<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 June 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 August 14, 1997
- -------------------------------------- ------------------------------
Common Stock, par value $.01 per share 29,641,704
<PAGE> 2
IMC MORTGAGE COMPANY AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 1997 and December 31, 1996 1
Consolidated Statements of Operations
for the three months and six months ended
June 30, 1997 and June 30, 1996 2
Consolidated Statements of Cash Flows
for the six months ended June 30, 1997
and June 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 22
Item 2. Changes in Securities 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
<PAGE> 4
IMC MORTGAGE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1997 1996
-------------- -------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 19,727,259 $ 13,289,128
Securities purchased under agreements to resell 658,800,000 659,490,000
Accrued interest receivable 15,148,312 8,311,530
Accounts receivable 10,401,953 3,689,540
Mortgage loans held for sale 1,543,477,641 914,586,703
Interest-only and residual certificates 206,572,219 86,246,674
Warehouse financing due from correspondents 18,751,090 5,045,385
Furniture, fixtures and equipment, net 8,855,200 1,676,822
Capitalized mortgage servicing rights 15,481,170 6,621,347
Investment in joint venture 1,636,274 1,738,760
Goodwill 36,253,756 1,843,144
Other assets 6,766,855 4,809,152
-------------- --------------
Total assets $2,541,871,729 $1,707,348,185
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse finance facilities $1,534,614,769 $ 895,132,545
Term debt 127,179,542 47,430,295
Accrued and other liabilities 20,705,661 10,309,858
Accrued interest payable 7,151,993 4,077,744
Securities sold but not yet purchased 661,614,496 661,061,161
-------------- --------------
Total liabilities 2,351,266,461 1,618,011,603
-------------- --------------
Commitments
Stockholders' equity:
Preferred stock, par value $.01 per share; 10,000,000
shares authorized; none issued and outstanding 0 0
Common stock, par value $.01 per share; 50,000,000
authorized; and 27,646,097 and 19,669,666 shares
issued and outstanding 276,461 196,696
Additional paid-in capital 158,027,966 76,489,738
Retained earnings 32,300,841 12,650,148
-------------- --------------
Total stockholders' equity 190,605,268 89,336,582
-------------- --------------
Total liabilities and stockholders' equity $2,541,871,729 $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 Six Months
Ended June 30, Ended June 30,
----------------------------- -----------------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues:
Gain on sales of loans $ 32,231,567 $ 11,315,433 $ 59,951,394 $ 22,190,900
Additional securitization transaction expense 0 (1,329,053) 0 (4,157,644)
------------ ------------ ------------ ------------
Net gain on sale of loans 32,231,567 9,986,380 59,951,394 18,033,256
------------ ------------ ------------ ------------
Warehouse interest income 32,309,191 6,453,721 53,017,401 11,614,663
Warehouse interest expense (23,107,299) (4,457,415) (37,862,980) (7,832,659)
------------ ------------ ------------ ------------
Net warehouse interest income 9,201,892 1,996,306 15,154,421 3,782,004
------------ ------------ ------------ ------------
Servicing fees 3,808,326 1,466,803 6,849,236 2,462,242
Other 4,530,905 835,709 6,239,234 1,464,245
------------ ------------ ------------ ------------
Total servicing fees and other 8,339,231 2,302,512 13,088,470 3,926,487
------------ ------------ ------------ ------------
Total revenues 49,772,690 14,285,198 88,194,285 25,741,747
------------ ------------ ------------ ------------
Expenses:
Compensation and benefits 16,257,573 4,372,965 28,585,523 8,039,650
Selling, general and administrative 13,183,864 2,895,854 22,776,250 5,136,710
Other interest expense 3,119,342 1,005,057 4,981,819 1,347,591
Sharing of proportionate value equity 0 0 0 2,555,000
------------ ------------ ------------ ------------
Total expenses 32,560,779 8,273,876 56,343,592 17,078,951
------------ ------------ ------------ ------------
Income before provision (benefit) for income taxes 17,211,911 6,011,322 31,850,693 8,662,796
Provision (benefit) for income taxes 6,500,000 (3,600,000) 12,200,000 (3,600,000)
------------ ------------ ------------ ------------
Net income $ 10,711,911 $ 9,611,322 $ 19,650,693 $ 12,262,796
============ ============ ============ ============
PRO FORMA DATA (GIVING EFFECT TO PROVISION FOR INCOME TAXES):
Income before provision for income taxes $ 17,211,911 $ 6,011,322 $ 31,850,693 $ 8,662,796
Pro forma provision (actual provision for the three
months and six months ended June 30, 1997)
for income taxes 6,500,000 2,358,522 12,200,000 3,384,522
------------ ------------ ------------ ------------
Pro forma (actual for the three months
and six months ended June 30, 1997) net income $ 10,711,911 $ 3,652,800 $ 19,650,693 $ 5,278,274
============ ============ ============ ============
Pro forma (actual for the three months and six months
ended June 30, 1997) net income per common share $ 0.36 $ 0.22 $ 0.70 $ 0.33
============ ============ ============ ============
Weighted average number of shares outstanding 29,760,782 16,434,386 27,960,852 16,199,332
============ ============ ============ ============
</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 Six Months
Ended June 30,
-----------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Cash flows for operating activities:
Net income $ 19,650,693 $ 12,262,796
Adjustments to reconcile net income to net cash used in
operating activities:
Sharing of proportionate value of equity --- 2,555,000
Depreciation and amortization 2,909,453 502,255
Deferred tax assets (280,000) (3,600,000)
Capitalized mortgage servicing rights (10,512,647) (3,081,154)
Net loss in joint venture 667,063 227,790
Net change in operating assets and liabilities, net of effects
of acquisitions of businesses:
Increase in mortgages loans held for sale (614,805,938) (240,249,702)
Decrease (increase) in securities purchased under agreement
to resell and securities sold but not yet purchased 1,243,335 (1,650,815)
Increase in accrued interest receivable (6,836,782) (1,510,776)
Increase in warehousing financing due from correspondents (13,705,705) (1,097,996)
Increase in interest-only and residual certificates (120,325,545) (20,113,194)
Increase in other assets (1,589,218) (359,806)
Increase in accounts receivable (6,712,413) (1,728,375)
Increase in accrued interest payable 3,074,249 976,134
Increase in accrued and other liabilities 6,984,983 4,509,042
--------------- ---------------
Net cash used in operating activities (740,238,472) (252,358,801)
--------------- ---------------
Investing activities:
Investment in joint venture (564,577) (2,563,474)
Purchase of furniture, fixtures, and equipment (6,531,409) (547,908)
Acquisitions of businesses, net of cash acquired and
including other cash payments associated with the acquisitions (10,337,121) ---
--------------- ---------------
Net cash used in investing activities (17,433,107) (3,111,382)
--------------- ---------------
Financing activities:
Issuance of common stock 58,709,239 58,203,377
Distributions to stockholders for taxes --- (9,842,583)
Borrowings - warehouse 2,256,111,305 653,246,666
Borrowings - term debt 99,650,330 18,387,940
Repayments of borrowings - warehouse (1,630,460,081) (438,700,801)
Repayments of borrowings - term debt (19,901,083) (11,800,000)
--------------- ---------------
Net cash provided by financing activities 764,109,710 269,494,599
--------------- ---------------
Net increase in cash and cash equivalents 6,438,131 14,024,416
Cash and cash equivalents, beginning of period 13,289,128 5,133,718
--------------- ---------------
Cash and cash equivalents, end of period $ 19,727,259 $ 19,158,134
=============== ===============
Supplemental disclosure cash flow information:
Cash paid during the period for interest $ 41,027,965 $ 8,204,116
=============== ===============
Cash paid during the period for taxes $ 14,625,300 $ ---
=============== ===============
</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 six months ended June 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 June 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 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. 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 three months and six months ended June
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 three months and six months
ended June 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, and stock
warrants. 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 six months ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------ ------------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Weighted average number of common
shares outstanding 26,202,855 12,505,690 24,087,750 12,252,846
Additional shares deemed outstanding:
Cheap stock 3,284,635 3,928,696 3,562,640 3,946,486
Employee stock options 273,292 0 310,462 0
---------- ---------- ---------- ----------
Weighted average number of common
shares and common share equivalents 29,760,782 16,434,386 27,960,852 16,199,332
========== ========== ========== ==========
</TABLE>
6
<PAGE> 10
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. The Company also acquired all of the assets of American
Mortgage Reduction, Inc. ("American Reduction"), a non-conforming
mortgage lender based in Owings Mills, Maryland, effective February 1,
1997.
These acquisitions have been accounted for using the purchase method of
accounting. The initial purchase price for American Reduction and Equity
Mortgage was $9.3 million in cash. The initial purchase price for
Mortgage America and CoreWest was valued at $24.5 million by an
independent appraiser. 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 amortized on a straight-line basis for periods up to 30 years.
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, and American Reduction 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 $22.9 million and $43.1 million for the
three months and six months ended June 30, 1996. Consolidated net income
would not have been materially different from the reported amounts for
the three and six months ended June 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 June 30, 1997
totaling approximately $2.40 billion ($1.02 billion at December 31, 1996)
of which at June 30, 1997 approximately $1.53 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.
7
<PAGE> 11
7. WAREHOUSE FINANCE FACILITIES AND TERM DEBT, CONTINUED:
The Company also has available term debt at June 30, 1997 totaling
approximately $183.5 million ($88.3 million at December 31, 1996) of
which at June 30, 1997 approximately $127.2 million was outstanding
($47.4 million at December 31, 1996).
8. 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 received approximately
$58 million from the sale of shares, net of underwriting discount and
expenses associated with the offering.
9. SUBSEQUENT EVENTS:
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. The
purchase price for substantially all of the assets of National Lending
Center consists of an initial payment of shares of common stock of the
Company and a note payable to the owners of National Lending Center and
includes a contingent payment in the future if National Lending Center
achieves certain performance targets. The acquisition of National
Lending Center 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 National Lending Center'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.
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 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. The Company also acquired all of the assets of American
Mortgage Reduction, Inc. ("American Reduction"), a non-conforming mortgage
lender based in Owings Mills, Maryland, effective February 1, 1997.
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 $98 million and $153 million of residential mortgage loans during
the three months and six months ended June 30, 1997.
9
<PAGE> 13
CoreWest commenced operations in early 1996. At the time of acquisition,
CoreWest originated 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 $57
million and $88 million of residential mortgage loans during the three months
and the six months ended June 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 $10 million and $20 million of
residential mortgage loans during the three months and six months ended June 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 $35
million of residential mortgage loans during the three months ended June 30,
1997 and $50 million from the date of acquisition (February 1, 1997) to June 30,
1997.
These four 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 initial purchase price for American Reduction and Equity
Mortgage was $9.3 million in cash. The initial purchase price for Mortgage
America and CoreWest was valued at $24.5 million by an independent appraiser.
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 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 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.
10
<PAGE> 14
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. The purchase price for
substantially all of the assets of National Lending Center consists of an
initial payment of shares of common stock of the Company and a note payable to
the owners of National Lending Center and includes a contingent payment in the
future if National Lending Center achieves certain performance targets. The
acquisition of National Lending Center 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 National Lending Center's assets approximated the
liabilities assumed and accordingly, the majority of the initial purchase price
is anticipated to be recorded as goodwill.
National Lending Center originates loans primarily through mortgage brokers and
has operations in 17 states throughout the United States. National Lending
Center originated approximately $250 million of residential mortgage loans in
1996 and approximately $98.5 million and $160.9 million of residential loans
for the three months and six months ended June 30, 1997.
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 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.
11
<PAGE> 15
RESULTS OF OPERATIONS
Three Months and Six Months Ended June 30, 1997 Compared to Three Months and Six
Months Ended June 30, 1996
Net income for the three and six months ended June 30, 1997 was $10.7 million
and $19.7 million representing an increase of $7.0 million and $14.4 million or
193.3% and 272.3% over pro forma net income of $3.7 million and $5.3 million for
three and six months ended June 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 $22.2 million or 222.8% and $42.0 million or 232.4% to $32.2
million and $60.0 million for the three and six months ended June 30, 1997 from
$10.0 million and $18.0 million for the three and six months ended June 30,
1996. Also contributing to the increase in net income was a $7.2 million and an
$11.4 million or 360.9% and 300.7% increase in net warehouse interest income to
$9.2 million and $15.2 million for the three and six months ended June 30, 1997
from $2.0 million and $3.8 million for the three and six months ended June 30,
1996, a $2.3 million and $4.3 million or 159.6% and 178.2% increase in servicing
fees to $3.8 million and $6.8 million for the three and six months ended June
30, 1997 from $1.5 million and $2.5 million for the three and six months ended
June 30, 1996 and a $3.7 million and a $4.7 million or 442.2% and a 326.1%
increase in other revenues to $4.5 million and $6.2 million for the three and
six months ended June 30, 1997 from $0.8 million and $1.5 million for the three
and six months ended June 30, 1996.
The increase in income was partially offset by an $11.9 million and $20.6
million or 271.8% and 255.6% increase in compensation and benefits to $16.3
million and $28.6 million for the three and six months ended June 30, 1997 from
$4.4 million and $8.0 million for the three and six months ended June 30, 1996,
of which $9.1 million and $15.3 million are related to the compensation and
benefits of the Acquisitions for the three and six months ended June 30, 1997
and the remainder related primarily to the growth of the Company. The increase
in income was also partially offset by a $10.3 million and $17.7 million or
355.3% and 343.4% increase in selling, general and administrative expenses to
$13.2 million and $22.8 million for the three and six months ended June 30, 1997
from $2.9 million and $5.1 million for the three and six months ended June 30,
1996, of which increase $7.0 million and $11.7 million are related to the
Acquisitions for the three and six months ended June 30, 1997 and the remainder
related primarily to the growth of the Company. The increase in income was
further offset by a $2.1 million and $3.7 million or 210.4% and 269.7% increase
in other interest expense to $3.1 million and $5.0 million for the three and six
months ended June 30, 1997 from $ 1.0 million and $1.3 million for the three and
six months ended June 30, 1996. Finally, income for the six months ended June
30, 1997 was favorably affected by a $2.6 million or 100% decrease in the
sharing of proportionate value of equity representing the Conti VSA to $0 for
the six months ended June 30, 1997 from $2.6 million for the six months ended
June 30, 1996.
12
<PAGE> 16
Loan securitization activity totaled $800.0 million and $1.53 billion for the
three and six months ended June 30, 1997. The loans securitized consisted
primarily of loans acquired in 1996 through the Company's correspondent network.
Only a small percentage of the retail loans originated by Mortgage America,
CoreWest Banc, Equity Mortgage or American Reduction since the acquisition of
these companies, was included in this securitization activity. 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 and
six months ended June 30, 1997 was reduced by substantially all the costs
associated with the retail originations of these four acquisitions, 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 first two quarters of 1997 will be recognized in future periods
as the loans are sold.
Income before taxes was reduced by a provision for income taxes of $6.5 million
and $12.2 million for the three and six months ended June 30, 1997 compared to a
pro forma provision for income taxes of $2.4 million and $3.4 million for the
three and six months ended June 30, 1996, representing an effective tax rate of
approximately 37.8% and 38.3% for the three and six months ended June 30, 1997.
The provision for income taxes prior to June 24, 1996 are pro forma amounts
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 six months ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
----------------------------- -----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Gain on sales of loans $ 32,231,567 $ 11,315,433 $ 59,951,394 $ 22,190,900
Additional securitization transaction
expense --- (1,329,053) --- (4,157,644)
------------ ------------ ------------ ------------
Net gain on sale of loans 32,231,567 9,986,380 59,951,394 18,033,256
------------ ------------ ------------ ------------
Warehouse interest income 32,309,191 6,453,721 53,017,401 11,614,663
Warehouse interest expense (23,107,299) (4,457,415) (37,862,980) (7,832,659)
------------ ------------ ------------ ------------
Net warehouse interest income 9,201,892 1,996,306 15,154,421 3,782,004
------------ ------------ ------------ ------------
Servicing fees 3,808,326 1,466,803 6,849,236 2,462,242
Other 4,530,905 835,709 6,239,234 1,464,245
------------ ------------ ------------ ------------
Total revenues $ 49,772,690 $ 14,285,198 $ 88,194,285 $ 25,741,747
============ ============ ============ ============
</TABLE>
Gain on Sale of Loans, Net. For the three and six months ended June 30, 1997,
gain on sale of loans increased to $32.3 million and $60.0 million from $11.3
million and $22.2 million for the three and six months ended June 30, 1996, an
increase of 184.8% and 170.2%, reflecting increased
13
<PAGE> 17
loan production and securitizations for the three and six months ended June 30,
1997. The total volume of loans produced increased by 244.9% and 230.5% to $1.4
billion and $2.2 billion for the three and six months ended June 30, 1997 as
compared with a total volume of $402.7 million and $666.6 million for the three
and six months ended June 30, 1996. Originations by the Company's correspondent
network increased 196.0% and 184.5% to $1.1 billion and $1.7 billion for the
three and six months ended June 30, 1997 from $371.4 million and $607.9 million
for the three and six months ended June 30, 1996, while production from the
Company's broker network and direct lending operations increased to
approximately $289.3 million and $474.3 million or 824.3% and 708.0% for the
three and six months ended June 30, 1997 from $31.3 million and $58.7 million
for the three and six months ended June 30, 1996. Production volume 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 $200.7
million and $310.7 million in residential mortgage loans originated during the
three and six months ended June 30, 1997. For the three and six months ended
June 30, 1997, the Company experienced higher gains as it sold more loans
through securitizations. Securitizations increased by $600 million and $1.15
billion, an increase of 300.0% and 306.7%, to $800 million and $1.53 billion for
the three and six months ended June 30, 1997 from $200 million and $375 million
for the three and six months ended June 30, 1996. The number of approved
correspondents increased by 192 or 65.3% to 486 at June 30, 1997 from 294 at
June 30, 1996 and the number of approved brokers increased by 449 or 31.3% to
1,883 at June 30, 1997 from 1,434 at June 30, 1996. Additional securitization
expense decreased to $0 for the three and six months ended June 30, 1997 from
$1.3 million and $4.2 million for the three and six months ended June 30, 1996.
For the three and six months ended June 30, 1997, gain on sale of loans, net,
increased to $32.2 million and $60.0 million from $10.0 and $18.0 million for
the three and six months ended June 30, 1996, an increase of 222.8% and 232.4%,
reflecting increased loan production and securitizations in the three and six
months ended June 30, 1997.
Net Warehouse Interest Income. Net warehouse interest income increased to $9.2
million and $15.2 million for the three and six months ended June 30, 1997 from
$2.0 million and $3.8 million for the three and six months ended June 30, 1996,
an increase of 360.9% and 300.7%. The increase in the three and six month period
ended June 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 $1.54 billion at June 30, 1997, an increase of 256.3%, from $433.3
million at June 30, 1996.
Servicing Fees. Servicing fees increased to $3.8 million and $6.8 million for
the three and six months ended June 30, 1997 from $1.5 million and $2.5 million
for the three and six months ended June 30, 1996, an increase of 159.6% and
178.2%. Servicing fees for the three and six months ended June 30, 1997 were
positively affected by an increase in mortgage loans serviced over the prior
period. The Company increased its servicing portfolio by $2.9 billion or 263.6%
to $4.0 billion as of June 30, 1997 from $1.1 billion as of June 30, 1996.
14
<PAGE> 18
Other. Other revenues, consisting principally of interest on interest-only and
residual certificates, increased to $4.5 million and $6.2 million or 442.2% and
326.1% for the three and six months ended June 30, 1997 from $0.8 million and
$1.5 million in three and six months ended June 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 six months ended June 30, 1997 and 1996.
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------ --------------------------
1997 1996 1997 1996
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Compensation and benefits $16,257,573 $4,372,965 $28,585,523 $ 8,039,650
Selling, general and administrative 13,183,864 2,895,854 22,776,250 5,136,710
Other interest expense 3,119,342 1,005,057 4,981,819 1,347,591
Sharing of proportionate value
equity --- --- --- 2,555,000
----------- ---------- ----------- -----------
Total expenses $32,560,779 $8,273,876 $56,343,592 $17,078,951
=========== ========== =========== ===========
</TABLE>
Compensation and benefits increased by $11.9 million and $20.6 million or 271.8%
and 255.6% to $16.3 million and $28.6 million for the three and six months ended
June 30, 1997 from $4.4 million and $8.0 million for the three and six months
ended June 30, 1996, principally due to an increase in the number of employees
to service the Company's increased mortgage loan production, and $9.1 million
and $15.3 million relating to compensation and benefits from the Acquisitions
for the three and six months ended June 30, 1997.
Selling, general and administrative expenses increased by $10.3 million and
$17.7 million or 355.3% and 343.4% to $13.2 million and $22.8 million for the
three and six months ended June 30, 1997 from $2.9 million and $5.1 million for
the three and six months ended June 30, 1996 principally due to an increase in
the volume of mortgage loan production, with $7.0 million and $11.7 million
relating to the Acquisitions for the three and six months ended June 30, 1997,
and an increase in amortization expense related to capitalized servicing rights
of $0.7 million and $1.4 million for the three and six months ended June 30,
1997.
Other interest expense increased by $2.1 million and $3.7 million or 210.4% and
269.7% to $3.1 million and $5.0 million for the three and six months ended June
30, 1997 from $1.0 million and $1.3 million for the three and six months ended
June 30, 1996 principally as a result of increased term debt borrowings.
15
<PAGE> 19
The sharing of proportionate value of equity, representing the amount payable
under the Conti VSA, decreased to $0 for the six months ended June 30, 1997 from
$2.6 million for the six months ended June 30, 1996. The Company's obligation to
make payments under the Conti VSA terminated in March 1996.
Pro Forma Income Taxes. The effective income tax rate for the three and six
months ended June 30, 1997 was approximately 37.8% and 38.3%, which differed
from the federal tax rate of 35% primarily due to state income taxes. The
increase in the provision for income taxes of $4.1 million and $8.8 million or
175.6% and 260.5% to $6.5 million and $12.2 million for the three and six months
ended June 30, 1997 from the pro forma provision for income taxes of $2.4
million and $3.4 million for the three and six months ended June 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.
FINANCIAL CONDITION
June 30, 1997 Compared to December 31, 1996
Mortgage loans held for sale at June 30, 1997 were $1.54 billion, representing
an increase of $628.9 million or 68.8% 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 June 30, 1997 were $206.6 million,
representing an increase of $120.4 million or 139.5% over interest-only and
residual certificates of $86.2 million at December 31, 1996. This increase was a
result of the Company completing three securitizations during the six months
ended June 30, 1997 for an aggregate of $1.53 billion.
Borrowings under warehouse financing facilities at June 30, 1997 were $1.53
billion, representing an increase of $639.5 million or 71.4% 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 June 30, 1997 was $127.2 million, representing an increase of $79.8
million or 168.2% 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.
16
<PAGE> 20
Stockholders' equity as of June 30, 1997 was $190.6 million, representing an
increase of $101.3 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 and CoreWest, and net income for the
six months ended June 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, 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,
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 six months ended
June 30, 1997, the Company used cash flow for operating activities of $740.2
million, an increase of $487.8 million, or 193.3%, over cash flows used for
operating activities of $252.4 million during the six months ended June 30,
1996. During the six months ended June 30, 1997, the Company received cash flows
from financing activities of $764.1 million, an increase of $494.6 million or
183.5% over cash flows received from financing activities of $269.5 million
during the six months ended June 30, 1996. The cash flows used for operating
activities related primarily to the funding of mortgage loan purchases or
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, 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 June 30, 1997, the Company had a $600 million uncommitted warehouse facility
with Bear Sterns Home Equity Trust 1996-1. This facility bears interest at LIBOR
plus 0.875%. Approximately $428.3 million was outstanding under this facility at
June 30, 1997. Subsequent to June 30, 1997, the warehouse facility was increased
to $1.0 billion.
17
<PAGE> 21
At June 30, 1996, the Company had a $900 million 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 $747.9
million was outstanding under this facility as of June 30, 1997. Subsequent to
June 30, 1997, the warehouse facility was increased to $1.25 billion.
Additionally, at June 30, 1997, the Company had approximately $900 million
available under numerous other warehouse lines of credit. As of June 30, 1997,
approximately $358.4 million was outstanding under these lines of credit.
Interest rates ranged from 6.3% to 7.2% as of June 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 June 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 June 30, 1997, the Company also had term debt outstanding of $127.2 million
which expires through January 2000. Outstanding borrowings under these
facilities are secured by interest-only and residual certificates and accrue
interest at rates ranging from 6.9% to 8.5%.
In December 1996, the Company executed an agreement with Bank of Boston pursuant
to which Bank of Boston provided a $25 million one year revolving credit
facility subject to the following sublimits and terms: (i) $5 million warehouse
line of credit due June 30, 1998, (ii) $25 million to finance interest-only and
residual certificates, to be repaid according to a repayment schedule calculated
by Bank of Boston 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 Bank of
Boston 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.
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 agreements.
18
<PAGE> 22
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 June 30, 1998. However, the Company has
substantial capital requirements and it anticipates that it may need to arrange
for additional external cash resources through additional 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 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.
19
<PAGE> 23
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 historically 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 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 would have a material adverse effect on the Company's results
of operations and financial condition. Conversely, lower than anticipated rates
of loan prepayments or gains would 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 - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
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: August 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
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 19,727,259
<SECURITIES> 0
<RECEIVABLES> 25,550,265
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 8,855,200
<DEPRECIATION> 803,251
<TOTAL-ASSETS> 2,541,871,729
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 276,461
<OTHER-SE> 190,328,807
<TOTAL-LIABILITY-AND-EQUITY> 2,541,871,729
<SALES> 59,951,394
<TOTAL-REVENUES> 88,194,285
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 51,361,773
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,844,799
<INCOME-PRETAX> 31,850,693
<INCOME-TAX> 12,200,000
<INCOME-CONTINUING> 19,650,693
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,650,693
<EPS-PRIMARY> 0.70
<EPS-DILUTED> 0.69
</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 June 30, 1997, and the related condensed
consolidated statements of operations for the three-month and six-month periods
ended June 30, 1997 and 1996 and the condensed statements of cash flows for the
six-month periods ended June 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
August 13, 1997
