ITEM 1. BUSINESS.
Tootsie Roll Industries, Inc. and its consolidated subsidiaries (the "Company") are engaged in the manufacture and sale of candy. This is the only industry segment in which the Company operates and is its only line of business. A majority of the Company's products are sold under the registered trademarks "Tootsie," "Tootsie Roll," or "Tootsie Pop." The principal product of the Company is the familiar "Tootsie Roll," a chocolate-flavored candy of a chewy consistency, which is sold in several sizes and which is also used as a center for other products in the line including "Tootsie Pops," a spherical fruit or chocolate-flavored shell of hard candy with a center of "Tootsie Roll" candy on a paper safety stick, and "Tootsie Pop Drops," a smaller sized version of the "Tootsie Pop" without the stick. The Company and its predecessors have manufactured the "Tootsie Roll" product to substantially the same formula and sold it under the same name for over 90 years. The Company's products also include "Tootsie Roll Flavor Rolls" and "Tootsie Frooties," multiflavored candies of chewy consistency.
The Company also manufactures and sells molded candy drop products under the registered trademark "Mason" and "Tootsie," including "Mason Dots," and "Mason Crows."
The Company's wholly owned subsidiary, Cella's Confections Inc., produces a chocolate covered cherry under the registered trademark "Cella's."
In 1988, the Company acquired the Charms Company. This candy manufacturer produces lollipops, including bubble gum-filled lollipops, and hard candy. The majority of the Company's products are sold under the registered trademarks "Charms," "Blow-Pop," "Blue Razz," and "Zip-A-Dee-Doo-Da-Pops."
On October 15, 1993, the Company acquired Cambridge Brands, Inc. which was the former Chocolate/Caramel Division of Warner Lambert. Cambridge Brands, Inc. produces various confectionery products under the registered trademarks "Junior Mint," "Charleston Chew," "Sugar Babies," "Sugar Daddy," and "Pom Poms."
The Company's products are marketed in a variety of packages designed to be suitable for display and sale in different types of retail outlets and vending machines and fund-raising religious and charitable organizations. They are distributed through approximately 100 candy and grocery brokers and by the Company itself to approximately 15,000 customers throughout the
United States. These customers include wholesale distributors of candy and groceries, supermarkets, variety stores, chain grocers, drug chains, discount chains, cooperative grocery associations, warehouse and membership club stores, vending machine operators, and fund-raising religious and charitable organizations.
The Company's principal markets are in the United States, Canada and Mexico. The Company's Mexican plant supplies a very small percentage of the products marketed in the United States and Canada.
The Company has advertised nationally for many years. Although nearly all advertising media have been used at one time or another, at present most of the Company's advertising expenditures are for the airing of network and syndicated TV and cable and spot television on major markets throughout the country.
The domestic candy business is highly competitive. The Company competes primarily with other manufacturers of bar candy and candy of the type sold in variety, grocery and convenience stores. Although accurate statistics are not available, the Company believes it is among the ten largest domestic manufacturers in this field. In the markets in which the Company competes, the main forms of competition comprise brand recognition as well as a fair price for our products at various retail price points.
Sale of candy products may be influenced to some extent by discussions of and effect on dental health and weight.
The Company did not have a material backlog of firm orders at the end of the calendar years 1993 or 1992.
All raw materials used by the Company are readily obtainable from a number of suppliers at competitive prices. The average cost of most major raw materials remained relatively stable in 1993 compared to 1992. It is not possible to project future changes in the price of raw materials. The Company has engaged in hedging transactions in sugar and corn and may do so in the future if and when advisable. From time to time the Company changes the size of certain of its products, which are usually sold at standard retail prices, to reflect significant changes in raw material costs.
The Company does not hold any material patents, licenses, franchises or concessions. The Company's major trademarks are registered in the United States and in many other countries. Continued trademark protection is of material importance to the Company's business as a whole.
The Company does not expend significant amounts on research or development activities.
Compliance with Federal, State and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material effect on the capital expenditures, earnings or competitive position of the Company nor does the Company anticipate any such material effects from presently enacted or adopted regulations.
The Company employs approximately 1,700 persons.
The Company has found that its sales normally maintain a consistent level throughout the year except for a substantial upsurge in the third quarter which reflects sales in anticipation of Halloween. In anticipation of this high sales period, the Company generally begins its Halloween inventory build up in the second quarter of each year. The Company historically offers extended credit terms for sales made under Halloween sales programs. Each year, after Halloween receivables have been paid, the Company invests funds in various temporary cash investments.
For a summary of sales, net earnings and assets of the Company by geographic area and additional information regarding the foreign subsidiaries of the Company, see Note 11 of the Notes to Consolidated Financial Statements on Page 15 of the Company's Annual Report to Shareholders for the year ended December 31, 1993 (the "1993 Report") and on Page 4 of the 1993 Report under the section entitled "International." Note 11 and the aforesaid section are incorporated herein by reference. Portions of the 1993 Report are filed as an exhibit to this report.
ITEM 2.

ITEM 2. PROPERTIES.
The Company owns its principal plant and offices which are located in Chicago, Illinois in a building consisting of approximately 2,200,000 square feet. The Company utilizes approximately 1,800,000 square feet for offices, manufacturing and warehousing facilities and leases, or has available to lease to third parties, approximately 400,000 square feet.
In addition to owning the principal plant and warehousing facilities mentioned above, the Company leases manufacturing and warehousing facilities at a second location in Chicago which comprises 80,600 square feet. The lease is renewable by the Company every five years through June, 2011. The Company also periodically leases additional warehousing space at this second location as needed on a month to month basis.
Cella's Confections, Inc., a subsidiary, owns a facility in New York City, containing approximately 43,000 square feet. This facility consists of manufacturing, warehousing and office space on three floors containing approximately 33,200 square feet with a below surface level of approximately 9,800 square feet.
Charms Company, a subsidiary, owns a facility in Covington, Tennessee, containing approximately 267,000 square feet of manufacturing, warehousing and office space.
Cambridge Brands, Inc., a subsidiary, owns a facility in Cambridge, Massachusetts, containing approximately 145,000 square feet. The facility consists of manufacturing, warehousing and office space on five floors.
The Company also owns property and a plant with manufacturing, warehousing and office space in Mexico City, Mexico, consisting of approximately 57,000 square feet plus parking lot and yard area comprising approximately 25,000 square feet.
The Company owns the production machinery and equipment located in the plants in Chicago, New York, Covington (Tennessee), Cambridge (Massachusetts) and Mexico City, except for approximately $7 million of equipment in Covington, Tennessee under an operating lease. The Company considers that all of its facilities are well maintained, in good operating condition and adequately insured.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings known to the Company to which the Company or any of its subsidiaries is a party or of which any of their property is the subject.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's shareholders through the solicitation of proxies or otherwise during the fourth quarter of 1993.
ADDITIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT.
See the information on Executive Officers set forth in the table in Part III, Item 10, Page 6 of this report, which is incorporated herein by reference.
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Shares are traded on the New York Stock Exchange.The Company's Class B Common Shares are subject to restrictions on transfer and no market exists for such shares. The Class B Common Shares are convertible at the option of the holder into Common Shares on a share for share basis. As of March 11, 1994, there were approximately 9,500 holders of record of Common and Class B Common Shares. For information on the market price of, and dividends paid with respect to, the Company's Common Shares, see the section entitled "1993-1992 Quarterly Summary of Tootsie Roll Industries, Inc. Stock Prices and Dividends" which appears on Page 16 of the 1993 Report.
This section is incorporated herein by reference and filed as an exhibit to this report.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA.
See the section entitled "Five Year Summary of Earnings and Financial Highlights" which appears on Page 17 of the 1993 Report. This section is incorporated herein by reference and filed as an exhibit to this report.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
See the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" on Pages 5-7 of the 1993 Report. This section is incorporated herein by reference and filed as an exhibit of this report.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements, together with the report thereon of Price Waterhouse dated February 17, 1994, appearing on Pages 8-15 of the 1993 Report and the Quarterly Financial Data on Page 16 of the 1993 Report are incorporated by reference in this report. With the exception of the aforementioned information and the information incorporated in Items 1, 5, 6 and 7, the 1993 Report is not to be deemed filed as part of this report.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
See the information with respect to the Directors of the Company which is set forth in the section entitled "Election of Directors" of the Company's Definitive Proxy Statement to be used in connection with the Company's 1994 Annual Meeting of Shareholders (the "1994 Proxy Statement"). Except for the last paragraph of this section relating to the compensation of Directors, this section is incorporated herein by reference. The 1994 Proxy Statement will be filed with the Securities and Exchange Commission on or before April 30, 1994.
The following table sets forth the information with respect to the executive officers of the Company:
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION.
See the information set forth in the section entitled "Executive Compensation and Other Information" of the Company's 1994 Proxy Statement. Except for the "Report on Executive Compensation" and "Performance Graph," this section of the 1994 Proxy Statement is incorporated herein by reference. See the last paragraph of the section entitled "Election of Directors" of the 1994 Proxy Statement, which paragraph is incorporated herein by reference. The 1994 Proxy Statement will be filed with the Securities and Exchange Commission on or before April 30, 1994.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
For information with respect to the beneficial ownership of the Company's Common and Class B Common shares by the beneficial owners of more than 5% of said shares and by the management of the Company, see the sections entitled "Ownership of Common Stock and Class B Common Stock by Certain Beneficial Owners" and "Ownership of Common Stock and Class B Common Stock by Management" of the 1994 Proxy Statement. These sections of the 1994 Proxy Statement are incorporated herein by reference. The 1994 Proxy Statement will be filed with the Securities and Exchange Commission on or before April 30, 1994.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Daniel G. Ross, a director of the Company, is a member of the law firm of Becker, Ross, Stone, DeStefano & Klein, which has served as general counsel to the Company for many years.
PART IV
Item 14.

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements.
The following financial statements and schedules are filed as part of this report:
(1) Financial Statements (filed herewith as part of Exhibit 13):
Report of Independent Accountants
Consolidated Statements of Earnings and Retained Earnings for the three years ended December 31, 1993
Consolidated Statements of Cash Flows for the three years ended December 31,
Consolidated Statements of Financial Position at December 31, 1993 and 1992
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Report of Independent Accountants on Financial Statement Schedules
For the year ended December 31, 1993-
I - Marketable Securities - Other Investments
For the three years ended December 31, 1993-
V- Property, Plant and Equipment VI- Accumulated Depreciation and Amortization of Property, Plant and Equipment VIII- Valuation and Qualifying Accounts IX- Short-Term Borrowings X- Supplementary Income Statement Information
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
(3) Exhibits required by Item 601 of Regulation S-K:
See Index to Exhibits which appears following Financial Schedule X.
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K dated October 15, 1993 and a Report on Form 8-K/A (Amendment No. 1) dated October 15, 1993, which described the acquisiton by the Company of the chocolate/caramel division of Warner-Lambert Company. The Report on Form 8-K/A filed the financial statements of the acquired company and unaudited pro forma financial statements of the Company.
No other reports on Form 8-K were filed during the quarter ended December 31, 1993.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, Tootsie Roll Industries, Inc., has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TOOTSIE ROLL INDUSTRIES, INC.
By S/ MELVIN J. GORDON ------------------------------- Melvin J. Gordon, Chairman of the Board of Directors and Chief Executive Officer
Date: March 28, 1994 -----------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
S/MELVIN J. GORDON - ------------------ Chairman of the Board Melvin J. Gordon of Directors and Chief Executive Office (principal executive officer) March 28, 1994
S/ELLEN R. GORDON - ----------------- Director, President, Ellen R. Gordon and Chief Operating Officer March 28, 1994
S/DANIEL G. ROSS - ----------------- Director March 28, 1994 Daniel G. Ross
- ------------------- Charles W. Seibert Director March 28, 1994
S/WILLIAM TOURETZ - ----------------- Director & Secretary William Touretz March 28, 1994
- -------------------- Lana Jane Lewis-Brent Director March 28, 1994
G.HOWARD EMBER JR. - -------------------- Vice President, Finance G. Howard Ember Jr. (principal financial officer and principal accounting officer) March 28, 1994
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES
To the Directors and Shareholders of Tootsie Roll Industries, Inc.
Our audit of the consolidated financial statements referred to in our report dated February 17, 1994 appearing on Page 15 of the 1993 Annual Report to Shareholders of Tootsie Roll Industries, Inc., (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedules listed in Item 14(a) of this Form 10-K. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated Financial Statements Schedules listed in Item 14(a) of this Form 10-K. In our opinion, these Financial Statement Schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/s/ PRICE WATERHOUSE
PRICE WATERHOUSE Chicago, Illinois February 17, 1994
FINANCIAL SCHEDULES
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
SCHEDULE I - MARKETABLE SECURITIES - OTHER INVESTMENTS AT DECEMBER 31, 1993
SCHEDULE I - MARKETABLE SECURITIES - OTHER INVESTMENTS AT DECEMBER 31, 1993
SCHEDULE I - MARKETABLE SECURITIES - OTHER INVESTMENTS AT DECEMBER 31, 1993
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
SCHEDULE VI - ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS DECEMBER 31, 1993, 1992 AND 1991
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
SCHEDULE IX - SHORT-TERM BORROWINGS FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 and 1991
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
INDEX TO EXHIBITS
2.1 Asset Sale Agreement dated September 29, 1993 between Warner-Lambert Company and the Company, including a list of omitted exhibits and schedules. Incorporated by reference to Exhibit 2 to the Company's Report on Form 8-K dated October 15, 1993; Commission File No. 1-1361.
The Company hereby agrees to provide the Commission, upon request, copies of any omitted exhibits or schedules required by Item 601(b)(2) of Regulation S-K.
3.1 Articles of Incorporation. Incorporated by reference to Exhibit 2.1 to Company's Registration Statement on Form 8-A dated February 29, 1988.
3.1.1 Articles of Amendment of the Articles of Incorporation dated May 2, 1988. Incorporated by reference to Exhibit 3.1.1 of the Company's Annual Report on Form 10-K for the year ended December 31, 1988; Commission File No. 1-1361.
3.1.2 Articles of Amendment of the Articles of Incorporation dated May 7, 1990. Incorporated by reference to Exhibit 3.1.2 of the Company's Annual Report on Form 10-K for the year ended December 31, 1990; Commission File No. 1-1361.
3.2 By-Laws. Incorporated by reference to Exhibit 2.2 to Company's Registration Statement of Form 8-A dated February 29, 1988.
3.3 Specimen Class B Common Stock Certificate. Incorporated by reference to Exhibit 1.1 to Company's Registration Statement on Form 8-A dated February 29, 1988.
10.5* Consultation Agreement between the Company and William Touretz dated December 21, 1979. Incorporated by reference to Exhibit 10.5 of the Company's Annual Report on Form 10-K for the year ended December 31, 1992; Commission File No. 1-1361.
INDEX TO EXHIBITS (CONTINUED)
10.5.1* Modification Agreement between the Company and William Touretz dated as of December 5, 1984. Incorporated by reference to Exhibit 10.5.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1984; Commission File No. 1-1361.
10.5.2* Modification Agreement between the Company and William Touretz dated as of December 13, 1985. Incorporated by reference to Exhibit 10.5.2 of the Company's Annual Report on Form 10-K for the year ended December 31, 1985; Commission File No. 1-1361.
10.5.3* Modification Agreement between the Company and William Touretz dated as of December 17, 1986. Incorporated by reference to Exhibit 10.5.3 of the Company's Annual Report on Form 10-K for the year ended December 31, 1986; Commission File No. 1-1361.
10.8.1* Excess Benefit Plan. Incorporated by reference to Exhibit 10.8.1 of the Company's Annual Report on Form 10-K for the year ended December 31, 1990; Commission File No. 1-1361.
10.8.2* Career Achievement Plan of the Company.
10.17* Family Security Agreement between the Company and G. Howard Ember dated March 5, 1992. Incorporated by reference to Exhibit 10.17 of the Company's Annual Report on Form 10-K for the year ended December 31, 1991; Commission File No. 1-1361.
INDEX TO EXHIBITS (CONTINUED)
10.12* Split Dollar Agreements (Special Trust and Daughters Revocable Trust) between the Company and trustee of Trust dated July 10, 1993.
10.18* Family Security Agreement between the Company and John W. Newlin dated October 30, 1986. Incorporated by reference to Exhibit 10.18 of the Company's Annual Report on Form 10-K for the year ended December 31, 1986; Commission File No. 1-1361.
10.19* Family Security Agreement between the Company and Thomas E. Corr dated November 18, 1986. Incorporated by reference to Exhibit 10.19 of the Company's Annual Report on Form 10-K for the year ended December 31, 1986; Commission File No. 1-1361.
10.20* Family Security Agreement between the Company and James M. Hunt dated August 26, 1993.
13 The following items incorporated by reference herein from the Company's 1993 Annual Report to Shareholders for the year ended December 31, 1993 (the "1993 Report"), are filed as Exhibits to this report:
(i) Information under the section entitled "International" set forth on Page 4 of the 1993 Report;
(ii) Information under the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" set forth on Pages 5-7 of the 1993 Report;
(iii) Consolidated Statements of Earnings and Retained Earnings for the three years ended December 31, 1993 set forth on Page 8 of the 1993 Report;
INDEX TO EXHIBITS (CONTINUED)
(iv) Consolidated Statements of Financial Position at December 31, 1993 and 1992 set forth on Pages 9-10 of the 1993 Report;
(v) Consolidated Statements of Cash Flow for the three years ended December 31, 1993 set forth on Page 11 of the 1993 Report;
(vi) Notes to Consolidated Financial Statements set forth on Pages 12-15 of the 1993 Report;
(vii) Report of Independent Accountants set forth on Page 15 of the 1993 Report;
(viii) Quarterly Financial Data set forth on Page 16 of the 1993 Report;
(ix) Information under the section entitled "1993-1992 Quarterly Summary of Tootsie Roll Industries, Inc. Stock Prices and Dividends" set forth on Page 16 of the 1993 Report; and
(x) Information under the section entitled "Five Year Summary of Earnings and Financial Highlights" set forth on Page 17 of the 1993 Report.
21 List of Subsidiaries of the Company.
- ------------------
* Executive compensation plan or arrangement.


ITEM 1. BUSINESS - ------- --------
Countrywide Mortgage Obligations III, Inc. (the "Registrant" or the "Company"), a Delaware corporation, was organized in the State of Delaware on March 26, 1987 as a qualified real estate investment trust ("REIT") subsidiary of its parent, Countrywide Mortgage Investments, Inc. ("CMI" or the "Parent"). CMI, incorporated in Maryland on July 16, 1985 and reincorporated in Delaware on March 6, 1987, is a publicly traded REIT which prior to 1993 was primarily a passive investor in single-family, first-lien, residential mortgage loans and mortgage-backed securities. In 1993, the Parent adopted a new operating plan which established another subsidiary as a jumbo and nonconforming mortgage loan conduit. As part of its new plan, the Parent has also commenced warehouse lending operations which provide short-term revolving financing to certain mortgage bankers.
The Registrant was organized for the purpose of issuing and selling collateralized mortgage obligations ("CMOs") which may be collateralized by any of the following instruments (the "Collateral"):
(i) mortgage loans, certificates or other securities issued or guaranteed by the Government National Mortgage Association ("GNMA Certificates");
(ii) mortgage loans, certificates or other securities issued or guaranteed by the Federal National Mortgage Association ("FNMA Certificates");
(iii) mortgage loans, certificates or other Federal Home Loan Mortgage Corporation ("FHLMC securities issued or guaranteed by the Certificates"); and
(iv) mortgage loans or other types of mortgage-related securities.
Pursuant to a transfer agreement, dated May 1, 1987, the Registrant became the depositor and holder of 100% of the equity interest in Countrywide Mortgage Trust 1987-I (the "Trust"), a Delaware common law business trust established for the sole purpose of issuing its Collateralized Mortgage Obligations, Series W-2, in the aggregate principal amount of $47.6 million. The previous depositor and equity holder was Countrywide Mortgage Obligations II, Inc., a limited purpose finance corporation whose stock is wholly owned by CMI.
On September 15, 1987, Countrywide Mortgage Obligations, Inc. ("CMO"), a limited purpose subsidiary of CMI, merged with the Registrant. CMO, a Maryland corporation, was a REIT organized for the purpose of issuing and selling CMOs. As a result of the merger, the Registrant assumed all of the rights, privileges, powers, franchises, debts, liabilities and duties of CMO.
CMO was, and the Registrant as successor to CMO is, the issuer of 15 series of CMOs with an aggregate initial principal amount of $1.7 billion. One of these series was redeemed in 1992 and two were redeemed in 1993. In connection with the merger, the Registrant entered into Indenture Supplements, each dated September 1, 1987 (the "Indenture Supplements"), by and among the Registrant, CMO and each of the trustees under the Indentures pursuant to which the CMOs were issued and outstanding (the "Indentures"). Under the Indenture Supplements, the Registrant, as successor issuer, assumed all the representations, warranties, covenants and agreements of CMO contained in each Indenture, each series supplement with respect to each Indenture, and each CMO issued thereunder and agreed to be bound by and to comply with the terms thereof.
On November 20, 1990, the Registrant entered into a Trust Agreement with Wilmington Trust Company creating the Countrywide Cash Flow Bond Trust (the "CCFBT"). The CCFBT is a Delaware common law business trust created for the purpose of issuing cash flow bonds secured by the residual cash flows and
other property of certain of the outstanding series of CMOs (the "Cash Flow Bonds"). (The CMOs and the Cash Flow Bonds are sometimes referred to collectively as the "CMOs.") The residual cash flows, which prior to transfer to the CCFBT belonged to the Registrant, represent the funds remaining after the payment of the principal and interest on and certain other obligations with respect to a series of CMOs. On November 21, 1990, the CCFBT issued bonds with an aggregate principal amount of $28.1 million secured by the residual cash flows and certain other property from the Registrant's Collateralized Mortgage Obligations Bonds Series E, F, G, I, J, K, and L. The Registrant as the sole beneficiary of the CCFBT received the proceeds from the issuance of the Cash Flow Bonds and loaned the proceeds to CMI.
Each series of CMOs issued by the Registrant as successor to CMO, or the Trust, is secured by FNMA Certificates, FHLMC Certificates (collectively "Certificates") or whole mortgage loans which were received from CMI at the time of issuance of each series. Substantially all of such Certificates or whole mortgage loans were subject to certain indebtedness incurred by CMI in connection with the acquisition of the Certificates, the acquisition of the mortgage loans underlying the Certificates, and the acquisition of the whole mortgage loans. Concurrently with the issuance of each series of CMOs, substantially all of the net proceeds from the sale of each series of CMOs were used to repay the indebtedness incurred by CMI and to release the respective liens on the Certificates or whole mortgage loans pledged to secure each series of CMOs. The pool of Certificates or whole mortgage loans were then pledged to a trustee under an indenture pursuant to which a series of CMOs was issued, free and clear of any liens and encumbrances, as collateral for the CMOs.
Each series of CMOs is fully payable from the principal and interest payments on the underlying Certificates or whole mortgage loans collateralizing such series, any cash or other collateral required to be pledged as a condition to receiving the desired rating on the CMOs, plus any investment income on such collateral. Distributions of principal and interest on the Certificates are made directly to the appropriate trustee for payment to the holders of such CMOs. Payments of principal and interest on whole mortgage loans are collected by the servicer and subsequently remitted to the trustee. Although the CMOs are recourse obligations of the Registrant, the Registrant does not have, nor does it anticipate having, any significant assets not pledged as collateral for specific series of CMOs.
In general, each series of CMOs consists of various classes. Except in certain circumstances relating to optional redemption of CMOs, the classes of CMOs are retired in order of maturity. The class of CMOs with the earliest maturity receives all principal payments until it is paid in full so that no payment of principal will be made on a particular class of CMOs until all classes of CMOs with earlier maturities are retired.
The table below gives additional information with respect to each series of CMOs (Dollar amounts in thousands):
*Collateralized by residual cash flows and remaining property of Series E, F, G, I, J, K, and L.
Pursuant to an agreement (the "Management Agreement") between CMI and Countrywide Asset Management Corporation ("CAMC"), an affiliate of Countrywide Funding Corporation ("CFC"), CAMC provides certain managerial services and activities for the Registrant, subject to supervision by CMI's Board of Directors. For 1992, CAMC received a management fee equal to 1/32 of 1% of such Registrant's average invested assets, with such fee being no less than $10,000 annually for each series of CMOs. There were no such fees in 1993 due to a change in the Management Agreement. Pursuant to agreements with Wilmington Trust Company as owner-trustee of the Trust and the CCFBT, CAMC manages the Trust and the CCFBT. CAMC receives no additional fee under the agreement with respect to the Trust and receives an annual fee of $1,000 under the agreement with respect to the CCFBT.
The Company has entered into servicing agreements appointing CFC as servicer of two series of CMOs that are collateralized by pools of whole mortgage loans. CFC receives an annual servicing fee of up to .32% of the aggregate unpaid balance of such whole mortgage loans. These servicing fees are deducted from interest payments on the mortgage loans prior to their remittance to the trustee for the holders of the CMOs secured thereby.
The Registrant's remaining activities consist solely of reporting activities required by the Indentures and routine corporate administration.
The Registrant has no salaried employees. All accounting and managerial services are provided by the Parent.
Competition - -----------
In issuing the CMOs, the Registrant competes with thrifts, banks, mortgage bankers, insurance companies, other lenders, mutual funds, investment bankers, the Government National Mortgage Association, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, many of which have greater financial resources than the Registrant. Additionally, the CMOs face competition from other investment opportunities available to prospective investors.
ITEM 2.

ITEM 2. PROPERTIES - ------- ----------
The Registrant does not own any real property for use in connection with its operations. The executive and administrative offices of the Registrant and CMI are located at 35 North Lake Avenue, Pasadena, California 91101-1857, telephone (800) 669-2300.
ITEM 3.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------- ---------------------------------------------------
Not required pursuant to General Instruction J(2)(c) of Form 10-K.
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY - ------- ------------------------------------- AND RELATED STOCKHOLDER MATTERS -------------------------------
All 1,000 shares of the Registrant's common stock are owned by CMI. There is no established public trading market for these securities. Because the Registrant is a qualified REIT subsidiary, it is required, in effect, to distribute annually at least 95% of its otherwise taxable income, subject to certain adjustments, to the sole owner of its common stock, CMI.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA - ------- -----------------------
The financial data presented below should be read in conjunction with the Financial Statements and related notes set forth in Item 8.
- --------------------------------------------------------------------------------
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF - ------- --------------------------------------- FINANCIAL CONDITION AND RESULTS OF OPERATIONS ---------------------------------------------
GENERAL - -------
The Company's principal source of earnings is net interest income generated from its investments. Investments that collateralize CMOs are fixed interest rate mortgage loans and mortgage-backed securities. The amount of net interest earned on these investments financed by CMOs is directly related to the rate of principal repayments (including prepayments) of the related mortgage loans.
When interest rates decline (as they did in 1992 and 1993), 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 the Company to repay the CMOs.
Several factors cause the net yield to the Company to decline from the yield that would have been realized if the mortgage loans had not been prepaid. These are discussed below.
A time lag of from 24 to 45 days exists from the date the underlying mortgage is prepaid to the date the Company actually receives the cash related to the prepayment. During this interim period, the Company does not earn interest income on the portion of the mortgage loans or mortgage-backed security that has been prepaid. The prepayment, as well as scheduled principal and interest, is deposited in a guaranteed investment contract ("GIC"), as required by certain of the indentures relating to the CMOs, pending the next bond payment date. The GIC earns interest at a substantially lower rate than the mortgage loans and mortgage-backed securities.
The amount of the prepayment is ultimately (after a period ranging from approximately 5 to 65 days) used to repay the CMOs. The class of each series of CMOs with the shortest maturity receives all principal payments until it is repaid in full. After the first class is fully retired, the second class will receive all principal payments until retired and so forth. The CMOs were structured with the shortest maturity class generally having the lowest interest rate and with interest rates increasing as the maturity of the class increases. Therefore, prepayments are generally applied to the bond class with the lowest interest rate. This has the effect of repaying CMOs with relatively low interest rates and of increasing the weighted average interest rate of the remaining outstanding bonds payable.
As prepayments occur, therefore, mortgage loans and mortgage-backed securities which may have relatively high interest rates are reduced and the proceeds are used to repay CMOs with relatively low interest rates. This decreases the interest rate spread earned from investments financed by CMOs in future periods. On the other hand, if interest rates increase (as occurred in certain prior years), prepayments on the underlying mortgage loans tend to decrease. This has the effect of lengthening the time (toward the contractual due dates) in which the Company realizes favorable interest spreads.
The Company has incurred certain costs in connection with acquiring its portfolio of fixed-rate mortgage loans and mortgage-backed securities and issuing its CMOs. These items, mortgage loan premium, bond issuance costs and original issue discount, are amortized over the period of repayment of the related asset or liability. As unanticipated prepayments increase, the rate of amortization of these costs increases. This has the effect of decreasing the interest yield from originally anticipated levels. In an increasing interest rate environment, however, the likely decline in prepayment rates tends to maximize the period over which the mortgage loan premium, deferred bond issuance costs and original issue discount are amortized.
RESULTS OF OPERATIONS 1993 COMPARED TO 1992 - -------------------------------------------
The Company's net loss for 1993 was $5.1 million compared to a net loss of $8.2 million for 1992. The Company's primary source of revenue is interest income from the Company's Collateral for CMOs. Interest income totaled $31.7 million for 1993 versus $64.7 million for 1992. This 51% decrease in interest income resulted primarily from the principal repayments (including prepayments) of the Company's Collateral for CMOs, which reduced the average outstanding principal balance from $698.2 million for 1992 to $360.6 million for 1993, combined with a decrease in the effective yield earned on the collateral from 9.27% in 1992 to 8.78% in 1993.
The Company incurred interest expense of $37.3 million with respect to CMOs outstanding for 1993, representing a 49% decrease from the $73.5 million of interest expense for 1992. This decrease was primarily due to a decrease in outstanding CMOs from December 31, 1992, partially offset by an increase in the weighted average cost of CMOs from 10.01% in 1992 to 11.05% in 1993. The average outstanding principal balance of CMOs was $338.1 million for 1993 compared to $734.4 million for 1992.
General and administrative expenses declined to $334,000 from $403,000 for 1993 and 1992, respectively. This decline is attributable to lower legal and professional fees in the administration of the CMOs. Management fees for 1992 were $227,000. There were no such fees in 1993 due to a change in the Management Agreement.
RESULTS OF OPERATIONS 1992 COMPARED TO 1991 - -------------------------------------------
The Company's net loss for 1992 was $8.2 million, compared to net earnings of $2.5 million for 1991. Interest income totaled $64.7 million for 1992 versus $99.0 million for 1991. This decrease in interest income resulted primarily from the principal repayments (including prepayments) of the Company's Collateral for CMOs which reduced the average outstanding principal balance from $1.0 billion for 1991 to $698.2 million for 1992, combined with a decrease in the effective yield earned on the collateral from 9.56% in 1991 to 9.27% in 1992.
The Company incurred interest expense of $73.5 million with respect to CMOs outstanding for 1992, representing a 23% decrease from the $95.8 million of interest expense for 1991. This decrease was due to a decrease in outstanding CMOs, partially offset by an increase in the weighted average interest rate on the CMOs from 9.37% in 1991 to 10.01% in 1992. The average outstanding principal balance of CMOs was $734.4 million for 1992 compared to $1.0 billion for 1991.
General and administrative expenses declined to $403,000 from $417,000 for 1992 and 1991, respectively. This decline is attributable to lower legal and professional fees in the administration of the CMOs. Management fees for 1992 declined to $227,000 from $323,000 for 1991. This decrease resulted principally from the decrease in average invested assets pledged to secure CMOs.
LIQUIDITY AND CAPITAL RESOURCES - -------------------------------
The Company's source of funds for repayment of the CMOs are the payments of interest and principal on the mortgage loans and mortgage-backed securities securing the CMOs and income from reinvestment thereof. Management believes that the Company will have sufficient liquidity and capital resources to pay principal and interest on the CMOs as they become due and all other anticipated expenses of the Company.
INFLATION - ---------
Inflation affects the Company to the extent that it influences interest rates. Interest rates generally will tend to increase during periods of high inflation. High levels of interest rates generally will tend to decrease the rate at which existing investments in mortgage loans prepay. A decrease in the rate of prepayments may lengthen the estimated average life of CMOs resulting in a higher positive net spread between the yield on the investments in mortgage loans pledged to secure the CMOs and the interest cost of the respective CMOs for a longer period of time than originally anticipated.
PROSPECTIVE TRENDS - ------------------
During 1993, lower long-term interest rates resulted in a high rate of mortgage refinancings. As discussed above, this adversely affects the Company's financial results. Sustained high levels of refinancings and the resulting prepayments could continue to adversely affect the Company's earnings.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------- -------------------------------------------
The information called for by this Item 8 is hereby incorporated by reference to the Registrant's Financial Statements beginning at page of this Form 10-K.
ITEM 9.

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - ------- ----------------------------------------------------
None.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - -------- --------------------------------------------------
Not required pursuant to General Instruction J(2)(c) of Form 10-K.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION - -------- ----------------------
Not required pursuant to General Instruction J(2)(c) of Form 10-K.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN - -------- ----------------------------- BENEFICIAL OWNERS AND MANAGEMENT --------------------------------
Not required pursuant to General Instruction J(2)(c) of Form 10-K.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------- ----------------------------------------------
Not required pursuant to General Instruction J(2)(c) of Form 10-K.
PART IV
ITEM 14.

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 these sections of Item 14 is set forth in the Index to Financial Statements beginning at page of this Form 10-K.
(a) (3) and (c): Exhibits
The information called for by these sections of Item 14 is set forth beginning at page E-1 of this Form 10-K.
(b): Reports on Form 8-K
None.
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 March 30, 1994.
COUNTRYWIDE MORTGAGE OBLIGATIONS III, INC.
BY: STANFORD L. KURLAND ----------------------------------- Stanford L. Kurland Director
BY: GERALD L. BAKER ----------------------------------- Gerald L. Baker Director
BY: MARSHALL M. GATES ----------------------------------- Marshall M. Gates Director
BY: MICHAEL W. PERRY ----------------------------------- Michael W. Perry Chief Executive Officer (Principal Financial and Accounting Officer)
CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
COUNTRYWIDE MORTGAGE OBLIGATIONS III, INC. (A WHOLLY OWNED SUBSIDIARY OF COUNTRYWIDE MORTGAGE INVESTMENTS, INC.)
DECEMBER 31, 1993, 1992 AND 1991
COUNTRYWIDE MORTGAGE OBLIGATIONS III, INC. (A WHOLLY OWNED SUBSIDIARY OF COUNTRYWIDE MORTGAGE INVESTMENTS, INC.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1992 AND 1991
All other schedules have been omitted since the required information is not applicable or not present in amounts sufficient to require submission of the schedules, or because the information required is included in the consolidated financial statements or notes thereto.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders Countrywide Mortgage Investments, Inc.
We have audited the accompanying consolidated balance sheets of Countrywide Mortgage Obligations III, Inc. (a wholly owned subsidiary of Countrywide Mortgage Investments, Inc.) as of December 31, 1993 and 1992, and the related consolidated statements of earnings, shareholder's equity, and cash flows for each of the three years in the period ended December 31, 1993. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Countrywide Mortgage Obligations III, Inc. as of December 31, 1993 and 1992, and the results of its operations and its 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 Obligations III, Inc. as of December 31, 1993. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein.
GRANT THORNTON
Los Angeles, California February 28, 1994
COUNTRYWIDE MORTGAGE OBLIGATIONS III, INC. (A WHOLLY OWNED SUBSIDIARY Of COUNTRYWIDE MORTGAGE INVESTMENTS, INC.)
CONSOLIDATED BALANCE SHEETS (DOLLAR AMOUNTS IN THOUSANDS)
The accompanying notes are an integral part of these statements.
COUNTRYWIDE MORTGAGE OBLIGATIONS III, INC. (A WHOLLY OWNED SUBSIDIARY OF COUNTRYWIDE MORTGAGE INVESTMENTS, INC.)
CONSOLIDATED STATEMENTS OF EARNINGS (DOLLAR AMOUNTS IN THOUSANDS)
The accompanying notes are an integral part of these statements.
COUNTRYWIDE MORTGAGE OBLIGATIONS III, INC. (A WHOLLY OWNED SUBSIDIARY OF COUNTRYWIDE MORTGAGE INVESTMENTS, INC.)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
The accompanying notes are an integral part of this statement.
COUNTRYWIDE MORTGAGE OBLIGATIONS III, INC. (A WHOLLY OWNED SUBSIDIARY OF COUNTRYWIDE MORTGAGE INVESTMENTS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLAR AMOUNTS IN THOUSANDS)
The accompanying notes are an integral part of these statements.
COUNTRYWIDE MORTGAGE OBLIGATIONS III, INC. (A WHOLLY OWNED SUBSIDIARY OF COUNTRYWIDE MORTGAGE INVESTMENTS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows:
1. BASIS OF PRESENTATION ---------------------
Certain amounts for 1992 and 1991 have been reclassified to conform to the 1993 presentation.
2. INCOME TAXES ------------
The Company is a qualified real estate investment trust subsidiary ("QRS") of Countrywide Mortgage Investments, Inc. (the "Parent") which operates as a real estate investment trust ("REIT") under the provisions of the Internal Revenue Code. As a QRS, the Company is not treated as a separate corporation for income tax purposes and all assets, liabilities and items of income, deductions and credits of the Company are treated as such items of the REIT. Accordingly, no provision for income taxes on the net earnings of the Company has been made in the accompanying financial statements.
If in any tax year the Company fails to continue to qualify as a QRS, then the Parent would be disqualified as a REIT and, therefore, the Parent would be subject to income taxes on its and the Company's earnings.
3. COLLATERAL FOR CMOS -------------------
Collateral for CMOs consist of mortgage loans and mortgage-backed securities and is carried at the outstanding principal balances net of unamortized purchase discounts or premiums.
4. COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS) AND DEFERRED BOND ISSUANCE COSTS ---------------------------------------------------------------------------
Collateralized mortgage obligations are carried at their outstanding principal balances net of unamortized original issue discounts or premiums. 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.
5. 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 collectable. 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. CMO discounts or premiums are amortized to interest expense using the interest method with effect given to principal reductions.
COUNTRYWIDE MORTGAGE OBLIGATIONS III, INC. (A WHOLLY OWNED SUBSIDIARY OF COUNTRYWIDE MORTGAGE INVESTMENTS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1993, 1992 AND 1991
6. FAIR VALUE OF FINANCIAL INSTRUMENTS -----------------------------------
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," requires that the Company disclose estimated fair values for its financial instruments.
Collateral for CMOs cannot be sold until the related obligations mature or are otherwise paid or redeemed. In addition, early redemption of a CMO series is restricted by the respective indenture. Accordingly, due to the nature of Collateral for CMOs and CMOs, such market values are not disclosed. As a REIT, the Company'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.
Fair values of guaranteed investment contracts ("GICs"), accrued interest receivable, deferred bond issuance costs, due from affiliate, other assets, accrued interest payable and accounts payable and accrued liabilities are not separately disclosed as such values approximate carrying amounts because of the nature of the underlying asset of liability.
NOTE B - 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.
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, the Company'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 the Company's Collateral is represented by the outstanding principal balance of the mortgage loans plus accrued interest.
Collateral for CMOs is summarized as follows:
COUNTRYWIDE MORTGAGE OBLIGATIONS III, INC. (A WHOLLY OWNED SUBSIDIARY OF COUNTRYWIDE MORTGAGE INVESTMENTS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
The mortgage loans and mortgage-backed securities, together with GICs, which are all held by trustees, collateralized 14 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 the Company actually receives the cash related to the prepayment. During this interim period, the Company 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 9.71% at December 31, 1993.
NOTE C - 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 holds investments in GICs amounting to $18.6 million and $39.8 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. The separate assets of the Company, included in the consolidated financial statements of the Parent, substantially all of which collateralize the CMOs, are generally not available for the satisfaction of the creditors of the Parent. In addition, the contributed capital of the Company which amounted to $83.3 million at December 31, 1993, is generally not available for transfer in the form of cash dividends, loans or advances.
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 quarterly 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 9.22% at December 31, 1993.
CMOs are summarized as follows:
COUNTRYWIDE MORTGAGE OBLIGATIONS III, INC. (A WHOLLY OWNED SUBSIDIARY OF COUNTRYWIDE MORTGAGE INVESTMENTS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
During 1993, the Company 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 the Company recognized a gain of $917,000.
NOTE D - RELATED PARTY TRANSACTIONS
The Parent has entered into an agreement (the "Management Agreement") with Countrywide Asset Management Corporation (the "Manager") to advise the Parent on various facets of its business and manage its operations, subject to supervision by the Parent's Board of Directors. The Manager has entered into a subcontract with its affiliate, Countrywide Funding Corporation ("CFC"), to perform such services for the Parent as the Manager deems necessary.
For performing these services in 1992, the Manager received a management fee equal to 1/32 of 1% of such average invested assets, with such fee being no less than $10,000 annually for each series of CMOs, except the CCFBT, for which the annual fee is $1,000. In 1992, the Manager earned management fees from the Company totaling $227,000. There were no such fees in 1993 due to a change in the Management Agreement. The Management Agreement is renewable annually and expires May 15, 1994.
The Company has entered into servicing agreements appointing CFC as servicer of two series of CMOs that are collateralized by pools of whole mortgage loans. CFC is entitled under each agreement to an annual fee up to .32% of the aggregate unpaid principal balance of the pledged mortgage loans. Net servicing fees paid to CFC under such agreements were $61,000, $181,000 and $318,000 for 1993, 1992 and 1991, respectively.
The Manager and CFC are wholly owned subsidiaries of Countrywide Credit Industries, Inc., a diversified financial services company whose shares of common stock are traded on the New York Stock Exchange.
In connection with the issuance in 1990 of bonds secured by residual cash flows from Collateral for CMOs (the cash flow bonds), the Company received the proceeds of $22.9 million and loaned such amount to the Parent. For each year, the Company earned interest of $2.4 million on this receivable. The principal and interest receivable totaling $30.5 at December 31, 1993 is included in due from affiliate in the accompanying consolidated balance sheet.
COUNTRYWIDE MORTGAGE OBLIGATIONS III, INC. (A WHOLLY OWNED SUBSIDIARY OF COUNTRYWIDE MORTGAGE INVESTMENTS, INC.)
SCHEDULE XII - MORTGAGE LOANS ON REAL ESTATE (DOLLAR AMOUNTS IN THOUSANDS)
December 31, 1993
- ---------------- (1) All mortgage loans are fixed-rate, conventional mortgage loans secured by single (one-to-four) family residential properties.
(2) Information with respect to the geographic breakdown of first mortgages on single-family residential housing as of December 31, 1993 is as follows: California 49% with no other state comprising more than 14%.
(3) The aggregate cost for federal income tax purposes is $9,277.
(4) Interest earned on mortgages by range of carrying amounts is not reasonably obtainable.
(5) 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.
(6) Balance at beginning of period $29,056 Additions during period - ------- 29,056 Deductions during period: Collections of principal 19,839 ------- Balance at close of period $9,217 =======
EXHIBIT INDEX -------------
___________ * Incorporated by reference herein.