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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
FORM 10-K/A
AMENDMENT NO. 2
FOR FISCAL YEAR ENDED DECEMBER 31, 1993
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1993
OR
[ ] TRANSITION REPORT PURSUANT TO THE SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number: 1-8972
COUNTRYWIDE MORTGAGE INVESTMENTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3983415
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)
35 NORTH LAKE AVENUE, PASADENA, CALIFORNIA 91101-1857
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (800) 669-2300
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
As of March 23,1994, there were 32,131,908 shares of Countrywide Mortgage
Investments, Inc. Common Stock, $.01 par value, outstanding. Based on the
closing price for shares of Common Stock on that date, the aggregate market
value of Common Stock held by non-affiliates of the registrant was approximately
$328,184,600. For the purposes of the foregoing calculation only, in addition to
affiliated companies, all directors and executive officers of the registrant
have been deemed affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
PROXY STATEMENT FOR THE 1994 ANNUAL MEETING---PART III
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COUNTRYWIDE MORTGAGE INVESTMENTS, INC.
1993 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PART I
ITEM 1. BUSINESS.............................................. 1
ITEM 2. PROPERTIES............................................ 9
ITEM 3. LEGAL PROCEEDINGS..................................... 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS... 9
PART II
ITEM 5. MARKET FOR THE COMPANY'S STOCK
AND RELATED SECURITY HOLDER MATTERS.................. 9
ITEM 6. SELECTED FINANCIAL DATA............................... 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................. 12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........... 19
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.. 19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 20
ITEM 11. EXECUTIVE COMPENSATION............................... 20
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT............................... 20
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....... 20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K................................. 21
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PART I
ITEM 1. BUSINESS
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GENERAL
Countrywide Mortgage Investments, Inc. was incorporated in the State of Maryland
on July 16, 1985 and reincorporated in the State of Delaware on March 6, 1987.
References to "CMI" mean either the parent company alone or the parent company
and the entities consolidated for financial reporting purposes, while references
to the "Company" means the parent company, its consolidated subsidiaries and
Countrywide Mortgage Conduit ("CMC"), which is not consolidated with CMI for
financial reporting purposes. All the common stock and 1% of the economic
interest of CMC is owned by Countrywide Funding Corporation ("CFC"), which is a
subsidiary of Countrywide Credit Industries, Inc. ("CCI"). All the preferred
stock and 99% of the economic interest of CMC is owned by CMI. The directors
and senior officers of CMC are also senior officers of CMI. In addition, CMC's
operations and technology are dependent upon and closely integrated with CMI,
and CMI is the sole supplier of its mortgage loans. Accordingly, CMC is
accounted for under a method similar to the equity method because CMI (as
opposed to affiliates of CMI) has the ability to exercise significant influence
over the financial and operating policies of CMC through its ownership of the
preferred stock and other contracts. CMI has elected to be taxed as a real
estate investment trust ("REIT") under the Internal Revenue Code of 1986, as
amended (the "Code"). As a result of this election, CMI will not, with certain
limited exceptions, be taxed at the corporate level on the net income
distributed to CMI's stockholders.
Historically, the Company has been a long-term investor in single-family, first-
lien, residential mortgage loans and in mortgage securities representing
interests in such loans (the "CMO portfolio"). Under its new operating plan
commenced in 1993, the Company conducts mortgage conduit activities through a
newly formed corporation, CMC, which is not a qualified REIT subsidiary and
which is subject to applicable federal and state income taxes. See "Certain
Federal Income Tax Considerations." As part of its new operating plan, CMI also
conducts warehouse lending operations which provide short-term revolving
financing to certain mortgage bankers.
MORTGAGE CONDUIT OPERATIONS
On October 22, 1992, CMI's Board of Directors approved a new operating plan,
implementation of which was begun in the first quarter of 1993. Under the new
plan, the Company primarily operates as a jumbo and nonconforming mortgage loan
conduit. As a jumbo mortgage loan conduit, the Company is an intermediary
between the originators of mortgage loans which have outstanding principal
balances in excess of the guidelines of the government and government sponsored
enterprises that guarantee mortgage-backed securities ("jumbo mortgage loans")
and permanent investors in mortgage-backed securities secured by or representing
an ownership interest in such mortgage loans. All loans purchased by CMI, for
which a REMIC transaction or whole loan sale is contemplated, are committed for
sale to CMC at the same price at which the loans were acquired by CMI. CMC does
not purchase any loans from entities other than CMI. Sellers generally retain
the rights to service the mortgage loans purchased by the Company. The
Company's principal sources of income from its mortgage conduit operations are
gains recognized on the sale of mortgage loans, the net spread between interest
earned on mortgage loans and the interest costs associated with the borrowings
used to finance such loans pending their securitization and the net interest
earned on its long-term investment portfolio.
Production
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The Company's mortgage conduit operations are designed to attract both large and
small sellers of jumbo mortgage loans by offering a variety of pricing and loan
underwriting methods designed to be responsive to such sellers' needs. The
Company focuses on sellers that originate loans in regions of the United States
with generally higher property values and mortgage balances.
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The Company has established three loan underwriting methods designed to be
responsive to the needs of jumbo mortgage loan sellers. The Company's first
method is designed to serve sellers who generally obtain mortgage pool insurance
commitments in connection with the origination of their loans. 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. The second method established by the
Company offers a delegated underwriting program for those loan sellers who meet
higher financial and performance criteria than those applicable to sellers
generally. Under the delegated underwriting program, 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. A sample of such loans is subsequently reviewed by the Company
in accordance with its expanded quality control guidelines. Finally, sellers may
submit to the Company loans for which there is no pool insurance commitment to
be underwritten in accordance with the Company's guidelines. 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."
Purchase Commitments
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Master Commitments. As part of its marketing strategy, the Company establishes
mortgage loan purchase commitments ("Master Commitments") with sellers that,
subject to certain conditions, obligate the seller to sell and the Company to
purchase a specified dollar amount of nonconforming 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 $10 million to $500 million in
aggregate committed principal amount.
Bulk and Other Commitments. 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 commitment basis. Bulk commitments 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 commitments enable the
Company to acquire substantial quantities of loans on a more immediate basis.
Underwriting and Quality Control
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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 Company's loan eligibility
requirements specified in its 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,
appraisal 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.
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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 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 loans fully reviewed is
thereafter reduced bimonthly to 20% after six months and maintained at this
level throughout the seller's participation in the delegated underwriting
program. 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.
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 of each
borrower and obtains a new credit report and independent appraisal with respect
to approximately 10% of the reviewed loan sample.
Mortgage Loans Acquired
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Substantially all of the mortgage loans purchased through the Company's mortgage
conduit operations are nonconforming mortgage loans. Nonconforming mortgage
loans are loans which do not qualify for purchase by the Federal Home Loan
Mortgage Corporation ("FHLMC") or the Federal National Mortgage Association
("FNMA") or for inclusion in a loan guarantee program sponsored by the
Government National Mortgage Association ("GNMA"). Nonconforming mortgage loans
generally consist of jumbo mortgage loans or loans which are not originated in
accordance with other agency criteria. Currently, the maximum principal balance
for a conforming loan is $203,150. The Company generally purchases jumbo
mortgage loans with original principal balances of up to $1 million. The
Company's loan purchase activities focus on those regions of the country where
higher volumes of jumbo 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 jumbo mortgage loans relates to properties 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 in 1993.
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. Fixed-rate mortgage loans accounted for over 90% of the
mortgage loans purchased by the Company in 1993 primarily because of the desire
of borrowers to lock in the low rates of interest prevailing in 1993. The
Company anticipates that its adjustable-rate mortgage loan purchase volume as a
percent of total loans purchased will grow as interest rates rise.
The Company also purchases adjustable rate mortgage ("ARM") loans which provide
the borrower with the option to convert to a fixed rate of interest in the
future. Although the Company sells or securitizes these ARM loans in connection
with its mortgage conduit operations, it generally is obligated to repurchase
the fixed-rate loans resulting from any such conversion. The Company generally
has the right to require repurchase of any such converted mortgage loan by the
servicer or seller of such loans.
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Seller Eligibility Requirements
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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, a servicing portfolio of at least $25
million and loan production aggregating at least $50 million during the last
three years. In addition, sellers are required to have comprehensive loan
origination quality control procedures. In connection with their 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
or any fraud or misrepresentation during the mortgage loan origination process.
Servicing Retention
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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 right to require
the Company to purchase such servicing rights at a previously determined price.
If a seller/servicer breaches certain 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.
Sale of Loans
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The Company, similar to other mortgage conduits, customarily sells all loans
that it purchases. When a sufficient volume of mortgage loans with similar
characteristics has been accumulated, generally $100 million to $500 million,
the loans are securitized through the issuance of mortgage-backed securities in
the form of real estate mortgage investment conduits ("REMICs") or
collateralized mortgage obligations ("CMOs") or resold in bulk whole loan sales.
The length of time between the Company's commitment 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 and the securitization process.
The Company's decision to form REMICs or CMOs or to 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 the 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 generally retains any residual
interests for investment. Management
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believes that because of the current low level of interest rates, investments in
residual interest or "excess master servicing fees" are prudent, and if interest
rates rise, the income from investments will mitigate declines in income that
may occur in the Company's purchase operations.
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 is directly
impacted by the levels of prepayment of the underlying mortgage loans. The
Company is required to retain a residual interest in its issued CMOs.
Substantially all of the Company's loans and mortgaged-backed securities ("MBS")
are sold at prices that are determined based on the cash market for MBS. As
such, the Company's interest-rate risk is directly correlated to the risk that
the price of MBS changes between the date on which a loan is purchased by the
Company and the date on which the mortgage loan is settled with the ultimate
investor. In addition, the Company is exposed to the risk that the value of the
loans that it has committed to purchase, but has not yet closed, will decline
between the commitment date and the date of the settlement with the investor.
In order to offset the risk that a change in interest rates will result in a
decrease in the value of the Company's current mortgage loan inventory, or its
commitments to purchase mortgage loans ("Committed Pipeline") the Company enters
into hedging transactions. The Company's hedging policies generally require
that all of its inventory of loans and the expected portion of its Committed
Pipeline that may close be hedged with forward contracts for the delivery of MBS
or whole loans. The Company hedges its inventory and Committed Pipeline of
mortgage loans by using whole-loan sale commitments to ultimate buyers, by using
temporary "cross hedges" with sales of government sponsored MBS since such loans
are ultimately sold based on a market spread to MBS, or by selling forward
private label MBS. As such, the Company is not exposed to significant risk nor
will it derive any benefit from changes in interest rates on the price of the
inventory net of gains or losses of associated hedge positions. The correlation
between the price performance of the hedge instruments and the inventory being
hedged is generally high due to the similarity of the asset and the related
hedge instrument. The Company is exposed to interest-rate risk to the extent
that the portion of loans from the Committed Pipeline that actually closes at
the committed price is less than the portion expected to close in the event of a
decline in rates and such decline in closings is not covered by options to
purchase MBS needed to replace the loans in process that do not close at their
committed price. The Company determines the portion of its Committed Pipeline
that it will hedge based on numerous factors, including the composition of the
Company's Committed Pipeline, the portion of such Committed Pipeline likely to
close, the timing of such closings and anticipated changes in interest rates.
Master Loan Servicing
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The Company acts as master servicer with respect to the mortgage loans it sells.
Master servicing includes collecting loan payments from seller/servicers of
loans and remitting loan payments, less master servicing fees and other fees,
to trustees. 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.
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 is 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
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securities are non-recourse to the Company. Typically, the Company has recourse
to the sellers of loans for any such breaches.
Financing of Mortgage Conduit Operations
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The Company's principal financing needs are the financing of loan purchase
activities and the investment in excess master servicing rights. To meet these
needs, the Company currently relies on reverse-repurchase agreements
collateralized by mortgage loans held for sale and cash flow from operations.
In addition, in 1993 the Company has relied on proceeds from public offerings of
common stock. For further information on the material terms of the borrowings
utilized by the Company to finance its inventory of mortgage loans and mortgage-
backed securities, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." The
Company continues to investigate and pursue alternative and supplementary
methods to finance its operations through the public and private capital
markets.
WAREHOUSE LENDING
As part of its new operating plan, the Company engages in warehouse lending
operations for small-and medium-size mortgage bankers. Warehouse lending
facilities typically provide short-term revolving financing to mortgage bankers
to finance mortgage loans during the time from the closing of the loan until its
settlement with an investor. The Company's warehouse lending program offers
warehouse lending facilities up to a maximum aggregate amount of $20 million to
mortgage bankers who have a minimum audited net worth of $300,000 subject to a
maximum debt-to-adjusted-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. All such lines of credit are subject to the prior approval of
a credit committee comprised of senior officers and directors of the Company.
The Company finances this program through a combination of reverse repurchase
agreements and equity. The Company has a committed one-year reverse repurchase
agreement facility with an investment bank in an aggregate amount of up to $100
million for this warehouse lending program.
As a warehouse lender the Company is a secured creditor of the mortgage bankers
to which it extends credit and is subject to the risks inherent in that status,
including the risks of borrower default and bankruptcy.
HISTORICAL OPERATIONS
In contrast to the Company's new mortgage conduit and warehouse lending
operations, which establish the Company as a niche mortgage banker and lender to
mortgage companies, the Company historically has been a long-term investor in
single-family, first-lien, residential mortgage loans and in mortgage 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 ("Agency Securities") and jumbo mortgage loans. The
principal source of earnings for the Company historically has 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, CMI 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, CMI sold substantially all of its portfolio of Agency ARMs, resulting in a
gain of approximately $9.0 million and the remainder of such portfolio was sold
during the first quarter of 1993 at its approximate carrying value. At December
31, 1993, CMI's assets included approximately $402.5 million of fixed-rate jumbo
mortgage loans and Agency Securities which were pledged to secure outstanding
CMOs issued by the Company's subsidiaries.
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During 1993, long-term interest rates, including mortgage rates, fell to their
lowest levels in over twenty years. The collateral for 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. If prepayments continue at
high levels, the performance of this CMO portfolio will continue to be adversely
impacted. Regardless of the level of interest rates or prepayments, CMI
anticipates no significant earnings from this CMO portfolio. Any continued
negative performance of this CMO portfolio will continue to adversely impact the
earnings of CMI to the extent of its investment in such portfolio.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
General Considerations
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CMI has elected to be taxed as a REIT under the Code and intends to continue to
do so. CMC, is not a qualified REIT subsidiary and is not consolidated for
either tax or financial purposes. Consequently, CMC is subject to applicable
federal and state income taxes. CMI will include in taxable income amounts
earned by CMC only when CMC remits its after-tax earnings by dividend to the
Company.
CMI's election to be treated as a REIT will be terminated automatically if CMI
fails to meet the requirements of the REIT provisions of the Code.
Qualification as a REIT requires that CMI satisfy a variety of tests relating to
its income, assets, distribution and ownership. Although CMI believes it has
operated and intends to continue to operate in such a manner as to qualify as a
REIT, no assurance can be given that CMI will in fact continue to so qualify.
If CMI fails to qualify as a REIT 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 CMI. In that event, CMI would not be eligible again
to elect REIT status until the fifth taxable year which begins after the year
for which CMI's election was terminated unless certain relief provisions apply.
CMI may also voluntarily revoke its election, although it has no intention of
doing so, in which event CMI would be prohibited, without exception, from
electing REIT status for the year to which the revocation relates and the
following four taxable years.
Distributions to stockholders of CMI with respect to any year in which CMI fails
to qualify would not be deductible by CMI 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 CMI incurring substantial indebtedness (to the extent borrowings are
feasible), or disposing of substantial investments, in order to pay the
resulting taxes or, at the discretion of CMI, to maintain the level of CMI's
distributions to its stockholders.
Excess Inclusion
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A portion of CMI's assets may be in the form of CMO residual interests. In
general, CMOs are debt instruments secured by fixed pools of mortgage
instruments in which investors hold multiple classes of interest. Part or all
of the income derived by CMI from a residual interest of a CMO issued by CMI
after December 31, 1991, pursuant to regulations yet to be published, may be
"excess inclusion" income. Such excess inclusion income generally is subject to
federal income tax in all events. If CMI pays any dividends to its shareholders
that are attributable to excess inclusion income, the shareholders who receive
such dividends generally will be subject to the same tax consequences that would
apply if they derived excess inclusion income from a direct investment in a CMO
residual interest. Excess inclusion income allocable to a shareholder may not
be offset by current deductions or net operating losses of such shareholder.
Moreover, such excess inclusion income constitutes unrelated business taxable
income for tax-exempt entities (including employee benefit plans) and would be
subject to a tax on any excess
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inclusion income that would be allocable to a "disqualified organization"
holding its shares. CMI's bylaws provide that disqualified organizations are
ineligible to hold CMI's shares.
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, mortgage bankers, insurance companies,
other lenders and other entities purchasing mortgage assets, many of which have
greater financial resources than the Company. Mortgage-backed securities issued
through the Company's mortgage conduit operations face competition from other
investment opportunities available to prospective investors.
FNMA and FHLMC are not permitted to purchase mortgage loans with original
principal balances above $203,150 (effective January 1, 1993). If this dollar
limitation increases, FNMA and FHLMC may be able to purchase a greater
percentage of the loans in the secondary market than they currently acquire, and
the Company's ability to maintain or increase its current acquisition levels
could be adversely affected.
The Company also faces competition in its warehouse lending operations from
banks and other warehouse lenders, including investment banks and other
financial institutions who offer warehouse financing through the use of reverse-
repurchase agreements.
RELATIONSHIPS WITH COUNTRYWIDE ENTITIES
CMI has entered into an agreement with Countrywide Asset Management Corporation
("CAMC") to advise the Company on various facets of its business and manage its
operations, subject to supervision by the CMI's Board of Directors. The Manager
has entered into a subcontract with its affiliate, Countrywide Funding
Corporation ("CFC"), to perform such services for the Company as the Manager
deems necessary.
CMI and Countrywide Credit Industries, Inc. ("CCI") are both publicly traded
companies whose shares of common stock are listed on the New York Stock
Exchange. The Company has utilized the mortgage 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.
CCI, directly or indirectly, owns approximately 3.50% of the common stock of
CMI. In addition, a number of directors and officers of CMI also serve as
directors and/or officers of CCI, CAMC and/or CFC. See "Directors and Executive
Officers of the Registrant." CAMC serves as the manager of the Company and
employs the personnel who conduct the Company's mortgage conduit, warehouse
lending and other operations. CMI also has a $10 million line of credit from
CFC. The Company may utilize CFC as a resource for loan servicing, technology,
information services and loan production. CFC owns all of the voting common
stock and a 1% economic interest in CMC, and CMI owns all of the preferred stock
and a 99% economic interest in CMC.
With a view toward protecting the interests of CMI's stockholders, the Bylaws of
CMI 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 CMI 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.
8
<PAGE>
EMPLOYEES
All employees and operating management of the Company are presently employees of
CAMC, a CCI subsidiary and manager of the Company. As of December 31, 1993,
CAMC had 60 employees dedicated to the Company's mortgage conduit, warehouse
lending and other operations.
ITEM 2. PROPERTIES
- ------- ----------
The primary executive and administrative offices of the Company and its
subsidiaries are located at 35 North Lake Avenue, Pasadena, California, and
consist of approximately 9,500 square feet. The principal lease covering such
space expires in the year 2001. The Company leases office space consisting of
approximately 2,500 square feet for its warehouse lending operations in another
building in the Pasadena area. This lease commenced February 15, 1994 and
expires February 15, 1999. In addition the Company leases office space
throughout the country for marketing its conduit and warehouse lending
operations.
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
A special meeting of CMI's stockholders was held on December 9, 1993 to vote on
a proposal to amend CMI's Certificate of Incorporation to increase the number of
authorized shares of common stock from 30,000,000 to 60,000,000 shares. The
votes cast on this proposal were as follows: 22,231,995 For; 546,514 Against;
138,623 Abstain; and 0 Broker Non-vote.
PART II
ITEM 5. MARKET FOR CMI'S STOCK AND RELATED SECURITY HOLDER MATTERS
- ------- ----------------------------------------------------------
CMI's Common Stock became listed on the New York Stock Exchange in November 1986
(Symbol: CWM).
The following table sets forth the high and low closing prices for the Common
Stock of CMI (as reported by NYSE), for the years ended December 31, 1993 and
1992 and cash dividends declared for earnings of the periods as indicated:
<TABLE>
<CAPTION>
1993 1992 CASH DIVIDENDS
---------------- --------------- --------------
HIGH LOW HIGH LOW 1993 1992
------- ------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
First Quarter $ 6 3/4 $5 1/4 $6 1/2 $4 3/4 $ .12 $ .12
Second Quarter 6 3/4 5 5/8 5 7/8 4 1/2 .12 .12
Third Quarter 10 1/8 5 3/4 5 1/8 4 5/8 .12 .12
Fourth Quarter 11 3/8 8 1/4 5 1/2 4 3/4 .12 .12
</TABLE>
As of March 23, 1994, CMI's Common Stock was held by 1,774 stockholders of
record.
9
<PAGE>
For each of the years ended December 31, 1993 and 1992, CMI declared quarterly
cash dividends for earnings of the periods aggregating $.48 per share. On
January 27, 1994, CMI declared a cash dividend for the fourth quarter of 1993 of
$.12 per share paid March 1, 1994 to shareholders of record on February 7, 1994.
CMI maintains a dividend reinvestment plan for stockholders who wish to reinvest
their cash dividends 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.
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------------
1993 1992 1991 1990 1989
--------- ---------- ---------- ---------- ----------
(Restated)
<S> <C> <C> <C> <C> <C>
SELECTED CONSOLIDATED
STATEMENT OF EARNINGS DATA
FOR THE YEAR ENDED
Interest income $ 66,301 $ 106,070 $ 148,634 $ 162,013 $ 185,481
Interest expense 65,312 107,511 135,395 149,511 173,589
--------- ---------- ---------- ---------- ----------
Net interest income (expense) 989 (1,441) 13,239 12,502 11,892
Equity in earnings of CMC 2,523 - - - -
Gain on sale of mortgage loans
and securities 917 9,031 735 - -
Expenses 1,949 2,603 3,107 2,989 3,247
--------- ---------- ---------- ---------- ----------
Net earnings 2,480 4,987 10,867 9,513 8,645
========= ========== ========== ========== ==========
Earnings per share $0.13 $0.36 $0.78 $0.70 $0.63
========= ========== ========== ========== ==========
Cash dividends per share $0.48 $0.48 $0.78 $0.69 $0.64
Weighted average
shares outstanding 18,578,307 13,978,683 13,924,326 13,645,000 13,645,000
SELECTED CONSOLIDATED
BALANCE SHEET DATA
AT YEAR END
Collateral for CMOs $402,503 $620,411 $1,118,321 $1,296,358 $1,448,907
Mortgage loans held for sale 794,132 - - - -
Revolving warehouse lines of credit 92,058 - - - -
Total assets 1,396,738 714,225 1,852,057 1,737,731 1,844,483
Collateralized mortgage obligations $365,886 $571,857 $1,040,495 $1,220,905 $1,352,824
Short-term borrowings 770,334 21,944 688,860 394,056 369,241
Shareholders' equity 250,608 119,995 122,403 121,147 120,776
Number of shares outstanding 32,020,484 13,980,387 13,976,375 13,645,000 13,645,000
Book value per share $7.83 $8.58 $8.76 $8.88 $8.85
SELECTED OTHER DATA:
Mortgage loans acquired $3,451,119 - - - -
</TABLE>
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
During the first quarter of 1993, the Company commenced operations of a mortgage
loan conduit, under which it purchases mortgage loans from eligible sellers who
generally retain the servicing rights. The Conduit activities are primarily
conducted through CMC. The Company generally purchases mortgage loans originated
in regions of the country with higher volumes of jumbo and non-conforming
mortgage loans, including California. As the mortgage loans are accumulated,
they are generally financed through short-term borrowing sources such as
reverse-repurchase agreements. When a sufficient volume of mortgage loans with
similar characteristics has been accumulated, the loans are securitized through
the issuance of mortgage-backed securities in the form of real estate mortgage
investment conduits ("REMICs") or collateralized mortgage obligations ("CMOs")
or resold in bulk whole loan sales. The Company's principal sources of revenue
from its new mortgage conduit operations are the net interest income earned from
holding the mortgage loans during the accumulation phase and gains or losses by
CMC on the REMIC or whole loan sale transactions. Alternatively, if the Company
elects to invest in the mortgage loans on a long-term basis using financing
provided by CMOs, the Company recognizes a net yield on these investments over
time. In addition, the Company earns fee income and net interest income through
its warehouse lending program which provides warehouse lines of credit to third
party mortgage loan originators.
Historically, the Company's principal source of earnings has been net interest
income generated from its mortgage portfolio which was primarily financed
through the issuance of CMOs (the "CMO Portfolio"). The amount of net interest
earned on the CMO Portfolio is directly affected by the rate of principal
repayment (including prepayments) of the related mortgage loans as discussed
below.
During 1993, low mortgage interest rates resulted in continued high prepayment
rates which adversely impacted the net interest income earned on the CMO
Portfolio. When prevailing mortgage interest rates are low relative to interest
rates of existing mortgage loans, prepayments on the existing mortgage loans
generally tend to increase as mortgagors refinance their loans. The cash flow
generated by these prepayments is used to repay the CMOs collateralized by these
mortgage loans. The substantial prepayments experienced by the CMO Portfolio
resulted in a negative cash flow and since mortgage loan premiums, original
issue discount and bond issuance costs were also required to be amortized, net
interest expense was ultimately realized on the portfolio. Continued negative
performance of the CMO Portfolio will adversely impact the future earnings of
the Company. Although higher interest rates may decrease prepayments and
mitigate the negative impact on the Company's earnings from its CMO Portfolio,
higher interest rates may otherwise adversely affect the Company's new mortgage
conduit and warehouse lending operations.
Historically, the Company also earned net interest income on its investments in
adjustable-rate mortgage-backed securities ("ARM Portfolio") financed with
reverse-repurchase agreements. CMI began accumulating adjustable-rate mortgage
assets in 1987 due to the attractive returns and earnings profile of these
investments. As interest rates declined in 1992, CMI partially offset the
declining earnings performance of its CMO Portfolio by selling substantially all
of its investments in the ARM Portfolio at a gain of
12
<PAGE>
$7.8 million. During the first quarter of 1993, CMI sold its remaining
adjustable-rate mortgage assets for an amount that approximated book value. The
sales of adjustable-rate mortgage assets were also designed to provide capital
for the Company's new mortgage loan conduit and warehouse lending
operations.
FINANCIAL CONDITION
CONDUIT AND WAREHOUSE LENDING OPERATIONS: Through its mortgage loan conduit
operations, the Company purchases jumbo and other nonconforming loans from
mortgage bankers and other financial institutions which generally retain the
mortgage loan servicing rights. During 1993, CMI purchased $3.5 billion of such
mortgage loans, which were financed on an interim basis using equity and short-
term borrowings in the form of reverse-repurchase agreements. In general, the
Company, through CMC, sells the loans in the form of REMICs or whole loan sales
or alternatively through CMI, invests in the loans on a long-term basis using
financing provided by CMOs. During 1993, CMC sold $2.3 billion of mortgage
loans through the issuance of REMIC securities and the sale of whole loans. In
addition, CMI issued two new series of CMOs in 1993 totaling $240.2 million (see
discussion below). At December 31, 1993, CMC was committed to sell
approximately $680.0 million of mortgage loans in connection with the issuance
of REMIC securities and the sale of whole loans in the first quarter of
1994.
The Company's warehouse lending program provides secured short-term revolving
financing to small- and medium-size mortgage bankers to finance mortgage loans
from the closing of the loan until it is sold to a permanent investor. At
December 31, 1993, CMI had extended lines of credit under this program in the
aggregate amount of $206.0 million, of which $92.1 million was outstanding.
Reverse-repurchase agreements associated with CMI financing of warehouse lines
of credit and mortgage loans held for sale totaled $770.3 million at December
31, 1993. In addition, CMI guaranteed the repayment of $36.2 million of reverse
repurchase agreements secured by mortgage loans held for sale by CMC.
CMO PORTFOLIO: As of December 31, 1993, the CMO Portfolio was comprised of 15
series of CMOs issued from CMI's inception through 1990 ("Pre-1993 CMO
Portfolio"). In 1993, two new series of CMOs were issued by CMI in connection
with the new mortgage conduit operation. Disclosures relative to the CMO
Portfolio include both groups of CMOs.
CMI's collateral for CMOs decreased from $620.4 million at December 31, 1992 to
$402.5 million at December 31, 1993. This decrease of $217.9 million included a
redemption of $34.0 million and repayments (including prepayments and premium
and discount amortization) of $405.7 million offset by additions of $248.2
million of collateral related to the issuance of two new series of CMOs. The
decrease was also due to decreases in guaranteed investment contracts ("GICs")
held by trustees and accrued interest receivable of $22.9 million and $3.5
million respectively. CMI's CMOs outstanding decreased to $365.9 million at
December 31, 1993 from $571.9 million at December 31, 1992. This decrease of
$206.0 million resulted from the redemption of two series of CMOs totaling $32.6
million and principal payments (including discount amortization) on CMOs of
$411.3 million, partially offset by the issuance of two series of CMOs totaling
$240.2 million. The decrease also resulted from a decrease in accrued interest
payable on CMOs of $2.3 million.
When interest rates decline, prepayments on the underlying mortgage loans
generally tend to increase as mortgagors refinance their existing loans. The
cash flow generated by these unanticipated prepayments is ultimately used by CMI
to repay the CMOs since they are collateralized by these mortgages. When
interest rates decline and prepayments increase, the net yield achieved from
CMI's net investment in the CMO Portfolio is adversely impacted due to factors
which are explained below.
13
<PAGE>
RESULTS OF OPERATIONS 1993 COMPARED TO 1992
NET EARNINGS: CMI's net earnings were $2.5 million or $0.13 per share, based on
18,578,307 weighted average shares outstanding for 1993 compared to $5.0 million
or $0.36 per share, based on 13,978,683 weighted average shares outstanding for
1992. The decrease in net earnings of $2.5 million was due to a decrease in
earnings of $17.1 million associated with the Pre-1993 CMO Portfolio and the ARM
Portfolio, offset by an increase in earnings of $14.2 million associated with
the new mortgage conduit and warehouse lending operations. In addition, CMI's
fixed organizational expenses decreased by $358,000.
The decrease in net earnings on the Pre-1993 CMO and ARM Portfolios was
primarily due to decreases in net interest income and in gains of approximately
$12.8 million and $7.8 million, respectively, associated with the sale of
substantially all of the Company's investment in adjustable-rate mortgage-backed
securities in 1992. These decreases were offset by the decrease in net interest
expense on the Pre-1993 CMO Portfolio of $3.4 million. In addition, gains
decreased by $283,000 related to the redemption of one CMO series in 1992 and
two CMO series in 1993. The earnings associated with the operation of the
Company's new warehouse lending program were $1.7 million. The earnings from
the new conduit operations totalled $9.9 million in addition to CMI's $2.5
million equity in earnings of CMC.
INTEREST INCOME: Total interest income was $66.3 million for 1993 and $106.1
million for 1992. Interest income on collateral for CMOs was $41.7 million and
$68.7 million for 1993 and 1992, respectively. The decline was attributable to
a decrease in the average aggregate principal amount of collateral for CMOs
outstanding, from $847.7 million for 1992 to $550.5 million for 1993, combined
with a decrease in the effective yield earned on the collateral from 8.10% in
1992 to 7.57% in 1993. The decrease in the average balance of collateral for
CMOs and the effective interest yield earned thereon was due to the continued
low interest rate environment experienced in 1993 which resulted in significant
prepayment activity. The rate of prepayments (including repayments) was 50% in
1993 compared to 42% in 1992. In a declining interest rate environment, loans
with higher interest rates prepay faster than loans with lower interest rates,
resulting in a lower overall effective yield. In addition, the interest income
was reduced on collateral for CMOs by the amortization of premiums paid in
connection with acquiring the portfolio, a delay in the receipt of prepayments
and temporary investment in lower yielding short-term investments (GICs) until
such amounts were used to repay CMOs.
Interest income earned on mortgage loans held for sale and revolving warehouse
lines of credit was $21.1 million and $1.9 million, respectively, for 1993. The
weighted average principal balance of mortgage loans held for sale and revolving
warehouse lines of credit approximated $281.9 million and $25.3 million,
respectively, for 1993 and earned interest at an effective yield of
approximately 7.48% and 7.67%, respectively. These operations commenced in
1993, therefore there was no such income in 1992.
Interest income on adjustable-rate mortgage securities amounted to $674,000 for
1993 and $37.4 million for 1992. The decrease resulted from the liquidation of
these securities which was completed in the first quarter of 1993. The net
proceeds from the sale of these securities were deployed in the new mortgage
loan conduit and warehouse lending operations.
14
<PAGE>
INTEREST EXPENSE: For 1993 and 1992, total interest expense was $65.3 million
and $107.5 million, respectively. Interest expense on CMOs was $55.0 million
and $83.6 million for 1993 and 1992, respectively. This decrease was primarily
attributable to a decrease in average aggregate CMOs outstanding from $813.6
million for 1992 to $516.2 million for 1993, partially offset by an increase in
the weighted average cost of CMOs from 10.27% in 1992 to 10.65% in 1993. The
decrease in the average balance of CMOs was directly related to the prepayment
activity on collateral for CMOs discussed above. The prepayments are ultimately
used to repay the related CMOs. In general, the class of each series of CMO
with the shortest maturity receives all principal payments until it is repaid in
full. After the first class is retired, the second class will receive all
principal payments until retired and so forth. Substantially all CMO bonds were
structured with the shortest maturity class generally having the lowest interest
rate and interest rates increasing as the maturity of the class increased.
Therefore, prepayments generally must be applied to the class with the lowest
interest rate, resulting in repayment of CMO classes with relatively low
interest rates and increasing the weighted average interest rate of the
remaining outstanding CMOs.
Interest expense on reverse-repurchase agreements financing mortgage loans held
for sale and revolving warehouse lines of credit was $10.4 million or 3.82% of
the average balance outstanding for 1993. Interest expense on reverse-repurchase
agreements financing the Company's investment in its adjustable-rate mortgage
portfolio was $24.0 million or 4.15% of the average balance outstanding for
1992.
EQUITY IN EARNINGS OF CMC: The earnings of CMC, which was formed in 1993 and in
which CMI owns 100% of the preferred stock and has a 99% economic interest,
resulted principally from interest income, net of interest expense of $3.1
million and net master servicing expense of $4.5 million, gains on sales of
mortgage loans of $8.4 million, expenses of $2.6 million and income taxes of
$1.8 million.
As a result of the new mortgage conduit operations, CMC began earning master
servicing fee income. At December 31, 1993, CMC master serviced loans with
principal balances aggregating $3.0 billion. The growth in CMC's master
servicing portfolio during 1993 was the result of loan production volume from
the Company's new conduit operations, partially offset by prepayments of
mortgage loans. The weighted average interest rate of the mortgage loans in
CMC's master servicing portfolio at December 31, 1993 was 7.21%. It is CMC's
strategy to build and retain for investment its master servicing portfolio
because of the returns CMC can earn from such investment and because CMC
believes that master servicing income is countercyclical to loan production
income.
CMC's investments in master servicing fees receivable have characteristics
comparable to "excess servicing" insofar as their value tends to decline as
prepayment rates increase. The yield on this portfolio could decline
considerably as a result of rapid prepayments occasioned by declining interest
rates. It is also possible that under certain high prepayment scenarios CMC
would not recoup its initial investment in such assets. In this scenario CMC
writes down its master servicing fees receivable asset so that the remaining
asset does not exceed the present value of future net master servicing income.
During 1993, CMC experienced significant prepayment activity due to the low
interest rate environment resulting in a write down of master servicing fees
receivable totaling $6.2 million. As a result, master servicing amortization
was in excess of master servicing income. In periods of rising interest rates,
prepayments tend to decline and income from the master servicing portfolio
should increase. As a result, future operating results associated with this
portfolio is dependent upon the direction of interest rates and the results of
CMC's hedging strategy as discussed below.
15
<PAGE>
To mitigate the effect on earnings of higher amortization (which is deducted
from master servicing income) resulting from increased prepayment activity, CMC
began purchasing call options on FNMA mortgage-backed securities in December
1993 which increase in value when interest rates decline. These options expire
in June of 1994. As of December 31, 1993, CMC had $300 million of call options
on FNMA mortgage-backed securities. These options had a book value and an
approximate fair market value of $4.1 million. Call option amortization totaled
$150,000 in 1993.
The net earnings of CMC for 1993 do not include certain personnel and other
operating expenses totaling $900,000 which have been absorbed by the Manager
under the terms of its Management Agreement. CMC began paying all expenses of
its new operations in June 1993. CMC's salaries and related expenses were $1.7
million for 1993. As of December 31, 1993, the Manager employed approximately
60 employees on behalf of the Company. General and administrative expenses
incurred by CMC for 1993 were $892,000. CMC anticipates that expenses will
continue to increase as the new operations expand and develop.
MANAGEMENT FEES: For 1993, management fees were $400,000 compared to $997,000
for 1992. The decrease was primarily due to a decrease in the base management
fee. In addition, included in management fees for 1992 were $254,000 in fees
associated with the management of the CMO Portfolio. There were no such fees in
1993 due to a change in the Management Agreement. Under the agreement with the
Manager, management fees were waived for 1993. Accordingly, such fees are
reflected as an expense and a corresponding capital contribution in the
accompanying financial statements.
RESULTS OF OPERATIONS 1992 COMPARED TO 1991
NET EARNINGS: CMI's net earnings were $5.0 million or $0.36 per share, based on
13,978,683 weighted average shares outstanding for 1992 compared to net earnings
of $10.9 million or $0.78 per share, based on 13,924,326 weighted average shares
outstanding for 1991. Earnings for 1992 reflected net interest expense of $1.4
million and a gain on sale of investments in mortgage loans and securities of
$9.0 million compared to net interest income of $13.2 million and a gain on sale
of investments of mortgage loans and securities of $735,000 for the prior
year.
As a result of higher than anticipated prepayment rates in 1992, net interest
income on the CMO Portfolio decreased $15.0 million. Included in net interest
expense is amortization of purchase premiums, relating to the collateral for the
CMOs, and amortization of deferred bond issuance costs and original issue
discounts, related to the costs associated with the issuance of CMOs. The
amount of amortization recorded in 1992 exceeded the amount recorded in 1991 by
$7.9 million. This decrease in net interest income was offset by gains of $1.1
million primarily associated with a redemption of a CMO series and a $7.1
million increase in gains on the sale of the ARM Portfolio. General and
administrative expenses increased $121,000 and management fees decreased
$625,000 from 1991 to 1992. As a consequence, net earnings for 1992 decreased
by $5.9 million from the prior year.
INTEREST INCOME: Total interest income amounted to $106.1 million for 1992 and
$148.6 million for 1991. Interest income on collateral for CMOs was $68.7
million and $106.9 million for 1992 and 1991, respectively. The decline was
primarily attributable to a decrease in the average aggregate principal amount
of collateral for CMOs outstanding from $1.2 billion for 1991 to $847.7 million
for 1992 combined with a decrease in the weighted average effective yield earned
from 9.00% in 1991 to 8.10% in 1992. The decrease in the average balance of
collateral for CMOs and the effective interest yield earned thereon is due to
the low interest rate environment experienced in 1992 resulting in significant
prepayment
16
<PAGE>
activity (including repayments) which totaled 42% in 1992 compared to
17% in 1991. In a declining interest rate environment, loans with higher
interest rates prepay faster than loans with lower interest rates resulting in a
lower overall effective yield. In addition, the interest income on collateral
for CMOs was reduced by the amortization of premiums paid in connection with
acquiring the portfolio, a delay in the receipt of prepayments, and temporary
investment in lower yielding short-term investments (GICs) until such amounts
were used to repay CMOs.
Interest income on the ARM Portfolio totaled $37.4 million and $41.8 million for
1992 and 1991, respectively. Although the average aggregate principal amount of
the ARM Portfolio increased from $522.8 million for 1991 to $597.9 million for
1992, the weighted average yield on such investments decreased from 7.99% for
1991 to 6.25% for 1992. This decline in weighted average yield was primarily
attributable to the effect of declining interest rates on CMI's ARM
Portfolio.
INTEREST EXPENSE: Total interest expense was $107.5 million and $135.4 million
for 1992 and 1991, respectively. Interest expense on CMOs was $83.6 million and
$106.7 million for 1992 and 1991, respectively. This decrease was primarily
attributable to a decrease in average aggregate CMOs outstanding from $1.1
billion for 1991 to $813.6 million for 1992. The weighted average cost of CMOs
increased from 9.47% for 1991 to 10.27% for 1992. The decrease in the average
balance on CMOs is directly related to the prepayment activity of collateral for
CMOs discussed above. The decrease in the weighted average cost of CMOs is
attributed to factors previously discussed (see Results of Operations 1993
Compared to 1992).
Interest expense on reverse-repurchase agreements amounted to $24.0 million and
$28.7 million for 1992 and 1991, respectively. This decrease of $4.7 million
was attributable to the decrease in the weighted average interest rate paid on
such borrowings from 5.92% in 1991 to 4.15% in 1992. The effect of the decrease
in the weighted average interest rate was offset by an increase in the average
aggregate outstanding amounts of borrowings from $485.3 million in 1991 to
$577.4 million for 1992.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses were
$1.6 million and $1.5 million for 1992 and 1991, respectively. Of these
amounts, approximately $437,000 and $457,000, respectively, were attributable to
the administration of CMOs. The increase in general and administrative expenses
was primarily due to increased insurance and franchise tax expenses.
MANAGEMENT FEES: Management fees for 1992 and 1991 were $997,000 and $1.6
million, respectively. Management fees paid for the management of collateral
for CMOs amounted to $254,000 and $360,000 for the same periods. This decrease
was a result of the decline in the average aggregate principal balance of
invested assets primarily due to principal prepayments. Management fees for the
other mortgage portfolio decreased $519,000 from $1.3 million for 1991 to
$743,000 for 1992, primarily due to a decrease in the base management fee rate
on assets not pledged to secure CMOs.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has used proceeds from the issuance of CMOs,
uncommitted reverse-repurchase agreements, other borrowings and proceeds from
the issuance of common stock to meet its working capital needs. In connection
with its new mortgage conduit operations, the Company has begun to issue REMIC
securities through CMC to help meet such needs. CMI may also borrow
collateral or funds from Countrywide Funding Corporation ("CFC") to meet
collateral maintenance requirements under reverse-repurchase
17
<PAGE>
agreements or margin calls on forward securities sales. These borrowings are
made pursuant to a $10 million, one-year, unsecured line of credit which expires
on September 30, 1994, subject to extension by CFC and CMI. As of December 31,
1993, CMI had no outstanding borrowings under this agreement. CMI has
established a committed reverse-repurchase facility in the aggregate amount of
up to $100 million for its mortgage conduit operations that expires in April
1994 and an additional facility in the aggregate amount of up to $100 million
for its warehouse lending program that expires in September 1994. CMI also has
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. The
maximum balance outstanding during the year was $851.0 million and as of
December 31, 1993, CMI had entered into reverse-repurchase agreements
aggregating $770.3 million and guaranteed repayment of $36.2 million of reverse
repurchase agreements associated with loans held by CMC. In February 1994, CMI
signed a commitment letter for a master repurchase agreement to provide a
committed short-term credit line in the amount of $500.0 million and an addition
$300.0 million on an uncommitted basis. The agreement expires in January 1996.
CMI, to the extent permitted by its Bylaws, may issue other debt securities or
incur other types of indebtedness from time to time.
The collateral maintenance requirements under reverse-repurchase agreements
could adversely affect the Company's liquidity in the event of a significant
decrease in the market value of the mortgage loans financed under reverse-
repurchase agreements. However, the Company has implemented a hedging strategy
for its mortgage portfolio which to some extent may mitigate this adverse
effect. The Company seeks to utilize financial instruments whose price
sensitivity has very close inverse correlation to the price sensitivity of the
related mortgage loans as a result of changes in applicable interest rates.
With respect to the Company's portfolio of mortgage loans held for sale, the
financial instrument which has historically demonstrated close inverse
correlation, and also trades in a relatively liquid and efficient manner, is a
forward commitment to sell a FNMA or FHLMC security of comparable maturity and
weighted average interest rate. With respect to the Company's portfolio of
adjustable rate loans held for sale, the Company generally utilizes short-term
Treasury futures to hedge against the effect of interest rate fluctuations.
During 1993, CMC recognized $12.9 million in gross losses on financial
instruments used to hedge the mortgage loan pipeline; an additional gross loss
of $1.8 million was unrealized and included in the lower of cost or market
computation for the mortgage loans held for sale as of December 31, 1993. These
gross hedging losses were offset by gross gains achieved on mortgage loans sold,
as a result of falling interest rates.
During 1993, CMI increased its capital resources through the issuance of
18,040,097 shares of common stock with net proceeds of $136.9 million. The REIT
provisions of the Internal Revenue Code require CMI to distribute to
shareholders substantially all of its income, thereby restricting its ability to
retain earnings.
Management believes that the cash flow from operations and the current and
potential financing arrangements are sufficient to meet current liquidity
requirements.
18
<PAGE>
INFLATION
Interest rates often increase during periods of high inflation. Higher interest
rates may depress the market value of the Company's investment portfolio if the
yield on such investments does not keep pace with increases in interest rates.
As a result of decreased market values it could be necessary for the Company to
borrow additional funds and pledge additional assets to maintain financing for
investments that have not been financed to maturity through the issuance of CMOs
or other debt securities. Increases in short-term borrowing rates relative to
rates earned on investments that have not been financed to maturity through the
issuance of CMOs or other debt securities may also adversely affect the
Company's earnings. However, the Company has implemented a hedging strategy
which may mitigate this adverse effect. In addition, high levels of interest
rates tend to decrease the rate at which mortgage investments prepay. A
decrease in the rate of prepayments may lengthen the estimated average lives for
the underlying mortgages for master servicing fees receivable by CMC and for
classes of the CMOs issued by CMI and may result in higher residual cash flows
from the CMOs than would otherwise have been obtained. However, higher interest
rates may otherwise adversely affect the Company's new mortgage conduit and
warehouse lending operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The information called for by this item 8 is hereby incorporated by reference to
CMI's Consolidated Financial Statements and Report of Independent Certified
Public Accountants beginning at Page F-1 of this Form 10-K.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
19
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------- --------------------------------------------------
The information required by this Item 10 as to directors and executive officers
of CMI is hereby incorporated by reference to CMI's definitive proxy statement,
to be filed pursuant to Regulation 14A within 120 days after the end of the
fiscal year.
The directors and principal executive officers of CAMC, the Company's Manager,
are:
<TABLE>
<CAPTION>
NAME AGE OFFICE
- ----------------------------- --- ----------------------------------------
<S> <C> <C>
Angelo R. Mozilo* 54 Chairman of the Board of Directors
David S. Loeb* 69 Vice Chairman of the Board of Directors
and Chief Executive Officer
Stanford L. Kurland* 40 President
Michael W. Perry* 31 Executive Vice President and Chief
Operating Officer
Eric P. Sieracki* 37 First Vice President and Chief Financial
Officer
Jeffery F. Butler 52 Director
Ralph S. Mozilo 52 Director
</TABLE>
* The above are also directors and/or officers of CMI. A description of their
backgrounds is hereby incorporated by reference to CMI's definitive proxy
statement, to be filed pursuant to Regulation 14A within 120 days after the end
of the fiscal year
Jeffrey F. Butler joined CCI in 1985 and became the Chief Information Officer in
1989 and Managing Director--Chief Information Officer in May 1991. He became a
director of CAMC in 1993.
Ralph S. Mozilo joined CFC in 1971 and is Executive Vice President of
Underwriting and Compliance for CFC. He became a director of CAMC in 1993.
ITEM 11. EXECUTIVE COMPENSATION
- ------- ----------------------
The information required by this Item 11 is hereby incorporated by reference to
CMI's definitive proxy statement, to be filed pursuant to Regulation 14A within
120 days after the end of the fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------- ----------------------------------------------- --------------
The information required by this Item 12 is hereby incorporated by reference to
CMI's definitive proxy statement, to be filed pursuant to Regulation 14A within
120 days after the end of the fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ------- ----------------------------------------------
The information required by this Item 13 is hereby incorporated by reference to
CMI's definitive proxy statement, to be filed pursuant to Regulation 14A within
120 days after the end of the fiscal year.
20
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
- -------- ---------------------------------------
AND REPORTS ON FORM 8-K
-----------------------
(a)(1) and (2) - Financial Statements and Schedules
The information called for by this section of Item 14 is set forth in the
Index to Financial Statements and Schedules at page F-1 of this Form 10-K.
(3) - Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<C> <S>
3.1 Certificate of Incorporation for CMI, as amended.
3.2* Bylaws of CMI as amended (incorporated by reference to Exhibit 4.2 to the
Company's Form 10-Q, for the quarter ended June 30, 1993).
4.1* Indenture (the "Indenture"), dated as of December 1, 1985, between
Countrywide Mortgage Obligations, Inc. ("CMO, Inc.") and Bankers Trust
Company, as Trustee ("BTC") (incorporated by reference to Exhibit 4.1 to
CMO, Inc.'s Form 8-K filed with the SEC on January 24, 1986).
4.2* Series A Supplement, dated as of December 1, 1985, to the Indenture
(incorporated by reference to Exhibit 4.2 to CMO, Inc.'s Form 8-K filed
with the SEC on January 24, 1986).
4.3* Series B Supplement, dated as of February 1, 1986, to the Indenture
(incorporated by reference to Exhibit 4.1 to CMO, Inc.'s Form 8-K filed
with the SEC on March 31, 1986).
4.4* Series C Supplement, dated as of April 1, 1986, to the Indenture
(incorporated by reference to Exhibit 4.4 to CMO, Inc.'s Amendment No. 1
to S-11 Registration Statement (No. 33-3274) filed with the SEC on May
13, 1986).
4.5* Series D Supplement, dated as of May 1, 1986, to the Indenture
(incorporated by reference to Exhibit 4.5 to the Company's S-11
Registration Statement (No. 33-6787) filed with the SEC on June 26,
1986).
4.6* Series E Supplement, dated as of June 1, 1986, to the Indenture
(incorporated by reference to Exhibit 4.6 to the Company's Amendment No.
1 to S-11 Registration Statement (No. 33-6787) filed with the SEC on July
30, 1986).
4.7* Series F Supplement, dated as of August 1, 1986, to the Indenture
(incorporated by reference to Exhibit 4.1 to CMO, Inc.'s Form 8-K filed
with the SEC on August 14, 1986).
4.8* Series G Supplement, dated as of August 1, 1986, to the Indenture
(incorporated by reference to Exhibit 4.8 to CMO, Inc.'s S-11
Registration Statement (No.33-8705) filed with the SEC on September 12,
1986).
4.9* Series H Supplement, dated as of September 1, 1986, to the Indenture
(incorporated by reference to Exhibit 4.1 to CMO, Inc's Form 8-K filed
with the SEC on October 7, 1986).
</TABLE>
21
<PAGE>
<TABLE>
<C> <S>
4.10* Series I Supplement, dated as of October 1, 1986, to the Indenture
(incorporated by reference to Exhibit 4.11 to CMO, Inc.'s Amendment No. 1
to S-11 Registration Statement (No. 33-8705) filed with the SEC on
October 27, 1986).
4.11* Series J Supplement, dated as of October 15, 1986, to the Indenture
(incorporated by reference to Exhibit 4.1 to CMO, Inc.'s Form 8-K filed
with the SEC on November 12, 1986).
4.12* Series K Supplement, dated as of December 1, 1986, to the Indenture
(incorporated by reference to 4.1 to CMO, Inc.'s Form 8-K filed with the
SEC on March 16, 1987).
4.13* Series L Supplement, dated as of December 1, 1986, to the Indenture
(incorporated by reference to Exhibit 4.2 to CMO, Inc.'s Form 8-K filed
with the SEC on March 16, 1987).
4.14* Series M Supplement, dated as of January 1, 1987, to the Indenture
(incorporated by reference to Exhibit 4.3 to CMO, Inc.'s Form 8-K filed
with the SEC on March 16, 1987).
4.15* Indenture (the "SPNB Indenture"), dated as of December 1, 1986, between
CMO, Inc. and Security Pacific National Bank, as Trustee ("SPNB")
(incorporated by reference to Exhibit 4.1 to CMO, Inc.'s Form 8-K filed
with the SEC on January 9, 1987).
4.16* Series W-1 Supplement, dated as of December 1, 1986, to the SPNB
Indenture (incorporated by reference to Exhibit 4.2 to CMO, Inc.'s
Form 8-K filed with the SEC on January 9, 1987).
4.17* Series N Supplement, dated as of February 1, 1987, to the SPNB Indenture
(incorporated by reference to Exhibit 4.1 to CMO, Inc.'s Form 8-K filed
with the SEC on March 16, 1987).
4.18* Indenture, dated as of February 1, 1987, between Countrywide Mortgage
Trust 1987-I (the "1987-I Trust") and SPNB (incorporated by reference to
Exhibit 4.18 to the Company's Form 10-K for the year ended December 31,
1986).
4.19* Indenture, dated as of June 1, 1987, between Countrywide Mortgage Trust
1987-II (the "1987-II Trust") and SPNB (incorporated by reference to
Exhibit 4.19 to the Company's Form 10-Q for the quarter ended June 30,
1987).
4.20* Indenture Supplement, dated as of September 1, 1987, among Countrywide
Mortgage Obligations III, Inc. ("CMO III, Inc."), CMO, Inc. and BTC
(incorporated by reference to Exhibit 4.1 to CMO III, Inc.'s Form 8-K
filed with the SEC on October 9, 1987).
4.21* Indenture Supplement, dated as of September 1,1987, among CMO III, Inc.,
CMO, Inc. and SPNB (incorporated by reference to Exhibit 4.2 to CMO III,
Inc.'s. Form 8-K filed with the SEC on October 9, 1987).
4.22* Indenture dated as of November 20, 1990, between the Countrywide Cash
Flow Bond Trust ("CCFBT") and BTC (incorporated by referenced to Exhibit
4.22 to the Company's Form 10-K for the year ended December 31, 1990).
4.23* Indenture dated as of March 30, 1993 between Countrywide Mortgage Trust
1993-I (the "1993-I Trust") and State Street Bank and Trust Company (the
"Bond Trustee") (incorporated by reference to Exhibit 4.1 to the
Company's 10-Q for the quarter ended March 31, 1993).
</TABLE>
22
<PAGE>
<TABLE>
<C> <S>
4.24* Indenture dated as of April 14, 1993 between Countrywide Mortgage Trust
1993-II (the "1993-II Trust") and the Bond Trustee (incorporated by
reference to Exhibit 4.2 to the Company's 10-Q for the quarter ended
March 31, 1993).
10.1* 1993 Amended and Extended Management Agreement, dated as of May 15, 1993,
between CMI and Countrywide Asset Management Corporation (the "Manager")
(incorporated by reference to Exhibit 10.1 to the Company's Amendment No.
3 to S-3 Registration Statement (No.33-63034) filed with the SEC on July
16, 1993).
10.2* 1987 Amended and Restated Servicing Agreement, dated as of May 15, 1987,
between CMI and Countrywide Funding Corporation ("CFC") (incorporated by
reference to Exhibit 10.2 to the Company's Form 10-Q filed for the
quarter ended June 30, 1987).
10.3* 1993 Amended and Extended Loan Purchase and Administrative Services
Agreement, dated as of May 15, 1993, between CMI and CFC (incorporated by
reference to Exhibit 10.9 to the Company's 10-Q for the quarter ended
June 30, 1993).
10.4* 1988 Amended and Restated Submanagement Agreement, dated as of May 15,
1988, between CFC and the Manager (incorporated by reference to Exhibit
10.4 to CMI's Form 10-Q for the quarter ended March 31, 1988).
10.5* 1985 Stock Option Plan adopted August 26, 1985, as amended February 12,
1987 (incorporated by reference to Exhibit 10.6 to CMI's Form 10-K for
the year ended December 31, 1986).
10.6* Form of Indemnity Agreement between CMI and CMI's directors and officers
(incorporated by reference to Exhibit 10.5 to CMI's Form 10-Q for the
quarter ended June 30, 1987).
10.7* Form of Guaranty of Indemnity Agreement made by Countrywide Credit
Industries, Inc. ("Countrywide Credit") to CMI and CMI's directors and
officers (incorporated by reference to Exhibit 10.6 to CMI's Form 10-Q
for the quarter ended June 30, 1987).
10.9* Servicing Agreement, dated as of November 15, 1986, among CMO, Inc. SPNB
and CFC (incorporated by reference to Exhibit 10.1 to CMO, Inc.'s Form 8-
K filed with the SEC on January 9, 1987).
10.10* Deposit Trust Agreement (the "1987-I Deposit Trust Agreement"), dated
January 16, 1987, between Countrywide Mortgage Obligations II, Inc. ("CMO
II, Inc.") and Wilmington Trust Company, as Owner Trustee of the 1987-I
Trust (incorporated by reference to Exhibit 10.15 to CMI's Form 10-K for
the year ended December 31, 1986).
10.11* Management Agreement, dated as of February 1, 1987, between Wilmington
Trust Company, as Owner Trustee of the 1987-I Trust, and the Manager
(incorporated by reference to Exhibit 10.17 to CMI's Form 10-K for the
year ended December 31, 1986).
10.12* Servicing Agreement, dated as of February 1, 1987, among the 1987-I
Trust, SPNB and CFC (incorporated by reference to Exhibit 10.18 to CMI's
Form 10-K filed for the year ended December 31, 1985).
10.13* Agreement between CMO, II, Inc. and CMI, dated as of February 1, 1987,
regarding certain bankruptcy matters (incorporated by reference to
Exhibit 10.19 to CMI's Form 10-K for the year ended December 31, 1986).
</TABLE>
23
<PAGE>
<TABLE>
<C> <S>
10.14* Agreement among CMO II, Inc., the Manager and CFC, dated as of February
1, 1987, regarding certain bankruptcy matters (incorporated by reference
to Exhibit 10.20 to CMI's Form 10-K for the year ended December 31,
1986).
10.15* Term Revolving Loan Agreement, dated March 30, 1987, between CMI and
Citicorp Real Estate, Inc. (incorporated by reference to Exhibit 10.21 to
CMI's Form 10-K for the year ended December 31, 1986).
10.16* Deposit Trust Agreement (the "1987-II Deposit Trust Agreement"), dated as
of April 29, 1987, between CMO II, Inc. and Wilmington Trust Company, as
Owner Trustee of the 1987-II Trust (incorporated by reference to Exhibit
10.7 to CMI's Form 10-Q for the quarter ended June 30, 1987).
10.17* First Amendment to 1987-II Deposit Trust Agreement, dated as of May 29,
1987, between CMO II, Inc. and Wilmington Trust Company, as Owner Trustee
of the 1987-II Trust (incorporated by reference to Exhibit 10.8 to CMI's
Form 10-Q for the quarter ended June 30, 1987).
10.18* Guaranty, dated as of May 29, 1987, by CMI of obligations of CMO II, Inc.
under the 1987-II Deposit Trust Agreement, as amended (incorporated by
reference to Exhibit 10.9 to CMI's Form 10-Q for the quarter ended June
30, 1987).
10.19* Management Agreement, dated as of June 1, 1987, between Wilmington Trust
Company, as Owner Trustee of the 1987-II Trust, and the Manager
(incorporated by reference to Exhibit 10.10 to CMI's Form 10-Q for the
quarter ended June 30, 1987).
10.20* Servicing Agreement, dated as of June 1, 1987, among the 1987-II Trust,
SPNB and CFC (incorporated by reference to Exhibit 10.11 to CMI's Form
10-Q for the quarter ended June 30, 1987).
10.21* Transfer Agreement, dated as of May 1, 1987, among CMI, CMO II, Inc. and
CMO III, Inc. (incorporated by reference to Exhibit 10.12 to CMI's Form
10-Q for the quarter ended June 30, 1987).
10.22* Guaranty, dated as of May 1, 1987, by CMI of obligations of CMO III, Inc.
under the 1987-I Deposit Trust Agreement (incorporated by reference to
Exhibit 10.13 to CMI's Form 10-Q for the quarter ended June 30, 1987).
10.23* Amended and Restated Security Agreement, dated as of July 15, 1987,
between CMI and Citicorp Real Estate, Inc. (incorporated by reference to
Exhibit 10.14 to CMI's Form 10-Q for the quarter ended June 30, 1987).
10.24* Assignment of Servicing Rights, dated as of July 15, 1987, among CMI, CFC
and Citicorp Real Estate, Inc. (incorporated by reference to Exhibit
10.15 to CMI's Form 10-Q for the quarter ended June 30, 1987).
10.25* Agreement of Merger, dated as of September 11, 1987, between CMO, Inc.
and CMO III, Inc. (incorporated by reference to Exhibit 2 to CMO III,
Inc.'s Form 8-K filed with the SEC on October 9, 1987).
10.26* Amendment to Term Revolving Loan Agreement between CMI and Citicorp Real
Estate, Inc. dated June 22, 1988. (incorporated by reference to Exhibit
10.26 to the Form S-11 filed with the SEC on June 24, 1988).
</TABLE>
24
<PAGE>
<TABLE>
<C> <S>
10.27* Credit Agreement, dated as of September 30, 1993, between CMI and CFC
(incorporated by reference to Exhibit 10.1 to CMI's 10-Q for the quarter
ended September 30, 1993).
10.28* Agreement between CMI and CFC dated December 1, 1988 (incorporated by
reference to Exhibit 10.28 to CMI's Form 10-K for the year ended December
31, 1988).
10.29* 1985 Stock Option Plan adopted August 26, 1985, as amended February 12,
1987 and as further amended on February 15, 1989 (incorporated by
reference to Exhibit 10.30 to CMI's Form 10-K for the year ended December
31, 1989).
10.30* Second Amendment to Term Revolving Loan Agreement between CMI and
Citicorp Real Estate, Inc., dated as of December 26, 1990 (incorporated
by reference to Exhibit 10.30 to CMI's Form 10-K for the year ended
December 31, 1990).
10.31* Trust Agreement, dated as of November 20, 1990, between CMO III, Inc. and
Wilmington Trust Company relating to the CCFBT (the "CCFBT Trust
Agreement") (incorporated by reference to Exhibit 10.31 to CMI's Form 10-
K for the year ended December 31, 1990).
10.32* Guaranty, dated as of November 20, 1990, by CMI of obligations of CMO
III, Inc. under the CCFBT Trust Agreement (incorporated by reference to
Exhibit 10.32 to CMI's Form 10-K for the year ended December 31, 1990).
10.33* Management Agreement, dated as of November 20, 1990, between CCFBT and
the Manager (incorporated by reference to Exhibit 10.33 to CMI's Form 10-
K for the year ended December 31, 1990).
10.34* Amendment, dated as of November 21, 1990, to the 1990 Amended and
Extended Management Agreement between CMI and the Manager (incorporated
by reference to Exhibit 10.34 to CMI's Form 10-K for the year ended
December 31, 1990).
10.35* Assignment Agreement, dated as of November 21, 1990, between CMO III,
Inc. and CCFBT (incorporated by reference to Exhibit 10.35 to CMI's Form
10-K for the year ended December 31, 1990).
10.36* Deposit Trust Agreement dated as of March 24, 1993 between Countrywide
Mortgage Obligations II, Inc. and Wilmington Trust Company (incorporated
by reference to Exhibit 10.1 to CMI's 10-Q for the quarter ended March
31, 1993).
10.37* Master Servicing Agreement dated as of March 30, 1993 by and among the
1993-I Trust, CMI and the Bond Trustee (incorporated by reference to
Exhibit 10.2 to CMI's 10-Q for the quarter ended March 31, 1993).
10.38* Servicing Agreement dated as of March 30, 1993 by and among the 1993-I
Trust, Countrywide Funding Corporation and the Bond Trustee (incorporated
by reference to Exhibit 10.3 to CMI's 10-Q for the quarter ended March
31, 1993).
10.39* Management Agreement, dated as of March 30, 1993 between Countrywide
Asset Management Corporation and the 1993-I Trust (incorporated by
reference to Exhibit 10.4 to CMI's 10-Q for the quarter ended March 31,
1993).
10.40* First Amendment dated as of March 30, 1993 to Agreement between
Countrywide Mortgage Obligations II, Inc. CMI (incorporated by reference
to Exhibit 10.5 to CMI's 10-Q for the quarter ended March 31, 1993).
</TABLE>
25
<PAGE>
<TABLE>
<C> <S>
10.41* First Amendment dated as of March 30, 1993 to Agreement between
Countrywide Mortgage Obligations II, Inc., Countrywide Asset Management
Corporation and Countrywide Funding Corporation (incorporated by
reference to Exhibit 10.6 to CMI's 10-Q for the quarter ended March 31,
1993).
10.42* Deposit Trust Agreement dated as of April 7, 1993 between Countrywide
Mortgage Obligations II, Inc. and Wilmington Trust Company (incorporated
by reference to Exhibit 10.7 to CMI's 10-Q for the quarter ended March
31, 1993).
10.43* Master Servicing Agreement dated as of April 14, 1993 by and among the
1993-II Trust, CMI and the Bond Trustee (incorporated by reference to
Exhibit 10.8 to CMI's 10-Q for the quarter ended March 31, 1993).
10.44* Servicing Agreement dated as of April 14, 1993 by and among the 1993-II
Trust, Countrywide Funding Corporation and the Bond Trustee (incorporated
by reference to Exhibit 10.9 to CMI's 10-Q for the quarter ended March
31, 1993).
10.45* Management Agreement, dated as of April 14, 1993 between Countrywide
Asset Management Corporation and the 1993-II Trust (incorporated by
reference to Exhibit 10.10 to CMI's 10-Q for the quarter ended March 31,
1993).
10.46* First Amendment to Deposit Trust Agreement dated as of April 13, 1993
between Countrywide Mortgage Obligations II, Inc. and Wilmington Trust
Company, as Owner Trustee (incorporated by reference to Exhibit 10.11 to
CMI's 10-Q for the quarter ended March 31, 1993).
10.47* Contribution and Mortgage Loan Acquisition Agreement dated as of April
19, 1993 between CMI and Countrywide Funding Corporation (incorporated by
reference to Exhibit 10.2 to CMI's Amendment No. 3 to S-3 Registration
Statement (No. 33-63034) filed with the SEC on July 16, 1993).
10.48* First Amendment to Deposit Trust Agreement dated as of April 16, 1993
between Countrywide Mortgage Obligations II, Inc. and Wilmington Trust
Company (incorporated by reference to Exhibit 10.8 to CMI's 10-Q for the
quarter ended June 30, 1993).
10.49* 1993 Amended and Extended Loan Purchase and Administrative Services
Agreement dated as of May 15, 1993 between CMI and Countrywide Funding
Corporation (incorporated by reference to Exhibit 10.9 to CMI's 10-Q for
the quarter ended June 30, 1993).
10.50* Custody Agreement dated as of April 5, 1993 among CMI, Merrill Lynch
Mortgage Capital, Inc. and State Street Bank and Trust Company of
California, N.A., Custodian (incorporated by reference to Exhibit 10.10
to CMI's 10-Q for the quarter ended June 30, 1993).
10.51* Master Repurchase Agreement dated as of April 5, 1993 between CMI and
Merrill Lynch Mortgage Capital, Inc. (incorporated by reference to
Exhibit 10.11 to CMI's 10-Q for the quarter ended June 30, 1993).
10.52 Master Repurchase Agreement dated October 1, 1993 between CMI and Merrill
Lynch Mortgage Capital, Inc.
21.1 List of Subsidiaries.
23.1 Consent of Grant Thornton LLP
</TABLE>
26
<PAGE>
*Incorporated by reference.
(b) - REPORTS ON FORM 8-K
None.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Pasadena,
State of California, on February 1, 1995.
COUNTRYWIDE MORTGAGE INVESTMENTS, INC.
BY: DAVID S. LOEB*
----------------------------------
David S. Loeb
Chairman of the Board of Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
DAVID S. LOEB*
- -------------------------- Director, Chairman of the February 1, 1995
David S. Loeb Board of Directors and
Chief Executive Officer
ANGELO R. MOZILO*
- -------------------------- Director, Vice Chairman of February 1, 1995
Angelo R. Mozilo the Board of Directors
and President
S:/ MICHAEL W. PERRY*
- -------------------------- Executive Vice President February 1, 1995
Michael W. Perry and Chief Operating Officer
(Principal Financial Officer
and Principal Accounting
Officer)
LYLE E. GRAMLEY*
- -------------------------- Director February 1, 1995
Lyle E. Gramley
THOMAS J. KEARNS*
- -------------------------- Director February 1, 1995
Thomas J. Kearns
FREDERICK J. NAPOLITANO*
- -------------------------- Director February 1, 1995
Frederick J. Napolitano
</TABLE>
*by s:/ Michael W. Perry
-----------------------
Michael W. Perry
Attorney-in-fact
pursuant to power of
attorney previously
filed with the
Commission
28
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
COUNTRYWIDE MORTGAGE INVESTMENTS, INC.
AND SUBSIDIARIES
December 31, 1993, 1992 and 1991
F-1
<PAGE>
COUNTRYWIDE MORTGAGE INVESTMENTS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
December 31, 1993, 1992, 1991
COUNTRYWIDE MORTGAGE INVESTMENTS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants F-3
Financial Statements
Consolidated Balance Sheets F-4
Consolidated Statements of Earnings F-5
Consolidated Statement of Shareholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Financial Statements F-8
Schedules
Schedule II -- Amounts Receivable from Related Parties and
Underwriters, Promoters and Employees other
than Related Parties F-18
Schedule III -- Condensed Financial Information of Registrant F-19
Schedule IX -- Short-Term Borrowings F-22
Schedule XII -- Mortgage Loans on Real Estate F-23
All other schedules have been omitted since the required
information is not present or not present in amounts sufficient
to require submission of the schedules, or because the information
required is included in the consolidated financial statements
or notes thereto.
COUNTRYWIDE MORTGAGE CONDUIT, INC.
Report of Independent Certified Public Accountants
F-24
Financial Statements
Balance Sheet F-25
Statement of Earnings F-26
Statement of Shareholders' Equity F-27
Statement of Cash Flows F-28
Notes to Financial Statements F-29
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Countrywide Mortgage Investments, Inc.
We have audited the accompanying consolidated balance sheets of Countrywide
Mortgage Investments, Inc. and subsidiaries as of December 31, 1993 and 1992,
and the related consolidated statements of earnings, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1993.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Countrywide
Mortgage Investments, Inc. and subsidiaries as of December 31, 1993 and 1992,
and the consolidated results of their operations and their consolidated cash
flows for each of the three years in the period ended December 31, 1993, in
conformity with generally accepted accounting principles.
We have also audited Schedule XII of Countrywide Mortgage Investments, Inc. and
subsidiaries as of December 31, 1993, and Schedules II, III and IX for each of
the three years in the period then ended. In our opinion, these schedules
present fairly, in all material respects, the information required to be set
forth therein.
GRANT THORNTON LLP
Los Angeles, California
February 28, 1994, except for Note A,
as to which the date is January 28, 1995
F-3
<PAGE>
COUNTRYWIDE MORTGAGE INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
December 31,
-----------------------
1993 1992
------------ ---------
(Restated)
<S> <C> <C>
ASSETS
Mortgage assets
Collateral for CMOs (market value $413,000 in 1993 and
$638,200 in 1992) $ 402,503 $620,411
Mortgage loans held for sale 794,132 -
Adjustable-rate mortgage-backed securities - 87,509
Revolving warehouse lines of credit 92,058 -
Cash 7,099 27
Investment in and advances to CMC 90,394 -
Other assets 10,552 6,278
---------- --------
Total asets $1,396,738 $714,225
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Collateralized mortgage obligations $ 365,886 $571,857
Reverse-repurchase agreements 770,334 21,944
Accounts payable and accrued liabilities 9,910 429
---------- --------
Total liabilities 1,146,130 594,230
Commitments and contingencies - -
Shareholders' equity
Common stock - authorized, 60,000,000 shares of
$.01 par value; issued and outstanding, 32,020,484 shares
in 1993 and 13,980,387 in 1992 320 140
Additional paid-in capital 256,587 119,450
Cumulative earnings 72,306 69,826
Cumulative distributions to shareholders (78,605) (69,421)
---------- --------
Total shareholders' equity 250,608 119,995
---------- --------
Total liabilities and shareholders' equity $1,396,738 $714,225
========== ========
</TABLE>
The accompany notes are an integral part of these statements.
F-4
<PAGE>
COUNTRYWIDE MORTGAGE INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------
1993 1992 1991
----------- ---------- ----------
(Restated)
<S> <C> <C> <C>
REVENUES
Interest income
Collateral for CMOs $41,685 $ 68,692 $106,863
Mortgage loans held for sale 21,086 - -
Adjustable-rate mortgage-backed securities 674 37,378 41,771
Revolving warehouse lines of credit 1,942 - -
Advances to CMC 914 - -
----------- ---------- ----------
Total interest income 66,301 106,070 148,634
Interest expense
Collaterized mortgage obligations 54,958 83,558 106,681
Reverse-repurchase agreements 10,354 23,953 28,714
----------- ---------- ----------
Total interest expense 65,312 107,511 135,395
Net interest income (expense) 989 (1,441) 13,239
Equity in earnings of CMC 2,523 - -
Gain on sale of mortgage loans and securities 917 9,031 735
---------- ---------- ---------
Net revenues 4,429 7,590 13,974
EXPENSES
General and administrative 1,549 1,606 1,485
Management fees to affiliate 400 997 1,622
----------- ---------- ----------
Total expenses 1,949 2,603 3,107
----------- ---------- ----------
NET EARNINGS $ 2,480 $ 4,987 $ 10,867
=========== ========== ==========
EARNINGS PER SHARE $0.13 $0.36 $0.78
=========== ========== ==========
Weighted average shares outstanding 18,578,307 13,978,683 13,924,326
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
COUNTRYWIDE MORTGAGE INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
Additional Cumulative
Three years ended Number of Common paid-in Cumulative distribution
December 31, 1993 shares stock capital earnings to shareholders Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1990 13,645,000 $136 $118,031 $53,972 $(50,992) $121,147
Common stock options exercised 331,375 4 1,405 - - 1,409
Net earnings for the year - - - 10,867 - 10,867
Cash dividends paid - $0.79
per share - - - - (11,020) (11,020)
---------------------------------------------------------------------------------
Balance at December 31, 1991 13,976,375 140 119,436 64,839 (62,012) 122,403
Common stock issued 2,137 - 10 - - 10
Common stock options exercised 1,875 - 8 - - 8
Dividend reinvestment plan
expense - - (4) - - (4)
Net earnings for the year - - - 4,987 - 4,987
Cash dividends paid - $0.53
per share - - - - (7,409) (7,409)
---------------------------------------------------------------------------------
Balance at December 31, 1992 13,980,387 140 119,450 69,826 (69,421) 119,995
Common stock issued 17,883,972 179 135,916 - - 136,095
Common stock options exercised 156,125 1 821 - - 822
Capital contribution by manager - - 400 - - 400
Net earnings for the year - - - 2,480 - 2,480
Cash dividends paid - $0.48
per share - - - - (9,184) (9,184)
---------------------------------------------------------------------------------
Balance at December 31, 1993 32,020,484 $320 $256,587 $72,306 $(78,605) $250,608
=================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
COUNTRYWIDE MORTGAGE INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1993 1992 1991
----------- ----------- ----------
(Restated)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $2,480 $4,987 $10,867
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Amortization 12,744 16,644 8,035
Gain on sale of mortgage loans and securities (917) (9,031) (735)
Equity in earnings of CMC (2,523) - -
Capital contribution by manager 400 - -
Change in other assets and liabilities 5,748 (21,350) 21,012
----------- --------- --------
Net cash provided by (used in) operating activities 17,932 (8,750) 39,179
----------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Collateral for CMOs:
Purchases of mortgage loans subsequently securitized (248,222) - -
Principal payments on collateral 401,106 502,713 227,437
Net change in GICs held by trustees 22,923 (16,107) (5,813)
Proceeds from sale of collateral for CMOs, net 2,641 6,090 -
----------- --------- --------
178,448 492,696 221,624
Purchases of mortgage loans held for sale (3,202,845) - -
Purchases of adjustable-rate mortgage-backed securities - (326,410) (972,693)
Proceeds from sale of mortgage loans and securities 2,477,801 873,080 513,276
Principal payments on mortgage loans and securities 18,417 74,898 95,862
Net increase in revolving warehouse lines of credit (92,058) - -
Investment in CMC (9,405) - -
Net advances to CMC (78,466) - -
Decrease (increase) in short-term investments - 8,276 (3,298)
----------- --------- --------
Net cash (used in) provided by investing activities (708,108) 1,122,540 (145,229)
----------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Collateralized mortgage obligations:
Proceeds from issuance of securities 239,659 - -
Principal payments on securities (418,534) (439,473) (179,324)
----------- --------- --------
(178,875) (439,473) (179,324)
Net increase (decrease) of reverse-repurchase agreements 748,390 (666,910) 294,804
Net proceeds from issuance of common stock 136,917 - 1,409
Cash dividends paid (9,184) (7,409) (11,020)
----------- --------- --------
Net cash provided by (used in) financing activities 697,248 (1,113,792) 105,869
----------- --------- --------
Net increase (decrease) in cash 7,072 (2) (181)
Cash at beginning of period 27 29 210
----------- ----------- ----------
Cash at end of period $ 7,099 $ 27 $ 29
=========== =========== ==========
Supplemental cash flow information:
Cash paid for interest $ 54,925 $ 103,279 $ 134,108
=========== =========== ==========
Cash paid for income taxes - - -
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
COUNTRYWIDE MORTGAGE INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1993, 1992 and 1991
NOTE A - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Countrywide
Mortgage Investments, Inc. and its consolidated subsidiaries ("CMI"). CMI also
owns all the preferred stock and has a 99% economic interest in Countrywide
Mortgage Conduit ("CMC"), a taxable corporation. Previously, CMC was
consolidated with CMI. The 1993 financial statements have been restated to
account for CMI's investment under a method similar to the equity method. The
directors and senior officers of CMC are also senior officers of CMI. In
addition, CMC's operations and technology are dependent upon and closely
integrated with CMI, and CMI is the sole supplier of its mortgage loans.
Accordingly, CMC is accounted for under a method similar to the equity method
because CMI (as opposed to affiliates of CMI) has the ability to exercise
significant influence over the financial and operating policies of CMC through
its ownership of the preferred stock and other contracts. Under this method,
original investments are recorded at cost and adjusted by CMI's share of
earnings or losses and decreased by dividends received.
All material intercompany balances and transactions have been eliminated in
consolidation. Certain amounts for 1992 and 1991 have been reclassified to
conform to the 1993 presentation.
NOTE B - NEW OPERATIONS
Historically, CMI's principal source of earnings has been net interest income
generated from mortgage investments which were primarily financed through the
issuance of collateralized mortgage obligations ("CMOs"). On October 22, 1992,
CMI's Board of Directors approved a new operating plan, implementation of which
was begun in the first quarter of 1993. Under the new plan, the Company,
primarily operates as a jumbo and nonconforming mortgage loan conduit. As a
jumbo and nonconforming mortgage loan conduit, the Company is an intermediary
between the purchasers of mortgage loans which have outstanding principal
balances in excess of the guidelines of the government and the government
sponsored enterprises that guarantee mortgage-backed securities ("jumbo mortgage
loans") and permanent investors in mortgage-backed securities secured by or
representing an ownership interest in such mortgage loans. All loans purchased
by CMI, for which a REMIC transaction or whole loan sale is contemplated, are
committed for sale to CMC at the same price at which the loans were acquired by
CMI. Sellers generally retain the rights to service the mortgage loan purchased
by the Company. The Company's principal sources of income from its mortgage
conduit operations are gains recognized on the sale of mortgage loans, the net
spread between interest earned on mortgage loans and the interest costs
associated with the borrowings used to finance such loans pending their
securitization, net master servicing fees and the net interest earned on its
long-term investment portfolio. In addition, the Company earns fee income and
net interest income through its warehouse lending program which provides
warehouse loans to third-party mortgage loan originators.
F-8
<PAGE>
COUNTRYWIDE MORTGAGE INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1993, 1992 and 1991
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Income Taxes
CMI intends to operate so as to continue to qualify as a real estate investment
trust (REIT) under the requirements of the Internal Revenue Code. Requirements
for qualification as a REIT include various restrictions on ownership of its
stock, requirements concerning distribution of taxable income and certain
restrictions on the nature of assets and sources of income. A REIT must
distribute at least 95% of its taxable income to its shareholders, the
distribution of which may extend until timely filing of its tax return in its
subsequent taxable year. Qualifying distributions of its taxable income are
deductible by a REIT in computing its taxable income. Accordingly, no provision
for income taxes has been made for CMI. If in any tax year CMI should not
qualify as a REIT, it would be taxed as a corporation and distributions to the
shareholders would not be deductible in computing taxable income. If CMI would
fail to qualify as a REIT in any tax year, it would not be permitted to qualify
for that year and the succeeding four years.
2. Collateral for CMOs
Collateral for CMOs consists of mortgage loans and mortgage-backed securities
and is carried at the outstanding principal balances net of unamortized purchase
discounts or premiums. Also included in collateral for CMOs are guaranteed
investment contracts ("GICs") held by trustees and accrued interest receivable
related to such collateral.
3. Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of cost or market,
computed by the aggregate method. All loans purchased by CMI, for which a REMIC
transaction or whole loan sale is contemplated, are committed for sale to CMC at
the same price in which the loans were acquired by CMI. CMI does not sell any
loans to entities other than CMC. Accordingly, as of December 31, 1993, the
market value of mortgage loans held for sale by CMI is equivalent to the
carrying value.
4. Revenue Recognition
Interest is recognized as revenue when earned according to the terms of the
mortgage loans and when, in the opinion of management, it is collectible.
Premiums paid and discounts obtained on collateral for CMOs are amortized to
interest income over the estimated life of the mortgage loans using the interest
method with effect given to principal reductions. Premiums paid and discounts
obtained on mortgage loans held for sale are deferred as an adjustment to the
carrying value of the loans until the loans are sold. CMO discounts or premiums
are amortized to interest expense using the interest method with effect given to
principal reductions. Gains on sale of mortgage loans and securities are
recognized upon settlement.
Substantially all commitment fees collected are refunded as commitments are
fulfilled. Such fees, with respect to expired unfilled commitments, are
credited to income at the time of expiration.
F-9
<PAGE>
COUNTRYWIDE MORTGAGE INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1993, 1992 and 1991
5. Collaterized Mortgage Obligations (CMOs) and Deferred Issuance Costs
Collateralized mortgage obligations are carried at their outstanding principal
balances net of unamortized original issue discounts or premiums. Also included
in CMOs is accrued interest payable on such obligations. Issuance costs have
been deferred and are amortized to expense over the estimated life of the CMOs
using the straight-line method with effect given to principal reductions. Such
method does not result in any material difference than would be provided by the
effective interest method. Unamortized deferred issuance costs are included in
other assets in the consolidated balance sheets.
6. Earnings Per Share
Earnings per share are computed on the basis of the weighted average number of
common shares outstanding for the year which were 18,578,307, 13,978,683 and
13,924,326 for 1993, 1992 and 1991, respectively. The effect on earnings per
share resulting from dilution upon exercise of stock options is not material in
any year and is therefore not presented. Of the total dividends per share paid
in 1993 and 1992, approximately $0.45 and $0.00, respectively, represented
return of capital.
7. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires that CMI disclose estimated fair
values for its financial instruments. The estimated fair value amounts have
been determined by CMI using available market information and appropriate
valuation methodologies. However, considerable judgment is necessarily required
to interpret market data to develop the estimates of fair value. Accordingly,
the estimates presented are not necessarily indicative of the amounts CMI could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated fair
value amounts.
Fair values of revolving warehouse lines of credit, cash, other assets,
reverse-repurchase agreements and accounts payable and accrued liabilities are
not separately disclosed as such values approximate carrying amounts because of
the short term to maturity or nature of the underlying asset or liability.
NOTE C - COLLATERAL FOR CMOs
Collateral for CMOs consists of fixed-rate mortgage loans secured by first liens
(enforceable through foreclosure proceedings) on one-to-four family residential
real estate and mortgage- backed securities. During the year ended December 31,
1993, CMI pledged approximately $248.2 million of mortgage loans as collateral
for two new series of CMOs.
All principal and interest on the collateral is remitted to a trustee and,
together with any reinvestment income earned thereon, is available for payment
on the CMOs. Generally, any default of a mortgage loan which is the basis for
a foreclosure action is covered (up to an aggregate benefit limit) under a pool
insurance policy provided by a private mortgage insurer. Furthermore, CMI's
mortgage-backed securities are guaranteed as to the repayment of principal and
interest of the underlying mortgages by the Federal Home Loan Mortgage
Corporation. The maximum amount of credit risk related to CMI's investment in
mortgage loans is represented by the outstanding principal balance of the
mortgage loans plus accrued interest.
F-10
<PAGE>
COUNTRYWIDE MORTGAGE INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1993, 1992 and 1991
NOTE C - COLLATERAL FOR CMOs - CONTINUED
Collateral for CMOs is summarized as follows:
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
December 31,
----------------------------
1993 1992
-------- --------
<S> <C> <C>
Mortgage loans $154,152 $ 85,353
Mortgage-backed securities 217,856 473,907
GICs held by trustees 21,670 44,593
Accrued Interest receivable 4,337 7,812
-------- --------
398,015 611,665
Unamortized premiums, net 4,488 8,746
-------- --------
Collateral for CMOs $402,503 $620,411
======== ========
</TABLE>
The mortgage loans and mortgage-backed securities, together with GICs, which are
all held by trustees, collateralized 17 series of CMOs at December 31, 1993. A
time lag of 24 to 45 days exists from the date the underlying mortgage is
prepaid to the date CMI actually receives the cash related to the prepayment.
During this interim period, CMI does not earn interest income on the portion of
the mortgage loan or mortgage-backed security that has been prepaid. The
weighted average coupon on collateral for CMOs, net of the related servicing
fees, was 8.88% at December 31, 1993.
As of December 31, 1993 and 1992, the aggregate market value of collateral for
CMOs was estimated to be $413.0 million and $638.2 million, respectively. This
estimate was determined based upon quoted market prices from dealers and brokers
for securities backed by similar types of loans. Collateral for CMOs cannot be
sold until the related obligations mature or are otherwise paid or redeemed. As
a consequence, the aggregate market values indicated above may not be
realizable. As a REIT, CMI's ability to sell these assets for gain also is
subject to restrictions under the Internal Revenue Code and any such sale may
result in substantial additional tax liability.
NOTE D - MORTGAGE LOANS HELD FOR SALE
Substantially all of the mortgage loans purchased are fixed-rate and adjustable-
rate nonconforming mortgage loans secured by first liens on single (one-to-
four) family residential properties. Approximately 69% of the mortgage loans
held for sale at December 31, 1993 were collateralized by properties located in
California.
In 1993, CMI purchased mortgage loans with an aggregate principal balance of
$3.5 billion and sold mortgage loans with an aggregate principal balance of $2.4
billion to CMC.
F-11
<PAGE>
COUNTRYWIDE MORTGAGE INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1993, 1992 and 1991
NOTE E - INVESTMENT IN AND ADVANCES TO CMC
CMI has an investment in CMC that is accounted for under a method similar to the
equity method. CMI owns 100% of the preferred stock and has a 99% economic
interest in CMC. CMC was incorporated in April 1993 and principally operates as
a jumbo and nonconforming mortgage loan conduit. All loans purchased by CMI, for
which a REMIC transaction or whole loan sale is contemplated, are committed for
sale to CMC at the same price at which the loans were acquired by CMI. CMC does
not purchase any loans from entites other than CMI. CMC's principal source of
income from its mortgage conduit operations are gains recognized on the sale of
mortgage loans or mortgage securities, the net spread between interest earned on
mortgage loans held for sale by CMC and the interest costs associated with the
borrowings used to finance such loans pending their sale or securitization and
net master servicing fee income.
As of December 31, 1993, CMI's investment in and advances to CMC totaled $12.0
million and $78.5 million, respectively. CMC has an open account with CMI
whereby funds are advanced to CMC primarily to finance assets in which CMC
invests. Such advances bear interest at rates indexed to the London Interbank
Offered Rates ("LIBOR"). Interest charged on advances to CMC was at an average
rate of approximately 5% for the year ended December 31, 1993.
NOTE F - COLLATERALIZED MORTGAGE OBLIGATIONS
Collateralized mortgage obligations are secured by a pledge of mortgage loans,
mortgage-backed securities or residual cash flows from such loans or securities.
As required by the indentures relating to the CMOs, the pledged collateral is in
the custody of a trustee. The trustee also held investments in GICs amounting to
$21.7 million and $44.6 million as of December 31, 1993 and 1992, respectively,
as additional collateral which is legally restricted to use in servicing the
CMOs. The trustee collects principal and interest payments on the underlying
collateral, reinvests such amounts in the GICs and makes corresponding principal
and interest payments on the CMOs to the bondholders.
In general, each series of CMOs consists of various classes which are retired
in order of maturity, with the shortest maturity class receiving all principal
payments until it is paid in full. After the first class is fully retired, the
second class will receive principal until retired and so forth. Each series is
also subject to redemption according to specific terms of the respective
indentures. As a result, the actual maturity of any class of a CMO series is
likely to occur earlier than its stated maturity.
Interest is payable monthly or quarterly, as applicable in accordance with the
respective indenture, for all classes other than deferred interest classes.
Interest on deferred interest classes is accrued and added to the principal
balance and will not be paid until all other classes in the series have been
paid in full. The weighted average coupon on CMOs was 8.43% at December 31,
1993.
CMI's investment in CMO residuals amounted to $40.2 million and $51.8 million at
December 31, 1993 and 1992, respectively.
F-12
<PAGE>
COUNTRYWIDE MORTGAGE INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1993, 1992 and 1991
NOTE F - COLLATERALIZED MORTGAGE OBLIGATIONS - CONTINUED
CMOs are summarized as follows:
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
December 31,
--------------------------
1993 1992
-------- --------
<S> <C> <C>
Collateralized mortgage obligations $371,332 $578,047
Accrued interest payable 3,526 5,874
-------- --------
374,858 583,921
Unamortized discounts, net (8,972) (12,064)
-------- --------
Collateralized mortgage obligations, net $365,886 $571,857
======== ========
Range of weighted average interest 6.51% - 8.63% -
rates, by series 11.00% 10.96%
Range of stated maturities 1998 - 2023 1998 - 2017
Number of series 17 17
</TABLE>
During 1993, CMI redeemed two series of CMOs (the "Series"), in accordance with
the terms of the indentures governing the Series. The mortgage-backed
securities that collateralized the Series were sold and CMI recognized a gain of
$917,000. Additionally, in March 1993 and April 1993, CMI issued two new series
of CMO's with a total initial balance of $240.2 million.
The estimated fair value of CMOs at December 31, 1993 and 1992 was $393.4
million and $604.0 million, respectively. This estimate was determined based
upon quoted market prices from dealers and brokers for securities backed by
similar types of loans.
NOTE G - REVERSE-REPURCHASE AGREEMENTS
During April 1993, CMI entered into a $100.0 million reverse-repurchase
agreement, which expires in April 1994, to provide the Company with a committed
revolving credit facility to finance mortgage loans held for sale. All
borrowings by CMC under this facility are guaranteed by CMI. CMI also has
obtained credit approval from the same lender to enter into additional reverse-
repurchase agreements, pledged with mortgage loans held for sale 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. The
maximum balance outstanding under CMI's borrowing during the year was $851.0
million and the balance outstanding at December 31, 1993 totaled $770.3 million.
The carrying value and estimated market value of mortgage loans held for sale
securing this facility totaled $754.2 million at December 31, 1993. Adjustable-
rate mortgage-backed securities totaling $23.3 million were pledged as
collateral for reverse-repurchase agreements at December 31, 1992. As of
December 31, 1993, CMC had $36.2 million in reverse-repurchase agreements
outstanding, all of which were guaranteed by CMI.
F-13
<PAGE>
COUNTRYWIDE MORTGAGE INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1993, 1992 and 1991
NOTE G - REVERSE-REPURCHASE AGREEMENTS - CONTINUED
During September 1993, CMI entered into an additional $100.0 million reverse-
repurchase agreement, which expires in September 1994, to provide CMI with a
committed revolving credit facility to be used to finance the warehouse lending
program. The balance outstanding at December 31, 1993 totaled $27.4 million.
The facility is secured by mortgage loans originated by small- and medium-size
mortgage bankers to which CMI advances funds for the period from the closing of
the loans until the loans are purchased by a permanent investor or CMC. The
book value and market value of revolving warehouse lines of credit securing this
facility totaled $92.1 million as of December 31, 1993.
At December 31, 1993, Merrill Lynch was the lender on all outstanding reverse-
repurchase agreements. Such agreements had maturities of less than five days
with interest at rates indexed to the London Interbank Offered Rates ("LIBOR").
As of December 31, 1993 and 1992, the borrowing rate on these reverse-repurchase
agreements was 4.7% and 3.2%, respectively. At December 31, 1993, CMI was in
compliance with all representations, warranties and covenants of its reverse-
repurchase agreements.
NOTE H - COMMITMENTS AND CONTINGENCIES
Financial Instruments With Off-Balance Sheet Risk. CMI is a party to financial
instruments with off-balance-sheet risk in the normal course of business. These
instruments include short-term commitments to extend credit associated with
warehouse lines of credit. These instruments involve elements of credit risk.
CMI is exposed to credit loss in the event of nonperformance by the
counterparties to the various agreements. However, CMI does not anticipate
nonperformance by the counterparties. Unless noted otherwise, CMI does not
require collateral or other security to support such commitments.
Commitments to Purchase and sell Loans. As of December 31, 1993, CMI had
entered into commitments to purchase mortgage loans totaling $618.6 million
subject to funding of such loans by various mortgage bankers and other financial
institutions. In addition, as of December 31, 1993, CMI had committed to sell
$794.1 million of mortgage loans to CMC. After purchase and sale of the
mortgage loans, CMI's exposure to credit loss in the event of nonperformance by
the mortgagor is limited. The fair value of commitments to purchase loans is
estimated to approximate cost at December 31, 1993, as all loans purchased by
CMI are committed for sale to CMC at CMI's purchase price.
Revolving Warehouse Lines of Credit Commitments. CMI's warehouse lending
program provides secured short-term revolving financing to small- and medium-
size mortgage bankers to finance mortgage loans from the closing of the loans
until sold to permanent investors. At December 31, 1993, CMI had extended lines
of credit under this program in the aggregate amount of $206.0 million, of which
$92.1 million was outstanding.
NOTE I - SHAREHOLDERS' EQUITY
CMI issued 10,215,000 shares of common stock in July 1993. Net proceeds of this
offering amounted to $74.1 million and were used to expand the Company's
mortgage conduit and warehouse lending operations.
F-14
<PAGE>
COUNTRYWIDE MORTGAGE INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1993, 1992 and 1991
NOTE I - SHAREHOLDERS' EQUITY - CONTINUED
In December 1993, CMI's shareholders approved an increase in the number of
authorized shares of common stock of from 30,000,000 to 60,000,000.
Subsequently, CMI issued 7,666,300 shares of common stock. Net proceeds of this
offering amounted to $62.0 million and will be used to expand the Company's
mortgage conduit operations and other aspects of its new business plan.
NOTE J - STOCK OPTION PLAN
The 1985 Stock Option Plan provides for the issuance of non-qualified and
incentive stock options to purchase up to 1,090,000 shares of CMI's common
stock. Options granted to date are at a per share exercise price equal to the
average of the high and low sales prices per share of CMI's common stock on the
date of grant. Options granted are exercisable one year from the date of grant
and generally terminate five years from the date of grant.
As of December 31, 1993, options to purchase 346,875 shares were exercisable and
47,750 shares were reserved for future grants. Stock option transactions for
the three years ended December 31, 1993, 1992 and 1991 are summarized as
follows:
<TABLE>
<CAPTION>
---------------------------------------------
Years ended December 31, 1993 1992 1991
---------------------------------------------
<S> <C> <C> <C>
Shares subject to:
Options at beginning of year.................... 558,000 438,625 570,000
Options granted............................... 206,000 150,000 200,000
Options canceled.............................. (55,000) (28,750)
Options exercised............................. (156,125) (1,875) (331,375)
---------------------------------------------
Shares Subject to Options at end of year 552,875 558,000 438,625
=============================================
Exercise price:
Per share for options outstanding at end of year $4.25-$8.375 $4.25-$6.62 $4.25-$6.62
Average per share for options exercised $5.26 $4.25 $4.25
</TABLE>
Two members of CMI's Board of Directors exercised options totaling 126,125
shares during the year ended December 31, 1993. The exercise of these options
was financed through CMI. At December 31, 1993 and 1992, the total principal
balances of notes receivable relating to the 1993 and prior option exercises by
Directors were $1.5 million and $1.1 million respectively; the notes are
secured by the common stock issued, have maturities of up to five years and bear
interest rates ranging from 4.17% to 7.70% at December 31, 1993.
NOTE K - RELATED PARTY TRANSACTIONS
CMI has entered into an agreement (the "Management Agreement") with Countrywide
Asset Management Corporation (the "Manager") to advise the Company on various
facets of its business and manage its operations, subject to supervision by
CMI's Board of Directors. The Manager has entered into a subcontract with its
affiliate, Countrywide Funding Corporation ("CFC"), to perform such services for
the Company as the Manager deems necessary.
F-15
<PAGE>
COUNTRYWIDE MORTGAGE INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1993, 1992 and 1991
NOTE K - RELATED PARTY TRANSACTIONS - CONTINUED
For performing these services, the Manager receives a base management fee of 1/8
of 1% per annum of average invested assets not pledged to secure CMOs. The
Manager also receives a subsidiary management fee equal to 3/8 of 1% per annum
of the average amounts outstanding under warehouse lines of credit. In
addition, the Manager receives incentive compensation equal to 25% of the amount
by which CMI's annualized return on equity exceeds the ten-year U.S. Treasury
Rate plus 2%. The Manager waived all fees pursuant to the above for 1993. Such
amounts are reflected as an expense and a corresponding capital contribution in
the accompanying financial statements. The Manager earned management fees
totaling $400,000, $997,000 and $1.6 million, for the years ended December 31,
1993, 1992 and 1991, respectively. The Management Agreement is renewable
annually and expires May 15, 1994.
The Manager incurs many of the operating expenses of the Company, including
personnel and related expenses. The Company's conduit operations are primarily
conducted in CMC and all other operations are conducted in CMI. Accordingly,
CMC is charged with the majority of the conduit's costs and CMI is charged with
the other operations' costs.
During 1993, the amount of common expenses incurred by CFC which were allocated
to CAMC and reimbursed by the Company totaled $192,000 and included data
processing and occupancy charges of $100,000 and $92,000, respectively. Data
processing charges are allocated on the basis of actual costs relative to the
number of employees. Occupancy charges are allocated on the basis of square
footage occupied by the Company. The Company estimates that such expenses would
not be materially different on a stand-alone basis. The majority of these
expenses have been allocated to CMC as they primarily relate to the Company's
conduit operations.
During 1993, CMI purchased approximately $415.0 million in nonconforming
mortgage loans from CFC.
In 1987 and 1993, CMI entered into servicing agreements appointing CFC as
servicer of pools of mortgage loans collaterizing five series of CMOs with
outstanding balances of approximately $154.2 million at December 31, 1993. CFC
is entitled to an annual fee of up to 0.32% of the aggregate unpaid principal
balance of the pledged mortgage loans. Servicing fees received by CFC under
such agreements were approximately $1.1 million, $290,000 and $462,000 in 1993,
1992 and 1991, respectively.
CFC has extended CMI a $10.0 million line of credit bearing interest at prime
and maturing September 30, 1994. At December 31, 1993, there was no outstanding
amount under the agreement.
The Manager and CFC are wholly-owned subsidiaries of Countrywide Credit
Industries, Inc. ("CCI"), a diversified financial services company whose shares
of common stock are traded on the New York Stock Exchange. CCI owned 1,100,000
shares or 3.44% of CMI's common stock at December 31, 1993. The Manager owned
20,000 shares of the CMI's common stock, which was purchased at inception. CFC
owns all of the common stock and has a 1% economic interest in CMC.
F-16
<PAGE>
COUNTRYWIDE MORTGAGE INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1993, 1992 and 1991
NOTE L - SUBSEQUENT EVENT
On January 27, 1994, the Board of Directors declared a $0.12 cash dividend to be
paid on March 1, 1994 to shareholders of record on February 7, 1994.
NOTE M - QUARTERLY FINANCIAL DATA - UNAUDITED
Selected quarterly financial data follows:
<TABLE>
<CAPTION>
Three Months Ended
Dollar amounts in thousands -----------------------------------------------
except per share data: March 31 June 30 September 30 December 31
-----------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1993
Net revenues $ 602 $ 512 $1,045 $2,270
Net earnings 118 54 564 1,744
Earnings per share (1) .01 .00 .03 .07
Dividends per share (2) .12 .12 .12 .12
Year ended December 31, 1992
Net revenues $1,907 $2,274 $2,282 $1,127
Net earnings 1,255 1,653 1,681 398
Earnings per share (1) .09 .12 .12 .03
Dividends per share (2) .12 .12 .12 .12
</TABLE>
- ----------
(1) Earnings per share are computed independently for each of the quarters
presented. Therefore the sum of the quarterly earnings per share may
not equal the total for the year.
(2) Declared for earnings of the period.
F-17
<PAGE>
COUNTRYWIDE MORTGAGE INVESTMENTS, INC. AND SUBSIDIARIES
SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES AND
UNDERWRITERS, PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ----------- ------------ ---------- -------------------------- ---------------------
Balance at End
Deductions of Period
Balance at -------------------------- ---------------------
Name of Beginning of Amounts Amounts Not
Debtor Period Additions Collected Written Off Current Current
- ----------- ------------ ---------- ----------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C>
For year ended December 31, 1993 (1)
Jack W. Carlson $ 361 $ 26 $ 39 $ - $ 39 $ 309
Robert J. Donato 239 16 255 - - -
Frederick J. Napolitano 361 26 29 - 40 318
David S. Loeb 83 594 13 - 65 599
Angelo R. Mozilo 73 5 7 - 10 61
Thomas J. Kearns - 45 - - 5 40
----------- ---------- ----------- ------------ --------- ---------
$1,117 $712 $343 $ - $159 $1,327
=========== ========== =========== ============ ========= =========
For year ended December 31, 1992 (1)
Jack W. Carlson $ 378 $26 $ 43 $ - $ 39 $ 322
Robert J. Donato 248 18 27 - 32 207
Frederick J. Napolitano 377 27 43 - 39 322
Harley W. Snyder 248 3 251 - - -
David S. Loeb 86 7 10 - 8 75
Angelo R. Mozilo 78 6 11 - 10 63
----------- ---------- ----------- ------------ --------- ---------
$1,415 $87 $385 $ - $128 $ 989
=========== ========== =========== ============ ========= =========
For year ended December 31, 1991 (1)
Jack W. Carlson $132 $282 $ 36 $ - $ 56 $ 322
Robert J. Donato 91 282 125 - 46 202
Frederick J. Napolitano 131 282 36 - 56 321
Harley W. Snyder 134 282 168 - 46 202
David S. Loeb - 86 - - 13 73
Angelo R. Mozilo - 86 8 - 14 64
----------- ---------- ----------- ------------ --------- ---------
$ 488 $1,300 $373 $ - $231 $1,184
=========== ========== =========== ============ ========= =========
</TABLE>
(1) The notes receivable are secured by Common Stock of CMI, have interest rates
of up to 7.70% per annum as of December 31, 1993 and have original
maturities of five years. Cash dividends on the Common Stock pledged for
these notes are used first to pay accrued interest and second to reduce the
outstanding principal of the notes.
F-18
<PAGE>
COUNTRYWIDE MORTGAGE INVESTMENTS, INC. AND SUBSIDIARIES
SCHEDULE III-CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
BALANCE SHEETS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
December 31,
---------------------
1993 1992
-------- --------
<S> <C> <C>
ASSETS
Cash $ 1,806 $ 20
Mortgage assets
Mortgage loans held for sale 794,132 -
Adjustable-rate mortgage-backed securities - 87,509
Investment in affiliates(1) 76,218 82,113
Due from affiliates 120,124 -
Other assets 5,795 2,819
-------- --------
Total assets $998,075 $172,461
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Reverse-repurchase agreements $742,911 $ 21,950
Accounts payable and accrued liabilities 4,556 287
Due to affiliates - 30,229
-------- --------
Total liabilities 747,467 52,466
Commitments and contingencies - -
Shareholders' equity
Common stock 320 140
Additional paid-in capital 256,587 119,450
Accumulated (deficit) earnings (6,299) 405
-------- --------
Total shareholders' equity 250,608 119,995
Total liabilities and shareholders' equity $998,075 $172,461
======== ========
</TABLE>
- ----------
(1) The Company has received cash dividends from its subsidiaries of $9,858 and
$8,803 for the years ended December 31, 1993 and 1992, respectively.
F-19
<PAGE>
COUNTRYWIDE MORTGAGE INVESTMENTS, INC. AND SUBSIDIARIES
SCHEDULE III-CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
(Continued)
STATEMENTS OF EARNINGS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1993 1992 1991
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES
Interest income $19,366 $37,378 $41,771
Interest expense 9,673 26,731 31,170
----------- ----------- -----------
Net interest income 9,693 10,647 10,601
Gain on sale of mortgage-backed securities - 7,831 735
Equity in net (loss) earnings of affiliates (5,659) (11,579) 1,821
----------- ----------- -----------
Net revenue 4,034 6,899 13,157
----------- ----------- -----------
EXPENSES
General and administrative 1,242 1,169 1,028
Management fees to affiliate 312 743 1,262
----------- ----------- -----------
Total expenses 1,554 1,912 2,290
----------- ----------- -----------
NET EARNINGS $2,480 $4,987 $10,867
=========== =========== ===========
EARNINGS PER SHARE $0.13 $0.36 $0.78
=========== =========== ===========
Weighted average shares outstanding 18,578,307 13,978,683 13,924,326
=========== =========== ===========
</TABLE>
F-20
<PAGE>
COUNTRYWIDE MORTGAGE INVESTMENTS, INC. AND SUBSIDIARIES
SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
(Continued)
STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1993 1992 1991
----------- ----------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $2,480 $4,987 $10,867
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Equity in net loss (earnings) of affiliates 5,659 11,579 (1,821)
Amortization 43 3,015 2,319
Gain on sale of mortgage-backed securities - (7,831) (735)
Capital contribution by manager 400 - -
(Increase) decrease in due from/due to affiliate (150,353) 1,349 3,989
Decrease in other assets and liabilities 1,186 14,733 66,708
----------- ----------- ----------
Net cash (used in) provided by operating activities (140,585) 27,832 81,327
----------- ----------- ----------
Cash flows from investing activities:
Decrease (increase) in short-term investments - 8,276 (3,298)
Purchases of mortgage loans and securities (3,202,897) (326,410) (972,693)
Purchases of mortgage loans subsequently securitized (248,222)
Proceeds from sale of mortgage loans and securities 2,725,700 880,911 513,276
Principal payments on mortgage loans and securities 18,791 74,898 93,556
Investment in subsidiaries (9,553) - -
Dividends received from subsidiaries 9,858 8,803 2,458
----------- ----------- ----------
Net cash (used in) provided by investing activities (706,323) 646,478 (366,701)
----------- ----------- ----------
Cash flows from financing activities:
Net proceeds (repayments) of reverse-repurchase agreements 720,961 (666,910) 294,804
Net proceeds from issuance of common stock 136,917 - 1,409
Cash dividends paid (9,184) (7,409) (11,020)
----------- ----------- ----------
Net cash provided by (used in) financing activities 848,694 (674,319) 285,193
----------- ----------- ----------
Net increase (decrease) in cash 1,786 (9) (181)
Cash at beginning of period 20 29 210
----------- ----------- ----------
Cash at end of period $1,806 $20 $29
=========== =========== ==========
Supplemental cash flow information:
Cash paid for interest $9,582 $24,309 $28,740
=========== =========== ==========
Cash paid for income taxes - - -
=========== =========== ==========
</TABLE>
F-21
<PAGE>
COUNTRYWIDE MORTGAGE INVESTMENTS, INC. AND SUBSIDIARIES
SCHEDULE IX - SHORT-TERM BORROWINGS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
- ------------------------------------------ ------------- ---------- --------------- -------------- ---------------
Maximum Average Weighted
Weighted amount amount average
average outstanding outstanding interest rate
Category of aggregate Balance at interest during the during the during the
short-term borrowings end of period rate period period(1) period(2)
- ------------------------------------------ ------------- ---------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993
Reverse-repurchase
agreements $770,334 4.67% $851,047 $271,231 3.82%
------------- ---------- --------------- -------------- ---------------
$770,334 4.67% $851,047 $271,231 3.82%
============= ========== =============== ============== ===============
Year ended December 31, 1992
Reverse-repurchase
agreements $21,950 4.00% $796,001 $548,903 4.35%
------------- ---------- --------------- -------------- ---------------
$21,950 4.00% $796,001 $548,903 4.35%
============= ========== =============== ============== ===============
Year ended December 31, 1991
Reverse-repurchase
agreements $688,860 5.29% $688,860 $485,346 5.88%
------------- ---------- --------------- -------------- ---------------
$688,860 5.29% $688,860 $485,346 5.88%
============= ========== =============== ============== ===============
</TABLE>
- ---------------
(1) Calculation of average amount outstanding during the period based upon the
monthly weighted average principal balance of borrowings.
(2) Calculation of weighted average interest rate during the period based upon
the monthly weighted average principal balance of borrowings divided into
total interest charges on such borrowings.
F-22
<PAGE>
COUNTRYWIDE MORTGAGE INVESTMENTS, INC. AND SUBSIDIARIES
SCHEDULE XII - MORTGAGE LOANS ON REAL ESTATE
(Dollar amounts in thousands)
December 31, 1993
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
- ---------------------------- ---------- ------------------ --------------- --------------- -----------------
Principal
Amount
of Loans
(1)(2)(3)(4)(5)(7)(10) Subject to Amount of
Range of Number Carrying Delinquent Mortgage
Carrying Amounts of Prior Amount of Principal Being Range of
of Mortgages Loans(1) Liens(1) Mortgages or Interest (1)(8) Foreclosed (1)(9) Interest Rates (1)(6)
- ---------------- ---------- ---------- ------------------ ----------------- --------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
$0-$50 4 $0 $193 $0 $0 7.000-7.7500
50-100 143 0 12,556 0 0 3.250-10.125
101-150 475 0 59,894 584 0 3.250-10.750
151-200 434 0 76,058 3,255 159 3.125-11.000
201 - 250 881 0 201,528 2,486 446 3.250-11.000
251 - 300 723 0 198,658 1,673 255 3.125-10.750
301 - 350 397 0 129,407 0 0 3.125-9.750
351 - 400 194 0 73,181 0 0 3.375-8.750
401 - 450 132 0 56,365 431 0 3.250-8.500
451 - 500 126 0 60,721 0 0 3.500-9.125
501 - 550 61 0 32,250 0 0 4.000-8.750
551 - 600 75 0 43,781 579 0 3.500-8.625
601 - 650 58 0 36,706 0 0 3.875-8.500
651 - 700 9 0 6,167 0 0 4.625-7.750
701 - 750 19 0 14,018 0 0 4.375-8.000
751 - 800 4 0 3,084 0 0 4.500-7.875
801 - 850 4 0 3,329 0 0 4.000-7.375
851 - 900 4 0 3,520 0 0 5.000-7.250
901 - 950 3 0 2,783 0 0 4.875-7.000
951 - 1,000 9 0 8,892 0 0 4.500-7.750
over 1,000 1 0 1,200 0 0 4.875
---------- ---------- ------------------ --------------- ---------------
3,756 $0 $1,024,292 $9,008 $861
========== ========== =============== ===============
Premium 5,165
------------------
$1,029,457
==================
</TABLE>
- --------------------------
(1) The above amounts are for the Company including both CMI and CMC.
(2) All mortgage loans are fixed or adjustable-rate, conventional mortgage loans
secured by single (one-to-four) family residential properties with initial
maturities of 15 to 30 years.
(3) Total mortgage loans comprised of $870,140 of mortgage loans held for sale
and $154,152 of whole loans pledged as collateral for CMOs.
(4) Information with respect to the geographic breakdown of first mortgages on
single family residential housing as of December 31, 1993 is as follows:
California 70% with no other state comprising more than 14%.
(5) The aggregate cost for federal income tax purposes is $1,029,457.
(6) Interest earned on mortgages by range of carrying amounts is not reasonably
obtainable.
(7) $ 415.0 million of mortgage loans purchased during 1993 were acquired from
CFC, an affiliate of the Company's Manager.
(8) $5.8 million of the total principal amount of loans subject to delinquent
principal or interest is related to Pre-1993 CMOs.
(9) Of the total amount of mortgages being foreclosed, $606 is related to Pre-
1993 CMOs and $255 is related to CMOs issued in 1993. Generally, any
default of a mortgage loan which is the basis of a foreclosure action is
covered (up to an aggregate benefit limit) under a pool insurance policy
provided by a private mortgage insurer.
<TABLE>
<CAPTION>
The Company (CMI and CMC) CMI Alone
------------------------- -------------------------
<S> <C> <C> <C> <C>
(10) Balance at beginning of period $85,353 $85,353
Additions during period:
New mortgage loans 3,420,202 3,420,202
---------- ----------
3,505,555 3,505,555
Deductions during period:
Sales of mortgage loans 2,260,739 2,363,994
Collections of principal 220,524 2,481,263 196,325 2,560,319
--------- ---------- --------- ----------
Balance at close of period $1,024,292 $ 945,236
========== ==========
</TABLE>
F-23
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Countrywide Mortgage Conduit, Inc.
We have audited the accompanying balance sheet of Countrywide Mortgage Conduit,
Inc. as of December 31, 1993, and the related statements of earnings,
shareholders' equity, and cash flows for the period from April 20, 1993
(inception) through December 31, 1993. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Countrywide Mortgage Conduit,
Inc. as of December 31, 1993, and the results of its operations and its cash
flows for the period from April 20, 1993 (inception) through December 31, 1993,
in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Los Angeles, California
January 28, 1995
F-24
<PAGE>
COUNTRYWIDE MORTGAGE CONDUIT, INC.
BALANCE SHEET
December 31, 1993
(Dollar amounts in thousands)
<TABLE>
<S> <C>
ASSETS
Mortgage loans held for sale $ 78,358
Master servicing fees receivable 45,237
Other assets 10,518
--------
Total assets $134,113
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Reverse-repurchase agreements $ 36,223
Due to CMI 78,466
Accounts payable and accrued liabilities 7,375
--------
Total liabilities 122,064
Commitments and contingencies -
Shareholders' equity
Series A preferred stock - authorized, 10,000
shares of $.01 par value; issued and
outstanding, 9,000 -
Common stock - authorized, 10,000 shares
of $.05 par value; issued and outstanding,
100 shares -
Capital in excess of par value 9,500
Retained earnings 2,549
--------
Total shareholders' equity 12,049
--------
Total liabilities and shareholders' equity $134,113
========
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE>
COUNTRYWIDE MORTGAGE CONDUIT, INC.
STATEMENT OF EARNINGS
Period from April 20, 1993 (inception) to December 31, 1993
(Dollar amounts in thousands)
<TABLE>
<S> <C>
REVENUES
Interest income $ 7,985
Mortgage loans held for sale
Interest expense
Reverse-repurchase agreements 3,988
Advances from CMI 914
--------
4,902
Net interest income 3,083
Master servicing income 2,477
Master servicing and servicing
hedge amortization (6,995)
--------
Net master servicing expense (4,518)
Gain on sale of mortgage loans and
securities 8,388
--------
Net revenues 6,953
EXPENSES
Salaries and related expenses 1,723
General and administrative 892
--------
Total expenses 2,615
--------
Earnings before income taxes 4,338
Provision for income taxes 1,789
--------
NET EARNINGS $ 2,549
========
</TABLE>
The accompanying notes are an integral part of these statements.
F-26
<PAGE>
COUNTRYWIDE MORTGAGE CONDUIT, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
Period from April 20, 1993 (Inception) to December 31, 1993
(Dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
Additional
Number of Common Preferred paid-in Retained
shares stock Stock capital earnings Total
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of preferred stock 9,900 $ 0 $ 0 $2,475 $ 0 $ 2,475
Issuance of common stock 100 - - 25 - 25
Additional capital contribution - - - 7,000 - 7,000
Net earnings during the period - - - - 2,549 2,549
---------------------------------------------------------------
Balance at December 31, 1993 10,000 $ 0 $ 0 $9,500 $2,549 $12,049
===============================================================
</TABLE>
The accompanying notes are an integral part of these statements.
F-27
<PAGE>
COUNTRYWIDE MORTGAGE CONDUIT, INC.
STATEMENT OF CASH FLOWS
Period from April 20, 1993 (inception) to December 31, 1993
(Dollar amounts in thousands)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 2,549
Adjustments to reconcile net earnings
to net cash used in operating activities:
Amortization 7,387
Purchases of mortgage loans from CMI (2,391,132)
Sale of mortgage loans and securities 2,286,060
Change in other assets and liabilities (3,543)
-----------
Net cash used in operating activities (98,679)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in master servicing fees receivable (52,222)
Principal payments on mortgage loans and securities 26,712
-----------
Net cash (used in) provided by investing activities (25,510)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net advances from CMI 78,466
Net proceeds (repayment) of reverse-repurchase
agreements 36,223
Proceeds from issuance of common stock 25
Proceeds from issuance of preferred stock 2,475
Proceeds from additional capital contribution 7,000
-----------
Net cash provided by (used in) financing activities 124,189
-----------
Net increase (decrease) in cash 0
Cash at beginning of period 0
-----------
Cash at end of period $0
===========
Supplemental cash flow information:
Cash paid for interest $3,871
===========
Cash paid for income taxes -
===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-28
<PAGE>
COUNTRYWIDE MORTGAGE CONDUIT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993
NOTE A - NEW OPERATIONS
On October 22, 1992, the Board of Directors of Countrywide Mortgage Investments,
Inc. ("CMI") approved a new operating plan, implementation of which was begun in
the first quarter of 1993. Under the new plan, CMI and Countrywide Funding
Corporation ("CFC") established Countrywide Mortgage Conduit, Inc. ("CMC"),
which was incorporated in April 1993 and principally operates as a jumbo and
nonconforming mortgage loan conduit. All of the common stock and 1% of the
economic interest of CMC is owned by CFC. All of the preferred stock and 99% of
the economic interest of CMC is owned by CMI. All loans purchased by CMI, for
which a REMIC transaction or whole loan sale is contemplated, are committed for
sale to CMC at the same price at which the loans were acquired by CMI. CMC does
not purchase any loans from any entity other than CMI. CMC's principal sources
of income are gains recognized on the sale of mortgage loans, the net spread
between interest earned on mortgage loans and the interest costs associated with
the borrowings used to finance such loans pending their securitization, and net
master servicing income.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of cost or market, which
is computed by the aggregate method (unrealized losses are offset by unrealized
gains). The cost of mortgage loans is adjusted by gains and losses generated
from corresponding hedging transactions entered into to protect the inventory
value from increases in interest rates. Hedge positions are also used to
protect the pipeline of committments to purchase loans from CMI from changes in
interest rates. Gains and losses resulting from changes in the market value of
the inventory, pipeline and open hedge positions are netted. Any net gain that
results is deferred; any net loss that results is recognized when incurred.
Hedging gains and losses realized during the commitment and warehousing period
related to the pipeline and mortgage loans held for sale are deferred. Hedging
losses are recognized currently if deferring such losses would result in
mortgage loans held for sale and the pipeline being valued in excess of their
estimated net realizable value.
2. Master Servicing Fees Receivable
CMC retains the master servicing rights associated with sales of mortgage loans
and securities. These master servicing rights entitle CMC to a future stream of
cash flows based on the outstanding principal balance of the mortgage loans and
the related contractual master service fees. The sales price of the loans and
the resulting gain or loss on sale are adjusted to provide for the recognition
of a normal master service fee rate over the estimated servicing lives of the
loans. The adjustment results in a receivable that is realized through receipt
of excess master servicing fees over time. Master servicing fees receivable are
amortized into income over the lives of the underlying mortgages using the
original discount rate and the effective yield method adjusted for the effects
of prepayments. CMC intends to hold the master servicing fees receivable for
investment or transfer receivables to CMI.
F-29
<PAGE>
COUNTRYWIDE MORTGAGE CONDUIT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
The weighted average discount rate inherent in the initial carrying amount of
the master servicing fees receivable recorded in 1993 was approximately 10.75%.
In computing the initial fair value of the master servicing fees receivable,
discount rates ranging from 8.40% to 12.20% were utilized. In determining the
appropriate discount rate to compute the carrying amount, CMC considers the
discount rate inherent in the fair values of similar investments such as excess
servicing, historical and expected prepayment assumptions, and required spreads
against alternative investments.
To protect the value of the master servicing fees receivable from the effects of
increased prepayment activity, CMC purchases options on mortgage-backed
securities that increase in value when interest rates decline. The cost of the
option fees is charged to expense over the contractual life of the options.
Options gains are recognized first as an offset to the "Incremental
Amortization" of the master servicing fees receivable (i.e. amortization due to
the impairment caused by increased projected prepayment speeds). To the extent
the master servicing hedge generates gains in excess of the Incremental
Amortization ("Excess Hedge Gain") CMC writes down the master servicing fees
receivable through additional amortization in an amount equal to the Excess
Hedge Gain. During 1993, CMC had no gains from these hedging transactions. As
of December 31, 1993 CMC had $300 million of call options on FNMA mortgage-
backed securities. The call options had a carrying value and an approximate
fair market value of $4.1 million, as of December 31, 1993.
3. Purchased Servicing Rights
CMC from time to time acquires the rights to service, as opposed to master
service, mortgage loans that it has previously purchased. CMC capitalizes the
cost of bulk purchases of servicing rights. The amount capitalized does not
exceed the present value of future net servicing income. Purchased servicing
rights are amortized over the lives of the underlying mortgages in proportion to
estimated net servicing revenues. As of December 31, 1993, CMC's purchased
servicing portfolio totaled $439.8 million and capitalized costs associated with
acquiring this portfolio totaled $4.9 million and is included in other assets.
4. Revenue Recognition
Interest is recognized as revenue when earned according to the terms of the
mortgage loans and when, in the opinion of management, it is collectible.
Premiums paid and discounts obtained on mortgage loans held for sale are
deferred as an adjustment to the carrying value of the loans until the loans are
sold. Gains on sale of mortgage loans or securities are recognized upon
settlement.
5. Income Taxes
The provision for income taxes in the accompanying financial statements is
computed using the liability method. For income tax purposes, CMC files a
separate tax return and is not consolidated with CMI or CFC. Taxable earnings
of CMC are subject to state and federal income taxes at the applicable statutory
rates.
F-30
<PAGE>
COUNTRYWIDE MORTGAGE CONDUIT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993
6. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires that CMC disclose estimated fair
values for its financial instruments. The estimated fair value amounts have
been determined by CMC using available market information and appropriate
valuation methodologies. However, considerable judgment is necessarily required
to interpret market data to develop the estimates of fair value. Accordingly,
the estimates presented are not necessarily indicative of the amounts CMC could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated fair
value amounts.
Fair values of cash, master servicing fees receivable, other assets, reverse-
repurchase agreements and accounts payable and accrued liabilities are not
separately disclosed as such values approximate carrying amounts because of the
short term to maturity or nature of the underlying asset or liability.
NOTE C - MORTGAGE LOANS HELD FOR SALE
Substantially all of the mortgage loans purchased by CMC from CMI are fixed-rate
and adjustable-rate nonconforming mortgage loans secured by first liens on
single (one-to-four) family residential properties. Approximately 68% of
mortgage loans held for sale at December 31, 1993 were collateralized by
properties located in California.
In 1993, CMC purchased mortgage loans from CMI with an aggregate principal
balance of $2.4 billion and sold mortgage loans in the form of REMIC securities
or bulk whole loan sales with an aggregate principal balance of $2.3 billion.
In connection with the issuance of these securities and whole loan sales, CMC
retained master servicing rights with a carrying value of $45.2 million at
December 31, 1993. CMC recognized gains on these securitizations in 1993
totaling $8.4 million, net of related expenses, losses and hedging costs.
NOTE D - MASTER SERVICING FEES RECEIVABLE
The changes in master servicing fees receivable for the period from April 20,
1993 through December 31, 1993 are as follows:
(Dollar amounts in thousands)
<TABLE>
<S> <C>
Balance at beginning of period $ 0
Additions 52,232
Amortization
Scheduled (836)
Unscheduled (6,159)
-------
Balance at end of period $45,237
=======
</TABLE>
As of December 31, 1993, the fair value of master servicing fees receivable is
estimated to approximate the carrying amount. Fair value is estimated by
discounting future cash flows from master servicing fees using discount rates
that approximate current discount rates used for similar investments such as
excess servicing and using expected future prepayment rates.
F-31
<PAGE>
COUNTRYWIDE MORTGAGE CONDUIT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993
NOTE E - REVERSE-REPURCHASE AGREEMENTS
CMI may assign to CMC a portion of its rights to borrow under a $100.0 million
reverse-repurchase agreement which expires in April 1994, subject to CMI
continuing to guarantee repayment. The maximum balance outstanding during the
year was $601.7 million and the balance outstanding at December 31, 1993 totaled
$36.2 million. This facility is secured by mortgage loans which are ultimately
sold in the form of REMIC securities or whole loans. The carrying value and
estimated market value of mortgage loans held for sale securing this facility
totaled $78.3 million at December 31, 1993.
At December 31, 1993, Merrill Lynch was the lender on all outstanding reverse-
repurchase agreements. Such agreements had maturities of less than five days
with interest at rates indexed to the London Interbank Offered Rates ("LIBOR").
As of December 31, 1993, the borrowing rate on these reverse-repurchase
agreements was 4.7%.
NOTE F - INCOME TAXES
Deferred income taxes reflect the net effect of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. As of December 31, 1993, the
components of CMC's deferred tax liability consisted of approximately $6.1
million related to the excess of carrying value assigned to its master servicing
fee receivable for financial reporting purposes over the tax value of the asset
reduced by approximately $4.3 million of future benefit to be derived from a net
operating loss carryforward for tax purposes of approximately $10.7 million,
which expires in 2008.
The provision for income tax expense for the year ended December 31, 1993
consists of deferred taxes of $1.3 million and $476,000 for federal and state
income tax purposes, respectively. The effective income tax rate included in
CMC's financial statements of 41.9% differs from the applicable federal
statutory income tax rate of 34.0% because of state tax expense of 7.2% and
other items which aggregate 0.7%.
NOTE G - COMMITMENTS AND CONTINGENCIES
Financial Instruments With Off-Balance Sheet Risk. CMC is a party to financial
instruments with off-balance-sheet risk in the normal course of business through
the acquisition and sale of mortgage loans and the management of interest-rate
risk. These instruments include master servicing fees receivable and short-term
commitments to purchase and sell loans. The instruments involve, to varying
degrees, elements of credit and interest-rate risk. CMC is exposed to credit
loss in the event of nonperformance by the counterparties to the various
agreements. However, CMC does not anticipate nonperformance by the
counterparties. As discussed below, CMC's exposure to credit risk with respect
to the master servicing portfolio in the event of nonperformance by the
mortgagor is limited due to the non-recourse nature of the loans in the
servicing portfolio. CMC's exposure to credit risk in the event of default by
the counterparty is the difference between the contract price and the current
market price. Unless noted otherwise, CMC does not require collateral or other
security to support financial instruments with credit risk.
Master Loan Servicing. As of December 31, 1993, CMC was master servicing loans
totaling $2.1 billion associated with mortgage-backed securities and whole loans
securitizing REMICs and whole loans.
F-32
<PAGE>
COUNTRYWIDE MORTGAGE CONDUIT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993
NOTE G - COMMITMENTS AND CONTINGENCIES - CONTINUED
In connection with REMIC issuances, 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 is borne by the security holders. Except in the case of a
breach of the standard representations and warranties made by CMC when mortgage
loans are securitized or sold, the loans or securities are non-recourse to CMC.
Typically, CMC has recourse to the sellers of such loans for any breaches of
similar representations and warranties made by the sellers.
As of December 31, 1993, approximately 64% of mortgage loans in CMC's master
servicing portfolio were secured by properties located in California. The
remainder are geographically dispersed throughout the United States, with no
more than 6% of the mortgage loans collateralized by properties in any other
state.
Commitments to Purchase Loans. As of December 31, 1993, CMC had entered into
commitments to purchase mortgage loans from CMI totaling $1.4 billion including
loans subject to purchase by CMI. After purchase and sale of the mortgage
loans, CMC's exposure to credit loss in the event of nonperformance by the
mortgagor is limited as described above. The fair value of commitments to
purchase loans is estimated to be $(264,000) at December 31, 1993. This
estimate is based upon the difference between the current value of similar loans
and the price at which the Company has committed to purchase the loans.
Commitments to Sell Loans. As of December 31, 1993, CMC had open commitments
amounting to approximately $680.0 million to sell mortgage loans and securities
in the first quarter of 1994. These commitments are utilized in delivering
mortgage loans held for sale and are considered in the valuation of the mortgage
loan inventory. In addition, CMC had forward commitments to sell $569 million
of FNMA mortgage-backed securities: these commitments are used to hedge mortgage
loans held for sale and the mortgage loan pipeline. These commitments to sell
loans and securities had an unrealized gain of approximately $147,000 which was
deferred as part of CMC's lower of cost or market analysis on its mortgage loans
held for sale. This estimate is based upon the difference between the
settlement values of those commitments and the quoted market values of the
underlying securities.
NOTE H - SHAREHOLDERS' EQUITY
CFC owns all of the common stock and has a 1% economic interest in CMC. CMI
owns all of the preferred stock and has a 99% economic interest in CMC.
NOTE I - RELATED PARTY TRANSACTIONS
As of December 31, 1993, advances due to CMI totaled $78.5 million. Such funds
were advanced by CMI, under an open account arrangement, to finance assets by
CMC. Such advances bear interest at rates indexed to the London Interbank
Offered Rates ("LIBOR"). Interest charged on advances from CMI was at an
average rate of approximately 5% for the year ended December 31, 1993.
F-33
<PAGE>
COUNTRYWIDE MORTGAGE CONDUIT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993
NOTE I - RELATED PARTY TRANSACTIONS - CONTINUED
CMI has entered into an agreement (the "Management Agreement") with Countrywide
Asset Management Corporation (the "Manager") to advise CMI and CMC on various
facets of its business and manage their operations, subject to supervision by
CMI's Board of Directors. The Manager has entered into a subcontract with its
affiliate, Countrywide Funding Corporation ("CFC"), to perform such services for
CMI and CMC as the Manager deems necessary.
For performing these services, the Manager receives a base management fee of 1/8
of 1% per annum of average invested assets not pledged to secure CMOs. In
addition, the Manager receives incentive compensation equal to 25% of the amount
by which CMI's annualized return on equity exceeds the ten-year U.S. Treasury
Rate plus 2%. The Manager waived all fees pursuant to the above for 1993. Base
management fees are allocated between CMI and CMC based upon their respective
average invested assets net of related borrowings and incentive management fees
are allocated between CMI and CMC based upon their respective contribution to
the earnings of the Company. Management fees allocated to CMC in 1993 were
insignificant. The Management Agreement is renewable annually and expires May
15, 1994.
The Manager incurs many of the operating expenses of the Company, including
personnel and related expenses. The Company's conduit operations are primarily
conducted in CMC and all other operations are conducted in CMI. Accordingly,
CMC is charged with the majority of the conduit's costs and CMI is charged with
the other operations' costs. During 1993 the Manager absorbed $900,000 of
operating expenses incurred in connection with its duties under the Management
Agreement all of which had been charged to CMC. CMC began paying all expenses
related to its operations in June 1993.
All loans purchased by CMI, for which a REMIC transaction or whole loan sale is
contemplated, are committed for sale to CMC at the same price at which the loans
were acquired by CMI. CMC does not purchase any loans from any entities other
than CMI.
As of December 31, 1993, CFC was subservicing approximately $72.7 million in
mortgage loans associated with purchased servicing rights. Subservicing fees
paid to CFC in 1993 totaled $6,000.
The Manager and CFC are wholly-owned subsidiaries of Countrywide Credit
Industries, Inc. ("CCI"), a diversified financial services company whose shares
of common stock are traded on the New York Stock Exchange. CFC owns 100% of the
common stock and has a 1% economic interest in CMC. CMI owns all of the
preferred stock and has a 99% economic interest in CMC.
F-34
