lender failed to notify the Lead Administrative Agent of a change in circumstances which rendered its exemption from withholding ineffective, or for any other reason), such Lender shall indemnify the Lead Administrative Agent fully for all amounts paid, directly or indirectly, by the Lead Administrative Agent as tax, withholding therefor, or otherwise, including penalties and interest, and including taxes imposed by any jurisdiction on amounts payable to the Lead Administrative Agent under this subparagraph, together with all costs and expenses related thereto (including attorneys fees and time charges of attorneys for the Lead Administrative Agent, which attorneys may be employees of the Lead Administrative Agent). The obligations of the Lenders under this Paragraph 4(h) shall survive the termination of this Agreement and the payment of all other Obligations. 4(i) Buy-Down Provisions. Notwithstanding anything contained in this Agreement, the Company and any ------------------- individual Lender (as used in this Paragraph 4(i), a "Buy-Down Lender") may notify the Lead Administrative Agent in writing that the Company and such Buy-Down Lender have entered into a Buy-Down Agreement with respect to all or a portion of the Loans from time to time outstanding held by such Buy-Down Lender (the Loans held by such Buy-Down Lender which are subject to a Buy-Down Agreement being referred to herein as "Buy-Down Rate Loans"), and that, pursuant to said Buy-Down Agreement, the interest rate otherwise applicable to the Buy-Down Rate Loans during any interest calculation period shall be reduced to the Buy-Down Rate and the interest otherwise payable by the Company to such Buy-Down Lender during such interest calculation period shall be reduced accordingly. Interest payable to such Buy-Down Lender with respect to Buy-Down Rate Loans shall be billed as provided in Paragraph 5(d) below. In no event shall the Lead Administrative Agent have any obligation or duty to verify the amount of any Buy-Down Deposits supporting the pricing of Buy-Down Rate Loans held by any Buy-Down Lender or the amount of any interest billing with respect thereto. Any deficiency fees payable to such Buy-Down Lender by the Company under the applicable Buy-Down Agreement shall be billed by such Buy-Down Lender to the Company directly. Any Buy-Down Lender may elect not to make demand for the payment of deficiency fees accruing in respect of Buy-Down Deposits from time to time and it is expressly agreed and understood that: (1) any such deficiency fee shall not, by reason of such failure of such Buy-Down Lender or otherwise, be deemed to have been waived by such Buy-Down Lender (except as such waiver is expressly acknowledged in writing by such Buy-Down Lender from time to time), and (2) all deficiency fees accrued and unpaid hereunder and not so expressly waived, whether or not previously declared due and owing by any such Buy-Down Lender, shall automatically be due and payable in full upon the Revolving Facility Maturity Date or, following the Conversion Date, the Final Maturity Date. 4(j) Obligation of Lenders to Mitigate; Replacement of Lenders. Each Lender agrees that: --------------------------------------------------------- (1) As promptly as practicable after the officer of such Lender responsible for administering the Loans of such Lender becomes aware of any event or condition that would entitle such Lender to receive payments under Paragraph 4(g) above or to cease making Eurodollar Loans pursuant to Paragraph 4(f) above, such Lender will use reasonable efforts (i) to make, issue, fund or maintain the affected Loans of such Lender through another lending office of such Lender or (ii) take such other measures as such Lender may deem reasonable, if as a result thereof the additional amounts which would otherwise be required to be paid to such Lender pursuant to Paragraph 4(g) above would be materially reduced or eliminated or the conditions rendering such Lender incapable of making Eurodollar Loans under Paragraph 4(f) above no longer would be applicable, and if, as determined by such Lender in its sole discretion, the making, issuing, funding or maintaining of such Loans through such other lending office or in accordance with such other measures, as the case may be, would not otherwise materially adversely affect such Loans or the interests of such Lender. (2) If the Company receives a notice pursuant to Paragraph 4(g) above or a notice pursuant to Paragraph 4(f) above stating that a Lender is unable to extend Eurodollar Loans (for reasons not generally applicable to the Majority Lenders), so long as (i) no Potential Default or Event of Default shall have occurred and be continuing, (ii) the Company has obtained a commitment from another Lender or another financial institution reasonably acceptable to the Lead Administrative Agent to purchase at par such Lender's Loans, Maximum Commitment and accrued interest and fees and to assume all obligations of the Lender to be replaced under the Credit Documents, and (iii) such Lender to be replaced is unwilling to withdraw the notice delivered to the Company, upon thirty (30) days' prior written notice to such Lender and the Lead Administrative Agent and payment of any amounts due under Paragraph 4(g) above, the Company may require, at the Company's expense and subject to Paragraph 4(e) above, the Lender giving such notice to assign, without recourse, all of its Loans, Maximum Commitment and accrued interest and fees to such other Lender or financial institution pursuant to the provisions of Paragraph 14 below. Following such assignment, the assigning Lender shall retain the benefits of Paragraphs 4(g) and 4(h) above and Paragraph 9(g) below as the same relate to the period prior to the effective date of such assignment. 5. Miscellaneous Lending Provisions. -------------------------------- 5(a) Use of Proceeds. The proceeds of Loans shall be utilized by the Company for general corporate --------------- purposes, including, without limitation, repayment of Indebtedness of the Company to the Parent permitted to be repaid by the Company to the Parent pursuant to the terms of the Credit Documents, and including CPNs. 5(b) Assumption of Funding/Purchase. The Lead Administrative Agent may (but shall not be obligated to) ------------------------------ assume that each Lender has advanced its Primary Percentage Share of Primary Loans and that each Swing Line Lender has advanced its Swing Line Percentage Share of Swing Loans required to be funded by such Lender hereunder on the funding date therefor and may, in reliance upon such assumption, make available to the Company on such date a corresponding amount. If and to the extent any Lender shall not have so made such amounts available, such Lender and the Company jointly and severally agree to repay to the Lead Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Company until the date such amount is repaid to the Lead Administrative Agent, at, in the case of the Company, the interest rate applicable at the time to the subject Loan and, in the case of the Lenders, the Federal Funds Effective Rate. If such Lender shall repay to the Lead Administrative Agent such corresponding amount, such amount so repaid shall constitute such Lender's Primary Percentage Share or Swing Line Percentage Share, as applicable, of the subject Loan, as applicable for all purposes of the Credit Documents as of the date such Loan was made. Nothing contained herein shall affect the liability of any Lender for its failure to make its Primary Percentage Share of Primary Loans or its Swing Line Percentage Share of Swing Loans available to the Company as required pursuant to this Agreement and the other Credit Documents. 5(c) Evidence of Indebtedness. The obligation of the Company to repay Loans shall be evidenced by ------------------------ notations on the books and records of the Lead Administrative Agent and the Lenders. Such accounts shall be conclusive absent manifest error. Any failure to record the advance of any Loan, the interest rate applicable thereto or any other information regarding the Obligations, or any error in doing so, shall not limit or otherwise affect the obligation of the Company with respect to any of the Obligations. Upon the request of any Lender, the Company shall promptly execute a promissory note or promissory notes in favor of such Lender evidencing the Obligations held by such Lender hereunder. 5(d) Interest and Fee Billing and Payment. The Lead Administrative Agent shall: ------------------------------------ (1) On or before the first Business Day of each month notify the Company (which notification may be telephonic) of the estimated amount of interest payable with respect to Alternate Base Rate Loans and Swing Loans as of the fifth day of the current month for the period from and including the first day of the immediately preceding month to and including the last day of such month, with the actual amount confirmed by notification by the Lead Administrative Agent to the Company (which notification may be telephonic and which, if telephonic, shall be promptly confirmed in writing) given no later than 9:00 a.m. (Los Angeles time) on the due date of payment thereof; (2) On the last day of the Interest Period for each Eurodollar Loan notify the Company (which notification may be telephonic and which, if telephonic, shall be promptly confirmed in writing) of the amount of interest payable on such date on account thereof; (3) On or before the first Business Day of the first month of each calendar quarter notify the Company (which notification may be telephonic) of the amount of facility fees payable pursuant to Paragraph 5(i)(2) below on the fifth day of such month for the period from and including the first day of the first month of the immediately preceding calendar quarter to and including the last day of such calendar quarter, with the actual amount confirmed by notification by the Lead Administrative Agent to the Company (which notification may be telephonic and which, if telephonic, shall be promptly confirmed in writing) given no later than 9:00 a.m. (Los Angeles time) on the due date of payment thereof; and (4) From time to time upon the request of any Lender, deliver to the Company a funding indemnification billing for amounts payable to such Lender pursuant to Paragraph 4(e) above or a billing for amounts payable to such Lender pursuant to Paragraphs 4(g), 4(h) and 4(i) above and Paragraph 5(l) below. The Company shall pay the full amount of interest and fees of which it has been notified pursuant to subparagraphs (1) and (3) above on the fifth day of each month, shall pay the full amount of interest of which it has been notified pursuant to subparagraph (2) above on the date such notification is given and shall pay the full amount of each billing delivered to it pursuant to subparagraph (4) above within five Business Days thereafter. Interest payable with respect to Buy-Down Loans prior to the occurrence of an Event of Default and acceleration of the Obligations shall be billed to the Company directly by each Buy-Down Lender in accordance with the timeframes set forth in subparagraph (1) above, and the Company shall pay the full amount of interest due on Buy-Down Loans directly to such Buy-Down Lender on the fifth day of each month. Following the occurrence of an Event of Default and acceleration of the Obligations, interest payable on all Loans shall be billed through the Lead Administrative Agent. 5(e) Nature and Place of Payments. Except as otherwise expressly provided in the Credit Documents, all ---------------------------- payments made on account of the Obligations shall be made to the Lead Administrative Agent at the Contact Office for distribution to the Lenders, as the Company shall, subject to Paragraph 5(h) below, direct pursuant to a Loan Request, Interest Rate Election and Payoff Notice, without set-off or counterclaim in lawful money of the United States of America in immediately available same day funds, and must be received by the Lead Administrative Agent accompanied by a Loan Request, Interest Rate Election and Payoff Notice at the Contact Office by 11:30 a.m. (Los Angeles time) on the day of payment, it being expressly agreed and understood that if a payment is received after 11:30 a.m. (Los Angeles time) by the Lead Administrative Agent or the Lead Administrative Agent does not receive a Loan Request, Interest Rate Election and Payoff Notice therefor, such payment will be considered to have been made on the next succeeding Business Day or such later date as the Lead Administrative Agent receives the Loan Request, Interest Rate Election and Payoff Notice therefor and interest thereon shall be payable by the Company at the then applicable rate during such extension. If any payment required to be made by the Company hereunder becomes due and payable on a day other than a Business Day, the due date thereof shall be extended to the next succeeding Business Day and interest thereon shall be payable at the then applicable rate during such extension. The Lead Administrative Agent is hereby authorized to debit accounts of the Company maintained with the Lead Administrative Agent for amounts payable by the Company under this Agreement through the Lead Administrative Agent and the Lead Administrative Agent will promptly notify the Company of any such debit. 5(f) Post-Default Interest. Following the occurrence of an Event of Default and until such Event of --------------------- Default is cured or waived as provided herein, Obligations shall bear interest at a per annum rate equal to the Alternate Base Rate plus three percent (3%). 5(g) Computations. All computations of interest and fees payable hereunder shall be based upon a year of ------------ 360 days for the actual number of days elapsed. The determination by the Lead Administrative Agent of any interest rate hereunder shall be conclusive and binding on the Company and the Lenders absent manifest error. 5(h) Disbursement of Payments Received. --------------------------------- (1) All amounts received by the Lead Administrative Agent on account of the Obligations shall be disbursed by the Lead Administrative Agent to the Lenders by wire transfer prior to the cut-off deadline of the Federal Reserve Wire System on the date of receipt if received by the Lead Administrative Agent before 11:30 a.m. (Los Angeles time) and accompanied by a Loan Request, Interest Rate Election and Payoff Notice (or disbursed on the day of receipt although received later than 11:30 a.m. (Los Angeles time) with the agreement of the Lead Administrative Agent and any Lender) or if received later or if the Lead Administrative Agent has not received a Loan Request, Interest Rate Election and Payoff Notice therefor, on the next succeeding Business Day or such later date as the Lead Administrative Agent receives the Loan Request, Interest Rate Election and Payoff Notice relating thereto, without interest payable by the Lead Administrative Agent. (2) Prior to the occurrence of an Event of Default and acceleration of the Obligations, amounts received by the Lead Administrative Agent on account of the Obligations shall be disbursed in accordance with the written direction of the Company, subject only to the requirements that amounts disbursed to the Lenders on account of Primary Loans or the Term Loan be disbursed pro rata in accordance with the Lenders' respective Primary Percentage Shares and that amounts disbursed to the Swing Line Lenders on account of Swing Loans be disbursed pro rata in accordance with the Swing Line Lenders' respective Swing Line Percentage Shares. (3) Following the occurrence of an Event of Default and acceleration of the Obligations, amounts received by the Lead Administrative Agent on account of the Obligations shall be disbursed as follows: (i) first among the Lenders, pro rata in accordance with their respective Primary Percentage Shares, on account of the Obligations until the Obligations have been paid in full, and (ii) then, to the Lead Administrative Agent with respect to the remaining Obligations held by it in its capacity as Lead Administrative Agent until such Obligations have been paid in full. 5(i) Fees. The Company shall pay: ---- (1) To the Lead Administrative Agent, such fees as may from time to time be agreed upon in writing by the Lead Administrative Agent and the Company; and (2) To each of the Lenders, a facility fee, said fee to be payable quarterly in arrears on the fifth day of the first month of each calendar quarter for the period from and including the first day of the first month of the immediately preceding calendar quarter to and including the last day of such calendar quarter and on the Revolving Facility Maturity Date or, following the Conversion Date, the Final Maturity Date, in an amount equal to such Lender's daily average Primary Percentage Share during the applicable calculation period multiplied by: (i) (y) to and including the Revolving Facility Maturity Date, the average daily Aggregate Credit Limit during such calculation period and (z) following the Conversion Date, the average daily outstanding principal balance of the Term Loan, multiplied by (ii) the product of a. 0.08% and b. a fraction the numerator of which is the number of days in the applicable calculation period and the denominator of which is 360. 5(j) Wire Transfers of Funds. Notwithstanding anything to the contrary contained herein and in the other ----------------------- Credit Documents, funds which the Lead Administrative Agent and the Lenders are transmitting by wire transfer shall be deemed to have been sent and received upon release by the transmitting party of such funds into the Federal Reserve Wire System. 5(k) Reduction in Aggregate Credit Limit. From the Effective Date to but not including the Revolving ----------------------------------- Facility Maturity Date, upon not less than thirty (30) days' prior written notice to the Lead Administrative Agent, which shall promptly transmit such notice to each of the Lenders, the Company may permanently reduce the Aggregate Credit Limit in full or in increments of $5,000,000.00 (with such reduction allocated pro rata against the Lenders' respective Maximum Commitments); provided, however, that any such reduction shall be in a minimum amount of $25,000,000.00; and, provided, further, that upon the effective date of any such reduction, the aggregate amount of Loans outstanding shall not exceed the Aggregate Credit Limit as so reduced. 5(l) Capital Requirements. The Company shall pay from time to time upon demand such amounts as any Lender -------------------- may determine to be necessary to compensate such Lender for all reasonable costs which such Lender determines are attributable to its making, agreeing to make, purchasing or maintaining its Primary Percentage Share of any Primary Loan or, following the Conversion Date, of the Term Loan, or its Swing Line Percentage Share of any Swing Loan under this Agreement, including, without limitation, reserve requirements attributed to the unused portion of the Aggregate Credit Limit, in respect of any amount of capital required to be maintained by such Lender pursuant to any law or regulation of any jurisdiction or any interpretation, directive or request affecting banks, savings and loan institutions and/or financial institutions generally notwithstanding the creditworthiness of any particular bank, savings and loan institution or other financial institution (whether or not having the force of law) of any court or governmental or monetary authority, whether in effect on the date of this Agreement or thereafter. A certificate as to any amounts payable pursuant hereto submitted by a Lender to the Company shall be conclusive in the absence of manifest error. The obligations of the Company under this Paragraph 5(l) shall survive the termination of this Agreement and the payment of all Loans and all other Obligations. 5(m) Extension of Revolving Facility Maturity Date. --------------------------------------------- (1) The Company may, by written notice to the Lead Administrative Agent (such notice being an "Extension Notice") given no earlier than ninety (90) days and no later than forty-five (45) days prior to the then current Revolving Facility Maturity Date, request the Lenders to consider an extension of the then current Revolving Facility Maturity Date to a date 364 days after the then current Revolving Facility Maturity Date. The Lead Administrative Agent shall promptly transmit any Extension Notice to each Lender. Each Lender shall notify the Lead Administrative Agent in writing whether it agrees to so extend the then current Revolving Facility Maturity Date no later than twenty (20) days prior to the then current Revolving Facility Maturity Date, and any such notice given by a Lender to the Lead Administrative Agent, once given, shall be irrevocable as to such Lender. Any Lender which does not expressly and timely notify the Lead Administrative Agent that it agrees to so extend the then current Revolving Facility Maturity Date shall be deemed to have rejected the Company's request for extension thereof. Lenders agreeing to extend the then current Revolving Facility Maturity Date are hereinafter referred to as "Continuing Lenders," and Lenders declining to consent to the extend thereof (or Lenders deemed to have so declined) are hereinafter referred to as "Non-Extending Lenders". If the Majority Lenders elect to so extend the then current Revolving Facility Maturity Date, the Lead Administrative Agent shall notify the Company of such election no later than fifteen (15) days prior to the then current Revolving Facility Maturity Date, and effective on the then current Revolving Facility Maturity Date and subject to the conditions precedent to such extension set forth in Paragraph 7(c) below, the Revolving Facility Maturity Date shall be automatically deemed so extended and the Aggregate Credit Limit shall be automatically deemed to be the aggregate Maximum Commitments of the Continuing Lenders (including, if applicable, any new Lenders who become Continuing Lenders pursuant to subparagraph (4) below). Upon the delivery of an Extension Notice the Company shall be deemed to have represented and warranted that on and as of the date of such Extension Notice no Potential Default or Event of Default has occurred and is continuing. It is expressly acknowledged and agreed by the Company that no Lender shall have any obligation to extend any Revolving Facility Maturity Date, or, having agreed to such an extension on any one or more occasions, to agree to any future extension and that any such decision by a Lender is in such Lender's sole and absolute discretion. (2) If a Revolving Facility Maturity Date shall have been extended in accordance with subparagraph (1) above, then upon the effectiveness of such extension, all references herein to the "Revolving Facility Maturity Date" shall refer to the Revolving Facility Maturity Date as so extended. (3) If any Lender shall elect not to extend the then current Revolving Facility Maturity Date as requested by any Extension Notice given by the Company pursuant to subparagraph (1) above but the Majority Lenders have agreed to do so, then concurrently with the effectiveness of such extension, the Maximum Commitment of such Lender shall terminate and the Company shall on such date pay to the Lead Administrative Agent, for the account of such Lender, the principal amount of, and accrued interest on, such Lender's Loans, together with any amounts payable to such Lender pursuant to Paragraph 4(e) above and any fees or other amounts owing to such Lender under this Agreement and the other Credit Documents. Following such termination, the Non-Extending Lender shall retain the benefits of Paragraphs 4(g) and 4(h) above and Paragraph 9(g) below as the same relate to the period prior to the effective date of such termination. (4) A Non-Extending Lender shall be obligated, at the request of the Company and subject to payment by the Company to the Lead Administrative Agent for the account of such Non-Extending Lender of the principal amount of, and accrued interest on, such Lender's Loans, together with any amounts payable to such Lender pursuant to Paragraph 4(e) above and any fees or other amounts owing to such Lender under this Agreement and the other Credit Documents, to transfer its Maximum Commitment or portions thereof to an Applicant Financial Institution and/or to one or more Continuing Lenders on the terms and subject to the conditions set forth in Paragraphs 14(a), 14(b) and 14(c) below, any such transfer to be without recourse, representation, warranty (other than good title to its Loans) or expense to such Non-Extending Lender, at any time prior to the then current Revolving Facility Maturity Date. Each such transferee, if not already a Continuing Lender hereunder, shall become a Continuing Lender hereunder in replacement of the Non-Extending Lender to the extent of the Maximum Commitment transferred to it shall enjoy all rights and assume all obligations on the part of the Lenders set forth in this Agreement and the other Credit Documents. Following such termination, the Non-Extending Lender shall retain the benefits of Paragraphs 4(g) and 4(h) above and Paragraph 9(g) below as the same relate to the period prior to the effective date of such termination. (5) No Loan Request, Interest Rate Election and Payoff Notice delivered prior to the then current Revolving Facility Maturity Date and requesting the funding of a Loan following such then current Revolving Facility Maturity Date shall be applicable to a Non-Extending Lender; provided, however, that nothing contained herein shall in any manner or to any extent relieve a Non-Extending Lender from its funding obligations hereunder prior to such current Revolving Facility Maturity Date. 6. Guaranty; Subordination; Additional Documents. --------------------------------------------- 6(a) Guaranty and Subordination Agreement. As support for the Obligations, the Company shall execute and ------------------------------------ deliver and shall cause to be executed and delivered to the Lead Administrative Agent on behalf of the Lenders: (1) the Guaranty and (2) the Subordination Agreement. 6(b) Further Documents. The Company agrees to execute and deliver and to cause to be executed and ----------------- delivered to the Lead Administrative Agent or such Persons as the Lead Administrative Agent may direct from time to time such documents, instruments and agreements as the Lead Administrative Agent on behalf of the Lenders may reasonably request, which are in any of the Lenders' judgment necessary or desirable to obtain for the Lead Administrative Agent, the Co-Administrative Agent, the Documentation Agent, the Syndication Agent, the Arranger, the Co-Arrangers, the Co-Agents and the Lenders the benefit of the Credit Documents. 7. Conditions Precedent. -------------------- 7(a) First Loan. As conditions precedent to the Effective Date and the funding of the first Loan hereunder: ---------- (1) There shall have been delivered to the Lead Administrative Agent, in form and substance and in quantities reasonably satisfactory to the Lenders and their counsel, the following: (i) A duly executed copy of this Agreement; (ii) A duly executed copy of each of the Guaranty; (iii) A duly executed copy of the Subordination Agreement; (iv) Such credit applications, financial statements, pro forma financial statements, authorizations and information concerning the Company and its business, operations and condition (financial and otherwise) as the Lead Administrative Agent or any Lender may reasonably request; (v) Certified copies of resolutions of the Boards of Directors of the Company and the Parent approving the execution and delivery of all documents required to be delivered by the Company and the Parent hereunder; (vi) Certificates of the Secretary or an Assistant Secretary of each of the Company and the Parent certifying the names, incumbency and true signatures of the officers of the Company and the Parent authorized to sign the documents required to be executed and delivered by the Company and the Parent hereunder; (vii) An opinion of counsel for the Company and the Parent (which counsel may be in-house counsel) in form and substance satisfactory to the Lenders and covering such matters as the Lenders may reasonably request; (viii) A certificate of an executive officer of each of the Company and the Parent in the form of that attached hereto as Exhibit A dated as of the date of this Agreement; and --------- (ix) A Covenant Compliance Certificate, dated as of February 29, 2000, for each of the Company and the Parent demonstrating in detail satisfactory to the Lenders the Company's compliance with the covenants set forth in Paragraphs 10(g), 10(i) and 10(j) below, and the Parent's compliance with the financial covenants set forth in Paragraphs 11(d) and 11(e) of the Guaranty. (2) All acts and conditions (including, without limitation, the obtaining of all necessary regulatory approvals and the making of all required filings, recordings and registrations) required to be done and performed and to have happened precedent to the execution, delivery and performance of the Credit Documents and to constitute the same legal, valid and binding obligations, enforceable in accordance with their respective terms, shall have been done and performed and shall have happened in due and strict compliance with all applicable laws. (3) All documentation, including, without limitation, documentation for corporate and legal proceedings in connection with the transactions contemplated by the Credit Documents, shall be satisfactory in form and substance to the Lenders and their counsel. (4) The Company shall have delivered to the Arranger a letter acceptable to the Arranger regarding the payment by the Company to the Arranger of fees, and the Company shall have paid all fees required under such letter to have been paid prior to the funding of the first Loan hereunder. (5) No material adverse change in the business, operations, assets or financial or other condition of the Company or the Company and its consolidated Subsidiaries taken as a whole shall have occurred since the Statement Date and the Company by presenting the initial Loan Request, Interest Rate Election and Payoff Notice shall be deemed to have so represented and warranted hereunder. (6) There shall be no "Loans" or other "Obligations" outstanding under (and as those terms are defined in) the Existing Credit Agreement. 7(b) All Primary Loans and Swing Loans. As conditions precedent to the funding of each Primary Loan and --------------------------------- Swing Loan hereunder, including the first such Loan, at and as of the date of, and after giving effect to, the funding of such Loan: (1) The representations and warranties of the Company and the Parent contained in the Credit Documents shall be accurate and complete in all respects as of such date; (2) If there has occurred a Potential Default or an Event of Default (other than under Paragraph 11(a) below or under Paragraph 11(e) below resulting from a breach or potential breach of Paragraph 10(i) or 10(j) below), the Majority Lenders have not elected in writing to cease funding Loans hereunder; (3) If there has occurred an Event of Default under Paragraph 11(a) below, one hundred percent (100%) of the Lenders have elected in writing to waive such Event of Default; (4) If there has occurred an Event of Default or Potential Default under Paragraph 11(e) below resulting from a breach or potential breach of Paragraph 10(i) or 10(j) below, the Majority Lenders have elected in writing to waive such Event of Default or Potential Default; (5) Following the making of such Loan, the aggregate principal amount of Primary Loans and Swing Loans outstanding shall not exceed the applicable limitations of Paragraphs 1(a) and 1(b) above nor shall the aggregate principal amount of Primary Loans held by any Lender plus such Lender's Percentage Share of Swing Loans outstanding or exceed such Lender's Maximum Commitment; and (6) The Company shall have delivered to the Lead Administrative Agent a duly executed Loan Request, Interest Rate Election and Payoff Notice requesting such Credit Event. By delivering a Loan Request, Interest Rate Election and Payoff Notice to the Lead Administrative Agent, the Company shall be deemed to have represented and warranted the accuracy and completeness of the statements set forth in subparagraphs (b)(1) through (b)(6) above and all information set forth in such Loan Request, Interest Rate Election and Payoff Notice. 7(c) Extension of Revolving Facility Maturity Date; Term Loan. As conditions precedent to the -------------------------------------------------------- effectiveness of any extension of the Revolving Facility Maturity Date pursuant to Paragraph 5(m) above or the conversion of Loans outstanding to the Term Loan, on and as of the proposed effective date of such extension or the Conversion Date, as applicable: (1) The representations and warranties of the Company and the Parent contained in the Credit Documents shall be accurate and complete in all respects as of such date; (2) There shall not have occurred a Potential Default or an Event of Default; and (3) In the case of the Conversion Date, after giving effect to the conversion of Loans outstanding into the Term Loan, no Lender's Primary Percentage Share of the Term Loan shall exceed such Lender's Maximum Commitment. By delivering an Extension Notice or a Loan Request, Interest Rate Election and Payoff Notice for the Term Loan to the Lead Administrative Agent, the Company shall be deemed to have represented and warranted the accuracy and completeness of the statements set forth in subparagraphs (c)(1) through (c)(3) above. 8. Representations and Warranties of the Company. As an inducement to the Lead Administrative Agent, the Co-Administrative Agent, the Documentation Agent, the Syndication Agent, the Arranger, the Co-Arrangers, the Co-Agents and each Lender to enter into this Agreement, the Company represents and warrants to the Lead Administrative Agent, the Co-Administrative Agent, the Documentation Agent, the Syndication Agent, the Arranger, the Co-Arrangers, the Co-Agents and each Lender that: 8(a) Financial Condition. The financial statements dated the Statement Date, copies of which have ------------------- heretofore been furnished to each Lender, are complete and correct and present fairly in accordance with GAAP the consolidated and consolidating financial condition of the Company and its consolidated Subsidiaries at such date and the consolidated and consolidating results of their operations and changes in financial position for the fiscal period then ended. 8(b) Corporate Existence; Compliance with Law. Each of the Company and its Subsidiaries: (1) is duly ---------------------------------------- organized, validly existing and in good standing as a corporation under the laws of the state of its incorporation, and is in good standing as a foreign corporation in each jurisdiction where its ownership of property or conduct of business requires such qualification and where failure to be in good standing could have a material adverse effect on the Company, any of its Subsidiaries, or their respective property and/or business or on the ability of the Company or the Parent to pay or perform the Credit Documents; (2) has the corporate power and authority and the legal right to own and operate its property and to conduct business in the manner in which it does and proposes so to do; and (3) is in compliance with all Requirements of Law and Contractual Obligations except to the extent that failure to comply could not have a material adverse effect on the Company, any of its Subsidiaries, or their respective property and/or business or on the ability of the Company or the Parent to pay or perform the Credit Documents. 8(c) Corporate Power; Authorization; Enforceable Obligations. Each of the Company and the Parent has the ------------------------------------------------------- corporate power and authority and the legal right to execute, deliver and perform the Credit Documents to which it is a party and, in the case of the Company, to borrow hereunder, and has taken all necessary corporate action to authorize the execution, delivery and performance of the Credit Documents. The Credit Documents have been duly executed and delivered on behalf of each of the Company and the Parent and constitute legal, valid and binding obligations of such party enforceable against such party in accordance with their respective terms. 8(d) No Legal Bar. The execution, delivery and performance of the Credit Documents, the borrowings ------------ thereunder and the use of the proceeds thereof, will not violate any Requirement of Law or any Contractual Obligation of the Company or the Parent to the extent that failure to comply therewith could have a material adverse effect on the Company or its property and/or business or on the ability of the Company or the Parent to pay or perform the Credit Documents. 8(e) No Material Litigation. Except as disclosed on Exhibit B attached hereto, no litigation, ---------------------- investigation or proceeding of or before any court, arbitrator or Governmental Authority is pending or, to the knowledge of the Company, threatened by or against the Company or any of its Subsidiaries or against any of such parties' properties or revenues involving amounts, in the case of any such individual litigation, investigation or proceeding, in excess of $10,000,000.00 or which, regardless of the amount in controversy, is likely to be adversely determined and which, if adversely determined, could have a material adverse effect on the business, operations, property or financial or other condition of the Company or any of its Subsidiaries. 8(f) Taxes. The Company and each of its Subsidiaries have filed or caused to be filed all tax returns that ----- are required to be filed and have paid all taxes (other than incidental local business and other municipal taxes which are not material to the operation of the Company and its Subsidiaries) shown to be due and payable on said returns or on any assessments made against them or any of their property other than taxes which are being contested in good faith by appropriate proceedings and as to which the Company or the applicable Subsidiary has established adequate reserves in conformity with GAAP. 8(g) Investment Company Act. The Company is not an "investment company" or a company "controlled" by an ---------------------- "investment company" within the meaning of the Investment Company Act of 1940, as amended. 8(h) Subsidiaries. Exhibit C attached hereto sets forth an accurate and complete list of all presently ------------ --------- existing Subsidiaries of the Company, their respective jurisdictions of incorporation and the percentage of their capital stock owned by the Company or other Subsidiaries of the Company. All of the issued and outstanding shares of capital stock of the Subsidiaries of the Company have been duly authorized and issued and are fully paid and non-assessable. 8(i) Federal Reserve Board Regulations. Neither the Company nor any of its Subsidiaries is engaged or will --------------------------------- engage, principally or as one of its important activities, in the business of extending credit for the purpose of "purchasing" or "carrying" any "margin stock" within the respective meanings of such terms under Regulation U. No part of the proceeds of any Loan made hereunder will be used for "purchasing" or "carrying" "margin stock" as so defined or for any purpose which violates, or which would be inconsistent with, the provisions of the Regulations of the Board of Governors of the Federal Reserve System. 8(j) ERISA. The Company and each of its Subsidiaries are in compliance in all material respects with the ----- requirements of ERISA and no Reportable Event has occurred under any Plan maintained by the Parent, the Company or any of its or their Subsidiaries which is likely to result in the termination of such Plan for purposes of Title IV of ERISA. 8(k) Assets. The Company and each of its Subsidiaries have good and marketable title to all property and ------ assets reflected in the financial statements referred to in Paragraph 8(a) above, except property and assets sold or otherwise disposed of in the ordinary course of business subsequent to that date. Neither the Company nor any of its Subsidiaries has outstanding Liens on any of its properties or assets nor are there any security agreements to which the Company or any of its Subsidiaries is a party, or title retention agreements, whether in the form of leases or otherwise, of any personal property except as reflected in said financial statements referred to in Paragraph 8(a) above or as permitted under Paragraph 10(a) below. 9. Affirmative Covenants. The Company hereby covenants and agrees with the Lead Administrative Agent and each --------------------- Lender that, as long as any Obligations remain unpaid or any Lender has any obligation to make all or any portion of any Loans, the Company shall: 9(a) Financial Statements. Furnish or cause to be furnished directly to the Lead Administrative Agent and -------------------- each Lender: (1) Within ninety (90) days after the last day of each fiscal year of the Parent, consolidated statements of income and statements of changes in cash flow of the Parent and its Subsidiaries for such year and a balance sheet as of the end of such year (including therein as supplemental information, consolidating statements of income and statements of changes in cash flow and balance sheets as of the end of such year) in each case presented fairly in accordance with GAAP and, in the case of the Company, the requirements of HUD Handbook IG 4000.3 REV and accompanied, in all cases, by an unqualified report of a firm of independent certified public accountants acceptable to the Majority Lenders; (2) Within forty-five (45) days after the last day of each fiscal quarter, consolidated and consolidating statements of income and statements of changes in cash flow of the Parent and its Subsidiaries for such fiscal quarter and balance sheets of the Parent and its Subsidiaries as of the last day of such fiscal quarter, presented fairly in accordance with GAAP, in each case certified in writing as to fairness of presentation by the chief financial officer or treasurer of the Company and the Parent; (3) Within forty-five (45) days following each Applicable Financial Test Date, a Covenant Compliance Certificate from the chief financial officer or treasurer of each of the Company and the Parent, certifying that there does not exist an Event of Default or Potential Default and, in addition, demonstrating in detail satisfactory to the Majority Lenders the Company's compliance with the covenants set forth in Paragraphs 10(g), 10(i) and 10(j) below as of and at such Applicable Financial Test Date, and the Parent's compliance with the covenants set forth in Paragraphs 11(d) and 11(e) of the Guaranty, as of and at such Applicable Financial Test Date; (4) As soon as is available any written report pertaining to material items in respect of the internal control matters of the Parent or the Company submitted to any of such Persons by their respective independent accountants in connection with each annual or interim special audit of the financial condition of such Persons made by such independent public accountants; and (5) Copies of all proxy statements, financial statements, and reports which the Parent sends to its stockholders, and copies of all regular, periodic and special reports, and all registration statements under the Securities Act of 1933, as amended (the "Act"), which the Parent or the Company files with the Securities and Exchange Commission or any governmental authority which may be substituted therefor, or with any national securities exchange; provided, however, that there shall not be required to be delivered hereunder to the Lead Administrative Agent such copies for any Lender of prospectuses relating to future series of offerings under registration statements filed under Rule 415 of the Act or other items which such Lender has indicated in writing to the Parent or the Company from time to time need not be delivered to such Lender. 9(b) Certificates; Reports; Other Information. Furnish or cause to be furnished directly to the Lead ---------------------------------------- Administrative Agent and each Lender: (1) Within forty-five (45) days following each Applicable Financial Test Date, prepared as of such Applicable Financial Test Date and certified by an appropriate officer of the Company, a report covering the servicing portfolio of the Company covering such matters as the Majority Lenders, through the Lead Administrative Agent, may reasonably request (but which shall in any event list the aggregate principal amount of mortgage notes serviced and the number and types of loans evidenced by such notes, and show all loans in the servicing portfolio more than thirty (30) days past due the due dates set forth in such notes). (2) Promptly, such additional financial and other information, including, without limitation, financial statements of the Company, the Parent or any Affiliate of the Company or the Parent, as any Lender, through the Lead Administrative Agent, may from time to time reasonably request, including, without limitation, such information as is necessary for any Lender to participate out any of its interests in Loans hereunder or to enable another financial institution to become a signatory hereto. (3) Promptly upon receipt thereof by the Company, copies of all audit reports prepared by or on behalf of FNMA, FHLMC and GNMA. 9(c) Payment of Indebtedness. Pay, discharge or otherwise satisfy at or before maturity or before it ----------------------- becomes delinquent, defaulted or accelerated, as the case may be, all its Indebtedness, except: (1) Indebtedness (other than Indebtedness with respect to CPNs) being contested in good faith and for which provision is made to the satisfaction of the Majority Lenders for the payment thereof in the event the Company is found to be obligated to pay such Indebtedness and which Indebtedness is thereupon promptly paid by the Company, and (2) additional Indebtedness (other than Indebtedness with respect to CPNs) in the aggregate not to exceed $100,000.00. 9(d) Maintenance of Existence and Properties. Maintain all rights, privileges, licenses, approvals, --------------------------------------- franchises, properties and assets necessary in the normal conduct of its business, and comply with all Contractual Obligations and Requirements of Law. The Company will at all times be a FNMA, FHLMC and GNMA-approved Seller/ Servicer and a wholly-owned Subsidiary of the Parent. 9(e) Inspection of Property; Books and Records; Discussions. Keep proper books of record and account in ------------------------------------------------ which full, true and correct entries in conformity with GAAP and all Requirements of Law shall be made of all dealings and transactions in relation to its business and activities, and permit representatives of each Lender (at no cost or expense to the Company unless there shall have occurred and be continuing an Event of Default) to visit and inspect those of its properties and examine and make abstracts from those of its books and records as are reasonably necessary to enable such Lender to conduct appropriate credit due diligence in connection with customary credit approval practices for credit facilities of this type, at any reasonable time and as often as may reasonably be desired by any of the Lenders, and to discuss the business, operations, properties and financial and other condition of the Company and any of its Subsidiaries with officers and employees of such parties, and with their independent certified public accountants. 9(f) Notices. Promptly give written notice to the Lead Administrative Agent (who shall promptly notify ------- each of the Lenders thereof) of: (1) The occurrence of any Potential Default or Event of Default; (2) Any litigation or proceeding affecting the Company or any of its Subsidiaries involving amounts, in the case of any such individual litigation, investigation or proceeding, in excess of $10,000,000.00 or which, regardless of the amount in controversy, is likely to be adversely determined and which, if adversely determined, could have a material adverse effect on the business, operations, property, or financial or other condition of the Company or the ability of the Company to pay and perform the Obligations; (3) Receipt by the Company or the Parent of notice from any rating agency concerning a potential change in any credit rating previously accorded the Company or the Parent by such rating agency; and (4) A material adverse change in the business, operations, property or financial or other condition of the Parent, the Company or any of their Subsidiaries. 9(g) Expenses. Pay all reasonable out-of-pocket expenses (including fees and disbursements of counsel) of -------- the Lead Administrative Agent, the Arranger and the Co-Arrangers incident to the preparation, negotiation, administration and amendment of the Credit Documents and, following the occurrence of an Event of Default, of the Lead Administrative Agent and each of the Lenders incident to the protection of the rights of the Lenders, the Arranger, the Co-Arrangers and the Lead Administrative Agent under the Credit Documents, and incident to the enforcement of payment of the Obligations, whether by judicial proceedings or otherwise, including, without limitation, in connection with bankruptcy, insolvency, liquidation, reorganization, moratorium or other similar proceedings involving the Parent or the Company or a "workout" of the Obligations. The obligations of the Company under this Paragraph 9(g) shall be effective and enforceable whether or not any Loan is advanced by any Lender hereunder and shall survive payment of all other Obligations. 9(h) Credit Documents. Comply with and observe all terms and conditions of the Credit Documents. ---------------- 9(i) Insurance. Obtain and maintain insurance with responsible companies in such amounts and against such --------- risks as are usually carried by corporations engaged in similar businesses similarly situated, including, without limitation, errors and omissions coverage and fidelity coverage in form and substance acceptable under FNMA or FHLMC guidelines, and furnish the Lenders on request full information as to all such insurance. 9(j) CPN Program. Obtain the written approval of the Majority Lenders to any modification of the ----------- documentation relating to the issuance of CPNs of the Company as in effect on the date of this Agreement. 9(k) Hedging Program. Maintain at all times a Hedging Program consistent with the Hedging Program in --------------- effect at and as of the Effective Date. 10. Negative Covenants. The Company hereby agrees that, as long as any Obligations remain unpaid or any Lender has ------------------ any obligation to make all or any portion of any Loans, the Company shall not, directly or indirectly: 10(a)Liens. Create, incur, assume or suffer to exist any Lien upon any of its property and assets ----- (including servicing rights) other than: (1) Liens or charges for current taxes, assessments or other governmental charges which are not delinquent or which remain payable without penalty, or the validity of which are contested in good faith by appropriate proceedings upon stay of execution of the enforcement thereof, provided the Company shall have set aside on its books and shall maintain adequate reserves for the payment of same in conformity with GAAP; (2) Liens, deposits or pledges made to secure statutory obligations, surety or appeal bonds, or bonds for the release of attachments or for stay of execution, or to secure the performance of bids, tenders, contracts (other than for the payment of borrowed money), leases or margin call requirements or for purposes of like general nature in the ordinary course of the Company's business; (3) Liens on Mortgage Loans and Mortgage-Backed Securities which are the subject of repurchase agreements; (4) Liens on real property (including fixtures and improvements thereon) securing Indebtedness in an amount not to exceed $50,000,000.00 in the aggregate at any time outstanding; (5) Liens on property and assets of the Company securing short term Indebtedness of the Company (Indebtedness with a maturity of one year or less and not automatically renewable by the Company at its sole option) in an amount not to exceed at any date twenty five percent (25%) of Mortgage Loans and MBS Held for Sale; and (6) Liens on servicing rights of the Company securing Indebtedness in an amount not to exceed at any date ten percent (10%) of Mortgage Servicing Rights. 10(b)Indebtedness. Create, incur, assume or suffer to exist, or otherwise become or be liable in respect ------------ of any Indebtedness if upon such creation, incurrence or assumption there would exist an Event of Default or the Company would fail to be in compliance with the requirements of Paragraphs 10(i) or 10(j) below (assuming such compliance were tested at such date immediately following such creation, incurrence or assumption). 10(c)Consolidation and Merger. Liquidate or dissolve or enter into any consolidation, merger, partnership, ------------------------ joint venture, syndicate or other combination, except that the Company may be consolidated with or merged with any corporation provided that (1) in any such merger or consolidation the Company shall be the surviving or resulting corporation and (2) at the time of and immediately after the effectiveness of such merger or consolidation there shall not have occurred and be continuing an Event of Default or Potential Default. 10(d)Acquisitions. Purchase or acquire or incur liability for the purchase or acquisition of any or all of ------------ the assets or business of any Person other than in the normal course of a mortgage banking-related business (it being expressly agreed and understood that the acquisition of servicing is a normal course of business activity); provided, however, that the Company may acquire all or a portion of the stock or assets of another mortgage company or companies so long as no Event of Default or Potential Default shall exist immediately following the consummation of such acquisition, and, provided, further, that the Company shall be in compliance with the financial covenants set forth in Paragraphs 10(i) and 10(j) below, assuming for purposes of this Paragraph 10(d) that the "Applicable Financial Test Date" referenced in such covenants is the day immediately following the consummation of such acquisition. 10(e)Payment of Dividends. Declare or pay any dividends upon any shares of the Company's stock now or -------------------- hereafter outstanding, except dividends payable in the capital stock of the Company, or make any distribution of assets to its stockholders as such, whether in cash, property or securities, if at the date of payment or distribution (either before or after giving effect thereto) there should exist an Event of Default or Potential Default. 10(f)Purchase or Retirement of Stock. Acquire, purchase, redeem or retire any shares of its capital stock ------------------------------- now or hereafter outstanding for value. 10(g)Investments; Advances; Receivables. Make or commit to make any advance, loan or extension of credit ---------------------------------- ("Advances") to, or hold any receivable ("Receivable") of, or make or commit to make any capital contribution to, or purchase any stock, bonds, notes, debentures or other securities ("Investments") of, or make any other investment in, any Person, except: (1) Advances constituting Mortgage Loans made in the ordinary course of the Company's business; (2) Advances to and Receivables of any Person which are fully secured on a first priority perfected basis by Mortgage Loans; (3) Investments in, Advances to and Receivables of any Affiliate which are fully secured on a first priority perfected basis by Mortgage Loans or Prime Quality Mortgage-Backed Securities; (4) Investment in, Advances to and Receivables of any Affiliate or any Servicing Pass-Through Venture which is not otherwise an Affiliate, which are unsecured or which are secured on a first priority perfected basis by collateral other than Mortgage Loans or Prime Quality Mortgage-Backed Securities, in an aggregate amount not to exceed fifteen percent (15%) of the net worth of the Company determined in accordance with GAAP; and (5) Investments in, Advances to and Receivables of Countrywide Capital Markets, Inc. or any of its Subsidiaries, which are fully secured on a first priority perfected basis by: (i) debt instruments issued by FNMA or FHLMC or (ii) time deposit accounts issued by a financial institution the deposits of which are insured by the Bank Insurance Fund and which financial institution has a deposit rating issued by a recognized rating agency not less than the rating assigned to the Company's long term indebtedness. 10(h)Sale of Assets. Sell, lease, assign, transfer or otherwise dispose of any of its assets (other than -------------- obsolete or worn out property), whether now owned or hereafter acquired, other than in the ordinary course of business as presently conducted and at fair market value (it being expressly agreed and understood that the sale or other disposition of Mortgage Loans with or without servicing released and the sale or other disposition of servicing rights are in the ordinary course of business); provided, however, that in no event shall the Company enter into any sale and leaseback transaction involving any of its assets without the prior written consent of the Majority Lenders; and, provided further, that the Company may sell, lease, assign, transfer or otherwise dispose of any of its assets to a Subsidiary of the Company (which, for the purpose of this proviso shall include any limited partnership the general and limited partners of which are Subsidiaries of the Company) so long as: (1) all classes of stock of, or partnership interests in, such Subsidiary are owned, directly or indirectly, by the Company, (2) such Subsidiary incurs no obligations for third party indebtedness except such obligations to employees and vendors as are necessary or desirable in the normal conduct of the business of servicing 1-4 unit single family mortgage loans and in managing an office building owned by such Subsidiary, and (3) any such unpaid obligations as are described in subsection (2) above (other than payroll and benefits obligations to employees) shall not exceed at any time $50,000,000.00 in the aggregate. 10(i)Minimum Net Worth. Permit its net worth determined in accordance with GAAP on and as of each ----------------- Applicable Financial Test Date to be less than $1,200,000,000.00. 10(j)Maximum Total Debt. Permit Total Debt on and as of each Applicable Financial Test Date to exceed the ------------------ sum of: (1) One hundred percent (100%) of Cash, plus (2) Ninety percent (90%) of Margins, plus (3) Ninety-seven percent (97%) of the amount of Mortgage Loans and MBS Held for Sale (including Mortgage Loans and Mortgage-Backed Securities subject to a Lien under a repurchase agreement but excluding all other Mortgage Loans and Mortgage-Backed Securities which are excluded from "Eligible Mortgage Assets" pursuant to subparagraphs (a), (b) and (c) of the definition of such term), plus (4) Ninety percent (90%) of Pool Loan Purchases and Mortgage Claims Receivable to the extent such assets represent VA and FHA Mortgage Loans repurchased by the Company from pools supporting GNMA Mortgage-Backed Securities, plus (5) Fifty percent (50%) of Deferred Commitment Fees, plus (6) Fifty percent (50%) of Property and Equipment, plus (7) Seventy-five percent (75%) of Mortgage Servicing Rights, plus (8) Fifty percent (50%) of Other Assets, excluding any unsecured Advances made to Affiliates permitted under Paragraph 10(g)(2) above. 11. Events of Default. Upon the occurrence of any of the following events (an "Event of Default"): ----------------- 11(a)The Company shall fail to make any payment on account of that portion of the Obligations consisting of principal or interest on Loans on the date when due; or 11(b)Any representation or warranty made or deemed made by the Company or the Parent in any Credit Document or in connection with any Credit Document shall be materially inaccurate or incomplete in any respect on or as of the date made or deemed made; or 11(c)The Company shall default in the observance or performance of any covenant or agreement contained in Paragraph 10 above (other than those contained in Paragraphs 10(i) and 10(j) above); or 11(d)The Parent shall fail to observe or comply with any term or provision contained in the Guaranty (other than those contained in Paragraph 11(d) thereof); or 11(e)The Company or the Parent shall fail to observe or perform any other term or provision contained in the Credit Documents and such failure shall continue for thirty (30) days; or 11(f)The Company, any of its Subsidiaries or the Parent shall default in any payment of any Indebtedness (other than the Obligations or as permitted under Paragraph 9(c) above) in an aggregate amount of more than $10,000,000.00 or any other event shall occur and, as a result, the holder or holders thereof, or any trustee or agent for such holders, either: (1) cause such Indebtedness to become due and payable prior to its stated maturity, or (2) elect not to cause such Indebtedness to become so due and payable, but such event continues for a period of thirty (30) days and is not cured or waived; or 11(g)(1) The Parent, the Company or any of its Subsidiaries shall commence any case, proceeding or other action (i) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (ii) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its assets, or the Parent, the Company or any of its Subsidiaries shall make a general assignment for the benefit of its creditors; or (2) there shall be commenced against the Parent, the Company or any of its Subsidiaries any case, proceeding or other action of a nature referred to in clause (1) above which (i) results in the entry of an order for relief or any such adjudication or appointment, or (ii) remains undismissed, undischarged or unbonded for a period of sixty (60) days; or (3) there shall be commenced against the Parent, the Company or any of its Subsidiaries any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within sixty (60) days from the entry thereof; or (4) the Parent, the Company or any of its Subsidiaries shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (1), (2) or (3) above; or (5) the Parent, the Company or any of its Subsidiaries shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; or 11(h)(1) Any Person shall engage in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (2) any "accumulated funding deficiency" (as defined in Section 302 of ERISA), whether or nor waived, shall exist with respect to any Plan, (3) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate, any Single Employer Plan, which Reportable Event or institution of proceedings is, in the reasonable opinion of the Lead Administrative Agent, likely to result in the termination of such Plan for purposes of Title IV of ERISA, and, in the case of a Reportable Event, the continuance of such Reportable Event unremedied for ten days after notice of such Reportable Event pursuant to Section 4043(a), (c) or (d) of ERISA is given or the continuance of such proceedings for ten days after commencement thereof, as the case may be, (4) any Single Employer Plan shall terminate for purposes of Title IV of ERISA, (5) any withdrawal liability to a Multiemployer Plan shall be incurred by the Company or the Parent or any Commonly Controlled Entity, or (6) any other event or condition shall occur or exist; and in each case in clauses (1) through (6) above, such event or condition, together with all other such events or conditions, if any, could subject the Parent, the Company or any of its Subsidiaries to any tax, penalty or other liabilities in the aggregate material in relation to the business, operations, property or financial or other condition of the Parent, the Company or any of its Subsidiaries; or 11(i)One or more judgments or decrees in amounts aggregating $1,000,000.00 or more not fully covered by insurance (exclusive of self-insurance (not to exceed $5,000,000.00) and deductibles) during any consecutive twelve (12) month period shall be entered against the Company or any of its Subsidiaries and all such judgments or decrees shall not have been vacated, discharged or satisfied, or stayed or bonded pending appeal, within sixty (60) days from the entry thereof unless counsel to the Company reasonably acceptable to the Majority Lenders has delivered to the Lenders within such sixty (60) day period an opinion that the Company has the legal right to have such judgment or decree vacated without the expenditure of funds (other than for costs of proceedings) and the Company is diligently proceeding to accomplish such vacation; or 11(j)The Parent shall notify the Lead Administrative Agent or any Lender of its intention to rescind or revoke the Guaranty or the Subordination Agreement, in whole or in part, with respect to future transactions or otherwise; or 11(k)The Parent shall cease to own one hundred percent (100%) of the outstanding capital stock of the Company; THEN: (1) Automatically upon the occurrence of an Event of Default under Paragraph 11(g) above, (2) At the option of any Lender upon the occurrence of an Event of Default under Paragraph 11(a) above unless such Event of Default is expressly waived in writing by one hundred percent (100%) of the Lenders, and (3) In all other cases, at the option of the Majority Lenders, each Lender's obligation to make Loans shall terminate and the principal balance of outstanding Loans and interest accrued but unpaid thereon and all other Obligations shall become immediately due and payable, without demand upon or notice or presentment to the Company, all of which are hereby waived. 12. Agency Provisions. ----------------- 12(a)Appointment. Each Lender hereby irrevocably designates and appoints each Agent as the agent of such ----------- Lender under the Credit Documents and each Lender hereby irrevocably authorizes each Agent, as the agent for such Lender, to take such action on its behalf under the provisions of the Credit Documents and to exercise such powers and perform such duties as are expressly delegated to such Agent by the terms of the Credit Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in the Credit Documents, no Agent shall have any duties or responsibilities, except those expressly set forth therein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into the Credit Documents or otherwise exist against any Agent. 12(b)Delegation of Duties. The Lead Administrative Agent may execute any of its duties under the Credit -------------------- Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Lead Administrative Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. 12(c)Exculpatory Provisions. No Agent nor any of its respective officers, directors, employees, agents, ---------------------- counsel, attorneys-in-fact or Affiliates shall be (1) liable to any Lender, any other Agent, the holder of any CPN or the Company for any action taken or omitted to be taken by it or such Person under or in connection with the Credit Documents (except for its or such Person's own gross negligence or willful misconduct), or (2) responsible in any manner to any of the Lenders, any other Agent, the holder of any CPN or the Company for: (i) any recitals, statements, representations or warranties made by the Company or any officer thereof contained in the Credit Documents or in any certificate, report, statement or other document referred to or provided for in, or received by such Agent under or in connection with, the Credit Documents (except such as are prepared by such Agent and, then, only to the extent such Agent is responsible for verification of the accuracy and completeness of the information contained therein or the facts upon which such information is based as expressly provided herein) or for the value, validity, effectiveness, genuineness, enforceability, collectability or sufficiency of the Credit Documents or for any failure of the Company to perform its obligations thereunder or (ii) assuring compliance of the Credit Documents and/or the transactions contemplated by the Credit Documents with any law or regulation binding upon such Person, it being expressly acknowledged, agreed and understood that each such Person has obtained independent advice satisfactory to it in all such regards. No Agent shall be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, the Credit Documents (other than agreements required to be complied with by such Agent thereunder and subject to the standards of care set forth herein with respect thereto) or to inspect the properties, books or records of the Company. Each Agent shall be entitled to refrain from exercising any discretionary powers or actions under this Agreement or any other Credit Document until it shall have received the prior written consent of one hundred percent (100%) of the Lenders to such action. 12(d)Reliance by Agent. Each Agent shall be entitled to rely, and shall be fully protected in relying, ----------------- upon any note, writing, resolution, notice, consent, certification, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document or conversation reasonably believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Company), independent accountants and other experts selected by such Agent. The Lead Administrative Agent may deem and treat each Lender designated on the current Commitment Schedule as a Lender hereunder for all purposes of the Credit Documents unless a written notice of assignment, negotiation or transfer of such Lender's interests hereunder and thereunder as permitted pursuant to Paragraph 14 below shall have been filed with the Lead Administrative Agent. Each Agent shall be fully justified in failing or refusing to take any action under the Credit Documents unless it shall first receive such advice or concurrence of the Majority Lenders (or all Lenders, as required under the Credit Documents) or it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any action (other than liability and/or expense arising out of such Agent's gross negligence or willful misconduct). Each Agent shall in all cases be fully protected in acting, or in refraining from acting, under the Credit Documents in accordance with a request of the Majority Lenders (or all Lenders, if applicable) absent gross negligence and willful misconduct on the part of such Agent in the method in which it acts or refrains from acting in accordance therewith, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders. 12(e)Notice of Default; Agreement to Advance. No Agent shall be deemed to have knowledge or notice of the --------------------------------------- occurrence of any Event of Default or Potential Default unless such Agent has received notice from a Lender or the Company referring to the Credit Documents, describing such Event of Default or Potential Default and stating that such notice is a "notice of default". In the event that any Agent receives such a notice, such Agent shall give notice thereof to the Lenders and the other Agents. 12(f)Non-Reliance on Agent and Other Lenders. Each Lender expressly acknowledges that no Agent nor any of --------------------------------------- its respective officers, directors, employees, agents, attorneys-in-fact or Affiliates has made any representations or warranties to it and that no act by such Agent hereafter taken, including any review of the affairs of the Company, shall be deemed to constitute any representation or warranty by such Agent to any Lender. Each Lender represents to each Agent that it has, independently and without reliance upon such Agent or any other Lender or their respective counsel, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Company and made its own decision to extend credit hereunder and enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon any Agent or any other Lender or their respective counsel, and based on such documents, information and legal advice (including, without limitation, advice of regulatory counsel to it) as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in entering into the Credit Documents and taking or not taking action thereunder, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Company. Except for notices, reports and other documents expressly required to be furnished to the Lenders by an Agent hereunder, such Agent shall not have any duty or responsibility to provide any Lender with any legal advice or credit or other information concerning the business, operations, property, financial and other condition or creditworthiness of the Company which may come into the possession of such Agent or any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates. 12(g)Indemnification. The Company agrees to indemnify, defend and hold harmless each Agent in its capacity --------------- as such from and against any and all claims, obligations, penalties, actions, suits, judgments, costs, disbursements, losses, liabilities and/or damages (including, without limitation, attorneys' fees) of any kind whatsoever which may at any time be imposed on, assessed against or incurred by such Agent in any way (1) relating to or arising out of the Credit Documents or any documents contemplated by or referred to therein or the transactions contemplated thereby or any action taken or omitted to be taken by such Agent in connection with the foregoing; provided, the Company shall not be liable for any portion of any such claims, obligations, etc., arising out of or resulting from the gross negligence or willful misconduct of such Agent or (2) resulting from any action taken or omitted to be taken by such Agent in accordance with written instructions given as provided in the Credit Documents or (3) relating to any one or more of the matters covered by Paragraph 12(c) above. The Lenders agree to indemnify and hold harmless each Agent in its capacity as such ratably in accordance with their Primary Percentage Shares to the extent required by the Company hereunder if any Agent is not reimbursed by the Company hereunder and without limiting the obligation of the Company to do so. To the extent indemnification payments made by the Lenders pursuant to this Paragraph 12(g) are subsequently recovered by any Agent from, or for the account of, the Company, such Agent will promptly refund such previously paid indemnity payments to the Lenders. The indemnification obligations of the Company and Lenders under this Paragraph 12(g) shall survive termination of this Agreement and payment in full of the Obligations. 12(h)Agent in Its Individual Capacity. Any Agent and its Affiliates may make loans to, accept deposits -------------------------------- from and generally engage in any kind of business with the Company as though such Agent were not an Agent hereunder. With respect to such loans made or renewed by them and any note issued to them hereunder, each Agent shall have the same rights and powers under the Credit Documents as any Lender thereunder and may exercise the same as though it were not an Agent, and the terms "Lender" and "Lenders" shall include Agents in their individual capacities. 12(i)Successor Agents. Any Agent may resign as such under the Credit Documents upon ninety (90) days' ---------------- prior written notice to the Lenders and the Company and the Lead Administrative Agent shall resign in the event its Maximum Commitment shall be less than $25,000,000.00. In addition, in the event any Agent fails to perform its obligations under the Credit Documents in any material manner and fails to correct its performance within thirty (30) days of written notice of such failure of performance given by not less than the Majority Lenders, then such Agent may be removed upon thirty (30) days notice given by not less than the Majority Lenders. If an Agent shall resign or be so removed, then, on or before the effective date of such resignation or removal, the Majority Lenders shall appoint a successor agent reasonably acceptable to the Company or, if the Majority Lenders are unable to agree on the appointment of a successor agent, such Agent shall appoint a successor agent for the Lenders, which successor agent shall be reasonably acceptable to the Company, whereupon such successor agent shall succeed to the rights, powers and duties of such Agent, and the term "Documentation Agent," "Syndication Agent," "Lead Administrative Agent," "Co-Administrative Agent," "Arranger", "Co-Arranger" or "Co-Agents," as applicable, shall mean such successor agent effective upon its appointment, and the former Agent's rights, powers and duties shall be terminated without any other or further act or deed on the part of such former Agent or any of the parties to this Agreement or any of the other Credit Documents or successors thereto. After any Agent's resignation or removal hereunder, the provisions of this Paragraph 12 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under the Credit Documents. 12(j)Sharing of Set-Offs. If following the occurrence and during the continuance of an Event of Default ------------------- any Lender (a "benefitted Lender") shall at any time receive any payment of all or part of the Obligations held by it or receive any collateral in respect thereof (whether voluntarily or involuntarily, by set-off or otherwise) in a greater proportion than any such payment to and collateral received by any other Lender, if any, in respect of such other Lender's portion of the Obligations, or interest thereon, such benefitted Lender shall purchase for cash from the other Lenders such portion of each such other Lender's Obligations, or shall provide such other Lenders with the benefits of such collateral, or the proceeds thereof, as shall be necessary to cause such benefitted Lender to share the excess payment or benefits of such collateral or proceeds ratably with each of the Lenders; provided, however, that if all or any portion of such excess payment or benefits is thereafter recovered from such benefitted Lender, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery but without interest. The Company agrees that each Lender so purchasing a portion of another Lender's Obligations may exercise all rights of payment (including, without limitation, rights of set-off) with respect to such portion as fully as if such Lender were the direct holder of such portion. 13. Miscellaneous Provisions. ------------------------ 13(a)No Assignment. The Company may not assign its rights or obligations under the Credit Documents ------------- without the prior written consent of one hundred percent (100%) of the Lenders. Subject to the foregoing, all provisions contained in this Agreement or any document or agreement referred to herein or relating hereto shall inure to the benefit of each Lender, its successors and assigns, and shall be binding upon the Company, its successors and assigns. 13(b)Amendment. The Credit Documents may not be amended or terms or provisions hereof waived unless such --------- amendment or waiver is in writing and signed by the Majority Lenders and the Company; provided, however, that without the prior written consent of one hundred percent (100%) of the Lenders, no amendment or waiver shall: (1) Waive or amend any term or provision of Paragraph 4(e), 4(f) or 4(g) above, or this Paragraph 13(b); (2) Reduce the principal of, or interest on, the Obligations or any amount of fees payable under this Agreement or extend the required payment date of principal or interest on the Obligations or any fees; (3) Increase the Aggregate Credit Limit above $2,000,000,000.00; (4) Modify any Lender's Primary Percentage Share or Swing Line Percentage Share except modifications resulting from an increase, permanent or temporary, in a Lender's Maximum Commitment or Swing Line Commitment made as permitted under this Agreement; (5) Modify the definition of "Majority Lenders"; (6) Include any Person other than the Lenders signatory hereto as a "Lender" hereunder except as expressly permitted pursuant to Paragraph 14(a) below; (7) Cancel or terminate the Guaranty or permit the revocation of the Subordination Agreement; or (8) Extend the Revolving Facility Maturity Date or the Final Maturity Date; provided, however, that nothing contained herein shall in any manner or to any extent be deemed to supersede any provision of the Credit Documents which expressly designates which Lenders are empowered to modify such provision, including, without limitation, any provision of the Credit Documents which expressly requires the consent of one hundred percent (100%) of the Lenders to any modification thereof. No amendment or waiver shall, unless agreed to in writing by the affected Agent, modify the rights or duties of such Agent. The Lead Administrative Agent shall provide notice and a copy of all amendments to the Credit Documents to all parties to the Credit Documents. 13(c)Cumulative Rights; No Waiver. The rights, powers and remedies of the Lenders hereunder are cumulative ---------------------------- and in addition to all rights, powers and remedies provided under any and all agreements between the Company and the Lenders relating hereto, at law, in equity or otherwise. Any delay or failure by the Lenders to exercise any right, power or remedy shall not constitute a waiver thereof by the Lenders, and no single or partial exercise by the Lenders of any right, power or remedy shall preclude any other or further exercise thereof or any exercise of any other rights, powers or remedies. 13(d)Entire Agreement; Severability. This Agreement and the documents and agreements referred to herein ------------------------------ embody the entire agreement and understanding between the parties hereto and supersede all prior agreements and understandings relating to the subject matter hereof and thereof. All waivers by the Company provided for in the Credit Documents have been specifically negotiated by the parties with full cognizance and understanding of their rights. If any of the provisions of the Credit Documents shall be held invalid or unenforceable, the Credit Documents shall be construed as if not containing such provisions, and the rights and obligations of the parties hereto shall be construed and enforced accordingly. 13(e)Survival. All representations, warranties, covenants and agreements herein contained on the part of -------- the Company shall survive the termination of this Agreement and shall be effective until the Obligations are paid and performed in full or longer as expressly provided herein. 13(f)Notices. All notices given by any party to any of the others shall be in writing (which may be by ------- facsimile transmission), delivered personally, by commercial courier service or by depositing the same in the United States mail, registered, with postage prepaid, addressed to such party at the address set forth on Annex II attached hereto. Any party may change the address to which notices are to be sent by notice of such change to the other party or parties given as provided herein. 13(g)Governing Law. This Agreement shall be deemed to be a contract made under the laws of the State of ------------- California, and for all purposes shall be construed in accordance with the laws of said State, without regard to principles of conflicts of law. 13(h)Counterparts. This Agreement may be executed in counterparts each of which when so executed shall be ------------ deemed to be an original and all of which when taken together shall constitute one and the same agreement. 13(i)Waiver of Jury Trial. EACH OF THE PARTIES HERETO WAIVES ITS RESPECTIVE RIGHTS TO A TRIAL BY JURY OF -------------------- ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER CREDIT DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. EACH OF THE PARTIES HERETO AGREES THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS PARAGRAPH 13(i) AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER CREDIT DOCUMENTS. 14. Additional Lenders; Assignments and Participations; Increases in Availability. -------------------------------------------------------------------- 14(a)Addition of New Lender. ---------------------- (1) Subject to the limitation on the Aggregate Credit Limit set forth in the definition of such term, the Company or any Lender may at any time propose that one or more Eligible Assignees (each, an "Applicant Financial Institution") become an additional Lender hereunder. At such time, the Company or such Lender, as applicable, shall notify the other parties hereto, including the Lead Administrative Agent, of the identity of such Applicant Financial Institution and such Applicant Financial Institution's proposed Maximum Commitment and, as applicable, Swing Line Commitment. The addition of any Applicant Financial Institution shall be subject to: (i) If such Applicant Financial Institution is proposed for inclusion as a Lender hereunder by a Lender, the prior written consent of the Company and the Lead Administrative Agent, and if such Applicant Financial Institution is proposed for inclusion as a Lender hereunder by the Company, the prior written consent of the Lead Administrative Agent, none of which consents shall be unreasonably withheld and which, if given, shall be given in writing to the other parties hereto no later than the tenth day following receipt by the Company of a written request for the inclusion of such Applicant Financial Institution as a Lender hereunder; and (ii) Delivery of each of the items and the occurrence of each of the events described in subparagraph (2) below. (2) Assuming delivery of the consent of the Company and/or Lead Administrative Agent as required pursuant to subparagraph (1)(i) above, the Lead Administrative Agent, the Company and, if such Applicant Financial Institution will be acquiring a portion of an existing Lender's Maximum Commitment by way of assignment from such existing Lender, such existing Lender, shall mutually agree on the Adjustment Date on which such Applicant Financial Institution shall become a party hereto and a Lender hereunder. On such Adjustment Date: (i) The Lead Administrative Agent shall deliver to the Company and each of the Lenders a Commitment Schedule to be effective as of such Adjustment Date, reflecting the inclusion of such Applicant Financial Institution as a party hereto and a Lender hereunder. (ii) No later than 12:30 p.m. (Los Angeles time) on such Adjustment Date, such Applicant Financial Institution shall pay to the Lead Administrative Agent an amount equal to such Applicant Financial Institution's Primary Percentage Share of Primary Loans outstanding and, as applicable, Swing Line Percentage Share of Swing Loans outstanding. If such Applicant Financial Institution is becoming a Lender hereunder as a result of an increase in the Aggregate Credit Limit, the Lead Administrative Agent shall thereupon remit to the Lenders, as applicable, their shares of such funds. If such Applicant Financial Institution is acquiring a portion of an existing Lender's outstanding Primary Loans, the Lead Administrative Agent shall thereupon remit such funds to the assigning Lender. Following such Adjustment Date, fees and interest accrued on the Obligations to but not including such Adjustment Date shall be payable to the Lenders in accordance with their respective Primary Percentage Shares and Swing Line Percentage Shares prior to such Adjustment Date before giving effect to the readjustment thereof pursuant to the Commitment Schedule provided by the Company on such Adjustment Date. (iii) If such Applicant Financial Institution is acquiring a portion of an existing Lender's Maximum Commitment by way of assignment from such existing Lender, the Lead Administrative Agent, the Company, the assigning Lender and the Applicant Financial Institution shall execute and deliver an Assignment Agreement, or if such Applicant Financial Institution is becoming a Lender hereunder as a result of an increase in the Aggregate Credit Limit, the Lead Administrative Agent, the Company and the Applicant Financial Institution shall execute and deliver an Additional Lender Agreement, either of which Assignment Agreement or Additional Lender Agreement shall constitute an amendment to this Agreement to the extent necessary to reflect the inclusion of the Applicant Financial Institution as a Lender hereunder. (iv) The Applicant Financial Institution shall pay to the Lead Administrative Agent a registration fee of $3,500.00. Subject to the requirements described above, the Applicant Financial Institution shall become a party hereto and a Lender hereunder and shall be entitled to all rights, benefits and privileges accorded a Lender under the Credit Documents and shall be subject to all obligations of a Lender under the Credit Documents. 14(b)Assignments Among Existing Lenders. Any Lender may at any time agree to assign a portion of such ---------------------------------- Lender's Maximum Commitment to a Transferee Lender. In such event the Lender and the Transferee Lender shall so notify the Lead Administrative Agent and the Company of the Adjustment Date on which such assignment is to be effective. On such Adjustment Date: (1) The Company shall deliver to the Lead Administrative Agent and each of the Lenders a Commitment Schedule to be effective as of such Adjustment Date reflecting the assignment. (2) The Lead Administrative Agent, the Company, the assigning Lender and the Transferee Lender shall execute and deliver an Assignment Agreement, which shall constitute an amendment to this Agreement to the extent necessary to reflect such transfer. (3) No later than 12:30 p.m. (Los Angeles time) on such Adjustment Date, the Transferee Lender shall pay to the Lead Administrative Agent an amount equal to, as applicable, such Transferee Lender's Primary Percentage Share of Primary Loans and Swing Line Percentage Share of Swing Loans outstanding in excess of such Transferee Lender's previous Primary Percentage Share and, as applicable, Swing Line Percentage Share thereof. The Lead Administrative Agent shall thereupon remit to the transferring Lender the amount thereof. 14(c)Minimum Loan Commitment. Notwithstanding anything to the contrary contained herein, the inclusion of ----------------------- any Applicant Financial Institution as a Lender hereunder pursuant to Paragraph 14(a) above and the assignment by a Lender of a portion of such Lender's Maximum Commitment to a Transferee Lender pursuant to Paragraph 14(b) above shall be subject to the following restrictions: (1) If an Applicant Financial Institution is acquiring a portion of an existing Lender's Maximum Commitment by way of an assignment from such existing Lender, then: (i) such assignment of Maximum Commitment must be in the minimum amount of $5,000,000.00 (or if in a higher amount, in integral multiples of $5,000,000.00 in excess thereof), and (ii) following the consummation of the contemplated assignment and after giving effect to any other assignments occurring on the related Adjustment Date, such existing Lender must continue to hold a Maximum Commitment of not less than $25,000,000.00 and such Applicant Financial Institution must hold a Maximum Commitment of not less than $25,000,000.00; (2) If an existing Lender is assigning a portion of its Maximum Commitment to a Transferee Lender, such assignment of Maximum Commitment is in the minimum amount of $5,000,000.00 (or if in a higher amount, in integral multiples of $5,000,000.00 in excess thereof) and such existing Lender shall continue to hold a Maximum Commitment of not less than $25,000,000.00 following the consummation of the contemplated assignment. There shall be no minimum hold requirement in the event that an existing Lender is assigning one hundred percent (100%) of its Maximum Commitment. 14(d)Sub-Participations by Lenders. Any Lender may at any time sell participating interests in any of the ----------------------------- Obligations held by such Lender and its commitments hereunder; provided, however, that: (1) No participation contemplated by this Paragraph 14(d) shall relieve such Lender from its obligations hereunder or under any other Credit Document; (2) Such Lender shall remain solely responsible for the performance of such obligations; (3) The Company, the Lead Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under the Credit Documents; (4) The participation agreement between such Lender and the Person purchasing such participation interest (a "Participant") shall provide that: (i) the participation interest of the Participant is an undivided interest in such Lender's Maximum Commitment, and (ii) the sole voting rights of the Participant are with respect to those items on which such Lender is entitled to vote pursuant to Paragraphs 13(b)(2) and 13(b)(7) above; and (5) Such Lender shall not enter into participation agreements with more than two Participants for each $25,000,000.00 of Maximum Commitment held by such Lender. The Company acknowledges and agrees that each Participant shall be considered a Lender for purposes of Paragraphs 4(e), 4(f), 4(g) and 5(l) above; provided, however, that in no event shall any Participant be entitled to receive any payment or compensation in excess of that to which such Participant's selling Lender would be entitled with respect to the participation interest held by such Participant if such Lender had not sold any participation interest to such Participant. 14(e)Federal Reserve Bank. Notwithstanding the provisions of Paragraphs 14(a) and 14(b) above, any Lender -------------------- may at any time pledge or assign all or any portion of such Lender's rights under this Agreement and the other Credit Documents to a Federal Reserve Bank. 14(f)Increases in Availability. From time to time the Company and any Lender (an "Increasing Lender") may ------------------------- agree, with the prior written consent of the Lead Administrative Agent, to permanently or temporarily increase such Lender's Maximum Commitment and Primary Percentage Share, the dollar amount of any such increase to be, subject to the Aggregate Credit Limit limitation, in the minimum dollar amount of $5,000,000.00 and integral multiples of $5,000,000.00 in excess thereof. The Company and the Increasing Lender shall agree on the Adjustment Date for said increase and, if the increase is a temporary rather than permanent increase, the date on which said increase shall terminate (the "Temporary Increase Termination Date"). The Lead Administrative Agent shall deliver to the Company and each of the Lenders a Commitment Schedule to be effective as of such Adjustment Date. On the Temporary Increase Termination Date the aggregate amount of such Increasing Lender's Primary Percentage Share of outstanding Primary Loans in excess of its Maximum Commitment after giving effect to the termination of the subject increase shall, if but only if at such Temporary Increase Termination Date there does not exist an Event of Default, be payable in full. If at the Temporary Increase Termination Date there exists an Event of Default, the temporary increase of the Increasing Lender shall continue in effect and, unless otherwise agreed by one hundred percent (100%) of the Lenders, shall be treated thereafter as a permanent increase in said Increasing Lender's Maximum Commitment. 14(g)Provision of Information; Confidentiality. The Company hereby acknowledges and agrees that in ----------------------------------------- connection with the proposed assignment or subparticipation by a Lender of its interest in the Obligations, such Lender may disclose to prospective assignees and Participants any and all information provided to such Lender hereunder; provided, however, that such information shall be furnished to such prospective assignees and Participants on a confidential basis. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written. COUNTRYWIDE HOME LOANS, INC., a New York corporation By Name Title ROYAL BANK OF CANADA, as Lead Administrative Agent, Arranger, a Swing Line Lender and a Lender By Name Title ABN AMRO BANK, N.V., as Co-Administrative Agent, a Co-Arranger, a Co-Agent, a Swing Line Lender and a Lender By Name Title CREDIT LYONNAIS NEW YORK BRANCH, as Syndication Agent, a Co-Arranger, a Co-Agent, a Swing Line Lender and a Lender By Name Title COMMERZBANK AG, NEW YORK BRANCH, as Documentation Agent, a Co-Arranger, a Co-Agent, a Swing Line Lender and a Lender By Name Title [INSERT SIGNATURE BLOCKS FOR OTHER LENDERS] ACKNOWLEDGED AND AGREED TO as of the day and year first above written: COUNTRYWIDE CREDIT INDUSTRIES, INC. By ___________________________________ Name ________________________________ Title _________________________________ SCHEDULE OF EXHIBITS TO CREDIT AGREEMENT EXHIBIT DOCUMENT A Form of Officer's Certificate B Litigation Schedule C Schedule of Existing Subsidiaries Annex I: Glossary ____ Attachments to Glossary: ----------------------- Schedule I: Commitment Schedule as of the Effective Date Exhibit A: Form of Additional Lender Agreement Exhibit B: Form of Assignment Agreement Exhibit C-1: Form of Covenant Compliance Certificate (Company) Exhibit C-2: Form of Covenant Compliance Certificate (Parent) Exhibit D: Form of Parent Guaranty Exhibit E: Form of Parent Subordination Agreement Annex II: Schedule of Notice Addresses la-364217 CREDIT AGREEMENT By and Among COUNTRYWIDE HOME LOANS, INC. and ROYAL BANK OF CANADA as Lead Administrative Agent and Arranger ABN AMRO BANK, N.V. ("ABN") as Co-Administrative Agent CREDIT LYONNAIS NEW YORK BRANCH ("CL") as Syndication Agent COMMERZBANK AG, NEW YORK BRANCY ("CA") as Documentation Agent ABN, CL and CA as Co-Arrangers and THE LENDERS PARTY THERETO April 12, 2000 TABLE OF CONTENTS Page RECITALS.............................. ........................................1 AGREEMENT ........................... .........................................1 1. Credit Facilities.......... ..........................................1 1(a) Primary Facility. ...........................................2 1(b) Swing Loan Facility..........................................2 1(c) Term Loan Facility...........................................3 2. Requests for Loans; Funding..................................3 2(a) Requests for Loans...........................................3 2(b) Funding of Primary Loans and Swing Loans ....................4 2(c) Funding Method...............................................4 3. Payment of Principal; Prepayments............................4 3(a) Required Principal Payments..................................4 3(b) Prepayments..................................................4 4. Calculation and Payment of Interest; Related Provisions......5 4(a) Interest on Primary Loans and the Term Loan..................5 4(b) Interest on Swing Loans......................................6 4(c) Payment of Interest..........................................6 4(d) Inability to Determine Rate..................................6 4(e) Funding Indemnification......................................7 4(f) Illegality; Impracticality...................................7 4(g) Requirements of Law; Increased Costs.........................8 4(h) Taxes........................................................8 4(i) Buy-Down Provisions.........................................11 4(j) Obligation of Lenders to Mitigate; Replacement of Lenders...11 5. Miscellaneous Lending Provisions............................12 5(a) Use of Proceeds.............................................12 5(b) Assumption of Funding/Purchase..............................12 5(c) Evidence of Indebtedness....................................12 5(d) Interest and Fee Billing and Payment........................13 5(e) Nature and Place of Payments................................14 5(f) Post-Default Interest.......................................14 5(g) Computations................................................14 5(h) Disbursement of Payments Received...........................14 5(i) Fees........................................................15 5(j) Wire Transfers of Funds.....................................15 5(k) Reduction in Aggregate Credit Limit.........................16 5(l) Capital Requirements........................................16 5(m) Extension of Revolving Facility Maturity Date...............16 6. Guaranty; Subordination; Additional Documents...............18 6(a) Guaranty and Subordination Agreement........................18 6(b) Further Documents...........................................18 7. Conditions Precedent.........................................18 7(a) First Loan..................................................18 7(b) All Primary Loans and Swing Loans...........................20 7(c) Extension of Revolving Facility Maturity Date; Term Loan....20 8. Representations and Warranties of the Company...............21 8(a) Financial Condition.........................................21 8(b) Corporate Existence; Compliance with Law....................21 8(c) Corporate Power; Authorization; Enforceable.................22 8(d) No Legal Bar................................................22 8(e) No Material Litigation......................................22 8(f) Taxes.......................................................22 8(g) Investment Company Act......................................22 8(h) Subsidiaries................................................22 8(i) Federal Reserve Board Regulations...........................22 8(j) ERISA.......................................................23 8(k) Assets......................................................23 9. Affirmative Covenants........................................23 9(a) Financial Statements........................................23 9(b) Certificates; Reports; Other Information....................24 9(c) Payment of Indebtedness.....................................25 9(d) Maintenance of Existence and Properties.....................25 9(e) Inspection of Property; Books and Records;..................25 9(f) Notices.....................................................25 9(g) Expenses....................................................26 9(h) Credit Documents............................................26 9(i) Insurance...................................................26 9(j) CPN Program.................................................26 9(k) Hedging Program.............................................26 10. Negative Covenants..........................................26 10(a) Liens.......................................................26 10(b) Indebtedness................................................27 10(c) Consolidation and Merger....................................27 10(d) Acquisitions................................................27 10(e) Payment of Dividends........................................28 10(f) Purchase or Retirement of Stock.............................28 10(g) Investments; Advances; Receivables..........................28 10(h) Sale of Assets..............................................29 10(i) Minimum Net Worth...........................................29 10(j) Maximum Total Debt..........................................29 11. Events of Default..............................................30 12. Agency Provisions...........................................32 12(a) Appointment.................................................32 12(b) Delegation of Duties........................................32 12(c) Exculpatory Provisions......................................32 12(d) Reliance by Agent...........................................33 12(e) Notice of Default; Agreement to Advance.....................33 12(f) Non-Reliance on Agent and Other Lenders.....................33 12(g) Indemnification.............................................34 12(h) Agent in Its Individual Capacity............................34 12(i) Successor Agents............................................35 12(j) Sharing of Set-Offs.........................................35 13. Miscellaneous Provisions.......................................35 13(a) No Assignment...............................................36 13(b) Amendment...................................................36 13(c) Cumulative Rights; No Waiver................................37 13(d) Entire Agreement; Severability..............................37 13(e) Survival....................................................37 13(f) Notices.....................................................37 13(g) Governing Law...............................................37 13(h) Counterparts................................................37 13(i) Waiver of Jury Trial........................................37 14. Additional Lenders; Assignments and Participations; Increases in Availability;....................................................37 14(a) Addition of New Lender......................................37 14(b) Assignments Among Existing Lenders..........................39 14(c) Minimum Loan Commitment.....................................40 14(d) Sub-Participations by Lenders...............................40 14(e) Federal Reserve Bank........................................41 14(f) Increases in Availability...................................42 14(g) Provision of Information; Confidentiality...................41 EX-11.1 7 0007.txt COMPUTATION OF PER SHARE EARNINGS COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES EXHIBIT 11.1 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS Year ended February 29 (28), (Dollar amounts in thousands, except per share data) 2000 1999 1998 -------------- -------------- ------------- BASIC Net earnings $410,243 $385,401 $344,983 ============== ============== ============= Total average shares 113,083 111,414 107,491 ============== ============== ============= Per share amount $3.63 $3.46 $3.21 ============== ============== ============= DILUTED Net earnings $410,243 $385,401 $344,983 ============== ============== ============= Average shares outstanding 113,083 111,414 107,491 Effect of dilutive stock options 3,605 5,631 4,035 -------------- -------------- ------------- Total average shares 116,688 117,045 111,526 ============== ============== ============= Per share amount $3.52 $3.29 $3.09 ============== ============== =============
EX-12.1 8 0008.txt 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 29, 2000 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 29(28), ------------- - -------------- -- -------------- - ------------- -- ------------- 2000 1999 1998 1997 1996 ------------- -------------- -------------- ------------- ------------- Net earnings $410,243 $385,401 $344,983 $257,358 $195,720 Income tax expense 220,955 246,404 220,563 164,540 130,480 Interest charges 930,294 983,829 568,359 423,447 337,655 Interest portion of rental expense 19,080 14,898 10,055 7,420 6,803 ------------- -------------- -------------- ------------- ------------- Earnings available to cover fixed charges $1,580,572 $1,630,532 $1,143,960 $852,765 $670,658 ============= ============== ============== ============= ============= Fixed charges Interest charges 930,294 983,829 568,359 423,447 337,655 Interest portion of rental expense 19,080 14,898 10,055 7,420 6,803 ------------- -------------- -------------- ------------- ------------- Total fixed charges $949,374 $998,727 $578,414 $430,867 $344,458 ============= ============== ============== ============= ============= Ratio of earnings to fixed charges 1.66 1.63 1.98 1.98 1.95 ============= ============== ============== ============= =============
EX-21 9 0009.txt LIST OF SUBSIDIARIES SUBSIDIARIES OF COUNTRYWIDE CREDIT INDUSTRIES, INC. State of Name of Company Incorp-oration/Jurisdiction AVCO Insurance Agency, Inc. (AZ) Arizona AVCO Insurance Agency, Inc. (CA) California AWL of Massachusetts, Inc. Delaware Balboa Insurance Company California Balboa Life Insurance Company California Continental Mobil Home Brokerage Corporation California Countrywide Agency of New York, Inc. New York Countrywide Agency of Ohio, Inc. Ohio Directnet Insurance Agency, Inc. New York Directnet Insurance Agency of Arizona, Inc. Arizona Countrywide Aircraft Corporation Oregon Countrywide Asset Management Corp. California Countrywide Capital I Delaware Countrywide Capital II Delaware Countrywide Capital III Delaware Countrywide Capital Markets, Inc. California Countrywide Document Services, Inc. Delaware Countrywide Field Services Corporation California Countrywide General Agency of Texas, Inc. Texas Countrywide GP, Inc. Nevada Countrywide Home Loans of Minnesota, Inc. Minnesota Countrywide Home Loans of New Mexico, Inc. New Mexico Countrywide Home Loans of Texas, Inc (dba "Full Spectrum Lending, Inc.") Texas Countrywide Home Loans, Inc. (dba "America's Wholesale Lender") New York Countrywide Insurance Agency of Massachusetts, Inc. Massachusetts Countrywide Insurance Agency of Ohio, Inc. Ohio Countrywide Insurance Group, Inc. California Countrywide Insurance Services, Inc Arizona Countrywide Insurance Services, Inc. (dba "CW Insurance Agency") California Countrywide International Consulting Services, LLC Delaware LLC Countrywide International GP Holdings, LLC Delaware LLC Countrywide International Holdings, Inc. Delaware Countrywide International Technology Holdings Limited Guernsey LC Countrywide JV Technology Holdings Limited Guernsey LC Countrywide Lending California Countrywide LP, Inc. Nevada Countrywide I Home Loans LP (currently known as Countrywide Home Loans Servicing LP) Texas - ------------------------------------------------------------------------ ----- Countrywide Mortgage Pass-Thru Corporation Delaware 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 Partnership Investments, Inc. California Countrywide Realty Partners, Inc. Delaware Countrywide Securities Corporation California Countrywide Servicing Exchange California Countrywide Tax Services Corporation California Countrywide Warehouse Lending California CTC Real Estate Services California CWABS, Inc. Delaware CWHL Funding Corporation Delaware CWMBS, Inc. Delaware CW Securities Holdings, Inc. Delaware Full Spectrum Lending, Inc. California GHL (One) Limited United Kingdom LC GHL (Two) Limited United Kingdom LC GHL Technology Limited Partnership English LP Global Home Loans Limited United Kingdom LC GlobaLoans International Technology LP English LP GlobaLoans JV Limited Partnership English LP GlobaLoans Technology Services Limited (currently known as CWTechSolutions Limited United Kingdom LC HomeSafe Termite Inspection, Inc. California ICS Investment Services, Inc. California Insurance Automation Corporation Delaware LandSafe Appraisal Services, Inc. California LandSafe Credit, Inc. California LandSafe Flood Determination, Inc. California LandSafe Home Inspection Services, Inc California LandSafe, Inc. Delaware LandSafe Real Estate Partnership Services, Inc. California LandSafe Services, Inc. Pennsylvania LandSafe Servicing, Inc. California LandSafe Title Agency, Inc. California LandSafe Title Agency of New York, Inc. New York LandSafe Title Agency of Ohio, Inc. Ohio LandSafe Title of California, Inc. California 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 Nevada, Inc. Nevada LandSafe Title of Texas, Inc. Texas LandSafe Title of Washington, Inc. Washington Meritplan Insurance Company California Newport Insurance Company Arizona Newport Management Corporation California Second Charter Reinsurance Company Vermont Suedore Limited Ireland The Countrywide Foundation California EX-23 10 0010.txt CONSENT OF INDEPENDENT ACCOUNTANTS CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated April 28, 2000, 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 29, 2000. We hereby consent to the incorporation by reference of said report in the Registration Statements of Countrywide Credit Industries, Inc. on Form 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 March 26, 1997; File No. 333-3835 and 333-3835-01, effective August 2, 1996 and amended on March 26, 1997; File No. 333-14111, 333-14111-01, 333-14111-02, and 333-14111-03, effective December 10, 1996; File No. 333-31529, 333-31529-01, effective August 12, 1997; File No. 333-58125 and 333-58125-01, effective July 16, 1998; and File No. 333-66467 and 333-66467-01, effective November 10, 1998) 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; File No. 333-66095, effective October 23, 1998; File No. 333-73089, effective March 1, 1999; File No. 333-87417, effective September 20, 1999) and on Form S-4 (File No. 333-37047, effective November 19, 1997). Los Angeles, California April 28, 2000 EX-27 11 0011.txt FINANCIAL DATA SCHEDULES
5 0000025191 Countrywide Credit Industries 1,000 1.00 12-MOS FEB-28-2000 MAR-01-1999 Feb-29-2000 1.00 59,890 0 0 0 0 0 410,899 218,828 15,822,328 12,434,449 0 0 0 5,673 2,882,206 15,822,328 0 2,018,675 0 1,387,477 0 0 0 631,198 220,955 410,243 0 0 0 410,243 3.63 3.52
-----END PRIVACY-ENHANCED MESSAGE-----