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Indymac Bancorp Inc – ‘S-3’ on 11/22/94

As of:  Tuesday, 11/22/94   ·   Accession #:  950117-94-273   ·   File #:  33-56547

Previous ‘S-3’:  None   ·   Next:  ‘S-3/A’ on 1/6/95   ·   Latest:  ‘S-3/A’ on 8/28/01

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

11/22/94  Indymac Bancorp Inc               S-3                    2:177K                                   Command F… Self-Filer/FA

Registration Statement for Securities Offered Pursuant to a Transaction   —   Form S-3
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: S-3         Cwm Mortgage Holdings, Inc. S-3                       43    290K 
 2: EX-23       Exhibit 23.1                                           1      5K 


S-3   —   Cwm Mortgage Holdings, Inc. S-3
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
3Available Information
"Incorporation of Certain Information by Reference
4Prospectus Summary
"The Company
5The Offering
6Risk Factors
12Selected Consolidated Financial Data
13Business
26Use of Proceeds
"Market Prices and Dividend Data
27Dividend Reinvestment Plan
"Capitalization
28Management of CWM Mortgage Holdings, Inc
30Common Stock Ownership of Management
31Description of Common Stock
32Certain Federal Income Tax Considerations
35ERISA Matters
"Underwriting
36Legal Matters
37Experts
38Index of Certain Definitions
40Item 14. Other Expenses of Issuance and Distribution.*
"Item 15. Indemnification of Directors and Officers
"Item 16. Exhibits
"1.1** -- Form of Purchase Agreement
"Item 17. Undertakings
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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 22, 1994 REGISTRATION NO. 33- ________________________________________________________________________________ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ CWM MORTGAGE HOLDINGS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ [Download Table] DELAWARE 95-3983415 (STATE OR OTHER JURISDICTION OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 35 NORTH LAKE AVENUE PASADENA, CALIFORNIA 91101-1857 (800) 669-2300 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ DAVID S. LOEB CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER CWM MORTGAGE HOLDINGS, INC. 35 NORTH LAKE AVENUE PASADENA, CALIFORNIA 91101-1857 (800) 669-2300 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ THE COMMISSION IS REQUESTED TO SEND COPIES OF ALL COMMUNICATIONS TO: [Download Table] EDWARD J. FINE OMER S.J. WILLIAMS BROWN & WOOD THACHER PROFFITT & WOOD ONE WORLD TRADE CENTER TWO WORLD TRADE CENTER NEW YORK, NEW YORK 10048 NEW YORK, NEW YORK 10048 (212) 839-5300 (212) 912-7400 ------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [ ] ------------------------ CALCULATION OF REGISTRATION FEE [Enlarge/Download Table] PROPOSED SHARES TO MAXIMUM PROPOSED MAXIMUM AMOUNT OF TITLE OF SHARES BE OFFERING PRICE AGGREGATE REGISTRATION TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) FEE(2) Common Stock, $.01 par value per share............... 6,900,000 $9 $62,100,000 $21,414 (1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457, based on the average of the high and low sales prices of the Common Stock on November 17, 1994 as reported on the New York Stock Exchange. (2) Paid by wire transfer to the Commission's account at Mellon Bank. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ________________________________________________________________________________
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SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED NOVEMBER 22, 1994 PROSPECTUS 6,000,000 SHARES [LOGO] COMMON STOCK ---------------------------------- All of the shares of Common Stock offered hereby are being sold by CWM Mortgage Holdings, Inc. (the 'Company'). The Common Stock of the Company is traded on the New York Stock Exchange under the symbol 'CWM.' On November 21, 1994, the last reported sale price for the Common Stock of the Company on the New York Stock Exchange was $8 7/8 per share. The shares of Common Stock offered hereby are subject to repurchase and certain restrictions on ownership and transfer. The Certificate of Incorporation and Bylaws of the Company prohibit governmental entities and other 'disqualified organizations' from owning shares of the Common Stock. In addition, tax-exempt organizations should note that a portion of the dividends paid on the Common Stock is expected to be treated as unrelated business taxable income. See 'Description of Common Stock' and 'Certain Federal Income Tax Considerations.' FOR A DISCUSSION OF CERTAIN INVESTMENT CONSIDERATIONS, SEE 'RISK FACTORS.' ---------------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. [Download Table] PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT(1) COMPANY(2) Per Share................................. $ $ $ Total(3).................................. $ $ $ (1) The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See 'Underwriting.' (2) Before deducting expenses payable by the Company estimated to be $425,000. (3) The Company has granted the several Underwriters an option to purchase up to an additional 900,000 shares of Common Stock to cover over-allotments. If all such shares of Common Stock are purchased, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. See 'Underwriting.' ---------------------------------- The shares of Common Stock are offered by the several Underwriters, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of certain legal matters by counsel for the Underwriters and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the shares of Common Stock will be made in New York, New York on or about , 1994. --------------------------------- MERRILL LYNCH & CO. ALEX. BROWN & SONS INCORPORATED DEAN WITTER REYNOLDS INC. PAINEWEBBER INCORPORATED SALOMON BROTHERS INC --------------------------------- The date of this Prospectus is December , 1994. INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the 'Exchange Act'), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the 'Commission'). Such reports, proxy statements and other information filed by the Company can be inspected and copied at the Public Reference Room of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following regional offices of the Commission: New York Regional Office, 7 World Trade Center, 13th Floor, New York, New York 10048 and Chicago Regional Office, Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials can also be obtained at prescribed rates from the Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The Company's Common Stock is listed on the New York Stock Exchange and reports, proxy statements and other information concerning the Company can also be inspected at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005. This Prospectus constitutes a part of a Registration Statement on Form S-3 (together with all amendments and exhibits, referred to as the 'Registration Statement') filed by the Company with the Commission under the Securities Act of 1933, as amended (the 'Securities Act'). This Prospectus omits certain of the information contained in the Registration Statement, and reference is hereby made to the Registration Statement for further information with respect to the Company and the Common Stock offered hereby. Any statement contained or incorporated by reference herein concerning the provisions of any document is not necessarily complete, and, in each instance, reference is made to the copy of such document filed as an exhibit to the Registration Statement or otherwise filed with the Commission. Each such statement is qualified in its entirety by such reference. INCORPORATION OF CERTAIN INFORMATION BY REFERENCE The following documents, heretofore filed by the Company with the Commission pursuant to the Exchange Act, are hereby incorporated by reference, except as superseded or modified herein: 1. The Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993; 2. The Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994; 3. The Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, as amended by Form 10-Q/A dated November 17, 1994; 4. The Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994; 5. The Company's Proxy Statement dated April 1, 1994; and 6. The description of the Company's Common Stock contained in the Company's Registration Statement on Form 8-A under the Exchange Act, including any amendment or report filed to update such description. Each document filed subsequent to the date of this Prospectus pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the termination of the offering of the Common Stock shall be deemed to be incorporated by reference in this Prospectus and shall be a part hereof from the date of filing of such document. Any statement contained herein or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained in any subsequently filed document deemed to be incorporated herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of the Registration Statement or this Prospectus. The Company will provide without charge to each person, including any beneficial owner, to whom a copy of this Prospectus is delivered, upon the written or oral request of any such person, a copy of any or all of the documents incorporated herein by reference (other than exhibits to such documents, unless such exhibits are specifically incorporated by reference therein). Requests for such copies should be directed to CWM Mortgage Holdings, Inc., 35 North Lake Avenue, Pasadena, California 91101-1857, Attention: Investor Relations. The Company's telephone number is (800) 669-2300. 2
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PROSPECTUS SUMMARY The following summary should be read in conjunction with, and is qualified in its entirety by, the more detailed information and selected consolidated financial data and consolidated financial statements appearing elsewhere in this Prospectus or incorporated by reference herein. See 'Risk Factors' for a discussion of certain factors that should be considered in connection with an investment in the Common Stock. See 'Index of Certain Definitions' for a reference guide to certain terms used in this Prospectus. Unless otherwise indicated, the information in this Prospectus assumes that the over-allotment option described in 'Underwriting' will not be exercised. THE COMPANY CWM Mortgage Holdings, Inc. (formerly Countrywide Mortgage Investments, Inc.) (the 'Company'), a real estate investment trust, operates three businesses: its principal business, a non-conforming mortgage loan conduit conducted through Independent National Mortgage Corporation (formerly Countrywide Mortgage Conduit, Inc.) ('INMC'), a warehouse lending division, Warehouse Lending Corporation of America ('WLCA') and a construction lending division, Construction Lending Corporation of America ('CLCA'). INMC is an intermediary between the originators of non-conforming mortgage loans and permanent investors in mortgage-backed securities secured by or representing an ownership interest in such mortgage loans. WLCA provides secured short-term revolving financing to mortgage bankers and brokers, and CLCA provides single-family subdivision construction lending to developers ('tract construction') and assists INMC in purchasing and administering combined construction and permanent financing to individual borrowers who are constructing or remodeling their homes. The Company's principal sources of income from its mortgage conduit operations are gains recognized on the sale of mortgage loans and securities, the net spread between interest earned on mortgage loans owned by the Company and the interest costs associated with the borrowings used to finance such loans pending their securitization, and net interest income earned on its investment portfolio of mortgage loans, master servicing fees receivable and mortgage-backed securities. See 'Business -- Mortgage Conduit Operations.' The Company's principal sources of income from its warehouse lending and construction lending operations are the net spread between interest earned on the warehouse loans and construction loans and the interest costs associated with the borrowings used to finance such loans and the fees paid to the Company by the borrowers in connection with such loans. See 'Business -- Warehouse Lending' and ' -- Construction Lending.' The Company's mortgage conduit operations consist of the purchase and securitization of mortgage loans secured by first liens on single (one-to-four) family residential properties that are originated in accordance with the Company's underwriting guidelines. The Company's mortgage conduit operations provide mortgage loan sellers with an expanded and competitively priced array of non-conforming mortgage loan products; timely purchasing of loans; flexible master commitments; and mandatory, best efforts and optional rate-locks. The Company's response time efficiencies, purchase commitment options, product innovations and pricing offered by its mortgage conduit operations have enabled it to compete effectively with other non-conforming mortgage loan conduits. As of September 30, 1994, 407 companies had been approved by the Company as being eligible to sell mortgage loans to INMC. During the nine months ended September 30, 1994, the Company purchased $4.5 billion aggregate principal amount of mortgage loans from sellers that had been so approved (including $27.8 million from Countrywide Funding Corporation ('CFC')). As of September 30, 1994, the Company had outstanding commitments to purchase mortgage loans at specified prices in the aggregate principal amount of $852.2 million. In addition, during the first nine months of 1994, the Company sold $4.1 billion of non-conforming mortgage loans in connection with the issuance of 20 series of multiple-class mortgage-backed securities in the form of real estate mortgage investment conduits ('REMICs') and sold $0.3 million of non-conforming mortgage loans as whole loans. As of September 30, 1994, the Company had committed to sell approximately $175 million of non-conforming mortgage loans in connection with the issuance of one REMIC security in the fourth quarter of 1994. 3
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As of September 30, 1994, the Company's master servicing portfolio totalled 27,084 loans with an aggregate principal balance of $6.3 billion. As of September 30, 1994, the Company had extended 81 committed lines of credit under its warehouse lending program in the aggregate amount of $328.3 million, of which $60.5 million was outstanding. The Company has only recently commenced its construction lending activities; consequently, amounts outstanding as of September 30, 1994 under the tract construction and combined construction and permanent loan programs were immaterial. See 'Business -- Construction Lending.' Prior to 1993, the Company was principally a long-term investor in single-family, first-lien, residential mortgage loans and in mortgage-backed securities representing interests in such loans. The Company's mortgage investment portfolio consisted principally of mortgage pass-through certificates issued by the Federal Home Loan Mortgage Corporation ('FHLMC') or the Federal National Mortgage Association ('FNMA') and non-conforming mortgage loans. The principal source of earnings for the Company historically was interest income generated from investments in such mortgage loans and mortgage-backed securities, net of the interest expense on the collateralized mortgage obligations ('CMOs') issued by the Company that were secured by such mortgage investments or reverse repurchase agreements used to finance such mortgage investments. The Company expects its principal activities going forward to be its mortgage conduit, warehouse lending and construction lending operations. Although the Company faces substantial competition in all of its business activities, its relationships with Countrywide Credit Industries, Inc. ('CCI') and CCI's subsidiary, CFC, provide significant benefits to its various operations. See 'Business -- Relationships with Countrywide Entities.' CCI is a diversified financial services company whose principal subsidiary, CFC, is the nation's leading residential mortgage lender. Countrywide Asset Management Corporation ('CAMC'), another subsidiary of CCI, is the manager of the Company and employs the personnel who conduct the Company's mortgage conduit, warehouse lending and construction lending operations. The Company's operations not only benefit from the mortgage banking experience and management expertise of CCI, CAMC and CFC, but also utilize CFC as a resource for loan servicing, personnel administration and loan production. Unless the context otherwise requires, references to the 'Company' mean CWM Mortgage Holdings, Inc. ('CWM') and each of the entities that is consolidated with CWM for financial reporting purposes. The Company's mortgage conduit operations are conducted through INMC, a taxable corporation that is consolidated with CWM for financial reporting purposes, but that is not consolidated for income tax purposes. The Company's warehouse lending and construction lending operations are conducted through Independent Lending Corporation ('ILC'), a qualified real estate investment trust subsidiary that is consolidated with CWM for financial reporting and income tax purposes. ILC conducts warehouse lending operations through its WLCA division, and conducts construction lending operations through its CLCA division. THE OFFERING [Enlarge/Download Table] Shares Offered to the Public................. 6,000,000 Shares Shares to be Outstanding After the Offering................................... 38,256,156 Shares Use of Proceeds.............................. To increase the Company's mortgage loan acquisition and securitization capabilities, to expand its warehouse lending activities and to fund its construction lending operations. Pending such application, the Company intends to use such proceeds temporarily to reduce its outstanding indebtedness. NYSE Symbol.................................. 'CWM' 4
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RISK FACTORS Before investing in the shares of Common Stock offered hereby, prospective investors should give special consideration to the information set forth below, in addition to the information incorporated by reference and set forth elsewhere in this Prospectus. CHANGES IN INTEREST RATES The Company's earnings will be affected by changes in market interest rates. In conducting its mortgage conduit operations, the Company is subject to the risk of rising mortgage interest rates between the time the Company commits to purchase mortgage loans at a fixed price and the time the Company sells or finances to maturity those mortgage loans. To mitigate this risk, the Company, principally through INMC, enters into transactions designed to hedge interest rate risks, including mandatory and optional forward selling of mortgage loans or mortgage-backed securities, mandatory forward selling or financing using REMICs or CMOs, mandatory and optional selling of futures and other financial futures transactions. The nature and quantity of these hedging transactions are determined by the management of the Company based on various factors, including market conditions and the expected volume of mortgage loan purchases. No assurance can be given that such hedging transactions will offset the risks of rising interest rates, and it is possible that there will be periods during which the Company could incur losses after accounting for its hedging activities. Neither the Company nor INMC will engage in any financial futures transaction unless the Company, INMC or CAMC, as appropriate, would be exempt from the registration requirements of the Commodity Exchange Act ('CEA') or would otherwise be in compliance with the provisions thereof. Higher rates of interest may discourage potential mortgagors from refinancing mortgage loans or borrowing to purchase a home, thus decreasing the volume of loans available to be purchased through the Company's mortgage conduit operations. In addition, an increase in short-term interest rates may decrease or eliminate or, under certain circumstances, cause to be negative, the Company's net interest spread during the accumulation of mortgage loans held for sale or the net interest spread on mortgage loans held for investment when such loans are financed through reverse repurchase agreements. Should short-term interest rates exceed long-term interest rates (an 'inverted yield curve' scenario), the negative effect on the Company's net interest spread would likely be coupled with a reduction in the Company's earnings on its master servicing portfolio to the extent prepayments on the underlying mortgage loans increased as long-term interest rates declined. Higher rates of interest may also negatively affect the yield on the Company's portfolio of 'principal only' securities and other types of mortgage-backed securities purchased at a discount and may also negatively affect the Company's warehouse and construction lending operations. If under such circumstances the Company were required to dispose of its 'principal only' securities, a loss could be incurred. Furthermore, because some of the warehouse loans and construction loans made by the Company bear interest based upon an intermediate-term index while the Company's borrowings to fund such loans bear interest based upon a short-term index, the Company is subject to the risk of narrowing interest rate spreads. Lower long-term rates of interest may negatively affect the yield on the Company's portfolio of 'interest only' securities, master servicing fees receivable and other mortgage loans and mortgage-backed securities purchased at a premium. It is also possible that in certain low interest rate environments the Company would not fully recoup its initial investment in such securities or investments. RISKS RELATING TO RETENTION OF MORTGAGE-BACKED SECURITIES AND ISSUANCE OF CMOS The Company has made, and expects to continue to make, investments in mortgage-backed securities. The Company's portfolio of mortgage-backed securities consists principally of securities retained in connection with its issuance of mortgage-backed securities in the form of REMICs, but also includes securities purchased in third party transactions. A mortgage-backed security is a type of derivative security, the cash flow on which is derived from payments on an underlying pool of mortgage loans. The yield derived from certain classes of mortgage-backed securities, including, but not limited to, 'interest only,' 'principal only' and subordinated securities, is particularly sensitive to interest rate, 5
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prepayment and credit risks. As used herein, 'subordinated securities' refers to mortgage-backed securities that are rated below AAA by Standard & Poor's Corporation or below an equivalent rating by another nationally recognized rating agency. The Company's investment portfolio includes each of these classes of securities, as well as investments in master servicing fees receivable, which have characteristics comparable to 'interest only' securities insofar as their value tends to decline as prepayment rates increase. The yield on the Company's portfolio of 'interest only' securities, master servicing fees receivable and similar investments would decline considerably as a result of rapid prepayments occasioned by declining interest rates. It is also possible that under certain high prepayment scenarios the Company would not recoup its initial investment in such securities or investments. In the case of 'principal only' securities, it is possible that under certain low prepayment scenarios, the Company's yield on such investments would be lower than the anticipated yield at the time such securities were purchased, and in the event such securities were sold under such circumstances, a loss could be incurred. Because subordinated securities, in general, bear all losses prior to the related senior securities, the amount of credit risk associated with the Company's investment in such subordinated securities is significantly greater than that which would be associated with a comparable investment in the related senior securities and, on a percentage basis, the risk is greater than holding the underlying mortgage loans directly. See ' -- Credit Risks' and 'Business -- Mortgage Conduit Operations -- Securitization Process.' Net earnings generated from the Company's investments in mortgage loans and mortgage-backed securities financed through the issuance of CMOs are derived primarily from the excess of the cash flow generated from such mortgage loans and mortgage-backed securities over the amounts required for debt service on the CMOs and related administrative expenses ('Residual Cash Flow'). In addition, earnings from the Company's CMO portfolios are reduced by amortization of the related premium, original issue discount and bond issuance costs. The Company's earnings from its CMO portfolio are primarily affected by changes in prepayment rates on the underlying mortgage loans. From 1992 through the beginning of 1994, the Company's earnings were negatively impacted by high prepayment rates caused primarily by low interest rates and the refinancing of mortgage loans securing CMOs issued by the Company. See 'Business -- Historical Operations.' To the extent classes of CMOs have variable interest rates, the Residual Cash Flow from such CMOs may decrease in a rising interest rate environment or increase in a declining interest rate environment. In any interest rate scenario, the Company's earnings over time from its CMO portfolio will decline as the earlier maturity, lower interest-cost classes of CMOs are repaid, thereby decreasing the remaining net interest spread, if any, and as administrative expenses associated with the CMOs become a larger percentage of the remaining Residual Cash Flow. Although increased levels of interest rates may decrease prepayments and mitigate the negative impact on the Company's earnings on its existing CMO portfolio, the Company anticipates no significant future earnings on its existing CMO portfolio, regardless of the level of interest rates or prepayments. See ' -- Changes in Interest Rates.' LIQUIDITY The Company uses proceeds from, among other things, reverse repurchase agreements to meet its working capital needs. The Company's reverse repurchase arrangements are subject to collateral maintenance agreements whereby the Company, in effect, may borrow a specified percentage of the market value of the mortgage loans and mortgage-backed securities which are the subject of the arrangements. The market value of such collateral is generally determined by the lender under such arrangements and may, due to the sometimes illiquid and volatile markets in certain of such collateral, as well as the lender's discretion in determining such market value, be somewhat uncertain. To the extent that the market value of the collateral declines (as will be the case if interest rates increase), additional collateral is required to secure such borrowings. If the required amount of collateral is increased, the Company's ability to raise funds through subsequent similar arrangements may be diminished, and the Company's ability to finance the accumulation of mortgage loans may be reduced. If the Company fails to post such additional collateral, the lender may terminate such arrangement, accelerate the Company's obligations and sell or retain the existing collateral in order to satisfy the Company's debt. The Company has implemented a hedging strategy for the portion of its mortgage 6
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portfolio held for sale which to some extent may mitigate the effect of adverse market movement. See ' -- Risks Relating to Retention of Mortgage-Backed Securities and Issuance of CMOs.' Currently, the Company does not have committed financing facilities available for the portion of its warehouse lending programs pursuant to which the Company may make loans that are secured by servicing rights, servicing sales receivables and foreclosure and repurchase mortgage loans, nor does the Company have committed financing facilities available for its newly organized construction lending programs. If the Company is unable to obtain financing for these assets and operations, the Company may have to discontinue these programs, which may have a negative impact on earnings. Although the Company has committed and uncommitted financing facilities available for its mortgage conduit operations, the aggregate amount outstanding under its reverse repurchase agreements has from time to time exceeded the maximum committed amount, and may from time to time exceed such maximum committed amount in the future. The REIT provisions of the Internal Revenue Code require the Company to distribute to its shareholders substantially all of its net earnings. As a result, such provisions restrict the Company's ability to retain earnings and replenish the capital committed to its business activities. The Company's liquidity is also affected by its ability to access the debt and equity capital markets. To the extent that the Company is unable to regularly access such markets, the Company could be forced to sell assets at unfavorable prices or discontinue various business activities in order to meet its liquidity needs. As a result, any such inability to access the capital markets could have a negative impact on the Company's earnings. Substantially all of the Company's assets are pledged to secure the repayment of CMOs, reverse repurchase agreements and other borrowings. It is anticipated that substantially all of the mortgage loans the Company acquires in the future will also be pledged to secure borrowings pending their securitization or sale or as a part of their long-term financing. The cash flows received by the Company from its investments that have not yet been distributed, pledged or used to acquire mortgage loans or other investments may be the only unpledged assets available to unsecured creditors and stockholders in the event of liquidation of the Company. COMPETITION In purchasing mortgage loans and issuing mortgage-backed securities, the Company competes with established mortgage conduit programs, investment banking firms, savings and loan associations, banks, FNMA, FHLMC, the Government National Mortgage Association ('GNMA'), mortgage bankers, insurance companies, other lenders and other entities purchasing mortgage assets. Certain changes currently taking place in the mortgage industry, including technological initiatives promoted by FNMA and FHLMC which could give such entities direct access to mortgage borrowers, may have an adverse impact upon current sellers to the Company's mortgage conduit operations. Continued consolidation in the mortgage banking industry may also reduce the number of such sellers, thus reducing the Company's potential customer base, resulting in the Company's purchasing a larger percentage of mortgage loans from a smaller number of sellers. Such changes could negatively impact the Company's mortgage conduit operations. See ' -- Demand for Residential Mortgage Loans and the Company's Non-Conforming Loan Products' and 'Business -- Mortgage Conduit Operations -- Marketing and Production -- Mortgage Loans Acquired.' Mortgage-backed securities issued through the Company's mortgage conduit operations face competition from other investment opportunities available to prospective investors. The Company faces competition in its warehouse lending operations from banks and other warehouse lenders, including investment banks and other financial institutions. Similarly, the Company faces competition in its construction lending operations from banks and other financial institutions. Many of the institutions with which the Company competes in its mortgage conduit, warehouse lending and construction lending operations have significantly greater financial resources than the Company. 7
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CREDIT RISKS The REMICs and CMOs created by the Company have been structured so that, in general, substantially all of such securities are rated investment grade by at least one nationally recognized rating agency. The ratings of the Company's mortgage-backed securities are based on the perceived credit risk by the applicable rating agency of the underlying mortgage loans, the structure of the securities and the associated level of credit enhancement. The Company currently provides credit enhancement principally by issuing mortgage-backed securities in senior/subordinated structures. In a senior/subordinated structure, the subordinated portion of the structure absorbs losses before the senior portion is affected. The Company, however, is at risk for credit losses on mortgage loans prior to their securitization and, to the extent it retains any of the mortgage-backed securities evidencing interests in such mortgage loans, subsequent to their securitization in an amount up to the amount of securities retained. Although the Company has recourse against the seller of the affected mortgage loan in the event of fraud or misrepresentation during the mortgage loan origination process or upon early payment default, the Company is at risk of loss to the extent that such seller does not perform its obligations. The Company also assumes credit risk for mortgage loans held for investment. In the future, the Company expects to continue to provide credit enhancement principally through the issuance of mortgage-backed securities in senior/subordinated structures. The Company has retained, and expects to continue to retain, certain of the subordinated securities so issued on a short- term or long-term basis and may occasionally purchase similar subordinated securities from other entities. Subordinated securities retained or acquired by the Company subject the Company to credit risk on the underlying mortgage loans up to the amount of the securities retained or acquired. As a warehouse and construction lender, the Company is a secured creditor of mortgage bankers and builders and is subject to the risks associated with such business, including the risks of fraud, borrower default and bankruptcy, any of which could result in credit losses for the Company. Any claim of the Company as a secured lender in a bankruptcy proceeding may be subject to adjustment and delay. See ' -- Construction Lending Risks' below and 'Business -- Warehouse Lending.' DEMAND FOR RESIDENTIAL MORTGAGE LOANS AND THE COMPANY'S NON-CONFORMING LOAN PRODUCTS The availability of mortgage loans meeting the Company's criteria is dependent upon, among other things, the size of and level of activity in the residential real estate lending market and, in particular, the demand for non-conforming mortgage loans. The size and level of activity in the residential real estate lending market depend on various factors, including the level of interest rates, regional and national economic conditions and inflation and deflation in residential property values. To the extent the Company is unable to obtain sufficient mortgage loans meeting its criteria, the Company's business will be adversely affected. FNMA, FHLMC and GNMA are not currently permitted to purchase mortgage loans with original principal balances above $203,150. If this dollar limitation is increased without a commensurate increase in home prices, the Company's ability to maintain or increase its current acquisition levels could be adversely affected as the size of the non-conforming mortgage loan market may be reduced, and FNMA, FHLMC and GNMA may be in a position to purchase a greater percentage of the mortgage loans in the secondary market than they currently acquire. In general, lower interest rates prompt greater demand for mortgage loans, because more individuals can afford to purchase residential properties (assuming incomes do not decline), and refinance transactions increase. However, if low interest rates are accompanied by a weak economy and high unemployment, demand for housing and residential mortgage loans may decline. Conversely, higher interest rates and lower levels of housing finance and refinance activity may decrease mortgage loan purchase volume levels, resulting in decreased economies of scale and higher costs per unit, reduced fee income, smaller gains on the sale of non-conforming mortgage loans and lower net income during the accumulation phase. The Company anticipates that the properties that secure the Company's mortgage loans will continue to have their largest concentration in California. Since 1989, the California economy has been adversely affected by an economic recession. A continued decline of general economic conditions in 8
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California or in the California real estate market resulting in decreased home purchasing and refinancing activity could have an adverse effect on the Company's ability to acquire mortgage loans in California. In addition, of the $4.5 billion in mortgage loans acquired by the Company during the nine months ended September 30, 1994, $3.4 billion (or 76%) were acquired from the Company's top ten sellers by volume of sales, and $2.6 billion (or 59%) were acquired from the top three of such sellers. If any one of the top three sellers were to cease selling mortgage loans to the Company and the Company were to be unable to replace the volume attributable to such seller, the Company's business could be adversely affected. While the Company is taking steps to increase the diversification of its top sellers, no assurance can be given that such steps will be successful. See 'Business -- Mortgage Conduit Operations -- Marketing and Production -- Mortgage Loans Acquired.' CONSTRUCTION LENDING RISKS In connection with its construction lending operations, the Company provides single family subdivision construction lending to developers. Risks involved in construction lending include both project risks and market risks, among others. Project risks include cost overruns, product liability for materials used in construction, borrower credit risk, environmental and other hazards and completion risk. Such risks can be mitigated in part by insurance, comprehensive disbursement procedures, and, in some cases, third party guarantees, but no assurance can be given as to the success of such attempts at mitigation. Market risks associated with construction lending include interest rate and affordability risk, product design risk and competition by competing builders. While the Company attempts to mitigate market risk by careful project underwriting to ensure market acceptability of the product, no assurance can be given that such attempts at mitigation will be successful. Other risks include fraud and borrower bankruptcy. As a new entrant to the construction lending field, the Company has no record of successful lending in such field and has little experience in originating and administering construction loans. Demand for the Company's construction loans is also affected by conditions prevailing in the regional economies where the Company makes construction loans and by the level of interest rates. The Company does not currently have committed financing facilities available to it with which to finance its construction lending operations and, as a consequence, must currently finance its construction lending operations with its equity capital. The Company faces competition in its construction lending operations from banks and other financial institutions, many of which have significantly greater financial resources than the Company. POTENTIAL CONFLICTS OF INTEREST Although the Company believes that its relationships with CAMC, CCI and CFC provide significant benefits to its various operations, the Company is subject to potential conflicts of interest arising from its relationship with its manager, CAMC, and CAMC's affiliates. CAMC, through its affiliation with CFC, has interests that conflict with those of the Company in fulfilling many of its duties. Although the Company generally purchases mortgage loans on a servicing retained basis (where the seller retains the servicing rights) and CFC purchases mortgage loans on a servicing released basis (where the buyer acquires the servicing rights), the Company may from time to time compete with CFC for the purchase of mortgage loans in those cases where sellers are evaluating servicing retained as well as servicing released sales options. In addition, the Company relies upon CAMC (which has entered into a subcontract with CFC to provide certain management services to the Company) for the day-to-day operation of its business. Currently, the Company has no employees and relies upon CAMC and its employees to conduct the Company's business including its mortgage conduit, warehouse lending and construction lending operations. In conducting its operations, the Company may utilize CFC as a resource for loan servicing, personnel administration and loan production. No assurance can be given that the Company's relationships with CAMC and its affiliates will continue indefinitely. The failure or inability of CAMC to provide the services required of it under the management agreement (or of CFC to perform its obligations under its subcontract with CAMC) or any other agreements or arrangements with the Company could have a material adverse effect on the Company's business. In addition, as sole 9
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holder of all outstanding voting stock of INMC, CFC has the right to elect all directors of INMC. Such directors elect the INMC officers and determine the dividend policy of INMC. RESTRICTIONS ON OWNERSHIP OF COMMON STOCK The Company's Certificate of Incorporation and Bylaws prohibit concentrated ownership of the Company which might jeopardize its qualification as a real estate investment trust under the Internal Revenue Code of 1986, as amended (the 'Code'). See 'Description of Common Stock.' These provisions may inhibit market activity and the resulting opportunity for the Company's stockholders to receive a control premium for their shares, since the Company's Certificate of Incorporation prohibits ownership of more than 9.8% of the Company's outstanding shares of Common Stock by any one person or group. Although the Company's directors do not anticipate that the Company will repurchase or otherwise reduce the number of outstanding shares of the Company's Common Stock (except in the event of mandatory purchases of Excess Shares, as defined herein), investors seeking to acquire substantial holdings in the Company should be aware that this ownership limitation may be exceeded by a stockholder without any action on his or her part if the number of outstanding shares of the Company's capital stock is reduced. The Company's Certificate of Incorporation and Bylaws provide that 'disqualified organizations' within the meaning of Section 860E(e)(5) of the Code, which generally include governmental entities and other tax-exempt persons not subject to tax on unrelated business taxable income, are ineligible to hold the Company's shares. Accordingly, the shares of Common Stock offered hereby should not be purchased or held by such disqualified organizations. See 'Certain Federal Income Tax Considerations.' CONSEQUENCES OF FAILURE TO QUALIFY AS A REAL ESTATE INVESTMENT TRUST Although the Company has satisfied and intends to continue to satisfy Sections 856 through 860 of the Code (the 'Real Estate Investment Trust Provisions of the Code'), no assurance can be given that the future operations of the Company will continue to satisfy such requirements. If in any tax year the Company should not qualify as a real estate investment trust, it would be taxed as a corporation, and distributions to the Company's stockholders would not be deductible by the Company in computing its taxable income. In that event, the Company would not be eligible again to elect real estate investment trust status until the fifth taxable year that begins after the year for which the Company's election was terminated unless certain relief provisions apply. Failure to qualify would reduce the amount of after-tax earnings available for distribution to stockholders and could result in the Company incurring substantial indebtedness (to the extent borrowings are feasible), or disposing of substantial investments, in order to pay the resulting taxes or, in the discretion of the Company, to maintain the level of the Company's distributions to its stockholders. See 'Certain Federal Income Tax Considerations.' 10
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SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data is qualified in its entirety by, and should be read in conjunction with, the consolidated financial statements and notes thereto incorporated by reference in this Prospectus. The consolidated financial data for each of the five years in the period ended December 31, 1993 has been derived from audited financial statements. The consolidated financial information for the nine months ended September 30, 1994 and 1993 has been derived from unaudited consolidated financial statements; however, in the opinion of management of the Company, all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the results for such periods have been included. The operating results of the Company for the nine months ended September 30, 1994 are not necessarily indicative of the operating results to be expected for the entire year. [Enlarge/Download Table] NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, ----------------------- ------------------------------------------------------------ 1994 1993 1993 1992 1991 1990 1989 ---------- ---------- ---------- -------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) SELECTED EARNINGS STATEMENT DATA: Interest income Mortgage loans held for sale.... $ 45,509 $ 15,880 $ 29,072 $ -- $ -- $ -- $ -- Collateral for CMOs............. 16,899 33,701 41,685 68,692 106,863 123,124 137,747 Mortgage loans held for investment.................... 6,121 -- -- -- -- -- -- Mortgage securities, net........ 2,385 674 674 37,378 41,771 38,889 47,734 Master servicing, net........... 4,415 244 (4,518) -- -- -- -- Other........................... 3,885 435 1,942 -- -- -- -- ---------- ---------- ---------- -------- ---------- ---------- ---------- Total interest income...... 79,214 50,934 68,855 106,070 148,634 162,013 185,481 Interest expense Reverse repurchase agreements and other borrowings.......... 36,849 7,223 14,341 23,953 28,714 32,073 43,059 CMOs............................ 21,607 43,409 54,958 83,558 106,681 117,438 130,530 ---------- ---------- ---------- -------- ---------- ---------- ---------- Total interest expense..... 58,456 50,632 69,299 107,511 135,395 149,511 173,589 ---------- ---------- ---------- -------- ---------- ---------- ---------- Net interest income (expense)........ 20,758 302 (444) (1,441) 13,239 12,502 11,892 Gain on sale of mortgage loans and securities......................... 7,782 4,613 9,305 9,031 735 -- -- Gains on sale of servicing........... 5,834 -- -- -- -- -- -- Salaries, general, and administrative expenses........................... (11,374) (2,182) (4,192) (1,606) (1,485) (1,538) (1,595) Management fees to affiliate......... (702) (315) (400) (997) (1,622) (1,451) (1,652) Provision for income taxes........... (3,237) (1,682) (1,789) -- -- -- -- ---------- ---------- ---------- -------- ---------- ---------- ---------- Net earnings............... $ 19,061 $ 736 $ 2,480 $ 4,987 $ 10,867 $ 9,513 $ 8,645 ---------- ---------- ---------- -------- ---------- ---------- ---------- ---------- ---------- ---------- -------- ---------- ---------- ---------- Earnings per share................... $0.59 $0.04 $0.13 $0.36 $0.78 $0.70 $0.63 ---------- ---------- ---------- -------- ---------- ---------- ---------- ---------- ---------- ---------- -------- ---------- ---------- ---------- Dividends per share (declared for earnings of the period)............ $0.60 $0.36 $0.48 $0.48 $0.78 $0.69 $0.64 ---------- ---------- ---------- -------- ---------- ---------- ---------- ---------- ---------- ---------- -------- ---------- ---------- ---------- SELECTED BALANCE SHEET DATA AT PERIOD END: Mortgage loans held for sale......... $ 599,845 $ 587,204 $ 872,490 $ -- $ -- $ -- $ -- Mortgage loans held for investment... 307,566 -- -- -- -- -- -- CMOs, including accrued interest..... 214,112 485,353 365,886 571,857 1,040,495 1,220,905 1,352,824 Reverse repurchase agreements, including accrued interest......... 991,630 498,401 806,757 21,950 688,860 394,056 369,241 Total shareholders' equity........... 256,267 189,263 250,608 119,995 122,403 121,147 120,776 SELECTED OTHER DATA: Mortgage loans acquired.............. $4,493,605 $1,886,107 $3,451,119 -- -- -- -- Master servicing portfolio........... 6,275,445 952,180 2,094,152 -- -- -- -- 11
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THE COMPANY The Company was incorporated in the State of Maryland on July 16, 1985 and reincorporated in the State of Delaware on March 6, 1987. The Company has elected to be taxed as a real estate investment trust under the Code. As a result of this election, the Company will not, with certain limited exceptions, be taxed at the corporate level on the net earnings distributed to the Company's stockholders. The principal executive offices of the Company are located at 35 North Lake Avenue, Pasadena, California 91101-1857, and its telephone number is (800) 669-2300. BUSINESS The Company operates three businesses: its principal business, a non-conforming mortgage loan conduit conducted through INMC, a warehouse lending division (WLCA) and a construction lending division (CLCA). The Company's principal sources of income from its mortgage conduit operations are gains recognized on the sale of mortgage loans and securities, the net spread between interest earned on mortgage loans owned by the Company and the interest costs associated with the borrowings used to finance such loans pending their securitization ('net interest spread') and the net interest income earned on its investment portfolio of mortgage loans, master servicing fees receivable and mortgage-backed securities. See ' -- Mortgage Conduit Operations.' The Company's principal sources of income from its warehouse lending and construction lending operations are the net spread between interest earned on the warehouse lending and construction loans and the interest costs associated with the borrowings used to finance such loans and the fee income paid to the Company by the borrowers in connection with such loans. See ' -- Warehouse Lending' and ' -- Construction Lending.' Prior to 1993, the Company had been exclusively a long-term investor in single-family, first-lien, residential mortgage loans and in mortgage-backed securities representing interests in such loans. See ' -- Historical Operations.' MORTGAGE CONDUIT OPERATIONS GENERAL As a non-conforming mortgage loan conduit, INMC is an intermediary between the originators of mortgage loans that do not currently meet the guidelines for purchase by the government and government sponsored entities (i.e., GNMA, FNMA and FHLMC) that guarantee mortgage-backed securities ('non-conforming mortgage loans') and permanent investors in mortgage-backed securities secured by or representing an ownership interest in such mortgage loans. The Company's mortgage conduit operations consist of the purchase and securitization of mortgage loans secured by first liens on single (one-to-four) family residential properties that are originated in accordance with the Company's underwriting guidelines. Sellers generally retain the rights to service the mortgage loans purchased by the Company. Based upon its experience in the mortgage banking industry and in the mortgage conduit business, management of the Company believes it can compete effectively by providing mortgage loan sellers with an expanded and competitively priced array of non-conforming mortgage loan products; timely purchasing of loans; flexible master commitments; and mandatory, best efforts and optional rate-locks. The Company also believes the response time efficiencies, purchase commitment options and pricing offered by its mortgage conduit operations have enabled it to compete effectively with other non- conforming mortgage loan conduits. MARKETING AND PRODUCTION Marketing Strategy. The Company's mortgage conduit operations are designed to attract both large and small sellers of non-conforming mortgage loans by offering a variety of products, pricing and loan underwriting methods designed to be responsive to such sellers' needs. The Company expects to continue to introduce niche products from time to time, which may give the Company temporary competitive advantages. The Company's products include fixed-rate, adjustable-rate and negative 12
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amortization mortgage loans, combined construction and permanent mortgage loans, mortgage loans for cooperatives, model homes and investment properties and mortgage loans to foreign nationals. In response to the perceived needs of non-conforming mortgage loan sellers, the Company's marketing strategy offers competitive pricing, response time efficiencies in the purchase process, direct and frequent contact through a trained sales force and flexible commitment programs. The Company recently restructured its sales and marketing staff by consolidating its sales force for its three businesses. Management believes that these restructuring efforts will encourage cross-selling of the Company's mortgage conduit, warehouse lending and construction lending products and, at the same time, reduce overall marketing costs. Additionally, the Company believes that this restructuring will assist it in targeting smaller mortgage bankers. The Company's sale of mortgage loans it purchases through the issuance of mortgage-backed securities enables the Company to offer sellers competitive pricing. The Company has developed a computer-based seller/servicer guide for sellers (the 'Seller/Servicer Guide') and plans to implement an electronic communications system with key sellers which will allow the Company to rate-lock and purchase mortgage loans more timely and effectively. In addition, sellers have direct access to the Company's senior management to resolve issues or to design solutions to their specific needs. The Company has established three loan underwriting methods designed to be responsive to the needs of non-conforming mortgage loan sellers. The first method established by the Company is a delegated underwriting program pursuant to which mortgage loans are underwritten in accordance with the Company's guidelines by the seller and purchased on the basis of the seller's financial strength, historical loan quality and other qualifications. The delegated underwriting program enables sellers to deliver loans to the Company without time delay imposed by the Company's underwriters or a third party underwriter, such as a mortgage pool insurer. A sample of such loans is subsequently reviewed by the Company in accordance with its expanded quality control guidelines. The efficiencies and other features of the delegated underwriting program have helped differentiate the Company's mortgage conduit operations from its competitors. The delegated underwriting program consists of two separate subprograms. The Company's principal delegated underwriting subprogram is designed for loan sellers that meet higher financial and performance criteria than those applicable to sellers generally. While certain sellers have delegated underwriting authority for all mortgage products under this subprogram, others have delegated authority only with respect to certain products. As of September 30, 1994, 55 sellers had received full delegated underwriting approval, and during the nine months ended September 30, 1994, the Company had purchased approximately $3.45 billion aggregate principal amount of mortgage loans from these sellers through this subprogram. The Company also operates a restricted delegated underwriting subprogram that is available to substantially all of the Company's sellers. Under this more limited subprogram, only the Company's standard loan products with loan-to-value ratio (i.e., the percentage obtained by dividing the principal amount of a loan by the lower of the sales price or appraised value of the mortgaged property when the loan is originated) and outstanding balance requirements which are more restrictive than the Company's standard guidelines may be submitted. During the nine months ended September 30, 1994, the Company purchased approximately $1 million aggregate principal amount of mortgage loans through this subprogram. Under the Company's second underwriting method, sellers submit to the Company mortgage loans for which there is no pool insurance commitment, to be underwritten in accordance with the Company's guidelines. During the nine months ended September 30, 1994, the Company purchased approximately $552 million aggregate principal amount of mortgage loans under this program. The Company's third method is designed to serve sellers who generally obtain mortgage pool insurance commitments in connection with the origination of their loans. Under the third method, the Company does not perform a full underwriting review of such mortgage loans, but instead relies on the credit review and analysis of the mortgage pool insurer and its own follow-up quality control procedures. During the nine months ended September 30, 1994, the Company purchased $488 million aggregate principal amount of mortgage loans under this program. The Company expects that significantly fewer mortgage loans will be purchased pursuant to this program in future periods than in 13
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recent periods. Under all three methods, loans are purchased by the Company only after completion of a legal documentation and eligibility criteria review. See ' -- Underwriting and Quality Control.' In addition to its three loan underwriting methods, the Company has established five methods for verifying borrower income and assets in order to be responsive to the needs of non-conforming mortgage loan sellers. With respect to all five methods, generally as the standards for required documentation are lowered, the borrower down payment requirements are increased and the required loan-to-value ratios are decreased, the borrower must have a stronger credit history, more cash reserves are required, and the appraisal of the subject property is reviewed more conservatively. The Company's first method of verifying borrower income and assets requires third party written verification of the borrower's liquid assets and income. The second method requires written evidence, obtained directly from the borrower, of the borrower's liquid assets and income. This includes W-2 forms, pay stubs and tax returns to verify income and bank and broker statements to verify assets. The third method requires third party written verification of assets. With respect to the borrower's income under this method, the borrower provides unverified information on the loan application and provides the Company with a tax form that can be used to verify income at a later date. The fourth method requires third party written verification of assets; however, no information is obtained regarding the borrower's income. Under the final method, the borrower provides unverified asset information in the loan application and no information is obtained regarding the borrower's income. The latter two methods are only available to borrowers with a strong asset base and perfect credit history and who have a demonstrated track record in making mortgage payments on a timely basis. As part of its marketing strategy, the Company emphasizes the advantages to the seller of retaining the rights to service the loans purchased by the Company. In general, retention of servicing rights may be advantageous, because earnings from a servicing portfolio may to some extent offset the effect of increasing interest rates on loan origination revenues. In addition, retention of servicing rights for non-conforming mortgage loans enables sellers to maintain direct contact with the non-conforming mortgage loan borrowers and may provide opportunities for the seller or its affiliates to offer other services or products. Maintaining an ongoing relationship may increase the likelihood that such borrowers will choose the seller or its affiliates for future real estate or financial transactions. Mortgage Loans Acquired. Substantially all of the mortgage loans purchased through the Company's mortgage conduit operations have been non-conforming mortgage loans. Non-conforming mortgage loans are loans that do not qualify for purchase by FHLMC or FNMA or for inclusion in a loan guarantee program sponsored by GNMA. Currently, the maximum principal balance for a conforming loan is $203,150. Loans that exceed such maximum principal balance are referred to as 'jumbo loans.' Non-conforming mortgage loans generally consist of jumbo mortgage loans or loans which are originated in accordance with underwriting or product guidelines that differ from those applied by FNMA, FHLMC and GNMA. Such non-conforming loans may involve some greater risk as a result of such different product structures and underwriting guidelines. The Company's loan purchase activities focus on those regions of the country where higher volumes of non-conforming mortgage loans are originated, including California, Connecticut, Florida, Hawaii, Illinois, Maryland, Michigan, New Jersey, New York, Ohio, Texas, Virginia, Washington and Washington, D.C. The Company's highest concentration of non-conforming mortgage loans relates to properties located in California because of the generally higher property values and mortgage loan balances prevalent there. Mortgage loans secured by California properties have accounted for approximately 69% of the mortgage loans purchased during the nine months ended September 30, 1994. In addition, of the $4.5 billion in loans acquired during the nine months ended September 30, 1994, $3.4 billion (or 76%) were acquired from the Company's top ten sellers by volume of sales, and $2.6 billion (or 59%) were acquired from the top three of such sellers. The Company is attempting to reduce its seller concentration by increasing its marketing efforts with respect to smaller and mid-sized loan sellers and by providing increased incentives to its sales force to develop such accounts. See 'Risk Factors -- Demand for Residential Mortgage Loans and the Company's Non-Conforming Loan Products' and ' -- Competition.' Mortgage loans acquired by the Company are secured by first liens on single (one-to-four) family residential properties with either fixed or adjustable interest rates. During the nine months ended September 30, 1994, fixed-rate mortgage loans accounted for approximately 56% of the mortgage loans 14
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purchased by the Company. Fixed-rate mortgage loans have a constant interest rate over the life of the loan, which is generally 15, 20 or 30 years. As interest rates have risen in recent periods, the volume of adjustable-rate mortgages ('ARMs') purchased by the Company has grown, and, in the quarter ended September 30, 1994, ARMs accounted for approximately 50% of all mortgage loans purchased by the Company. ARM loans provide for the periodic adjustment of the rate of interest, which equals the sum of a fixed margin and an interest index, subject to periodic and lifetime interest rate adjustment caps. The Company anticipates that all mortgage loans it purchases will fully amortize over their remaining terms. In connection with its mortgage conduit operations, the Company currently purchases (i) fixed-rate mortgage loans that have original terms to maturity ranging from 5 to 30 years, (ii) ARM mortgage loans that adjust based on the one year constant maturity Treasury index (the 'CMT Index'), the six month Certificate of Deposit rate or the six month London interbank offered rate ('LIBOR'), (iii) negative amortization payment-capped ARM mortgage loans that adjust based on the one-month eleventh district cost of funds index and the one-month LIBOR, (iv) negative amortization graduated payment mortgage loans, (v) 5/25 mortgage loans that adjust once five years following origination based on the spread over the 30-year FNMA 60-day yield and (vi) ARM 3/1, ARM 5/1, ARM 7/1 and ARM 10/1 mortgage loans that adjust yearly commencing three, five, seven or ten years, respectively, following origination based on the CMT Index. All of the Company's ARM mortgage loans are 30-year amortizing mortgage loans. The Company may from time to time purchase mortgage loans with other interest rate and maturity characteristics. The Company also purchases ARM loans which provide the borrower with the future option to convert to a fixed rate of interest. Although the Company generally plans to sell or securitize these ARM loans in connection with its mortgage conduit operations, it will generally be obligated to repurchase the fixed-rate loans resulting from any such conversion. Although the Company generally has the right to require repurchase of any such converted mortgage loan by the servicer or seller of such loan, no assurance can be given that the servicer or seller will be able to honor its obligations. Seller Eligibility Requirements. The mortgage loans acquired pursuant to the Company's mortgage conduit operations are originated by various sellers, including savings and loan associations, banks, mortgage bankers and other mortgage lenders. Sellers are required to meet certain regulatory, financial, insurance and performance requirements established by the Company before they are eligible to participate in the Company's mortgage loan purchase program, and must submit to periodic reviews by the Company to ensure continued compliance with these requirements. The Company's current criteria for seller participation generally include a tangible net worth of at least $1 million, approval as a FNMA or FHLMC Seller/Servicer in good standing, and approval as a HUD approved mortgagee in good standing or a financial institution that is insured by the FDIC or comparable federal or state agency and is supervised and examined by a federal or state authority. In addition, sellers are required to have comprehensive loan origination quality control procedures. In connection with its qualification, each seller enters into an agreement that provides for recourse by the Company against the seller in the event of any material breach of a representation or warranty made by the seller with respect to mortgage loans sold to the Company, any fraud or misrepresentation during the mortgage loan origination process or upon early payment default on such loans. As of September 30, 1994, 407 sellers have been approved by the Company as being eligible to participate in its mortgage conduit operations. Servicing Retention. Sellers of mortgage loans to the Company are generally expected to retain the rights to service the mortgage loans purchased by the Company. Servicing includes collecting and remitting loan payments, making required advances, accounting for principal and interest, holding escrow or impound funds for payment of taxes and insurance, if applicable, making required inspections of the mortgaged property, contacting delinquent borrowers and supervising foreclosures and property dispositions in the event of unremedied defaults in accordance with the Company's guidelines. The servicer receives fees generally ranging from 1/4% to 1/2% per annum on the declining principal balances of the loans serviced. Under certain circumstances, sellers have the option to require the Company to purchase such servicing rights at a previously determined price. During 1993 and through September 30, 1994, the Company purchased servicing rights with respect to approximately $2.3 billion in initial aggregate principal amount of mortgage loans which it had previously purchased on a servicing-retained basis from sellers, and sold such servicing rights with respect to approximately $1.8 billion in initial aggregate principal amount of mortgage loans to CFC in June 1994. If a seller/servicer breaches certain 15
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of its representations and warranties made to the Company, the Company may terminate the servicing rights of such seller/servicer and assign such servicing rights to another servicer, including CFC. The Company acts as master servicer with respect to the mortgage loans it sells. Master servicing includes collecting loan payments from servicers of loans and remitting loan payments, less master servicing fees and other fees, to a trustee for each series of mortgage-backed securities master serviced. In addition, as master servicer, the Company monitors compliance with its servicing guidelines and is required to perform, or to contract with a third party to perform, all obligations not adequately performed by any servicer. As of September 30, 1994, the Company was master servicing 27,084 loans with an aggregate outstanding principal balance of approximately $6.3 billion. In connection with REMIC issuances, the Company master services on a non-recourse basis substantially all of the mortgage loans it purchases. Each series of mortgage-backed securities is typically fully payable from the mortgage assets underlying such series, and the recourse of investors is limited to those assets and any credit enhancement features, such as insurance. Generally, any losses in excess of the credit enhancement obtained are borne by the security holders. Except in the case of a breach of the standard representations and warranties made by the Company when mortgage loans are securitized, the securities are non-recourse to the Company. Typically, the Company will have recourse to the sellers of loans for any such breaches, but there can be no assurance as to the sellers' abilities to honor their respective obligations. PURCHASE COMMITMENT PROCESS AND PRICING Master Commitments. As part of its marketing strategy, the Company establishes mortgage loan purchase commitments ('Master Commitments') with sellers that, subject to certain conditions, entitle the seller to sell and obligate the Company to purchase a specified dollar amount of non-conforming mortgage loans over a period generally ranging from three months to one year. The terms of each Master Commitment specify whether a seller may sell loans to the Company on a mandatory, best efforts or optional basis, or a combination thereof. Master Commitments do not obligate the Company to purchase loans at a specific price, but rather provide the seller with a future outlet for the sale of its originated loans based on the Company's quoted prices at the time of purchase. Master Commitments specify the types of mortgage loans the seller is entitled to sell to the Company and generally range from $5 million to $1 billion in aggregate committed principal amount. The provisions of the Company's Seller/Servicer Guide are incorporated in each Master Commitment and may be modified by negotiations between the parties. In addition, there are individualized Master Commitment options available to sellers which include alternative pricing structures. In order to obtain a Master Commitment, each seller is generally expected to pay a non-refundable upfront or non-delivery fee, or both, to the Company. As of September 30, 1994, the Company had outstanding Master Commitments with 100 sellers to purchase mortgage loans in the aggregate principal amount of approximately $9.3 billion over periods ranging from three months to one year, of which $2.4 billion had been purchased or committed to be purchased pursuant to rate-locks (as defined below). Sellers that have entered into Master Commitments sell mortgage loans to the Company by executing individual, bulk or other rate-locks (each, a 'rate-lock'). Each rate-lock, in conjunction with the related Master Commitment, specifies the terms of the related sale, including the quantity and price of the mortgage loans or the formula by which the price will be determined, the rate-lock type and the delivery requirements. The upfront fee paid by a seller to the Company to obtain a Master Commitment on a mandatory delivery basis is often refunded pro rata as the seller delivers loans pursuant to rate-locks. Bulk and Other Rate-Locks. The Company also acquires mortgage loans from sellers that are not purchased pursuant to Master Commitments. These purchases may be made on a bulk or individual rate-lock basis. Bulk rate-locks obligate the seller to sell and the Company to purchase a specific group of loans, generally ranging from $1 million to $50 million in aggregate committed principal amount, at set prices on specific dates. Bulk rate-locks enable the Company to acquire substantial quantities of loans on a more immediate basis. The specific pricing, delivery and program requirements of these purchases are determined by negotiation between the parties but are generally in accordance with the provisions of the Company's Seller/Servicer Guide. Due to the active presence of investment banks and 16
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other substantial investors in this area, bulk pricing is extremely competitive. Loans are also purchased from individual sellers (typically smaller originators of mortgage loans) who do not wish to sell pursuant to either a Master Commitment or bulk rate-lock. The terms of these individual purchases are based primarily on the Company's Seller/Servicer Guide and standard pricing provisions, and are offered on a mandatory or best efforts basis. Mandatory, Best Efforts and Optional Rate-Locks. Mandatory rate-locks require the seller to deliver a specified quantity of loans to the Company over a specified period of time regardless of whether the loans are actually originated by the seller or whether circumstances beyond the seller's control prevent delivery. The Company is required to purchase all loans covered by the rate-lock at prices established at the time of rate-lock. If the seller is unable to deliver the specified loans, it may instead deliver comparable loans approved by the Company within the specified delivery time. Failure to deliver the specified mortgage loans or acceptable substitute loans under a mandatory rate-lock obligates the seller to pay the Company a penalty, and, if the Company's mortgage loan yield requirements have declined, the present value of the difference in yield the Company would have obtained on the mortgage loans that the seller agreed to deliver and the yield available on similar mortgage loans subject to mandatory rate-lock issued at the time of such failure to deliver. In contrast, mortgage loans sold on a best efforts basis must be delivered to the Company only if they are actually originated by the seller. The best efforts rate-lock provides sellers with an effective way to sell loans during the origination process without any penalty for failure to deliver. However, the Company generally requires a higher yield, a price adjustment or an upfront fee for best efforts rate-locks. Optional rate-locks give the seller the option to deliver mortgage loans to the Company at a fixed price on a future date and require the payment of upfront fees to the Company. Upfront fees paid in connection with best efforts and optional rate-locks are retained by the Company whether or not the loans are delivered. As of September 30, 1994, the Company had outstanding rate-locks to purchase mortgage loans at specified prices in the aggregate principal amount of approximately $852.2 million. These rate-locks were made pursuant to Master Commitments, bulk rate-locks and other negotiated rate-locks. During the nine months ended September 30, 1994, sellers have elected to sell more than 90% of the mortgage loans purchased by the Company pursuant to mandatory rate-locks. The Company expects this trend to continue in the future. Pricing. The Company sets purchase prices at least once every business day for mortgage loans it acquires for its conduit operations based on prevailing market conditions. Different prices are established for the various types of loans, rate-lock periods and types of rate-locks (mandatory, best efforts or optional). The Company's standard pricing is based on the anticipated price the Company will receive upon sale or securitization of the loans, the anticipated interest spread realized during the accumulation period, the targeted profit margin and the anticipated issuance, credit enhancement and ongoing administrative costs associated with such sale or securitization. Alternatively, such pricing may be based on the anticipated cost of financing such loans to maturity plus associated costs. The credit enhancement cost component of the Company's pricing is established for individual mortgage loans or pools of mortgage loans based upon the characteristics of such loan or loan pool. As the characteristics of the loan or loan pool vary, this cost component is correspondingly adjusted upward or downward to reflect the variation. For example, an upward adjustment to the Company's required yield would be made for loan characteristics which increase the cost of credit enhancement, such as loans with reduced documentation, outstanding principal amounts in excess of $650,000, loan-to-value ratios in excess of 85%, non-owner occupied properties, cash-out refinancings and mortgage loans secured by properties in California. The Company's adjustments are reviewed periodically by management to reflect changes in the costs of credit enhancement. Adjustments to the Company's standard pricing may also be negotiated on an individual basis under master commitments or bulk or individual rate-locks with sellers. Following the issuance of a specific rate-lock, the Company is subject to the risk of interest rate fluctuations and will, principally through INMC, enter into hedging transactions to diminish such risk. Hedging transactions may include mandatory or optional forward sales of mortgage loans or mortgage-backed securities, mandatory forward sales or financings using REMICs or CMOs, mandatory or optional sales of futures and other financial futures transactions. See ' -- Securitization Process.' The 17
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nature and quantity of hedging transactions will be determined by the management of the Company based on various factors, including market conditions and the expected volume of mortgage loan purchases. In addition, neither the Company nor INMC will engage in any financial futures transaction unless the Company, INMC or CAMC, as appropriate, would be exempt from the registration requirements of the CEA or otherwise comply with the provisions thereof. Gains and losses on hedging transactions will be deferred as an adjustment to the carrying value of the related mortgage loans. UNDERWRITING AND QUALITY CONTROL Purchase Guidelines. The Company has developed comprehensive purchase guidelines for its acquisition of mortgage loans. Subject to certain exceptions, each loan purchased must conform to the loan eligibility requirements specified in the Company's Seller/Servicer Guide with respect to, among other things, loan amount, type of property, loan-to-value ratio, type and amount of insurance, credit history of the borrower, income ratios, sources of funds, appraisals and loan documentation. The Company also performs a legal documentation review prior to the purchase of any loan. For loans with mortgage pool insurance commitments, the Company does not perform a full underwriting review prior to purchase, but instead relies on the credit review and analysis performed by the mortgage pool insurer and its own post-purchase quality control review. In contrast, for mortgage loans that have not been underwritten for mortgage pool insurance and are not part of the delegated underwriting program, the Company performs a full credit review and analysis to ensure compliance with its loan eligibility requirements. This review specifically includes, among other things, an analysis of the underlying property and associated appraisal and an examination of the credit, employment and income history of the borrower. For loans purchased pursuant to the delegated underwriting program, the Company relies on the credit review performed by the seller and its own follow-up quality control procedures. Delegated Underwriting Program. The Company has established a delegated underwriting program which is similar in concept to the delegated underwriting programs established by FNMA, FHLC and GNMA. Under this program, qualified sellers are required to underwrite loans in compliance with the Company's underwriting guidelines as set forth in the Company's Seller/Servicer Guide or an individual Master Commitment. As part of the approval process, the seller must submit a small sample of loans for a post-purchase quality control review by the Company. If the submitted loans comply with the Company's underwriting guidelines and the seller meets the Company's financial and performance criteria, the seller will be approved for the delegated underwriting program. In connection with its approval, the seller must represent and warrant to the Company that all mortgage loans sold to the Company will be of a similar or higher quality than the submitted sample of loans reviewed by the Company. The Company, however, has implemented certain additional guidelines for seller participation in this program. The Company's principal delegated underwriting program is specifically designed for those sellers that meet higher financial and performance criteria than those applicable to sellers generally. The current financial, historical loan quality and other criteria for seller participation in this program generally include a minimum net worth of $3 million (including the values of the seller's servicing portfolio), a minimum servicing portfolio of $75 million, overall residential mortgage loan delinquency and default ratio experience equal to or below industry standards as published by the Mortgage Bankers Association for the region(s) in which loans are originated, and a satisfactory repurchase history with FNMA, FHLMC and GNMA. As of September 30, 1994, 55 sellers had been qualified by the Company for participation in the delegated underwriting program. The Company also operates a restricted delegated underwriting program that is available to substantially all of the Company's sellers under which only the Company's standard loan products with loan-to-value ratio and outstanding balance requirements that are more restrictive than the Company's standard guidelines may be submitted. See ' -- Marketing Strategy.' As part of its quality control process, all loans subsequently submitted to the Company for purchase from a participating seller under the delegated underwriting program are subject to a pre-purchase legal documentation review of, among other things, the promissory note, deed of trust or mortgage and title policy. The Company also conducts a full post-purchase underwriting review of 50% of the loans purchased during the first two months of a seller's participation in the delegated underwriting program to ensure ongoing compliance with the Company's guidelines. The percentage of 18
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loans fully reviewed is thereafter reduced bimonthly in 10% increments to 20% after six months and maintained at this level throughout the seller's participation in the delegated underwriting program. Failure to comply with the Company's underwriting guidelines may result in a seller's suspension from participation in the delegated underwriting program or termination of a seller's participation in any loan acquisition program of the Company. In addition, the Company has the right to require a seller to repurchase any loan that fails to meet the Company's guidelines within five business days after receipt of a repurchase request from the Company. There is no assurance, however, that any such seller will be able to honor its repurchase obligations. Quality Control. Ongoing quality control reviews are conducted by the Company to ensure that the mortgage loans purchased meet the Company's quality standards. The type and extent of the quality control review will depend on the nature of the seller and the characteristics of the loans. Loans acquired under the delegated underwriting program are reviewed in accordance with the quality control procedures described above. The Company reviews on a post-purchase basis approximately 10% of all loans submitted to the Company with mortgage pool insurance commitments or underwritten by the Company for compliance with the Company's guidelines. In addition, a higher percentage of mortgage loans with certain specified characteristics are reviewed by the Company either before or after their purchase, including loans in excess of $650,000 in principal amount, loans on which 12 or more payments have been made and loans made in connection with cash-out refinancings. In performing a quality control review on a loan, the Company analyzes the underlying property and associated appraisal and examines the credit, employment and income history of the borrower. In addition, all documents submitted in connection with the loan, including insurance policies, appraisals, credit records, title policies, deeds of trust and promissory notes, are examined for compliance with the Company's underwriting guidelines. Furthermore, the Company reverifies the employment, income and source of funds documentation, as appropriate, of each borrower and obtains a new credit report and independent appraisal with respect to 10% of the reviewed loan sample. SECURITIZATION PROCESS General. The Company primarily uses reverse repurchase agreements and equity to finance the initial acquisition of mortgage loans from sellers. When a sufficient volume of mortgage loans with similar characteristics has been accumulated, generally $100 million to $500 million, they are securitized through the issuance of mortgage-backed securities in the form of REMICs or CMOs or resold in bulk whole loan sales. The length of time between when the Company commits to purchase a mortgage loan and when it sells or securitizes such mortgage loan generally ranges from ten to 90 days, depending on certain factors, including the length of the purchase commitment period, the loan volume by product type and the securitization process. The Company's decision to form REMICs or CMOs or sell the loans in bulk is influenced by a variety of factors. REMIC transactions are generally accounted for as sales of the mortgage loans and can eliminate or minimize any long-term residual investment in such loans. REMIC securities consist of one or more classes of 'regular interests' and a single class of 'residual interest.' The regular interests are tailored to the needs of investors and may be issued in multiple classes with varying maturities, average lives and interest rates. These regular interests are predominately senior securities but, in conjunction with providing credit enhancement, may be subordinated to the rights of other regular interests. The residual interest represents the remainder of the cash flows from the mortgage loans (including, in some instances, reinvestment income) over the amounts required to be distributed to the regular interests. In some cases, the regular interests may be structured so that there is no significant residual cash flow, thereby allowing the Company to sell its entire interest in the mortgage loans. As a result, in some cases the capital originally invested in the mortgage loans by the Company may be redeployed in the mortgage conduit operations. The Company may retain regular and residual interests on a short-term or long-term basis. The creation of REMIC securities through INMC is the Company's preferred method of securitizing mortgage loans, because this method provides the maximum flexibility in structuring securities for sale to the broadest group of investors and may permit the immediate redeployment of a portion of the originally invested capital of the Company. During the first nine months of 1994, the Company sold $4.1 billion of non-conforming mortgage loans in connection with the issuance of 20 series of multiple-class mortgage-backed securities in the form of REMICs and sold $0.3 million of non-conforming mortgage loans as whole loans. As of 19
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September 30, 1994, the Company had committed to sell approximately $175 million of non-conforming mortgage loans in connection with the issuance of one REMIC security in the fourth quarter of 1994. Beginning in the third quarter of 1993, the Company began issuing all of its REMIC securities utilizing a shelf registration statement established by CWMBS, Inc., a wholly owned limited purpose finance subsidiary of CCI. As an alternative to REMIC sales, the Company may issue CMOs to finance mortgage loans to maturity. For accounting and tax purposes, the mortgage loans financed through the issuance of CMOs are treated as assets of the Company, and the CMOs are treated as debt of the Company. The Company earns the net interest spread between the interest income on the mortgage loans and the interest and other expenses associated with the CMO financing. The net interest spread will be directly impacted by the levels of prepayment of the underlying mortgage loans and, to the extent CMO classes have variable rates of interest, may be affected by changes in short term interest rates. The Company is required to retain a residual interest in its issued CMOs. See 'Risk Factors -- Risks Relating to Retention of Mortgage-Backed Securities and Issuance of CMOs.' The Company may issue CMOs from time to time based on the Company's current and future investment needs, market conditions and other factors. CMOs, however, do not offer the Company the structuring flexibility of REMICs and are expected to be a secondary method of securitizing the Company's mortgage loans. Credit Enhancement. REMICs or CMOs created by the Company are structured so that in general substantially all of such securities are rated investment grade by at least one nationally recognized rating agency. In contrast to mortgage-backed securities in which the principal and interest payments are guaranteed by the U.S. government or an agency thereof, securities created by the Company do not benefit from any such guarantee. The ratings for the Company's mortgage-backed securities are based on the perceived credit risk by the applicable rating agency of the underlying mortgage loans, the structure of the securities and the associated level of credit enhancement. Credit enhancement is designed to provide protection to the security holders in the event of borrower defaults and other losses including those associated with fraud or reductions in the principal balances or interest rates on mortgage loans as required by law or a bankruptcy court. The Company can utilize multiple forms of credit enhancement, including mortgage pool and special hazard insurance, reserve funds, letters of credit, surety bonds and subordination or any combination thereof. In determining whether to provide credit enhancement through mortgage pool insurance, subordination or other credit enhancement methods, the Company will take into consideration the costs associated with each method. The Company principally provides credit enhancement through the issuance of mortgage-backed securities in senior/subordinated structures. The subordinated securities may be sold, retained by the Company and accumulated for sale in subsequent transactions or retained as long term investments. Each series of mortgage-backed securities is typically fully payable from the mortgage assets underlying such series, and the recourse of investors is limited to such assets and any associated credit enhancement features, such as senior/subordinated structures. To the extent the Company holds subordinated securities, a form of credit enhancement, the Company will generally bear all losses prior to the related senior security holders. Generally, any losses in excess of the credit enhancement obtained will be borne by the security holders. Except in the case of a breach of the standard representations and warranties made by the Company when mortgage loans are securitized, such securities are non-recourse to the Company. Typically, the Company will have recourse to the sellers of loans for any such breaches, but there can be no assurance of the sellers' abilities to honor their respective obligations. Retention of Mortgage-Backed Securities and Other Investments. In connection with the issuance of mortgage-backed securities or other investments in the form of REMICs or CMOs, the Company may retain subordinated securities or regular or residual interests (including residual interests that may be subordinated to other classes of securities) on a short-term or long-term basis. Any such retained residual or regular interest may include 'principal only' or 'interest only' securities or other interest rate or prepayment sensitive securities or investments. Any such retained securities or investments may subject the Company to credit, interest rate and/or prepayment risks. The Company anticipates it will retain such securities only on terms which it believes are sufficiently attractive to compensate it for 20
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assuming such associated risks. As of September 30, 1994, the Company held $19.1 million principal amount of principal only securities, with a book value of $10.7 million. As of September 30, 1994, the Company also held an investment in one inverse floater (a type of mortgage-backed security the interest rate on which resets periodically based upon a designated index and that varies inversely in accordance with such index, and that, absent default, entitles the holder thereof to the return of the principal portion of the investment), with an outstanding principal amount of $19.4 million and a book value of $7.5 million. As of September 30, 1994, the Company held $146.2 million in master servicing fees receivable, of which $110.8 million had been securitized. Master servicing fees receivable have characteristics similar to interest only securities; accordingly, they have many of the same risks inherent in interest only securities, including the risk that they will lose a substantial portion of their value as a result of rapid prepayments occasioned by declining interest rates. It is also possible that under certain high prepayment scenarios the Company would not fully recoup its initial investment in such receivables. Management of the Company believes that because of the current level of interest rates, investments in current coupon master servicing fees receivable are prudent, and if interest rates rise, these investments will mitigate declines in income that may occur in the Company's origination operations. The Company intends to hold the master servicing fees receivable for investment. Currently there is no liquid secondary market for master servicing fees receivable; accordingly, it is unlikely the Company could sell these receivables at or above the values at which they are currently carried by the Company. The Company has also retained subordinated securities, with ratings ranging from AA to unrated, with principal amounts totalling $87.9 million and a book value of $71 million as of September 30, 1994. The portfolio of subordinated securities consists of fixed-rate securities with an aggregate principal amount of $52.5 million and a book value of $42 million and adjustable rate securities with an aggregate principal amount of $35.5 million and a book value of $29 million. The fixed-rate securities primarily evidence interests in 30-year mortgages. The adjustable-rate securities primarily evidence interests in 30-year amortizing mortgage loans that adjust every six months and annually based on the 6-month LIBOR and 1-year CMT rates, respectively. In general, subordinated classes of a particular series of securities bear all losses prior to the related senior classes. Losses in excess of expected losses at the time such securities are purchased would adversely affect the Company's yield on such securitization and, in extreme circumstances, could result in the failure of the Company to recoup its initial investment. See 'Risk Factors -- Changes in Interest Rates' and ' -- Risks Relating to Retention of Mortgage-Backed Securities and Issuance of CMOs.' WAREHOUSE LENDING WLCA engages in warehouse and secured lending operations for small and medium-sized mortgage bankers and brokers. The standard warehouse lending facilities typically provide short-term revolving financing to mortgage companies to finance mortgage loans during the time between the closing of a loan and its sale to investors. Although the loans financed by WLCA through its standard warehouse lending activities represent a broader line of mortgage products than those purchased by INMC, at present all of such loan products are eligible for financing by WLCA under the reverse-repurchase agreements used by WLCA to fund its operations. WLCA also provides financing through credit facilities secured by other mortgage-related assets such as servicing rights and servicing sales receivables. WLCA offers credit facilities to mortgage bankers and brokers with a minimum audited net worth of $100,000 and subject to a maximum debt to net worth ratio of 20 to 1. The specific terms of any warehouse line of credit, including the amount, are determined based upon the financial strength, historical performance and other qualifications of the mortgage banker or broker. All such lines of credit are subject to the prior approval of a credit committee comprised of senior officers and Directors of the Company. WLCA finances this program through a combination of reverse repurchase agreements and equity. WLCA has two committed two-year reverse repurchase agreement facilities with investment banks with sublimits in an aggregate amount of up to $500 million for certain of its warehouse lending operations. As of September 30, 1994, WLCA had extended mortgage warehouse lines of credit under this program to 81 borrowers in the aggregate principal amount of approximately $328.3 million. Outstanding amounts under these warehouse lines totalled $60.5 million at that date. It is anticipated that the amount outstanding under this program will grow as newly approved lines are utilized. 21
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As a warehouse lender, WLCA is a secured creditor of the mortgage bankers and brokers to which it extends credit and subject to the risks inherent in that status, including the risks of borrower default and bankruptcy. Any claim of WLCA as a secured lender in a bankruptcy proceeding may be subject to adjustment and delay. CONSTRUCTION LENDING The Company's new construction lending division, CLCA, which began operations in August 1994, offers tract construction loans to developers and assists INMC in purchasing combined construction and permanent mortgage loans from mortgage companies and administering the construction draws. The tract construction loans are made to small-and mid-size builders of single-family residences. The target project for CLCA's construction lending division is 15 to 100 units of single-family homes, built in one to five phases, that are marketed to entry level/first-time or trade-up buyers. The maximum loan size is $15 million. The specific terms of any construction loan, including the principal amount thereof, are determined based upon the financial strength, historical performance and other qualifications of the builder. All construction loans to developers are subject to the prior approval of a credit committee comprised of senior officers and Directors of the Company. Combined construction and permanent loans are originated by INMC's sellers to borrowers who want to construct or remodel their residences. CLCA's construction lending division assists INMC in the purchase of such loans and administers the construction draws. Under this program, advances to borrowers to fund the purchase of a lot before construction begins are subject to a 60% loan-to-value limitation, as well as other detailed criteria. Criteria for permanent loans are similar to those applied by INMC to loan purchases generally. The maximum loan size is $1 million. As of September 30, 1994, CLCA had extended commitments of $4 million and $750,000, of which $350,000 and $200,000 were outstanding, under the tract construction and combined construction and permanent loan programs, respectively. FINANCING SOURCES The Company uses proceeds from the sale of REMIC securities and CMOs, reverse-repurchase agreements, other borrowings and proceeds from the issuance of common stock to meet its working capital needs. The Company may also borrow up to $10 million from CFC to meet collateral maintenance requirements under reverse repurchase agreements or margin calls on forward securities sales. These borrowings can be made pursuant to a one-year, unsecured line of credit which expires on September 30, 1995 subject to extension by CFC and the Company. As of September 30, 1994, the Company had no outstanding borrowings under this agreement. The Company has established a committed reverse repurchase facility with an aggregate amount of up to $500 million (with a decreasing annual credit limit) for its mortgage conduit operations and warehouse lending operations that expires in April 1996. The Company has also obtained credit approval from the same lender to enter into additional reverse repurchase agreements associated with the mortgage conduit operations, under which individual transactions and their terms will be subject to agreement by the parties based upon market conditions at the time of each transaction. As of September 30, 1994, $864.4 million was outstanding under this facility. In August 1994, the Company signed another master repurchase agreement with a different lender to provide a committed short-term credit line in the amount of $300 million for its mortgage conduit and warehouse lending operations. This agreement expires in August 1996. As of September 30, 1994, $12.1 million was outstanding under this facility. In the second quarter of 1994, the Company signed a commitment letter with a third lender for a two year master repurchase agreement to provide a committed short-term credit line for its mortgage conduit and warehouse lending operations in the amount of $500 million. In November 1994, the Company signed an agreement for a committed reverse repurchase facility in the amount of $225 million to provide financing for certain mortgage-related securities which have been retained or purchased. This agreement expires in November 1996. As of September 30, 1994, $114.8 million was outstanding under this facility. The Company, to the extent permitted by its Bylaws, may issue other debt securities or incur other types of indebtedness from time to time. 22
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The maximum balance outstanding under reverse repurchase agreements during the third quarter of 1994 was $1.5 billion. The provider of two of the Company's reverse repurchase facilities is an affiliate of one of the representatives of the underwriters of the shares of Common Stock being offered hereby. MANAGEMENT AGREEMENT Since its inception, the Company has each year entered into a management agreement with CAMC pursuant to which CAMC advises the Company on various facets of its business and manages its day-to-day operations, subject to the supervision of the Company's Board of Directors. CAMC conducts the day-to-day mortgage conduit, warehouse lending and construction lending operations. CFC has guaranteed the performance of the duties and obligations of CAMC under the management agreement. CAMC has subcontracted with CFC to provide certain management services to the Company. Such subcontract may be terminated by either party upon 60 days' prior notice. Under the terms of the management agreement with the Company, CAMC is entitled to receive a base management fee of 1/8 of 1% per annum of the mortgage conduit's average invested assets (which, for purposes of the management agreement, means the average of the aggregate book value of the assets of the mortgage conduit invested in loans secured by real estate, but excluding any mortgage loans or Agency Securities (as defined herein) securitized through the issuance of mortgage-backed securities in the form of REMICs or CMOs) or pledged to secure other mortgage collateralized debt. In addition, CAMC is entitled to receive a warehouse lending management fee equal to 1/5 of 1% of the average daily balance of the outstanding amounts under the Company's warehouse lending facilities. Incentive compensation will also be paid to CAMC if the Company's 'annualized return on equity' during any fiscal quarter is in excess of the then current Ten Year U.S. Treasury Rate plus 2%. In such event, CAMC will receive 25% of such excess amount. As used in calculating CAMC's incentive compensation, the term 'annualized return on equity' means the annualized return on stockholders' equity during a quarter, calculated by dividing the Company's annualized 'net income' for the quarter by its 'average net worth' for the quarter, in each case determined in accordance with generally accepted accounting principles. For such calculations, the 'net income' of the Company means total revenues less expenses and 'average net worth' is defined as the arithmetic average of the sum (as of the beginning of each quarter and at the end of each calendar month in the quarter) of the gross proceeds from any offering 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. CAMC, however, has agreed to waive 25% of its incentive compensation, if any, for 1994. In addition, all operating expenses incurred by the Company or CAMC on behalf of the Company in 1994 will be paid directly by the Company. For the nine months ended September 30, 1994, management fees were $702,000, consisting of $256,000 in base compensation and $446,000 in incentive management fees. As of September 30, 1994, CAMC had a total of 113 employees, all of whom were dedicated to the Company's mortgage conduit, warehouse lending, construction lending and other operations. The Company also has access to the expertise of CAMC's affiliates, including CFC and CCI, in the mortgage banking area. CCI is a diversified financial services company whose principal subsidiary, CFC, is the nation's leading residential mortgage lender. CAMC, another subsidiary of CCI, is the manager of the Company and employs the personnel who conduct the Company's mortgage conduit, warehouse lending and construction lending operations. The Company not only benefits from the mortgage banking experience and management expertise of CCI, CAMC and CFC, but also utilizes CFC as a resource for loan servicing, technology, information services and loan production. The Company also believes that its relationship with CFC benefits the Company in its sale of mortgage-backed securities, since CFC is one of the largest mortgage loan sellers in the secondary market, with established relationships with dealers in mortgage-backed securities. No assurances can be given that the Company's relationships with CAMC and its affiliates will continue indefinitely. RELATIONSHIPS WITH COUNTRYWIDE ENTITIES The Company and CCI are both publicly traded companies whose shares of common stock are listed on the New York Stock Exchange. As previously described, the Company utilizes the mortgage 23
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banking experience, management expertise and resources of CCI, CAMC and CFC in conducting its new mortgage conduit operations. CAMC and CFC are both wholly owned subsidiaries of CCI. After giving effect to this offering, CCI, directly or indirectly, will own approximately 2.8% of the Common Stock of the Company. In addition, a number of Directors and officers of the Company also serve as Directors and/or officers of CCI, CAMC and/or CFC. See 'Management.' The Company also has a $10 million line of credit from CFC, and the Company may utilize CFC as a resource for loan servicing, technology, information services and loan production. See 'Risk Factors -- Potential Conflicts of Interest.' CFC owns all of the voting common stock of INMC, and the Company owns all of the preferred stock of INMC. With a view toward protecting the interests of the Company's stockholders, the Certificate of Incorporation and the Bylaws of the Company provide that a majority of the Board of Directors (and a majority of each committee of the Board of Directors) must not be 'Affiliates' of CAMC, as that term is defined in the Bylaws, and that the investment policies of the Company must be reviewed annually by a majority of these unaffiliated directors. Moreover, approval of the management agreement requires the affirmative vote of a majority of the unaffiliated directors, and a majority of such unaffiliated directors may terminate the management agreement with CAMC at any time upon 60 days' notice. HISTORICAL OPERATIONS Prior to the initiation of the Company's mortgage conduit and warehouse lending operations in 1993 and the initiation of its construction lending operations in 1994, the Company was principally a long-term investor in single-family, first-lien, residential mortgage loans and in mortgage-backed securities representing interests in such loans. The Company's mortgage investment portfolio consisted primarily of fixed-rate mortgage pass-through certificates issued by FHLMC or FNMA (collectively, 'Agency Securities') and non-conforming mortgage loans. The principal source of earnings for the Company historically had been interest income generated from investments in such mortgage loans and mortgage-backed securities, net of the interest expense on the CMOs or reverse repurchase agreements used to finance such mortgage investments. In 1987, the Company began to invest in Agency Securities representing undivided interests in pools of adjustable-rate mortgages ('Agency ARMs') purchased through various broker-dealers and financed primarily through reverse repurchase agreements. During 1992, the Company sold substantially all of its portfolio of Agency ARMs, resulting in a gain of approximately $9 million, and the remainder of such portfolio was sold during the first quarter of 1993 at its approximate carrying value. At September 30, 1994, the Company's assets included approximately $246 million of fixed-rate non-conforming mortgage loans and Agency Securities (including cash held in trust and accrued interest receivable) which were pledged to secure outstanding CMOs issued by the Company's subsidiaries. During 1992, 1993 and continuing in the beginning of 1994, long-term interest rates, including mortgage rates, fell to their lowest levels in nearly 20 years. These lower interest rates affected the Company's portfolios of fixed-rate and ARM assets and their related debt in dramatically different fashions. The portfolio of mortgage investments financed by CMOs experienced substantial prepayments, resulting in significantly decreased net earnings, and as mortgage loan premiums, original issue discount and bond issuance costs were required to be amortized, losses on the portfolio were realized. The portfolio of Agency ARMs served in part as a hedge against the effects of declining interest rates. The decline in interest rates lowered the cost of financing this portfolio through reverse repurchase agreements substantially more quickly than the level of interest income earned on the Agency ARMs declined and, consequently, the net interest income generated from the ARM portfolio improved significantly. During 1992, the Company sold substantially all of its Agency ARMs to recognize the increased market values of these assets and to provide capital for the Company's new operating plan. These sales helped to offset the negative effects of lower interest rates and higher prepayment rates on the performance of the Company's CMO portfolio. Regardless of the level of interest rates or prepayments, the Company anticipates no significant earnings from this CMO portfolio. Any continued negative performance of this CMO portfolio will continue to adversely impact the earnings of the Company to the extent of its investment in such portfolio. For a discussion of the effect of higher interest rates, which have occurred in 1994, see 'Risk Factors -- Changes in Interest Rates.' 24
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USE OF PROCEEDS The net proceeds to the Company from the sale of the Common Stock offered hereby are estimated to be $ ($ if the Underwriters' over-allotment option is exercised in full). The Company intends to apply such proceeds to increase the Company's mortgage loan acquisition and securitization capabilities, to expand its warehouse lending activities and to fund its construction lending operations. See 'Business.' Pending application of the net proceeds of this offering, the Company intends to use such proceeds temporarily to reduce its outstanding indebtedness under various reverse repurchase agreements. These reverse repurchase agreements are the equivalent of short-term secured borrowings by the Company, in that they mature within one year. The implied interest rate on these reverse repurchase agreements ranges from LIBOR plus 0.6% to LIBOR plus 0.95% per annum. As this indebtedness is reduced, the assets of the Company that were pledged to the repayment of the indebtedness become unencumbered and may be pledged as collateral for additional future borrowings or securitized through the issuance of mortgage-backed securities or resold in bulk whole loan sales. MARKET PRICES AND DIVIDEND DATA The Common Stock of the Company is traded on the New York Stock Exchange under the symbol 'CWM.' The following table sets forth, for the periods indicated, the high and low sales prices per share of Common Stock as reported on the New York Stock Exchange composite tape and the cash dividends paid per share of Common Stock: [Enlarge/Download Table] STOCK PRICES --------------------------- CASH HIGH LOW DIVIDENDS ------------ ----------- --------- 1992 First quarter.......................................................... $ 6 1/2 $ 4 3/4 $0.12 Second quarter......................................................... 5 7/8 4 1/2 0.12 Third quarter.......................................................... 5 1/8 4 5/8 0.12 Fourth quarter......................................................... 5 1/2 4 3/4 0.12 1993 First quarter.......................................................... $ 6 3/4 $ 5 1/4 $0.12 Second quarter......................................................... 6 3/4 5 5/8 0.12 Third quarter.......................................................... 10 1/8 5 3/4 0.12 Fourth quarter......................................................... 11 3/8 8 1/4 0.12 1994 First quarter.......................................................... $ 11 3/4 $ 9 1/2 $0.16 Second quarter......................................................... 10 3/8 7 0.18 Third quarter.......................................................... 9 1/8 7 1/8 0.26 Fourth quarter (through )............................... On November 21, 1994, the last reported sale price for the Common Stock was $8 7/8 per share. As of November 18, 1994, the Company's 32,256,156 outstanding shares of Common Stock were held by approximately 1,768 stockholders of record. The Company declared a dividend of $0.26 per share, $0.18 per share and $0.16 per share for each of the quarters ended September 30, June 30 and March 31, 1994, respectively. The Company intends to make distributions to its stockholders of all or substantially all of its taxable income in each year (subject to certain adjustments) so as to qualify for the tax benefits accorded to real estate investment trusts under the Code. Taxable income, if any, not distributed through regular quarterly dividends will be distributed annually, at or near year end, in a special dividend. This dividend policy is subject to revision at the discretion of the Board of Directors. All distributions will be made by the Company at the discretion of the Board of Directors and will depend on the earnings of the Company, the financial condition of the Company, maintenance of real estate investment trust status and such other factors as the Board of Directors deems relevant. In 1993, the Company declared dividends in excess of its taxable income, and may pay dividends in excess of its taxable income again in the future. In 1994, the Company declared dividends equal to its taxable income. 25
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DIVIDEND REINVESTMENT PLAN The Company maintains a dividend reinvestment plan for stockholders who wish to reinvest their distributions in additional shares of Common Stock. The dividend reinvestment plan currently provides for the purchase of additional shares of Common Stock on the open market for the accounts of its participants. CAPITALIZATION The consolidated capitalization and indebtedness of the Company, as of September 30, 1994, and as adjusted to reflect the sale of the shares of Common Stock offered hereby, is as follows: [Enlarge/Download Table] AS OF SEPTEMBER AS OF SEPTEMBER 30, 1994 AS 30, 1994 ACTUAL ADJUSTED --------------- --------------- (DOLLARS IN THOUSANDS) Reverse repurchase agreements....................................... $ 991,152 $ 991,152 Collateralized mortgage obligations................................. 214,112 214,112 Total borrowings.......................................... 1,205,264 1,205,264 --------------- --------------- Shareholders' equity Common Stock, par value $.01; authorized -- 60,000,000 shares; outstanding -- 32,256,156 shares(1), 38,256,156 shares, as adjusted..................................................... 323 Additional paid-in capital.......................................... 257,815 Net unrealized gain on available-for-sale mortgage securities....... 166 166 Cumulative earnings................................................. 91,367 91,367 Cumulative distributions to shareholders............................ (93,404) (93,404) --------------- --------------- Total shareholders' equity................................ 256,267 --------------- --------------- Total capitalization...................................... $1,461,531 $ --------------- --------------- --------------- --------------- ------------ (1) Does not include shares of Common Stock reserved for issuance under the 1985 Stock Option Plan and the 1994 Stock Incentive Plan. 26
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MANAGEMENT OF CWM MORTGAGE HOLDINGS, INC. The following table provides information regarding the executive officers and Directors of the Company. Biographical information for each of the individuals named in the table is presented below. [Enlarge/Download Table] CURRENT TITLE DIRECTOR NAME AGE TITLE SINCE SINCE ------------------------------ --- ------------------------------------------------------- ------- -------- David S. Loeb................. 70 Chairman of the Board of Directors and Chief Executive 1985 1985 Officer Angelo R. Mozilo.............. 55 Vice Chairman of the Board of Directors and President 1985 1985 Lyle E. Gramley............... 67 Director -- 1993 Thomas J. Kearns.............. 55 Director -- 1990 Frederick J. Napolitano....... 64 Director -- 1985 Michael W. Perry.............. 32 Executive Vice President and Chief Operating Officer 1993 -- S. Blair Abernathy............ 32 Senior Vice President, Secondary Marketing 1994 -- Carmella L. Grahn............. 31 Senior Vice President, Chief Accounting Officer 1993 -- Kellie A. Johnson............. 33 Senior Vice President, Sales and Marketing 1993 -- Maxine L. Matteo.............. 38 Senior Vice President, Warehouse Lending 1994 -- Kathleen H. Rezzo............. 40 Senior Vice President, Construction Lending 1994 -- Richard H. Wohl............... 36 Senior Vice President, General Counsel & Secretary 1994 -- N. Lance Jackson.............. 38 Vice President, Corporate Credit 1993 -- Peter L. Konkowski............ 32 Vice President, Quality Control 1994 -- Steven E. West................ 33 Vice President, Treasurer 1993 -- David S. Loeb has been Chairman of the Board of Directors and Chief Executive Officer of the Company since its formation in July 1985. He is co-founder of CCI and has been Chairman and President of CCI since its formation in March 1969. Mr. Loeb also serves as Chief Executive Officer of CAMC. In addition, Mr. Loeb serves as Chairman of INMC. Angelo R. Mozilo has been President of the Company since its formation and a Director since October 1985. He has been Vice Chairman of the Board of Directors since 1993. He is co-founder of CCI and has been Vice Chairman of the Board of Directors and Executive Vice President of CCI since its formation in March 1969. Mr. Mozilo serves as Chairman of the Board of CAMC. Mr. Mozilo has served since 1978 as President of CFC and, since 1994, has served as Chairman and Chief Executive Officer of CFC. In addition, Mr. Mozilo serves as Vice Chairman of INMC. Lyle E. Gramley became a Director of the Company in January 1993. He is a former member of the Board of Governors of the Federal Reserve System. Since September 1985, he has been employed by the Mortgage Bankers Association of America as its chief economist and more recently as a consulting economist, and during that period he has also been self-employed as an economic consultant. He also serves on the Board of Trustees of the following mutual funds distributed by Dreyfus Service Corporation: Cash Management, Cash Management Plus, Inc., Government Cash Management, Treasury Cash Management, Treasury Prime Cash Management, Tax Exempt Cash Management, Municipal Cash Management Plus and New York Municipal Cash Management. Thomas J. Kearns has been a Director of the Company since June 1990. He is President of Thomas J. Kearns Inc., a financial consulting firm, and has been in the securities business for 30 years. He spent approximately 16 years with Merrill Lynch Capital Markets as a First Vice President. He is a Managing Director of Commonwealth Associates and serves on the Board of Directors of Jameson Inns, Inc., a hotel real estate investment trust. Frederick J. Napolitano has been a Director of the Company since its inception and has been Chairman of the Board of Pembroke Enterprises, Inc., a real estate development company located in Virginia since 1973. He was also a Director of Home Mortgage Access Corporation and serves on the 27
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board and executive committee of the National Association of Home Builders and was President of the National Association of Home Builders in 1982. He served on the Federal Home Loan Bank Board Advisory Council from 1983 to 1985, Federal Home Loan Mortgage Corporation Advisory Committee from 1981 to 1983, Federal National Mortgage Association Board from 1984 to 1985, was chairman of the Hampton Roads Chamber of Commerce in 1989, and is a member of the Industrial Development Services Advisory Board for the Commonwealth of Virginia. Michael W. Perry is currently Executive Vice President and Chief Operating Officer of the Company, President and Chief Executive Officer of INMC and Chairman and CEO of ILC. Mr. Perry has been with the Company since January 1993 and has direct responsibility for the management of the Company and its subsidiaries. From May 1987 to December 1992, he served as Senior Executive Vice President in charge of the Mortgage Banking Division of Commerce Security Bank. He has 11 years of business experience with financial institutions, real estate firms and mortgage banking companies, including four years as a certified public accountant with KPMG Peat Marwick LLP. S. Blair Abernathy is currently Senior Vice President of the Company and Executive Vice President of INMC. He is responsible for secondary marketing (pricing, hedging and mortgage finance), funding, master servicing (servicer compliance and investor accounting) and new product development. Prior to joining the Company in February 1994, Mr. Abernathy was Senior Vice President and Chief Financial Officer of Commerce Security Bank in Sacramento, California. Mr. Abernathy was also Vice President and Controller of Sunrise Bancorp of California, and worked as a certified public accountant in the financial institutions group of KPMG Peat Marwick LLP for four years. Carmella L. Grahn is currently Senior Vice President, Chief Accounting Officer of the Company and Executive Vice President, Chief Accounting Officer of each of the Company's subsidiaries. Ms. Grahn is responsible for treasury, accounting, financial reporting, taxes, human resources and the implementation and evaluation of internal controls. Prior to joining the Company in October 1993, Ms. Grahn worked for Price Waterhouse as a certified public accountant and audit manager. She also served as Senior Vice President and Chief Financial Officer of Olympic National Bank, a publicly held bank with assets of $150 million. Kellie A. Johnson is currently Senior Vice President of Sales and Marketing for the Company and Executive Vice President of Sales and Marketing for each of the Company's operating subsidiaries. The sales and marketing group is made up of 11 national account managers, 3 account executives and 7 production assistants responsible for marketing INMC and warehouse and construction lending products. Prior to joining the Company in March 1993, Ms. Johnson was Assistant Vice President and Builder Division Manager for Cypress Financial Corporation in northern California. Ms. Johnson also held various production positions at North American Mortgage Company. Ms. Johnson has over 11 years experience in the mortgage industry and is a licensed mortgage broker in the state of California. Maxine L. Matteo is currently Senior Vice President of the Company, EVP-Warehouse Lending of ILC and President and Chief Executive Officer of WLCA, a division of ILC for which she oversees all sales and operations. Before joining the Company in March 1994, Ms. Matteo was executive vice president of GE Capital Mortgage Services, Inc., where she headed a national jumbo mortgage conduit. Ms. Matteo has also held various executive positions at firms such as the U.S. League of Savings Institutions, PaineWebber Incorporated, and California First Bank. Kathleen H. Rezzo is currently Senior Vice President of the Company, EVP-Construction Lending of ILC and President and Chief Executive Officer of CLCA, a division of WLC. From 1977 until joining the Company in August 1994, Ms. Rezzo held various positions at Security Pacific National Bank, which included Chief Credit Officer and positions within the Commercial Lending Group and the Real Estate Industries Group. Ms. Rezzo also managed the Participating Mortgage Unit, and held the position of Senior Vice President/Los Angeles Division Manager for the Real Estate Industries Division, of Bank of America, where she was responsible for a loan portfolio in excess of $2 billion and a staff of 40. Richard H. Wohl is currently Senior Vice President, General Counsel and Secretary for the Company and Executive Vice President, General Counsel and Secretary for each of the Company's subsidiaries. Prior to joining the Company in April 1994, Mr. Wohl was a senior associate at Morrison & Foerster in Los Angeles. In that capacity, he worked extensively in the institutional lending and 28
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corporate areas, and represented a number of major warehouse lenders and other financial institutions in the mortgage banking industry. Mr. Wohl graduated with distinction from Stanford University and received his J.D. from the Harvard Law School, where he was an editor of the Harvard Law Review. N. Lance Jackson is currently Vice President, Corporate Credit of the Company. Mr. Jackson heads the Corporate Credit Department, which performs initial and on-going due diligence on the customers of INMC and WLCA. Prior to joining the Company, Mr. Jackson was a Senior Auditor at FHLMC, where he reviewed overall origination, selling and servicing operations of seller/servicers located throughout the United States. Prior to FHLMC, Mr. Jackson worked as a certified public accountant in the position of Senior Accountant at KPMG Peat Marwick LLP and as a loan officer for Great Western Bank. Peter L. Konkowski is currently Vice President and Quality Control Manager of the Company. Mr. Konkowski manages the quality control and underwriting areas, which are responsible for the review of loans for which prior approval is required, review and approval of prospective delegated underwriting clients and review of loans on a post purchase basis. Prior to joining the Company in May 1994, Mr. Konkowski served as Director of Client Relations for the Lender Express Conduit for the Prudential Home Mortgage Company, a subsidiary of Residential Services Corporation of America. Mr. Konkowski also worked for FSB Investors Corporation as Marketing Representative and for Bank-Fund Staff Federal Credit Union as Loan Closer. Steven E. West is currently Vice President and Treasurer of the Company and each of its subsidiaries. He is responsible for financing the various products offered by the Company and managing overall liquidity. Prior to joining the Company in November 1993, Mr. West managed the processing and investor reporting departments within the loan administration division for First Nationwide Bank and was also responsible for developing correspondent banking relationships and managing overall cash flow. Mr. West is a former employee of KPMG Peat Marwick LLP and graduated from California State University. COMMON STOCK OWNERSHIP OF MANAGEMENT The following table sets forth information regarding stock options and stock ownership for directors, certain executive officers and CCI. Except as otherwise noted, the Company knows of no agreements among its stockholders that relate to voting or investment power of its shares of Common Stock. [Enlarge/Download Table] NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED SHARES OF COMMON OPTIONS AT OCTOBER 31, IN-THE-MONEY OPTIONS STOCK OWNED PERCENT 1994(4) AT OCTOBER 31, 1994(4) BENEFICIALLY AS OF OF --------------------------- --------------------------- NAME OCTOBER 31, 1994(1)(2)(4) CLASS EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE -------------------------- ------------------------- ------- ----------- ------------- ----------- ------------- David S. Loeb............. 255,600 * 25,000 30,000 $ 64,063 $ 22,500 Angelo R. Mozilo.......... 174,431(3) * 80,000 30,000 226,250 22,500 Lyle E. Gramley........... 62,425 * -- 30,000 -- 22,500 Thomas J. Kearns.......... 102,000 * 40,000 30,000 95,938 22,500 Frederick J. Napolitano... 176,400 * 25,000 30,000 64,063 22,500 Michael W. Perry.......... 25,000 * 20,000 120,000 58,750 143,750 All directors and executive officers as a group (14 persons)...... 797,356 2.5% 190,000 297,500 509,064 287,656 ------------ * Less than one percent of class. (1) Unless otherwise indicated, includes sole voting and investment power. (2) Includes shares which may be purchased through stock options exercisable within 60 days of October 31, 1994 held by the following persons: Mr. Loeb, 25,000 shares, Mr. Mozilo, 80,000 shares, Mr. Kearns, 40,000 shares, Mr. Napolitano, 25,000 shares, Mr. Perry, 20,000 shares, and all directors and executive officers as a group, 190,000 shares. (footnotes continued on next page) 29
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(footnotes continued from previous page) (3) Includes 1,000 shares owned by Phyllis Mozilo, the wife of Angelo Mozilo, as to which shares he disclaims any beneficial interest. (4) As of October 31, 1994, CCI owned 1,100,000 shares of the Company's Common Stock, which represents 3.4% of such class as of such date. DESCRIPTION OF COMMON STOCK The authorized capital stock of the Company consists of 60,000,000 shares of Common Stock, $.01 par value. Each share is entitled to participate equally in dividends when and as declared by the Board of Directors and in the distribution of assets of the Company upon liquidation. Each share of Common Stock is entitled to one vote and will be fully paid and non-assessable by the Company upon issuance. Shares of the Common Stock of the Company have no preference, conversion, exchange, preemptive or cumulative voting rights. The authorized capital stock of the Company may be increased and altered from time to time as permitted by Delaware law. Meetings of the stockholders of the Company are to be held annually and special meetings may be called by the Board of Directors, the Chairman of the Board, the President or a majority of the unaffiliated directors. The Certificate of Incorporation reserves to the Company the right to amend any provision thereof in the manner prescribed by law. Repurchase of Shares and Restrictions on Transfer. Two of the requirements of qualification for the tax benefits accorded by the Real Estate Investment Trust Provisions of the Code are that (i) during the last half of each taxable year not more than 50% in value of the outstanding shares may be owned directly or indirectly by five or fewer individuals and (ii) there must be at least 100 stockholders on 335 days of each taxable year of 12 months. In order that the Company may meet these requirements at all times, the Certificate of Incorporation prohibits any person or group of persons from acquiring or holding, directly or indirectly, ownership of a number of shares of capital stock in excess of 9.8% of the outstanding shares. Shares of capital stock owned by a person or group of persons in excess of such amounts are referred to herein as 'Excess Shares.' For this purpose, the term 'ownership' is defined in accordance with the Real Estate Investment Trust Provisions of the Code, the constructive ownership provisions of Section 544 of the Code and Rule 13d-3 promulgated by the Commission under the Exchange Act and the term 'group' is defined to have the same meaning as that term has for purposes of Section 13(d)(3) of the Exchange Act. Accordingly, shares of capital stock owned or deemed to be owned by a person who individually owns less than 9.8% of the shares outstanding may nevertheless be Excess Shares. The constructive ownership provisions applicable under Section 544 of the Code attribute ownership of securities owned by a corporation, partnership, estate or trust proportionately to its stockholders, partners or beneficiaries, attribute ownership of securities owned by family members and partners to other members of the same family, treat securities with respect to which a person has an option to purchase as actually owned by that person, and set forth rules as to when securities constructively owned by a person are considered to be actually owned for the application of such attribution provisions (i.e., 'reattribution'). For purposes of determining whether a person holds Excess Shares, a person or group will thus be treated as owning not only shares of Common Stock actually or beneficially owned, but also any shares of Common Stock attributed to such person or group under the attribution rules described above. Ownership of shares of the Company's Common Stock through such attribution is generally referred to as constructive ownership. The Certificate of Incorporation also provides that in the event any person acquires Excess Shares, such Excess Shares are deemed tendered for purchase to the Company. Except as set forth below, the purchase price for such Excess Shares shall be the closing price on the purchase date of such share of capital stock on the New York Stock Exchange or other national securities exchange on which the stock is listed, the closing bid price on the NASDAQ System if the stock is not listed on any such exchange or, if neither listed on an exchange nor quoted on the NASDAQ System, the net asset value of such share as determined in good faith by the Board of Directors. The purchase price of any shares so 30
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purchased shall be paid, at the option of the Company, in cash or in the form of an unsecured, subordinated promissory note of the Company bearing interest and having a term to maturity (to be not less than five nor more than 20 years) as shall be determined by the Board of Directors. From and after the date fixed for purchase by the Board of Directors and the tender by the Company of the purchase price therefor, each as specified in the Company's notice of acceptance of the offer of sale which must be sent to the holder, the holder of any shares to be so purchased shall cease to be entitled to any rights as a holder of such shares, excepting only the right to receive payment of the purchase price for such shares. Under the Certificate of Incorporation any acquisition of shares of the Company that would result in the disqualification of the Company as a real estate investment trust under the Code is void to the fullest extent permitted by law, and the Board of Directors is authorized to refuse to transfer shares to a person if, as a result of the transfer, that person would own Excess Shares. Prior to any transfer or transaction which, if consummated, would cause a stockholder to own shares in excess of 9% of the outstanding shares of the Company, and in any event upon demand by the Board of Directors, a stockholder is required to file with the Company an affidavit setting forth, as to that stockholder, the information required to be reported in returns filed by stockholders under Regulation 1.857-9 issued by the Internal Revenue Service (the 'IRS') and in reports held under Section 13(d) of the Exchange Act. Additionally, each proposed transferee of shares of Common Stock, upon demand of the Board of Directors, also may be required to file a statement or affidavit with the Company setting forth the number of shares already owned by the transferee and any related person. Restrictions on Ownership. The Company's Certificate of Incorporation and Bylaws provide that 'disqualified organizations' within the meaning of Section 860E(e)(5) of the Code, which generally include governmental entities and other tax-exempt persons not subject to tax on unrelated business taxable income, are ineligible to hold the Company's shares. Accordingly, the shares of Common Stock offered hereby should not be purchased or held by such disqualified organizations. See 'Certain Federal Income Tax Considerations.' Transfer Agent and Registrar. The transfer agent and registrar for the Company's Common Stock is Chemical Trust Company of California. CERTAIN FEDERAL INCOME TAX CONSIDERATIONS FEDERAL INCOME TAXATION OF STOCKHOLDERS The following is a summary of certain anticipated material federal income tax consequences of an investment in the Company that should be considered by prospective stockholders. This summary is based on existing provisions of the Code, final and proposed Treasury regulations promulgated thereunder, judicial decisions and administrative rulings, all of which are subject to change or alternative construction with possible retroactive effect. This summary does not purport to deal with all federal income tax consequences applicable to all categories of investors, some of which may be subject to special rules. Prospective stockholders should consult their own tax advisors to determine the federal, state, local and other tax consequences to them of their investment in the Company. Prospective stockholders should also note that no rulings have been obtained by the Company from the IRS concerning any of the matters discussed below, and no assurance can be given that the IRS will not take contrary positions. GENERAL CONSIDERATIONS The Company has elected to be taxed as a real estate investment trust under the Code and intends to continue to do so. Brown & Wood, counsel to the Company, has given the Company its opinion to the effect that, based on existing law and certain representations made to it by the Company, and subject to the limitations and qualifications set forth in the opinion given to the Company and as set forth below, (i) the Company operated in a manner which qualified it as a real estate investment trust under the Code since its inception and (ii) the organization and contemplated method of operation of the Company are such as to enable it to continue to so qualify in this and subsequent years, provided 31
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the various tests for qualification as a real estate investment trust relating to its income, assets, distributions, ownership and certain administrative matters are satisfied in those years. However, there are aspects of the Company's method of operation which have not been considered by the courts or the IRS, and there can be no assurance that the courts or the IRS will agree with this opinion. In addition, qualification as a real estate investment trust depends on future transactions and events which cannot be known at this time. Accordingly, Brown & Wood is unable to opine whether the Company will in fact continue to qualify as a real estate investment trust under the Code. If the requirements for qualification as a real estate investment trust under the Code are satisfied, the Company generally will not be subject to federal corporate income tax with respect to income which it distributes to stockholders. Any subsidiary of the Company that has been wholly owned by the Company during the subsidiary's entire existence (a 'qualified real estate investment trust subsidiary') will not be treated as a corporation separate from the Company for federal income tax purposes. Thus, any assets, liabilities, income, deductions or credits of such a subsidiary will be attributed to the Company. However, the Company can be taxed on undistributed earnings on income from certain sources or activities (e.g., active business income earned from foreclosure property). In addition, INMC, which operates the Company's mortgage conduit operations and is included in the Company's consolidated GAAP financial statements, is not a qualified real estate investment trust subsidiary. Consequently, INMC is subject to applicable federal and state income taxes. The Company will include in income amounts earned by INMC only upon payment to the Company by dividend of after-tax earnings of INMC. The Company may be taxable on the portion of any excess inclusion income allocable to any stockholder which is a 'disqualified organization' within the meaning of Section 860E(e)(5) of the Code, which generally includes governmental entities and other tax-exempt persons not subject to the tax on UBTI. However, the Company's Certificate of Incorporation and Bylaws provide that disqualified organizations are ineligible to hold the Company's shares. The Company's election to be treated as a real estate investment trust will be terminated automatically if the Company fails to meet the requirements of the Real Estate Investment Trust Provisions of the Code. Although the Company believes it has operated and intends to continue to operate in such a manner as to qualify as a real estate investment trust, no assurance can be given that the Company will in fact continue to so qualify. If the Company fails to qualify as a real estate investment trust in any taxable year, it would be subject to federal corporate income tax (including any alternative minimum tax) on its taxable income at regular corporate rates, and distributions to its stockholders would not be deductible by the Company. In that event, the Company would not be eligible again to elect real estate investment trust status until the fifth taxable year which begins after the year for which the Company's election was terminated unless certain relief provisions apply. The Company may also voluntarily revoke its election, although it has no intention of doing so, in which event the Company would be prohibited, without exception, from electing real estate investment trust status for the year to which the revocation relates and the following four taxable years. Distributions to stockholders of the Company with respect to any year in which the Company fails to qualify would not be deductible by the Company nor would they be required to be made. In such event, to the extent of current and accumulated earnings and profits, any distributions to stockholders would be taxable as ordinary income and, subject to certain limitations in the Code, eligible for the dividends-received deduction for corporations. Failure to qualify would reduce the amount of after-tax earnings available for distribution to stockholders and could result in the Company incurring substantial indebtedness (to the extent borrowings are feasible), or disposing of substantial investments, in order to pay the resulting taxes or, in the discretion of the Company, to maintain the level of the Company's distributions to its stockholders. SPECIAL CONSIDERATIONS -- TAX-EXEMPT AND CERTAIN OTHER INVESTORS For CMOs issued by the Company or a qualified real estate investment trust subsidiary after December 31, 1991, pursuant to regulations not yet published, the portion of any dividends paid to stockholders attributable to 'excess inclusion income' on the retained residual interests in such CMOs would be subject to certain special rules. Such rules include (i) the characterization of excess inclusion 32
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income as unrelated business taxable income ('UBTI') for tax-exempt stockholders (including employee benefit plans and individual retirement accounts), (ii) the application of federal income tax withholding at the maximum rate (without reduction for any otherwise applicable income tax treaty) on any excess inclusion income allocable to foreign stockholders and (iii) the inability of a stockholder generally to offset excess inclusion income with net operating losses. Generally, tax-exempt entities are subject to federal income tax on excess inclusion income and other unrelated business income in excess of $1,000 per year. Excess inclusion income is generally taxable income with respect to a residual interest in excess of a specified return on investment in the residual interest. In some cases, substantially all taxable income with respect to a residual interest may be considered excess inclusion income. Until regulations or other guidance are issued, the Company will use methods it believes are appropriate for calculating the amount of excess inclusion income it recognizes from CMOs issued after December 31, 1991, and allocating any excess inclusion income to its stockholders. The Company may invest in or otherwise acquire residual interests in REMICs. In general, a REMIC is a fixed pool of mortgage instruments in which investors hold multiple classes of interests and for which a REMIC election has been made. Part or all of any income derived by the Company from a REMIC residual interest may be excess inclusion income. If the Company pays any dividends to its stockholders that are attributable to such excess inclusion income, the stockholders who receive such dividends would also be subject to the rules described above. TAXATION OF DISTRIBUTIONS BY THE COMPANY Assuming that the Company maintains its status as a real estate investment trust, any distributions that are properly designated as 'capital gain dividends' generally will be taxed to stockholders as long-term capital gains, regardless of how long a stockholder has owned his shares. Any other distributions out of the Company's current or accumulated earnings and profits will be dividends taxable as ordinary income, generally in the year paid. However, any dividend declared by the Company in October, November or December of any year payable to a stockholder of record on a specific date in any such month will be treated as both paid by the Company and received by the stockholder on December 31 of such year, provided that the dividend is actually paid by the Company during January of the following calendar year. Stockholders will not be entitled to dividends-received deductions with respect to any dividends paid by the Company. Distributions in excess of the Company's current or accumulated earnings and profits will be treated as tax-free returns of capital, to the extent of the stockholder's basis in his shares of Common Stock, and as gain from the disposition of shares, to the extent they exceed such basis. Stockholders may not include on their own returns any of the Company's ordinary or capital losses. Dividends paid by the Company to organizations that are exempt from federal income tax under Section 501(a) of the Code generally will not be taxable to them as UBTI except to the extent that (i) purchase of shares of Common Stock was financed by 'acquisition indebtedness' or (ii) such dividends are attributable to excess inclusion income. The Company expects that tax-exempt investors will be required to treat a portion of their dividends as UBTI, because the Company expects that a portion of its income will be treated as excess inclusion income. Because an investment in the Company may give rise to UBTI or trigger the filing of an income tax return that otherwise would not be required, tax-exempt organizations should give careful consideration to whether an investment in the Company is prudent. TAXATION OF DISPOSITION OF SHARES OF THE COMMON STOCK In general, any gain or loss realized upon a taxable disposition of shares will be treated as long-term capital gain or loss if the shares have been held for more than 12 months and otherwise as short-term capital gain or loss. However, any loss realized upon a taxable disposition of shares held for six months or less will be treated as long-term capital loss to the extent of any capital gain dividends received with respect to such shares. All or a portion of any loss realized upon a taxable disposition of shares of Common Stock may be disallowed if other shares of Common Stock are purchased (under a dividend reinvestment plan or otherwise) within 30 days before or after the disposition. 33
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BACKUP WITHHOLDING The Company generally is required to withhold and remit to the United States Treasury 31% of the dividends paid to any stockholder who (i) fails to furnish the Company with a correct taxpayer identification number, (ii) has underreported dividend or interest income to the IRS or (iii) under certain circumstances, fails to certify to the Company that he is not subject to backup withholding. An individual's taxpayer identification number is his social security number. STATE AND LOCAL TAX CONSIDERATIONS State and local tax laws may not correspond to the federal income tax principles discussed in this section. Accordingly, prospective investors should consult their tax advisors concerning the state and local tax consequences of an investment in the Company. FOREIGN INVESTORS The preceding discussion does not address the federal income tax consequences to foreign investors of an investment in the Company. Foreign investors in the Company should consult their own tax advisors concerning the federal income tax consequences to them of a purchase of shares of the Company's Common Stock, including the application of United States withholding tax on distributions made to them. Any excess inclusion income allocated to a foreign investor would be subject to such withholding without reduction by any otherwise applicable income tax treaty between the United States and the foreign investor's country. ERISA MATTERS The Employee Retirement Income Security Act of 1974, as amended ('ERISA'), imposes certain restrictions on employee benefit plans subject to ERISA ('Plans'). Fiduciaries of Plans should consult their legal advisors when considering an investment in the shares of Common Stock regarding, among other matters, the investment's compliance with the Plans' governing documents and the normal fiduciary investment standards of ERISA, including prudence and diversification, as well as the fact that an investment in such shares may give rise to UBTI being recognized by the Plans and other tax-exempt investors. See 'Certain Federal Income Tax Considerations.' The Company believes that the shares of Common Stock are 'publicly offered securities' under United States Department of Labor regulation 29 C.F.R. SS2510.3-101. Accordingly, the Company believes that its underlying assets will not be considered 'plan assets' of Plans which purchase shares of Common Stock. UNDERWRITING Subject to the terms and conditions set forth in a purchase agreement (the 'Purchase Agreement'), the Company has agreed to sell to each of the Underwriters named below, and each of the Underwriters, for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated, Alex. Brown & Sons Incorporated, Dean Witter Reynolds Inc., PaineWebber Incorporated and Salomon Brothers Inc are acting as representatives (the 'Representatives'), has severally agreed to purchase, the number of shares of Common Stock set forth below opposite its respective name. The Underwriters are committed 34
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to purchase all of such shares if any are purchased. Under certain circumstances, the commitments of non-defaulting Underwriters may be increased as set forth in the Purchase Agreement. [Enlarge/Download Table] NUMBER UNDERWRITER OF SHARES --------- Merrill Lynch, Pierce, Fenner & Smith Incorporated....................................................... Alex. Brown & Sons Incorporated.................................................. Dean Witter Reynolds Inc. ....................................................... PaineWebber Incorporated......................................................... Salomon Brothers Inc............................................................. --------- Total.............................................................. 6,000,000 --------- --------- The Representatives of the Underwriters have advised the Company that they propose initially to offer the shares of Common Stock to the public at the public offering price set forth on the cover page of this Prospectus, and to certain dealers at such price less a concession not in excess of $. per share. The Underwriters may allow, and such dealers may reallow, a discount not in excess of $. per share on sales to certain other dealers. After the initial public offering, the public offering price, concession and discount may be changed. The Company has granted the Underwriters an option, exercisable for 30 days after the date hereof, to purchase up to 900,000 additional shares of Common Stock to cover over-allotments, if any, at the initial public offering price, less the underwriting discount set forth on the cover page of this Prospectus. If the Underwriters exercise this option, each of the Underwriters will have a firm commitment, subject to certain conditions, to purchase approximately the same percentage thereof which the number of shares to be purchased by it shown in the foregoing table is of the 6,000,000 shares of Common Stock initially purchased by the Underwriters. The Company has agreed that, for a period of 180 days from the date of this Prospectus, it will not, without the prior written consent of the Representatives, directly or indirectly sell, offer to sell, grant any option for the sale of, or otherwise dispose of any shares of Common Stock or any security convertible into Common Stock, except, with respect to the Company, for Common Stock or options issued pursuant to reservations, agreements, employee benefit plans or stock option plans. CCI has agreed that, for a period of 180 days from the date of this Prospectus, it will not, without 30 days' prior written notice to the Representatives, directly or indirectly sell, offer to sell, grant any option for the sale of, or otherwise dispose of any shares of Common Stock or any security convertible into Common Stock of the Company, and that the Representatives shall have a right of first refusal to purchase any such Common Stock or security convertible into Common Stock from CCI. The Company has agreed to indemnify the several Underwriters against certain civil liabilities, including liabilities under the Securities Act. LEGAL MATTERS The validity of the shares offered hereby will be passed upon for the Company by Brown & Wood and for the Underwriters by Thacher Proffitt & Wood. 35
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EXPERTS The consolidated financial statements and schedules of the Company and its subsidiaries included in the Company's Annual Report on Form 10-K for the year ended December 31, 1993, which is incorporated herein by reference, have been audited by Grant Thornton, independent certified public accountants, as set forth in their report, and have been so incorporated in reliance upon such report and upon the authority of such firm as experts in accounting and auditing. 36
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INDEX OF CERTAIN DEFINITIONS Set forth below is a list of certain terms used in this Prospectus, together with the pages on which the terms are defined or described. [Enlarge/Download Table] PAGE ---- Adjustable-Rate Mortgage (ARM)............................................................................. 15 Agency ARMs................................................................................................ 24 Agency Securities.......................................................................................... 24 Best Efforts Rate-Lock..................................................................................... 17 Bulk Rate-Lock............................................................................................. 16 Collateralized Mortgage Obligation (CMO)................................................................... 4 Commodity Exchange Act (CEA)............................................................................... 5 Constant Maturity Treasury Index (CMT Index)............................................................... 15 Construction Lending Corporation of America (CLCA)......................................................... 3 Countrywide Asset Management Corporation (CAMC)............................................................ 4 Countrywide Credit Industries, Inc. (CCI).................................................................. 4 Countrywide Funding Corporation (CFC)...................................................................... 3 Disqualified Organization.................................................................................. 10 Excess Shares.............................................................................................. 30 Federal Home Loan Mortgage Corporation (FHLMC)............................................................. 4 Federal National Mortgage Association (FNMA)............................................................... 4 Government National Mortgage Association (GNMA)............................................................ 7 Independent Lending Corporation (ILC)...................................................................... 4 Independent National Mortgage Corporation (INMC)........................................................... 3 Loan-to-Value (LTV)........................................................................................ 13 Master Commitment.......................................................................................... 16 Mortgage Conduit........................................................................................... 12 Net Interest Spread (Net Spread)........................................................................... 12 Non-conforming Mortgage Loans.............................................................................. 12 Purchase Agreement......................................................................................... 34 Qualified Real Estate Investment Trust Subsidiary.......................................................... 32 Rate-lock.................................................................................................. 16 Real Estate Investment Trust Provisions of the Code........................................................ 10 Real Estate Mortgage Investment Conduit (REMIC)............................................................ 3 Residual Cash Flow......................................................................................... 6 Subordinated Securities.................................................................................... 5 Tract Construction......................................................................................... 3 Warehouse Lending Corporation of America (WLCA)............................................................ 3 37
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_____________________________ _____________________________ NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY AGENT, DEALER OR UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. ------------------------------------- TABLE OF CONTENTS [Enlarge/Download Table] PAGE ---- Available Information....................................................................................................... 2 Incorporation of Certain Information by Reference........................................................................... 2 Prospectus Summary.......................................................................................................... 3 Risk Factors................................................................................................................ 5 Selected Consolidated Financial Data........................................................................................ 11 The Company................................................................................................................. 12 Business.................................................................................................................... 12 Use of Proceeds............................................................................................................. 25 Market Prices and Dividend Data............................................................................................. 25 Dividend Reinvestment Plan.................................................................................................. 26 Capitalization.............................................................................................................. 26 Management of CWM Mortgage Holdings, Inc.................................................................................... 27 Common Stock Ownership of Management........................................................................................ 29 Description of Common Stock................................................................................................. 30 Certain Federal Income Tax Considerations................................................................................... 31 ERISA Matters............................................................................................................... 34 Underwriting................................................................................................................ 34 Legal Matters............................................................................................................... 35 Experts..................................................................................................................... 36 Index of Certain Definitions................................................................................................ 37 6,000,000 SHARES [LOGO] COMMON STOCK --------------------------- PROSPECTUS --------------------------- MERRILL LYNCH & CO. ALEX. BROWN & SONS INCORPORATED DEAN WITTER REYNOLDS INC. PAINEWEBBER INCORPORATED SALOMON BROTHERS INC DECEMBER , 1994 _____________________________ _____________________________
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PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.* [Enlarge/Download Table] Securities and Exchange Commission filing fees and expenses....................... $ 21,414 Printing and engraving............................................................ 75,000 Legal fees and expenses........................................................... 200,000 NASD filing fee................................................................... 6,710 Accounting fees and expenses...................................................... 15,000 Blue Sky qualifications and expenses (including legal fees)....................... 15,000 Listing fees...................................................................... 25,000 Miscellaneous..................................................................... 66,876 -------- Total................................................................... $425,000 -------- -------- ------------ *All expenses except Securities and Exchange Commission and NASD filing fees are estimates. ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the General Corporation Law of the State of Delaware provides that a corporation shall have the power, and in some cases is required, to indemnify an agent, including an officer or director, who was or is a party or is threatened to be made a party to any proceedings, against expenses, judgments, fines, settlements and other amounts under certain circumstances. The Certificate of Incorporation and Bylaws of the Company provide, in effect, that, to the extent and under the circumstances permitted by Section 145 of the General Corporation Law of Delaware, the Company shall indemnify any person who was or is a party or is threatened to be made a party to any action, suit or proceeding by reason of the fact that he or she is or was a director, officer, employee or agent of the Company. The Company maintains insurance covering certain liabilities of the directors and officers of the Company. The Company has also entered into contractual arrangements with its directors and officers pursuant to which such persons may be entitled to indemnity from the Company against certain liabilities arising from the discharge of their duties in such capacities. ITEM 16. EXHIBITS. [Enlarge/Download Table] 1.1** -- Form of Purchase Agreement. 4.1* -- Certificate of Incorporation for the Company (incorporated by reference to Exhibit 3.1 to the Company's Form 10-Q filed with the Commission on November 14, 1994). 4.2* -- Bylaws of the Company (incorporated by reference to Exhibit 4.2 to the Company's Form 10-Q filed with the Commission on August 12, 1993). 4.3* -- Form of Common Stock Certificate (incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-3, as amended (File No. 33-63034)). 5.1** -- Opinion of Brown & Wood as to the legality of the Common Stock being offered. 8.1** -- Opinion of Brown & Wood as to tax matters. 23.1 -- Consent of Grant Thornton. 23.2** -- Consent of Brown & Wood (included in Exhibit 5.1 and Exhibit 8.1). 24.1 -- Power of Attorney (included on page II-3 of the Registration Statement). ------------ *Incorporated by reference. **To be filed by amendment. ITEM 17. UNDERTAKINGS. (a) The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to Section 13(a) II-1
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or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in this Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described in Item 15 above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted against the Registrant by such director, officer or controlling person in connection with the securities being registered hereby, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (c) The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-2
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SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Pasadena, State of California, on the 21st day of November, 1994. CWM MORTGAGE HOLDINGS, INC. By /s/ MICHAEL W. PERRY ................................... MICHAEL W. PERRY EXECUTIVE VICE PRESIDENT AND CHIEF OPERATING OFFICER POWER OF ATTORNEY Each person whose signature appears below hereby appoints David S. Loeb, Angelo R. Mozilo and Michael W. Perry and any one of them, as his true and lawful attorneys-in-fact and agents with full power of substitution, for him and in his name, in any and all capacities, to sign any or all amendments (including post-effective amendments) to this Registration Statement, and to file the same with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. [Enlarge/Download Table] SIGNATURE TITLE DATE ------------------------------------------ -------------------------------------------- ------------------- /s/ DAVID S. LOEB Director, Chief Executive Officer November 21, 1994 ......................................... and Chairman of the (DAVID S. LOEB) Board of Directors (Principal Executive Officer) /s/ ANGELO R. MOZILO Director, President and Vice November 21, 1994 ......................................... Chairman of the Board (ANGELO R. MOZILO) of Directors /s/ MICHAEL W. PERRY Executive Vice President and November 21, 1994 ......................................... Chief Operating Officer (MICHAEL W. PERRY) (Principal Financial Officer) /s/ CARMELLA L. GRAHN Senior Vice President and November 21, 1994 ......................................... Chief Accounting Officer (CARMELLA L. GRAHN) (Principal Accounting Officer) /s/ LYLE E. GRAMLEY Director November 21, 1994 ......................................... (LYLE E. GRAMLEY) /s/ THOMAS J. KEARNS Director November 21, 1994 ......................................... (THOMAS J. KEARNS) /s/ FREDERICK J. NAPOLITANO Director November 21, 1994 ......................................... (FREDERICK J. NAPOLITANO) II-3
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EXHIBIT INDEX [Enlarge/Download Table] SEQUENTIAL EXHIBIT PAGE NUMBER EXHIBIT NUMBER ------ ----------------------------------------------------------------------------------------------- ---------- 1.1** -- Form of Purchase Agreement.................................................................. 4.1* -- Certificate of Incorporation for the Company (incorporated by reference to Exhibit 3.1 to the Company's Form 10-Q filed with the Commission on November 14, 1994)...................... 4.2* -- Bylaws of the Company (incorporated by reference to Exhibit 4.2 to the Company's Form 10-Q filed with the Commission on August 12, 1993)................................................ 4.3* -- Form of Common Stock Certificate (incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-3, as amended (File No. 33-63034)).......................... 5.1** -- Opinion of Brown & Wood as to the legality of the Common Stock being offered................ 8.1** -- Opinion of Brown & Wood as to tax matters................................................... 23.1 -- Consent of Grant Thornton................................................................... 23.2** -- Consent of Brown & Wood (included in Exhibit 5.1 and Exhibit 8.1)........................... 24.1 -- Power of Attorney (included on page II-3 of the Registration Statement)..................... ------------ * Incorporated by reference. ** To be filed by amendment. STATEMENT OF DIFFERENCES [Download Table] The section symbol shall be expressed as............. SS

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10/31/943031
9/30/9432710-Q,  10-Q/A
6/30/94310-Q,  10-Q/A
4/1/943
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