-----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, HeGyb+uuLQtrE9fx8+bQWRfM9mMht2yuzIFzDX0HCdWC/IKoEVN3nbwD8EhRoLtm ifZDRwJfBrRHQh3TcMUN+A== 0000025191-95-000015.txt : 19951016 0000025191-95-000015.hdr.sgml : 19951016 ACCESSION NUMBER: 0000025191-95-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19950831 FILED AS OF DATE: 19951013 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COUNTRYWIDE CREDIT INDUSTRIES INC CENTRAL INDEX KEY: 0000025191 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 954083087 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08422 FILM NUMBER: 95580453 BUSINESS ADDRESS: STREET 1: 155 NORTH LAKE AVE CITY: PASADENA STATE: CA ZIP: 91101-1857 BUSINESS PHONE: 8183048400 10-Q 1 2ND QUARTER FORM 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 period ended August 31, 1995 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.) 155 N. Lake Avenue, Pasadena, California 91101 - ---------------------------------------- ------------------------------- (Address of principal executive offices) (Zip Code) (818) 304-8400 ----------------------------------------------------------------------- (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 issuer's classes of common stock, as of the latest practicable date. Class Outstanding at October 3, 1995 ----- ------------------------------ Common Stock $.05 par value 101,882,904 PART I FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) August 31, February 28, 1995 1995 ------------ ------------ (Dollar amounts in thousands) ASSETS Cash ............................................................. $ 5,455 $ 17,624 Receivables for mortgage loans shipped ........................... 2,236,407 1,174,648 Mortgage loans held for sale ..................................... 2,084,511 1,724,177 Other receivables ................................................ 428,233 476,754 Property, equipment and leasehold improvements, at cost - net of accumulated depreciation and amortization ..................... 138,170 145,612 Capitalized servicing fees receivable ............................ 555,595 464,268 Mortgage servicing rights ........................................ 1,471,097 1,332,629 Other assets ..................................................... 444,472 243,950 ------------ ------------ Total assets .............................................. $ 7,363,940 $ 5,579,662 ============ ============ Borrower and investor custodial accounts (segregated in special accounts - excluded from corporate assets) .................... $ 2,126,707 $ 1,063,676 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Notes payable .................................................... $ 5,479,172 $ 3,963,091 Drafts payable issued in connection with mortgage loan closings .. 142,288 200,221 Accounts payable and accrued liabilities ......................... 98,213 105,097 Deferred income taxes ............................................ 425,447 368,695 ------------ ------------ Total liabilities ......................................... 6,145,120 4,637,104 Commitments and contingencies Shareholders' equity Common stock - authorized, ...................................... 240,000,000 shares of $.05 par value; issued and outstanding, 101,823,400 shares at August 31, 1995 and 91,370,364 shares at February 28, 1995 .................... 5,091 4,568 Additional paid-in capital ....................................... 813,546 608,289 Retained earnings ................................................ 400,183 329,701 ------------ ------------ Total shareholders' equity ................................ 1,218,820 942,558 ------------ ------------ Total liabilities and shareholders' equity ................ $ 7,363,940 $ 5,579,662 ============ ============ Borrower and investor custodial accounts ......................... $ 2,126,707 $ 1,063,676 ============ ============ The accompanying notes are an integral part of these statements ..
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) Three Months Six Months Ended August 31, Ended August 31, 1995 1994 1995 1994 --------- --------- --------- --------- (Dollar amounts in thousands, except per share data) Revenues Loan origination fees ......................................... $ 53,385 $ 49,041 $ 94,906 $ 122,777 Gain (loss) on sale of loans .................................. 19,283 (16,503) 32,014 (4,755) --------- --------- --------- --------- Loan production revenue ..................................... 72,668 32,538 126,920 118,022 Interest earned .............................................. 116,726 72,868 208,457 163,650 Interest charges ............................................. (98,148) (54,379) (178,260) (118,022) --------- --------- --------- --------- Net interest income ........................................ 18,578 18,489 30,197 45,628 Loan servicing income ........................................ 139,131 103,248 268,513 199,178 Less amortization and impairment of servicing assets ............................................ (53,678) (25,068) (199,421) (48,068) Servicing hedge benefit (expense) ............................ 18,105 (19,344) 135,080 (39,260) Less write-off of servicing hedge ............................ -- (25,600) -- (25,600) --------- --------- --------- --------- Net loan administration income ............................. 103,558 33,236 204,172 86,250 Gain on sale of servicing .................................... -- 56,880 -- 56,880 Commissions, fees and other income ........................... 14,506 9,963 26,984 21,444 --------- --------- --------- --------- Total revenues .......................................... 209,310 151,106 388,273 328,224 --------- --------- --------- --------- Expenses Salaries and related expenses ................................. 55,969 48,990 106,608 109,122 Occupancy and other office expenses ........................... 24,538 25,611 51,083 51,616 Guarantee fees ................................................ 28,259 20,720 54,281 39,778 Marketing expenses ............................................ 6,589 5,395 12,540 12,152 Branch and administrative office consolidation costs ......................................... -- 8,000 -- 8,000 Other operating expenses ...................................... 12,369 10,541 21,881 19,492 --------- --------- --------- --------- Total expenses .......................................... 127,724 119,257 246,393 240,160 --------- --------- --------- --------- Earnings before income taxes ..................................... 81,586 31,849 141,880 88,064 Provision for income taxes .................................... 32,634 12,739 56,752 35,225 --------- --------- --------- --------- NET EARNINGS .................................................. $ 48,952 $ 19,110 $ 85,128 $ 52,839 ========= ========= ========= ========= Earnings per share Primary ....................................................... $ 0.49 $ 0.21 $ 0.88 $ 0.57 Fully diluted ................................................. $ 0.49 $ 0.21 $ 0.88 $ 0.57 The accompanying notes are an integral part of these statements ..
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended August 31, 1995 1994 ------------ ------------ (Dollar amounts in thousands) Cash flows from operating activities: Net earnings .................................................. $ 85,128 $ 52,839 Adjustments to reconcile net earnings to net cash (used) provided by operating activities: Amortization and impairment of mortgage servicing rights .... 162,821 46,768 Amortization and impairment of capitalized servicing fees receivable ............................................ 36,600 1,300 Depreciation and other amortization ......................... 14,175 12,647 Deferred income taxes ....................................... 56,752 35,225 Gain on bulk sale of servicing rights ....................... -- (56,880) Origination and purchase of loans held for sale ............. (15,634,664) (15,588,789) Principal repayments and sale of loans ...................... 14,212,571 15,925,278 ------------ ------------ (Increase) decrease in mortgage loans shipped and held for Sale ................................. (1,422,093) 336,489 Increase in other receivables and other assets .............. (154,833) (15,153) (Decrease) increase in accounts payable and accrued liabilities (6,884) 18,975 ------------ ------------ Net cash (used) provided by operating activities .......... (1,228,334) 432,210 ------------ ------------ Cash flows from investing activities: Additions to mortgage servicing rights ........................ (301,289) (267,656) Additions to capitalized servicing fees receivable ............ (127,927) (106,596) Proceeds from bulk sale of servicing rights ................... -- 20,547 Purchase of property, equipment and leasehold improvements - net .......................................... (3,901) (21,800) ------------ ------------ Net cash used by investing activities ..................... (433,117) (375,505) ------------ ------------ Cash flows from financing activities: Net increase (decrease) in warehouse debt and other short-term borrowings ....................................... 1,414,229 (176,029) Issuance of long-term debt .................................... 140,000 201,205 Repayment of long-term debt ................................... (96,081) (65,418) Issuance of common stock ...................................... 205,780 956 Cash dividends paid ........................................... (14,646) (14,586) ------------ ------------ Net cash provided (used) by financing activities .......... 1,649,282 (53,872) ------------ ------------ Net (decrease) increase in cash .................................. (12,169) 2,833 Cash at beginning of period ...................................... 17,624 4,034 ============ ============ Cash at end of period ............................................ $ 5,455 $ 6,867 ============ ============ Supplemental cash flow information: Cash used to pay interest ..................................... $ 169,642 $ 125,321 Cash refunded from income taxes ............................... -- ($ 814) The accompanying notes are an integral part of these statements ..
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - BASIS OF PRESENTATION 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 six month period ended August 31, 1995 are not necessarily indicative of the results that may be expected for the fiscal year ending February 29, 1996. 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 28, 1995 of Countrywide Credit Industries, Inc. (the "Company"). In May 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 122, Accounting for Mortgage Servicing Rights, which the Company adopted effective March 1, 1995. SFAS No. 122 amended SFAS No. 65, Accounting for Certain Mortgage Banking Activities. Since SFAS No. 122 prohibits retroactive application, historical accounting results have not been restated and, accordingly, the accounting results for the quarter and six months ended August 31, 1995 are not directly comparable to prior periods. See Note E. NOTE B - NOTES PAYABLE
Notes payable consisted of the following ........................ (Dollar amounts in thousands) ................................ August 31, February 28, 1995 1995 Commercial paper ............................................. $2,698,754 $2,122,348 Revolving credit facility .................................... 75,000 -- Medium-term notes, Series A, B, C and D, net of discounts ........................................... 1,438,300 1,393,900 Reverse-repurchase agreements ................................ 965,967 245,212 Subordinated notes ........................................... 200,000 200,000 Unsecured note payable, matured September 7, 1995 ............ 100,000 -- Other notes payable (2.40%-2.90%) ............................ 1,151 1,631 ========== ========== $5,479,172 $3,963,091 ========== ==========
Revolving Credit Facility and Commercial Paper As of August 31, 1995, Countrywide Funding Corporation ("CFC"), the Company's mortgage banking subsidiary, had an unsecured credit agreement (revolving credit facility) with forty-three commercial banks permitting CFC to borrow an aggregate maximum amount of $3 billion, less commercial paper backed by the agreement. The amount available under the facility is subject to a borrowing base, which consists of mortgage loans held for sale, receivables for mortgage loans shipped and mortgage servicing rights. The facility contains various financial covenants and restrictions, certain of which limit the amount of dividends that can be paid by the Company or CFC. The interest rate on direct borrowings is based on a variety of sources, including the prime rate and the London Interbank Offered Rates ("LIBOR") for U.S. dollar deposits. This interest rate varies, depending on CFC's credit ratings. The weighted average borrowing rate on direct borrowings and commercial paper borrowings for the six months ended August 31, 1995, including the effect of the interest rate swap agreements discussed below, was 5.91%. The weighted average borrowing rate on commercial paper outstanding as of August 31, 1995 was 5.83%. Under certain circumstances, including the failure to maintain specified minimum credit ratings, borrowings under the revolving credit facility and commercial paper may become secured by mortgage loans held for sale, receivables for mortgage loans shipped and mortgage servicing rights. The facility expires in May 1998. Medium-Term Notes As of August 31, 1995, outstanding medium-term notes issued by CFC under various shelf registrations filed with the Securities and Exchange Commission were as follows.
(Dollar amounts in thousands) Outstanding Balance Interest Rate Maturity Date Floating-Rate Fixed-Rate Total From To From To ---------- ---------- ---------- ----- ---- -------- ------- Series A . -- 344,800 344,800 6.10% 8.79% Mar 1997 Mar 2002 Series B . 11,000 469,000 480,000 5.11% 6.98% Mar 1996 Aug 2005 Series C . 303,000 195,500 498,500 5.81% 8.43% Dec 1997 Mar 2004 Series D . 115,000 -- 115,000 6.10% 6.22% Aug 1998 Aug 2000 ---------- ---------- ---------- Total ..$ 429,000 $1,009,300 $1,438,300 ========== ========== ==========
As of August 31, 1995, all of the outstanding fixed-rate notes had been effectively converted by interest rate swap agreements to floating-rate notes. The weighted average borrowing rate on medium-term note borrowings for the six months ended August 31, 1995, including the effect of the interest rate swap agreements, was 6.93%. In addition, as of August 31, 1995, $1.5 million and $385 million were available for future issuances under the Series C and Series D shelf registrations, respectively. Reverse-Repurchase Agreements As of August 31, 1995, the Company had entered into short-term financing arrangements to sell mortgage-backed securities ("MBS") and whole loans under agreements to repurchase. The weighted average borrowing rate for the six months ended August 31, 1995 was 6.01%. The weighted average borrowing rate on reverse-repurchase agreements outstanding as of August 31, 1995 was 5.83%. The reverse-repurchase agreements were collateralized by either MBS or whole loans. All MBS and whole loans underlying reverse-repurchase agreements are held in safekeeping by broker-dealers, and all agreements are to repurchase the same or substantially identical MBS or whole loans. Pre-Sale Funding Facilities As of August 31, 1995, CFC had uncommitted revolving credit facilities with two government-sponsored entities and an affiliate of an investment banking firm. The credit facilities are secured by conforming mortgage loans which are in the process of being pooled into MBS. Interest rates are based on LIBOR, federal funds and/or the prevailing rates for MBS reverse-repurchase agreements. The weighted average borrowing rate for all three facilities for the six months ended August 31, 1995 was 6.10%. As of August 31, 1995, the Company had no outstanding borrowings under any of these facilities. NOTE C - SUBSEQUENT EVENTS On September 13, 1995, the Company declared a cash dividend of $0.08 per common share payable October 17, 1995 to shareholders of record on October 3, 1995. NOTE D - SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY The following tables present summarized financial information for Countrywide Funding Corporation. (Dollar amounts in thousands) ............ August 31, February 28, 1995 1995 Balance Sheets: Mortgage loans shipped and held for sale $4,320,918 $2,898,825 Other assets ........................... 2,963,899 2,621,458 ========== ========== Total assets ........................ $7,284,817 $5,520,283 ========== ========== Short- and long-term debt .............. $5,621,460 $4,152,712 Other liabilities ...................... 479,213 433,025 Equity ................................. 1,184,144 934,546 ========== ========== Total liabilities and equity ......... $7,284,817 $5,520,283 ========== ========== (Dollar amounts in thousands) ........... Six Months Ended August 31, 1995 1994 Statements of Earnings: Revenues .............................. $ 363,793 $ 310,146 Expenses .............................. 229,667 227,020 Provision for income taxes ............ 53,650 33,251 ---------- ---------- Net earnings ........................ $ 80,476 $ 49,875 ========== ========== NOTE E - IMPLEMENTATION OF NEW ACCOUNTING STANDARD In May 1995, the Financial Accounting Standards Board issued SFAS No. 122, which the Company adopted effective March 1, 1995. The overall impact on the Company's financial statements of adopting SFAS No. 122 was an increase in net earnings for the quarter ended August 31, 1995 of $10.7 million, or $0.11 per fully diluted share. The overall impact on earnings for the six months ended August 31, 1995 was $19.6 million, or $0.20 per fully diluted share. SFAS No. 122 requires the recognition of originated mortgage servicing rights ("OMSRs"), as well as purchased mortgage servicing rights ("PMSRs"), as assets by allocating total costs incurred between the loan and the servicing rights based on their relative fair values. Under SFAS No. 65, the cost of OMSRs was not recognized as an asset and was charged to earnings when the related loan was sold. The separate impact of recognizing OMSRs as assets in the Company's financial statements in accordance with SFAS No. 122 was an increase in net earnings of $24.8 million, or $0.25 per fully diluted share and $43.4 million, or $0.45 per fully diluted share for the quarter and six months ended August 31, 1995, respectively. With respect to PMSRs, SFAS No. 122 has a different cost allocation methodology than SFAS No. 65. In contrast to a cost allocation based on relative market value as set forth in SFAS No. 122, the prior requirement was to allocate the costs incurred in excess of the market value of the loans without the servicing rights to PMSRs. The separate impact of the application of the SFAS No. 122 cost allocation method, along with the effect of changes in market conditions, was to reduce PMSR capitalization by $14.1 million, or $0.14 per fully diluted share and $23.8 million, or $0.25 per fully diluted share, for the quarter and six months ended August 31, 1995, respectively. SFAS No. 122 also requires that all capitalized mortgage servicing rights ("MSRs") be evaluated for impairment based on the excess of the carrying amount of the MSRs over their fair value. For purposes of measuring impairment, MSRs are stratified on the basis of interest rate and type of interest rate (fixed or adjustable). In addition to normal amortization of the servicing assets amounting to $41.2 million and $70.3 million for the quarter and six months ended August 31, 1995, respectively, the Company reduced the servicing assets by an additional $12.5 million and $129.1 million of impairment during the quarter and six months ended August 31, 1995, respectively. The entire amount of such impairment was offset by a pre-tax net gain of $18.1 million and $135.1 million for the quarter and six months ended August 31, 1995, respectively, in the Company's servicing hedge which is designed to protect its servicing investment. The net gain included net unrealized gains of $2.4 million and $92.5 million and net realized gains of $15.7 million and $42.6 million for the quarter and six months ended August 31, 1995, respectively, from the sale of various financial instruments that comprise the hedge. As a part of the adoption of SFAS No. 122, the Company revised its servicing hedge accounting policy, effective March 1, 1995, to adjust the basis of the servicing assets for unrealized gains or losses in the derivative financial instruments comprising the servicing hedge. NOTE F - SERVICING HEDGE The following summarizes the notional amounts of servicing hedge derivative contracts. Long Call Options Interest Rate on U.S. Treasury Long Call Options (Dollar amounts in millions) Floors Futures on MBS Balance, February 28, 1995 . $ 4,000 $ -- $ -- Additions ........... 9,000 2,950 1,500 Dispositions ........ -- (950) -- ------------- ------------------ ----------------- Balance, August 31, 1995 ... $13,000 $ 2,000 $ 1,500 ============= ================== ================= NOTE G - VALUATION ALLOWANCE FOR CAPITALIZED MORTGAGE SERVICING RIGHTS The following summarizes the aggregate activity in the valuation allowances for capitalized mortgage servicing rights. (Dollar amounts in thousands) Aggregate Balances At February 28, 1995 $ -- Additions charged 49,175 ------- At August 31, 1995 $49,175 ======= NOTE H - RATIO OF EARNINGS TO FIXED CHARGES The ratios of earnings to fixed charges for the six months ended August 31, 1995 and 1994 were 1.78 and 1.72, respectively. For purposes of calculating the ratio of earnings to fixed charges, earnings consist of income before Federal income taxes, plus fixed charges. Fixed charges include interest expense on debt and the portion of rental expenses which is considered to be representative of the interest factor (one-third of operating leases). Since the major portion of the Company's interest costs is incurred to finance mortgage loans which generate interest income, and since interest income and interest expense are generated simultaneously, management believes that a more meaningful measure of its debt service requirements is the ratio of earnings to net fixed charges. Under this alternative formula, net fixed charges are defined as interest expense on debt, other than debt incurred to finance the Company's mortgage loan inventory, plus the interest element (one-third of operating leases). Under such alternative formula, these ratios for the six months ended August 31, 1995 and 1994 were 5.67 and 3.82, respectively. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Quarter Ended August 31, 1995 Compared to Quarter Ended August 31, 1994 Revenues for the quarter ended August 31, 1995 increased 39% to $209.3 million from $151.1 million for the quarter ended August 31, 1994. Net earnings increased 156% to $49.0 million for the quarter ended August 31, 1995 from $19.1 million for the quarter ended August 31, 1994. Effective March 1, 1995, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 122, Accounting for Mortgage Servicing Rights. Since SFAS No. 122 prohibits retroactive application, historical accounting results have not been restated and, accordingly, the accounting results for the quarter ended August 31, 1995 are not directly comparable to prior periods. The overall impact on the Company's financial statements of adopting SFAS No. 122 was an increase in net earnings for the quarter ended August 31, 1995 of $10.7 million, or $0.11 per fully diluted share. In addition to the accounting change, the increase in revenues and net earnings for the quarter ended August 31, 1995 compared to the quarter ended August 31, 1994 was attributable to an increase in the size of the Company's servicing portfolio, higher production volume and improved pricing margins, partially offset by the non-recurring gain on the sale of servicing in the prior year which was offset, in part, by a non-recurring write-off of the servicing hedge in the prior year. The total volume of loans produced increased 42% to $8.9 billion for the quarter ended August 31, 1995 from $6.2 billion for the quarter ended August 31, 1994. Refinancings totaled $2.6 billion, or 28% of total fundings, for the quarter ended August 31, 1995, as compared to $1.2 billion, or 20% of total fundings, for the quarter ended August 31, 1994. Fixed-rate loan production totaled $6.7 billion, or 75% of total fundings, for the quarter ended August 31, 1995, as compared to $4.0 billion, or 66% of total fundings, for the quarter ended August 31, 1994. Production in the Company's Consumer Markets Division increased to $2.0 billion for the quarter ended August 31, 1995 compared to production of $1.8 for the quarter ended August 31, 1994. Production in the Company's Wholesale Division increased to $2.1 billion for the quarter ended August 31, 1995 compared to $2.0 billion for the quarter ended August 31, 1994. The Company's Correspondent Division purchased $4.8 billion in mortgage loans for the quarter ended August 31, 1995 compared to $2.4 billion for the quarter ended August 31, 1994. The factors which affect the relative volume of production among the Company's three divisions include pricing decisions and the relative competitiveness of such pricing, the level of real estate and mortgage lending activity in each Division's markets, and the success of each Division's sales and marketing efforts. At August 31, 1995 and 1994, the Company's pipeline of loans in process was $5.2 billion and $3.7 billion, respectively. In addition, at August 31, 1995, the Company had committed to make loans in the amount of $1.2 billion, subject to property identification and borrower qualification ("LOCK N' SHOPSM Pipeline"). At August 31, 1994, the LOCK N' SHOP Pipeline was $3.2 billion. Historically, approximately 43% to 75% of the pipeline of loans in process has funded. For the quarters ended August 31, 1995 and 1994, the Company received 115,782 and 69,896 new loan applications, respectively, at an average daily rate of $196 million and $121 million, respectively. The following actions were taken during the quarter ended August 31, 1995 on the total applications received during that quarter: 59,502 loans (51% of total applications received) were funded and 15,764 applications (14% of total applications received) were either rejected by the Company or withdrawn by the applicant. The following actions were taken during the quarter ended August 31, 1994 on the total applications received during that quarter: 36,648 loans (52% of total applications received) were funded and 7,939 applications (11% of total applications received) were either rejected by the Company or withdrawn by the applicant. The factors that affect the percentage of applications received and funded during a given time period include the movement and direction of interest rates, the average length of loan commitments issued, the creditworthiness of applicants, the production divisions' loan processing efficiency and loan pricing decisions. Loan origination fees increased during the quarter ended August 31, 1995 as compared to the quarter ended August 31, 1994 due to higher loan production that resulted from a decrease in the level of mortgage interest rates. The percentage increase in loan origination fees was less than the percentage increase in total production. This is primarily because production by the Correspondent Division (which, due to lower cost structures, charges lower origination fees per dollar loaned) comprised a greater percentage of total production in the quarter ended August 31, 1995 than in the quarter ended August 31, 1994. Gain (loss) on sale of loans improved during the quarter ended August 31, 1995 as compared to the quarter ended August 31, 1994 primarily due to improved pricing margins and the impact of adopting SFAS No. 122. SFAS No. 122 requires the recognition of originated mortgage servicing rights ("OMSRs"), as well as purchased mortgage servicing rights ("PMSRs"), as assets by allocating total costs incurred between the loan and the servicing rights based on their relative fair values. This accounting methodology, in turn, increases the gain (or reduces the loss) on sale of loans as compared to the accounting results obtained under SFAS No. 65, the previously applicable accounting standard. Under SFAS No. 65, the cost of OMSRs was not recognized as an asset and was included in the gain or loss recorded when the related loan was sold. The separate impact of recognizing OMSRs as assets in the Company's financial statements in accordance with SFAS No. 122 for the quarter ended August 31, 1995 was an increase in gain on sale of loans of $41.3 million. With respect to PMSRs, SFAS No. 122 has a different cost allocation methodology than SFAS No. 65. In contrast to a cost allocation based on relative market value as set forth in SFAS No. 122, the prior requirement was to allocate the costs incurred in excess of the market value of the loans without the servicing rights to PMSRs. During the quarter ended August 31, 1995, the separate impact of the application of the SFAS No. 122 cost allocation method, along with the effect of changes in market conditions, was to reduce PMSR capitalization, and therefore negatively impact gain (loss) on sale of loans, by $23.5 million. In general, loan origination fees and gain (loss) on sale of loans are affected by numerous factors including loan pricing decisions, interest rate volatility, the general direction of interest rates and the volume of loans produced. Net interest income (interest earned net of interest charges) increased to $18.6 million for the quarter ended August 31, 1995 from $18.5 million for the quarter ended August 31, 1994. Consolidated net interest income is principally a function of: (i) net interest income earned from the Company's mortgage loan warehouse ($9.4 million and $7.8 million for the quarters ended August 31, 1995 and 1994, respectively); (ii) interest expense related to the Company's investment in servicing rights ($15.5 million and $2.4 million for the quarters ended August 31, 1995 and 1994, respectively) and (iii) interest income earned from the custodial balances associated with the Company's servicing portfolio ($24.7 million and $13.1 million for the quarters ended August 31, 1995 and 1994, respectively). The Company earns interest on, and incurs interest expense to carry, mortgage loans held in its warehouse. The increase in net interest income from the mortgage loan warehouse was attributable to an increase in the average amount of the mortgage loan warehouse due to increased production, offset somewhat by a lower net earnings rate. The increase in interest expense on the investment in servicing rights resulted primarily from a larger servicing portfolio and an increase in the payments of interest to certain investors pursuant to customary servicing arrangements with regard to paid-off loans in excess of the interest earned on these loans through their respective payoff dates ("Interest Costs Incurred on Payoffs"). The increase in net interest income earned from the custodial balances was related to an increase in the earnings rate and an increase in the average custodial balances (caused by growth of the servicing portfolio and an increase in prepayments) from the quarter ended August 31, 1994 to the quarter ended August 31, 1995. During the quarter ended August 31, 1995, loan administration income was positively affected by the continued growth of the loan servicing portfolio. At August 31, 1995, the Company serviced $126.4 billion of loans (including $1.7 billion of loans subserviced for others) compared to $96.8 billion (including $1.1 billion of loans subserviced for others) at August 31, 1994, a 31% increase. The growth in the Company's servicing portfolio during the quarter ended August 31, 1995 was the result of loan production volume and the acquisition of bulk servicing rights, partially offset by prepayments, partial prepayments, and scheduled amortization of mortgage loans. The weighted average interest rate of the mortgage loans in the Company's servicing portfolio at August 31, 1995 was 7.8% compared to 7.3% at August 31, 1994. It is the Company's strategy to build and retain its servicing portfolio because of the returns the Company can earn from such investment and because the Company believes that servicing income is countercyclical to loan production income. During the quarter ended August 31, 1995, the prepayment rate of the Company's servicing portfolio was 13%, as compared to 8% for the quarter ended August 31, 1994. In general, the prepayment rate is affected by the relative level of mortgage interest rates, activity in the home purchase market and the relative level of home prices in a particular market. The increase in the prepayment rate is primarily attributable to increased refinance activity caused by decreased mortgage interest rates in the quarter ended August 31, 1995 from the quarter ended August 31, 1994. The primary means used by the Company to reduce the sensitivity of its earnings to changes in interest rates is through a strong loan production capability and a growing servicing portfolio. To mitigate the effect on earnings of higher amortization and impairment (which are deducted from loan servicing income) resulting from increased prepayment activity, the Company acquires financial instruments, including derivative contracts, that increase in value when interest rates decline (the "Servicing Hedge"). These financial instruments include call options on U.S. Treasury futures and MBS, interest rate floors and certain tranches of collateralized mortgage obligations ("CMOs"). The CMOs, which consist primarily of principal-only ("P/O") securities, have been purchased at deep discounts to their par values. As interest rates decline, prepayments on the collateral underlying the CMOs should increase. These changes should result in a decline in the average lives of the P/O securities and an increase in the present values of their cash flows. The Servicing Hedge instruments utilized by the Company are designed to protect the value of the investment in servicing rights 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 servicing rights increases while the value of the hedge instruments declines. However, the Company is not exposed to loss beyond its initial outlay to acquire the hedge instruments. During the quarter ended August 31, 1995, the Company recognized a net gain of $18.1 million from its Servicing Hedge. The net gain included unrealized gains of $2.4 million and realized gains of $15.7 million from the sale of various financial instruments that comprise the Servicing Hedge. As a part of the adoption of SFAS No. 122, the Company has revised its servicing hedge accounting policy, effective March 1, 1995, to adjust the basis of the servicing assets for unrealized gains or losses in the derivative financial instruments comprising the Servicing Hedge. There can be no assurance the Company's Servicing Hedge will generate gains in the future. The Company recorded amortization and impairment of its servicing assets in the quarter ended August 31, 1995 totaling $53.7 million (consisting of normal amortization amounting to $41.2 million and impairment of $12.5 million), compared to $25.1 million of amortization in the quarter ended August 31, 1994. SFAS No. 122 requires that all capitalized mortgage servicing rights be evaluated for impairment based on the excess of the carrying amount of the mortgage servicing rights over their fair value. Under SFAS No. 65, the impairment evaluation could be made using either discounted or undiscounted cash flows. No uniform required level of disaggregation was specified. The Company used a disaggregated undiscounted method. The factors affecting the amount of amortization and impairment recorded in an accounting period include the level of prepayments during the period, the change in prepayment expectations and the amount of Servicing Hedge gains. During the quarter ended August 31, 1995, the Company acquired bulk servicing rights for loans with principal balances aggregating $0.5 billion at a price of 1.10% of the aggregate outstanding principal balance of the servicing portfolios acquired. During the quarter ended August 31, 1994, the Company acquired bulk servicing rights for loans with principal balances aggregating $5.1 billion at a price of approximately $68.9 million or 1.34% of the aggregate outstanding principal balance of the servicing portfolios acquired. During the quarter ended August 31, 1994, the Company sold servicing rights for loans with principal balances of $5.9 billion and recognized a gain of $56.9 million. No servicing rights were sold during the quarter ended August 31, 1995. Salaries and related expenses are summarized below for the quarters ended August 31, 1995 and 1994. (Dollar amounts in thousands) . Quarter Ended August 31, 1995 Production Loan Other Activities Administration Activities Total Base Salaries ............... $27,893 $ 7,337 $ 2,389 $37,619 Incentive Bonus ............. 11,711 114 813 12,638 Payroll Taxes and Benefits .. 4,266 1,171 275 5,712 ------- ------- ------- ------- Total Salaries and Related $43,870 $ 8,622 $ 3,477 $55,969 Expenses ======= ======= ======= ======= Average Number of Employees .. 2,509 1,036 189 3,734 (Dollar amounts in thousands) . Quarter Ended August 31, 1994 Production Loan Other Activities Administration Activities Total Base Salaries ............... $26,602 $ 5,926 $ 1,205 $33,733 Incentive Bonus ............. 7,934 98 2,085 10,117 Payroll Taxes and Benefits .. 4,047 956 137 5,140 ------- ------- ------- ------- Total Salaries and Related $38,583 $ 6,980 $ 3,427 $48,990 Expenses ======= ======= ======= ======= Average Number of Employees .. 2,430 835 120 3,385 The amount of salaries increased during the quarter ended August 31, 1995 primarily due to the increased number of employees resulting from increased production volume, a larger servicing portfolio and growth in the Company's non-mortgage banking subsidiaries. Incentive bonuses earned during the quarter ended August 31, 1995 increased primarily due to larger loan production and increased loan production personnel, offset somewhat by reduced bonuses paid to employees of the Company's non-mortgage banking subsidiaries. Occupancy and other office expenses for the quarter ended August 31, 1995 decreased to $24.5 million from $25.6 million for the quarter ended August 31, 1994. The decrease was primarily the result of decreased office and equipment rental expenses resulting from the closure of 10 Wholesale Division branch offices from the quarter ended August 31, 1994 to the quarter ended August 31, 1995. Guarantee fees (fees paid to guarantee timely and full payment of principal and interest on MBS and whole loans sold to permanent investors and to transfer the credit risk of the loans in the servicing portfolio) for the quarter ended August 31, 1995 increased 36% to $28.3 million from $20.7 million for the quarter ended August 31, 1994. This increase resulted primarily from an increase in the servicing portfolio. Marketing expenses for the quarter ended August 31, 1995 increased 22% to $6.6 million from $5.4 million for the quarter ended August 31, 1994. The increase in marketing expenses reflected the Company's implementation of a new marketing plan. In the quarter ended August 31, 1994, the Company incurred an $8.0 million charge related to the consolidation and relocation of branch and administrative offices that occurred as a result of the reduction in staff caused by declining production. No such charge was incurred in the quarter ended August 31, 1995. Other operating expenses for the quarter ended August 31, 1995 increased from the quarter ended August 31, 1994 by $1.8 million, or 17%. This increase was primarily due to increased activity in the Company's servicing operations and non-mortgage banking subsidiaries. Profitability of Loan Production and Servicing Activities In the quarter ended August 31, 1995, the Company's pre-tax earnings from its loan production activities (which include loan origination and purchases, warehousing and sales) were $17.9 million. In the quarter ended August 31, 1994, the Company's comparable pre-tax loss was $38.3 million. The increase of $56.2 million was primarily attributable to increased loan production, improved pricing margins, the effect of the adoption of SFAS No. 122 previously discussed and a change of $10.5 million in the Company's internal method of allocating overhead between its production and servicing activities. In the quarter ended August 31, 1995, the Company's pre-tax income from its loan servicing activities (which include administering the loans in the servicing portfolio, selling homeowners and other insurance and acting as tax payment agent) was $60.9 million as compared to $68.1 million in the quarter ended August 31, 1994. The decrease of $7.2 million was principally due to a non-recurring gain on the sale of servicing in the prior year (which was offset, in part, by a non-recurring write-off of the servicing hedge in the prior year) and the change in the Company's internal overhead allocation method discussed above, partially offset by an increase in the size of the servicing portfolio. RESULTS OF OPERATIONS Six Months Ended August 31, 1995 Compared to Six Months Ended August 31, 1994 Revenues for the six months ended August 31, 1995 increased 18% to $388.3 million from $328.2 million for the six months ended August 31, 1994. Net earnings increased 61% to $85.1 million for the six months ended August 31, 1995 from $52.8 million for the six months ended August 31, 1994. Since SFAS No. 122 prohibits retroactive application, historical accounting results have not been restated and, accordingly, the accounting results for the six months ended August 31, 1995 are not directly comparable to prior periods. The overall impact on the Company's financial statements of adopting SFAS No. 122 was an increase in net earnings for the six months ended August 31, 1995 of $19.6 million, or $0.20 per fully diluted share. In addition to the accounting change, the increase in revenues and net earnings for the six months ended August 31, 1995 compared to the six months ended August 31, 1994 was attributable to an increase in the size of the Company's servicing portfolio and improved pricing margins, partially offset by the non-recurring gain on the sale of servicing in the prior year which was offset, in part, by a non-recurring write-off of the servicing hedge in the prior year. The total volume of loans produced was $15.6 billion for each of the six months ended August 31, 1995 and August 31, 1994. Refinancings totaled $3.6 billion, or 23% of total fundings, for the six months ended August 31, 1995, as compared to $6.1 billion, or 39% of total fundings, for the six months ended August 31, 1994. Fixed-rate mortgage loan production totaled $11.2 billion, or 72% of total fundings, for the six months ended August 31, 1995, as compared to $11.5 billion, or 73% of total fundings, for the six months ended August 31, 1994. Production in the Company's Consumer Markets Division decreased to $3.3 billion for the six months ended August 31, 1995 compared to $4.7 billion for the six months ended August 31, 1994. Production in the Company's Wholesale Division decreased to $3.9 billion for the six months ended August 31, 1995 compared to $5.0 billion for the six months ended August 31, 1994. The Company's Correspondent Division purchased $8.4 billion in mortgage loans for the six months ended August 31, 1995 compared to $5.9 billion for the six months ended August 31, 1994. For the six months ended August 31, 1995 and 1994, the Company received 216,987 and 160,796 new loan applications, respectively, at an average daily rate of $178 million and $143 million, respectively. The following actions were taken during the six months ended August 31, 1995 on the total applications received during that six months: 131,694 loans (61% of total applications received) were funded and 40,674 applications (19% of total applications received) were either rejected by the Company or withdrawn by the applicant. The following actions were taken during the six months ended August 31, 1994 on the total applications received during that six months: 100,670 loans (63% of total applications received) were funded and 30,743 applications (19% of total applications received) were either rejected by the Company or withdrawn by the applicant. Loan origination fees decreased during the six months ended August 31, 1995 as compared to the six months ended August 31, 1994 primarily because production by the Correspondent Division comprised a greater percentage of total production in the six months ended August 31, 1995 than in the six months ended August 31, 1994. Gain (loss) on sale of loans improved during the six months ended August 31, 1995 as compared to the six months ended August 31, 1994 primarily due to the impact of adopting SFAS No. 122. The separate impact of recognizing OMSRs as assets in the Company's financial statements in accordance with SFAS No. 122 for the six months ended August 31, 1995 was an increase in gain on sale of loans of $72.4 million. The separate impact of the application of the SFAS No. 122 cost allocation method, along with the effect of changes in market conditions, was to reduce PMSR capitalization, and therefore negatively impact gain (loss) on sale of loans, by $39.7 million during the six months ended August 31, 1995. Net interest income (interest earned net of interest charges) decreased to $30.2 million for the six months ended August 31, 1995 from $45.6 million for the six months ended August 31, 1994. Consolidated net interest income is principally a function of: (i) net interest income earned from the Company's mortgage loan warehouse ($11.6 million and $27.2 million for the six months ended August 31, 1995 and 1994, respectively); (ii) interest expense related to the Company's investment in servicing rights ($24.2 million and $8.8 million for the six months ended August 31, 1995 and 1994, respectively) and (iii) interest income earned from the custodial balances associated with the Company's servicing portfolio ($42.8 million and $27.2 million for the six months ended August 31, 1995 and 1994, respectively). The decrease in net interest income from the mortgage loan warehouse was primarily attributable to a lower net earnings rate. The increase in interest expense on the investment in servicing rights resulted primarily from a larger servicing portfolio. The increase in net interest income earned from the custodial balances was related to an increase in the earnings rate and an increase in the average custodial balances from the six months ended August 31, 1994 to the six months ended August 31, 1995. During the six months ended August 31, 1995, loan administration income was positively affected by the continued growth of the loan servicing portfolio. The growth in the Company's servicing portfolio during the six months ended August 31, 1995 was the result of loan production volume and the acquisition of bulk servicing rights, partially offset by prepayments, partial prepayments, and scheduled amortization of mortgage loans. During the six months ended August 31, 1995, the prepayment rate of the Company's servicing portfolio was 9%, as compared to 13% for the six months ended August 31, 1994. The decrease in the prepayment rate was due to a decline in the level of refinancings caused by generally higher interest rates prior to and during the six months ended August 31, 1995 than prior to and during the six months ended August 31, 1994. During the six months ended August 31, 1995, the Company recognized a net gain of $135.1 million from its Servicing Hedge. The net gain included unrealized gains of $92.5 million and realized gains of $42.6 million from the sale of various financial instruments that comprise the Servicing Hedge. The Company recorded amortization and impairment of its servicing assets in the six months ended August 31, 1995 totaling $199.4 million (consisting of normal amortization amounting to $70.3 million and impairment of $129.1 million), compared to $48.1 million of amortization in the six months ended August 31, 1994. During the six months ended August 31, 1995, the Company acquired bulk servicing rights for loans with principal balances aggregating $3.5 billion at a price of approximately $44.3 million or 1.28% of the aggregate outstanding principal balance of the servicing portfolios acquired. During the six months ended August 31, 1994, the Company acquired bulk servicing rights for loans with principal balances aggregating $8.6 billion at a price of approximately $119.8 million or 1.30% of the aggregate outstanding principal balance of the servicing portfolios acquired. During the six months ended August 31, 1994, the Company sold servicing righs for loans with principal balances of $5.9 billion and recognized a gain of $56.9 million. No servicing rights were sold during the six months ended August 31, 1995. Salaries and related expenses are summarized below for the six months ended August 31, 1995 and 1994. (Dollar amounts in thousands) Six Months Ended August 31, 1995 Production Loan Other Activities Administration Activities Total Base Salaries .............. $ 53,428 $ 13,990 $ 4,453 $ 71,871 Incentive Bonus ............ 19,711 249 2,567 22,527 Payroll Taxes and Benefits . 9,264 2,373 573 12,210 ------- -------- -------- ------- Total Salaries and Related $ 82,403 $ 16,612 $ 7,593 $106,608 Expenses ======= ======== ======== ======= Average Number of Employees . 2,438 998 167 3,603 (Dollar amounts in thousands) Six Months Ended August 31, 1994 Production Loan Other Activities Administration Activities Total Base Salaries .............. $ 60,258 $ 11,419 $ 2,921 $ 74,598 Incentive Bonus ............ 18,628 208 2,767 21,603 Payroll Taxes and Benefits . 10,587 1,914 420 12,921 ------- -------- -------- ------- Total Salaries and Related $ 89,473 $ 13,541 $ 6,108 $109,122 Expenses ======= ======== ======== ======= Average Number of Employees . 2,910 819 112 3,841 The amount of salaries decreased during the six months ended August 31, 1995 primarily due to the decreased number of employees resulting from the Company's strategy to increase productivity and efficiency primarily in the loan production area, offset somewhat by an increased number of employees due to a larger servicing portfolio and growth in the Company's non-mortgage banking subsidiaries. Occupancy and other office expenses for the six months ended August 31, 1995 decreased slightly to $51.1 million from $51.6 million for the six months ended August 31, 1994. The decrease was due to the net reduction in costs resulting from the opening and closing of various Consumer Markets and Wholesale Division branch offices. Guarantee fees for the six months ended August 31, 1995 increased 36% to $54.3 million from $39.8 million for the six months ended August 31, 1994. This increase resulted primarily from an increase in the servicing portfolio. Marketing expenses for the six months ended August 31, 1995 increased 3% to $12.5 million from $12.2 million for the six months ended August 31, 1994. In the six months ended August 31, 1994, the Company incurred an $8.0 million charge related to the consolidation and relocation of branch and administrative offices that occurred as a result of the reduction in staff caused by declining production. No such charge was incurred in the six months ended August 31, 1995. Other operating expenses for the six months ended August 31, 1995 increased from the six months ended August 31, 1994 by $2.4 million, or 12%. This increase was due primarily to increased activity in the Company's servicing operations and non-mortgage banking subsidiaries. Profitability of Loan Production and Servicing Activities In the six months ended August 31, 1995, the Company's pre-tax earnings from its loan production activities were $16.5 million. In the six months ended August 31, 1994, the Company's comparable pre-tax loss was $17.4 million. The increase of $33.9 million was primarily attributable to improved pricing margins, the effect of the adoption of SFAS No. 122 previously discussed and a change of $20.5 million in the Company's internal method of allocating overhead between its production and servicing activities. In the six months ended August 31, 1995, the Company's pre-tax income from its loan servicing activities was $120.9 million as compared to $100.1 million in the six months ended August 31, 1994. The increase of $20.8 million was principally due to the increase in the size of the servicing portfolio, partially offset by the change in the Company's internal overhead allocation method discussed above and a non-recurring gain on the sale of servicing in the prior year (which was offset, in part, by a non-recurring write-off of the servicing hedge in the prior year). INFLATION Inflation affects the Company in the areas of loan production and servicing. Interest rates normally increase during periods of high inflation and decrease during periods of low inflation. Historically, as interest rates increase, loan production, particularly from loan refinancings, decreases, although in an environment of gradual interest rate increases, purchase activity may actually be stimulated by an improving economy or the anticipation of increasing real estate values. In such periods of reduced loan production, production margins may decline due to increased competition resulting from overcapacity in the market. In a higher interest rate environment, servicing-related earnings are enhanced because prepayment rates tend to slow down. This extends the average life of the Company's servicing portfolio and reduces both amortization of the servicing assets and Interest Costs Incurred on Payoffs. In addition, the rate of interest earned from the custodial balances tends to increase. Conversely, as interest rates decline, loan production, particularly from loan refinancings, increases. However, during such periods, prepayment rates tend to accelerate (principally on the portion of the portfolio having a note rate higher than the then-current interest rates), thereby decreasing the average life of the Company's servicing portfolio and adversely impacting its servicing-related earnings. This is primarily due to increased amortization and impairment of the Servicing Assets (which may be offset by income from the Servicing Hedge), a decreased rate of interest earned from the custodial balances, and increased Interest Costs Incurred on Payoffs. SEASONALITY The mortgage banking industry is generally subject to seasonal trends. These trends reflect the general national pattern of sales and resales of homes, although refinancings tend to be less seasonal and more closely related to changes in interest rates. Sales and resales of homes typically peak during the spring and summer seasons and decline to lower levels from mid-November through February. LIQUIDITY AND CAPITAL RESOURCES The Company's principal financing needs are the financing of loan funding activities and the investment in servicing rights. To meet these needs, the Company currently utilizes commercial paper supported by its revolving credit facility, medium-term notes, pre-sale funding facilities, MBS and whole loan reverse-repurchase agreements, subordinated notes, unsecured notes, cash flow from operations and direct borrowings from its revolving credit facility. In June 1995, the Company completed a public offering of its common stock through the issuance and sale of 10,000,000 shares at a price of $21 per share. In addition, in the past the Company has utilized servicing-secured bank facilities, privately-placed financings and public offerings of preferred stock. See Note B to the Company's Consolidated Financial Statements included herein for more information on the Company's financings. Certain of the debt obligations of the Company and CFC contain various provisions that may affect the ability of the Company and CFC to pay dividends and remain in compliance with such obligations. These provisions include requirements concerning net worth, current ratio and other financial covenants. These provisions have not had, and are not expected to have, an adverse impact on the ability of the Company and CFC to pay dividends. The Company continues to investigate and pursue alternative and supplementary methods to finance its growing operations through the public and private capital markets. These may include such methods as mortgage loan sale transactions designed to expand the Company's financial capacity and reduce its cost of capital and the securitization of servicing income cash flows. In connection with its derivative contracts, the Company may be required to deposit cash or certain government securities or obtain letters of credit to meet margin requirements. The Company considers such potential margin requirements in its overall liquidity management. In the course of the Company's mortgage banking operations, the Company sells to investors the mortgage loans it originates and purchases but generally retains the right to service the loans, thereby increasing the Company's investment in loan servicing rights. The Company views the sale of loans on a servicing-retained basis in part as an investment vehicle. Significant unanticipated prepayments in the Company's servicing portfolio could have a material adverse effect on the Company's future operating results and liquidity. Cash Flows Operating Activities In the six months ended August 31, 1995, the Company's operating activities used cash of approximately $1.4 billion on a short-term basis to fund the increase in its warehouse of mortgage loans. The Company's operating activities also generated $194 million of positive cash flow, which was principally allocated to the long-term investment in servicing as discussed below under "Investing Activities." Investing Activities The primary investing activity for which cash was used during the six months ended August 31, 1995 was the investment in servicing. Net cash used by investing activities increased to $433 million for the six months ended August 31, 1995 from $376 million for the six months ended August 31, 1994. Financing Activities Net cash provided by financing activities amounted to $1.6 billion for the six months ended August 31, 1995. Net cash used by financing activities amounted to $54 million for the six months ended August 31, 1994. The increase in net cash provided was primarily the result of net short-term borrowings by the Company during the six months ended August 31, 1995 and net short-term debt repayments in the six months ended August 31, 1994. PROSPECTIVE TRENDS Applications and Pipeline of Loans in Process During the six months ended August 31, 1995, the Company received new loan applications at an average daily rate of $178 million and at August 31, 1995, the Company's pipeline of loans in process was $5.2 billion. This compares to a daily application rate during the six months ended August 31, 1994 of $143 million and a pipeline of loans in process at August 31, 1994 of $3.7 billion. During most of the period from August 31, 1994 to February 28, 1995, interest rates increased, resulting in a decrease in demand for mortgage loans. However, during the six months ended August 31, 1995, interest rates decreased, resulting in an increase in demand for mortgage loans. The size of the pipeline is generally an indication of the level of future fundings, as historically 43% to 75% of the pipeline of loans in process has funded. In addition, the Company's LOCK N' SHOP Pipeline at August 31, 1995 was $1.2 billion and at August 31, 1994 was $3.2 billion. Future application levels and loan fundings are dependent on numerous factors, including the level of demand for mortgage credit, the extent of price competition in the market, the direction of interest rates, seasonal factors and general economic conditions. For the month ended September 30, 1995, the average daily amount of applications received was $208 million, and at September 30, 1995, the pipeline of loans in process was $5.3 billion and the LOCK N' SHOP pipeline was $1.4 billion. Market Factors Mortgage interest rates generally increased in 1994 and have declined in 1995. The environment of rising interest rates resulted in lower production (particularly from refinancings) and greater price competition, which adversely impacted earnings from loan production activities and may continue to do so in the future. The Company took steps to maintain its productivity and efficiency, particularly in the loan production area, by reducing staff and embarking on a program to reduce production-related and overhead costs. However, the rising interest rates enhanced earnings from the Company's loan servicing portfolio as amortization and impairment of the servicing assets and Interest Costs Incurred on Payoffs decreased from levels experienced during the prior periods of declining interest rates and the rate of interest earned from the custodial balances associated with the Company's servicing portfolio increased. The decline in interest rates during the six months ended August 31, 1995 resulted in impairment (as specified in SFAS No. 122) of $129.1 million and a servicing hedge gain of $135.1 million. In addition, the Company has further increased the size of its servicing portfolio, thereby increasing its servicing revenue base, by acquiring servicing contracts through bulk purchases. During the six months ended August 31, 1995, the Company purchased such servicing contracts with principal balances amounting to $3.5 billion. Prepayments in the Company's servicing portfolio were $5.3 billion during the six months ended August 31, 1995 and $1.2 billion during the month of September 1995. The Company's primary competitors are commercial banks and savings and loans and mortgage banking subsidiaries of diversified companies, as well as other mortgage bankers. Particularly in California, savings and loans and other portfolio lenders have competed with the Company by offering aggressively priced adjustable-rate mortgage products which grow in popularity when in interest rates rise. Generally, the Company has experienced significant price competition among mortgage lenders which has resulted in downward pressure on loan production earnings. Some regions in which the Company operates, particularly some regions of California, have been experiencing slower economic growth, and real estate financing activity in these regions has been negatively impacted. As a result, home lending activity for single- (one-to-four) family residences in these regions may also have experienced slower growth. The Company's California mortgage loan production (measured by principal balance) constituted 30% of its total production during the six months ended August 31, 1995, down from 31% for the six months ended August 31, 1994. The Company is making a continued effort to expand its production capacity outside of California. Since California's mortgage loan production constituted a significant portion of the Company's production during the period, there can be no assurance that the Company's operations will not continue to be adversely affected to the extent California continues to experience slower or negative economic growth resulting in decreased residential real estate lending activity or market factors further impact the Company's competitive position in the state. Because the Company services substantially all conventional loans on a non-recourse basis, foreclosure losses are generally the responsibility of the investor or insurer and not the Company. Accordingly, any increase in foreclosure activity should not result in significant foreclosure losses to the Company. However, the Company's expenses may be increased somewhat as a result of the additional staff efforts required to foreclose on a loan. Similarly, government loans serviced by the Company (23% of the Company's servicing portfolio at August 31, 1995) are insured or partially guaranteed against loss by the Federal Housing Administration or the Veterans Administration. In the Company's view, the limited unreimbursed costs that may be incurred by the Company on government foreclosed loans are not material to the Company's consolidated financial statements. Servicing Hedge As previously discussed, the Company recorded a net gain of $135.1 million from its Servicing Hedge which is designed to protect its servicing investment from the effects of increased prepayment activity that generally results from declining interest rates. There can be no assurance the Company's Servicing Hedge will generate gains in the future, or that if gains are generated, they will fully offset impairment of the Servicing Assets. PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders (a) The Company's Annual Meeting of Stockholders was held July 12, 1995. (b) At the Annual Meeting, the stockholders voted on the following matters: (1) Election of Directors Voted For Votes Withheld Robert J. Donato 82,911,480 327,297 Harley W. Snyder 82,913,822 324,955 (2) Amendment to Stock Option Financing Plan Votes For: 64,486,405 Votes Against: 2,263,637 Votes Abstain: 1,166,640 (3) Approval of selection of Grant Thornton as the independent accountants for the fiscal year ending February 29, 1996 Votes For: 82,991,290 Votes Against: 91,216 Votes Abstain: 156,271 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.1 1995 Amended and Extended Management Agreement, dated as of May 15, 1995, between CWM Mortgage Holdings, Inc. ("CWM") and Countrywide Asset Management Corporation. 10.2 1995 Amended and Extended Loan Purchase and Administrative Services Agreement, dated as of May 15, 1995, between CWM and Countrywide Funding Corporation. 11.1 Statement Regarding Computation of Per Share Earnings. 12.1 Computation of the Ratio of Earnings to Fixed Charges. 12.2 Computation of the Ratio of Earnings to Net Fixed Charges. 27 Financial Data Schedules (included only with the electronic filing with the SEC). (b) Reports on Form 8-K. A Form 8-K was filed June 12, 1995, which contained the press release announcing the Company's results for the quarter ended May 31, 1995. 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: October 13, 1995 /s/ Stanford L. Kurland ---------------------------------- Senior Managing Director and Chief Operating Officer DATE: October 13, 1995 /s/ Carlos M. Garcia ---------------------------------- Managing Director; Chief Financial Officer and Chief Accounting Officer (Principal Financial Officer and Principal Accounting Officer) EXHIBIT INDEX Exhibit Number Document Description 10.1 1995 Amended and Extended Management Agreement, dated as of May 15, 1995, between CWM Mortgage Holdings, Inc. ("CWM") and Countrywide Asset Management Corporation. 10.2 1995 Amended and Extended Loan Purchase and Administrative Services Agreement, dated as of May 15, 1995, between CWM and Countrywide Funding Corporation. 11.1 Statement Regarding Computation of Per Share Earnings. 12.1 Computation of the Ratio of Earnings to Fixed Charges. 12.2 Computation of the Ratio of Earnings to Net Fixed Charges. 27 Financial Data Schedules (included only with the electronic filing with the SEC). EX-10 2 1995 AMENDED & EXTENDED MANAGEMENT AGREEMENT 15 1995 AMENDED AND EXTENDED MANAGEMENT AGREEMENT THIS AGREEMENT, initially made as of September 3, 1985 and amended and extended from time to time thereafter, is amended and extended as of May 15, 1995 by and between CWM MORTGAGE HOLDINGS, INC. (formerly known as Countrywide Mortgage Investments, Inc.), a Delaware corporation which has elected to qualify as a real estate investment trust (the "Company"), and COUNTRYWIDE ASSET MANAGEMENT CORPORATION, a Delaware corporation, and its permitted successors and assigns under this agreement (the "Manager"). WITNESSETH WHEREAS, the Company has elected to qualify for the tax benefits accorded by Sections 856 to 860 of the Internal Revenue Code of 1986, as amended; and WHEREAS, the Company, directly or through Subsidiaries, in the conduct of its business primarily operates a mortgage loan conduit, engages in warehouse lending and construction lending, purchases and sells credit-impaired mortgage loans, and invests in mortgage loans and mortgage-related securities meeting the investment criteria established from time to time by its Board of Directors; and WHEREAS, the Company desires to retain the Manager to manage the operations and investments of the Company and its Subsidiaries and to perform administrative services for the Company and its Subsidiaries, each in the manner and on the terms set forth in this Agreement; and WHEREAS, the Company and the Manager wish to amend and extend their agreement originally entered into as of September 3, 1985 for a one year period through May 14, 1996; NOW, THEREFORE, in consideration of the mutual agreements set forth in this Agreement, the Company and the Manager agree as follows: Section 1. Definitions. Whenever used in this Agreement, the following terms, unless the context otherwise requires, shall have the following meanings: (a) "Affiliate" of another person shall mean any person directly or indirectly owning, controlling or holding with power to vote, more than 5% of the outstanding voting securities of such other person; any person 5% or more of whose outstanding voting securities are directly or indirectly owned, controlled or held with power to vote by such other person; any person directly or indirectly controlling, controlled by or under common control with, such other person; and any officer, director, partner or employee of such other person. The term "person" includes a natural person, corporation, partnership, trust, company or other entity. (b) "Agency Securities" shall mean (i) fully modified pass-through mortgage-backed certificates guaranteed as to timely payment of principal and interest by the Government National Mortgage Association, (ii) mortgage participation certificates guaranteed as to payment of interest and principal by the Federal Home Loan Mortgage Corporation and (iii) mortgage pass-through certificates guaranteed as to payment of interest and principal by the Federal National Mortgage Association. (c) "Agreement" shall mean this 1995 Amended and Extended Management Agreement. (d) "Average Invested Assets" for any period shall mean the average of the aggregate book value of the assets of the mortgage conduit operations of the Company and its Subsidiaries invested, directly or indirectly, in loans secured by real estate (including without limitation whole mortgage loans, retained undivided interests in mortgage loans and Agency Securities, but not including any whole mortgage loans, retained undivided interests in mortgage loans, or Agency Securities pledged to secure the issuance of collateralized mortgage obligations or other mortgage collateralized debt or sold in the form of mortgage backed securities in transactions entered into by the Company or a Subsidiary), computed by taking the average of such values at the end of each calendar month during such period. (e) "Average Net Worth" for any period shall mean the arithmetic average of the Net Worth of the Company at the beginning of such period and at the end of each calendar month during such period. (f) "Board of Directors" shall mean the Board of Directors of the Company. (g) "CCI" shall mean Countrywide Credit Industries, Inc., a Delaware corporation. (h) "CFC" shall mean Countrywide Funding Corporation, a Subsidiary of CCI, and a New York corporation. (i) "Commitment" shall mean any document containing the terms pursuant to which the Company or any Subsidiary agrees to purchase on a forward basis any specified mortgage loans, including purchases from Affiliates of the Manager. (j) "Consolidated Average Invested Assets" for any period shall mean the Average Invested Assets for the Company and its consolidated subsidiaries taken as a whole, computed by taking the average of such values at the end of each calendar month during such period. (k) "Governing Instruments" shall mean the articles or certificate of incorporation, trust agreement and bylaws of the Company or any Subsidiary, as applicable. (l) "INMC" shall mean Independent National Mortgage Corporation, a Delaware corporation. (m) "Internal Revenue Code" shall mean the Internal Revenue Code of 1986, as amended. (n) "Loan Purchase Agreement" shall mean the 1995 Amended and Extended Loan Purchase and Administrative Services Agreement, dated as of May 15, 1995, as thereafter amended or supplemented, between the Company and CFC. (o) "Mortgage Backed Securities" shall mean the collateralized mortgage obligations, mortgage collateralized debt, mortgage pass-through securities including real estate mortgage investment conduits or other mortgage-related securities issued by the Company or a Subsidiary of the Company. (p) "Net Income" for any period shall mean total revenues applicable to such period, less the expenses applicable to such period determined in accordance with generally accepted accounting principles. (q) "Net Worth" at any time shall mean the sum of the gross proceeds from any offerings of equity securities by the Company (before deducting any underwriting discounts and commissions and other expenses and costs relating to the offering), plus or minus any retained earnings or losses of the Company, computed in accordance with generally accepted accounting principals. (r) "Return on Equity" for a period shall be calculated by dividing the Company's Net Income for such period by the Company's Average Net Worth for such period. (s) "Servicing Agreement" shall mean an agreement between the Company or any Subsidiary and each seller or servicer of mortgage loans purchased by the Company, including CFC, which agreement governs the sale and/or servicing of such mortgage loans. (t) "Shareholders" shall mean the owners of the shares of the Company. (u) "Subsidiary" shall mean any corporation, whether now existing or in the future established, of which the Company, directly or indirectly, owns more than 50% of the outstanding voting securities of any class or classes, any business trust, partnership or similar non-corporate form in which the Company, directly or indirectly, owns more than 50% of the beneficial interests, and INMC. (v) "Ten Year Average Yield" shall mean the average yield to maturity for actively traded marketable U.S. Treasury fixed interest rate securities (adjusted to constant maturities of 10 years). (w) "Ten Year U.S. Treasury Rate" for a quarterly period shall mean the arithmetic average of the weekly per annum Ten Year Average Yields published by the Federal Reserve Board during such quarter. In the event that the Federal Reserve Board does not publish a weekly per annum Ten Year Average Yield during any week in a quarter, then the Ten Year U.S. Treasury Rate for such week shall be the weekly per annum Ten Year Average Yields published by any Federal Reserve Bank or by any U.S. Government department or agency selected by the Company for such week. In the event that the Company determines in good faith that for any reason the Company cannot determine the Ten Year U.S. Treasury Rate for any quarter as provided above, then the Ten Year U.S. Treasury Rate for such quarter shall be the arithmetic average of the per annum average yields to maturity based upon the daily closing bids during such quarter for each of the issues of actively traded marketable U.S. Treasury fixed interest rate securities (other than securities which can, at the option of the holder, be surrendered at face value in payment of any federal estate tax) with a final maturity date not less than eight nor more than twelve years from the date of each such quotation, as chosen and quoted for each business day (or less frequently if daily quotations shall not be generally available) in each such quarterly period in New York City to the Company by at least three recognized dealers in U.S. Government securities selected by the Company. (x) "Unaffiliated Directors" shall mean those members of the Board of Directors of the Company who are not Affiliates of the Manager. Section 2. General Duties of the Manager. Subject to the supervision of the Board of Directors and in accordance with the Governing Instruments, the Manager shall provide services to the Company and INMC, and to the extent directed by the Board of Directors, shall provide similar services to any other Subsidiary of the Company, as follows: (a) conduct the day-to-day mortgage loan conduit, warehouse lending and construction lending and other operations of the Company and INMC as approved by the Board of Directors, including without limitation, the purchase, accumulation, financing and securitization of mortgage loans, the establishment and financing of warehouse lending and construction lending facilities, the management of assets and investments and the administration thereof; and (b) provide such reports and analysis to the Board of Directors regarding the operating strategies and results of the Company and its Subsidiaries as the Board may reasonably request. The Manager shall perform its duties and shall take actions on behalf of the Company and its Subsidiaries consistent with (i) the operating policies and criteria established from time to time by the Board of Directors or any authorized officer with respect thereto, and (ii) the obligations of the Company and its Subsidiaries under the various agreements to which each is a party. So long as the Manager is serving as the Manager under this Agreement, it shall be and remain a Subsidiary of and wholly owned, directly or indirectly, by CCI. Section 3. Additional Activities of Manager. Except as provided in the Letter Agreement between CCI and the Company attached hereto as Exhibit A, nothing herein shall prevent the Manager or its Affiliates from engaging in other businesses or from rendering services of any kind to any other person or entity, including investment in or advisory service to others investing in any type of real estate investment, including investments which meet the principal investment objectives of the Company or any Subsidiary of the Company. Directors, officers, employees and agents of the Manager or Affiliates of the Manager may serve as directors, officers, employees, agents, nominees or signatories for the Company or any Subsidiary of the Company, to the extent permitted by its Governing Instruments, as from time to time amended, or by any resolutions duly adopted by the Board of Directors pursuant to its Governing Instruments. When executing documents or otherwise acting in such capacities for the Company or any Subsidiary of the Company, such persons shall use their respective titles in the Company or such Subsidiary. Section 4. Purchases and Sales of Investments and Loans from the Manager and its Affiliates. The Manager agrees that sales of investments to and purchases of investments from the Manager and its Affiliates, including without limitation purchases and sales of mortgage loans, Agency Securities and Commitments, shall only be made as stated in an agreement therefor setting forth in general the operating policies and guidelines within which such sales or purchases may be made, which agreement has been approved by the Board of Directors, including a majority of the Unaffiliated Directors. Notwithstanding the terms of any other agreements between the manager or its Affiliates and the Company, the Manager further agrees that all such sales and purchases will be made upon terms no less favorable to the Company than are generally available to other third parties. The Manager shall purchase or exercise the Company's option to purchase mortgage loans from CFC in accordance with the Company's rights and obligations under the Loan Purchase Agreement or any other applicable agreement between the Company and CFC which is approved by the Board of Directors, including a majority of the Unaffiliated Directors. Section 5. Repurchase Obligation. (a) The Manager agrees that if the Company purchases any mortgage loan, Agency Security or other investment which does not meet the investment and/or purchase criteria and policies of the Company and/or INMC as applicable at the time of purchase, the Manager will repurchase or will cause the repurchase of such mortgage loan, Agency Security or other investment from the Company for an amount not less than the unpaid principal balance of the mortgage loan, Agency Security or other investment as of the date of repurchase, less any amounts received by the Company representing prepaid interest not accrued as of the date of repurchase, plus any amounts representing accrued and unpaid interest to the date of repurchase and any amounts incurred by the Company, including, but not limited to reasonable fees and out-of-pocket expenses of counsel, in enforcing the obligation of the Manager to repurchase or cause the repurchase of such mortgage loan. In lieu of repurchasing or causing the repurchase of any mortgage loan, Agency Security or other investment, the Manager may, in its discretion, substitute or cause the substitution, respectively, of a mortgage loan, Agency Security or other investment having an unpaid principal amount and yield at least equivalent to and a maturity not later than the defective mortgage loan, Agency Security or other investment and otherwise meeting the investment and/or purchase criteria and policies of the Company and/or INMC as applicable and the terms of the agreement, if any, pursuant to which the mortgage loan, Agency Security or other investment has been securitized. (b) The Manager shall be subrogated to any and all rights of the Company or any Subsidiary, and the Company agrees to assign to the Manager or direct its Subsidiary to assign to the Manager its rights, under any Servicing Agreement with any third party with respect to any mortgage loan repurchased or substituted for, by or on behalf of the Manager under Subsection (a). Section 6. Bank Accounts. The Manager may establish and maintain one or more bank accounts in the name of the Company or any Subsidiary, at the direction of the Board of Directors, and may collect and deposit into any such account or accounts, and disburse from any such account or accounts, any money on behalf of the Company or any Subsidiary, under such terms and conditions as the Board of Directors may approve; and the Manager shall from time to time render appropriate accountings of such collections and payment to the Board of Directors and, when requested, to the auditors of the Company or any Subsidiary. Section 7. Records; Confidentiality. The Manager shall maintain appropriate books of account and records relating to services performed hereunder, which books of account and records shall be accessible for inspection by the Company or any Subsidiary at any time during normal business hours. The Manager agrees to keep confidential any and all information it obtains from time to time in connection with the services it renders under this Agreement and shall not disclose any portion thereof to non-affiliated third parties except with the prior written consent of the Company. Section 8. Obligations of Manager. (a) The Manager shall use its best efforts to provide that each mortgage loan conforms to the purchase criteria of the Company or INMC as applicable and shall require each seller or transferor of mortgage loans to the Company or INMC in connection with such purchase or transfer to make all applicable representations and warranties contained in the Servicing Agreement for such loans. The Manager shall take such other action as the Manager deems necessary or appropriate with regard to the protection of the Company's or INMC's investments. (b) Anything else in this Agreement to the contrary notwithstanding, the Manager shall refrain from any action which in its sole judgment made in good faith would adversely affect the status of the Company, or any Subsidiary which elects to so qualify, as a real estate investment trust as defined and limited in Section 856 through 860 of the Internal Revenue Code or which in its sole judgment made in good faith would violate any law, rule or regulation of any governmental body or agency having jurisdiction over the Company or any Subsidiary or which would otherwise not be permitted by the Company's or its Subsidiary's Governing Instruments except if such action shall be ordered by the Board of Directors, in which event the Manager shall promptly notify the Board of Directors of the Manager's judgment that such action would adversely affect such status or violate any such law, rule or regulation or the Governing Instruments and shall refrain from taking such action pending further clarification or instructions from the Board of Directors. If the Board of Directors thereafter instructs the Manager, despite the Manager's notification as provided herein, to take any such action and the Manager so acts upon the instructions given, the Manager shall not be responsible for any loss of the Company's or Subsidiary's status as a real estate investment trust or violation of any law, rule or regulation or the Governing Instruments caused thereby. Section 9. Fidelity Bond. The Manager shall maintain a fidelity bond with a responsible surety company in an amount approved by the Board of Directors covering all officers and employees of the Manager handling funds of the Company or any Subsidiary and any documents or papers, which bond shall protect the Company or any Subsidiary against all losses of any such property from acts of such officers and employees through theft, embezzlement, fraud, negligent acts, errors and omissions or otherwise. The premium for said bond shall be paid by the Manager. Section 10. Compensation. (a) Manager will receive a base management fee equal to the Average Invested Assets multiplied by 1/8 of 1%. (b) The Manager shall be paid for services rendered with respect to warehouse lending and construction lending activities a management fee in an amount equal to two tenths of 1% of the average daily balance of the amounts outstanding under warehouse lines of credit extended by the Company or its Subsidiaries to originators of mortgage loans. (c) If the Company's annualized Return on Equity during any fiscal quarter (computed by multiplying the Return on Equity for such fiscal quarter by four) is in excess of the Ten Year U.S. Treasury Rate, plus 2% after taking into account any recovery of the Manager's fees under Subsection (d), the Company will pay the Manager as incentive compensation for such quarter an amount equal to 25% of the amount by which the annualized Return on Equity of the Company for such fiscal quarter exceeds the Ten Year U.S. Treasury Rate plus 2%, but in no event shall any payment of incentive compensation under this Subsection reduce the Company's annualized Return on Equity for such quarter to less than the Ten Year U.S. Treasury Rate plus 2%. For purposes of the calculation contained in this Subsection, all Net Income of the Company and any Subsidiaries shall be deemed to have been distributed on the last day of each quarter. The incentive compensation shall be paid to the Manager within 60 days after the end of each fiscal quarter on an interim basis, subject to adjustment under Subsection (d). (d) The Manager shall compute the compensation payable under Subsections (a), (b) and (c) within 45 days after the end of each fiscal quarter. A copy of the computations made by the Manager to calculate its compensation shall thereafter by promptly delivered to the Company and, upon such delivery, payment of the interim compensation earned under Subsections (a), (b) and (c) shown therein shall be due and payable within 60 days after the end of such fiscal quarter. The aggregate amount of the Manager's compensation for each fiscal year shall be adjusted within 120 days after the end of such fiscal year so as to provide compensation for such year in the annual amounts stated in Subsections (a), (b) and (c) and any excess owed to, or shortfall owed by, the Manager with respect to such compensation, collectively, shall be promptly remitted by, or paid to, the Company. (e) Notwithstanding the definition of Average Invested Assets, in the event the Company implements a strategy of investing directly or indirectly in loans secured by real estate which are not intended to be securitized, the base management fee in Subsection (a) shall be paid with respect to these assets. Section 11. Operating Expenses. The Manager shall be reimbursed by the Company for its operating expenses on a monthly basis. Any allocation of general administrative costs and overhead by the Manager to the Company shall be supported by documentation establishing that each other applicable affiliate of the Manager is also charged a pro rata share of such expenses. Promptly following the end of each month for which reimbursement is due, the Manager shall submit an itemized accounting of its expenses to the Company, and the Company shall pay within 30 days of the receipt of the accounting. The Board of Directors shall have the authority to approve the incurrence of any expenses by the Manager for the account of the Company, either prior to or after such expenses have been incurred. The Manager shall be required to request and receive the approval of the Board of Directors with respect to the compensation and expense reimbursement provided to the executive officers of the Company. In the event the Company determines that any expenses, costs or overhead charged by the Manager can be reduced by the Company's utilizing another provider or source, the Company shall so notify the Manager, and thirty (30) days after the delivery of such notice (the "Notice Effective Date"), the Company shall have the right to utilize any other such provider or source pursuant to such arrangements as the Company may from time to time make; provided that any expenses, costs or overhead allocable by the Manager to the Company in accordance with the terms of this section shall be reimbursed by the Company for the period up to and including the Notice Effective Date. Section 12. Limits of Manager Responsibility. The Manager assumes no responsibility under this Agreement other than to render the services called for hereunder in good faith and shall not be responsible for any action of the Board of Directors in following or declining to follow any advice or recommendations of the Manager, including as set forth in Subsection 8(b) above. The Manager, its directors, officers, shareholders and employees will not be liable to the Company, any Subsidiary, the Unaffiliated Directors of the Company or the Company's or any Subsidiary's shareholders for any acts performed by the Manager, its directors, officers, shareholders or employees in accordance with this Agreement, except by reason of acts constituting bad faith, willful misconduct, gross negligence or reckless disregard of their duties. The Company or any Subsidiaries, as applicable, shall reimburse, indemnify and hold harmless the Manager, its shareholders, directors, officers or employees for and from any and all expenses, losses, damages, liabilities, demands, charges and claims of any nature whatsoever in respect of or arising from any acts or omissions of the Manager, its shareholders, directors, officers and employees made in good faith in the performance of the Manager's duties under this Agreement and not constituting bad faith, willful misconduct, gross negligence or reckless disregard of duties. Section 13. No Joint Venture. The Company and the Manager are not partners or joint venturers with each other and nothing herein shall be construed to make them such partners or joint venturers or impose any liability as such on either of them. Section 14. Term; Termination. This agreement shall continue in force through May 14, 1996, and thereafter it may be extended only with the consent of the Manager and by the affirmative vote of a majority of the Unaffiliated Directors. Each extension shall be executed in writing by all parties hereto before the expiration of this Agreement or of any extension thereof. Each such extension shall be effective for a period in no case exceeding twelve months. Notwithstanding any other provision to the contrary, this Agreement, or any extension hereof, may be terminated by any party, upon sixty (60) days' written notice, by majority vote of the Unaffiliated Directors or by majority vote of the Shareholders, in the case of termination by the Company, or, in the case of termination by the Manager, by majority vote of the directors of the Manager. If this Agreement is terminated pursuant to this Section, such termination shall be without any further liability or obligation of either party to the other, except as provided in Section 17. Section 15. Assignment; Subcontract. (a) This Agreement may not be assigned, in whole or in part, by the Manager, unless such assignment is to a corporation, association, trust or other organization which shall acquire the property and carry on the business of the Manager, if at the time of such assignment a majority of the voting stock of such assignee organization shall be owned, directly or indirectly, by CCI or any of its Affiliates or unless such assignment is consented to in writing by the Company with the consent of a majority of the Unaffiliated Directors. Such a permitted assignment shall bind the assignee hereunder in the same manner as the Manager is bound under this Agreement and, to further evidence its obligations, under this Agreement, the assignee shall execute and deliver to the Company a counterpart of this Agreement. This Agreement shall not be assignable by the Company without the consent of the Manager, except in the case of assignment by the Company to a real estate investment trust or other organization which is a successor (by merger, consolidation, or otherwise purchase of assets) to the Company, in which case such successor organization shall be bound hereunder and by the terms of said assignment in the same manner as the Company is bound hereunder. (b) Notwithstanding the foregoing, the Company and the Manager agree that the Manager may enter into a subcontract with CFC or any of its Affiliates pursuant to which CFC or such Affiliate will provide such of the management services required under this Agreement as the Manager deems necessary, and the Company hereby consents to the entering into and performance of such subcontract; provided, however, that no such arrangement between the Manager and CFC or any of its Affiliates shall relieve the Manager of any of its duties or obligations under this Agreement; and, provided further, that if any subcontract results in operating expenses to be paid by the Company to the Manager, such expenses shall be in the amount actually incurred by the Manager. In the event the Company determines that any expenses, costs or overhead charged by such subcontractor can be reduced by the Company's utilizing another provider or source, the Company shall so notify the Manager, and thirty (30) days after the delivery of such notice (the "Notice Effective Date"), the Company shall have the right to utilize any other such provider or source pursuant to such arrangements as the Company may from time to time make; provided that any expenses, costs or overhead allocable by the Manager to the Company in accordance with the terms of this section shall be reimbursed by the Company for the period up to and including the Notice Effective Date. . Section 16. Termination by Company for Cause. At the option solely of the Company, this Agreement shall be and become terminated upon thirty days' written notice of termination from the Board of Directors to the Manager if any of the following events shall occur: (a) If the Manager shall violate any provision of this Agreement and, after notice of such violation, shall not cure such default within 30 days; or (b) There is entered an order for relief or similar decree or order with respect to the Manager by a court having jurisdiction in the premises in an involuntary case under the federal bankruptcy laws as now or hereafter constituted or under any applicable federal or state bankruptcy, insolvency or other similar laws; or the Manager (i) ceases or admits in writing its inability to pay debts as they become due and payable, or makes a general assignment for the benefit of, or enters into any composition or arrangement with, creditors; (ii) applies for, or consents (by admission of material allegations of a petition or otherwise) to the appointment of a receiver, trustee, assignee, custodian, liquidator or sequestrator (or other similar official) of the Manager or of any substantial part of its properties or assets, or authorizes such an application or consent, or proceedings seeking such appointment are commenced without such authorization, consent or application against the Manager and continue undismissed for 30 days; (iii) authorizes or files a voluntary petition in bankruptcy, or applies for or consents (by admission of material allegations of a petition or otherwise) to the application of any bankruptcy, reorganization, arrangement, readjustment of debt, insolvency, dissolution, liquidation or other similar law of any jurisdiction, or authorizes such application or consent, or proceedings to such end are instituted against the Manager without such authorization, application or consent and remain undismissed for 30 days or result in adjudication of bankruptcy or insolvency; or (iv) permits or suffers all or any substantial part of its properties or assets to be sequestered or attached by court order and the order remains undismissed for 30 days. (c) The Manager agrees that if any of the events specified in paragraph (b) of this Section 16 shall occur, it will give prompt written notice thereof to the Board of Directors after the happening of such event. Section 17. Action Upon Termination. From and after the effective date of termination of this Agreement, pursuant to Sections 14, 15, or 16 hereof, the Manager shall not be entitled to compensation for further services hereunder, but shall be paid all compensation accruing to the date of termination, subject to adjustment on an annualized basis in accordance with Section 10(d). The Manager shall forthwith upon such termination: (a) Pay over to the Company or any Subsidiary, as applicable, all money collected and held for the account of the Company or any Subsidiary pursuant to this Agreement, after deducting any accrued compensation and reimbursement for its expenses to which it is then entitled; (b) Deliver to the Board of Directors a full accounting, including a statement showing all payments collected by it and a statement of all money held by it, covering the period following the date of the last accounting furnished to the Board of Directors with respect to the Company or any Subsidiary; and (c) Deliver to the Board of Directors all property and documents of the Company or any Subsidiary then in the custody of the Manager. Section 18. Release of Money or Other Property Upon Written Request. The Manager agrees that any money or other property of the Company or any Subsidiary held by the Manager under this Agreement shall be held for the Company or such Subsidiary in a custodial capacity, and the Manager's records shall be appropriately marked to reflect clearly the ownership of such money or other property by the Company or such Subsidiary. Upon the receipt by the Manager of a written request signed by a duly authorized officer of the Company requesting the Manager to release to the Company or any Subsidiary any money or other property then held by the Manager for the account of the Company or any Subsidiary under this Agreement, the Manager shall release such money or other property to the Company or any Subsidiary within a reasonable period of time, but in no event later than 60 days following such request. The Manager shall not be liable to the Company, any Subsidiary, the Unaffiliated Directors, or the Company's Shareholders for any acts thereafter performed or omissions thereafter to act by the Company or any Subsidiary of the Company in connection with the money or other property released to the Company or any Subsidiary in accordance with this Section. The Company and any Subsidiary receiving released money or other property hereby agree to indemnify the Manager, its directors, officers, shareholders and employees against any and all expenses, losses, damages, liabilities, demands, charges and claims of any nature whatsoever, which arise in connection with the Manager's release of such money or other property to the Company or such Subsidiary in accordance with the terms of this Section unless the Manager's release of such money constitutes bad faith, willful misconduct, gross negligence or reckless disregard of duties. This provision shall be in addition to any right of the Manager to indemnification under Section 12. Section 19. Representations and Warranties. (a) The Company hereby represents and warrants to the Manager as follows: (i) Corporate Existence. The Company is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, has the corporate power to own its assets and to transact the business in which it is now engaged and is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification, except for failures to be so qualified, authorized or licensed that could not in the aggregate have a material adverse effect on the business operations, assets or financial condition of the Company and its Subsidiaries, taken as a whole. The Company does not do business under any fictitious business name. (ii) Corporate Power; Authorization; Enforceable Obligations. The Company has the corporate power, authority and legal right to execute, deliver and perform this Agreement and all obligations required hereunder and has taken all necessary corporate action authorize this Agreement on the terms and conditions hereof and its execution, delivery and performance of this Agreement and all obligations required hereunder. Except such as have been obtained, no consent of any other person including, without limitation, stockholders and creditors of the Company, and no license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority is required by the Company in connection with this Agreement or the execution, delivery, performance, validity or enforceability of this Agreement and all obligations required hereunder. This Agreement has been, and each instrument or document required hereunder will be, executed and delivered by a duly authorized officer of the Company, and this Agreement constitutes, and each instrument or document required hereunder when executed and delivered hereunder will constitute, the legally valid and binding obligation of the Company enforceable against the Company in accordance with its terms. (iii) No Legal Bar to This Agreement. The execution, delivery and performance of this Agreement and the documents or instruments required hereunder, will not violate any provision of any existing law or regulation binding on the Company, or any order, judgment, award or decree of any court, arbitrator or governmental authority binding on the Company, or the certificate of incorporation or by-laws of, or any securities issued by the Company or of any mortgage, indenture, lease, contract or other agreement, instrument or undertaking to which the Company is a party or by which the Company or any of its assets may be bound, the violation of which would have a material adverse effect on the business operations, assets or financial condition of the Company and its Subsidiaries, taken as a whole, and will not result in, or require, the creation or imposition of any lien on any of its property, assets or revenues pursuant to the provisions of any such mortgage, indenture, lease, contract or other agreement, instrument or undertaking. (b) The Manager hereby represents and warrants to the Company as follows: (i) Corporate Existence. The Manager is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, has the corporate power to own its assets and to transact the business in which it is now engaged and is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification, except for failures to be so qualified, authorized or licensed that could not in the aggregate have a material adverse effect on the business operations, assets or financial condition of the Manager and its Subsidiaries, taken as a whole. The Manager does not do business under any fictitious business name. (ii) Corporate Power; Authorization; Enforceable Obligations. The Manager has the corporate power, authority and legal right to execute, deliver and perform this Agreement and all obligations required hereunder and has taken all necessary corporate action to authorize this Agreement on the terms and conditions hereof and its execution, delivery and performance of this Agreement and all obligations required hereunder. Except such as have been obtained, no consent of any other person including, without limitation, stockholders and creditors of the Manager, and no license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority is required by the Manager in connection with this Agreement or the execution, delivery, performance, validity or enforceability of this Agreement and all obligations required hereunder. This Agreement has been, and each instrument or document required hereunder will be, executed and delivered by a duly authorized officer of the Manager, and this Agreement constitutes, and each instrument or document required hereunder when executed and delivered hereunder will constitute, the legally valid and binding obligation of the Manager enforceable against the Manager in accordance with its terms. (iii) No Legal Bar to This Agreement. The execution, delivery and performance of this Agreement and the documents or instruments required hereunder, will not violate any provision of any existing law or regulation binding on the Manager, or any order, judgment, award or decree of any court, arbitrator or governmental authority binding on the Manager, or the certificate of incorporation or by-laws of, or any securities issued by the Manager or of any mortgage, indenture, lease, contract or other agreement, instrument or undertaking to which the Manager is a party or by which the Manager or any of its assets may be bound, the violation of which would have a material adverse effect on the business operations, assets or financial condition of the Manager and its Subsidiaries, taken as a whole, and will not result in, or require, the creation or imposition of any lien on any of its property, assets or revenues pursuant to the provisions of any such mortgage, indenture, lease, contract or other agreement, instrument or undertaking. Section 20. Notices. Any notice, report, or other communication required or permitted to be given hereunder shall be in writing unless some other method of giving such notice, report, or other communication is accepted by the party to whom it is given, and shall be given by being delivered at the following addresses of the parties hereto: The Company: CWM Mortgage Holdings, Inc. 35 North Lake Avenue P.O. Box 7211 Pasadena, California 91109-7311 Attention: General Counsel The Manager: Countrywide Asset Management Corporation 155 North Lake Avenue P.O. Box 7137 Pasadena, California 91109-7137 Attention: General Counsel Either party may at any time give notice in writing to the other party of a change of its address for the purpose of this Section 20. Section 21. Name Change Upon Termination of Management Agreement. The Company agrees that, if at any time the Manager or any Affiliate of CCI shall cease to serve generally as manager of the Company or any Subsidiary, upon receipt of a written request from the Manager, the Company and such Subsidiary will cause their Governing Instruments to be amended so as to change their names to a name that does not include "Countrywide" or any approximation thereof; provided, however, that such requirement shall not apply to any trust in which the Company or any of its Subsidiaries has sold a majority of the beneficial interest, and which has issued Mortgage Backed Securities that remain outstanding in whole or in part. Section 22. Amendments. This Agreement shall not be amended, changed, modified, terminated or discharged in whole or in part except by an instrument in writing signed by all parties hereto, or their respective successors or assigns, or otherwise as provided herein. Section 23. Successors and Assigns. This Agreement shall bind any successors or assigns of the parties hereto as herein provided. Section 24. Governing Law. This Agreement shall be governed, construed and interpreted in accordance with the laws of the State of California. Section 25. Headlines and Cross References. The section headings hereof have been inserted for convenience of reference only and shall not be construed to affect the meaning, construction or effect of this Agreement. Any reference in this Agreement to a "Section" or "subsection" shall be construed, respectively, as referring to a section of this Agreement or a subsection of a section of this Agreement in which the reference appears. Section 26. Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity of any other provision, and all other provisions shall remain in full force and effect. Section 27. Entire Agreement. This instrument contains the entire agreement between the parties as to the rights granted and the obligations assumed in this instrument. Section 28. Waiver. Any forbearance by a party to this Agreement in exercising any right or remedy under this Agreement or otherwise afforded by applicable law shall not be a waiver of or preclude the exercise of that or any other right or remedy. Section 29. Execution in Counterparts. This Agreement may be executed in one or more counterparts, any of which shall constitute an original as against any party whose signature appears on it, and all of which shall together constitute a single instrument. This Agreement shall become binding when one or more counterparts, individually or taken together, bear the signatures of both parties. Section 30. Guaranty of Manager's Obligations. The Manager agrees that in order to insure the performance of its duties under this Agreement, it will be necessary for CFC to guarantee the full performance of the Manager, and this Agreement is conditioned upon the execution and delivery to the Company of a Guaranty Agreement in the form attached to this Agreement as Exhibit B. Such Guaranty Agreement shall remain in effect through the term of this Agreement, including any renewals or extensions; provided, however, that the Guaranty Agreement may be terminated by the Guarantor as provided therein at such time as the Manager and the Guarantor are no longer Affiliates. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their officers thereunto duly authorized as of the day and year first above written. CWM MORTGAGE HOLDINGS, INC. By: \s\ Michael W. Perry Michael W. Perry Executive Vice President COUNTRYWIDE ASSET MANAGEMENT CORPORATION By: \s\ Stanford L. Kurland Stanford L. Kurland President EX-10 3 1995 AMENDED & EXTD LOAN PURCH & ADMIN SERV AGRMNT 8 1 1995 AMENDED AND EXTENDED LOAN PURCHASE AND ADMINISTRATIVE SERVICES AGREEMENT THIS AGREEMENT is made as of May 15, 1995, by and between CWM Mortgage Holdings, Inc. (formerly known as Countrywide Mortgage Investments, Inc.), a Delaware corporation (the "Company"), and Countrywide Funding Corporation, a New York corporation ("CFC"). WITNESSETH: WHEREAS, the Company has elected to qualify for the tax benefits accorded by Sections 856 to 860 of the Internal Revenue Code of 1986, as amended; and WHEREAS, the Company, directly or through Subsidiaries, in the conduct of its business primarily operates a mortgage loan conduit, engages in warehouse lending and construction lending, and invests in mortgage loans and mortgage-related securities meeting the investment criteria established from time to time by the Board of Directors; and WHEREAS, the Company may desire to purchase mortgage loans originated or purchased by CFC and may want CFC to cause the issuance of Agency Securities supported by pools of such mortgage loans on its behalf; and WHEREAS, the Company may desire to appoint CFC to service mortgage loans originated by others and purchased by the Company through its mortgage loan conduit operations; and WHEREAS, the Company and CFC desire to amend and extend the Loan Purchase and Administrative Services Agreement originally entered into as of September 3, 1985, for a one-year period through May 14, 1996, upon the terms and subject to the conditions set forth in this Agreement. NOW THEREFORE, in consideration of the mutual agreements herein set forth, the parties hereto agree as follows: Section 1. Definitions. Whenever used in this Agreement, the following terms, unless the context otherwise requires, shall have the following meanings: (a) "Affiliate" shall have the meaning attributed to such term in the Management Agreement. (b) "Agency Securities" shall mean GNMA Certificates, FHLMC Certificates and/or FNMA Certificates. (c) "Agreement" shall mean this 1995 Amended and Extended Loan Purchase and Administrative Services Agreement. (d) "Board of Directors" shall mean the Board of Directors of the Company. (e) "Conforming Loan" shall mean an FHA Loan, a VA Loan or a conventional mortgage loan eligible for sale to FNMA or FHLMC. (f) "FHA Loan" shall mean any mortgage loan insured by the Federal Housing Administration under the National Housing Act. (g) "FHLMC" shall mean the Federal Home Loan Mortgage Corporation, a corporation organized and existing under the laws of the United States, or any successor thereto. (h) "FHLMC Certificate" shall mean a mortgage participation certificate, guaranteed as to payment of interest and principal by FHLMC and backed by a pool of conventional mortgage loans. (i) "FNMA" shall mean the Federal National Mortgage Association, a corporation organized and existing under the laws of the United States, or any successor thereto. (j) "FNMA Certificate" shall mean a guaranteed mortgage pass-through certificate, guaranteed as to timely payment of interest and principal by FNMA and backed by a pool of FHA Loans, VA Loans, and/or conventional mortgage loans. (k) "GNMA" shall mean the Government National Mortgage Association, a wholly owned corporate instrumentality of the United States within the Department of Housing and Urban Development, or any successor thereto. (l) "GNMA Certificate" shall mean a fully modified pass-through mortgage-backed certificate guaranteed as to timely payment of interest and principal by GNMA and backed by a pool of FHA Loans or VA Loans. (m) "Jumbo Loan" shall mean any mortgage loan which is not a Conforming Loan. (n) "Management Agreement" shall mean that certain agreement dated as of May 15, 1995 between the Company and the Manager governing the management of the Company's investments and day-to-day operations. (o) "Manager" shall mean Countrywide Asset Management Corporation, or any successor thereto, under a Management Agreement with the Company. (p) "Mortgage Backed Securities" shall have the meaning attributed to such term in the Management Agreement. (q) "Subsidiary" shall have the meaning attributed to such term in the Management Agreement. (r) "Unaffiliated Directors" shall mean those members of the Board of Directors who are not Affiliates of the Manager. (s) "VA Loan" shall mean any mortgage loan guaranteed by the Veterans Administration under the Servicemen's Readjustment Act of 1944, as amended, or Chapter 37 of Title 38, United States Code. Section 2. Purchase of Mortgage Loans and Agency Securities from CFC by the Company. (a) CFC may sell to the Company mortgage loans, Agency Securities and other mortgage-related assets meeting the Company's investment criteria. CFC agrees that all such sales shall be made in accordance with the normal and customary industry practices with respect to the sale of mortgage loans, Agency Securities and other mortgage-related assets. CFC agrees that all mortgage loans or other investments sold by it to the Company will meet the investment criteria of the Company in effect at the time of sales. (b) CFC agrees that, any sale of mortgage loans, Agency Securities and other mortgage-related assets from CFC to the Company will be made at prices no less favorable to the Company than are available to CFC from other purchasers. (c) The Company agrees that prior to the delivery of each mortgage loan purchased, it shall have no interest in such mortgage loan. CFC shall bear all expenses and costs associated with the mortgage loans prior to delivery, including the costs associated with mortgage loans that are not sold. Upon the delivery of such mortgage loan, the Company shall be the sole beneficial owner of such mortgage loan although legal title to the mortgage and the mortgage note will be held by CFC if so directed by the Company to permit the issuance of Agency Securities under Section 3. (d) Notwithstanding the fact that the Company is the beneficial owner of the mortgage loans it purchases, the Company and CFC agree that from and after the date first written above, the Conforming Loans sold to the Company under this Agreement shall be sold "servicing retained" and the servicing rights therefor shall remain with CFC or the other holder thereof. Notwithstanding the foregoing, neither CFC nor such holder may assign its servicing rights to such Conforming Loans without the consent of the Company prior to the issuance of Agency Securities backed by such Conforming Loans. The Company agrees that it will not unreasonably withhold its consent to such an assignment of servicing rights. CFC's rights to assign the servicing rights to Conforming Loans that have been pooled and exchanged for Agency Securities shall be subject to Subsection 3(c). (e) CFC hereby represents and warrants that at the time of sale of mortgage loans to the Company such mortgage loans will meet the representations and warranties required to be made by sellers of mortgage loans to the Company or any Subsidiary pursuant to the Seller/Servicer Guide incorporated by reference into the Seller/Servicer Contract executed by CFC. (f) CFC shall act as an independent contractor and not as an agent of the Company for purposes of originating and purchasing mortgage loans and selling to the Company mortgage loans and Agency Securities and other investments. Section 3. Pooling of Mortgage Loans; Issuance of Agency Securities; Payments of Certain Amounts to Company. (a) If directed by the Company, CFC on behalf of the Company will pool any FHA Loans and VA Loans purchased by the Company in accordance with the requirements of FNMA and will use its best efforts to have GNMA Certificates issued backed by such FHA Loans and VA Loans. In connection therewith, CFC will (i) apply to GNMA for a commitment to guarantee mortgage-backed securities by the issuance of such GNMA Certificates; (ii) once such a commitment has been issued by GNMA, deliver the pool of mortgage loans to a custodian (selected by CFC and acceptable to the Company, subject to GNMA requirements) to be held for the benefit of the holder of the Certificates; and (iii) once the custodian verifies to GNMA that it has custody of the pool, enter into or cause to be created an appropriate GNMA guaranty pursuant to which CFC will issue a GNMA Certificate owned by and registered in the name of or deposited into a depository institution for the account of the Company. After the issuance of such GNMA Certificates, CFC will retain all responsibilities and duties to GNMA, including the payment of all GNMA guaranty fees, with respect to such FHA Loans, VA Loans and GNMA Certificates and will service such FHA Loans and VA Loans after the issuance of the GNMA Certificates in accordance with GNMA requirements. (b) If directed by the Company, CFC on behalf of the Company will pool any conventional mortgage loans and/or FHA Loans and VA Loans purchased by the Company in accordance with the requirements of FNMA and/or the requirements of FHLMC and will use its best efforts to have FNMA Certificates and/or FHLMC Certificates issued backed by such conventional mortgage loans, FHA Loans and VA Loans, but only if CFC in its sole discretion determines that such conventional mortgage loans, FHA Loans and VA Loans meet all FNMA or FHLMC underwriting and other requirements for such issuance. In connection therewith, CFC will (i) apply to FNMA or FHLMC for a commitment to issue FNMA Certificates or FHLMC Certificates and (ii) once such commitment has been approved, CFC will contract with FNMA or FHLMC to pool such conventional mortgage loans, FHA Loans and VA Loans and cause to be issued FNMA Certificates or FHLMC Certificates backed by such loans, which FNMA Certificates or FHLMC Certificates will be owned by and will be registered in the name of or deposited into a depository institution for the account of the Company. After the issuance of such FNMA Certificates and FHLMC Certificates, CFC will retain all responsibilities and duties to FNMA and FHLMC, including the payment of all FNMA or FHLMC guaranty fees, with respect to such conventional mortgage loans, FHA Loans, VA Loans, FNMA Certificates and FHLMC Certificates and will service such conventional mortgage loans, FHA Loans and VA Loans after the issuance of the FNMA or FHLMC Certificates which they back, in accordance with FNMA and FHLMC requirements. (c) If Agency Securities are issued to the Company pursuant to this Section, CFC agrees that for such time as it is servicing the mortgage loans underlying each Agency Security on behalf of the Company, in addition to all duties and obligations imposed on CFC by the servicing agreement which incorporates the appropriate GNMA, FNMA or FHLMC requirements, CFC shall remit to the Company at the same time it remits each periodic installment of principal and interest on the Agency Security, the amount, if any, representing the difference between (i) the scheduled installment of principal and interest on the mortgage loans underlying the Agency Security, less the applicable GNMA, FNMA or FHLMC guaranty fee and CFC's servicing fee as agreed to between the Company and CFC, and (ii) the scheduled installment of principal and interest on the Agency Security. The obligation of CFC to remit such amounts to the Company shall arise upon receipt by CFC from the mortgagor of the scheduled installment of principal and interest on the underlying mortgage loan. CFC agrees that in the event it assigns its right to service the mortgage loans underlying Agency Securities, either the successor servicer of such mortgage loans will continue to remit the amounts referred to above to the Company or CFC will remit to the Company an amount representing the present value of the anticipated amounts which would otherwise be received by the Company over the life of the mortgage loans under this Subsection. Section 4. Obligation to Assume Servicing. In the event the Company or any Subsidiary acquires rights to service mortgage loans or terminates the servicing rights of any entity which has sold mortgage loans to the Company or any Subsidiary on a servicing retained basis, the Company and CFC agree to negotiate a servicing agreement pursuant to which CFC will assume the servicing function. Section 5. Additional Activities of CFC. Nothing herein shall prevent CFC or its Affiliates from engaging in other businesses or from rendering services of any kind to any other person or entity, including the performance of monitoring, administering or servicing activities for others investing in any type of real estate investment. Section 6. Bank Accounts. Fidelity Bond. (a) CFC may establish and maintain in connection with the services performed hereunder one or more bank accounts in the name of the Company, at the direction of the Company, and may collect and deposit into any such account or accounts, and disburse from any such account or accounts, moneys on behalf of the Company, under such terms and conditions as the Company may approve; and CFC shall from time to time render appropriate accountings of such collections and payments to the Company and, when requested, to the auditors of the Company. (b) CFC shall maintain a fidelity bond with a responsible surety company in an amount approved by the Board of Directors covering all officers and employees of CFC handling funds of the Company and any documents or papers, which bond shall protect the Company against all losses of any such property from acts of such officers and employees through theft, embezzlement, fraud, negligent acts, errors and omissions or otherwise, the premium for said bond to be paid by CFC. Section 7. Records; Confidentiality. CFC shall maintain appropriate books of account and records relating to services performed hereunder, which books of account and records shall be accessible for inspection and copying by the Company at any time during normal business hours. CFC agrees to keep confidential any and all information it obtains from time to time in connection with the services it renders hereunder and shall not disclose any portion thereof to nonaffiliated third parties except with the prior written consent of the Company. Section 8. Term; Termination. (a) This Agreement shall continue in force through May 14, 1996, and thereafter it may be extended only with the consent of CFC and by the affirmative vote of a majority of the Unaffiliated Directors. Each extension shall be executed in writing by both parties hereto before the expiration of this Agreement or of any extension thereof. (b) CFC may terminate this Agreement upon 30 days' written notice if at any time any of the Affiliates of Countrywide Credit Industries, Inc. are no longer serving as Manager. (c) Notwithstanding any other provision herein to the contrary, this Agreement, or any extension hereof, may be terminated by the Company with cause, upon 30 days' written notice, or by either party without cause, upon 60 days' written notice, by majority vote of the Unaffiliated Directors or by vote of the holders of a majority of the outstanding shares of common stock of the Company, in the case of termination by the Company, or in the case of termination by CFC, by majority vote of the Directors of CFC. Section 9. Assignment. This Agreement shall not be assignable in whole or in part by CFC, unless such assignment is to a corporation, association, trust or other organization which shall acquire the property and carry on the business of CFC, if at the time of such assignment a majority of the voting stock of such assignee organization shall be owned, directly or indirectly, by Countrywide Credit Industries, Inc. or unless such assignment is consented to in writing by the Company with the consent of a majority of the Unaffiliated Directors. Such an assignment shall bind the assignee hereunder in the same manner as CFC is bound hereunder, and, to further evidence its obligations hereunder, the assignee shall execute and deliver to the Company a counterpart of this Agreement. This Agreement shall not be assignable by the Company without the consent of CFC, except in the case of an assignment by the Company to a corporation or other organization which is a successor (by merger, consolidation or purchase of assets) to the Company, in which case such successor organization shall be bound hereunder by the terms of said assignment in the same manner as the Company is bound hereunder. Section 10. Termination by Company for Cause. At the option solely of the Company, this Agreement may be and become terminated upon receipt of thirty days' written notice of termination from the Board of Directors to CFC is any of the following events shall occur: (a) If CFC shall violate any provisions of this Agreement and, after notice of such violation, shall not cure such default within 30 days; or (b) There is entered an order for relief or similar decree or order with respect to CFC by a court having jurisdiction in the premises in an involuntary case under the federal bankruptcy laws as now or hereafter constituted or under any applicable federal or state bankruptcy, insolvency or other similar laws; or CFC (i) ceases or admits in writing its inability to pay its debts as they become due and payable, or makes a general assignment for the benefit of, or enters into any composition or arrangement with, creditors; (ii) applies for, or consents (by admission of material allegations of a petition or otherwise) to the appointment of a receiver, trustee, assignee, custodian, liquidator or sequestrator (or other similar official) of CFC or of any substantial part of its properties or assets, or authorizes such an application or consent, or proceedings seeking such appointment are commenced without such authorization, consent or application against CFC and continue undismissed for 30 days; (iii) authorizes or files a voluntary petition in bankruptcy, or applies for or consents (by admission of material allegations of a petition or otherwise) to the application of any bankruptcy, reorganization, arrangement, readjustment of debt, insolvency, dissolution, liquidation or other similar law of any jurisdiction, or authorizes such application or consent, or proceedings to such end are instituted against CFC without such authorization, application or consent and remain undismissed for 30 days or result in adjudication of bankruptcy or insolvency; or (iv) permits or suffers all or any substantial part of its properties or assets to be sequestered or attached by court order and the order remains undismissed for 30 days. (c) CFC agrees that if any of the events specified in paragraph (b) of this Section 10 shall occur, it will give prompt written notice thereof to the Board of Directors after the happening of such event. Section 11. Action Upon Termination. From and after the effective date of termination of this Agreement, pursuant to Sections 8, 9 or 10 hereof, CFC shall not be entitled to compensation for further services hereunder, but shall be paid all compensation accruing to the date of termination. CFC shall forthwith upon such termination: (a) Pay over to the Company any money collected and held for the account of the Company pursuant to this Agreement or otherwise, after deducting any accrued compensation to which it is then entitled; (b) Deliver to the Board of Directors a full accounting, including a statement showing any payments collected by it and a statement of any money held by it, covering the period following the date of the last accounting furnished to the Board of Directors; and (c) Deliver to the Board of Directors all property and documents of the Company then in the custody of CFC, except to the extent that to do so would conflict with the terms of its servicing agreement with the Company. Section 12. Release of Money or other Property Upon Written Request. CFC agrees that any money or other property of the Company held by CFC under this Agreement shall be held for the Company in a custodial capacity, and CFC's records shall be appropriately marked to clearly reflect the ownership of such money or other property of the Company. CFC shall release its custody of any money or other property only in accordance with written instructions from the Company. Section 13. Notices. Any notice, report or other communication required or permitted to be given hereunder shall be in writing, unless some other method of giving such notice , report or other communication is accepted by the party to whom it is given, and shall be given by being delivered at the following addresses of the parties hereto: The Company: CWM Mortgage Holdings, Inc. 35 North Lake Avenue Pasadena, California 91101-1857 Attention: General Counsel CFC: Countrywide Funding Corporation 155 North Lake Avenue Post Office 7137 Pasadena, California 91109-7137 Attention: General Counsel Either party may at any time give notice in writing to the other party of a change of its address for the purpose of this Section 13. Section 14. No Joint Venture. The Company and CFC are not partners or joint venturers with each other and nothing herein shall be construed to make them such partners or joint venturers or impose any liability as such on either of them. Section 15. Amendments. This Agreement shall not be amended, changed, modified, terminated or discharged in whole or in part, and the performance of any obligation hereunder may not be waived, except by an instrument in writing signed by both parties hereto, or their respective successors or permitted assigns, or otherwise as provided herein. Section 16. Successors and Assigns. This Agreement shall bind any successors or permitted assigns of the parties hereto as herein provided. Section 17. Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity of any other provision, and all other provisions shall remain in full force and effect. Section 18. Entire Agreement. This instrument contains the entire agreement between the parties as to the rights granted and the obligations assumed in this instrument. Section 19. Waiver. Any forbearance by a party to this Agreement in exercising any right or remedy under this Agreement or otherwise afforded by applicable laws shall not be a waiver of or preclude the exercise of that or any other right or remedy. Section 20. Governing Law. This Agreement shall be governed by, construed under and interpreted in accordance with the laws of the State of California. Section 21. Supplemental Servicing. From and after the date of this Agreement the Supplemental Servicing Agreement dated as of May 15, 1987, by and among the Company, CFC and the Manager shall be of no further force and effect. Section 22. Headings and Cross-References. The section headings hereof have been inserted for convenience of reference only and shall not be construed to affect the meaning, construction or effect of this Agreement. Any reference in this Agreement to a "Section" or "Subsection" shall be construed, respectively, as referring to a section of this Agreement or a subsection of a section of this Agreement in which the reference appears. Section 23. Execution in Counterparts. This Agreement may be executed in one or more counterparts, any of which shall constitute an original as against any party whose signature appears on it, and all of which shall together constitute a single instrument. This Agreement shall become binding when one or more counterparts, individually or taken together, bear the signatures of both parties. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their officers thereunto duly authorized as of the day and year first above written. CWM MORTGAGE HOLDINGS, INC. By: \s\ Michael W. Perry Michael W. Perry Title: Executive Vice President COUNTRYWIDE FUNDING CORPORATION By: \s\ Kevin W. Bartlett Kevin W. Bartlett Title: Managing Director The undersigned, as Manager, consents to the foregoing terms and provisions of this Agreement and agrees to be bound by them in performing its duties as Manager of the Company. COUNTRYWIDE ASSET MANAGEMENT CORPORATION By: \s\ Stanford L. Kurland Stanford L. Kurland Title: President EX-11 4 COMPUTATION OF PER SHARE EARNINGS
Exhibit 11.1 COUNTRYWIDE CREDIT INDUSTRIES, INC. STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS Six Months Ended August 31, 1995 1994 ---------------- ----------------- (Dollar amounts in thousands, except per share data) Primary Net earnings applicable to common stock $85,128 $52,839 ================ ================= Average shares outstanding 94,875 91,165 Net effect of dilutive stock options -- based on the treasury stock method using average market price 1,607 935 ---------------- ----------------- Total average shares 96,482 92,100 ================ ================= Per share amount $0.88 $0.57 ================ ================= Fully diluted Net earnings applicable to common stock $85,128 $52,839 ================ ================= Average shares outstanding 94,875 91,165 Net effect of dilutive stock options -- based on the treasury stock method using the closing market price, if higher than average market price. 2,096 948 ---------------- ----------------- Total average shares 96,971 92,113 ================ ================= Per share amount $0.88 $0.57 ================ =================
EX-12 5 RATIO OF EARNINGS TO FIXED CHARGES
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES EXHIBIT 12.1 - COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES (Dollar amounts in thousands) The following table sets forth the ratio of earnings to fixed charges of the Company for the six months ended August 31, 1995 and 1994 and for the five fiscal years ended February 28, 1995 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). Six Months Ended August 31, For Fiscal Years Ended February 28(29), ------------------- ---------------------------------------------------- 1995 1994 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- -------- -------- Net earnings ............... $ 85,128 $ 52,839 $ 88,407 $179,460 $140,073 $ 60,196 $ 22,311 Income tax expense ......... 56,752 35,225 58,938 119,640 93,382 40,131 14,874 Interest charges ........... 178,260 118,022 267,685 275,906 148,765 81,959 73,428 Interest portion of rental expense .................. 3,342 3,843 7,379 6,372 4,350 2,814 2,307 -------- -------- -------- -------- -------- -------- -------- Earnings available to cover fixed charges ............ $323,482 $209,929 $422,409 $581,378 $386,570 $185,100 $112,920 ======== ======== ======== ======== ======== ======== ======== Fixed charges Interest charges ......... $178,260 $118,022 $267,685 $275,906 $148,765 $ 81,959 $ 73,428 Interest portion of rental expense ................ 3,342 3,843 7,379 6,372 4,350 2,814 2,307 -------- -------- -------- -------- -------- -------- -------- Total fixed charges .. $181,602 $121,865 $275,064 $282,278 $153,115 $ 84,773 $ 75,735 ======== ======== ======== ======== ======== ======== ======== Ratio of earnings to fixed charges .................. 1.78 1.72 1.54 2.06 2.52 2.18 1.49 ======== ======== ======== ======== ======== ======== ========
EX-12 6 RATIO OF EARNINGS TO NET FIXED CHARGES
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES EXHIBIT 12.2 - COMPUTATION OF THE RATIO OF EARNINGS TO NET FIXED CHARGES (Dollar amounts in thousands) The following table sets forth the ratio of earnings to net fixed charges of the Company for the six months ended August 31, 1995 and 1994 and for the five fiscal years ended February 28, 1995 computed by dividing net fixed charges (interest expense on debt other than to finance mortgage loan inventory plus the interest element (one-third) of operating leases) into earnings (income before income taxes and net fixed charges). Six Months Ended August 31, For Fiscal Years Ended February 28(29), ------------------- ---------------------------------------------------- 1995 1994 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- -------- -------- Net earnings ................ $ 85,128 $ 52,839 $ 88,407 $179,460 $140,073 $ 60,196 $ 22,311 Income tax expense .......... 56,752 35,225 58,938 119,640 93,382 40,131 14,874 Interest charges ............ 27,023 27,348 55,045 85,240 51,551 45,928 23,609 Interest portion of rental expense ................... 3,342 3,843 7,379 6,372 4,350 2,814 2,307 -------- -------- -------- -------- -------- -------- -------- Earnings available to cover net fixed charges ......... $172,245 $119,255 $209,769 $390,712 $289,356 $149,069 $ 63,101 ======== ======== ======== ======== ======== ======== ======== Net fixed charges Interest charges .......... $ 27,023 $ 27,348 $ 55,045 $ 85,240 $ 51,551 $ 45,928 $ 23,609 Interest portion of rental expense ................. 3,342 3,843 7,379 6,372 4,350 2,814 2,307 -------- -------- -------- -------- -------- -------- -------- Total net fixed charges $ 30,365 $ 31,191 $ 62,424 $ 91,612 $ 55,901 $ 48,742 $ 25,916 ======== ======== ======== ======== ======== ======== ======== Ratio of earnings to net fixed ....................... 5.67 3.82 3.36 4.26 5.18 3.06 2.43 charges ======== ======== ======== ======== ======== ======== ========
EX-27 7 ART.5 FDS FOR 2ND QUARTER 10-Q
5 1,000 6-MOS FEB-29-1996 AUG-31-1995 5,455 0 428,233 0 0 0 199,358 61,188 7,363,940 0 1,639,451 5,091 0 0 1,213,729 7,363,940 0 388,273 0 246,393 0 0 0 141,880 56,752 85,128 0 0 0 85,128 .88 .88 Total Revenues includes $178,260 of interest expense related to mortgage loan activities.
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