<PAGE> 1
SECURITIES EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Act of
- --- 1934 for the quarterly period ended September 30, 1997.
Transition Report Pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934.
Commission file No. 333-3954
------------
IMC MORTGAGE COMPANY
(Exact name of issuer as specified in its Charter)
Florida 59-3350574
-----------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification number)
5901 E. FOWLER AVENUE
TAMPA, FLORIDA 33617
(Address of Principal Executive Offices)
Issuer's telephone number, including area code: (813) 984-8801
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing for the past 90 days.
Yes X No
----- -----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Title of each Class: Outstanding at November 14, 1997
- -------------------------------------- --------------------------------
Common Stock, par value $.01 per share 30,665,119
<PAGE> 2
IMC MORTGAGE COMPANY AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 1997 and December 31, 1996 1
Consolidated Statements of Operations
for the three months and nine months ended
September 30, 1997 and September 30, 1996 2
Consolidated Statements of Cash Flows
for the nine months ended September 30, 1997
and September 30, 1996 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Results of Operations and
Financial Condition 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
<PAGE> 4
IMC MORTGAGE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 11,104,565 $ 13,289,128
Securities purchased under agreements to resell 567,700,000 659,490,000
Accrued interest receivable 26,721,004 8,311,530
Accounts receivable 12,767,910 3,689,540
Mortgage loans held for sale 1,794,933,611 914,586,703
Interest-only and residual certificates 318,081,256 86,246,674
Warehouse financing due from correspondents 21,706,005 5,045,385
Furniture, fixtures and equipment, net 12,690,598 1,676,822
Capitalized mortgage servicing rights 24,730,863 6,621,347
Investment in joint venture 1,713,023 1,738,760
Goodwill 84,467,919 1,843,144
Other assets 15,499,895 4,809,152
-------------- --------------
Total assets $2,892,116,649 $1,707,348,185
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse finance facilities $1,799,313,546 $ 895,132,545
Term debt 254,188,773 47,430,295
Accrued and other liabilities 22,763,144 10,309,858
Accrued interest payable 13,846,771 4,077,744
Securities sold but not yet purchased 569,925,842 661,061,161
-------------- --------------
Total liabilities 2,660,038,076 1,618,011,603
-------------- --------------
Commitments
Stockholders' equity:
Preferred stock, par value $.01 per share; 10,000,000
shares authorized; none issued and outstanding - -
Common stock, par value $.01 per share; 50,000,000
authorized; and 30,358,478 and 19,669,666 shares
issued and outstanding 303,585 196,696
Additional paid-in capital 186,005,962 76,489,738
Retained earnings 45,769,026 12,650,148
-------------- --------------
Total stockholders' equity 232,078,573 89,336,582
-------------- --------------
Total liabilities and stockholders' equity $2,892,116,649 $1,707,348,185
============== ==============
</TABLE>
See accompanying notes to Consolidated Financial Statements.
1
<PAGE> 5
IMC MORTGAGE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------------ -------------------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues:
Gain on sales of loans $ 59,096,344 $ 12,537,421 $ 119,047,738 $ 34,728,321
Additional securitization transaction expense - - - (4,157,644)
------------ ------------ ------------- ------------
Net gain on sale of loans 59,096,344 12,537,421 119,047,738 30,570,677
------------ ------------ ------------- ------------
Warehouse interest income 38,436,720 10,634,571 91,454,121 22,249,234
Warehouse interest expense (32,079,402) (6,672,572) (69,942,382) (14,505,231)
------------ ------------ ------------- ------------
Net warehouse interest income 6,357,318 3,961,999 21,511,739 7,744,003
------------ ------------ ------------- ------------
Servicing fees 5,374,714 1,753,139 12,223,950 4,215,381
Other 2,900,208 1,513,446 9,139,442 2,977,691
------------ ------------ ------------- ------------
Total servicing fees and other 8,274,922 3,266,585 21,363,392 7,193,072
------------ ------------ ------------- ------------
Total revenues 73,728,584 19,766,005 161,922,869 45,507,752
------------ ------------ ------------- ------------
Expenses:
Compensation and benefits 26,373,221 3,947,843 54,958,744 11,987,493
Selling, general and administrative 20,547,997 5,279,887 43,324,247 10,416,597
Other interest expense 4,539,181 473,202 9,521,000 1,820,793
Sharing of proportionate value equity 0 0 0 2,555,000
------------ ------------ ------------- ------------
Total expenses 51,460,399 9,700,932 107,803,991 26,779,883
------------ ------------ ------------- ------------
Income before provision for income taxes 22,268,185 10,065,073 54,118,878 18,727,869
Provision for income taxes 8,800,000 3,975,701 21,000,000 375,701
------------ ------------ ------------- ------------
Net income $ 13,468,185 $ 6,089,372 $ 33,118,878 $ 18,352,168
============ ============ ============= ============
PRO FORMA DATA (GIVING EFFECT TO PROVISION
FOR INCOME TAXES):
Income before provision for income taxes $ 22,268,185 $ 10,065,073 $ 54,118,878 $ 18,727,869
Pro forma provision (actual provision for the three
months ended September 30, 1997 and 1996 and
the nine months ended September 30, 1997)
for income taxes 8,800,000 3,975,701 21,000,000 7,397,508
------------ ------------ ------------- ------------
Pro forma net income $ 13,468,185 $ 6,089,372 $ 33,118,878 $ 11,330,361
============ ============ ============= ============
Pro forma (actual for the three months ended
September 30, 1997 and 1996 and the
nine months ended September 30, 1997) net income
per common share $ 0.39 $ 0.26 $ 1.08 $ 0.64
============ ============ ============= ============
Weighted average number of shares outstanding 34,743,402 23,431,704 30,723,301 17,683,600
============ ============ ============= ============
</TABLE>
See accompanying notes to Consolidated Financial Statements.
2
<PAGE> 6
IMC MORTGAGE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
-----------------------------------
1997 1996
--------------- --------------
<S> <C> <C>
Operating activities:
Net income $ 33,118,878 $ 18,352,168
Adjustments to reconcile net income to net cash used in
operating activities:
Sharing of proportionate value of equity - 2,555,000
Depreciation and amortization 6,058,278 926,201
Deferred taxes (1,479,000) -
Capitalized mortgage servicing rights (21,281,715) (5,780,936)
Net loss in joint venture 1,200,761 635,848
Net change in operating assets and liabilities, net of effects of
acquisitions of businesses:
Increase in mortgages loans held for sale (848,340,978) (432,632,747)
Decrease (increase) in securities purchased under agreement
to resell and securities sold but not yet purchased 654,681 (224,207)
Increase in accrued interest receivable (18,388,431) (3,949,912)
Increase in warehousing financing due from correspondents (21,467,018) (2,667,428)
Increase in interest-only and residual certificates (231,834,582) (46,222,260)
Increase in other assets (8,248,134) (1,427,635)
Increase in accounts receivable (8,374,573) (4,463,994)
Increase in accrued interest payable 9,769,027 1,834,448
(Decrease) increase in accrued and other liabilities (1,191,998) 5,939,922
--------------- --------------
Net cash used in operating activities (1,109,804,804) (467,125,532)
--------------- --------------
Investing activities:
Investment in joint venture (1,175,024) (2,591,011)
Purchase of furniture, fixtures, and equipment (10,403,945) (778,574)
Acquisitions of businesses, net of cash acquired and
including other cash payments associated with the acquisitions (11,868,383) -
--------------- --------------
Net cash used in investing activities (23,447,352) (3,369,585)
--------------- --------------
Financing activities:
Issuance of common stock 59,672,007 58,203,377
Distributions to stockholders for taxes 0 (11,149,228)
Borrowings - warehouse 4,078,065,800 1,124,609,329
Borrowings - term debt 257,066,330 38,570,409
Repayments of borrowings - warehouse (3,200,187,598) (719,181,024)
Repayments of borrowings - term debt (63,548,946) (16,135,906)
--------------- --------------
Net cash provided by financing activities 1,131,067,593 474,916,957
--------------- --------------
Net (decrease) increase in cash and cash equivalents (2,184,563) 4,421,840
Cash and cash equivalents, beginning of period 13,289,128 5,133,718
--------------- --------------
Cash and cash equivalents, end of period $ 11,104,565 $ 9,555,558
=============== ==============
Supplemental disclosure cash flow information:
Cash paid during the period for interest $ 69,694,355 $ 14,491,756
=============== ==============
Cash paid during the period for taxes $ 23,380,150 $ -
=============== ==============
</TABLE>
See accompanying notes to Consolidated Financial Statements.
3
<PAGE> 7
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the three and nine months ended September 30,
1997 and 1996
(unaudited)
1. ORGANIZATION:
IMC Mortgage Company (the "Company") was formed in 1993 by a team of
executives experienced in the non-conforming home equity loan industry. The
Company was originally structured as a partnership, Industry Mortgage
Company, L.P. (the "Partnership"), which became a wholly owned subsidiary
of the Company in June 1996 when the limited partners and the general
partner exchanged their partnership interests for voting common shares (the
"exchange" or "recapitalization") of the Company. The exchange was
consummated on an historical cost basis as all entities were under common
control. Accordingly, since June 1996, the Company has owned 100% of the
limited partnership interests in the Partnership and 100% of the general
partnership interest in the Partnership. At the time of the exchange, the
retained earnings previously reflected by the Partnership were transferred
to additional paid in capital.
The accompanying consolidated financial statements include the accounts of
the Company, the Partnership and their wholly owned subsidiaries, after
giving effect to the exchange as if it had occurred at inception. All
intercompany transactions have been eliminated in the accompanying
consolidated financial statements.
On January 27, 1997, the Board of Directors declared a two-for-one split of
common stock payable on February 13, 1997 to stockholders of record as of
February 6, 1997. A total of $98,348 was transferred from additional
paid-in-capital to the stated value of common stock in connection with the
stock split. The par value of the common stock remains unchanged. All share
and per share amounts have been restated retroactively herein to reflect
the stock split.
2. BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the interim periods are not necessarily indicative of financial results for
the full year. These unaudited condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996. The year-end balance
sheet data was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting
principles. The condensed consolidated balance sheet as of September 30,
1997 and the condensed consolidated statements of operations and cash flows
included herein have been subjected to a review by Coopers & Lybrand
L.L.P., the registrant's independent public accountants, whose report is
included as an exhibit to this filing.
4
<PAGE> 8
2. BASIS OF PRESENTATION, CONTINUED:
Certain reclassifications have been made to the presentations to conform to
current period presentations.
3. NEW ACCOUNTING PRONOUNCEMENTS:
On January 1, 1997, the Company adopted the Financial Accounting Standards
Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities ("SFAS 125"), which addresses the accounting
for all types of securitization transactions, securities lending and
repurchase agreements, collateralized borrowing arrangements and other
transactions involving the transfer of financial assets. SFAS 125
distinguishes transfers of financial assets that are sales from transfers
that are secured borrowings. SFAS 125 requires the Company to allocate the
total cost of mortgage loans sold among the mortgage loans sold (without
servicing rights), interest-only and residual certificates and servicing
rights based on their relative fair values. SFAS 125 is generally effective
for transactions that occur after December 31, 1996, and is to be applied
prospectively. The adoption of this standard did not have a material effect
on the Company's financial position or results of operations.
In February 1997, the FASB issued SFAS No. 128 "Earnings per Share" ("SFAS
128"), which simplifies the standards for computing earnings per share
("EPS") previously found in APB Opinion No. 15 "Earnings per Share" and
makes them comparable to international EPS standards. SFAS 128 replaces the
presentation of "primary" EPS with a presentation of "basic" EPS and
requires dual presentation of "basic" and "diluted" EPS on the face of the
statement of operation for all entities with complex capital structures.
The standard also requires a reconciliation of the numerator and
denominator of the "basic" EPS computation to the numerator and denominator
of the "diluted" EPS computation. SFAS 128 is effective for fiscal years
ending after December 15, 1997, but application to interim periods prior to
December 15, 1997 is not permitted. The adoption of SFAS 128 is not
expected to have a material effect on the Company's presentation of EPS.
In March 1997, the FASB issued SFAS No. 129 "Disclosure of Information
about Capital Structure" ("SFAS 129"), which consolidates existing
disclosure requirements. SFAS 129 contains no change in existing disclosure
requirements and is effective for fiscal years ending after December 15,
1997.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income"
("SFAS 130"), which establishes standards for reporting and display of
comprehensive income and its components (revenue, expenses, gains, and
losses) in a full set of general-purpose financial statements. SFAS 130 is
effective for fiscal years beginning after December 15, 1997. The Company
expects to adopt the provisions of SFAS 130 in the first quarter of 1998
and will reclassify the financial statements for earlier periods provided
for comparative purposes as required by the statement. The application of
the new rules will not have an impact on the Company's financial position
or results of operations.
5
<PAGE> 9
4. PRO FORMA DATA:
The Partnership which is included in the consolidated financial statements
became a wholly owned subsidiary of the Company on June 24, 1996 as
described in Note 1. The Partnership made no provision for income taxes
since the Partnership's income or losses were passed through to the
partners individually.
The Partnership became subject to income taxes as of June 24, 1996, the
effective date of the exchange. The pro forma data included in the
consolidated statements of operations of the Company includes a pro forma
provision for income taxes for the nine months ended September 30, 1996 to
indicate what taxes would have been had the exchange occurred in prior
periods.
5. PRO FORMA EARNINGS PER SHARE:
Pro forma net income per common share for the nine months ended September
30, 1996 has been computed using the weighted average number of common
shares and dilutive common share equivalents outstanding during the period
after giving effect to the recapitalization described in Note 1. Dilutive
common share equivalents consist of stock options (calculated using the
treasury stock method), convertible preferred stock, stock warrants and
common stock contingently issuable under earn-out arrangements with
acquired companies. Pursuant to the requirements of the Securities and
Exchange Commission, common shares and common equivalent shares issued at
prices below the public offering price of $9 per share during the twelve
months immediately preceding the date of the initial filing of the
Registration Statement have been included in the calculation of common
shares and common share equivalents, using the treasury stock method, as if
they were outstanding for all periods presented.
Weighted average number of shares outstanding is comprised of the following
for the three months and nine months ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average number of common
shares outstanding 30,216,518 19,669,666 26,153,123 14,743,166
Additional shares deemed outstanding:
Cheap stock 3,160,470 3,741,384 3,427,056 2,933,624
Employee stock options 216,296 20,654 282,114 6,810
Contingent shares 1,150,118 - 861,008 -
---------- ---------- ---------- ----------
Weighted average number of common
Shares and common share equivalents 34,743,402 23,431,704 30,723,301 17,683,600
========== ========== ========== ==========
</TABLE>
6. ACQUISITIONS
Effective January 1, 1997, the Company acquired all of the assets of
Mortgage America, Inc. ("Mortgage America"), a non-conforming mortgage
lender based in Bay City, Michigan and Equity Mortgage Co., Inc. ("Equity
Mortgage"), a non-conforming mortgage lender based in Baltimore, Maryland,
and all of the outstanding common stock of CoreWest Banc ("CoreWest"), a
non-conforming mortgage lender based in Los Angeles, California. Effective
February 1, 1997,
6
<PAGE> 10
6. ACQUISITIONS, CONTINUED:
the Company acquired all of the assets of American Mortgage Reduction, Inc.
("American Reduction"), a non-conforming mortgage lender based in Owings
Mills, Maryland. Effective July 1, 1997, the Company acquired
substantially all of the assets of National Lending Center, Inc. ("National
Lending Center"), a non-conforming mortgage lender based in Deerfield
Beach, Florida, and Central Money Mortgage Co., Inc. ("Central Money
Mortgage"), a non-conforming mortgage lender based in Baltimore, Maryland.
These acquisitions have been accounted for using the purchase method of
accounting. The fair value of the acquired companies' tangible assets
approximated the liabilities assumed, and accordingly, the majority of the
initial purchase prices has been recorded as goodwill which will be
amortized on a straight-line basis for periods up to 30 years. The
aggregate purchase price for these acquisitions included cash,
approximately 4.7 million shares of common stock, and $13.2 million of
notes payable. The Company recorded goodwill of approximately $84.0
million related to these acquisitions. Most of the acquisitions include
earn-out arrangements that provide for additional consideration if the
acquired company achieves certain performance targets after the
acquisition. Any such contingent payments will result in an increase in
the amount of recorded goodwill related to such acquisition.
The operating results of Mortgage America, Equity Mortgage, CoreWest Banc,
American Reduction, National Lending Center, and Central Money Mortgage
have been included in the consolidated statement of operations since the
effective acquisition dates. On the basis of a pro forma consolidation of
the results of operations as if the acquisitions had taken place at the
beginning of 1996, consolidated total revenues would have approximated
$188 million and $88 million for the nine months ended September 30, 1997
and 1996, respectively and $34 million for the three months ended September
30, 1996. Consolidated net income and earnings per share would not have
been materially different from the reported amounts for the nine months
ended September 30, 1997 and 1996 and the three months ended September 30,
1996. Such amounts are not necessarily indicative of what the actual
consolidated results of operations might have been if the acquisitions had
been effective at the beginning of 1996.
7. WAREHOUSE FINANCE FACILITIES AND TERM DEBT:
The Company has available numerous lines of credit at September 30, 1997
totaling approximately $3.27 billion ($1.02 billion at December 31, 1996)
of which at September 30, 1997 approximately $1.80 billion was outstanding
($895.1 million at December 31, 1996). Outstanding borrowings under
warehouse finance facilities are collateralized by the mortgage loans held
for sale and warehouse financing due from correspondents.
The Company also has available term debt at September 30, 1997 totaling
approximately $281.2 million ($88.3 million at December 31, 1996) of which
at September 30, 1997 approximately $254.2 million was outstanding ($47.4
million at December 31, 1996).
8. MORTGAGE LOANS HELD FOR SALE:
Mortgage loans held for sale at September 30, 1997 of $1.79 billion (which
includes a deferred hedge loss of $2.2 million and is net of an allowance
of $8.0 million), consistent with mortgage loans held for sale at December
31, 1996 of $914.6 million (which includes a deferred hedge loss of $1.6
million and is net of an allowance of $1.1 million) is comprised primarily
of loans secured by first or second mortgages on one-to-four family
residences. In October 1997, the Company completed a securitization through
a public offering of securities for delivery of $700.0 million of mortgage
loans.
9. STOCKHOLDERS EQUITY:
On April 23, 1997, the Company completed an offering for the sale of
6,300,000 shares of common stock. Of the 6,300,000 shares offered,
5,040,000 were offered by the Company and 1,260,000 were offered by certain
stockholders of the Company. The Company
7
<PAGE> 11
9. STOCKHOLDERS EQUITY, CONTINUED:
received approximately $58 million from the sale of shares, net of
underwriting discount and expenses associated with the offering.
10. SUBSEQUENT EVENTS:
Effective October 1, 1997, the Company acquired substantially all of the
assets of Residential Mortgage Corporation ("Residential Mortgage"), a
non-conforming mortgage lender based in Cranston, Rhode Island. The
purchase price for substantially all of the assets of Residential Mortgage
consists of an initial payment of shares of common stock of the Company and
includes a contingent payment in the future if Residential Mortgage
achieves certain performance targets. The acquisition of Residential
Mortgage will be accounted for using the purchase method of accounting and,
accordingly, the purchase price will be allocated to assets acquired and
liabilities assumed based on the fair values at the date of acquisition.
The fair value of Residential Mortgage's assets approximated the
liabilities assumed and accordingly, the majority of the initial purchase
price is anticipated to be recorded as goodwill. Any contingent payments
will result in an increase in the amount of recorded goodwill.
On November 4, 1997, the Company sold, on a non-recourse basis,
interest-only and residual certificates that as of September 30, 1997 had
an estimated net book value of $267 million. The sale was effected through
a securitization (the "Excess Cashflow Securitization") by which the
Company received approximately $228 million of net cash proceeds, or
approximately 85% of the estimated net book value, and retained a
subordinated residual certificate for the remaining balance. The Company
does not expect to recognize any gain or loss as a result of the Excess
Cashflow Securitization. The Company used the net proceeds to retire or
reduce certain term debt.
8
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the consolidated
financial statements and notes included in Item 1 of this Quarterly Report, and
the financial statements and the notes thereto and Management's Discussion and
Analysis of Financial Condition and Results of Operations included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1996. The following management's discussion and analysis of the Company's
financial condition and results of operations contains forward-looking
statements which involve risks and uncertainties. The Company's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of important factors such as reduced demand for
non-conforming loans, competitive forces, too-high expectations of acquired
companies, limitations on available funds and market forces affecting the price
of the Company's shares.
GENERAL
IMC is a specialized consumer finance company engaged in purchasing,
originating, servicing and selling home equity loans secured primarily by first
liens on one- to four-family residential properties. The Company focuses on
lending to individuals whose borrowing needs are generally not being served by
traditional financial institutions due to such individuals' impaired credit
profiles and other factors. Loan proceeds are typically used by such individuals
to consolidate or refinance debt, to finance home improvements, to pay
educational expenses and for a variety of other uses. By focusing on individuals
with impaired credit profiles and providing prompt responses to their borrowing
requests, the Company has been able to charge higher interest rates for its loan
products than typically are charged by conventional mortgage lenders.
Pursuant to the Company's acquisition strategy, effective January 1, 1997, the
Company acquired all of the assets of Mortgage America, Inc. ("Mortgage
America"), a non-conforming mortgage lender based in Bay City, Michigan and
Equity Mortgage Co., Inc. ("Equity Mortgage"), a non-conforming mortgage lender
based in Baltimore, Maryland, and all of the outstanding common stock of
CoreWest Banc ("CoreWest"), a non-conforming mortgage lender based in Los
Angeles, California. Effective February 1, 1997, The Company acquired all of the
assets of American Mortgage Reduction, Inc. ("American Reduction"), a
non-conforming mortgage lender based in Owings Mills, Maryland. Effective July
1, 1997, the Company acquired substantially all of the assets of National
Lending Center, Inc. ("National Lending Center"), a non-conforming mortgage
lender based in Deerfield Beach, Florida, and Central Money Mortgage Co., Inc.
("Central Money Mortgage"), a non-conforming mortgage lender based in Baltimore,
Maryland.
Mortgage America at the time of acquisition originated residential mortgage
loans from a network of 32 retail offices located in 29 states. Mortgage America
originated over $248 million of residential mortgage loans in 1996, including
over $69 million during the last quarter of 1996. IMC purchased $45.3 million of
residential mortgage loans from Mortgage America during 1996, including $21.1
million during the last quarter of 1996. Mortgage America originated
approximately $103 million and $256 million of residential mortgage loans during
the three months and nine months ended September 30, 1997.
CoreWest commenced operations in early 1996. At the time of acquisition,
CoreWest originated
9
<PAGE> 13
residential mortgage loans primarily through a network of nine mortgage centers
located in California, Colorado, Washington, Utah and Oregon. CoreWest
originated over $48 million of residential mortgage loans in 1996, including
over $22 million during the last quarter of 1996. IMC purchased $10.3 million of
residential mortgage loans from CoreWest during 1996, all of which was during
the last quarter of 1996. CoreWest originated approximately $94 million and $181
million of residential mortgage loans during the three months and the nine
months ended September 30, 1997.
Equity Mortgage at the time of acquisition originated residential mortgage loans
from its offices in the greater Baltimore metropolitan region, Delaware and
Pennsylvania. Equity Mortgage originated approximately $36 million of
residential mortgage loans in 1996, including over $11 million during the last
quarter of 1996. IMC purchased $12.5 million of residential mortgage loans from
Equity Mortgage during 1996, including $3.3 million during the last quarter of
1996. Equity Mortgage originated approximately $7 million and $28 million of
residential mortgage loans during the three months and nine months ended
September 30, 1997.
American Reduction at the time of acquisition originated residential mortgage
loans from its main office in Owings Mills, and four satellite offices located
in Pennsylvania. American Reduction originated over $80 million of residential
mortgage loans in 1996, including over $28 million during the last quarter of
1996. IMC did not purchase a significant amount of residential mortgage loans
from American Reduction in 1996. American Reduction originated approximately $30
million of residential mortgage loans during the three months ended September
30, 1997 and $79 million from the date of acquisition (February 1, 1997) to
September 30, 1997.
National Lending Center at the time of acquisition originated residential
mortgage loans primarily through mortgage brokers and had operations in 17
states. National Lending Center originated approximately $250 million of
residential mortgage loans in 1996 and approximately $166 million of residential
mortgage loans during the first six months of 1997. IMC purchased $36.8 million
and $74.1 million of residential mortgage loans from National Lending Center in
1996 and the first six months of 1997, respectively. National Lending Center
originated approximately $102 million loans during the three months ended
September 30, 1997.
Central Money Mortgage at the time of acquisition originated residential
mortgage loans primarily through mortgage brokers in nine states and through one
retail office in Maryland. Central originated approximately $76 million of
residential mortgage loans in 1996 and approximately $52 million of residential
mortgage loans during the first six months of 1997. IMC purchased $61.8 million
and $34.6 million of residential mortgage loans from Central Money Mortgage in
1996 and the first six months of 1997, respectively. Central Money Mortgage
originated approximately $29 million of residential mortgage loans during the
three months ended September 30, 1997.
These six acquisitions (collectively, the "Acquisitions") have been accounted
for using the purchase method of accounting and the results of operations have
been included with the Company's results of operations since the effective
acquisition dates. The fair value of the acquired companies' tangible assets
approximated the liabilities assumed, and accordingly, the majority of the
initial purchase prices has been recorded as goodwill which will be amortized
on a straight-line basis for periods up to 30 years.
Several acquisitions include earn-out arrangements that provide the sellers with
additional consideration if the acquired company reaches certain performance
targets after the acquisition. Any
10
<PAGE> 14
such contingent payments will result in an increase in the amount of goodwill
recorded on the Company's balance sheet related to each acquisition. Goodwill
represents the excess of cost over fair market value of the net assets acquired
in each acquisition and is amortized through periodic charges to earnings for up
to 30 years.
Effective October 1, 1997, IMC acquired substantially all of the assets of
Residential Mortgage Corporation ("Residential Mortgage"), a mortgage lender
based in Cranston, Rhode Island. Residential Mortgage originates residential
mortgage loans primarily through mortgage brokers in twelve states and through
one retail office in Rhode Island. Residential Mortgage originated approximately
$115 million of residential mortgage loans in 1996, (of which approximately $59
were non-conforming loans) and approximately $99 million of residential mortgage
loans the first nine months of 1997 (of which approximately $58 million were
non-conforming loans). IMC purchased $10.6 million of residential mortgage loans
from Residential Mortgage during the first nine months of 1997. IMC did not
purchase a significant amount of residential mortgage loans from Residential
Mortgage during 1996.
The purchase price for substantially all of the assets of Residential Mortgage
consists of an initial payment of shares of common stock of the Company and
includes a contingent payment in the future if Residential Mortgage achieves
certain performance targets. The acquisition of Residential Mortgage will be
accounted for using the purchase method of accounting and, accordingly, the
purchase price will be allocated to assets acquired and liabilities assumed
based on the fair values of the date of acquisition. The fair value of
Residential Mortgage assets approximated the liabilities assumed and
accordingly, the majority of the initial purchase price is anticipated to be
recorded as goodwill.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB issued SFAS No. 128 "Earnings per Share" ("SFAS
128"), which simplifies the standards for computing earnings per share ("EPS")
previously found in APB Opinion No. 15 "Earnings per Share" and makes them
comparable to international EPS standards. SFAS 128 replaces the presentation of
"primary" EPS with a presentation of "basic" EPS and requires dual presentation
of "basic" and "diluted" EPS on the face of the statement of operations for all
entities with complex capital structures. The standard also requires a
reconciliation of the numerator and denominator of the "basic" EPS computation
to the numerator and denominator of the "diluted" EPS computation. SFAS 128 is
effective for fiscal years ending after December 15, 1997, but application to
interim periods prior to December 15, 1997 is not permitted. The adoption of
SFAS 128 is not expected to have a material effect on the Company's presentation
of EPS.
In March 1997, the FASB issued SFAS No. 129 "Disclosure of Information about
Capital Structure" ("SFAS 129"), which consolidates existing disclosure
requirements and is effective for fiscal years ending after December 15, 1997.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income"
("SFAS 130"), which establishes standards for reporting and display of
comprehensive income and its components (revenue, expenses, gains, and losses)
in a full set of general-purpose financial statements. SFAS 130 is effective for
fiscal years beginning after December 15, 1997. The Company expects to adopt the
provisions of SFAS 130 in the first quarter of 1998 and will reclassify the
financial statements for earlier periods provided for comparative purposes are
required by the Statement. The application of
11
<PAGE> 15
the new rules will not have an impact on the Company's financial position or
results of operations.
RESULTS OF OPERATIONS
Three Months and Nine Months Ended September 30, 1997 Compared to Three Months
and Nine Months Ended September 30, 1996.
Net income for the three and nine months ended September 30, 1997 was $13.5
million and $33.1 million representing an increase of $7.4 million and $21.8
million or 121.2% and 192.3% over net income of $6.1 million for the three
months ended September 30, 1996 and pro forma net income of $11.3 million for
the nine months ended September 30, 1996. Pro forma net income is calculated on
the basis of historical net income, adjusted for a pro forma income tax expense
as if the Company had been taxable as a corporation since its inception.
The increase in net income resulted principally from increases in net gain on
sale of loans of $46.6 million or 371.4% and $88.5 million or 289.4% to $59.1
million and $119.0 million for the three and nine months ended September 30,
1997 from $12.5 million and $30.6 million for the three and nine months ended
September 30, 1996. Also contributing to the increase in net income was a $2.4
million and a $13.8 million or 60.5% and 177.8% increase in net warehouse
interest income to $6.4 million and $21.5 million for the three and nine months
ended September 30, 1997 from $4.0 million and $7.7 million for the three and
nine months ended September 30, 1996, a 206.6% and 190.0% increase in servicing
fees to $5.4 million and $12.2 million for the three and nine months ended
September 30, 1997 from $1.8 million and $4.2 million for the three and nine
months ended September 30, 1996, and a 91.6% and a 206.9% increase in other
revenues to $2.9 million and $9.1 million for the three and nine months ended
September 30, 1997 from $1.5 million and $3.0 million for the three and nine
months ended September 30, 1996.
The increase in income was partially offset by a $22.4 million and $43.0 million
or 568.0% and 358.5% increase in compensation and benefits to $26.4 million and
$55.0 million for the three and nine months ended September 30, 1997 from $3.9
million and $12.0 million for the three and nine months ended September 30,
1996, of which $15.2 million and $30.5 million are related to the compensation
and benefits of the Acquisitions for the three and nine months ended September
30, 1997 and the remainder related primarily to the growth of the Company. The
increase in income was also partially offset by a $15.3 million and $32.9
million or 289.2% and 315.9% increase in selling, general and administrative
expenses to $20.5 million and $43.3 million for the three and nine months ended
September 30, 1997 from $5.3 million and $10.4 million for the three and nine
months ended September 30, 1996, of which increase of $8.0 million and $19.7
million related to the Acquisitions for the three and nine months ended
September 30, 1997, an increase in the valuation allowance for mortgage loans
held for sale of $5.0 million and $6.9 million for the three and nine months
ended September 30, 1997, an increase in amortization expenses of $2.0 million
and $4.2 million related to the amortization of goodwill and capitalized
mortgage servicing rights for the three and nine months ended September 30,
1997, and the remainder related primarily to the growth of the Company. The
increase in income was further offset by a $4.0 million and $7.7 million or
859.2% and 422.9% increase in other interest expense to $4.5 million and $9.5
million for the three and nine months ended September 30, 1997 from $0.5 million
and $1.8 million for the three and nine months ended September 30, 1996.
Finally, income for the nine months ended September 30, 1997 was favorably
affected by a $2.6 million or 100% decrease in the sharing of proportionate
value of equity representing a value sharing arrangement with ContiFinancial
Corporation (the "Conti VSA") to $0 for the nine months ended September 30,
1997 from $2.6 million for the nine months ended September 30, 1996.
Loan securitization activity totaled $1.55 billion and $3.08 billion for the
three and nine months ended
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<PAGE> 16
September 30, 1997. Costs associated with retail loan production are generally
expensed at the time the loan is funded, while related upfront points and
origination fees are recognized into income at the time the loans are sold.
Accordingly, net income for the three months ended September 30, 1997 was
reduced by substantially all the costs associated with the retail originations
of National Lending Center and Central Money Mortgage (which approximated $5
million), however, a corresponding increase to net income from the related
upfront points and origination fees was not recognized. The upfront points and
origination fees received in the three months ended September 30, 1997 will be
recognized in future periods as the loans are sold.
Income before taxes was reduced by a provision for income taxes of $8.8 million
and $21.0 million for the three and nine months ended September 30, 1997
compared to a provision for income taxes of $4.0 million for the three months
ended September 30, 1996 and a pro forma provision for income taxes of $7.4
million for the nine months ended September 30, 1996, representing an effective
tax rate of approximately 39% for the three and nine months ended September 30,
1997. The provision for income taxes prior to June 24, 1996 is a pro forma
amount because prior to that date the Company operated as a partnership and did
not pay income taxes at the partnership level.
Revenues
The following table sets forth information regarding components of the Company's
revenues for the three months and nine months ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------------ -------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Gain on sales of loans $ 59,096,344 $ 12,537,421 $ 119,047,738 $ 34,728,321
Additional securitization transaction expense -- - -- (4,157,644)
------------ ------------ ------------- ------------
Net gain on sale of loans 59,096,344 12,537,421 119,047,738 30,570,677
------------ ------------ ------------- ------------
Warehouse interest income 38,436,720 10,634,571 91,454,121 22,249,234
Warehouse interest expense (32,079,402) (6,672,572) (69,942,382) (14,505,231)
------------ ------------ ------------- ------------
Net warehouse interest income 6,357,318 3,961,999 21,511,739 7,744,003
------------ ------------ ------------- ------------
Servicing fees 5,374,714 1,753,139 12,223,950 4,215,381
Other 2,900,208 1,513,446 9,139,442 2,977,691
------------ ------------ ------------- ------------
Total revenues $ 73,728,584 $ 19,766,005 $ 161,922,869 $ 45,507,752
============ ============ ============= ============
</TABLE>
Gain on Sale of Loans, Net. For the three and nine months ended September 30,
1997, gain on sale of loans increased to $59.1 million and $119.0 million from
$12.5 million and $34.7 million for the three and nine months ended September
30, 1996, an increase of 371.4% and 242.8%, reflecting increased loan production
and securitizations for the three and nine months ended September 30, 1997
offset by higher premiums paid on loan production and higher prepayment speeds
(lower average loan life) assumed in securitizations for the three and nine
months ended September 30, 1997 compared to the three and nine months ended
September 30, 1996. The average premium paid for loan production was 5.4% and
5.4% for the three and nine months ended September 30, 1997 compared to 4.6% and
5.0% for the three and nine months ended September 30, 1996 and the average loan
life assumed for loans in securitization declined by approximately 0.4 years for
the three and nine months ended September 30, 1997 compared to comparable
periods in 1996. The total volume of loans produced increased by 295.0% and
272.7% to approximately $1.9 billion and $4.1 billion for the three and nine
months ended September 30, 1997 as compared with a total volume of approximately
$481 million and $1.1 billion for the three and nine months ended September 30,
1996. Originations by the Company's correspondent network increased 226.3% and
210.0% to approximately $1.4 billion and $3.1 billion for the three and nine
months ended September 30, 1997 from approximately $429 million and $1.0
billion for the three and nine months ended September 30, 1996, while
production from the Company's broker network and direct lending operations
increased to approximately $470 million and $944 million or 803.8% and 750.5%
for the three and nine months ended September 30, 1997 from approximately $52
million and $111 million for the three and nine months ended September 30,
1996. Production volume
13
<PAGE> 17
increased during the 1997 period due to : (i) the Company's expansion program;
(ii) the increase of its securitization activity; (iii) the growth of its loan
servicing capability; and (iv) the Acquisitions, which accounted for
approximately $364 million and $675 million in residential mortgage loans
originated during the three and nine months ended September 30, 1997. For the
three and nine months ended September 30, 1997, the Company experienced higher
gains as it sold more loans through securitizations. Securitizations increased
by $1.3 billion and $2.45 billion, an increase of 520.0% and 392.0%, to $1.55
billion and $3.08 billion for the three and nine months ended September 30, 1997
from $250 million and $625 million for the three and nine months ended September
30, 1996. The number of approved correspondents increased by 195 or 58.7% to 527
at September 30, 1997 from 332 at September 30, 1996 and the number of approved
brokers increased by 462 or 30.2% to 1,991 at September 30, 1997 from 1,529 at
September 30, 1996. Additional securitization expense decreased to $0 for the
three and nine months ended September 30, 1997 from $0 million and $4.2 million
for the three and nine months ended September 30, 1996. For the three and nine
months ended September 30, 1997, gain on sale of loans, net, increased to $59.1
million and $119.0 million from $12.5 and $30.6 million for the three and nine
months ended September 30, 1996, an increase of 371.4% and 289.4%, reflecting
increased loan production and securitizations in the three and nine months ended
September 30, 1997.
Net Warehouse Interest Income. Net warehouse interest income increased to $6.4
million and $21.5 million for the three and nine months ended September 30, 1997
from $4.0 million and $7.7 million for the three and nine months ended September
30, 1996, an increase of 60.5% and 177.8%. The increase in the three and nine
month period ended September 30, 1997 reflected higher interest income resulting
primarily from increased mortgage loan production and mortgage loans being held
for sale in inventory for longer periods of time which was partially offset by
interest expense associated with warehouse facilities. The mortgage loans held
for sale increased to $1.79 billion at September 30, 1997, an increase of
186.8%, from $625.9 million at September 30, 1996.
Servicing Fees. Servicing fees increased to $5.4 million and $12.2 million for
the three and nine months ended September 30, 1997 from $1.8 million and $4.2
million for the three and nine months ended September 30, 1996, an increase of
206.6% and 190.0%. Servicing fees for the three and nine months ended September
30, 1997 were positively affected by an increase in mortgage loans serviced over
the prior period. The Company increased its servicing portfolio by $4.1 billion
or 279.6% to $5.6 billion as of September 30, 1997 from $1.5 billion as of
September 30, 1996.
Other. Other revenues, consisting principally of interest on interest-only and
residual certificates, increased to $2.9 million and $9.1 million or 91.6% and
206.9% for the three and nine months ended September 30, 1997 from $1.5 million
and $3.0 million in three and nine months ended September 30, 1996 as a result
of increased securitization volume and investment in interest-only and residual
certificates.
Expenses
The following table sets forth information regarding components of the Company's
expenses for the three and nine months ended September 30, 1997 and 1996.
14
<PAGE> 18
It is anticipated that the Company's compensation and benefits will increase as
the Company expands; however, the amount of executive bonuses is directly
related to increases in the Company's earning per share.
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------------- ----------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Compensation and benefits $26,373,221 $3,947,843 $ 54,958,744 $11,987,493
Selling, general and administrative 20,547,997 5,279,887 43,324,247 10,416,597
Other interest expense 4,539,181 473,202 9,521,000 1,820,793
Sharing of proportionate value equity -- -- -- 2,555,000
----------- ---------- ------------ -----------
Total expenses $51,460,399 $9,700,932 $107,803,991 $26,779,883
=========== ========== ============ ===========
</TABLE>
Compensation and benefits increased by $22.4 million and $43.0 million or 568.0%
and 358.5% to $26.4 million and $55.0 million for the three and nine months
ended September 30, 1997 from $3.9 million and $12.0 million for the three and
nine months ended September 30, 1996, principally due to $15.2 million and $30.5
million related to compensation and benefits from the Acquisitions for the three
and nine months ended September 30, 1997, an increase in the number of employees
to service the Company's increased mortgage loan production, and an increase in
executive bonuses of $1.4 million during 1997. It is anticipated that the
Company's compensation and benefits will increase as the Company expands;
however, the amount of executive bonuses is directly related to increases in
the Company's earnings per share.
Selling, general and administrative expenses increased by $15.3 million and
$32.9 million or 289.2% and 315.9% to $20.5 million and $43.3 million for the
three and nine months ended September 30, 1997 from $5.3 million and $10.4
million for the three and nine months ended September 30, 1996 principally due
to an increase in the volume of mortgage loan production, with $8.0 million and
$19.7 million relating to the Acquisitions for the three and nine months ended
September 30, 1997, an increase in the valuation allowance for mortgage loans
held for sale of $5.0 million and $6.9 million for the three and nine months
ended September 30, 1997, an increase in amortization expenses of $2.0 million
and $4.2 million related to the amortization of goodwill and capitalized
mortgage servicing rights for the three and nine months ended September 30,
1997, and the remainder related primarily to the growth of the Company.
Other interest expense increased by $4.0 million and $7.7 million or 859.2% and
422.9% to $4.5 million and $9.5 million for the three and nine months ended
September 30, 1997 from $0.5 million and $1.8 million for the three and nine
months ended September 30, 1996 principally as a result of increased term debt
borrowings.
The sharing of proportionate value of equity, representing the amount payable
under the Conti VSA, decreased to $0 for the nine months ended September 30,
1997 from $2.6 million for the nine months ended September 30, 1996. The
Company's obligation to make payments under the Conti VSA terminated in March
1996.
Provision for Income Taxes. The effective income tax rate for the three and nine
months ended September 30, 1997 was approximately 39% which differed from the
federal tax rate of 35% primarily due to state income taxes. The increase in the
provision for income taxes of $4.8 million and $13.6 million or 121.3% and
183.9% to $8.8 million and $21.0 million for the three and nine months ended
September 30, 1997 from the provision for income taxes of $4.0 million for the
three months ended September 30, 1996 and the pro forma provision for income
taxes of $7.4 million for the nine months ended September 30, 1996 was
proportionate to the increase in pre-tax income. The provision for income taxes
prior to June 24, 1996 is a pro forma amount because prior to that date the
Company operated as a partnership and did not pay any income taxes.
15
<PAGE> 19
FINANCIAL CONDITION
September 30, 1997 Compared to December 31, 1996
Mortgage loans held for sale at September 30, 1997 were $1.79 billion,
representing an increase of $880.3 million or 96.2% over mortgage loans held for
sale of $914.6 million at December 31, 1996. This increase was a result of the
Company's strategy to increase its financial flexibility by increasing its
balance of mortgage loans held for sale. The increase in the volume of loan
originations, allowing the Company to increase its financial flexibility, was a
result of increased loan purchases and originations as the Company expanded into
new states, loan originations from the Acquisitions since their effective dates,
and increased purchasing and origination efforts in states in which the Company
had an existing market presence.
Interest-only and residual certificates at September 30, 1997 were $318.1
million, representing an increase of $231.8 million or 268.8% over interest-only
and residual certificates of $86.2 million at December 31, 1996. This increase
was a result of the Company completing five securitizations during the nine
months ended September 30, 1997 for an aggregate of $3.08 billion. On November
4, 1997, the Company sold, on a non-recourse basis, interest-only and residual
certificates that as of September 30, 1997 had an estimated net book value of
$267 million. See "Liquidity and Capital Resources".
Borrowings under warehouse financing facilities at September 30, 1997 were $1.80
billion, representing an increase of $904.2 million or 101.0% over warehouse
financing facilities of $895.1 million at December 31, 1996. This increase was a
result of increased mortgage loans held for sale and higher utilization of
warehouse financing facilities which fund a portion of the premiums paid on
loans purchased.
Term debt at September 30, 1997 was $254.2 million, representing an increase of
$206.8 million or 435.9% over term debt of $47.4 million at December 31, 1996.
This increase was primarily a result of financing the increase in interest-only
and residual certificates. On November 4, 1997, the Company retired or reduced
approximately $228 million of term debt. See "Liquidity Capital Resources".
Stockholders' equity as of September 30, 1997 was $232.1 million, representing
an increase of $142.7 million over stockholders' equity of $89.3 million at
December 31, 1996. This increase was primarily a result of proceeds of
approximately $58 million from the sale of 5,040,000 shares of common stock (net
of underwriting discount and expenses associated with the offering), common
stock issued to acquire Mortgage America, CoreWest, National Lending Center and
Central Money Mortgage, and net income for the nine months ended September 30,
1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company uses its cash flow from the sale of loans through securitizations,
whole loan sales, loan origination fees, processing fees, net interest income,
servicing fees and borrowings under its warehouse facilities and term debt to
meet its working capital needs. The Company's cash requirements include the
funding of loan purchases and originations, payment of interest costs, funding
of over-collateralization requirements for securitizations, operating expenses,
income taxes,
16
<PAGE> 20
acquisitions when acquired for cash and capital expenditures.
The Company has an ongoing need for capital. Adequate credit facilities and
other sources of funding, including the ability of the Company to sell loans and
to continue to access capital through public or private capital markets, are
essential to the continuation of the Company's ability to purchase and originate
loans. As a result of increased loan purchases and originations and its growing
securitization program, the Company has operated, and expects to continue to
operate, on a negative cash flow basis. During the nine months ended September
30, 1997, the Company used cash flow for operating activities of $1.11 billion,
an increase of $642.7 million, or 137.6%, over cash flows used for operating
activities of $467.1 million during the nine months ended September 30, 1996.
During the nine months ended September 30, 1997, the Company received cash flows
from financing activities of $1.13 billion, an increase of $656.2 million or
138.2% over cash flows received from financing activities of $474.9 million
during the nine months ended September 30, 1996. The cash flows used for
operating activities related primarily to the funding of mortgage loan purchases
and originations and cash flows received from financing activities related
primarily to the funding of the mortgage loan purchases or originations.
The Company's sale of loans through securitizations has resulted in an increase
in the amount of gain on sale recognized by the Company. The recognition of this
gain on sale results in significant cash costs being incurred upon closing of a
securitization transaction. The Company does not, however, typically receive a
significant portion of the cash representing the gain until later periods when
the related loans are repaid or otherwise collected. The Company borrows funds
on a short-term basis to support the accumulation of loans prior to sale. These
short-term borrowings are made under warehouse lines of credit with various
lenders.
At September 30, 1997, the Company had a $1.00 billion uncommitted warehouse
facility with Bear Stearns Home Equity Trust 1996-1. This facility bears
interest at LIBOR (5.7% at September 30, 1997) plus 0.875%. Approximately
$505.4 million was outstanding under this facility at September 30, 1997.
At September 30, 1997, the Company had a $1.18 billion uncommitted warehouse
facility with Paine Webber Real Estate Securities, Inc. This facility bears
interest at rates ranging from LIBOR plus 0.65% to LIBOR plus .90%.
Approximately $872.9 million was outstanding under this facility as of
September 30, 1997.
Additionally, at September 30, 1997, the Company had approximately $1.09 billion
available under numerous other warehouse lines of credit. As of September 30,
1997, approximately $421.0 million was outstanding under these lines of credit.
Interest rates ranged from LIBOR plus 0.65% to LIBOR plus 1.50% as of September
30, 1997, and all borrowings mature within one year.
Outstanding borrowings on the Company's warehouse financing facilities are
collateralized by mortgage loans held for sale and warehouse financing due from
correspondents at September 30, 1997 and servicing rights on approximately $250
million of mortgage loans. Upon the sale of these loans and the repayment of
warehouse financing due from correspondents, the borrowings under these lines
will be repaid.
At September 30, 1997, the Company also had term debt outstanding of $254.2
million which expires through January 2000. Outstanding borrowings under these
facilities are collateralized by interest-only and residual certificates and
accrue interest at rates ranging from LIBOR plus 1.25% to 10%.
17
<PAGE> 21
On November 4, 1997, the Company sold, on a non-recourse basis, interest-only
and residual certificates that as of September 30, 1997 had an estimated net
book value of $267 million. The sale was effected through a securitization (the
"Excess Cashflow Securitization") by which the Company received approximately
$228 million of net cash proceeds, or approximately 85% of the estimated net
book value of the interest-only and residual certificates, and retained a
subordinated residual certificate for the remaining balance. The Company does
not expect to recognize any gain or loss as a result of the Excess Cashflow
Securitization. The Company used the net proceeds to retire or reduce certain
term debt, including all amounts outstanding under the BankBoston facility
described below.
In December 1996, the Company executed an agreement with BankBoston, N.A.
("BankBoston"). BankBoston provided a $25 million one year revolving credit
facility subject to the following sublimits and terms: (i) $5 million warehouse
line of credit due September 30, 1998, (ii) $25 million to finance interest-only
and residual certificates, to be repaid according to a repayment schedule
calculated by BankBoston with a maximum amortization period after the revolving
period of three years; and (iii) $20 million for acquisitions or bridge
financing due within six months from the initial borrowing date of each takedown
of the bridge financing, but in no event later than June 30, 1998. In April,
1997, the BankBoston facility was amended to increase the line of credit to
$50.0 million, all of which may be used by the Company to finance either: (i)
interest-only and residual certificates or, (ii) bridge financing as described
above. In addition, the $50.0 million available under bridge facility maturity
date was extended to October 15, 1998. In August 1997, the BankBoston facility
was temporarily increased to $75.0 million. At September 30, 1997, there was $30
million outstanding under this facility, which is included in term debt
outstanding of $254.2 million.
The Company's warehouse lines and term debt contain various affirmative and
negative covenants customary for credit arrangements of their type and which the
Company believes will not have a material effect on its operations, growth and
financial flexibility. The credit facility with Bank of Boston also contains
certain financial covenants requiring the maintenance of certain debt-to-equity
or debt-to-net worth ratios, as well as establishing limits on the ability of
the Company to incur unsecured indebtedness. The Company does not believe that
the existing financial covenants will restrict its operations within the next 12
months. Management believes the Company is in compliance with all such covenants
under these arrangements.
The Company's current warehouse lines generally are subject to one-year terms.
Certain warehouse lines have automatic renewal features subject to the absence
of defaults and permit the lender to terminate the facility on notice to the
Company. There can be no assurance either that the Company's current creditors
will renew their facilities as they expire or that the Company will be able to
obtain additional credit lines.
On April 23, 1997, the Company completed an offering for the sale of 6,300,000
shares of common stock (the "Offering"). Of the 6,300,000 shares offered,
5,040,000 were offered by the Company and 1,260,000 were offered by certain
stockholders of the Company. The Company received approximately $58 million from
the sale of shares, net of underwriting discount and expenses associated with
the Offering.
Funds available under the Company's current warehouse and other credit
facilities and the net proceeds from the Offering are expected to be sufficient
to fund the Company's liquidity requirements, including the implementation of
its business strategy, through the second quarter of 1998. However, the Company
has substantial capital requirements and it anticipates that it may need to
arrange for
18
<PAGE> 22
additional external cash resources through additional excess cashflow
securitizations, financings or offerings. There can be no assurance that the
Company will be able to arrange additional external cash resources through
excess cashflow securitizations, financings or offerings.
The Company purchases and originates mortgage loans and then sells them
primarily through securitizations. At the time of securitization and the
delivery of the loans, the Company recognizes gain on sale based on a number of
factors including the difference, or "spread", between the interest rate on the
loans and the interest rate paid to investors (which typically is priced based
on the treasury security with a maturity corresponding to the anticipated life
of the loans). If interest rates rise between the time the Company originates or
purchases the loans and the time the loans are priced at securitization, the
spread narrows, resulting in a loss in value of the loans. To protect against
such losses, the Company hedges a portion of the value of the loans through the
short sale of treasury securities. Prior to hedging, the Company performs an
analysis of its loans taking into account, among other things, interest rates
and maturities to determine the amount, type, duration and proportion of each
treasury security to sell short so that the risk to the value of the loans is
effectively hedged. The Company executes the sale of the treasury securities
with large, reputable securities firms and uses the proceeds received to acquire
treasury securities under repurchase agreements. These securities are designated
as hedges in the Company's records and are closed out when the loans are sold.
If the value of the hedges decreases, offsetting an increase in the value of the
loans, the Company, upon settlement with its counterparty, will pay the hedge
loss in cash and realize the corresponding increase in the value of the loans as
part of its interest-only and residual certificates. Conversely, if the value of
the hedges increase, offsetting a decrease in the value of the loans, the
Company, upon settlement with its counterparty, will receive the hedge gain in
cash and realize the corresponding decrease in the value of the loans through a
reduction in the value of the corresponding interest-only and residual
certificates.
The Company believes that its hedging activities using treasury securities are
substantially similar in purpose, scope and execution to customary hedging
activities using treasury securities engaged in by many of its competitors.
INFLATION
Inflation in the periods presented has had no material effect on the Company's
results of operations. Inflation affects the Company most in the area of loan
originations and can have an effect on interest rates. Interest rates normally
increase during periods of high inflation and decrease during periods of low
inflation.
Profitability may be directly affected by the level and fluctuation in interest
rates which affect the Company's ability to earn a spread between interest
received on its loans and the costs of its borrowings. The profitability of the
Company is likely to be adversely affected during any period of unexpected or
rapid changes in interest rates. A substantial and sustained increase in
interest rates could adversely affect the ability of the Company to purchase and
originate loans and affect the mix of first and second mortgage loan products.
Generally, first mortgage production increases relative to second mortgage
production in response to low interest rates and second mortgage production
increases relative to first mortgage production during periods of high interest
rates. A significant decline in interest rates could decrease the size of the
Company's loan servicing portfolio by increasing the level
19
<PAGE> 23
of loan prepayments. Additionally, to the extent servicing rights and
interest-only and residual certificates have been capitalized on the books of
the Company, higher than anticipated rates of loan prepayments or losses could
require the Company to write down the value of such servicing rights and
interest-only and residual certificates which could have a material adverse
effect on the Company's results of operations and financial condition.
Conversely, lower than anticipated rates of loan prepayments or lower losses
could allow the Company to increase the value of interest-only and residual
certificates which could have a favorable effect on the Company's results of
operations and financial condition. Fluctuating interest rates also may affect
the net interest income earned by the Company from the difference between the
yield to the Company on loans held pending sales and the interest paid by the
Company for funds borrowed under the Company's warehouse facilities. In
addition, inverse or flattened interest yield curves could have an adverse
impact on the profitability of the Company because the loans pooled and sold by
the Company have long-term rates, while the senior interests in the related
REMIC trusts are priced on the basis of intermediate term rates.
20
<PAGE> 24
PART II. OTHER INFORMATION
<PAGE> 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is party to various legal proceedings arising out of the
ordinary course of its business. Management believes that none of these
actions, individually or in the aggregate, will have a material adverse
effect on the results of operations or financial condition of the
Company.
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders was held on July 9, 1997.
Election of Director - Mitchell W. Legler was reelected to the
Board for a term of three years. There were 17,562,319 votes cast in
favor of Mr. Legler's election and 52,834 votes withheld.
Approval of a Resolution to Adopt the IMC Mortgage Company
1997 Incentive Plan - The IMC Mortgage Company 1997 Incentive Plan was
approved. There were 15,933,605 votes cast in favor of the resolution
to approve the adoption of the plan, 1,565,521 votes cast against the
resolution and 126,727 votes withheld.
Ratification of the Appointment of Coopers & Lybrand L.L.P. as
Independent Accountants for the Company for the fiscal year ending
December 31, 1997 - The appointment of Coopers & Lybrand L.L.P. as
independent accountants for the Company for the fiscal year ending
December 31, 1997 was ratified. There were 17,622,311 votes cast in
favor of the ratification, 2,000 votes cast against the ratification
and 1,542 votes withheld.
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
27 - Financial Data Schedule (for SEC use only)
99 - Report of Independent Accountants
B. Reports on Form 8-K
None
22
<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 14, 1997 IMC MORTGAGE COMPANY
By: /s/ Thomas G. Middleton
Thomas G. Middleton President, Chief Operating Officer, Assistant
Secretary and Director
By: /s/ Stuart D. Marvin
Stuart D. Marvin, Chief Financial Officer
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF IMC MORTGAGE COMPANY FOR THE NINE SIX MONTH PERIOD ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 11,104,565
<SECURITIES> 0
<RECEIVABLES> 39,488,914
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 12,690,598
<DEPRECIATION> 1,154,887
<TOTAL-ASSETS> 2,892,116,649
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 303,585
<OTHER-SE> 231,774,988
<TOTAL-LIABILITY-AND-EQUITY> 2,892,116,649
<SALES> 119,047,738
<TOTAL-REVENUES> 161,922,869
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 98,282,991
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 79,463,382
<INCOME-PRETAX> 54,118,878
<INCOME-TAX> 21,000,000
<INCOME-CONTINUING> 33,118,878
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,118,878
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.08
</TABLE>
<PAGE> 1
EXHIBIT 99
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
IMC MORTGAGE COMPANY AND SUBSIDIARIES
We have reviewed the condensed consolidated balance sheet of IMC Mortgage
Company and Subsidiaries as of September 30, 1997, and the related condensed
consolidated statements of operations for the three-month and nine-month periods
ended September 30, 1997 and 1996 and the condensed consolidated statements of
cash flows for the nine-month periods ended September 30, 1997 and 1996. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended (not presented herein), and in our report dated
February 21, 1997, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 1996, is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
COOPERS & LYBRAND L.L.P.
Tampa, Florida
November 13, 1997
