-----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, TtIhyXuq5I3vfjWO2JTa7S/6FXfOPJFr7MMbS34HQr5qxYHoWVF89mdGFaDMFe1t sv2+G+dXFljKttALGC20Gw== /in/edgar/work/0000025191-00-000038/0000025191-00-000038.txt : 20000718 0000025191-00-000038.hdr.sgml : 20000718 ACCESSION NUMBER: 0000025191-00-000038 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000531 FILED AS OF DATE: 20000717 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-Q SEC ACT: SEC FILE NUMBER: 001-12331-01 FILM NUMBER: 673595 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-Q 1 0001.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 31, 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 or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 4500 Park Granada, Calabasas, California 91302 - ------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) (818) 225-3000 ------------------------------------------------------------ (Registrant's telephone number, including area code) 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 the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Class Outstanding at July 13, 2000 ----- --------------------------- Common Stock $.05 par value 114,178,909 PART I FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Dollar amounts in thousands, except per share data) A S S E T S May 31, February 29, 2000 2000 ------------------- ------------------- Cash $236,833 $ 59,890 Mortgage loans and mortgage-backed securities held for sale 2,517,167 2,653,183 Trading securities, at market value 2,144,249 1,984,031 Mortgage servicing rights, net 5,602,884 5,396,477 Investments in other financial instruments 5,152,439 3,562,458 Property, equipment and leasehold improvements, at cost - net of accumulated depreciation and amortization 408,661 410,899 Other assets 2,377,857 1,755,390 ------------------- ------------------- Total assets $18,440,090 $15,822,328 =================== =================== Borrower and investor custodial accounts (segregated in special accounts - excluded from corporate assets) $3,825,752 $2,852,738 =================== =================== LIABILITIES AND SHAREHOLDERS' EQUITY Notes payable $12,118,028 $ 9,782,625 Drafts payable issued in connection with mortgage loan closings 464,655 382,108 Accounts payable, accrued liabilities and other 1,121,247 997,405 Deferred income taxes 1,295,002 1,272,311 ------------------- ------------------- Total liabilities 14,998,932 12,434,449 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, 114,146,330 shares at May 31,2000 and 113,463,424 February 29, 2000 5,707 5,673 Additional paid-in capital 1,187,304 1,171,238 Accumulated other comprehensive loss (68,368) (33,234) Retained earnings 1,816,515 1,744,202 ------------------- ------------------- Total shareholders' equity 2,941,158 2,887,879 ------------------- ------------------- Total liabilities and shareholders' equity $18,440,090 $15,822,328 =================== =================== Borrower and investor custodial accounts $3,825,752 $2,852,738 =================== =================== The accompanying notes are an integral part of these statements.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) (Dollar amounts in thousands, except per share data) Three Months Ended May 31, 2000 1999 -------------- -------------- Revenues Loan origination fees $ 84,294 $146,701 Gain on sale of loans, net of commitment fees 133,154 170,012 -------------- -------------- Loan production revenue 217,448 316,713 Interest earned 258,594 275,562 Interest charges (261,474) (246,034) -------------- -------------- Net interest income (2,880) 29,528 Loan servicing revenue 325,869 272,997 Amortization & impairment/recovery of mortgage servicing rights, net of service hedge (118,159) (146,845) -------------- -------------- Net loan administration revenue 207,710 126,152 Net premiums earned 62,005 5,691 Commissions, fees and other revenues 43,949 60,626 -------------- -------------- Total revenues 528,232 538,710 Expenses Salaries and related expenses 171,531 185,426 Occupancy and other office expenses 66,518 72,208 Guarantee fees 53,666 45,843 Marketing expenses 19,759 19,523 Insurance net losses 25,638 - Other operating expenses 60,195 46,236 -------------- -------------- Total expenses 397,307 369,236 -------------- -------------- Earnings before income taxes 130,925 169,474 Provision for income taxes 47,466 66,095 -------------- -------------- NET EARNINGS $ 83,459 $103,379 ============== ============== Earnings per share Basic $0.73 $0.92 Diluted $0.72 $0.88 The accompanying notes are an integral part of these statements.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollar amounts in thousands) Three Months Ended May 31, 2000 1999 ---------------- ----------------- Cash flows from operating activities: Net earnings Adjustments to reconcile net earnings to net cash $83,459 $103,379 provided (used) by operating activities: Gain on sale of available-for-sale securities - (11,194) Amortization and impairment/recovery of mortgage servicing rights 104,895 (24,491) Depreciation and other amortization 20,049 15,752 Deferred income taxes 47,466 66,130 Origination and purchase of loans held for sale (14,546,038) (23,193,000) Principal repayments and sale of loans 14,682,054 22,711,136 ---------------- ----------------- Decrease (increase) in mortgage loans and mortgage- Backed securities held for sale 136,016 (481,864) Increase in other financial instruments (1,667,765) (289,922) Increase in trading securities (160,218) (556,952) (Increase) decrease in other assets (633,624) 21,235 Increase in accounts payable and accrued liabilities 123,842 157,417 ---------------- ----------------- Net cash provided (used) by operating activities (1,945,880) (1,000,510) ---------------- ----------------- Cash flows from investing activities: Additions to mortgage servicing rights, net (311,302) (432,368) Purchase of property, equipment and leasehold improvements, net (11,713) (27,043) Proceeds from sale of available-for-sale securities 2,070 49,360 Proceeds from sale of securitized service fees 22,338 - ---------------- ----------------- Net cash used by investing activities (298,607) (410,051) ---------------- ----------------- Cash flows from financing activities: Net increase in warehouse debt and other short-term borrowings 1,593,214 745,601 Issuance of long-term debt 934,736 717,000 Repayment of long-term debt (110,000) (75,315) Issuance of common stock 14,626 8,632 Cash dividends paid (11,146) (11,268) ---------------- ----------------- Net cash provided by financing activities 2,421,430 1,384,650 ---------------- ----------------- Net decrease in cash 176,943 (25,911) Cash at beginning of period 59,890 58,748 ---------------- ----------------- Cash at end of period $236,833 $32,837 ================ ================= Supplemental cash flow information: Cash used to pay interest $ 269,494 $ 246,724 Cash used to pay income taxes $ $ 7 5,262 Noncash investing activities: Unrealized gain (loss) on available-for-sale securities, net of tax $ (35,134) $ 3,178 The accompanying notes are an integral part of these statements.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (Dollar amounts in thousands) Three Months Ended May 31, 2000 1999 --------------- --------------- NET EARNINGS $83,459 $103,379 Other comprehensive income, net of tax: Unrealized gains (losses) on available for sale securities: Unrealized holding gains (losses) arising during the period, before tax 16,403 (54,891) Income tax benefit (expense) 19,799 (6,397) --------------- --------------- Unrealized holding (losses) gains arising during the period, net of tax (35,092) 10,006 Less: reclassification adjustment for gains (losses) included in net earnings, before tax (66) 11,194 Income tax benefit (expense) 24 (4,366) --------------- --------------- Reclassification adjustment for (losses) gains included in net earnings, net (42) 6,828 of tax --------------- --------------- Other comprehensive (loss) income (35,134) 3,178 ---------------- --------------- COMPREHENSIVE INCOME $48,325 $106,557 ================ ===============
The accompanying notes are an integral part of these statements. COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Page 24 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended May 31, 2000 are not necessarily indicative of the results that may be expected for the fiscal year ending February 28, 2001. For further information, refer to the consolidated financial statements and footnotes thereto included in the annual report on Form 10-K for the fiscal year ended February 29, 2000 of Countrywide Credit Industries, Inc. (the "Company"). Certain amounts reflected in the consolidated financial statements for the three-month period ended May 31, 1999 have been reclassified to conform to the presentation for the three-month period ended May 31, 2000. NOTE B - MORTGAGE SERVICING RIGHTS The activity in mortgage servicing rights was as follows. ------------------------------------------------ --------------------------- Three Months Ended (Dollar amounts in thousands) May 31, 2000 ------------------------------------------------ --------------------- Mortgage Servicing Rights Balance at beginning of period $5,420,239 Additions 311,302 Scheduled amortization (108,240) Hedge losses (gains) applied 1,761 --------------------- Balance before valuation reserve at end of period 5,625,062 --------------------- Reserve for Impairment of Mortgage Servicing Rights Balance at beginning of period (23,762) Reductions (additions) 1,584 ---------------------- Balance at end of period (22,178) ---------------------- Mortgage Servicing Rights, net $5,602,884 ======================
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (UNAUDITED) COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) (UNAUDITED) Page 7 NOTE C - INVESTMENTS IN OTHER FINANCIAL INSTRUMENTS Investments in other financial instruments included the following. ------------------------------------------------------------ ----------------------------------------------------- May 31, February 29, (Dollar amounts in thousands) 2000 2000 ------------------------------------------------------------------- --- ----------------- --- ---------------- --- Servicing hedge instruments $2,102,907 $1,784,315 Mortgage-backed securities retained in securitization 826,148 775,867 Insurance company investment portfolio 516,661 520,490 Securities purchased under agreements to resell 1,659,164 435,593 Equity securities, restricted and unrestricted 47,559 46,193 ----------------- ---------------- $5,152,439 $3,562,458 ================= ================
------------------------------------------------------------------- Securities purchased under agreements to resell are classified as receivables. It is the policy of the Company to take possession of securities purchased under agreements to resell. The Company's agreements with third parties specify its rights to request additional collateral. The Company monitors the fair value of the underlying securities as compared with the related receivable, including accrued interest, and requests additional collateral as necessary. NOTE D - AVAILABLE FOR SALE SECURITIES Amortized cost and fair value of available for sale securities were as follows. ---------------------------------- ---------------- May 31, 2000 ---------------- - ------------------------------------ -- ---------------- Gross Gross Amortized Unrealized Unrealized Fair (Dollar amounts in thousands) Cost Gains Losses Value ---------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- --- Mortgage-backed Securities retained in Securitization $834,317 $30,767 ($38,936) $826,148 Principal only securities 1,383,930 2,497 (73,857) 1,312,570 Insurance company investment portfolio 529,319 989 (13,647) 516,661 Equity securities 63,136 3,415 (18,992) 47,559 ---------------- ----------------- ---------------- ---------------- $2,810,702 $37,668 ($145,432) $2,702,938 ================ ================= ================ ================
NOTE D - AVAILABLE FOR SALE SECURITIES (Continued) ---------------------------------- ---------------- - ------------------------------------ -- ---------------- --- 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 - NOTES PAYABLE Notes payable consisted of the following. ------------------------------------------------------------ ----------------------------------------------------- May 31, February 29, (Dollar amounts in thousands) 2000 2000 -------------------------------------------------------------------- -- --- ---------------- --- ----------------- --- Commercial paper $ 526,795 $ 103,829 Medium-term notes, Series A, B, C, D, E, F, G, H and Euro Notes 8,800,060 7,975,324 Securities sold under agreements to repurchase 2,554,879 1,501,409 Unsecured notes payable 35,000 - Subordinated notes 200,000 200,000 Other notes payable 1,294 2,063 ----------------- ---------------- $12,118,028 $9,782,625 ================= ================
Commercial Paper and Backup Credit Facilities As of May 31, 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 expires on April 11, 2001, with a total commitment of $1.0 billion. As consideration for the facility, CHL pays annual commitment fees of $0.8 million. 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 May 31, 2000. The weighted average borrowing rate on commercial paper borrowings for the three months ended May 31, 2000 was 6.10%. The weighted average borrowing rate on commercial paper outstanding as of May 31, 2000 was 6.89%. 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 E - NOTES PAYABLE (Continued) Medium-Term Notes As of May 31, 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 - 251,000 251,000 6.65% 6.98% Mar. 2003 Aug. 2005 Series C 105,000 127,000 232,000 5.88% 7.75% Mar. 2001 Mar. 2004 Series D 75,000 385,000 460,000 6.05% 7.15% Aug. 2000 Sep. 2005 Series E 210,000 655,000 865,000 6.83% 7.45% Aug. 2000 Oct. 2008 Series F 311,000 1,344,000 1,655,000 6.16% 7.39% Oct. 2000 May 2013 Series G 5,000 581,000 586,000 5.35% 7.00% Oct. 2000 Nov. 2018 Series H 467,000 2,049,000 2,516,000 6.25% 8.25% May 2001 Oct. 2019 Euro Notes 679,600 1,411,960 2,091,560 6.10% 8.08% Jul. 2000 Jan. 2009 ------------------------------------------- Total $1,852,600 $6,947,460 $8,800,060
=========================================== As of May 31, 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 borrowing rate on medium-term note borrowings for the three-months ended May 31, 2000, including the effect of the interest rate swap agreements, was 6.58%. As of May 31, 2000, there were $1,362 million foreign currency denominated fixed-rate notes issued pursuant to the Euro medium-term notes program outstanding. Such notes are denominated in Deutsche Marks, French Francs, Portuguese Escudos, Japanese Yen 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. Securities Sold Under Agreements to Repurchase The Company routinely enters into short-term financing arrangements to sell MBS under agreements to repurchase. The weighted average borrowing rate for the three-months ended May 31, 2000 was 6.02%. The weighted average borrowing rate on repurchase agreements outstanding as of May 31, 2000, was 6.57%. 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 E - NOTES PAYABLE (Continued) Pre-Sale Funding Facilities As of May 31, 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 that are in the process of being pooled into MBS. As of May 31, 2000, the Company had no outstanding borrowings under any of these facilities. NOTE F - FINANCIAL INSTRUMENTS The following table summarizes the notional amounts of derivative contracts included in the Servicing Hedge. - -------------------------------------- -------------------- -------------------- ------------------ --------------------- (Dollar amounts in millions) Balance, Dispositions/ Balance, February 29, 2000 Additions Expirations May 31, 2000 - -------------------------------------- -------------------- -------------------- ------------------ --------------------- Interest Rate Floors $50,500 - (2,000) $48,500 Long Call Options on Interest Rate Futures $15,000 5,000 - $20,000 Long Put Options on Interest Rate Futures $1,750 3,500 - $5,250 Long Call Options on MBS $8,561 - - $8,561 Capped Swaps $1,000 - - $1,000 Interest Rate Swaps $1,500 - - $1,500 Interest Rate Cap $2,500 - (1,000) $1,500 Swaptions $36,250 6,000 - $42,250 - -------------------------------------- -------------------- -------------------- ------------------ ---------------------
Fair Value of Financial Instruments The following disclosure of the estimated fair value of financial instruments as of May 31, 2000 and February 29, 2000 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 F- FINANCIAL INSTRUMENTS (Continued) May 31, 2000 February 29, 2000 (Dollar amounts in thousands) Carrying Estimated Carrying Estimated Amount fair value amount fair value Assets: Mortgage loans and mortgage-backed securities held for sale $2,517,167 $2,517,167 $2,653,183 $2,653,183 Trading securities 2,144,249 2,144,249 1,984,031 1,984,031 Items included in investments in other financial instruments: Principal only securities purchased 1,312,570 1,312,570 952,840 952,840 Mortgage-backed securities retained in securitizations 826,148 826,148 775,867 775,867 Insurance Company investment portfolio 516,661 516,661 520,490 520,490 Securities purchased with agreements to rese1,659,164 1,659,164 435,593 435,593 Equity Securities - restricted and 47,559 47,559 46,193 46,193 unrestricted Items included in other assets: Rewarehoused FHA and VA loans 279,371 279,371 336,273 336,273 Loans held for investment 184,724 184,724 177,330 177,330 Receivables related to broker-dealer activitie463,479 463,479 22,612 22,612 Liabilities: Notes payable 12,118,028 11,685,252 9,782,625 9,459,011 Securities sold not yet purchased 296,213 296,213 181,903 181,903 Derivatives: Interest rate floors 372,299 149,095 411,278 180,360 Forward contracts on MBS (11,425) 37,805 (11,080) (13,511) Options on MBS 79,671 34,084 75,950 32,415 Options on interest rate futures 18,169 9,803 8,921 6,032 Interest rate caps 30,405 21,514 47,348 39,088 Capped Swaps (8,031) (8,926) (5,619) (8,040) Swaptions 348,580 60,133 341,039 76,254 Interest rate swaps (8,814) (508,394) (23,228) (457,051) Short-term commitments to extend credit - 65,100 - 52,500 ---- ------------------------------------------------ --------------- -- ------------- -- ------------- --- -------------
The fair value estimates as of May 31, 2000 and February 29, 2000 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. NOTE G - LEGAL PROCEEDINGS 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. NOTE H - SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY Summarized financial information for Countrywide Home Loans, Inc. was as follows. ---- ----------------------------------------- ---- ------------------------------------------------- May 31, February 29, (Dollar amounts in thousands) 2000 2000 ---- ---------------------------------------------- ------- -------------- ----------- -------------- Balance Sheets: Mortgage loans and mortgage-backed securities held for sale $2,517,167 $2,653,183 Mortgage servicing rights, net 5,602,884 5,396,477 Other assets 6,563,603 5,240,247 -------------- -------------- Total assets $14,683,654 $13,289,907 ============== ============== Short- and long-term debt $10,563,556 $9,224,956 Other liabilities 1,649,552 1,632,106 Equity 2,470,546 2,432,845 -------------- -------------- Total liabilities and equity $14,683,654 $13,289,907 ============== ==============
---- ---------------------------------------------- ------- -------------- ----------- -------------- --------- ----- ----------------------------------------- --- --------------------------------------------------- -------- Three Months Ended May 31, (Dollar amounts in thousands) 2000 1999 ----- --------------------------------------------- ------- --------------- ---------- --------------- --------- --------------- ---------- --------------- --------- Statements of Earnings: Revenues $356,945 $438,204 Expenses 271,790 305,021 Provision for income taxes 30,948 51,941 --------------- --------------- Net earnings $ 54,207 $ 81,242 =============== ===============
NOTE I - SEGMENTS AND RELATED INFORMATION The Company has six major segments that are grouped into Consumer and Institutional businesses. Consumer Businesses include Mortgage Originations, Mortgage-Related Investments and Business to Consumer ("B2C") Insurance. Institutional Businesses include Processing and Technology, Capital Markets and Business to Business ("B2B") Insurance. The Mortgage Originations segment originates mortgage loans through the Company's retail branch network (Consumer Markets Division and Full Spectrum Lending, Inc.) and the Wholesale Division. This segment also provides other complementary services offered as part of the origination process through LandSafe, Inc., including title, escrow, appraisal, credit reporting and flood determination services. The Mortgage-Related Investments segment consists of investments in assets retained in the mortgage securitization process, including MSRs and residual interests. The B2C Insurance Segment, through Countrywide Insurance Services, Inc., acts as an agent in the sale of insurance, including homeowners, fire, flood, earthquake, life and disability insurance, primarily to the Company's mortgage customers. The Processing and Technology segment activities include mortgage servicing, as well as mortgage subservicing and subprocessing for other domestic financial institutions and foreign financial institutions (through Global Home Loans, Limited). The Capital Markets segment purchases mortgage loans through the Correspondent Lending Division, acts as a broker/dealer specializing in mortgages and mortgage-related securities through Countrywide Securities Corporation ("CSC"), and as an agent (Countrywide Servicing Exchange, Inc.), facilitates the purchase and sale of bulk servicing rights. The B2B Insurance Segment includes the activities of Balboa Life and Casualty ("Balboa"), an insurance carrier that offers property and casualty insurance (specializing in creditor-placed insurance), and life and disability insurance, along with Second Charter, Inc., a mortgage reinsurance company. Included in the tables below labeled "Other" is the holding company activities and certain reclassifications to conform management reporting to the consolidated financial statements. NOTE I - SEGMENTS AND RELATED INFORMATION (Continued) - ------------------------------------------------------------------------------------------------------------------------------------ For the three months ended May 31, 2000 Consumer Businesses Institutional Businesses ---------- ---------- --------- ----------- ---------- --------- --------- ---------- Mortgage-Related Processing Mortgage InvestmentsB2C and Capital B2B (Dollars in thousanOriginations Insurance Total Technology Markets Insurance Total Other Total - ------------------ ---------- ---------- --------- ----------- ---------- --------- --------- ---------- -------- ------------ External revenues $210,553 $181,028 $9,401 $400,982 $ 6,667 $52,979 $68,369 $128,015 ($765) $528,232 Intersegment revenues - (63,407) - (63,407) 63,407 - - 63,407 - - ---------- ---------- --------- ----------- ---------- --------- --------- ---------- -------- ------------ Total revenues $210,553 $117,621 $9,401 $337,575 $70,074 $52,979 $68,369 $191,422 ($765) $528,232 ========== ========== ========= =========== ========== ========= ========= ========== ======== ============ Segment earnings (pre-tax) $27,554 $62,166 $1,060 $90,780 $10,505 $16,901 $14,248 $41,654 ($1,509) $130,925 Segment assets $2,073,776 $9,374,307 $50,691 $11,498,774 $159,483 $5,812,925$827,757 $6,800,165 $141,151 $18,440,090 - ------------------ ---------- ---------- --------- ----------- -- ---------- --------- --------- ---------- -- -------- ------------ - ------------------------------------------------------------------------------------------------------------------------------------ For the three months ended May 31, 1999 Consumer Businesses Institutional Businesses ---------- ---------- --------- ----------- ---------- --------- --------- ---------- Mortgage-Related Processing Mortgage InvestmentsB2C and Capital B2B (Dollars in thousanOriginations Insurance Total Technology Markets Insurance Total Other Total - ------------------ ---------- ---------- --------- ----------- ---------- --------- --------- ---------- -------- ------------ External revenues $327,468 $122,664 $7,426 $457,558 $ 6,126 $64,327 $5,940 $76,393 $4,759 $538,710 Intersegment revenues - (54,729) - (54,729) 54,729 - - 54,729 - - ---------- ---------- --------- ----------- ---------- --------- --------- ---------- -------- ------------ Total revenues $327,468 $ 67,935 $7,426 $402,829 $60,855 $64,327 $5,940 $131,122 $4,759 $538,710 ========== ========== ========= =========== ========== ========= ========= ========== ======== ============ Segment earnings (pre-tax) $112,150 $16,020 $1,192 $129,362 $6,501 $28,045 $5,883 $40,429 ($317) $169,474 Segment assets $4,498,388 $7,299,581 $27,600 $11,825,569 $114,955 $5,183,810$33,924 $5,332,689 $206,349 $17,364,607 - ------------------ ---------- ---------- --------- ----------- -- ---------- --------- --------- ---------- -- -------- ------------
NOTE J - SUBSEQUENT EVENTS On June 21, 2000, the Company declared a cash dividend of $0.10 per common share payable July 31, 2000 to shareholders of record on July 13, 2000. On June 27, 2000, the Company filed a $3.0 billion shelf registration with the Securities and Exchange Commission ("SEC") covering Series I Medium-Term Notes. The Company intends to use the proceeds from the sale of the medium-term notes for general corporate purposes, which may include retirement of indebtedness of the Company and investment in servicing rights through the current production of loans and the bulk acquisition of contracts to service loans. NOTE K - 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 on the Consolidated Financial Statements upon the adoption of this standard. NOTE L - EARNINGS PER SHARE Basic earnings per share 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 three months ended May 31, 2000 and 1999. - ------------------------ -- -- ----- ------------------------------------ Three Months Ended May 31, -- -- ----- ------------------------------------ -- ----- ---- 2000 1999 --------- --------- --------- ---------- --------- --------- (Dollar amounts in Per-Share Per-Share thousands, except per Net Amount Net Amount share data) Earnings Shares Earnings Shares - ------------------------ --------- --------- --------- --------- --------- ---------- Net earnings $83,459 $103,379 ========= ========== Basic EPS Net earnings available to common shareholders $83,459 113,792 $0.73 $103,379 112,751 $0.92 Effect of dilutive stock options - 2,316 - 4,762 --------- --------- ---------- --------- Diluted EPS Net earnings available to common shareholders $83,459 116,108 $0.72 $103,379 117,513 $0.88 ========= ========= ========== =========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 29 FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q 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 actual 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 could cause actual results to differ materially from historical results or those anticipated: (1) the level of demand for mortgage credit, which is affected by such external factors as the level of interest rates, the strength of the various segments of the economy and demographics of the Company's lending markets; (2) the direction of interest rates; (3) the relationship between mortgage interest rates and the cost of funds; (4) federal and state regulation of the Company's mortgage origination, mortgage servicing, capital markets and insurance operations; and (5) competition within the mortgage banking, capital markets and insurance industries. RESULTS OF OPERATIONS Quarter Ended May 31, 2000 Compared to Quarter Ended May 31, 1999 Revenues for the quarter ended May 31, 2000 decreased 2% to $528.2 million, down from $538.7 million for the quarter ended May 31, 1999. Net earnings decreased 19% to $83.5 million for the quarter ended May 31, 2000, down from $103.4 million for the quarter ended May 31, 1999. The decrease in revenues and net earnings for the quarter ended May 31, 2000 compared to the quarter ended May 31, 1999 was primarily due to a decline in prime loan originations attributable to a decline in loan refinancings. The decline was partially offset by increased revenue from mortgage-related investments and the B2B insurance segment, together with increased production of non-traditional loan products (home equity and sub-prime loans). The total volume of loans produced by the Company decreased 37% to $14.5 billion for the quarter ended May 31, 2000, down from $23.2 billion for the quarter ended May 31, 1999. The decrease in loan production was primarily due to a decrease in the mortgage origination market, driven largely by a reduction in refinances. Total loan production by purpose and by interest rate type is summarized below. - -------------------------------------------- -- (Dollar amounts in millions) Loan Production Three Months Ended May 31, - -------------------------------------------- --------------------------------------- 2000 1999 ------------- ---------------- Purchase $11,595 $11,722 Refinance 2,951 11,471 ------------- ---------------- Total $14,546 $23,193 ============= ================ ------------- ---------------- Fixed Rate $11,145 $21,611 Adjustable Rate 3,401 1,582 ------------- ---------------- Total $14,546 $23,193 ============= ================
Total loan production by Division is summarized below. - -------------------------------------------- ---------------------------------- (Dollar amounts in millions) Loan Production Three Months Ended May 31, - -------------------------------------------- --------------------------------- 2000 1999 ------------- ----------- Consumer Markets Division $4,042 $ 7,035 Wholesale Lending Division 4,062 7,122 Correspondent Lending Division 6,021 8,712 Full Spectrum Lending, Inc. 421 324 ------------- ---------- Total $14,546 $23,193 ============= ========
- --------------------------------------------------------------------------- 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. - -------------------------------------------- ------------------------------- Non-Traditional (Dollar amounts in millions) Loan Production Three Months Ended May 31, - -------------------------------------------- --------------------------------- 2000 1999 ------------- --------- Sub-prime $1,440 $769 Home Equity Loans 1,131 717 ------------- ---------- Total $2,571 $1,486 ============= ==========
- -------------------------------------------------------------------------------- Loan origination fees decreased in the quarter ended May 31, 2000 as compared to the quarter ended May 31, 1999 primarily due to lower production and a change in the Divisional mix. The Consumer Markets and Wholesale Lending Divisions (which, due to their cost structures, charge higher origination fees per dollar loaned than the Correspondent Division), comprised a lower percentage of total production in the quarter ended May 31, 2000 than in the quarter ended May 31, 1999. Gain on sale of loans also decreased in the quarter ended May 31, 2000 as compared to the quarter ended May 31, 1999 primarily due to decreased production and reduced margins on prime credit quality mortgages. These declines were partially offset by increased sales during the quarter ended May 31, 2000 of higher margin home equity and sub-prime loans. The sale of home equity loans contributed $21.6 million and $20.3 million to gain on sale of loans in the quarter ended May 31, 2000 and the quarter ended May 31, 1999, respectively. Sub-prime loans contributed $60.7 million to the gain on sale of loans in the quarter ended May 31, 2000 and $35.5 million in the quarter ended May 31, 1999. In general, loan origination fees and gain on sale of loans are affected by numerous factors including the volume and mix of loans produced and sold, loan pricing decisions, and movements of interest rates. Net interest expense (interest earned net of interest charges) of $2.9 million for the quarter ended May 31, 2000, is down from net income of $29.5 million for the quarter ended May 31, 1999. Net interest income (expense) is principally a function of: (i) net interest income earned from the Company's mortgage loan inventory ($20.6 million and $47.2 million for the quarter ended May 31, 2000 and the quarter ended May 31, 1999, respectively); (ii) interest expense related to the Company's mortgage-related investments ($86.8 million and $66.8 million for the quarters ended May 31, 2000 and May 31, 1999, respectively) and (iii) interest income earned from the custodial balances associated with the Company's servicing portfolio ($51.8 million and $43.1 million for the quarters ended May 31, 2000 and May 31, 1999, respectively). The Company earns interest on, and incurs interest expense to carry, mortgage loans held in its inventory. The decrease in net interest income from the mortgage loan inventory was primarily attributable to lower inventory levels combined with a lower net earnings rate during the quarter ended May 31, 2000. The increase in interest expense related to mortgage-related investments resulted primarily from an increase in amounts financed coupled with an increase in short-term interest rates. The increase in net interest income earned from the custodial balances was primarily due to an increase in the earnings rate from the quarter ended May 31, 2000 to the quarter ended May 31, 1999. During the quarter ended May 31, 2000, loan servicing revenue before amortization increased primarily due to growth of the loan servicing portfolio and improved performance of the residual investments. As of May 31, 2000, the Company serviced $261.9 billion of loans (including $6.8 billion of loans subserviced for others), up from $226.0 billion (including $2.3 billion of loans subserviced for others) as of May 31, 1999, a 16% increase. The growth in the Company's servicing portfolio since May 31, 1999 was the result of loan production volume and the acquisition of bulk servicing rights. This was partially offset by prepayments, partial prepayments and scheduled amortization. During the quarter ended May 31, 2000, the annual prepayment rate of the Company's servicing portfolio was 9%, compared to 21% for the quarter ended May 31, 1999. In general, the prepayment rate is affected by the level of refinance activity, which in turn is driven by the relative level of mortgage interest rates, and activity in the housing market. The weighted average interest rate of the mortgage loans in the Company's servicing portfolio as of May 31, 2000 was 7.7% compared to 7.4% as of May 31, 1999. The Company recorded MSR amortization for the quarter ended May 31, 2000 totaling $108.2 compared to $127.0 for the quarter ended May 31, 1999. The Company recorded recovery of previous impairment of $3.3 million for the quarter ended May 31, 2000 compared to $151.5 for the quarter ended May 31, 1999. The primary factors affecting the amount of amortization and impairment recovery of 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 the quarter ended May 31, 2000, the Company recognized a net expense of $13.3 million from its Servicing Hedge. The net expense included unrealized net losses of $6.7 million and realized net expense of $6.6 million from the sale of various financial instruments that comprise the Servicing Hedge net of premium amortization. In the quarter ended May 31, 1999, the Company recognized a net expense of $171.4 million from its Servicing Hedge. The net expense included unrealized net losses of $182.8 million and net realized gains of $11.4 million from the sale of various financial instruments that comprise the Servicing Hedge net of premium amortization. The financial instruments that comprised the Servicing Hedge included 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 swaps, interest rate swaps with the Company's maximum payment capped ("Capped Swaps") and interest rate caps. 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. With respect to the Interest Rate Swaps contracts entered into by the Company as of May 31, 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 May 31, 2000, the Company estimates that its maximum exposure to loss over the contractual terms is $2 million. Salaries and related expenses are summarized below for the quarters ended May 31, 2000 and 1999. ---- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- ----- (Dollar amounts in Quarter Ended May 31, 2000 thousands) -- ------ ------------------------------------------------- ----- -- ---- ----- ---- --------------------------- -- Consumer Institutional Corporate Businesses Businesses Administration Total ---- --------------------------- -- ----------------- -- ---------------- -- ----------------- - ------------------ Base Salaries $59,799 $32,919 $25,007 $117,725 Incentive Bonus 21,508 8,160 4,454 34,122 Payroll Taxes and Benefits 10,023 5,128 4,533 19,684 ----------------- ---------------- ----------------- ------------------ Total Salaries and Related Expenses $91,330 $46,207 $33,994 $171,531 ================= ================ ================= ================== Average Number of 5,810 3,557 1,648 11,015 Employees ---- --------------------------- -- ----------------- -- ---------------- -- ----------------- - ------------------
---- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- ----- (Dollar amounts in Quarter Ended May 31, 1999 thousands) -- ------ ------------------------------------------------- ----- -- ---- ----- ---- --------------------------- -- Consumer Institutional Corporate Businesses Businesses Administration Total ---- --------------------------- -- ----------------- -- ---------------- -- ----------------- - ------------------ Base Salaries $72,117 $22,770 $24,881 $119,768 Incentive Bonus 33,172 6,707 5,905 45,784 Payroll Taxes and Benefits 12,241 3,611 4,022 19,874 ----------------- ---------------- ----------------- ------------------ Total Salaries and Related Expenses $117,530 $33,088 $34,808 $185,426 ================= ================ ================= ================== Average Number of 7,095 2,597 1,804 11,496 Employees ---- --------------------------- -- ----------------- -- ---------------- -- ----------------- - ------------------
The amount of salaries decreased during the quarter ended May 31, 2000 as compared to the quarter ended May 31, 1999 primarily due to a reduction in staff in the consumer businesses due to the decline in mortgage originations. The decline was partially offset by an increase in institutional businesses as a result of a larger servicing portfolio and the acquisition of Balboa on November 30, 1999. Incentive bonuses earned during the quarter ended May 31, 2000 decreased primarily due to the decline in production volume. Occupancy and other office expenses for the quarter ended May 31, 2000 decreased to $66.5 million from $72.2 million for the quarter ended May 31, 1999. This was primarily due to the initiation of cost reduction measures in the production areas as a result of a decline in production. Guarantee fees represent fees paid to Fannie Mae and Ginnie Mae ("GSEs") to guarantee timely and full payment of principal and interest in the Company's agency MBS and to transfer the credit risk of the loans in the servicing portfolio sold to these entities. For the quarter ended May 31, 2000, guarantee fees increased 17% to $53.7 million, up from $45.8 million for the quarter ended May 31, 1999. The increase resulted from an increase in the servicing portfolio, changes in the mix of the portfolio guaranteed by the GSEs and terms negotiated at the time of loan sales. Marketing expenses for the quarter ended May 31, 2000 increased 1% to $19.8 million as compared to $19.5 million for the quarter ended May 31, 1999. Other operating expenses were $60.2 million for the quarter ended May 31, 2000 as compared to $46.2 million May 31, 1999. The increase was primarily due to the acquisition of Balboa on November 30, 1999. OPERATING SEGMENTS The Company's business strategy is primarily focused on six areas that are grouped into Consumer and Institutional businesses. Consumer Businesses include Mortgage Originations, Mortgage-Related Investments and Business to Consumer ("B2C") Insurance. Institutional Businesses include Processing and Technology, Capital Markets and Business to Business ("B2B") Insurance. The Mortgage Originations segment originates mortgage loans through the Company's retail branch network (Consumer Markets Division and Full Spectrum Lending, Inc.) and the Wholesale Division. This segment also provides other complementary services offered as part of the origination process through LandSafe, Inc., including title, escrow, appraisal, credit reporting and flood determination services. The Mortgage-Related Investments segment consists of investments in assets retained in the mortgage securitization process, including MSRs and residual interests. The B2C Insurance Segment, through Countrywide Insurance Services, Inc., acts as an agent in the sale of insurance, including homeowners, fire, flood, earthquake, life and disability insurance, primarily to the Company's mortgage customers. The Processing and Technology segment activities include mortgage servicing, as well as mortgage subservicing and subprocessing for other domestic financial institutions and foreign financial institutions (through Global Home Loans, LTD.). The Capital Markets segment purchases mortgage loans through the Correspondent Lending Division, acts as a broker/dealer specializing in mortgages and mortgage-related securities through Countrywide Securities Corporation ("CSC"), and as an agent (Countrywide Servicing Exchange, Inc.), facilitates the purchase and sale of bulk servicing rights. The B2B Insurance Segment includes the activities of Balboa Life and Casualty ("Balboa"), an insurance carrier that offers property and casualty insurance (specializing in creditor-placed insurance), and life and disability insurance, along with Second Charter, Inc., a mortgage reinsurance company. The Company's pre-tax earnings by segment is summarized below. - -------------------------------------------- -------------------------------- Three months ended (Dollar amounts in millions) May 31, - -------------------------------------------- ---------------------------------- 2000 1999 ------------- ----------- Consumer Businesses: Mortgage Originations $27,554 $112,150 Mortgage-Related Investments 62,166 16,020 B2C Insurance 1,060 1,192 ------------- ------------ Total Consumer Business $90,780 $129,362 Institutional Businesses: Processing and Technology $10,505 $6,501 Capital Markets 16,901 28,045 B2B Insurance 14,248 5,883 -------------- ------------- Total Institutional Business $41,654 $40,429 Other (1,509) (317) ------------- -------------- Pre-tax Earnings $130,925 $169,474 ============= ============== - ---------------------------------------------------------------------------------------------
Profitability of Mortgage Originations Segment The Mortgage Originations segment activities include loan origination through the Company's retail branch network (Consumer Markets Division and Full Spectrum Lending, Inc.) and the Wholesale Division, the warehousing and sales of such loans and loan closing services. The decline in pre-tax earnings of $84.6 million in the quarter ended May 31, 2000 as compared to the quarter ended May 31, 1999 was primarily attributable to lower production and reduced margins on prime credit quality 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 Mortgage-Related Investments Segment Mortgage-Related Investment segment activities include investments in assets retained in the mortgage securitization process, including mortgage servicing rights, residual interests in asset-backed securities and other mortgage-related assets. The increase in pre-tax earnings of $46.1 million in the quarter ended May 31, 2000 as compared to the quarter ended May 31, 1999 was primarily due to an increase in servicing revenues resulting from servicing portfolio growth, a reduction in MSR amortization attributable to the decline in refinance activity and improved performance of the residual investments. These positive factors were partially offset by higher servicing expenses driven by the growth in the servicing portfolio, including the subservicing fee paid to the processing and technology sector. Profitability of B2C Insurance Segment B2C Insurance segment activities include the operations of an insurance agency, Countrywide Insurance Services ("CIS"), an insurance agency that provides homeowners, life, disability and automobile as well as other forms of insurance, primarily to the Company's mortgage customers. The decrease in pre-tax earnings of $0.1 in the quarter ended May 31, 2000 as compared to the quarter ended May 31, 1999 was primarily due to a slight decline in new policies sold. Profitability of Processing and Technology Segment Processing and Technology segment activities include mortgage servicing, as well as mortgage subservicing and subprocessing for other domestic and foreign financial institutions. The increase in pre-tax earnings of $4.0 million in the quarter ended May 31, 2000 as compared to the quarter ended May 31, 1999 was primarily due to growth in the servicing portfolio. Profitability of Capital Markets Segment Capital Markets segment activities include primarily the operations of Countrywide Securities Corporation ("CSC"), a registered broker-dealer specializing in the secondary mortgage market, and the Correspondent Lending Division ("CLD"), through which the Company purchases closed loans from mortgage bankers, commercial banks and other financial institutions. The decrease in pre-tax earnings of $11.1 million in the quarter ended May 31, 2000 as compared to the quarter ended May 31, 1999 was primarily due to CLD's decreased production volume attributable primarily to the decline in refinance activity. Profitability of B2B Insurance Segment B2B Insurance segment includes the activities of Balboa, an insurance carrier that offers property and casualty insurance (specializing in creditor placed insurance), and life and disability insurance together with the activities of a mortgage reinsurance company. The increase in pre-tax earnings of $8.4 million in the quarter ended May 31, 2000 as compared to the quarter ended May 31, 1999 was due to the acquisition of Balboa (on November 30, 1999) and increased mortgage reinsurance premium volume. 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 May 31, 2000, the Company estimates that a permanent 0.50% reduction in interest rates, all else being constant, would result in a $0.04 million after-tax loss related to its trading securities and there would be a $13.4 million loss related to its other financial instruments. As of May 31, 2000, the Company estimates that this combined after-tax loss of $13.4 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 E). 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 Mortgage Originations, Mortgage-Related Investments and Capital Markets. 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, mortgage-related investment 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, 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 prevailing mortgage rates), thereby decreasing the average life of the Company's servicing portfolio and adversely impacting its mortgage related investment earnings primarily due to increased amortization and impairment of the MSRs, and decreased earnings from residual investments. The Servicing Hedge is designed to mitigate the impact of changing interest rates on mortgage related investment 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 mortgage 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 (CSC). To meet these needs, the Company currently utilizes commercial paper supported by the 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. 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 revolving credit facilities 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 CSC consist of the financing of its inventory of securities and mortgage loans. Its securities inventory is financed primarily through repurchase agreements. CSC also has access to a $200 million secured bank loan facility and a lending facility with CHL The primary cash needs for the B2B insurance segment 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, Balboa currently utilizes cash flow provided from operations as well as maturities and sales of invested assets. 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 additional 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 the quarter ended May 31, 2000, the Company's operating activities used cash of approximately $1.9 billion on a short-term basis primarily to support an increase in other financial instruments, primarily securities purchased under agreements to resale. In the quarter ended May 31, 1999, operating activities used cash of approximately $1.0 billion on a short-term basis primarily to support the increase in its mortgage loans and MBS held for sale. Investing Activities The primary investing activity for which cash was used by the Company was the investment in MSRs. Net cash used by investing activities was $0.3 billion for the quarter ended May 31, 2000 and $0.4 billion for the quarter ended May 31, 1999. Financing Activities Net cash provided by financing activities amounted to $2.4 billion for the quarter ended May 31, 2000 and $1.4 billion for the quarter ended May 31, 1999. The increase in cash flow from financing activities was primarily used to fund the change in the Company's mortgage loan inventory, other financial instruments and investment in MSRs. Prospective Trends Applications and Pipeline of Loans in Process For the month ended June 30, 2000, the Company received new loan applications at an average daily rate of $361 million. As of June 30, 2000, the Company's pipeline of loans in process was $9.5 billion. This compares to a daily application rate for the month ended June 30, 1999 of $490 million and a pipeline of loans in process as of June 30, 1999 of $14.7 billion. The size of the pipeline is generally an indication of the level of near-term future fundings, as historically 43% to 77% of the pipeline of loans in process has funded. In addition, the Company's LOCK `N SHOP(R) Pipeline as of June 30, 2000 was $3.5 billion and as of June 30, 1999 was $3.5 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 mortgage rates, seasonal factors and general economic conditions. Market Factors Loan production decreased 37% from the quarter ended May 31, 1999 to the quarter ended May 31, 2000. This decrease was primarily due to a smaller mortgage origination market, driven by reduced refinances. Home purchase related loan production was essentially unchanged during the same period. The prepayment rate in the servicing portfolio decreased from 21% for the quarter ended May 31, 1999 to 9% for the quarter ended May 31, 2000. This was due primarily to a decrease in refinances. The Company's California mortgage loan production (as measured by principal balance) constituted 20% of its total production during the quarter ended May 31, 2000 and 23% during the quarter ended May 31, 1999. 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 4.12% at May 31, 2000 from 3.00% as of May 31, 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 5% of the total portfolio as of May 31, 2000, up from 1% as of May 31, 1999. In addition, the weighted average age of the FHA and VA loans in the portfolio increased to 32 months at May 31, 2000 from 27 months in May 31, 1999. Delinquency rates tend to increase as loans age, reaching a peak at three to five years of age. Related late charge income has historically been sufficient to offset incremental servicing expenses resulting from increased loan delinquencies. The percentage of loans in the Company's servicing portfolio, excluding sub-servicing, that are in foreclosure increased to 0.35% as of May 31, 2000 from 0.27% as of May 31, 1999. Because the Company services substantially all conventional loans on a non-recourse basis, related credit 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 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 (23% of the Company's servicing portfolio as of May 31, 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 May 31, 2000, the Company had investments in such subordinated interests amounting to $647.5 million. 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. Page 26 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.73 Deferred Compensation Plan Amended and Restated Effective March 1, 2000. 11.1 Statement Regarding Computation of Per Share Earnings 12.1 Computation of the Ratio of Earnings to Fixed Charges 27 Financial Data Schedules (included only in the electronic filing with the SEC). (b) The Company filed the following reports on Form 8-K: (1) June 1, 2000 under Item 5, containing Countrywide Securities Corporation's financial statements and report of independent certified public accountants for the period beginning March 1, 1999 and ending February 29, 2000. (2) June 27, 2000 under Item 5, containing the Selling Agency Agreement and form of notes used in connection with Countrywide Home Loans Medium-Term Notes Program Series I. (b) 27 Pursuant to the requirements 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. ----------------------------------- (Registrant) DATE: July 13, 2000 /s/STANFORD L. KURLAND -------------------------------------- Executive Managing Director and Chief Operating Officer DATE: July 13, 2000 /s/CARLOS M. GARCIA -------------------------------------- Senior Managing Director; Finance, Chief Financial Officer and Chief Accounting Officer (Principal Financial Officer and Principal Accounting Officer) CONFIDENTIAL DRAFT OF FEBRUARY 1, 1996 h:\rick\forms\variable.doc -2- EX-10.7.3 2 0002.txt DEFERRED COMP PLAN Exhibit 10.7.3 COUNTRYWIDE CREDIT INDUSTRIES, INC. DEFERRED COMPENSATION PLAN AMENDED AND RESTATED EFFECTIVE MARCH 1, 2000 Originally Effective August 1, 1993 Amended and Restated Effective March 1, 2000 Copyright (C) 1997 By Compensation Resource Group, Inc. All Rights Reserved Page 35 TABLE OF CONTENTS Page Purpose ...................................................................................................1 ARTICLE 1 Definitions............................................................................ 1 ARTICLE 2 Selection, Enrollment, Eligibility.................................................... 10 2.1 Selection by Committee................................................................ 10 2.2 Enrollment Requirements............................................................... 10 2.3 Eligibility; Commencement of Participation............................................ 10 2.4 Termination of Participation and/or Deferrals......................................... 10 ARTICLE 3 Deferral Commitments/Crediting/Taxes.................................................. 10 3.1 Minimum Deferral...................................................................... 10 3.2 Maximum Deferral...................................................................... 11 3.3 Election to Defer; Effect of Election Form............................................ 12 3.4 Withholding of Annual Deferral Amounts................................................ 12 3.5 Annual Company Contribution Amount.................................................... 12 3.6 Stock Option Amount.................................................................... 13 3.7 Investment of Trust Assets............................................................. 13 3.8 Source of Stock........................................................................ 13 3.9 Vesting................................................................................ 13 3.10 Crediting/Debiting of Account Balances................................................. 13 3.11 FICA, Withholding and Other Taxes...................................................... 16 ARTICLE 4 Short-Term Payout; Unforeseeable Financial Emergencies; Withdrawal Election............ 17 4.1 Short-Term Payout...................................................................... 17 4.2 One-Time Rollover Election............................................................. 17 4.3 Other Benefits Take Precedence Over Short-Term Payout.................................. 17 4.4 Withdrawal Payout/Suspensions for Unforeseeable Financial Emergencies.................. 17 4.5 Withdrawal Election.................................................................... 18 ARTICLE 5 Retirement Benefit..................................................................... 18 5.1 Retirement Benefit..................................................................... 18 5.2 Payment of Retirement Benefit.......................................................... 18 5.3 Death Prior to Completion of Retirement Benefit........................................ 19 ARTICLE 6 Pre-Retirement Survivor Benefit........................................................ 19 6.1 Pre-Retirement Survivor Benefit........................................................ 19 6.2 Payment of Pre-Retirement Survivor Benefit............................................. 19 ARTICLE 7 Termination Benefit.................................................................... 20 7.1 Termination Benefit.................................................................... 20 7.2 Payment of Termination Benefit......................................................... 20 ARTICLE 8 Disability Waiver and Benefit.......................................................... 20 8.1 Disability Waiver...................................................................... 20 8.2 Continued Eligibility; Disability Benefit.............................................. 21 ARTICLE 9 Beneficiary Designation................................................................ 21 9.1 Beneficiary............................................................................ 21 9.2 Beneficiary Designation; Change; Spousal Consent....................................... 21 9.3 Acknowledgment......................................................................... 21 9.4 No Beneficiary Designation............................................................. 22 9.5 Doubt as to Beneficiary................................................................ 22 9.6 Discharge of Obligations............................................................... 22 ARTICLE 10 Leave of Absence....................................................................... 22 10.1 Paid Leave of Absence.................................................................. 22 10.2 Unpaid Leave of Absence................................................................ 22 ARTICLE 11 Termination, Amendment or Modification................................................. 22 11.1 Termination............................................................................ 22 11.2 Amendment.............................................................................. 23 11.3 Effect of Payment.......................................................................24 ARTICLE 12 Administration......................................................................... 24 12.1 Committee Duties....................................................................... 24 12.2 Agents................................................................................. 24 12.3 Binding Effect of Decisions............................................................ 24 12.4 Indemnity of Committee................................................................. 24 12.5 Employer Information................................................................... 24 ARTICLE 13 Other Benefits and Agreements.......................................................... 25 13.1 Coordination with Other Benefits....................................................... 25 13.2 Coordination with Other Benefit Plans.................................................. 25 ARTICLE 14 Claims Procedures...................................................................... 25 14.1 Presentation of Claim.................................................................. 25 14.2 Notification of Decision............................................................... 25 14.3 Review of a Denied Claim............................................................... 26 14.4 Decision on Review..................................................................... 26 14.5 Legal Action........................................................................... 26 ARTICLE 15 Trust.................................................................................. 27 15.1 Establishment of the Trust............................................................. 27 15.2 Interrelationship of the Plan and the Trust............................................ 27 15.3 Distributions From the Trust........................................................... 27 15.4 Stock Transferred to the Trust......................................................... 27 ARTICLE 16 Miscellaneous.......................................................................... 27 16.1 Status of Plan......................................................................... 27 16.2 Unsecured General Creditor............................................................. 27 16.3 Employer's Liability................................................................... 28 16.4 Nonassignability....................................................................... 28 16.5 Not a Contract of Employment........................................................... 28 16.6 Furnishing Information................................................................. 28 16.7 Terms.................................................................................. 28 16.8 Captions............................................................................... 28 16.9 Governing Law.......................................................................... 28 16.10 Notice................................................................................. 29 16.11 Successors............................................................................. 29 16.12 Spouse's Interest...................................................................... 29 16.13 Validity............................................................................... 29 16.14 Incompetent............................................................................ 29 16.15 Court Order............................................................................ 29 16.16 Distribution in the Event of Taxation.................................................. 30 16.17 Insurance.............................................................................. 30 16.18 Legal Fees To Enforce Rights After Change in Control................................... 30
COUNTRYWIDE CREDIT INDUSTRIES, INC. DEFERRED COMPENSATION PLAN Originally Effective August 1, 1993 Amended and Restated Effective March 1, 2000 Purpose The purpose of this Plan is to provide specified benefits to a select group of management and highly compensated Employees who contribute materially to the continued growth, development and future business success of Countrywide Credit Industries, a Delaware corporation, and its subsidiaries, if any, that sponsor this Plan. This Plan shall be unfunded for tax purposes and for purposes of Title I of ERISA. ARTICLE 1 Definitions For purposes of this Plan, unless otherwise clearly apparent from the context, the following phrases or terms shall have the following indicated meanings: 1.1 "Account Balance" shall mean, with respect to a Participant, a credit on the records of the Employer equal to the sum of (i) the Deferral Account balance, (ii) the vested Company Contribution Account balance and (iii) the Stock Option Account balance. The Account Balance, and each other specified account balance, shall be a bookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to a Participant, or his or her designated Beneficiary, pursuant to this Plan. 1.2 "Annual Bonus" shall mean any compensation, in addition to Base Annual Salary, paid during any Plan Year, whether or not relating to services performed in such Plan Year, payable to a Participant as an Employee under any Employer's annual bonus and cash incentive plans, excluding stock options. 1.3 "Annual Company Contribution Amount" shall mean, for any one Plan Year, the amount determined in accordance with Section 3.5. 1.4 "Annual Deferral Amount" shall mean that portion of a Participant's Base Annual Salary and Annual Bonus that a Participant elects to have, and is deferred, in accordance with Article 3, for any one Plan Year. In the event of a Participant's Retirement, Disability (if deferrals cease in accordance with Section 8.1), death or a Termination of Employment prior to the end of a Plan Year, such year's Annual Deferral Amount shall be the actual amount withheld prior to such event. 1.5 "Annual Stock Option Amount" shall mean, with respect to a Participant for any one Plan Year, the amount of Qualifying Gains deferred on Eligible Stock Option exercise in accordance with Section 3.6 of this Plan, calculated using the closing price of Stock as of the end of the business day closest to the date of such Eligible Stock Option exercise 1.6 "Base Annual Salary" shall mean the annual cash compensation relating to services performed during any Plan Year, whether or not paid in such Plan Year or included on the Federal Income Tax Form W-2 for such Plan Year, excluding bonuses, commissions, overtime, fringe benefits, stock options, relocation expenses, incentive payments, non-monetary awards, directors fees and other fees, automobile and other allowances paid to a Participant for employment services rendered (whether or not such allowances are included in the Employee's gross income). Base Annual Salary shall be calculated before reduction for compensation voluntarily deferred or contributed by the Participant pursuant to all qualified or non-qualified plans of any Employer and shall be calculated to include amounts not otherwise included in the Participant's gross income under Code Sections 125, 402(e)(3), 402(h), or 403(b) pursuant to plans established by any Employer; provided, however, that all such amounts will be included in compensation only to the extent that, had there been no such plan, the amount would have been payable in cash to the Employee. 1.7 "Beneficiary" shall mean one or more persons, trusts, estates or other entities, designated in accordance with Article 9, that are entitled to receive benefits under this Plan upon the death of a Participant. 1.8 "Beneficiary Designation Form" shall mean the form established from time to time by the Committee that a Participant completes, signs and returns to the Committee to designate one or more Beneficiaries. 1.9 "Board" shall mean the board of directors of the Company. 1.10 "Bonus Rate" shall mean, with respect to amounts deemed invested in the Moody's Bond Index Measurement Fund for a Plan Year, an interest rate, if any, determined by the Committee, in its sole discretion, which rate shall be determined and announced before the commencement of the Plan Year for which the rate applies. This rate may be zero for any Plan Year. 1.11 "Change in Control" shall mean the first to occur of any 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 Acquisiton" (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 Acquistion" 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 September 13, 1996, are members of the Board (the "Incumbent Board"), cease for any reason to constitute at least two-thirds of the members of the Board; provided, however, that if the election, or nomination for election by 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, in the event that, immediately following the consummation of such transaction, a corporation beneficially owns, directly or indirectly, a majority of the Voting Securities of the Surviving Corporation, the Board of Directors of such corporation; and (C) no Person other than (i) 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 (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 ten outstanding common stock or Voting Securities Beneficially Owned by the Subject Person, then a Change in Control shall occur." 1.12 "Claimant" shall have the meaning set forth in Section 14.1. 1.13 "Code" shall mean the Internal Revenue Code of 1986, as it may be amended from time to time. 1.14 "Committee" shall mean the committee described in Article 12. 1.15 "Company" shall mean Countrywide Credit Industries, Inc., a Delaware corporation, and any successor to all or substantially all of the Company's assets or business. 1.16 "Company Contribution Account" shall mean (i) the sum of the Participant's Annual Company Contribution Amounts, plus (ii) amounts credited in accordance with all the applicable crediting provisions of this Plan that relate to the Participant's Company Contribution Account, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to the Participant's Company Contribution Account. 1.17 "Company Stock Index Measurement Fund" shall have the meaning set forth in Section 3.10(c). 1.18 "Crediting Rate" shall mean, with respect to amounts deemed invested in the Moody's Bond Index Measurement Fund for a Plan Year, an interest rate, stated as an annual rate, determined and announced by the Committee before the Plan Year for which it is to be used, that is equal to the applicable "Moody's Rate." The Moody's Rate for a Plan Year shall be an interest rate, stated as an annual rate, that (i) is published in Moody's Bond Record under the heading of "Moody's Corporate Bond Yield Averages--Av. Corp." and (ii) is equal to the average corporate bond yield calculated for the month of December that immediately precedes the Plan Year for which the rate is to be used; provided, however, that, effective March 1, 2000, the Moody's Rate for a Plan Year shall be an interest rate, stated as an annual rate, that (i) is published in Moody's Bond Record under the heading of "Moody's Corporate Bond Yield Averages--Av. Corp." and (ii) is equal to the average corporate bond yield calculated for the month of October that immediately precedes the Plan Year for which the rate is to be used. 1.19 "Deduction Limitation" shall mean the following described limitation on a benefit that may otherwise be distributable pursuant to the provisions of this Plan. Except as otherwise provided, this limitation shall be applied to all distributions that are "subject to the Deduction Limitation" under this Plan. If an Employer determines in good faith prior to a Change in Control that there is a reasonable likelihood that any compensation paid to a Participant for a taxable year of the Employer would not be deductible by the Employer solely by reason of the limitation under Code Section 162(m), then to the extent deemed necessary by the Employer to ensure that the entire amount of any distribution to the Participant pursuant to this Plan prior to the Change in Control is deductible, the Employer may defer all or any portion of a distribution under this Plan. Any amounts deferred pursuant to this limitation shall continue to be credited/debited with additional amounts in accordance with Section 3.11 below, even if such amount is being paid out in installments. The amounts so deferred and amounts credited thereon shall be distributed to the Participant or his or her Beneficiary (in the event of the Participant's death) at the earliest possible date, as determined by the Employer in good faith, on which the deductibility of compensation paid or payable to the Participant for the taxable year of the Employer during which the distribution is made will not be limited by Section 162(m), or if earlier, the effective date of a Change in Control. Notwithstanding anything to the contrary in this Plan, the Deduction Limitation shall not apply to any distributions made after a Change in Control. 1.20 "Deferral Account" shall mean (i) the sum of all of a Participant's Annual Deferral Amounts, plus (ii) amounts credited in accordance with all the applicable crediting provisions of this Plan that relate to the Participant's Deferral Account, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to his or her Deferral Account. 1.21 "Disability" shall mean a period of disability during which a Participant qualifies for permanent disability benefits under the Participant's Employer's long-term disability plan, or, if a Participant does not participate in such a plan, a period of disability during which the Participant would have qualified for permanent disability benefits under such a plan had the Participant been a participant in such a plan, as determined in the sole discretion of the Committee. If the Participant's Employer does not sponsor such a plan, or discontinues to sponsor such a plan, Disability shall be determined by the Committee in its sole discretion. 1.22 "Disability Benefit" shall mean the benefit set forth in Article 8. 1.23 "Election Form" shall mean the form established from time to time by the Committee that a Participant completes, signs and returns to the Committee to make an election under the Plan. 1.24 "Eligible Employee" shall mean an employee whose base salary is at least $100,000 or such greater amount as may be determined by the Committee from time to time. 1.25 "Eligible Stock Option" shall mean, prior to July 27, 1997, one or more non-qualified stock option(s) selected by the Committee in its sole discretion. 1.26 "Employee" shall mean a person who is an employee of any Employer and who is compensated through the payroll system. 1.27 "Employer(s)" shall mean the Company and/or any of its subsidiaries (now in existence or hereafter formed or acquired) that have adopted the Plan by having one or more Employees participating in the Plan. 1.28 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as it may be amended from time to time. 1.29 "First Plan Year" shall mean the period beginning August 1, 1993 and ending February 28, 1994. 1.30 "Installment Method" shall mean, for installment payments of benefits in pay status on or before February 28, 2000, the Monthly Installment Method; and shall mean, for installment payments of benefits commencing pay status on or after March 1, 2000, the Variable Retirement Installment Method. 1.31 "Measurement Fund" shall have the meaning set forth in Section 3.10(c). 1.32 "Monthly Installment Method" shall be a monthly installment payment(s) over the number of months selected by the Participant in accordance with this Plan, calculated as follows: (a) The portion of the Account Balance deemed invested in the Moody's Bond Index Measurement Fund (the "Moody's Fund Account Balance") shall have interest credited and compounded commencing on the first day of the month after a Participant terminates employment using a fixed interest rate that is determined by averaging the Preferred Rates for the current Plan year and the four (4) preceding Plan Years. If a participant has completed fewer than five (5) Plan Years, this average shall be determined using the Crediting Rate for the Plan Years during which the Participant participated in the Plan. (b) The portion of the Account Balance deemed invested in the Company Stock Index Measurement Fund ("Stock Fund Account Balance") shall be calculated as of the close of business three business days prior to the last business day of the month. The monthly installment shall be calculated by multiplying this balance by a fraction, the numerator of which is one, and the denominator of which is the remaining number of monthly payments due the Participant. By way of example, if the Participant elects a 120 month Monthly Installment Method, the first payment shall be 1/120 of the Stock Fund Account Balance, calculated as described in this definition. The following month, the payment shall be 1/119 of the Stock Fund Account Balance, calculated as described in this definition. Each monthly installment shall be paid on or as soon as practicable after the last business day of the applicable month; and 1.33 "Moody's Bond Index Measurement Fund" shall have the meaning set forth in Section 3.10(c). 1.34 "Participant" shall mean any Eligible Employee: (i) who is selected to participate in the Plan, (ii) who elects to participate in the Plan, (iii) who signs an Election Form and a Beneficiary Designation Form, (iv) whose signed Election Form and Beneficiary Designation Form are accepted by the Committee, (v) who commences participation in the Plan, and (vi) whose Plan participation has not terminated. A spouse or former spouse of a Participant shall not be treated as a Participant in the Plan or have an account balance under the Plan, even if he or she has an interest in the Participant's benefits under the Plan as a result of applicable law or property settlements resulting from legal separation or divorce. 1.35 "Plan" shall mean the Company's Amended and Restated Deferred Compensation Plan, which shall be evidenced by this instrument, as it may be amended from time to time. 1.36 "Plan Year" shall, except for the First Plan Year, mean a period beginning March 1 of each calendar year and continuing through February 28 of such calendar year. Effective March 1, 2000, "Plan Year" shall mean a period beginning March 1, 2000 and continuing through December 31, 2000. Effective January 1, 2001, "Plan Year" shall mean a period beginning January 1 of each calendar year and continuing through December 31 of such calendar year. 1.37 "Preferred Rate" shall mean, for amounts deemed invested in the Moody's Bond Index Measurement Fund for a Plan Year, an interest rate that is the sum of the Crediting Rate and the Bonus Rate for that Plan Year. 1.38 "Pre-Retirement Survivor Benefit" shall mean the benefit set forth in Article 6. 1.39 "Qualifying Gain" shall mean the value accrued upon exercise of an Eligible Stock Option (i) using a Stock-for-Stock payment method and (ii) having an aggregate fair market value in excess of the total Stock purchase price necessary to exercise the option. In other words, the Qualifying Gain upon exercise of an Eligible Stock Option equals the total market value of the shares (or share equivalent units) acquired minus the total stock purchase price. For example, assume a Participant elects to defer the Qualifying Gain accrued upon exercise of an Eligible Stock Option to purchase 1000 shares of Stock at an exercise price of $20 per share, when Stock has a current fair market value of $25 per share. Using the Stock-for-Stock payment method, the Participant would deliver 800 shares of Stock (worth $20,000) to exercise the Eligible Stock Option and receive, in return, 800 shares of Stock plus a Qualifying Gain (in this case, in the form of an unfunded and unsecured promise to pay money or property in the future) equal to $5,000 (i.e., the current value of the remaining 200 shares of Stock). 1.40 "Retirement", "Retire(s)" or "Retired" shall mean, with respect to an Employee, severance from employment from all Employers for any reason other than a leave of absence, death or Disability on or after the earlier of the attainment of (a) age sixty-five (65) or (b) age fifty-five (55) with eleven (11) Years of Service. 1.41 "Retirement Benefit" shall mean the benefit set forth in Article 5. 1.42 "Short-Term Payout" shall mean the payout set forth in Section 4.1. 1.43 "Stock" shall mean Countrywide Credit Industries, Inc. common stock, $0.05 par value, or any other equity securities of the Company designated by the Committee. 1.44 "Stock Option Account" shall mean the sum of (i) the Participant's Annual Stock Option Amounts, plus (ii) amounts credited/debited in accordance with all the applicable crediting/debiting provisions of this Plan that relate to the Participant's Stock Option Account, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to the Participant's Stock Option Account. 1.45 "Stock Option Amount" shall mean, for any Eligible Stock Option, the amount of Qualifying Gains deferred in accordance with Section 3.7 of this Plan, calculated using the average of the high and low price of Stock as of the business day closest to the date of exercise of such Eligible Stock Option. 1.46 "Termination Benefit" shall mean the benefit set forth in Article 7. 1.47 "Termination of Employment" shall mean the severing of employment with all Employers, voluntarily or involuntarily, for any reason other than Retirement, Disability, death or an authorized leave of absence. 1.48 "Trust" shall mean one or more trusts established pursuant to that certain Master Trust Agreement, dated as of August 1, 1993 between the Company and the trustee named therein, as amended from time to time. 1.49 "Unforeseeable Financial Emergency" shall mean an unanticipated emergency that is caused by an event beyond the control of the Participant that would result in severe financial hardship to the Participant resulting from (i) a sudden and unexpected illness or accident of the Participant or a dependent of the Participant, (ii) a loss of the Participant's property due to casualty, or (iii) such other extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, all as determined in the sole discretion of the Committee. 1.50 "Variable Retirement Installment Method" shall be an installment payment over the number of years selected by the Participant in accordance with this Plan, calculated as follows: The Account Balance of the Participant shall be calculated as of the close of business on the last business day of the year. The annual installment shall be calculated by multiplying this balance by a fraction, the numerator of which is one, and the denominator of which is the remaining number of annual payments due the Participant. By way of example, if the Participant elects a 10 year Annual Installment Method, the first payment shall be 1/10 of the Account Balance, calculated as described in this definition. The following year, the payment shall be 1/9 of the Account Balance, calculated as described in this definition. One twelfth of each annual installment shall be paid on or as soon as practicable after the last business day of each month of the applicable year. 1.51 "Years of Plan Participation" shall mean the total number of full Plan Years a Participant has been a Participant in the Plan prior to his or her Termination of Employment (determined without regard to whether deferral elections have been made by the Participant for any Plan Year). Any partial year shall not be counted. Notwithstanding the previous sentence, a Participant's first Plan Year of participation shall be treated as a full Plan Year for purposes of this definition, even if it is only a partial Plan Year of participation. Notwithstanding any provision of this Plan that may be construed to the contrary, solely for purposes of Section 7.1 below, effective March 1, 2000, each Participant shall be deemed to have no less than five (5) Years of Plan Participation. 1.52 "Years of Service" shall mean the total number of full years in which a Participant has been employed by one or more Employers. For purposes of this definition, a year of employment shall be a 365 day period (or 366 day period in the case of a leap year) that, for the first year of employment, commences on the Employee's date of hiring and that, for any subsequent year, commences on an anniversary of that hiring date. Any partial year of employment shall not be counted. Page 50 ARTICLE 2 Selection, Enrollment, Eligibility 2.1 Selection by Committee. Participation in the Plan shall be limited to a select group of management and highly compensated Employees of the Employers, as determined by the Committee in its sole discretion. From that group, the Committee shall select, in its sole discretion, Employees to participate in the Plan. 2.2 Enrollment Requirements. As a condition to participation, each selected Employee shall complete, execute and return to the Committee an Election Form and a Beneficiary Designation Form, all within 30 days after he or she is selected to participate in the Plan. In addition, the Committee shall establish from time to time such other enrollment requirements as it determines in its sole discretion are necessary. 2.3 Eligibility; Commencement of Participation. Provided an Employee selected to participate in the Plan has met all enrollment requirements set forth in this Plan and required by the Committee, including returning all required documents to the Committee within the specified time period, that Employee shall commence participation in the Plan on the first day of the month following the month in which the Employee completes all enrollment requirements. If an Employee fails to meet all such requirements within the period required, in accordance with Section 2.2, that Employee shall not be eligible to participate in the Plan until the first day of the Plan Year following the delivery to and acceptance by the Committee of the required documents. 2.4 Termination of Participation and/or Deferrals. If the Committee determines in good faith that a Participant no longer qualifies as a member of a select group of management or highly compensated employees, as membership in such group is determined in accordance with Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA, the Committee shall have the right, in its sole discretion, to (i) terminate any deferral election the Participant has made for the remainder of the Plan Year in which the Participant's membership status changes, (ii) prevent the Participant from making future deferral elections and/or (iii) immediately distribute the Participant's then Account Balance as a Termination Benefit and terminate the Participant's participation in the Plan. ARTICLE 3 Deferral Commitments/Crediting/Taxes 3.1 Minimum Deferrals. - ----------------------------------- Base Annual Salary and Annual Bonus. Subject to Section 3.3 below, for each Plan Year, a Participant may elect to defer Base Annual Salary (to the extent it exceeds the amount stated in section 401(a)(17) of the Code) and Annual Bonus, provided that the amounts so elected for that Plan Year total, in the aggregate, at least $2,000. If no election is made, the amount deferred shall be zero. (b) Short Plan Year. If a Participant first becomes a Participant after the first day of a Plan Year, or in the case of the first Plan Year of the Plan itself, the minimum Base Annual Salary deferral shall be an amount equal to $2,000, multiplied by a fraction, the numerator of which is the number of complete months remaining in the Plan Year and the denominator of which is 12. (c) Stock Option Amount. For each Eligible Stock Option, a Participant may elect to defer, as his or her Stock Option Amount, the following minimum percentage of Qualifying Gain with respect to exercise of the Eligible Stock Option: Deferral Minimum - -------- ------- Qualifying Gain 10% provided, however, that such Stock Option Amount shall be no less than the lesser of $20,000 or 100% of such Qualifying Gain. 3.2 Maximum Deferral (a) Base Annual Salary and Annual Bonus. For each Plan Year, a Participant may elect to defer, as his or her Annual Deferral Amount, Base Annual Salary and Annual Bonus up to the following maximum percentages for each deferral elected: Maximum Deferral Amount -------- ------ Base Annual Salary 50% Annual Bonus 100%
(b) Notwithstanding the foregoing, if a Participant first becomes a Participant after the first day of a Plan Year, or in the case of the first Plan Year of the Plan itself, the maximum Annual Deferral Amount, with respect to Base Annual Salary and Annual Bonus shall be limited to the amount of compensation not yet earned by the Participant as of the date the Participant submits an Election Form to the Committee for acceptance. (c) For each Eligible Stock Option, a Participant may elect to defer, as his or her Stock Option Amount, Qualifying Gain up to the following maximum percentage with respect to exercise of the Eligible Stock Option: Maximum Deferral Percentage - -------- ---------- Qualifying Gain 100% (d) Stock Option Amounts may also be limited by other terms or conditions set forth in the stock option plan or agreement under which such options are granted. 3.3 Election to Defer; Effect of Election Form. - ------------------------------------------------------------ (a) First Plan Year. In connection with a Participant's commencement of participation in the Plan, the Participant shall make an irrevocable deferral election for the Plan Year in which the Participant commences participation in the Plan, along with such other elections as the Committee deems necessary or desirable under the Plan. For these elections to be valid, the Election Form must be completed and signed by the Participant, timely delivered to the Committee (in accordance with Section 2.2 above) and accepted by the Committee. (b) Subsequent Plan Years. For each succeeding Plan Year, an irrevocable deferral election for - ---------------------------------------- that Plan Year, and such other elections as the Committee deems necessary or desirable under the Plan, shall be made by timely delivering to the Committee, in accordance with its rules and procedures, before (i) the end of the Plan Year preceding the Plan Year for which the election is made for deferral of Base Annual Salary, and (ii) the end of the calendar year preceding the Plan Year in which an Annual Bonus is payable, a new Election Form. If no such Election Form is timely delivered for a Plan Year, the Annual Deferral Amount shall be zero for that Plan Year. (c) Stock Option Deferral. For an election to defer gain upon an Eligible Stock Option exercise to - ---------------------------------------- be valid: (i) a separate Election Form must be completed and signed by the Participant with respect to the Eligible Stock Option; (ii) the Election Form must be timely delivered to the Committee and accepted by the Committee at least six (6) months prior to the date the Participant elects to exercise the Eligible Stock Option; provided, however, that, effective January 1, 1998, the Election Form must be timely delivered to the Committee and accepted by the Committee at least twelve (12) months prior to the date the Participant elects to exercise the Eligible Stock Option, or prior to the date the Participant becomes vested with respect to the Eligible Stock Option, whichever is later; (iii) the Eligible Stock Option must be exercised using an actual or phantom Stock-for-Stock payment method; and (iv) the Stock actually or constructively delivered by the Participant to exercise the Eligible Stock Option must have been owned by the Participant during the entire six (6) month period prior to its delivery. 3.4 Withholding of Annual Deferral Amounts. For each Plan Year, the Base Annual Salary portion of the Annual Deferral Amount shall be withheld from each regularly scheduled Base Annual Salary payroll in equal amounts, as adjusted from time to time for increases and decreases in Base Annual Salary. The Annual Bonus portion of the Annual Deferral Amount shall be withheld at the time the Annual Bonus is or otherwise would be paid to the Participant. 3.5 Annual Company Contribution Amount. For each Plan Year, an Employer, in its sole discretion, may, but is not required to, credit any amount it desires to any Participant's Company Contribution Account under this Plan, which amount shall be for that Participant the Annual Company Contribution Amount for that Plan Year. The amount so credited to a Participant may be smaller or larger than the amount credited to any other Participant, and the amount credited to any Participant for a Plan Year may be zero, even though one or more other Participants receive an Annual Company Contribution Amount for that Plan Year. The Annual Company Contribution Amount, if any, shall be credited as of the first day of the Plan Year. Commencing with contributions made on or after March 1, 1999, a Participant shall vest in the Annual Company Contribution Amount at the same time he or she vests in the Countrywide Credit Industries, Inc. Supplemental Executive Retirement Plan Benefit. 3.6 Stock Option Amount. Subject to any terms and conditions imposed by the Committee, Participants may elect to defer, under the Plan, Qualifying Gains attributable to an Eligible Stock Option exercise. Stock Option Amounts shall be credited/debited to the Participant on the books of the Employer at the time Stock would otherwise have been delivered to the Participant pursuant to the Eligible Stock Option exercise, but for the election to defer. 3.7 Investment of Trust Assets. The Trustee of the Trust shall be authorized, upon written instructions received from the Committee or investment manager appointed by the Committee, to invest and reinvest the assets of the Trust in accordance with the applicable Trust Agreement, including the disposition of Stock and reinvestment of the proceeds in one or more investment vehicles designated by the Committee. 3.8 Sources of Stock. If Stock is credited under the Plan in the Trust pursuant to Section 3.6 in connection with an Eligible Stock Option exercise, the shares so credited shall be deemed to have originated, and shall be counted against the number of shares reserved, under such other plan, program or arrangement. 3.9 Vesting. Except as provided in Section 7.1, a Participant shall at all times be 100% vested in his or her Deferral Account and Stock Option Account. A Participant shall vest in his or her Company Contribution Amount in accordance with Section 3.5 above. 3.10 Crediting/Debiting of Account Balances. In accordance with, and subject to, the rules and procedures that are established from time to time by the Committee, in its sole discretion, amounts shall be credited or debited to a Participant's Account Balance in accordance with the following rules: (a) Election of Measurement Funds. Except as otherwise provided in Section 3.10(f) below, a -------------------------------------------------- Participant, in connection with his or her initial deferral election in accordance with Section 3.3(a) above, shall elect, on the Election Form, one or more Measurement Fund(s) (as described in Section 3.10(c) below) to be used to determine the additional amounts to be credited to his or her Account Balance for the first business day in which the Participant commences participation in the Plan and continuing thereafter for each subsequent day in which the Participant participates in the Plan, unless changed in accordance with the next sentence. Except as otherwise provided in Section 3.10(f) below, commencing with the first business day that follows the Participant's commencement of participation in the Plan and continuing thereafter for each subsequent day in which the Participant participates in the Plan, the Participant may (but is not required to) elect, by submitting an Election Form to the Committee that is accepted by the Committee, to add or delete one or more Measurement Fund(s) to be used to determine the additional amounts to be credited to his or her Account Balance, or to change the portion of his or her Account Balance allocated to each previously or newly elected Measurement Fund. If an election is made in accordance with the previous sentence, it shall apply to the next business day and continue thereafter for each subsequent day in which the Participant participates in the Plan, unless changed in accordance with the previous sentence. (b) Proportionate Allocation. In making any election described in Section 3.10(a) above, the Participant shall specify on the Election Form, in increments of five percentage points (5%), the percentage of his or her Account Balance to be allocated to a Measurement Fund (as if the Participant was making an investment in that Measurement Fund with that portion of his or her Account Balance). (c) Measurement Funds. Except as otherwise provided in Section 3.10(f) below, subject to the rules and procedures established by the Committee, the Participant may elect one or more of the following measurement funds (the "Measurement Funds"), for the purpose of crediting additional amounts to his or her Account Balance: (i) Moody's Bond Index Measurement Fund. Amounts deemed invested in the Moody's Bond Index Measurement Fund shall be credited with interest at the Preferred Rate until February 28, 2000, except as otherwise provided in this Plan, and, effective March 1, 2000, at the Crediting Rate, which rate shall be treated as the nominal rate for crediting interest on such amounts. (ii) Company Stock Index Measurement Fund. Amounts deemed invested in the Company Stock Index Measurement Fund shall be credited or debited, based on the performance of the Company's Stock, as if 100% of such amounts had been invested in whole or fractional shares of Stock, with any dividends declared deemed reinvested in additional whole or fractional shares of Stock. (iii) PIMCO Total Return Fund. - ----------------------------------------- (iv) BT Investment Equity 500 Index Fund. - ----------------------------------------------------- (v) BT Advisor Small Cap Index. - -------------------------------------------- (vi) Morgan Stanley (Van Kampen) International Magnum Fund. - ----------------------------------------------------------------------- As necessary, the Committee may, in its sole discretion, discontinue, substitute or add a Measurement Fund. As necessary, the Committee may restrict the availability of any Measurement Fund to any Participant. Each such action will take effect as of the first day of the calendar quarter that follows by thirty (30) days the day on which the Committee gives Participants advance written notice of such change. (d) Crediting or Debiting Method. The performance of each elected Measurement Fund (either - ------------------------------------------------- positive or negative) will be determined by the Committee, in its reasonable discretion, based on the performance of the Measurement Funds themselves. A Participant's Account Balance shall be credited or debited on a daily basis based on the performance of each Measurement Fund selected by the Participant, as determined by the Committee in its sole discretion, as though (i) a Participant's --------------------------------------------------------- Account Balance were invested in the Measurement Fund(s) selected by the Participant, in the percentages applicable to such day, at the closing price on such date; (ii) the portion of the Annual Deferral Amount that was actually deferred during any day were invested in the Measurement Fund(s) selected by the Participant, in the percentages applicable to such day, no later than the close of business on the first business day after the day on which such amounts are actually deferred from the Participant's Base Annual Salary and/or Annual Bonus through reductions in his or her payroll, at the closing price on such date; and (iii) any distribution made to a Participant that decreases such Participant's Account Balance ceased being invested in the Measurement Fund(s), in the percentages applicable to such business day, no earlier than one business day prior to the distribution, at the closing price on such date. The Participant's Annual Company Contribution Amount shall be credited to his or her Company Contribution Account for purposes of this Section 3.10(d) as of the close of business on the business day selected by the Committee. The Participant's Annual Stock Option Amount(s) shall be credited to his or her Stock Option Account no later than the close of business on the first business day after the day on which the Eligible Stock Option was exercised or otherwise disposed of. (e) No Actual Investment. Notwithstanding any other provision of this Plan that may be interpreted --------------------------------------- to the contrary, the Measurement Funds are to be used for measurement purposes only, and a Participant's election of any such Measurement Fund, the allocation to his or her Account Balance thereto, the calculation of additional amounts and the crediting or debiting of such amounts to a Participant's Account Balance shall not be considered or construed in any manner as an actual ----- --- investment of his or her Account Balance in any such Measurement Fund. In the event that the Company or the Trustee (as that term is defined in the Trust), in its own discretion, decides to invest funds in any or all of the Measurement Funds, no Participant shall have any rights in or to such investments themselves. Without limiting the foregoing, a Participant's Account Balance shall at all times be a bookkeeping entry only and shall not represent any investment made on his or her behalf by the Company or the Trust; the Participant shall at all times remain an unsecured creditor of the Company. (f) Special Rule for Company Contribution Account. Notwithstanding any provision of this Plan that may be construed to the contrary, the Participant's Company Contribution Account must be deemed invested in the Moody's Bond Index Measurement Fund at all times prior to any distribution of benefits under Articles 4, 5, 6, 7 or 8. 3.11 FICA and Other Taxes. - -------------------------------------- (a) Annual Deferral Amounts. For each Plan Year in which an Annual Deferral Amount is being - ------------------------------------------- withheld from a Participant, the Participant's Employer(s) shall withhold from that portion of the Participant's Base Annual Salary and Annual Bonus that is not being deferred, in a manner determined by the Employer(s), the Participant's share of FICA and other employment taxes on such Annual Deferral Amount and/or on benefits due under any other nonqualified employee benefit plan(s) of the Employer. If necessary, the Committee may reduce the Annual Deferral Amount in order to comply with this Section 3.11. (b) Company Contribution Amounts. When a participant becomes vested in a portion of his or her Company Contribution Account, the Participant's Employer(s) shall withhold from the Participant's Base Annual Salary and/or Annual Bonus that is not deferred, in a manner determined by the Employer(s), the Participant's share of FICA and other employment taxes. If necessary, the Committee may reduce the vested portion of the Participant's Company Contribution Account in order to comply with this Section 3.11. (c) Annual Stock Option Amounts. For each Plan Year in which an Annual Stock Option Amount is being first withheld from a Participant, the Participant's Employer(s) shall withhold from that portion of the Participant's Base Annual Salary, Annual Bonus and Qualifying Gains that are not being deferred, in a manner determined by the Employer(s), the Participant's share of FICA and other employment taxes on such Annual Stock Option Amount. If necessary, the Committee may reduce the Annual Stock Option Amount in order to comply with this Section 3.11. (d) Distributions. The Participant's Employer(s), or the trustee of the Trust, shall withhold from any payments made to a Participant under this Plan all federal, state and local income, employment and other taxes required to be withheld by the Employer(s), or the trustee of the Trust, in connection with such payments, and/or in connection with any other nonqualified benefit plan(s) of the Employer, in amounts and in a manner to be determined in the sole discretion of the Employer(s) and the trustee of the Trust. ARTICLE 4 Short-Term Payout; Unforeseeable Financial Emergencies; Withdrawal Election 4.1 Short-Term Payout. In connection with each election to defer an Annual Deferral Amount, a Participant may irrevocably elect to receive a future "Short-Term Payout" from the Plan with respect to such Annual Deferral Amount. Subject to the Deduction Limitation, the Short-Term Payout shall be a lump sum payment in an amount that is equal to the Annual Deferral Amount plus amounts credited or debited in the manner provided in Section 3.10 above on that amount, determined at the time that the Short-Term Payout becomes payable. Subject to the Deduction Limitation and the other terms and conditions of this Plan, each Short-Term Payout elected shall be paid out during a period beginning 1 day and ending 60 days after the first day of any Plan Year designated by the Participant that is at least five Plan Years after the Plan Year in which the Annual Deferral Amount is actually deferred. By way of example, if a five year Short-Term Payout is elected for Annual Deferral Amounts that are deferred in the Plan Year commencing March 1, 1997, the five year Short-Term Payout would become payable during a 60 day period commencing March 1, 2002. 4.2 One-Time Rollover Election. Notwithstanding Section 4.1, a Participant may make a one-time election to change a Short-Term Payout from the Plan with respect to an Annual Deferral Amount to a Retirement Payout; provided, that such election occur at least one year in advance of the first day of the Plan Year for which such Short-Term Payout is payable. By way of example, a Short-Term Payout that becomes payable during a 60-day period commencing March 1, 2002, may be changed to a Retirement Payout if the election to defer is made prior to March 1, 2001. 4.3 Other Benefits Take Precedence Over Short-Term. Should an event occur that triggers a benefit under Article 5, 6, 7 or 8, any Annual Deferral Amount, plus amounts credited or debited thereon, that is subject to a Short-Term Payout election under Section 4.1 shall not be paid in accordance with Section 4.1 but shall be paid in accordance with the other applicable Article. 4.4 Withdrawal Payout/Suspensions for Unforeseeable Financial Emergencies. If the Participant experiences an Unforeseeable Financial Emergency, the Participant may petition the Committee to (i) suspend any deferrals required to be made by a Participant and/or (ii) receive a partial or full payout from the Plan. The payout shall not exceed the lesser of the Participant's Account Balance, calculated as if such Participant were receiving a Termination Benefit, or the amount reasonably needed to satisfy the Unforeseeable Financial Emergency. If, subject to the sole discretion of the Committee, the petition for a suspension and/or payout is approved, suspension shall take effect upon the date of approval and any payout shall be made within 60 days of the date of approval. The payment of any amount under this Section 4.4 shall not be subject to the Deduction Limitation. 4.5 Withdrawal Election. A Participant (or, after a Participant's death, his or her Beneficiary) may elect, at any time, to withdraw all of his or her Account Balance, calculated as if there had occurred a Termination of Employment as of the day of the election, less a withdrawal penalty equal to 10% of such amount (the net amount shall be referred to as the "Withdrawal Amount"). This election can be made at any time, before or after Retirement, Disability, death or Termination of Employment, and whether or not the Participant (or Beneficiary) is in the process of being paid pursuant to an installment payment schedule. If made before Retirement, Disability or death, a Participant's Withdrawal Amount shall be his or her Account Balance calculated as if there had occurred a Termination of Employment as of the day of the election. No partial withdrawals of the Withdrawal Amount shall be allowed. The Participant (or his or her Beneficiary) shall make this election by giving the Committee advance written notice of the election in a form determined from time to time by the Committee. The Participant (or his or her Beneficiary) shall be paid the Withdrawal Amount within 60 days of his or her election. Once the Withdrawal Amount is paid, the Participant's participation in the Plan shall terminate and the Participant shall not be eligible to participate in the Plan in the future. The payment of this Withdrawal Amount shall not be subject to the Deduction Limitation. ARTICLE 5 Retirement Benefit 5.1 Retirement Benefit. Subject to the Deduction Limitation, a Participant who Retires or who attains "Rule of 105 Status" (as hereafter defined) shall receive as a Retirement Benefit his or her Account Balance provided that no payment shall be made to or in respect of any Participant prior to April 1, 1999, on account of attainment of Rule 105 of Status. For purposes of the Plan, a Participant attains Rule of 105 Status when while employed by an Employer the sum of his or her age and Years of Service equals 105. 5.2 Payment of Retirement Benefit. A Participant, in connection with his or her commencement of participation in the Plan, shall elect on an Election Form to receive the Retirement Benefit in a lump sum or pursuant to an Installment Method of 60, 120 or 180 months. The Participant may annually change his or her election to an allowable alternative payout period by submitting a new Election Form to the Committee; provided that any Election Form must be submitted at least one year prior to the Participant's Retirement or attainment of Rule of 105 Status, as the case may be, and such Form is accepted by the Committee in its sole discretion; provided, further, that in the case of any Participant attaining Rule of 105 Status prior to April 1, 2000, such Election Form must be submitted prior to April 1, 1999, or if later, the date the Participant attains Rule of 105 Status, and shall be given effect the date that is one year after such Election Form is submitted and accepted by the Committee. The Election Form most recently accepted by the Committee shall govern the payout of the Retirement Benefit. If a Participant does not make any election with respect to the payment of the Retirement Benefit, then such benefit shall be payable in a lump sum. The lump sum payment shall be made, or installment payments shall commence, no later than 60 days following the earlier of (a) the date the Participant Retires, or (b) the date the Participant attains Rule of 105 Status, or, if later, one year following the date the Participant submits and the Committee accepts a revised Election Form as described above. Any payment made shall be subject to the Deduction Limitation. 5.3 Death Prior to Completion of Retirement Benefit. If a Participant dies after Retirement but before the Retirement Benefit is paid in full, the Participant's unpaid Retirement Benefit payments shall continue and shall be paid to the Participant's Beneficiary (a) over the remaining number of months and in the same amounts as that benefit would have been paid to the Participant had the Participant survived, or (b) in a lump sum, if requested by the Beneficiary and allowed in the sole discretion of the Committee, that is equal to the Participant's unpaid remaining Account Balance. ARTICLE 6 Pre-Retirement Survivor Benefit 6.1 Pre-Retirement Survivor Benefit. Subject to the Deduction Limitation, the Participant's Beneficiary shall receive a Pre-Retirement Survivor Benefit equal to the Participant's Account Balance if the Participant dies before he or she Retires, experiences a Termination of Employment or suffers a Disability. 6.2 Payment of Pre-Retirement Survivor Benefit. A Participant, in connection with his or her commencement of participation in the Plan, shall elect on an Election Form whether the Pre-Retirement Survivor Benefit shall be received by his or her Beneficiary in a lump sum or pursuant to an Installment Method of 60, 120 or 180 months. The Participant may annually change this election to an allowable alternative payout period by submitting a new Election Form to the Committee, which form must be accepted by the Committee in its sole discretion. The Election Form most recently accepted by the Committee prior to the Participant's death shall govern the payout of the Participant's Pre-Retirement Survivor Benefit. If a Participant does not make any election with respect to the payment of the Pre-Retirement Survivor Benefit, then such benefit shall be paid in a lump sum. Despite the foregoing, if the Participant's Account Balance at the time of his or her death is less than $25,000, payment of the Pre-Retirement Survivor Benefit may be made, in the sole discretion of the Committee, in a lump sum or pursuant to an Installment Method of not more than 60 months. The lump sum payment shall be made, or installment payments shall commence, no later than 60 days after the date the Committee is provided with proof that is satisfactory to the Committee of the Participant's death. Any payment made shall be subject to the Deduction Limitation. ARTICLE 7 Termination Benefit 7.1 Termination Benefit. Subject to the Deduction Limitation and the following sentence, the Participant shall receive a Termination Benefit, which shall be equal to the Participant's Account Balance. Interest on amounts deemed invested in the Moody's Bond Index Measurement Fund shall be credited in the manner provided in Section 3.9, but using the applicable interest rate set forth in the following schedule, if a Participant experiences a Termination of Employment prior to his or her Retirement, death or Disability: Completion of Years of Plan Participation Applicable Rate Less than five years Crediting Rate Five or more years Preferred Rate until February 28, 2000; Crediting Rate effective March 1, 2000 7.2 Payment of Termination Benefit. If the Participant's Account Balance at the time of his or her Termination of Employment is less than $25,000, payment of his or her Termination Benefit shall be paid in a lump sum. If his or her Account Balance at such time is equal to or greater than that amount, the Committee, in its sole discretion, may cause the Termination Benefit to be paid in a lump sum or pursuant to an Installment Method over a period of time that does not exceed fifteen (15) years in duration. The lump sum payment shall be made, or installment payments shall commence, no later than 60 days after the date the date of the Participant's Termination of Employment. Any payment made shall be subject to the Deduction Limitation. ARTICLE 8 Disability Waiver and Benefit 8.1 Disability Waiver. - ----------------------------------- (a) Waiver of Deferral. A Participant who is determined by the Committee to be suffering from a - ------------------------------------ Disability shall be (i) excused from fulfilling that portion of the Annual Deferral Amount commitment that would otherwise have been withheld from a Participant's Base Annual Salary and Annual Bonus for the Plan Year during which the Participant first suffers a Disability and (ii) excused from fulfilling any unexercised Stock Option Amount commitments. During the period of Disability, the Participant shall not be allowed to make any additional deferral elections, but will continue to be considered a Participant for all other purposes of this Plan. (b) Return to Work. If a Participant returns to employment with an Employer after a Disability ceases, the Participant may elect to defer an Annual Deferral Amount and Stock Option Amount for the Plan Year following his or her return to employment or service and for every Plan Year thereafter while a Participant in the Plan; provided such deferral elections are otherwise allowed and an Election Form is delivered to and accepted by the Committee for each such election in accordance with Section 3.3 above. 8.2 Continued Eligibility; Disability Benefit. A Participant suffering a Disability shall, for benefit purposes under this Plan, continue to be considered to be employed and shall be eligible for the benefits provided for in Articles 4, 5, 6 or 7 in accordance with the provisions of those Articles. Notwithstanding the above, the Committee shall have the right to, in its sole and absolute discretion and for purposes of this Plan only, and must in the case of a Participant who is otherwise eligible to Retire, deem the Participant to have experienced a Termination of Employment, or in the case of a Participant who is eligible to Retire, to have Retired, at any time (or in the case of a Participant who is eligible to Retire, as soon as practicable) after such Participant is determined to be suffering a Disability, in which case the Participant shall receive a Disability Benefit equal to his or her Account Balance at the time of the Committee's determination; provided, however, that should the Participant otherwise have been eligible to Retire, he or she shall be paid in accordance with Article 5. The Disability Benefit shall be paid in a lump sum or, upon a Participant's request and in the Committee's sole discretion, installment payments over not more than 180 months. The lump sum payment shall be made, or installment payments shall commence, within 60 days of the Committee's exercise of its right to deem a Participant to have experienced a Termination of Employment. Any payment made shall be subject to the Deduction Limitation. ARTICLE 9 Beneficiary Designation 9.1 Beneficiary. Each Participant shall have the right, at any time, to designate his or her Beneficiary(ies) (both primary as well as contingent) to receive any benefits payable under the Plan to a beneficiary upon the death of a Participant. The Beneficiary designated under this Plan may be the same as or different from the Beneficiary designation under any other plan of an Employer in which the Participant participates. 9.2 Beneficiary Designation; Change; Spousal Consent. A Participant shall designate his or her Beneficiary by completing and signing the Beneficiary Designation Form, and returning it to the Committee or its designated agent. A Participant shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Committee's rules and procedures, as in effect from time to time. If the Participant names someone other than his or her spouse as a Beneficiary, a spousal consent, in the form designated by the Committee, must be signed by that Participant's spouse and returned to the Committee. Upon the acceptance by the Committee of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be canceled. The Committee shall be entitled to rely on the last Beneficiary Designation Form filed by the Participant and accepted by the Committee prior to his or her death. 9.3 Acknowledgment. No designation or change in designation of a Beneficiary shall be effective -------------------------------- until received and acknowledged in writing by the Committee or its designated agent. 9.4 No Beneficiary Designation. If a Participant fails to designate a Beneficiary as provided in Sections 9.1, 9.2 and 9.3 above or, if all designated Beneficiaries predecease the Participant or die prior to complete distribution of the Participant's benefits, then the Participant's designated Beneficiary shall be deemed to be his or her surviving spouse. If the Participant has no surviving spouse, the benefits remaining under the Plan to be paid to a Beneficiary shall be payable to the executor or personal representative on behalf of the Participant's estate. 9.5 Doubt as to Beneficiary. If the Committee has any doubt as to the proper Beneficiary to receive payments pursuant to this Plan, the Committee shall have the right, exercisable in its discretion, to cause the Participant's Employer to withhold such payments until this matter is resolved to the Committee's satisfaction. 9.6 Discharge of Obligations. The payment of benefits under the Plan to a Beneficiary shall fully and completely discharge all Employers and the Committee from all further obligations under this Plan with respect to the Participant, and that Participant's Plan participation shall terminate upon such full payment of benefits. ARTICLE 10 Leave of Absence 10.1 Paid Leave of Absence. If a Participant is authorized by the Participant's Employer for any reason to take a paid leave of absence from the employment of the Employer, the Participant shall continue to be considered employed by the Employer and the Annual Deferral Amount shall continue to be withheld during such paid leave of absence in accordance with Section 3.3. 10.2 Unpaid Leave of Absence. If a Participant is authorized by the Participant's Employer for any reason to take an unpaid leave of absence from the employment of the Employer, the Participant shall continue to be considered employed by the Employer and the Participant shall be excused from making deferrals until the earlier of the date the leave of absence expires or the Participant returns to a paid employment status. Upon such expiration or return, deferrals shall resume for the remaining portion of the Plan Year in which the expiration or return occurs, based on the deferral election, if any, made for that Plan Year. If no election was made for that Plan Year, no deferral shall be withheld. ARTICLE 11 Termination, Amendment or Modification 11.1 Termination. Although each Employer anticipates that it will continue the Plan for an indefinite period of time, there is no guarantee that any Employer will continue the Plan or will not terminate the Plan at any time in the future. Accordingly, each Employer reserves the right to discontinue its sponsorship of the Plan and/or to terminate the Plan at any time with respect to any or all of its participating Employees by action of its board of directors. Upon the termination of the Plan with respect to any Employer, the Plan participation of the affected Participants who are employed by that Employer shall terminate and their Account Balances, determined as if they had experienced a Termination of Employment on the date of Plan termination or, if Plan termination occurs after the date upon which a Participant was eligible to Retire, then with respect to that Participant as if he or she had Retired on the date of Plan termination, shall be paid to the Participants as follows: Prior to a Change in Control, if the Plan is terminated with respect to all of its Participants, an Employer shall have the right, in its sole discretion, and notwithstanding any elections made by the Participant, to pay such benefits in a lump sum or pursuant to a Monthly Installment Method of up to 15 years, with amounts credited and debited during the installment period as provided herein. If the Plan is terminated with respect to less than all of its Participants, an Employer shall be required to pay such benefits in a lump sum. After a Change in Control, the Employer shall be required to pay such benefits in a lump sum. The termination of the Plan shall not adversely affect any Participant or Beneficiary who has become entitled to the payment of any benefits under the Plan as of the date of termination; provided however, that the Employer shall have the right to accelerate installment payments without a premium or prepayment penalty by paying the Account Balance in a lump sum or pursuant to a Monthly Installment Method using fewer months (provided that the present value of all payments that will have been received by a Participant at any given point of time under the different payment schedule shall equal or exceed the present value of all payments that would have been received at that point in time under the original payment schedule). The applicable interest rate to be used as the discount rate for determining such present value shall be the Crediting Rate for the Plan Year of termination. 11.2 Amendment. Any Employer may, at any time, amend or modify the Plan in whole or in part with respect to that Employer by the action of its board of directors; provided, however, that no amendment or modification shall be effective to decrease or restrict the value of a Participant's Account Balance in existence at the time the amendment or modification is made, calculated as if the Participant had experienced a Termination of Employment as of the effective date of the amendment or modification or, if the amendment or modification occurs after the date upon which the Participant was eligible to Retire, the Participant had Retired as of the effective date of the amendment or modification. The amendment or modification of the Plan shall not affect any Participant or Beneficiary who has become entitled to the payment of benefits under the Plan as of the date of the amendment or modification; provided, however, that the Employer shall have the right to accelerate installment payments by paying the Account Balance in a lump sum or pursuant to a Monthly Installment Method using fewer months (provided that the present value of all payments that will have been received by a Participant at any given point of time under the different payment schedule shall equal or exceed the present value of all payments that would have been received at that point in time under the original payment schedule, using the Crediting Rate as of the date of amendment or modification as the discount rate for calculating present value). 11.3 Effect of Payment. The full payment of the applicable benefit under Articles 4, 5, 6, 7 or 8 of the Plan shall completely discharge all obligations to a Participant and his or her designated Beneficiaries under this Plan and the Participant's Plan participation shall terminate. ARTICLE 12 Administration 12.1 Committee Duties. This Plan shall be administered by a Committee, which shall consist of the Board, or such committee as the Board shall appoint. Members of the Committee may be Participants under this Plan. The Committee shall also have the discretion and authority to (i) make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Plan, (ii) interpret where necessary all provisions of this Plan (including, without limitation, by supplying omissions from, correcting deficiencies in, or resolving inconsistencies in, the language of this Plan), and (iii) determine all factual matters as may arise in connection with the Plan. Any individual serving on the Committee who is a Participant shall not vote or act on any matter relating solely to himself or herself. When making a determination or calculation, the Committee shall be entitled to rely on information furnished by a Participant or the Company. 12.2 Agents. In the administration of this Plan, the Committee, and the Administrator may, from time to time, employ agents and delegate to them such administrative duties as it sees fit (including acting through a duly appointed representative) and may from time to time consult with counsel who may be counsel to any Employer. 12.3 Binding Effect of Decisions. The decision or action of the Committee with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Plan. 12.4 Indemnity of Committee. All Employers shall indemnify and hold harmless the members of the Committee, and any Employee to whom the duties of the Committee may be delegated, against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Plan, except in the case of willful misconduct by the Committee or any of its members or any such Employee. 12.5 Employer Information. To enable the Committee to perform its functions, each Employer shall supply full and timely information to the Committee on all matters relating to the compensation of its Participants, the date and circumstances of the Retirement, Disability, death or Termination of Employment of its Participants, and such other pertinent information as the Committee may reasonably require. ARTICLE 13 Other Benefits and Agreements 13.1 Coordination with Other Benefits. The benefits provided for a Participant and Participant's Beneficiary under the Plan are in addition to any other benefits available to such Participant under any other plan or program for employees of the Participant's Employer. The Plan shall supplement and shall not supersede, modify or amend any other such plan or program except as may otherwise be expressly provided. 13.2 Coordination with Other Benefit Plans. Any Participant who was a participant in the Countrywide Credit Industries, Inc. Deferred Compensation Plan For Key Management Employees prior to becoming a Participant in this Plan shall have the right to elect, upon the later of the date upon which he or she first becomes designated for participation in the Plan to transfer his or her Account balance in that plan to this Plan. This election shall be made in accordance with the rules and on the forms established from time to time by the Committee. If the election is made, the Participant's Account Balance under this Plan and any such transferred account balance shall become subject to the terms and conditions of this Plan. Upon completion of the transfer of his or her account balance under the other plan to this Plan, the Participant's participation in the other plan shall be terminated and he or she shall have no further interest in the Countrywide Credit Industries, Inc. Deferred Compensation Plan for Key Management Employees. ARTICLE 14 Claims Procedures 14.1 Presentation of Claim. Any Participant or Beneficiary of a deceased Participant (such Participant or Beneficiary being referred to below as a "Claimant") may deliver to the Committee a written claim for a determination with respect to the amounts distributable to such Claimant from the Plan. If such a claim relates to the contents of a notice received by the Claimant, the claim must be made within 60 days after such notice was received by the Claimant. All other claims must be made within 180 days of the date on which the event that caused the claim to arise occurred. The claim must state with particularity the determination desired by the Claimant. 14.2 Notification of Decision. The Committee shall consider a Claimant's claim within a reasonable - ------------------------------------------- time, and shall notify the Claimant in writing: (a) that the Claimant's requested determination has been made, and that the claim has been allowed in full; or (b) that the Committee has reached a conclusion contrary, in whole or in part, to the Claimant's requested determination, and such notice must set forth in a manner calculated to be understood by the Claimant: (i) the specific reason(s) for the denial of the claim, or any part of it; (ii) specific reference(s) to pertinent provisions of the Plan upon which such denial was based; (iii) a description of any additional material or information necessary for the Claimant to perfect the claim, and an explanation of why such material or information is necessary; and (iv) an explanation of the claim review procedure set forth in Section 14.3 below. 14.3 Review of a Denied Claim. Within 60 days after receiving a notice from the Committee that a claim has been denied, in whole or in part, a Claimant (or the Claimant's duly authorized representative) may file with the Committee a written request for a review of the denial of the claim. Thereafter, but not later than 30 days after the review procedure began, the Claimant (or the Claimant's duly authorized representative): (a) may review pertinent documents; (b) may submit written comments or other documents; and/or (c) may request a hearing, which the Committee, in its sole discretion, may grant. 14.4 Decision on Review. The Committee shall render its decision on review promptly, and not later than 60 days after the filing of a written request for review of the denial, unless a hearing is held or other special circumstances require additional time, in which case the Committee's decision must be rendered within 120 days after such date. Such decision must be written in a manner calculated to be understood by the Claimant, and it must contain: (a) specific reasons for the decision; (b) specific reference(s) to the pertinent Plan provisions upon which the decision was based; and (c) such other matters as the Committee deems relevant. 14.5 Legal Action. A Claimant's compliance with the foregoing provisions of this Article 14 is a mandatory prerequisite to a Claimant's right to commence any legal action with respect to any claim for benefits under this Plan. ARTICLE 15 Trust 15.1 Establishment of the Trust. The Company shall establish the Trust, and each Employer shall at least annually transfer over to the Trust such assets as the Employer determines, in its sole discretion, are necessary to provide, on a present value basis, for its respective future liabilities created with respect to the Annual Deferral Amounts, Annual Company Contribution Amounts, Annual Stock Option Amounts for such Employer's Participants for all periods prior to the transfer, as well as any debits and credits to the Participants' Account Balances for all periods prior to the transfer, taking into consideration the value of the assets in the trust at the time of the transfer. 15.2 Interrelationship of the Plan and the Trust. The provisions of the Plan shall govern the rights of a Participant to receive distributions pursuant to the Plan. The provisions of the Trust shall govern the rights of the Employers, Participants and the creditors of the Employers to the assets transferred to the Trust. Each Employer shall at all times remain liable to carry out its obligations under the Plan. 15.3 Distributions From the Trust. Each Employer's obligations under the Plan may be satisfied with Trust assets distributed pursuant to the terms of the Trust, and any such distribution shall reduce the Employer's obligations under this Plan. 15.4 Stock Transferred to the Trust. Notwithstanding any other provision of this Plan or the Trust: (i) if Trust assets are distributed to a Participant in a distribution which reduces the Participant's Stock Option Account balance under this Plan, such distribution must be made in the form of Stock during every 6 month period beginning on the date an Eligible Stock Option of the Participant is exercised, to the extent of the Qualifying Gain deferred in accordance with Section 3.7 with respect to that Eligible Stock Option; and (ii) any Stock transferred to the Trust may not be otherwise distributed or disposed of by the Trustee until at least 6 months after the date such Stock is transferred to the Trust. ARTICLE 16 Miscellaneous 16.1 Status of Plan. The Plan is intended to be a plan that is not qualified within the meaning of Code Section 401(a) and that "is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employee" within the meaning of ERISA Sections 201(2), 301(a)(3) and 401(a)(1). The Plan shall be administered and interpreted to the extent possible in a manner consistent with that intent. 16.2 Unsecured General Creditor. Participants and their Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interests or claims in any property or assets of an Employer. For purposes of the payment of benefits under this Plan, any and all of an Employer's assets shall be, and remain, the general, unpledged unrestricted assets of the Employer. An Employer's obligation under the Plan shall be merely that of an unfunded and unsecured promise to pay money in the future. 16.3 Employer's Liability. An Employer's liability for the payment of benefits shall be defined - --------------------------------------- only by the Plan. An Employer shall have no obligation to a Participant under the Plan except as expressly provided in the Plan. 16.4 Nonassignability. Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate, alienate or convey in advance of actual receipt, the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are expressly declared to be, unassignable and non-transferable. No part of the amounts payable shall, prior to actual payment, be subject to seizure, attachment, garnishment or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, be transferable by operation of law in the event of a Participant's or any other person's bankruptcy or insolvency or be transferable to a spouse as a result of a property settlement or otherwise. 16.5 Not a Contract of Employment. The terms and conditions of this Plan shall not be deemed to constitute a contract of employment between any Employer and the Participant. Such employment is hereby acknowledged to be an "at will" employment relationship that can be terminated at any time for any reason, or no reason, with or without cause, and with or without notice, unless expressly provided in a written employment agreement. Nothing in this Plan shall be deemed to give a Participant the right to be retained in the service of any Employer as an Employee or to interfere with the right of any Employer to discipline or discharge the Participant at any time. 16.6 Furnishing Information. A Participant or his or her Beneficiary will cooperate with the Committee by furnishing any and all information requested by the Committee and take such other actions as may be requested in order to facilitate the administration of the Plan and the payments of benefits hereunder, including but not limited to taking such physical examinations as the Committee may deem necessary. 16.7 Terms. Whenever any words are used herein in the masculine, they shall be construed as though they were in the feminine in all cases where they would so apply; and whenever any words are used herein in the singular or in the plural, they shall be construed as though they were used in the plural or the singular, as the case may be, in all cases where they would so apply. 16.8 Captions. The captions of the articles, sections and paragraphs of this Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions. 16.9 Governing Law. Subject to ERISA, the provisions of this Plan shall be construed and -------------------------------- interpreted according to the internal laws of the State of California without regard to its conflicts of laws principles. 16.10 Notice. Any notice or filing required or permitted to be given to the Committee under this Plan shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below: Administrative Committee DCP Countrywide Credit Industries, Inc. 4500 Park Granada Calabasas, California 91302 Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. Any notice or filing required or permitted to be given to a Participant under this Plan shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Participant. 16.11 Successors. The provisions of this Plan shall bind and inure to the benefit of the Participant's Employer and its successors and assigns and the Participant and the Participant's designated Beneficiaries. 16.12 Spouse's Interest. The interest in the benefits hereunder of a spouse of a Participant who has predeceased the Participant shall automatically pass to the Participant and shall not be transferable by such spouse in any manner, including but not limited to such spouse's will, nor shall such interest pass under the laws of intestate succession. 16.13 Validity. In case any provision of this Plan shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal or invalid provision had never been inserted herein. 16.14 Incompetent. If the Committee determines in its discretion that a benefit under this Plan is to be paid to a minor, a person declared incompetent or to a person incapable of handling the disposition of that person's property, the Committee may direct payment of such benefit to the guardian, legal representative or person having the care and custody of such minor, incompetent or incapable person. The Committee may require proof of minority, incompetence, incapacity or guardianship, as it may deem appropriate prior to distribution of the benefit. Any payment of a benefit shall be a payment for the account of the Participant and the Participant's Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Plan for such payment amount. 16.15 Court Order. The Committee is authorized to make any payments directed by court order in any action in which the Plan or the Committee has been named as a party. In addition, if a court determines that a spouse or former spouse of a Participant has an interest in the Participant's benefits under the Plan in connection with a property settlement or otherwise, the Committee, in its sole discretion, shall have the right, notwithstanding any election made by a Participant, to immediately distribute the spouse's or former spouse's interest in the Participant's benefits under the Plan to that spouse or former spouse. 16.16 Distribution in the Event of Taxation. - ------------------------------------------------------- (a) In General. If, for any reason, all or any portion of a Participant's benefits under this Plan - ---------------------------- becomes taxable to the Participant prior to receipt, a Participant may petition the Committee before a Change in Control, or the trustee of the Trust after a Change in Control, for a distribution of that portion of his or her benefit that has become taxable. Upon the grant of such a petition, which grant shall not be unreasonably withheld (and, after a Change in Control, shall be granted), a Participant's Employer shall distribute to the Participant immediately available funds in an amount equal to the taxable portion of his or her benefit (which amount shall not exceed a Participant's unpaid Account Balance under the Plan). If the petition is granted, the tax liability distribution shall be made within 90 days of the date when the Participant's petition is granted. Such a distribution shall affect and reduce the benefits to be paid under this Plan. (b) Trust. If the Trust terminates in accordance with Section 3.6(e) of the Trust and benefits are distributed from the Trust to a Participant in accordance with that Section, the Participant's benefits under this Plan shall be reduced to the extent of such distributions. 16.17 Insurance. The Employers, on their own behalf or on behalf of the trustee of the Trust, and, in their sole discretion, may apply for and procure insurance on the life of the Participant, in such amounts and in such forms as the Trust may choose. The Employers or the trustee of the Trust, as the case may be, shall be the sole owner and beneficiary of any such insurance. The Participant shall have no interest whatsoever in any such policy or policies, and at the request of the Employers shall submit to medical examinations and supply such information and execute such documents as may be required by the insurance company or companies to whom the Employers have applied for insurance. 16.18 Legal Fees To Enforce Rights After Change in Control. The Company and each Employer is aware that upon the occurrence of a Change in Control, the Board or the board of directors of a Participant's Employer (which might then be composed of new members) or a shareholder of the Company or the Participant's Employer, or of any successor corporation might then cause or attempt to cause the Company, the Participant's Employer or such successor to refuse to comply with its obligations under the Plan and might cause or attempt to cause the Company or the Participant's Employer to institute, or may institute, litigation seeking to deny Participants the benefits intended under the Plan. In these circumstances, the purpose of the Plan could be frustrated. Accordingly, if, following a Change in Control, it should appear to any Participant that the Company, the Participant's Employer or any successor corporation has failed to comply with any of its obligations under the Plan or any agreement thereunder or, if the Company, such Employer or any other person takes any action to declare the Plan void or unenforceable or institutes any litigation or other legal action designed to deny, diminish or to recover from any Participant the benefits intended to be provided, then the Company and the Participant's Employer irrevocably authorize such Participant to retain counsel of his or her choice at the expense of the Company and the Participant's Employer (who shall be jointly and severally liable) to represent such Participant in connection with the initiation or defense of any litigation or other legal action, whether by or against the Company, the Participant's Employer or any director, officer, shareholder or other person affiliated with the Company, the Participant's Employer or any successor thereto in any jurisdiction. IN WITNESS WHEREOF, the Company has signed this Plan document as of __________, ____. "Company" Countrywide Credit Industries, Inc., a Delaware corporation By: __________________________________ Title: _______________________________ EX-11.1 3 0003.txt EPS Exhibit 11.1 COUNTRYWIDE CREDIT INDUSTRIES, INC. STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS Three Months Ended May 31, 2000 1999 ----------------- -- ---------------- (Amounts in thousands, except per share data) Basic Net earnings applicable to common stock $83,459 $103,379 ================ ================= Average shares outstanding 113,792 112,751 ================ ================= Per share amount $0.73 $0.92 ================ ================= Diluted Net earnings applicable to common stock $83,459 $103,379 ================ ================= Average shares outstanding 113,792 112,751 Net effect of dilutive stock options -- based on the treasury stock method using the average market price. 2,316 4,762 ---------------- ----------------- Total average shares 116,108 117,513 ================ ================= Per share amount $0.72 $0.88 ================ =================
EX-12 4 0004.txt 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 three months ended May 31, 2000 and 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). Three months ended May 31, Fiscal Years Ended February 29(28), -------------------------- ------------------------------------------------------------------ 2000 1999 2000 1999 1998 1997 1996 ------------ ------------- ------------ ------------- ------------ ------------ ------------- Net earnings $83,459 $103,379 $410,243 $385,401 $344,983 $257,358 $195,720 Income tax expense 47,466 66,095 220,955 246,404 220,563 164,540 130,480 Interest charges 261,474 246,034 922,225 977,326 564,640 418,682 333,140 Interest portion of rental Expense 4,519 4,798 19,080 14,898 10,055 7,420 6,803 ------------ ------------- ------------ ------------- ------------ ------------ ------------- Earnings available to cover fixed charges $396,918 $420,306 $1,572,503 $1,624,029 $1,140,241 $848,000 $666,143 ============ ============= ============ ============= ============ ============ ============= Fixed charges Interest charges $261,474 $246,034 $922,225 $977,326 $564,640 $418,682 $333,140 Interest portion of rental Expense 4,519 4,798 19,080 14,898 10,055 7,420 6,803 ------------ ------------- ------------ ------------- ------------ ------------ ------------- Total fixed charges $265,993 $250,832 $941,305 $992,224 $574,695 $426,102 $339,943 ============ ============= ============ ============= ============ ============ ============= Ratio of earnings to fixed Charges 1.49 1.68 1.67 1.64 1.98 1.99 1.96 ============ ============= ============ ============= ============ ============ =============
EX-27 5 0005.txt FINANCIAL DATA SCHEDULE
5 0000025191 Countrywide Credit Industries 1,000 1.00 3-MOS FEB-29-2000 MAR-01-2000 May-31-2000 1.00 236,833 0 0 0 0 0 408,661 232,779 18,440,090 14,998,932 0 0 0 5,707 2,935,451 18,440,090 0 528,232 0 397,307 0 0 0 130,925 47,466 83,459 0 0 0 83,459 0.73 0.72
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