ITEM 1. BUSINESS
Organization
Guaranteed Mortgage Corporation III (the "Company") was incorporated under the laws of the State of Michigan on October 18, 1982, as a wholly-owned limited purpose financing subsidiary of Pulte Financial Companies, Inc. ("PFCI"), a wholly-owned subsidiary of Pulte Corporation, a publicly-owned holding company listed on the New York Stock Exchange.
Issuance of Collateralized Mortgage Bonds
The Company was organized to facilitate the financing of long-term mortgage loans on single-family residential homes, including homes built by Pulte Home Corporation ("PHC"), through the issuance and sale of bonds secured by mortgage-backed securities ("Certificates") or by funding agreements with various limited-purpose financing companies ("Funding Companies") and the notes issued thereunder that are secured by Certificates ("Funding Notes"), or by a combination thereof. Such Certificates consist of Guaranteed Mortgage Pass-Through Certificates ("FNMA Certificates"), issued and guaranteed as to the full and timely payment of principal and interest by the Federal National Mortgage Association, Fully Modified Pass-Through mortgage-backed certificates ("GNMA Certificates"), guaranteed as to the full and timely payment of principal and interest by the Government National Mortgage Association, Mortgage Participation Certificates ("FHLMC Certificates"), issued and guaranteed as to the full and timely payment of interest and as to the ultimate payment of principal by the Federal Home Loan Mortgage Corporation, or a combination of such Certificates. To accomplish its purpose, the Company issued collateralized mortgage bonds in series and used the net proceeds of such sales to purchase Certificates backed by mortgage loans, some of which were originated by ICM Mortgage Corporation, a wholly-owned subsidiary of PHC, and are secured by homes, some of which were built by PHC. Alternatively, the Company remitted a portion of the net proceeds of such sales of collateralized mortgage bonds in series to a Funding Company that, in turn, pledged to the Company certain Funding Notes, which, together with certain other collateral, serve as security for the obligations of that Funding Company to the Company.
The Company, although incorporated in October, 1982 and capitalized in August, 1984, did not commence operations until it issued its first series of bonds on October 24, 1984. Prior to 1994, the Company issued fifteen series of bonds, all of which were offered and sold to the public pursuant to a registration statement filed with the Securities and Exchange Commission. The bonds had an aggregate original principal amount of $1,208,697,000, with stated annual interest rates ranging from 7.0% to 12.5%. The Company did not issue any additional series of bonds in 1994. At December 31, 1994, the Company had $189,715,500 in aggregate principal amount of bonds outstanding, with stated annual interest rates ranging from 8.50% to 9.00%. This aggregate principal amount includes $21,860,006 in outstanding aggregate principal amount of the Company's Series H Bonds, secured by Funding Notes, and $53,024,658 in outstanding aggregate principal amount of the Company's Series L and Series M Bonds, all of which are non-recourse obligations and do not represent a liability of the Company.
Each series of the Company's bonds is secured by a separate collateral package consisting, in part, of the Certificates purchased in connection with the issuance of a bond series, or Funding Notes or a combination thereof, additional pledged GNMA certificates and cash. The collateral package for a series is pledged to NBD Bank, N.A., as trustee on behalf of the holders of the bonds of such series. Funds held by the trustee with respect to the bonds are restricted so as to assure the payment of principal and interest on the bonds to the extent of such funds.
Year Ended FORM 10-K GUARANTEED MORTGAGE CORPORATION III 12/31/94
Under the Company's articles of incorporation and the terms of the indenture governing the issuance of the Company's collateralized mortgage bonds, the Company may only issue collateralized mortgage bonds rated in the highest category by Standard & Poor's Corporation.
ITEM 2.
ITEM 2. PROPERTIES
The Company has no material physical properties. Its primary asset is ownership of the various Certificates, and the mortgage loans underlying such Certificates, pledged to NBD Bank, N.A., as trustee, to secure the Company's collateralized mortgage bonds.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Information in response to this item is omitted pursuant to General Instruction J(2).
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company is a wholly-owned subsidiary of PFCI. (See "Business - Organization" in Item 1 of this Report.) Thus, there is no market for its common stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Information in response to this item is omitted pursuant to General Instruction J(2).
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company's mortgage-backed securities (Certificates) or finance companies' notes secured by Certificates (Funding Notes) are used as collateral for associated bonds payable. Mortgage-backed securities were acquired from affiliates. Any difference between the acquisition price and the principal balance of the securities at their date of acquisition (mortgage discounts/premiums) was amortized into operations as an adjustment of mortgage yield.
The Company's pretax income (loss) before extraordinary item was $(7,204,441) for 1994 as compared to pretax income (loss) before extraordinary item of $(794,434) and $4,905,355 for 1993 and 1992, respectively. Earnings decreased during 1994 as compared to 1993 primarily due to increased amortization of mortgage discounts, bond discounts and bond issue costs as a result of GMC III changing its accounting
Year Ended FORM 10-K GUARANTEED MORTGAGE CORPORATION III 12/31/94
estimate of amortization speeds in December, 1994 due to greater than expected prepayment experience.
Earnings decreased during 1993 from 1992 primarily due to reduced net interest carry as a result of volume declines resulting from accelerated mortgage prepayments related to heavy refinancing activity in 1993.
Pretax extraordinary losses from the bond extinguishments during 1993 and 1992 were $2,028,327 and $1,872,795, respectively. These losses resulted from the write-off of unamortized bond discounts and issue costs. There was no similar activity in 1994.
Financial Condition
The Company will have no additional capital or liquidity requirements, assuming the mortgage-backed securities continue to pay principal and interest in accordance with their terms.
Year Ended FORM 10-K GUARANTEED MORTGAGE CORPORATION III 12/31/94
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Year Ended FORM 10-K GUARANTEED MORTGAGE CORPORATION III 12/31/94
BALANCE SHEETS DECEMBER 31, 1994 AND 1993
See accompanying notes.
Year Ended FORM 10-K GUARANTEED MORTGAGE CORPORATION III 12/31/94
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
See accompanying notes.
Year Ended FORM 10-K GUARANTEED MORTGAGE CORPORATION III 12/31/94
STATEMENTS OF SHAREHOLDER'S EQUITY FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
See accompanying notes.
Year Ended FORM 10-K GUARANTEED MORTGAGE CORPORATION III 12/31/94
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
See accompanying notes.
Year Ended FORM 10-K GUARANTEED MORTGAGE CORPORATION III 12/31/94
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION, RELATED PARTY TRANSACTIONS AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Guaranteed Mortgage Corporation III (GMC III) is a wholly-owned financing subsidiary of Pulte Financial Companies, Inc. (PFCI), which is a wholly-owned financing subsidiary of Pulte Corporation.
GMC III acquired mortgage-backed securities from affiliates and entered into funding agreements with various limited purpose financing companies (funding companies), the notes (funding notes) issued thereunder being secured by mortgage-backed securities. GMC III then issued bonds collateralized by such securities or funding notes. The mortgage-backed securities are guaranteed by the Government National Mortgage Association, the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation.
RELATED PARTY TRANSACTIONS
Transactions and arrangements between GMC III and PFCI, Pulte Corporation, and/or Pulte Home Corporation (PHC), an indirect wholly-owned subsidiary of Pulte Corporation, are summarized as follows:
- GMC III has periodic interest-free cash and non-cash advances from certain affiliates, the net payable balances of which were $86,479 and $249,956 at December 31, 1994 and 1993, respectively. Average month-end balances due these affiliates were $171,485 and $4,784,151 during the years ended December 31, 1994 and 1993, respectively. Advances payable by GMC III to affiliates relate principally to the acquisition of mortgage-backed securities.
- GMC III's taxable income is included in the consolidated tax returns of Pulte Corporation. Pursuant to PFCI's tax sharing agreement with Pulte Corporation, no federal income taxes were provided in 1992, because the consolidated group did not incur federal income tax expense. Effective January 1, 1993, GMC III implemented the new method of accounting for income taxes (FAS No. 109) that requires income taxes to be provided by subsidiaries based on their own results of operations. In 1994 and 1993, GMC III provided for income taxes on a stand alone basis at statutory rates. The related income tax benefit was settled by a dividend to the parent corporation and did not represent a cash transaction.
- Certain of GMC III's corporate officers are also officers of PFCI, Pulte Corporation, PHC, ICM, and/or other affiliates of GMC III.
- PFCI incurs certain administrative expenses on behalf of GMC III, for which GMC III reimburses PFCI.
- During the years ended December 31, 1994, 1993 and 1992, GMC III paid $33,303, $45,917 and $71,233, respectively, to PFCI for management fees related to the issuance and administration of non-recourse bonds (see Note 3).
- During the years ended December 31, 1994, 1993 and 1992, GMC III paid dividends to PFCI of $2,809,732, $1,100,877 and $334,500, respectively. Dividends during 1994 and 1993 related entirely to income tax benefits that did not represent cash transactions.
SIGNIFICANT ACCOUNTING POLICIES
- Mortgage-backed securities are classified as held-to-maturity based upon the Company's positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost and are adjusted for amortization of premiums and accretion of discounts over the estimated life of the security. Such amortization, along with interest and dividends are included in interest income.
- Unamortized net mortgage discounts/premiums, bond discounts and issue costs had been amortized using the interest method over the estimated lives of the mortgage-backed securities and bonds, respectively. The rates previously used to amortize these into operations were based on management's estimates of the remaining lives of the mortgage-backed securities and bonds. These estimates had been periodically reviewed and adjusted, as necessary.
- In December 1994, due to higher than anticipated collateral prepayment experience, GMC III changed its accounting estimate of required amortization and expensed all remaining mortgage discounts, bond discounts and issue costs amounting to $5,812,061. Unamortized net mortgage premiums were $2,164,399 at December 31, 1993.
Year Ended FORM 10-K GUARANTEED MORTGAGE CORPORATION III 12/31/94
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. MORTGAGE-BACKED SECURITIES
At December 31, 1994, mortgage-backed securities (GNMA certificates) had an estimated fair market value of $115,620,712 which included gross unrealized gains of $1,605,605 on securities with an amortized cost of $114,015,107. At December 31, 1993, these securities had an estimated fair market value of $163,612,379, which included gross unrealized gains of $9,079,734 on securities with an amortized cost of $154,532,645. Actual maturities of these mortgage-backed securities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without penalties.
During the year ended December 31, 1993, GMC III extinguished $79,295,473 of its long-term debt prior to scheduled maturity. Due to this redemption, GMC III transferred the related outstanding collateral of $77,044,581 and the unamortized discount of $1,740,318 associated with this collateral, to its affiliate, Pulte Financial Holding Company.
3. BONDS PAYABLE
Bonds payable at December 31, 1994 and 1993 consisted of two bond issues with stated interest rates ranging from 8.50% to 9.00%. Weighted average stated interest rates were 8.88% and 8.82% at December 31, 1994 and 1993, respectively. Both of the bond issues have classes of bonds with serial maturities. Each series of the bonds is secured by separate pools of mortgage-backed securities. Timing of bond retirements is dependent upon payments received on mortgage loans. The bonds are further collateralized by additional pledged GNMA certificates in the aggregate amount of $1,060,400.
Bonds payable are stated net of unamortized bond discounts of $4,279,765 at December 31, 1993 ($0 at December 31, 1994).
The estimated fair market values of the outstanding bonds payable at December 31, 1994 and 1993 were $115,084,000 and $162,725,000, respectively. This was estimated using December secondary market activity for comparable securities. Secondary market activity for these specific securities is limited.
Under provisions of the bond indenture, funds held by trustee are restricted so as to assure the payment of principal and interest on the bonds to the extent of such funds.
As of December 31, 1994, $74,884,664 was outstanding for three series of non-recourse bonds issued by GMC III in the initial aggregate principal amount of $527,300,000, which are secured by funding notes or mortgage-backed securities in which GMC III has nominal or no ownership interest. In accordance with generally accepted accounting principles, these series of bonds are not treated as borrowings and, accordingly, such bonds and related collateral are not included on the balance sheet.
4. EXTRAORDINARY ITEM
During the year ended December 31, 1993, GMC III extinguished $79,295,473 of its long-term debt prior to scheduled maturity, resulting in an extraordinary pretax loss of $2,028,327 due to the write-off of unamortized bond discounts and issue costs.
During the year ended December 31, 1992, GMC III extinguished or notified the trustee of its intent to extinguish $51,370,603 of its long-term debt prior to scheduled maturity, resulting in an extraordinary loss of $1,872,795 due to the write-off of unamortized bond discounts and issue costs. The funds for these extinguishments were obtained from the sale of the mortgage-backed securities which collateralized the bonds.
Year Ended FORM 10-K GUARANTEED MORTGAGE CORPORATION III 12/31/94
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDER GUARANTEED MORTGAGE CORPORATION III
We have audited the accompanying balance sheets of Guaranteed Mortgage Corporation III as of December 31, 1994 and 1993, and the related statements of income, shareholder's equity and cash flows for each of the three years in the period ended December 31, 1994. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule 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.
As more fully described in Note 1, Guaranteed Mortgage Corporation III is a wholly-owned financing subsidiary of Pulte Financial Companies, Inc., which in turn is a wholly-owned financing subsidiary of Pulte Corporation. Guaranteed Mortgage Corporation III has certain transactions with affiliates.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Guaranteed Mortgage Corporation III at December 31, 1994 and 1993, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 1 of the Notes to the Financial Statements, Guaranteed Mortgage III changed its method of accounting for income taxes in 1993.
ERNST & YOUNG LLP Detroit, Michigan January 31, 1995
Year Ended FORM 10-K GUARANTEED MORTGAGE CORPORATION III 12/31/94
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
This item is not applicable.
PART III
Information in response to this part is omitted pursuant to General Instruction J(2).
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as a part of this Annual Report on Form 10-K:
(a) (1) Financial Statements
GUARANTEED MORTGAGE CORPORATION III Balance Sheets at December 31, 1994 and 1993 Statements of Operations for the years ended December 31, 1994, 1993 and 1992 Statements of Shareholder's Equity for the years ended December 31, 1994, 1993 and 1992 Statements of Cash Flows for the years ended December 31, 1994, 1993 and 1992 Notes to Financial Statements Report of Ernst & Young LLP, Independent Auditors
(a) (2) Financial Statement Schedules
GUARANTEED MORTGAGE CORPORATION III
IV - Indebtedness of and to Related Parties - Not Current
All other schedules have been omitted since the required information is not present, is not present in amounts sufficient to require submission of the schedule or because the required information is included in the financial statements or notes thereto.
(a) (3) Exhibits
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(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the last quarter of the fiscal year covered by this Report.
Year Ended FORM 10-K GUARANTEED MORTGAGE CORPORATION III 12/31/94
SCHEDULE IV - INDEBTEDNESS OF AND TO RELATED PARTIES - NOT CURRENT ($000's omitted)
Year Ended FORM 10-K GUARANTEED MORTGAGE CORPORATION III 12/31/94
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, on March 21, 1995.
GUARANTEED MORTGAGE CORPORATION III
By /s/JAMES A. WEISSENBORN -------------------------------- James A. Weissenborn, President
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.
Year Ended FORM 10-K GUARANTEED MORTGAGE CORPORATION III 12/31/94
INDEX TO EXHIBITS ------------------
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