<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
IMC MORTGAGE COMPANY
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
1. [LOGO]
IMC MORTGAGE COMPANY
5901 E. FOWLER AVENUE
TAMPA, FL 33617
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 5, 1998
To the Stockholders of IMC MORTGAGE COMPANY:
The Annual Meeting of Stockholders ("Annual Meeting") of IMC Mortgage
Company (the "Company"), a Florida Corporation, will be held at the Embassy
Suites, 3706 Spectrum Boulevard, Tampa, Florida 33612 on June 5, 1998 at 10:30
a.m., prevailing local time, for the following purposes:
1. To elect two directors to the Board of Directors to serve
until the 2001 annual meeting of stockholders;
2. To approve the adoption of the IMC Mortgage Company Employee
Stock Purchase Plan.
3. To ratify the appointment of Coopers & Lybrand L.L.P. as
independent accountants for the Company for the 1998 fiscal
year; and
4. To transact such other business as may be properly brought
before the meeting and any adjournment thereof. The Board is
presently aware of no other business to come before the annual
meeting.
The Board of Directors has fixed the close of business on April 30, 1998
as the record date for the determination of stockholders entitled to receive
notice of and to vote at the Annual Meeting or any adjournment thereof. Shares
of Common Stock can be voted at the Annual Meeting only if the holder is present
at the Annual Meeting in person or by valid proxy. We hope that you will attend
the meeting in person. Your Board of Directors and management look forward to
greeting those stockholders able to attend.
By Order of the Board of Directors,
George Nicholas
Chairman of the Board and Chief Executive Officer
Tampa, Florida
April 30, 1998
IMPORTANT
WHETHER OR NOT YOU PLAN TO ATTEND, PLEASE SIGN, DATE AND RETURN THE ENCLOSED
PROXY IN THE ENCLOSED POSTAGE PAID ENVELOPE. IF YOU DO ATTEND THE MEETING, YOU
MAY, IF YOU WISH, REVOKE YOUR PROXY AND VOTE YOUR SHARES IN PERSON.
<PAGE> 3
[LOGO]
PROXY STATEMENT
GENERAL INFORMATION
This Proxy Statement and enclosed form of proxy are being furnished in
connection with the solicitation of proxies on behalf of the Board of Directors
(the "Board" or the "Board of Directors") of IMC Mortgage Company, a Florida
corporation (the "Company" or "IMC"), for use at the Annual Meeting of
Stockholders to be held on June 5, 1998 at 10:30 a.m. at the Embassy Suites,
3706 Spectrum Boulevard, Tampa, Florida 33612 and any adjournment thereof, for
the purposes set forth in the accompanying Notice of Annual Meeting of
Stockholders. Any proxy given pursuant to such solicitation and received in time
for the Annual Meeting will be voted as specified in such proxy. If no
instructions are given, proxies will be voted FOR all proposals listed in the
Notice of Annual Meeting of Stockholders and in the discretion of the proxies
named on the proxy card with respect to any other matter properly brought before
the Annual Meeting.
Only stockholders of record at the close of business on April 30, 1998
are entitled to notice of and to vote at the Annual Meeting or any adjournment
thereof. At the close of business on April 30, 1998, there were [number of
shares] shares of the Company's Common Stock, par value $0.01 per share (the
"Common Stock"), outstanding and the Company has no other class of equity
securities outstanding. Each share of Common Stock entitles the record holder
thereof to one vote on all matters properly brought before the Annual Meeting.
The presence at the Annual Meeting of a majority of the votes entitled to be
cast, represented in person or by proxy, will constitute a quorum for the
transaction of business at the Annual Meeting. A person giving the enclosed
proxy has the power to revoke it any time before it is exercised by (i)
attending the Annual Meeting and giving the Secretary notice of his or her
intention to vote in person, (ii) duly executing and delivering a proxy bearing
a later date, or (iii) sending a written notice of revocation to the Secretary
of the Company, 5901 E Fowler Avenue, Tampa, Florida 33617.
The cost of solicitation will be borne by the Company. Arrangements have
been made with American Stock Transfer & Trust Company, the Company's Transfer
Agent, and various depositories, custodians, nominees and fiduciaries for the
forwarding of solicitation material to the beneficial owners of Common Stock.
American Stock Transfer & Trust Company is appointed by the Company as the
tabulating agent for all proxy votes. A tabulation report will be available to
the Inspector of Elections at the Annual Meeting.
Abstentions may be specified on all proposals being submitted.
Abstentions and votes from brokerage firms on behalf of their clients who do not
furnish voting instructions within ten days of the Annual Meeting ("broker
non-votes"), will be treated as shares that are present and entitled to vote for
purposes of determining the presence of a quorum, but as unvoted for purposes of
determining the approval of any matter submitted to the shareholders for a vote.
1
<PAGE> 4
The year ended December 31, 1997 audited consolidated financial
statements are incorporated in this Proxy Statement. Such audited consolidated
financial statements do not form any part of the proxy solicitation materials.
The date of this Proxy Statement is the approximate date on which the Proxy
Statement and form of proxy were first sent or given to shareholders.
2
<PAGE> 5
PROPOSAL 1
ELECTION OF DIRECTORS
The Company's Articles of Incorporation provide that the Company's Board
of Directors consists of such number of persons as shall be fixed by the Board
of Directors from time to time by resolution and is divided into three classes,
with each class to be as nearly equal in number of directors as possible. See
Information Concerning Directors and Nominees below. The Company's Bylaws
provide that the Board of Directors shall consist of no fewer than one nor more
than ten persons. Currently there are five directors. The term of office of the
directors in each of the three classes expires at the annual meeting of
stockholders in 1998 through 2000, respectively. Messrs. Wykle and Goryeb serve
until their term ends at the Annual Meeting of Stockholders scheduled for June
5, 1998. Messrs. Nicholas and Middleton serve until their term ends at the
Annual Meeting of Stockholders to be held in 1999. Mr. Legler serves until his
term ends at the Annual Meeting of Stockholders to be held in the year 2000. At
each annual meeting, the successors to the class of directors whose term expires
at that time are to be elected to hold office for a term of three years, and
until their respective successors are elected and qualified, so that the term of
one class of directors expires at each such annual meeting. In the case of any
vacancy on the Board of Directors, including a vacancy created by an increase in
the number of directors, the vacancy shall be filled by the Board of Directors,
with the director so elected to serve until the next Annual Meeting of
Stockholders. Any newly created directorships or decreases in directorships are
to be assigned by the Board of Directors so as to make all classes as nearly
equal in number as possible. Directors may be removed only for cause.
At the Annual Meeting, two directors will be elected whose terms will
expire at the 2001 Annual Meeting of Stockholders. Mr. Goryeb, whose term of
office expires at the Annual Meeting of Stockholders scheduled for June 5, 1998,
has been nominated for re-election at the Annual Meeting of Stockholders. Mr.
Lorimer has been nominated for election at the Annual Meeting of Stockholders
scheduled for June 5, 1998. The shares represented by the enclosed proxy will be
voted in favor of Mr. Goryeb and Mr. Lorimer, unless a vote is withheld from the
nominee. If a nominee becomes unavailable for any reason, or if a vacancy should
occur before election (which events are not anticipated), the shares represented
by the enclosed proxy may be voted for such other person as may be determined by
the holders of such proxy. Votes that are withheld will be excluded entirely
from the vote and will have no effect. Directors are elected by a plurality of
the votes cast at the Annual Meeting either in person or by proxy.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE
NOMINEES.
3
<PAGE> 6
INFORMATION CONCERNING CONTINUING DIRECTORS AND DIRECTOR NOMINEES
Background information with respect to the nominees for election and the
three directors whose terms of office will continue after the Annual Meeting of
Stockholders appears below. See "Security Ownership of Certain Beneficial Owners
and Management" for information regarding such persons' holdings of IMC Mortgage
Company Common Stock.
Director Nominees to Serve for a Three-Year Term Expiring at the Annual Meeting
of Shareholders held in the year 2001.
JOSEPH P. GORYEB - Mr. Goryeb, 67, has served as a director of IMC since
April 1996. Mr. Goryeb is the Chairman and Chief Executive Officer of Champion
Mortgage Co., Inc., a leading non-conforming residential mortgage institution
that was founded by Mr. Goryeb in 1981. His 40 years of experience in the
consumer lending industry include previous positions with Beneficial Finance
Company and Suburban Finance Company.
MARK W. LORIMER Mr. Lorimer, 39, has served as the Executive Vice
President and Chief Operating Officer of Auto-By-Tel Corporation, the leading
international online buying service for automotive purchasing, financing and
insurance, since May 1997. Mr. Lorimer served as Vice President and General
Counsel of Auto-By-Tel Corporation from December 1996 until May 1997. Prior to
joining Auto-By-Tel Corporation, Mr. Lorimer was a partner of and, from March
1989 to January 1996, was an associate with, the law firm of Dewey Ballantine.
Directors Continuing in Office Until the Annual Meeting of Shareholders held in
1999.
GEORGE NICHOLAS - Mr. Nicholas, 55, has served as Chief Executive
Officer and Chairman of the Board of IMC since the formation of the Company in
December 1995 and as Assistant Secretary of IMC since April 1996. Since his
founding of Industry Mortgage Company, L.P., a Delaware limited partnership (the
"Partnership"), in August 1993, Mr. Nicholas has served as Chief Executive
Officer of the Partnership and Chairman of the Board and sole stockholder of its
general partner. The Company became the successor of the Partnership in June
1996. Mr. Nicholas' experience in the lending business spans 34 years. He has
previously held positions at General Electric Credit Corp., Household Finance
Corp., and American Financial Corporation of Tampa ("AFC"), a company of which
he was the owner and Chief Executive Officer from its formation in February 1986
until it was acquired by Equibank in 1988. From February 1988 until May 1992,
Mr. Nicholas was President of AFC, a subsidiary of Equibank, which was a
wholesale lending institution specializing in the purchase of non-conforming
mortgage loans. From June 1992 until July 1993, Mr. Nicholas was an independent
mortgage industry consultant. In 1993, Mr. Nicholas organized the original
Industry Partners and led negotiations with investment bankers in connection
with the formation of the Partnership.
4
<PAGE> 7
THOMAS G. MIDDLETON - Mr. Middleton, 51, has served as Director and
President of IMC since December 1995 and as Assistant Secretary of IMC since
April 1996. Mr. Middleton has served as Chief Operating Officer of the
Partnership since August 1993 and as President of the Partnership since July
1995. Mr. Middleton has 28 years of experience in the lending business. From
April 1992 until August 1993, Mr. Middleton was Senior Vice-President of Shawmut
National Corporation and from February 1991 until April 1992, Mr. Middleton was
Managing Director of SAG Financial Inc. Mr. Middleton served as Executive
Vice-President and Chief Credit Officer of Equimark Corp. from June 1987 until
February 1991.
Director Continuing in Office Until the Annual Meeting of Shareholders held in
the year 2000.
MITCHELL W. LEGLER - Mr. Legler, 56, has served as a director of IMC
since April 1996. Mr. Legler is the sole stockholder of Mitchell W. Legler, P.A.
and has been general counsel to IMC since August 1995. Mr. Legler is currently a
director of Stein Mart, Inc., a Nasdaq listed company. From January 1991 to
August 1995, Mr. Legler was a partner of Foley & Lardner, prior to which he was
a partner of Commander, Legler, Werber, Dawes, Sadler & Howell, P.A., attorneys
at law in Jacksonville, Florida.
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS
The Board of Directors of the Company held nine meetings in 1997. During
such year, each Director attended more than 75% of the meetings held by the
Board of Directors and the committees on which he served. The Company's Board of
Directors also acts from time to time by unanimous written consent in lieu of
meetings.
The Company has an Audit Committee, a Compensation Committee, an Option
Committee, an Executive Committee and a 1997 Incentive Plan Committee.
Audit Committee. During 1997 the Audit Committee consisted of Messrs.
Goryeb, Legler and Allen Wykle, a director whose term of office expires at the
Annual Meeting and who is not standing for re-election. The Audit Committee
makes recommendations concerning the engagement of independent public
accountants, reviews with the independent public accountants the plans and
results of the audit engagement, approves professional services provided by the
independent public accountants, reviews the independence of the independent
public accountants, considers the range of audit and non-audit fees, and reviews
the adequacy of the Company's internal accounting controls. The Audit Committee
held meetings on February 10, 1997 and July 9, 1997.
Compensation Committee. The Compensation Committee consists of Messrs.
Nicholas, Middleton and Legler. The Compensation Committee determines the
compensation of the
5
<PAGE> 8
Company's executive officers. The Compensation Committee met once during 1997 on
September 9, 1997.
Option Committee. During 1991 the Option Committee consisted of Mr.
Goryeb and Mr. Wykle. The Option Committee has the authority to administer the
Company's stock option plans and to grant options thereunder. The Option
Committee met once during 1997 on February 10, 1997.
Executive Committee. The Executive Committee consists of Messrs.
Nicholas, Middleton, and any one other member of the Board of Directors. The
Executive Committee met on July 10, 1997 and September 26, 1997. The Executive
Committee also acts from time to time by unanimous written consent in lieu of
meetings.
1997 Incentive Plan Committee. The 1997 Incentive Plan Committee
consists of Messrs. Nicholas and Middleton and has the authority to grant
options to eligible employees under the IMC Mortgage 1997 Incentive Plan.
Other Committees. The Board of Directors may establish other committees
as deemed necessary or appropriate from time to time.
The Company does not have a nominating committee. The functions
customarily performed by a nominating committee are performed by the Board of
Directors as a whole. Any stockholder who wishes to make a nomination at an
annual or special meeting for the election of directors must do so in compliance
with the applicable procedures set forth in the Company's Bylaws. The Company
will furnish Bylaw provisions upon written request to Laurie Williams at the
Company's principal executive offices at 5901 E. Fowler Avenue, Tampa, FL
33617-2362.
DIRECTOR COMPENSATION
Directors who are not employees of the Company received stock options
pursuant to the Directors' Stock Option Plan (the "Directors' Plan"). Each of
Messrs. Goryeb, Legler and Wykle has received ten-year options to purchase
12,932 shares of Common Stock pursuant to the Directors' Plan at $2.35 per
share. If Mr. Lorimer is elected as a Director at the Annual Meeting of
Stockholders, he will be granted ten-year options to purchase 12,932 shares of
Common Stock pursuant to the Directors' Plan. The Company pays non-employee
directors $5,000 per quarter. All directors receive reimbursement of reasonable
out-of-pocket expenses incurred in connection with meetings of the Board of
Directors. No director who is an employee of the Company receives separate
compensation for services rendered as a director.
6
<PAGE> 9
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors consists of Messrs.
Nicholas, Middleton, and Legler. Messrs. Nicholas and Middleton are Executive
Officers of the Company. (See "Executive Compensation") Mr. Legler is the sole
stockholder in Mitchell W. Legler, P.A., which is retained by the Company as its
general counsel. (See "General Counsel") No interlocking relationship exists
between the Company's Board of Directors or officers responsible for
compensation decisions and the board of directors or compensation committee of
any other company, nor has any such interlocking relationship existed in the
past.
7
<PAGE> 10
EXECUTIVE OFFICERS
The executive officers of the Company as of the date of this Proxy
Statement are identified below, together with information regarding the business
experience of such officers. Information regarding the business experience of
Messrs. Nicholas and Middleton is set forth above under the heading "Information
Concerning Directors and Nominee". Each executive officer is elected by the
Board of Directors of the Company and serves at the pleasure of the Board.
<TABLE>
<CAPTION>
Name (Age) Position and Business Experience
- ---------- --------------------------------
<S> <C>
George Nicholas (55) Chief Executive Officer, Chairman of the Board, and
Assistant Secretary
See "Information Concerning Directors and Nominees"
for business experience.
Thomas G. Middleton (51) President and Chief Operating Officer
See "Information Concerning Directors and Nominees"
for business experience.
Stuart D. Marvin (38) Chief Financial Officer
Mr. Marvin has served as Chief Financial Officer
since August 1, 1996. Mr. Marvin is a certified
public accountant and prior to joining the Company
was a partner in the Jacksonville, Ft. Lauderdale,
and Miami, Florida offices of Coopers & Lybrand
L.L.P.
</TABLE>
8
<PAGE> 11
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth compensation
earned, whether paid or deferred, by the Company's Chief Executive Officer and
other executive officers whose compensation exceeded $100,000 during the year
ended December 31, 1997 for all services rendered in all capacities as employees
of the Company during the years ended December 31, 1995, 1996 and 1997.
Information is provided for each fiscal period during which such persons were
employed by the Company.
<TABLE>
<CAPTION>
Long Term
Compensation Awards
-------------------
Annual Compensation
---------------------------------------------
Securities Issuance
Other Annual Underlying of
Name and Principal Position Year Salary Bonus Compensation(1) Options(2) securities(3)
- --------------------------- ---- ------ ----- --------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
George Nicholas, Chairman 1997 $522,500 $1,567,500 $373,344 13,003
of the Board, Chief 1996 475,000 1,425,000 6,500
Executive Officer ................. 1995 233,492 100,000 4,927 565,732
Thomas G. Middleton, 1997 $418,000 $1,254,000 $300,575 10,331
President, Chief Operating 1996 380,000 1,140,000 9,500
Officer............................ 1995 208,144 25,000 6,500 282,866
Stuart D. Marvin, Chief 1997 $256,250 $ 300,000 $227,638 2,513
Financial Officer (4).............. 1996 111,677 93,750 96,000
</TABLE>
- -----------------
(1) Represents payments made in cash to Executive Officers for the tax
benefit realized by the Company (See "Executive Officer Unregistered
Stock Plan") in relation to the issuance of Common Stock as a part of
their annual compensation, payments for automobile allowances and
matching contributions by IMC under the IMC Savings Plan, a defined
contribution plan under Section 410(k) of the Internal Revenue Code, as
amended.
(2) Represents number of shares of Common Stock underlying options. Options
for Mr. Nicholas and Mr. Middleton are fully vested. Mr. Marvin was
granted 120,000 options on August 1, 1996, which vest over five years
at a rate of 1 2/3 % per month. Mr. Marvin exercised 24,000 of these
options in 1997. (See: "Aggregated Option Exercises and Year-End Option
Values")
(3) Original issue shares of Common Stock (par value $.01) issued to
executive officers as part of annual compensation. Amounts shown are
net of shares withheld by Company at the request of the Executive
Officer to pay federal income taxes. Shares withheld were 30,997,
24,869 and
9
<PAGE> 12
22,751 for Messrs. Nicholas, Middleton and Marvin, respectively. (See
"Executive Officer Unregistered Stock Plan").
(4) 1996 represents compensation from commencement of employment on August
1, 1996, and includes reimbursement of $17,927 for relocation costs to
Tampa, Florida.
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS GRANTS. No stock options
were granted to any executive officer or director of the Company during the year
ended December 31, 1997. No stock appreciation rights have ever been granted to
any executive officers.
AGGREGATED OPTION EXERCISES AND YEAR-END OPTION VALUES. The following
table sets forth information concerning the exercise of stock options during
1997 and the value of unexercised options held by each of the executive officers
at December 31, 1997.
<TABLE>
<CAPTION>
Value of
Number of securities Unexercised In-the
underlying unexercised Money Options at
options at Fiscal Year Fiscal Year End/
Shares Acquired on End/ Un-exercisable & Un-exercisable &
Name Exercise (#) Value Realized ($) Exercisable(3) Exercisable (3)
- ---- ------------ ------------------ -------------- ---------------
<S> <C> <C> <C> <C>
George Nicholas 90,000(1) $835,875(1) 475,732 $4,531,347
Thomas G. Middleton ----- ----- 282,866 2,694,299
Stuart D. Marvin 24,000 106,500(2) 96,000 372,000
</TABLE>
(1) Based on the offering price for IMC Mortgage Company's secondary Common
Stock offering on April 23, 1997, net of the underwriting discount, Mr.
Nicholas exercised stock options and sold shares in the secondary
offering receiving $ 11.6375 per share or $835,875 in net cash
proceeds.
(2) Mr. Marvin exercised 18,000 options on May 1, 1997 and 6,000 options on
August 8, 1997 and received 18,000 and 6,000 shares of IMC Common Stock
respectively. The Value Realized was determined based on the per share
closing prices of IMC Common Stock of $11.75 on May 1, 1997 and $16.375
on August 8, 1997. Mr. Marvin did not sell any shares of IMC Common
Stock during 1997.
(3) Based on the closing price of $11.875 per share of the Common Stock on
Nasdaq on December 31, 1997, the last trading day of the Company's
fiscal year. All options held by Mr. Nicholas and Mr. Middleton are
fully vested and are exercisable. Mr. Marvin was granted 120,000
options on August 1, 1996, which vest over five years at a rate of 1
2/3 % per month, of which he exercised 24,000 during 1997.
10
<PAGE> 13
EMPLOYMENT AGREEMENTS
The Company has employment agreements with George Nicholas, its Chairman
and Chief Executive Officer, Thomas G. Middleton, its President and Chief
Operating Officer, and Stuart D. Marvin, its Chief Financial Officer
("Employment Agreements"). In addition to the Employment Agreements described
below, in September of 1997, the board of directors established the Executive
Officer Unregistered Share Plan. (See "Summary Compensation Table" above for
awards granted to Executive Officers in 1997. See "Executive Officer
Unregistered Share Plan" below for the plan description).
Mr. Nicholas' Employment Agreement commenced on January 1, 1996 and
terminates on December 31, 2001 (subject to automatic five-year extensions,
unless either the Company or Mr. Nicholas gives a notice of termination six
months prior to the extension). The Employment Agreement provides for an annual
salary of $574,750 for the year of 1998, plus an increase each subsequent year
equal to the greater of (i) the change in the cost of living in Tampa, Florida,
and (ii) an amount equal to 10% of the base salary for the prior year, but only
if the Company has achieved an increase in net income per share of 10% or more
in that year. In addition, the Employment Agreement provides for payment of a
bonus equal to 15% of the base salary of the relevant year for each one percent
by which the increase in net income per share exceeds 10% up to a maximum of
300% of his base salary. For example, if the increase in net income per share
for a particular year were 20%, the bonus payment would equal 150% of the base
salary for such year. The Employment Agreement also provides that the Company
shall use its best efforts to elect Mr. Nicholas to the Company's Board of
Directors and to its Executive Committee. Mr. Nicholas' employment may be
terminated by the Company at any time for "cause" (including material breach of
the Employment Agreement, certain criminal or intentionally dishonest and
misleading acts, and breaches of confidentiality and failure to follow
directives of the Board). If Mr. Nicholas is terminated for cause or voluntarily
terminates his employment (in the absence of a Company breach or a "change of
control") he does not receive any deferred compensation. Mr. Nicholas is
entitled to deferred compensation upon (i) his termination by the Company
without cause, (ii) the Company's failure to renew his Employment Agreement on
expiration, (iii) death or disability, (iv) voluntary termination by Mr.
Nicholas after a material breach by the Company, and (v) voluntary termination
after a "change of control" (defined as any (A) acquisition of 25% or more of
the voting power or equity of the Company, (B) change in a majority of the
members of the Board excluding any change approved by the Board, or (C) approval
by the Company's stockholders of a liquidation or dissolution of the Company,
the sale of substantially all of its assets, or a merger in which the Company's
stockholders own a minority interest of the surviving entity). The amount, if
any, of deferred compensation payable to Mr. Nicholas will be determined at the
time of termination equal to the greater of (i) his base salary for the
remainder of the then-current term of the Employment Agreement, and (ii) an
amount equal to 150% of the highest annualized compensation earned by him during
the preceding three years. Receipt of deferred compensation is Mr. Nicholas'
sole remedy in the event of a wrongful termination by the Company. Mr. Nicholas'
Employment Agreement contains a restrictive covenant prohibiting him, for a
period of 18 months following the termination of his employment for any reason,
from competing with the Company
11
<PAGE> 14
within the continental United States or from soliciting any employees from the
Company who are earning in excess of $50,000 per year. However, this restrictive
covenant is not applicable if Mr. Nicholas is terminated without cause or if the
Company defaults in the payment of deferred compensation to Mr. Nicholas or
otherwise materially breaches the Employment Agreement. The Employment Agreement
also provides that the Company shall indemnify Mr. Nicholas for any and all
liabilities to which he may be subject as a result of his services to the
Company.
Mr. Middleton's Employment Agreement commenced on January 1, 1996 and
contains terms that are substantially the same as those of Mr. Nicholas'
Employment Agreement, with the exception that Mr. Middleton's annual salary for
the year 1998 is $ 459,800, plus increases as provided therein.
Mr. Marvin's Employment Agreement, as amended on October 3, 1997,
commenced on August 1, 1996 and extends until December 31, 2001. The Employment
Agreement provide for an annual salary of $330,000 during 1998, plus an increase
each calendar year equal to the greater of (i) the change in the cost of living
in Tampa, Florida, and (ii) an amount equal to ten percent of the base salary
for the prior year, but only if the Company has achieved an increase in net
income per share of ten percent or greater. In addition, the Employment
Agreement provides for a payment of a bonus equal to fifteen percent of the base
salary of the relevant year for each one percent by which the increase in net
income per share exceeds ten percent up to a maximum of three hundred percent of
his base salary.
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Board of Directors has furnished the
following report on executive compensation for inclusion in this proxy
statement:
Compensation Philosophy. Base salaries and bonus for executive officers
shown on the summary compensation table set forth above under "Executive
Compensation" were established by employment agreements that were entered into
prior to the Company's initial public offering in June of 1996 and continue
through 2001, except in the case of Stuart Marvin, the Company's Chief Financial
Officer, whose employment agreement was executed in August of 1996, and amended
October 3, 1997, and extends until December 31, 2001. The employment agreements
are described in more detail above and the Compensation Committee believes that
those agreements established base salaries, which are reasonable when compared
the Company's industry peers. The employment agreements call for bonuses that
can be as much as three times base salary.
As the bonuses for the Company's executive officers are a direct
function of increases in earnings per share, the Compensation Committee believes
that the compensation plan and employment agreements for the Company's executive
officers are in line with the Company's dual goals of rewarding performance and
establishing compensation arrangements which align the interests of officers and
other key employees with those of the Company's shareholders.
12
<PAGE> 15
Long Term Compensation Incentive Plans.
Employee Sock Option Plan and IMC Mortgage Company 1997 Incentive Plan.
The Company has an Employee Stock Option Plan and the IMC Mortgage Company 1997
Incentive Plan ("The Option Plans"). The purpose of The Option Plans is to
provide long-term incentive to the Company's key employees. The Compensation
Committee believes that The Option Plans are a principal vehicle for motivating
management and employees to work toward long-term growth and shareholder value.
Consistent with the Company's philosophy of providing incentives to key
employees, options under The Employee Stock Option Plan have been awarded to a
relatively broad base of employees. No options under The IMC Mortgage Company
1997 Incentive Plan were awarded during 1997, although awards are anticipated
during 1998.
The Option Plans reflect the Company's philosophy that officers' and
employees' incentive compensation should reflect the same long-term interests as
those of the Company's shareholders. To encourage continued service with the
Company, the options granted under The Option Plans typically vest over a
five-year period of employment with the Company. Additional increases in the
value of the Common Stock, which benefit all shareholders, will thus serve as a
primary incentive to officers and key employees.
Executive Officer Unregistered Share Plan. On October 3, 1997, the
Board of Directors adopted the Executive Officer Unregistered Share Plan (the
"Executive Unregistered Share Plan") pursuant to which each of the Company's
Chief Executive Officer, Chief Operating Officer and Chief Financial Officer
could receive an annual bonus payable solely in unregistered shares of the
Company's Common Stock if the Company achieved at least a ten percent (10%)
growth in net income per share for the year then ending over the net income per
share for the prior fiscal year. In each case, the bonus would equal the
officer's base salary then in effect. The number of unregistered shares issued
to each Executive Officer is calculated by dividing the base salary for each
Executive Officer by the closing price of the Company's shares on NASDAQ at the
end of the year as to which the bonus relates. The Company will "gross-up" each
bonus for taxes saved by the Company on the issuance of the shares and taxes may
be paid by withholding of shares. The plan also allows Executive Officers to
surrender shares or options for shares of the Company's Common Stock owned by
them to satisfy income tax obligations arising from any compensation received
from the Company for the calendar year. (See Executive Compensation table above
for the unregistered shares awarded pursuant to this plan for 1997.)
Vice-President Unregistered Share Plan .On October 3, 1997, the Board
of Directors adopted the Vice-President Unregistered Share Plan pursuant to
which certain of the Company's officers could receive an annual bonus payable
solely in unregistered shares of the Company's Common Stock. The number of
unregistered shares is calculated by dividing the base salary of the employee by
the closing price of the Company's shares on NASDAQ at the end of the year as to
which the bonus relates. The unregistered shares granted will vest over a period
of three years, with one-third vesting immediately and one-third vesting on the
last day of each of the next two
13
<PAGE> 16
fiscal years so long as the officer is still employed by the Company on such
date. The Company will "gross-up" each bonus for taxes saved by the Company on
the issuance of the shares and taxes may be paid by withholding of shares.
CEO Compensation. George Nicholas, Chairman and Chief Executive
Officer, received his option grant from the Company's predecessor, Industry
Mortgage Company, L.P., a Delaware limited partnership (the "Partnership") and
that grant was approved by all partners of the Partnership. Mr. Nicholas'
compensation is pursuant to his employment agreement commencing on January 1,
1996. Mr. Nicholas is a member of the Compensation Committee. (See "Employment
Agreements" and "Compensation Philosophy").
IMC MORTGAGE COMPANY COMPENSATION COMMITTEE:
Mitchell W. Legler, Secretary
George Nicholas
Thomas G. Middleton
14
<PAGE> 17
STOCK PERFORMANCE GRAPH
The following graph depicts the cumulative total return on the
Company's Common Stock compared to the cumulative total return for The Nasdaq
Composite Index ("Nasdaq Composite") and the Nasdaq Other Financial Index, a
peer group selected by the Company on an industry and line-of-business basis,
commencing June 25, 1996 and ending December 31, 1997. The graph assumes an
investment of $100 on June 25, 1996, when the Company's stock was first traded
in a public market.
[GRAPH]
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
June 25, June 28, September December March 31, June 30, September December
1996 1996 30, 1996 31, 1996 1997 1997 30, 1997 11, 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
IMC Mortgage Company 100.00 109.76 156.10 163.41 143.90 162.24 150.05 115.90
NASDAQ Composite 100.00 101.06 104.63 110.10 104.19 122.98 143.76 133.92
NASDAQ Other Financial 100.00 100.30 110.53 123.17 128.48 147.44 172.97 193.33
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 18
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of April 1,1998,
concerning the Common Stock of the Company beneficially owned (i) by each
director and nominee for election as director of the Company, (ii) by the
Company's executive officers, (iii) by all executive officers and directors as a
group, and (iv) by each stockholder known by the Company to be the beneficial
owner of more than five percent of the outstanding Common Stock. Unless
otherwise indicated in the footnotes to the table, the beneficial owners named
have, to the knowledge of the Company, sole voting and dispositive power with
respect to shares beneficially owned, subject to community property laws where
applicable.
<TABLE>
<CAPTION>
Name and Address of Beneficial Owner Shares Percent (1)
------------------------------------ ------ -----------
<S> <C> <C>
AMVESCAP PLC (2) 2,519,000 8.19%
11 Devonshire Square
London EC2M 4YR
England
ContiTrade Services Corporation (3) 2,165,000 6.58
277 Park Avenue
New York, NY 10172
Wellington Management Company, LL (4) 1,702,000 5.53
19th Floor
Boston, MA 02109
Branchview, Inc. (5) 1,661,856 5.40
989 McBride Avenue
West Patterson, NJ 07424
Neal Henschel (6) 1,608,775 5.23
700 W. Hillsboro Boulevard
Building 1, suite 204
Deerfield Beach, FL 33441
George Nicholas (7) 1,489,645 4.77
5901 E. Fowler Avenue
Tampa, FL 33617
</TABLE>
16
<PAGE> 19
<TABLE>
<S> <C> <C>
Thomas P. LaPorte Trust (8) 929,603 3.02
2230 Groveland
Bay City, MI 48708
Mary M. Reid Trust (8) 727,845 2.37
2230 Groveland
Bay City, MI 48708
Joseph P. Goryeb (9) 532,106 1.73
Waterview Corporate Centre
20 Waterview Boulevard
Parsippany, NJ 07054-1267
Thomas G. Middleton (10) 507,671 1.64
5901 E. Fowler Avenue
Tampa, FL 33617
Mitchell W. Legler (11) (12) 118,297 *
1 Independent Drive, Suite 3104
Jacksonville, FL 32202
Stuart D. Marvin (13) 48,605 *
5901 E. Fowler Avenue
Tampa, FL 33617
Allen D. Wykle (11) (14) 20,042 *
3420 Holland Road
Virginia Beach, VA 23452
All directors and executive officers as a group 2,716,366 8.83
</TABLE>
- --------------
* Represents less than one percent (1%)
(1) Based on an aggregate of (i) the number of shares of the Company's
Common Stock outstanding as of April 1, 1998 and (ii) options vested
within 60 days after April 1, 1998.
(2) Source of ownership information: SEC Form 13 G dated February 9, 1998
filed by AMVESCAP PLC, the parent holding company of six subsidiaries
which acquired the security. The reporting persons disclaim beneficial
ownership of and report shared voting power for these shares.
(3) Source of ownership information: SEC Form 13 G filed as an amendment on
February 11, 1998. Ownership reported includes 2,160,000 shares of
Common Stock issuable upon the exercise of warrants. ContiTrade
Services Corporation, an affiliate of Continental Grain Company, owns
the warrants, which are exercisable for a de minimis amount, and
represent shared voting and
17
<PAGE> 20
disposition powers. The 13-G filing includes 5,000 shares owned by Paul
J. Fribourg, President and Chairman of Continental Grain Company. Mr.
Fribourg has sole voting and disposition power over 5,000 shares and
shared voting and disposition power over the 2,160,000 shares issuable
upon exercise of the warrants.
(4) Source of ownership information: SEC Form 13 G dated January 14, 1998.
The reporting person is an Investment Adviser registered under the
Investment Advisers Act of 1940 and reports shared voting power.
(5) Excludes 110,000 registered shares purchased by shareholders of
Branchview, Inc. in the Company's initial public offering.
(6) Excludes 178,753 shares owned by Mr. Henschel's adult child.
(7) Includes 475,732 shares of Common Stock issuable upon the exercise of
options under the Incentive Plan.
(8) Includes 4,282 shares of Common Stock issuable upon the exercise of
options issued to Mortgage America under the Incentive Plan. Thomas P.
LaPorte and Mary M. Reid are husband and wife and have voting and
investment control of the stock issuable upon the exercise of the 4,282
Common Stock options.
(9) Excludes 504,119 shares of Common Stock owned by Mr. Goryeb's adult
children. Includes 2,586 shares of Common Stock issuable upon the
exercise of options under the Directors' Plan.
(10) Includes 282,866 shares of Common Stock issuable upon the exercise of
options under the Incentive Plan
(11) Includes 12,932 shares of Common Stock issuable upon the exercise of
options under the Directors' Plan.
(12) Includes 62,026 shares of Common Stock issuable upon exercise of
options under the Incentive Plan, 27,776 shares held by Mr. Legler
jointly with his spouse, 6,000 shares held in his IRA and 9,563
unregistered shares received in 1998 as compensation in connection with
certain acquisitions. (See "General Counsel" below)
(13) Includes 22,092 shares of Common Stock issuable upon the exercise of
vested options under the Incentive Plan.
(14) Excludes 980,875 shares of Common Stock and 5,250 shares of Common
Stock issuable upon the exercise of options under the Incentive Plan
owned by Approved Financial Corp. ("Approved"). Mr. Wykle, who owns 32%
of the voting stock of Approved, has voting, but not investment,
control of the Common Stock owned by Approved. Mr. Wykle disclaims
beneficial ownership of the shares of Common Stock and issuable upon
the exercise of such options owned by Approved.
18
<PAGE> 21
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since its inception, the Company has had business relationships and
engaged in certain transactions with affiliated companies and parties as
described below. It is the policy of the Company to engage in transactions with
related parties only on terms that, in the opinion of the Company, are no less
favorable to the Company than could be obtained from unrelated parties and each
of the transactions described below conforms to that policy.
AGREEMENTS WITH CONTIFINANCIAL
Conti Warehouse Facility. The Company and ContiFinancial are party to
the Amended and Restated Loan and Security Agreement, dated as of September 1,
1995 (together with its predecessor agreement, the "Warehouse Facility").
Pursuant to the Warehouse Facility, the Company has a $125.0 million line of
credit that is secured by its mortgage loans and expires on August 31, 1998.
Amounts outstanding under the Warehouse Facility bear interest at a rate of
LIBOR plus 1.5% per year. During 1997, the Company made interest payments under
the Warehouse Facility of approximately $3.7 million.
Conti Standby Agreement. The Company and ContiFinancial are party to a
Standby Agreement through which the Company funds the income taxes payable as a
result of the recognition of the securitization gain on sale and other working
capital needs prior to receipt of any cash flow from the residual interests in
its securitzation. Amounts borrowed under the Standby Agreement bear interest at
a rate of LIBOR plus 1.7% per annum. The Standby Agreement expires on January
12, 2000. At December 31, 1997, the Company had no amount outstanding under the
Standby Agreement. During 1997, the Company made interest payments to
ContiFinancial under the Standby Agreement of $0.9 million.
Conti Warrant. Effective December 31, 1995, the Company granted
ContiFinancial an option (the "Conti Option") to purchase a portion of its
equity. Prior to the Company's initial public offering in June 1996, the Conti
Option was converted into the Conti Warrant. The Conti Warrant grants
ContiTrade, an affiliate of ContiFinancial, certain registration rights. The
Conti Warrant is exercisable for 2.16 million shares (after giving effect to
ContiFinancial's sale in June 1996 of ten percent (10%) of its interest in the
Conti Warrant and the sale of warrants exercisable for 540,000 shares in April
1997) of Common Stock for a de minimis amount, subject to adjustment if the
Company issues Common Stock below fair market value and certain other
anti-dilution adjustments.
IMC ASSOCIATES
IMC Associates. IMC Associates, Inc. ("IMC Associates") leases skybox suites in
various arenas for professional sporting events. The Company purchases tickets
for sporting events from IMC Associates for an aggregate amount equal to the
annual lease costs of the skyboxes. IMC
19
<PAGE> 22
Associates is owned by George Nicholas, the Chairman of the Board and Chief
Executive Officer of the Company.
GENERAL COUNSEL
General Counsel. The Company has an arrangement with Mitchell W.
Legler, P.A., which is solely owned by Mr. Legler who serves as the Company's
general counsel. Mr. Legler is also a member of the Company's board of
directors. IMC paid Mr. Legler's law firm $17,500 per month during 1997 for Mr.
Legler's services as general counsel. In addition, Mitchell W. Legler, P.A. is
entitled to a contingent cash fee for acting in the primary role in identifying
potential acquisition candidates and in analyzing, negotiating, and closing
acquisitions of other non-conforming lenders and strategic alliances with other
non-conforming lenders. The contingent fees are based on a percentage of the
expected increase in IMC's earnings per share resulting from an acquisition or
strategic alliance based on the first year following the closing of the
acquisition and based on the first three years following the closing of a
strategic alliance.
The contingency fees are capped at $750,000 in cash on a running
two-year average. Any contingency fees earned in excess of the cash cap are to
be paid in unregistered shares of the Company's Common Stock, subject to a cap
on unregistered shares paid on a running two year average of $550,000 in value
of such shares. During 1997, the Company completed eight acquisitions. As a
result of those acquisitions, Mr. Legler's law firm received approximately
$750,000 in cash contingency fees in 1997. No shares of unregistered Common
Stock of the Company were issued to Mr. Legler in 1997, however, 9,563 shares
were issued in January 1998 in connection with acquisitions completed during
1997.
LAKEVIEW
Lakeview Savings Bank, ("Lakeview") The Company entered into the
Lakeview Facility in January 1996 with Lakeview, an affiliate of Branchview,
Inc., one of the original partners in Industry Mortgage Company, LP (The
"Industry Partners"). The Lakeview Facility is a $7 million credit facility,
which matures July 31, 1999 and bears interest at 10% per annum. At December 31,
1997, $6.8 million was outstanding under this credit facility. In 1996, IMC,
through its wholly owned subsidiary, IMC Credit Card, Inc., entered into the
Credit Card Joint Venture with Lakeview Credit. The Credit Card Joint Venture is
owned fifty percent by IMC Credit Card, Inc., and fifty percent by Lakeview
Credit. Branchview sold loans in the aggregate amount of $ 13 million to IMC in
1997.
MORTGAGE AMERICA
Mortgage America. Effective January 1, 1997, IMC acquired all of the
assets of Mortgage America, one of the Industry Partners. Thomas LaPorte and
Mary Reid are husband and wife and were the primary owners of Mortgage America
prior to the acquisition. The purchase price for all
20
<PAGE> 23
of the assets of Mortgage America was an initial payment of 1,790,000 shares of
Common Stock and assumption of a stock option plan which could result in
issuance of an additional 334,596 shares of Common Stock and a contingent
payment of up to 2,770,000 additional shares of Common Stock at the end of three
years based on the growth and profitability of Mortgage America during that
period. As a condition of the acquisition agreement, Tom LaPorte and Jon
LaPorte, his adult child, have employment agreements with IMC for approximately
three years. The employment agreements include a non-compete clause.
Thomas LaPorte is President of Mortgage America. Since January 1, 1997,
the effective date of the Company's acquisition of Mortgage America, the Company
has leased administrative and executive offices from MA Real Estate and
Investments, L.L.C., which is owned by Mr. LaPorte, under non-cancelable leases
expiring December 31, 2006 and from LaPorte, Inc. a company owned by Mr.
LaPorte's brother. Combined annual rent payments to these two entities in 1997
was $ 196,699 in addition to total leasehold improvements made by the Company of
$151,232.
Since June 1997, the Company has leased a corporate jet from Tomahawk
Aviation, L.L.C., which is owned by Mr. LaPorte, for $500 per hour. Total lease
payments paid by the Company under this lease were $124,657 during 1997.
APPROVED FINANCIAL CORP.
Approved Financial Corp. ("Approved"). Mr. Wykle, a member of the Board
of Directors of IMC, is Chairman and Chief Executive Officer of Approved, and a
controlling shareholder of Approved. Approved, formerly American Industrial Loan
Association, sold loans in the aggregate amount of $ 235 million to IMC during
1997 (see Industry Partner's Incentive Plan below) and has agreed to sell $24
million in loans to IMC in 1998. In January 1996, IMC and Approved entered into
a warehouse financing facility pursuant to which IMC committed to lend Approved
$8.0 million secured by mortgage loans. Borrowings under the facility bear
interest at one and three-quarters percent (1.75%) over the one-month LIBOR
rate. Approved paid IMC $79,651 in interest payments during 1997. The line of
credit had no outstanding balance as of December 31, 1997.
CHAMPION MORTGAGE CO. INC.
Champion Mortgage Co. Inc. ("Champion"). Mr. Goryeb, a member of the
Board of Directors of IMC, is Chairman and Chief Executive Officer of Champion.
Champion sold loans in the aggregate amount of $26 million to the Company during
1997 (see Industry Partners' Incentive Plan below) and has agreed to sell $24
million in loans to the Company in 1998.
21
<PAGE> 24
INDUSTRY PARTNERS' INCENTIVE PLAN
Industry Partners' Incentive Plan. To encourage the Industry Partners
to continue to sell more mortgage loans than required under their original
commitments, the Company created an incentive plan for Industry Partners in
March 1996 (the "Industry Partners' Incentive Plan"). Under that plan, Industry
Partners that doubled their loan sale commitments per quarter are eligible to
receive on a pro rata basis fully paid shares of Common Stock equal to $150,000
divided by the market price of the Common Stock at the end of that quarter. The
dollar amount of the quarterly award of Common Stock is reduced by the pro rata
reduction in the total loan sale commitment resulting when participating
Industry Partners are acquired by IMC Mortgage Company and are no longer in the
incentive plan. At December 31, 1997 the quarterly award amount was $105,000 as
a result of the acquisition of Mortgage America and Equity Mortgage, both
Industry Partners. The fully paid shares of Common Stock are issued pro rata
among those Industry Partners that doubled their commitments to the extent the
Industry Partner exceeded its doubled commitment amount for the quarter. A total
of 29,293 shares were earned under this plan for the year of 1997 of which
23,175 were earned by Approved and 243 were earned by JRJ Associates, Inc, an
affiliate of Champion (See sections on "Approved" and "Champion").
22
<PAGE> 25
PROPOSAL 2
RATIFICATION OF THE ADOPTION OF
IMC MORTGAGE COMPANY EMPLOYEE STOCK PURCHASE PLAN
PROPOSAL TO ADOPT EMPLOYEE STOCK PURCHASE PLAN
PROPOSAL. In February 1998, the Company's Board of Directors adopted,
subject to stockholder approval, the IMC Mortgage Company Employee Stock
Purchase Plan (the "Plan"). The Plan is intended to encourage an alignment of
the interest of the Company's employees with those of the Company's stockholders
by encouraging ownership of the Company's shares by its employees. The Company
believes the Plan will provide a convenient method, through payroll deduction,
for employees to acquire shares in the Company and provide an excellent
complement to the Company's Stock Option Plan for employees.
The adoption of the Plan is subject to approval by the Company's
stockholders. The Plan will be adopted if a majority of the shares voted with
respect to the Plan are voted to approve the adoption thereof. For this purpose,
abstentions and broker non-votes will not be counted.
SUMMARY OF PLAN. All employees who complete 90 days employment with the
Company and who work on a full-time basis or are regularly scheduled to work
more than 20 hours per week are eligible to participate in the Plan. No employee
is eligible to participate in the Plan if the employee possesses 5% of more of
the voting power of the Company's shares. In addition, no employee may accrue
rights to purchase shares under the Plan that exceeds $25,000 in market value of
stock (determined at the time of the grant) for any calendar year.
The Company will make annual offerings under the Plan (the
"Offerings"). The Offerings will be for a period of six or twelve months each.
Shares eligible under the Plan are limited to 400,000 shares in the aggregate
and the Plan will be effective for the years of 1998 through 2001, with no more
than 100,000 shares being made available in each calendar year.
Participants in the Plan are permitted to use payroll deductions to
acquire shares at 85% of the fair market value of the Company's stock determined
at either the beginning or end of each Offering period. An employee who is a
participant in the Plan may withdraw from participation at any time prior to the
last day of each Offering.
FEDERAL INCOME TAX CONSEQUENCES. The following general description of
the tax consequences of transactions under the Purchase Plan is based on present
federal tax laws and does not purport to be complete.
The Purchase Plan is intended to satisfy the requirements of sections
421 and 423 of the Code. Under these provisions, a participant generally will
not recognize income at the time an
23
<PAGE> 26
option is granted or exercised. The tax consequences to a participant upon a
disposition of shares acquired upon option exercise will generally depend upon
the holding period of the shares.
If shares acquired upon the exercise of an option are disposed of at
least two years after the date of option grant and at least one year after the
date of option exercise (or if a participant dies while owning the shares,
regardless of the holding period), then the participant will recognize, at the
time of disposition, ordinary income equal to the lesser of (i) the excess of
the fair market value of the shares at the time of disposition over the option
price, or (ii) the excess of the fair market value of the shares on the date of
option grant over the option price (computed as of the grant date). Any
additional gain will be treated as capital gain (and taxed at a rate depending
upon the participant's holding period for the shares, which will generally
commence on the date of option exercise). If the shares are sold at a price less
than the option price, there is no ordinary income and the participant has
capital loss equal to the difference. If the requisite holding periods are met,
the Company will not be entitled to a tax deduction at any time.
If the shares acquired upon the exercise of an option are sold or
disposed of within two years after the date of option grant or within one year
after the date of option exercise, then the participant will recognize, at the
time of disposition, ordinary income equal to the excess of the fair market
value of the shares on the purchase date over the option price, and the Company
will be entitled to a tax deduction in that amount. Any appreciation in the
price of the shares between the purchase date and disposition date will be
treated as capital gain (and taxed at a rate depending upon the participant's
holding period for the shares, which will generally commence on the date of
option exercise). Even if the shares are sold for less than the fair market
value of the shares on the purchase date, the participant will recognize the
same amount of ordinary income, and will have capital loss equal to the
difference between the sales price and the fair market value of the shares on
the purchase date.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE "FOR" THE PROPOSAL TO APPROVE THE ADOPTION OF
THE IMC MORTGAGE COMPANY EMPLOYEE STOCK PURCHASE PLAN.
24
<PAGE> 27
IMC MORTGAGE COMPANY EMPLOYEE STOCK PURCHASE PLAN
ARTICLE I - PURPOSE
1.01 Purpose.
The IMC Mortgage Company Employee Stock Purchase Plan (the "Plan") is
intended to provide a method whereby employees of IMC Mortgage Company, and its
Subsidiary Corporations (hereinafter referred to, unless the context otherwise
requires, as the "Company") will have an opportunity to acquire a proprietary
interest in the Company through the purchase of shares of the Common Stock of
the Company. It is the intention of the Company to have the Plan qualify as an
employee stock purchase plan under Section 423 of the Internal Revenue Code of
1986, as amended (the "Code"). The provisions of the Plan shall be construed so
as to extend and limit participation in a manner consistent with the
requirements of that section of the Code.
ARTICLE II - DEFINITIONS
2.01 Base Pay.
"Base Pay" shall mean regular straight-time earnings excluding payments
for overtime, shift premium, bonuses and other special payments, commissions and
other marketing incentive payments.
2.02 Committee.
"Committee" shall mean the individuals described in Article XI.
2.03 Employee.
"Employee" means any person who is customarily employed on a full-time
or part-time basis by the Company and is regularly scheduled to work more than
20 hours per week.
2.04 Subsidiary Corporation.
"Subsidiary Corporation" shall mean any present or future corporation
which (i) would be a "subsidiary corporation" of IMC Mortgage Company as that
term is defined in Section 424 of the Code and (ii) is designated as a
participant in the Plan by the Committee.
25
<PAGE> 28
ARTICLE III - ELIGIBILITY AND PARTICIPATION
3.01 Initial Eligibility.
Any employee who shall have completed ninety (90) days employment and
shall be employed by the Company on the date the employee's participation in the
Plan is to become effective shall be eligible to participate in offerings under
the Plan which commence on or after such ninety day period has concluded.
3.02 Leave of Absence.
For purposes of participation in the Plan, a person on leave of absence
shall be deemed to be an employee for the first ninety (90) days of such leave
of absence and such employee's employment shall be deemed to have terminated at
the close of business on the 90th day of such leave of absence unless such
employee shall have returned to regular full-time or part-time employment (as
the case may be) prior to the close of business on such 90th day. Termination by
the Company of any employee's leave of absence, other than termination of such
leave of absence on return to full-time or part-time employment, shall terminate
an employee's employment for all purposes of the Plan and shall terminate such
employee's participation in the Plan and right to exercise any option.
3.03 Restrictions on Participation.
Notwithstanding any provisions of the Plan to the contrary, no employee
shall be granted the election to participate in the Plan:
(a) if, immediately after the grant, such employee would own
stock, and/or hold outstanding options to purchase stock, possessing 5%
or more of the total combined voting power or value of all classes of
stock of the Company (for purposes of this paragraph, the rules of
Section 424 (d) of the Code shall apply in determining stock ownership
of any employee); or
(b) which permits the employee's rights to purchase stock
under all employee stock purchase plans of the Company to accrue at a
rate which exceeds $25,000 in fair market value of the stock
(determined at the time such option is granted) for each calendar year
in which such option is outstanding.
26
<PAGE> 29
3.04 Commencement of Participation.
An eligible employee may become a participant by completing an
authorization for a payroll deduction on the form provided by the Company and
filing it with the Director of Human Resources for the Company on or before the
date set therefor by the Committee, which date shall be prior to the Offering
Commencement Date for the Offering (as such terms are defined below). Payroll
deductions for a participant shall commence on the applicable Offering
Commencement Date when the employee's authorization for a payroll deduction
becomes effective and shall end on the Offering Termination Date of the Offering
to which such authorization is applicable unless sooner terminated by the
participant as provided in Article VIII.
ARTICLE IV - OFFERINGS
4.01 Annual Offerings.
The Plan will be implemented by four annual offerings of the Company's
Common Stock (the "Offerings") beginning on the 1st day of January in each of
the years 1999, 2000 and 2001, and on July 1 for the year 1998, each Offering
terminating on December 31 of the same year, provided, however, that each annual
Offering may, in the discretion of the Committee exercised prior to the
commencement thereof, be divided into two six-month Offerings commencing,
respectively, on January 1 (or July1 as to 1998) and July 1 of such year and
terminating on June 30 of such year and December 31 of the same year,
respectively. The maximum number of shares issued in the respective years shall
be:
From July 1, 1998 to December 31, 1998: 100,000 shares.
From January 1, 1999 to December 31, 1999:100,000 shares plus
unissued shares from the prior Offerings, whether offered or not.
From January 1, 2000 to December 31, 2000:100,000 shares plus
unissued shares from the prior Offerings, whether offered or not.
From January 1, 2001 to December 31, 2001:100,000 shares plus
unissued shares from the prior Offerings, whether offered or not.
If a six-month Offering is made, the maximum number of shares to be
issued shall be one-half of the number of shares set forth for the annual period
in which the six-month Offering falls, plus, if the Offering is an July 1 to
December 31 Offering, unissued shares, whether offered or not, from the
immediately preceding six-month Offering. As used in the Plan, "Offering
Commencement Date" means the January 1 or July 1, as the case may be, on which
the particular Offering begins and "Offering Termination Date" means the June 30
or December 31 as the case may be, on which the particular Offering terminates.
27
<PAGE> 30
ARTICLE V - PAYROLL DEDUCTIONS
5.01 Amount of Deduction.
At the time a participant files his authorization for payroll
deduction, he shall elect to have deductions made from the employee's pay on
each payday during the time the employee is a participant in an Offering at the
rate of 1, 2, 3, 4, 5, 6, 7, 8, 9 or 10% of the employee's base pay in effect at
the Offering Commencement Date of such Offering; provided, however, that the
minimum payroll deduction shall be $5 per pay period or $260 per year and the
maximum payroll deduction shall be $20,000 per year. In the case of a part-time
hourly employee, such employee's base pay during an Offering shall be determined
by multiplying such employee's hourly rate of pay in effect on the Offering
Commencement Date by the number of regularly scheduled hours of work for such
employee during such Offering.
5.02 Participant's Account.
All payroll deductions made for a participant shall be credited to the
employee's account under the Plan. A participant may not make any separate cash
payment into such account except when on leave of absence and then only as
provided in Section 5.04.
5.03 Changes in Payroll Deductions.
A participant may discontinue the employee's participation in the Plan
as provided in Article VIII, but no other change can be made during an Offering
and, specifically, a participant may not alter the amount of the employee's
payroll deductions for that Offering.
5.04 Leave of Absence.
If a participant goes on a leave of absence, such participant shall
have the right to elect: (a) to withdraw the balance in the employee's account
pursuant to Section 7.02, (b) to discontinue contributions to the Plan but
remain a participant in the Plan, or remain a participant in the Plan during
such leave of absence, authorizing deductions to be made from payments by the
Company to the participant during such leave of absence and undertaking to make
cash payments to the Plan at the end of each payroll period to the extent that
amounts payable by the Company to such participant are insufficient to meet such
participant's authorized Plan deductions.
ARTICLE VI - GRANTING OF OPTION
6.01 Number of Option Shares.
On the Commencement Date of each Offering, a participating employee
shall be deemed to have been granted an option to purchase a maximum number of
shares of the stock of the Company equal to an amount determined as follows: an
amount equal to (i) that percentage of the
28
<PAGE> 31
employee's base pay which the employee has elected to have withheld (but not in
any case in excess of 10%) multiplied by (ii) the employee's base pay during the
period of the Offering (iii) divided by 85% of the market value of the stock of
the Company on the applicable Offering Commencement Date. The market value of
the Company's stock shall be determined as provided in paragraphs (a) and (b) of
Section 6.02 below. An employee's base pay during the period of an Offering
shall be determined by multiplying, in the case of a one-year Offering, his
normal weekly rate of pay (as in effect on the last day prior to the
Commencement Date of the particular Offering) by 52 or the hourly rate by 2,080
or, in the case of a six-month Offering, by 26 or 1040, as the case may be,
provided that, in the case of a part time hourly employee, the employee's base
pay during the period of an Offering shall be determined by multiplying such
employee's hourly rate by the number of regularly scheduled hours of work for
such employee during such Offering.
6.02 Option Price.
The option price of common stock purchased with payroll deductions made
during such annual offering for a participant therein shall be the lower of:
(a) 85% of the closing price of the stock on the Offering
Commencement Date or the nearest prior business day on which trading
occurred on the NASDAQ National Market System; or
(b) 85% of the closing price of the stock on the Offering
Termination Date or the nearest prior business day on which trading
occurred on the NASDAQ National Market System. If the Common Stock of
the Company is not admitted to trading on any of the aforesaid dates
for which closing prices of the stock are to be determined, then
reference shall be made to the fair market value of the stock on that
date, as determined on such basis as shall be established or specified
for the purpose by the Committee.
ARTICLE VII - EXERCISE OF OPTION
7.01 Automatic Exercise.
Unless a participant gives written notice to the Company as hereinafter
provided, the employee's option for the purpose of common stock with payroll
deductions made during any Offering will be deemed to have been exercised
automatically on the Offering Termination Date applicable to such Offering, for
the purchase of the number of full shares of stock which the accumulated payroll
deductions in his account at that time will purchase at the applicable Option
Price (but not in excess of the number of shares for which options have been
granted to the employee pursuant to Section 6.01), and any excess in the
employee's account at that time will be returned to the employee.
29
<PAGE> 32
7.02 Withdrawal of Account.
By written notice to the Vice President for Human Resources of the
Company, at any time prior to the Offering Termination Date applicable to any
Offering, a participant may elect to withdraw all the accumulated payroll
deductions in the employee's account at such time.
7.03 Fractional Shares.
Fractional Shares will not be issued under the Plan and any accumulated
payroll deductions which would have been used to purchase fractional shares will
be returned to any employee promptly following the termination of an Offering,
without interest.
7.04 Transferability of Option.
During a participant's lifetime, options held by such participant shall
be exercisable only by that participant.
7.05 Delivery of Stock.
As promptly as practicable after the Offering Termination Date of each
Offering, the Company will deliver to each participant, as appropriate, the
stock purchased upon exercise of the employee's option.
ARTICLE VIII - WITHDRAWAL
8.01 In General.
As indicated in Section 7.02, a participant may withdraw payroll
deductions credited to the employee's account under the Plan at any time by
giving written notice to the Director for Human Resources of the Company. All of
the participant's payroll deductions credited to the employee's account will be
paid to the employee promptly after receipt of the employee's notice of
withdrawal, and no further payroll deductions will be made from the employee's
pay during such Offering. The Company may, at its option, treat any attempt to
borrow by an employee on the security of his accumulated payroll deductions as
an election, under Section 3.02, to withdraw such deductions.
8.02 Effect on Subsequent Participation.
A participant's withdrawal from any Offering will not have any effect
upon the employee's eligibility to participate in any succeeding Offering or in
any similar plan which may hereafter be adopted by the Company.
30
<PAGE> 33
8.03 Termination of Employment.
Upon termination of the participant's employment for any reason,
including retirement (but excluding death while in the employ of the Company or
continuation of a leave of absence for a period beyond 90 days), the payroll
deductions credited to the employee's account will be returned to the employee,
or, in the case of the employee's death subsequent to the termination of the
employee's employment, to the person or persons entitled thereto under Section
12.01.
8.04 Termination of Employment Due to Death.
Upon termination of the participant's employment because of the
employee's death, the employee's beneficiary (as defined in Section 12.01) shall
have the right to elect, by written notice given to the Director for Human
Resources of the Company prior to the earlier of the Offering Termination Date
or the expiration of a period of sixty (60) days commencing with the date of the
death of the participant; either:
(a) to withdraw all of the payroll deductions credited to the
participant's account under the Plan, or
(b) to exercise the participant's option for the purchase of
stock on the Offering Termination Date next following the date of the
participant's death for the purchase of the number of full shares of
stock which the accumulated payroll deductions in the participant's
account at the date of the participant's death will purchase at the
applicable option price, and any excess in such account will be
returned to said beneficiary, without interest.
In the event that no such written notice of election shall be duly
received by the Director for Human Resources of the Company, the beneficiary
shall automatically be deemed to have elected, pursuant to paragraph (b), to
exercise the participant's option.
8.05 Leave of Absence.
A participant on leave of absence shall, subject to the election made
by such participant pursuant to Section 5.04, continue to be a participant in
the Plan so long as such participant is on continuous leave of absence. A
participant who has been on leave of absence for more than 90 days and who has
therefore is not an employee for the purpose of the Plan shall not be entitled
to participate in any Offering commencing after the 90th day of such leave of
absence. Notwithstanding any other provisions of the Plan, unless a participant
on leave of absence returns to regular full time or part time employment with
the Company at the earlier of: (a) the termination of such leave of absence or
(b) three months from the 90th day of such leave of absence, such participant's
participation in the Plan shall terminate on whichever of such dates first
occurs.
31
<PAGE> 34
ARTICLE IX - INTEREST
9.01 Payment of Interest.
No interest will be paid or allowed on any money paid into the Plan or
credited to the account of any participant employee; provided, however, that
interest shall be paid on any and all money which is distributed to an employee
or the employee's beneficiary pursuant to the provisions of Sections 7.02, 8.01,
8.03, 8.04 and 10.01. Such distributions shall bear simple interest during the
period from the date of withholding to the date of return at the thirty-day
Libor rate published, during the applicable Offering period or, if such rates
are not published or otherwise available for such purpose, at the regular
passbook saving account rates per annum in effect during such period at another
major commercial bank in Tampa, Florida selected by the Committee. Where the
amount returned represents an excess amount in an employee's account after such
account has been applied to the purchase of stock, the employee's withholding
account shall be deemed to have been applied first toward purchase of stock
under the Plan, so that interest shall be paid on the last withholdings during
the period which results in the excess amount.
ARTICLE X - STOCK
10.01 Maximum Shares.
The maximum number of shares which shall be issued under the Plan,
subject to adjustment upon changes in capitalization of the Company as provided
in Section 12.04 shall be 100,000 shares in each annual Offering (50,000 shares
in each six-month Offering) plus in each Offering all unissued shares from prior
Offerings, whether offered or not, (except the six month Offering in 1998 which
shall be 100,000 shares) not to exceed 400,000 shares for all Offerings. If the
total number of shares for which options are exercised on any Offering
Termination Date in accordance with Article VI exceeds the maximum number of
shares for the applicable Offering, the Company shall make a pro rata allocation
of the shares available for delivery and distribution in an nearly a uniform
manner as shall be practicable and as it shall determine to be equitable, and
the balance of payroll deductions credited to the account of each participant
under the Plan shall be returned to him as promptly as possible.
10.02 Participant's Interest in Option Stock.
The participant will have no interest in stock covered by the
employee's option until such option has been exercised.
10.03 Registration of Stock.
Stock to be delivered to a participant under the Plan will be
registered in the name of the participant, or, if the participant so directs by
written notice to the Director of Human Resources of the Company prior to the
Offering Termination Date applicable thereto, in the names of the
32
<PAGE> 35
participant and one such other person as may be designate by the participant, as
joint tenants with rights of survivorship or as tenants by the entireties, to
the extent permitted by applicable law.
10.04 Restrictions on Exercise.
The Board of Directors may, in its discretion, require as conditions to
the exercise of any option that the shares of Common Stock reserved for issuance
upon the exercise of the option shall have been duly listed, upon official
notice of issuance, upon a stock exchange or NASDAQ and that either:
(a) a Registration Statement under the Securities Act of 1933,
as amended, with respect to said shares shall be effective, or
(b) the participant shall have represented at the time of
purchase, in form and substance satisfactory to the Company, that it is
the employee's intention to purchase the shares for investment and not
for resale or distribution.
ARTICLE XI - ADMINISTRATION
11.01 Appointment of Committee.
The Board of Directors shall appoint a committee (the "Committee") to
administer the Plan, which shall consist of no fewer than three members of the
Board of Directors. No members of the Committee shall be eligible to purchase
stock under the Plan.
11.02 Authority of Committee.
Subject to the express provisions of the Plan, the Committee shall have
plenary authority in its discretion to interpret and construe any and all
provisions of the Plan, to adopt rules and regulations for administering the
Plan, and to make all other determinations deemed necessary or advisable for
administering the Plan. The Committee's determination on the foregoing matters
shall be conclusive.
11.03 Rules Governing the Administration of the Committee.
The Board of Directors may from time to time appoint members of the
Committee in substitution for or in addition to members previously appointed and
may fill vacancies, however caused, in the Committee. The Committee may select
one of its members as its Chairman and shall hold its meetings at such times and
places as it shall deem advisable and may hold telephonic meetings. A majority
of its members hall constitute a quorum. All determinations of the Committee may
correct any defect or omission or reconcile any inconsistency in the Plan, in
the manner and to the extent it shall deem desirable. Any decision or
determination reduced to writing and signed by as fully effective as if it had
been made by a majority vote at a meeting duly called
33
<PAGE> 36
and held. The Committee may appoint a secretary and shall make such rules and
regulations for the conduct of its business as it shall deem advisable.
11.04 Third Party Administration.
The Committee may employ the services of a third party administrator
("TPA") to maintain records and accounts and to perform ministerial
administrative services for the Plan.
ARTICLE XII - MISCELLANEOUS
12.01 Designation of Beneficiary.
A participant may file a written designation of a beneficiary who is to
receive any stock and/or cash. Such designation of beneficiary may be changed by
the participant at any time by written notice to the Treasurer of the Company.
Upon the death of a participant and upon receipt by the Company of proof of
identity and existence at the participant's death of a beneficiary validly
designated by him under the Plan, the Company shall deliver such stock and/or
cash to such beneficiary. In the event of the death of a participant and in the
absence of a beneficiary validly designated under the Plan who is living at the
time of such participant's death, the Company shall deliver such stock and/or
cash to the executor or administrator of the estate of the participant, or if no
such executor or administrator has been appointed (to the knowledge of the
Company), the Company, in its discretion, may deliver such stock and/or cash to
the spouse or to any one or more dependents of the participant as the Company
may designate. No beneficiary shall, prior to the death of the participant by
whom he has been designated, acquire any interest in the stock or cash credited
to the participant under the Plan.
12.02 Transferability.
Neither payroll deductions credited to a participant's account nor any
rights with regard to the exercise of an option or to receive stock under the
Plan may be assigned, transferred, pledged, or otherwise disposed of in any way
by the participant other than by will or the laws of descent and distribution.
Any such attempted assignment, transfer, pledge or other disposition shall be
without effect, except that the Company may treat such act as an election to
withdraw funds in accordance with Section 7.02.
12.03 Use of Funds.
All payroll deductions received or held by the Company under this Plan
may be used by the Company for any corporate purpose and the Company shall not
be obligated to segregate such payroll deductions.
34
<PAGE> 37
12.04 Adjustment Upon Changes in Capitalization.
(a) If, while any options are outstanding, the outstanding shares of
Common Stock of the Company have increased, decreased, changed into, or been
exchanged for a different number or kind of shares or securities of the Company
through reorganization, merger, recapitalization, reclassification, stock split,
reverse stock split or similar transaction, appropriate and proportionate
adjustments may be made by the Committee in the number and/or kind of share
which are subject to purchase under outstanding options and on the option
exercise price or prices applicable to such outstanding options. In addition, in
any such event, the number and/or kind of shares which may be offered in the
Offerings described in Article IV hereof shall also be proportionately adjusted.
No adjustments shall be made for dividends except those payable in the Company's
Common Stock.
12.05 Amendment and Termination.
The Board of Directors shall have complete power and authority to
terminate or amend the Plan; provided, however, that the Board of Directors
shall not, without the approval of the stockholders of the Corporation (i)
increase the maximum number of shares which may be issued under any Offering
(except pursuant to Section 12.04; (ii) amend the requirements as to the class
of employees eligible to purchase stock under the Plan or permit the members of
the Committee to purchase stock under the Plan. No termination, modification or
amendment of the Plan may, without the consent of an employee then having an
option under the Plan to purchase stock, adversely affect the rights of such
employee under such option.
12.06 Effective Date.
The Plan shall become effective as of July1, 1998, subject to approval
by the holders of the majority of the Common Stock present and represented at a
special or annual meeting of the shareholders held on or before December 31,
1998. If the Plan is not so approved, the Plan shall not become effective.
12.07 No Employment Rights.
The Plan does not, directly or indirectly, create any right for the
benefit of any employee or class of employees to purchase any shares under the
Plan, or create in any employee or class of employees any right with respect to
continuation of employment by the Company, and it shall not be deemed to
interfere in any way with the Company's right to terminate, or otherwise modify,
an employee's employment at any time.
12.08 Effect of Plan.
The provisions of the Plan shall, in accordance with its terms, be
binding upon, and inure to the benefit of, all successors of each employee
participating in the Plan, including, without
35
10
<PAGE> 38
limitation, such employee's estate and the executors, administrators or trustees
thereof, heirs and legatees, and any receiver, trustee in bankruptcy or
representative of creditors of such employee.
12.09 Governing Law.
The law of the State of Florida will govern all matters relating to
this Plan except to the extent it is superseded by the laws of the United
States.
Adopted
February 9, 1998
IMC Mortgage Company
By:
-----------------------------------
George Nicholas, Chairman
36
<PAGE> 39
PROPOSAL NO. 3
RATIFICATION OF APPOINTMENT
OF INDEPENDENT ACCOUNTANTS
On the recommendation of its Audit Committee, the Board of Directors
has selected Coopers & Lybrand L.L.P., independent accountants, to audit the
financial statements of the Company for the 1998 fiscal year. Such nomination is
being presented to the shareholders for ratification at the Annual Meeting. The
affirmative vote of the holders of a majority of shares present in person or
represented by proxy and entitled to vote at the Annual Meeting is required to
ratify the Board's appointment of Coopers & Lybrand. If the stockholders reject
the nomination, the Board of Directors may reconsider its selection. If the
stockholders ratify the appointment, the Board of Directors, in its sole
discretion, may still direct the appointment of new independent accountants at
any time during the year if the Board of Directors believe that such a change
would be in the best interests of the Company.
Coopers & Lybrand L.L.P. has audited and certified the Company's
financial statements since 1995 and audited and certified the Company's
financial statements from the time of inception. The Company has been advised
that a representative of Coopers & Lybrand L.L.P. will be present at the Annual
Meeting, will have the opportunity to make a statement, and is expected to be
available to respond to appropriate questions.
The affirmative vote of the holders of a majority of the shares of
Common Stock voting on this proposal is required for ratification of the
appointment of Coopers & Lybrand L.L.P. as the Company's independent accountants
for the fiscal year ending December 31, 1998.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE
"FOR" RATIFICATION OF THE APPOINTMENT OF COOPERS & LYBRAND L.L.P. AS THE
COMPANY'S INDEPENDENT AUDITORS FOR THE 1998 FISCAL YEAR.
PROPOSALS BY STOCKHOLDERS
Any stockholder proposal which is intended to be presented at the
Company's Annual Meeting of Stockholders to be held in 1999 must be received at
the Company's principal executive offices, located at 5901 E. Fowler Avenue,
Tampa, FL 33617-2362, Attention: Laurie Williams, Secretary of the Company, by
no later than February 1, 1999, if such proposal is to be considered for
inclusion in the Company's proxy statement and form of proxy relating to such
meeting. Stockholders of the Company who intend to bring business before the
meeting must also comply with the applicable procedures set forth in the
Company's Bylaws. The Company will furnish copies of such Bylaw provisions upon
written request to Laurie Williams at the aforementioned address.
37
<PAGE> 40
AVAILABILITY OF FORM 10-K
The Company will provide to any stockholder, without charge, upon
written request of such stockholder, a copy of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997, as filed with the
Securities and Exchange Commission. Such requests should be addressed to IMC
Mortgage Company, 5901 E. Fowler Avenue, Tampa, FL 33617-2362, Attention: Laurie
Williams.
SECTION 16(A) REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons owning more than ten
percent of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership of such equity securities with the
Securities and Exchange Commission. To the Company's knowledge, based solely on
the information furnished to the Company and written representations by such
persons, all filing requirements under Section 16(a) during 1997 were complied
with, except that one sale transaction of the Common Stock of the Company was
inadvertently reported late by each of Mr. George Nicholas and Mr. Allen Wykle.
OTHER BUSINESS
The Annual Meeting of Stockholders scheduled for June 5, 1998 is being
held for the purpose set forth in the Notice that accompanies this Proxy
Statement. The Board is not presently aware of business to be transacted at the
Annual Meeting other than as set forth in the Notice. However, if any other
business properly comes before the meeting, the Proxies named on the
accompanying proxy card will vote their Proxies in their discretion on such
business.
By Order of the Board of Directors
George Nicholas
Chairman of the Board
Tampa, Florida
April 30, 1998
38
<PAGE> 41
SELECTED FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Period From
Inception
(August 12, 1993) Year Ended
Through December 31,
December 31, -----------------------------------------------------------
1993 1994 1995 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (DOLLARS THOUSANDS
EXCEPT PER SHARE DATA):
Total revenues ............................. $ 513 $ 10,094 $ 19,673 $ 65,654 $ 238,759
Pro forma net income (loss) ................ (216) 1,856 4,032 17,929 47,929
Pro forma earnings (loss) per share ........ (0.02) 0.15 0.34 0.92 1.54
Weighted average number of shares
outstanding ............................ 12,000,000 12,000,000 12,000,000 19,539,963 31,147,944
BALANCE SHEET DATA (DOLLARS IN THOUSANDS):
Mortgage loans held for sale ............... 7,972 28,996 193,003 914,587 1,673,144
Total assets ............................... 8,861 36,642 354,551 1,707,348 2,945,932
Total liabilities .......................... 7,412 30,786 348,942 1,618,011 2,691,868
Shareholders' equity ....................... 1,449 5,856 5,609 89,337 254,064
OPERATING DATA (DOLLARS IN MILLIONS):
Loans purchased or originated .............. $ 30 $ 283 $ 622 $ 1,770 $ 5,893
Loans sold through securitization .......... -- 82 388 935 4,858
Whole loan sales ........................... 22 180 70 129 145
Serviced loan portfolio .................... -- 92 536 2,148 6,957
</TABLE>
39
<PAGE> 42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 certain factors. The following discussion should be
read in conjunction with Consolidated Financial Statements of the Company and
the Notes thereto.
General
The Company 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,
1996 the Company acquired all of the assets of EquityStars, and effective
January 1, 1997 the Company acquired all of the assets of Mortgage America Inc.
("Mortgage America") and Equity Mortgage Co., Inc ("Equity Mortgage") and all of
the outstanding common stock of CoreWest Banc ("CoreWest"). Effective February
1, 1997, the Company acquired all of the assets of American Reduction, Inc.
("American Reduction"). Effective July 1, 1997, the Company acquired
substantially all of the assets of National Lending Center, Inc. ("National
Lending Center") and Central Money Mortgage Co., Inc. ("Central Money
Mortgage"). Effective October 1, 1997, the Company acquired substantially all
of the assets of Residential Mortgage Corporation, and effective November 1,
1997, the Company acquired substantially all of the assets of Alternative
Capital Group, Inc. ("Alternative Capital Group").
These 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 included 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 up to 30 years.
40
<PAGE> 43
CERTAIN ACCOUNTING CONSIDERATIONS
INTEREST-ONLY AND RESIDUAL CERTIFICATES
The Company purchases and originates loans for the purpose of sale
primarily through securitizations. In a securitization transaction, the Company
sells a pool of mortgages to a trust which simultaneously sells senior interests
to third-party investors. The Company retains the residual interests (or a
portion thereof) represented by residual class certificates and interest-only
certificates. The Company retains the rights to service the pool of mortgages
owned by the trust. In addition, by retaining the residual class certificates,
the Company is entitled to receive the excess cash flows generated by the
securitized loans calculated as the difference between (a) the monthly interest
payments from the loans and (b) the sum of (i) pass-through interest paid to
third-party investors, (ii) trustee fees, (iii) third-party credit enhancement
fees, and (iv) servicing fees. The Company's right to receive this excess cash
flow stream begins after certain over-collateralization requirements have been
met, which are specific to each securitization and are used to provide credit
enhancement.
The Company initially records these securities at their allocated cost
based upon the present value of the interest in the cash flows retained by the
Company after considering various economic factors, including interest rates,
collateral value and estimates of the value of future cash flows from the
securitized mortgage pools under expected loss and prepayment assumptions
discounted at a market yield. The weighted average rates used to discount the
cash flows range from 11% to 14.5% based on the risks associated with each
securitized mortgage pool. The Company utilizes prepayment and loss curves which
the Company believes will approximate the timing of prepayments and losses over
the life of the securitized loans. Prepayments on fixed rate loans securitized
by the Company are expected to gradually increase from a constant prepayment
rate ("CPR") of 4% to 28% in the first year of the loan and remain at 28%
thereafter. The Company currently expects prepayments on adjustable rate loans
to gradually increase from a CPR of 4% to 35% in the first year of the loan and
remain at 35% thereafter. The CPR measures the annualized percentage of mortgage
loans which prepay during a given period. The CPR represents the annual
prepayment rate such that, in the absence of regular amortization, the total
prepayment over the year would equal that percent of the original principal
balance of the mortgage loan. The Company expects losses from defaults to
gradually increase from zero in the first six months of securitization to 100
basis points after 36 months. The loss curve utilized by the Company
approximates an assumed loss rate of approximately 65 basis points per year at
inception of the securitization.
MORTGAGE SERVICING RIGHTS
Effective January 1, 1996, the Company adopted SFAS 122. Because SFAS
122 prohibited retroactive application, the historical accounting results for
the periods ended December 31, 1994 and 1995 have not been restated and,
accordingly, the accounting results for the year ended December 31, 1996 are not
comparable to any previous period. In June 1996, the FASB released SFAS 125,
which superseded SFAS 122 and was adopted by the Company January 1, 1997.
41
<PAGE> 44
SFAS 122 required that a mortgage banking entity recognize as a
separate asset the rights to service mortgage loans for others. Mortgage banking
entities that acquire or originate loans and subsequently sell or securitize
those loans and retain the mortgage servicing rights are required to allocate
the total cost of the loans between the mortgage servicing rights and the
mortgage loans. The Company was also required to assess capitalized mortgage
servicing rights for impairment based upon the fair value of those rights. The
impact of the adoption of SFAS 122 on the Company's Statement of Operations for
the year ended December 31, 1996 resulted in additional operating income of
approximately $6.6 million and an additional pro forma provision for income tax
expense of approximately $2.6 million. The effect on unaudited pro forma net
income and pro forma net income per common share for the year ended December 31,
1996 was an increase of $4.1 million and $0.21 per share, respectively.
SFAS 125 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 is generally
effective for transactions that occur after December 31, 1996 and has been
applied prospectively. SFAS 125 requires the Company to allocate the total cost
of mortgage loans sold among the mortgage loans sold (servicing released), I/O
and residual certificates and servicing rights based on their relative fair
values. The Company is required to assess the I/O and residual certificates and
servicing rights for impairment based upon the fair value of those assets. SFAS
125 also requires the Company to provide additional disclosure about the I/O and
residual certificates in its securitizations and to account for these assets
each quarterly reporting period at fair value in accordance with SFAS 115. The
application of the provisions of SFAS 125 did not cause earnings to differ
materially from the results which would have been reported under SFAS 122.
GAIN ON SALE OF LOANS, NET
Gain on sale of loans, net, which arises primarily from
securitizations, includes all related revenues and costs, including the proceeds
from sales of residual class certificates, the value of such certificates,
hedging gains or losses and underwriting fees and other related securitization
expenses and fees. See " -- Transactions with ContiFinancial -- Additional
Securitization Transaction Expense."
NET WAREHOUSE INTEREST INCOME
Net warehouse interest income is interest earned from the Company's
mortgage loans which generally carry long-term interest rates, less interest
expense on borrowings to finance the funding of such mortgage loans. The Company
generally sells loans in its inventory within 210 days and finances such loans
under its secured borrowing facilities, which bear short-term interest rates.
Ordinarily, short-term interest rates are lower than long-term interest rates,
and the Company
42
<PAGE> 45
earns net interest income from this difference, or spread, during the period the
mortgage loans are held by the Company.
SERVICING FEES
The Company generally retains servicing rights and recognizes servicing
income from fees, prepayment penalties and late payment charges earned for
servicing the loans owned by certificate holders and others. Servicing fees are
generally earned at a rate of approximately 1/2 of 1%, on an annualized basis,
of the unamortized loan balance being serviced.
TRANSACTIONS WITH CONTIFINANCIAL
ADDITIONAL SECURITIZATION TRANSACTION EXPENSE
IMC, in conjunction with the start up of its operations, maintained an
investment banking relationship with ContiFinancial from August 1993 to June
1996. As part of this relationship, ContiFinancial provided warehouse and
revolving credit facilities to IMC and acted as placement agent and underwriter
of certain securitizations. In addition, as part of its cash flow management
strategy, the first six securitizations were structured so that ContiFinancial
received, in exchange for cash, a portion of the I/O and residual interest in
such securitizations. These transactions reduced IMC's gain on sale of loans by
approximately $5.5 million in 1995 and $4.2 million in 1996. ContiFinancial also
had a warrant to purchase 2.7 million shares of Common Stock (subject to certain
adjustments) for a de minimis amount, of which 0.5 million shares have been
issued. IMC continues to maintain a financing relationship with ContiFinancial.
SHARING OF PROPORTIONATE VALUE OF EQUITY
Prior to March 26, 1996, the Company's financing and investment banking
agreements with ContiFinancial included the ContiFinancial Value Sharing
Arrangement ("Conti VSA"). The existence of the Conti VSA had no cash impact on
the Company, but resulted in reductions of $4.2 million and $2.6 million in the
Company's pre-tax income for the years ended December 31, 1995 and 1996,
respectively. The Conti VSA was converted into an option entitling
ContiFinancial on exercise to approximately 18% of the equity of the Partnership
for a de minimus amount (the "Conti Option") on March 26, 1996. Consequently,
subsequent to March 26, 1996, no liability has been reflected on the Company's
balance sheet, and no expense has been reflected on the Company's income
statement with respect to the Conti VSA subsequent to that date.
43
<PAGE> 46
The Company's pre-tax income before and after the Conti VSA for the
years ended December 31, 1995 and 1996 was as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------
1995 1996
------- -------
(in thousands)
<S> <C> <C>
Total revenues .............................. $19,673 $65,654
Total expenses .............................. 13,119 36,535
------- -------
Pre-tax income after Conti VSA ......... 6,554 29,119
Effect of Conti VSA ......................... 4,204 2,555
------- -------
Pre-tax income before Conti VSA ........ $10,758 $31,674
======= =======
</TABLE>
RESULTS OF OPERATIONS
Year Ended December 31,1997 Compared to Year Ended December 31, 1996
Net income for the year ended December 31, 1997 was $47.9 million
representing an increase of $30.0 million or 167.3% over pro forma net income of
$17.9 million for the year ended December 31, 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 $138.9 million or 330.1% to $181.0 million for the year
ended December 31, 1997 from $42.1 million for the year ended December 31, 1996.
Also contributing to the increase in net income was an $11.8 million or 91.1%
increase in net warehouse interest income to $24.7 million for the year ended
December 31, 1997 from $12.9 million for the year ended December 31, 1996, a
$13.8 million or 205.1% increase in servicing fees to $20.6 million for the year
ended December 31, 1997 from $6.7 million for the year ended December 31, 1996
and an $8.6 million or 220.0% increase in other revenues to $12.5 million for
the year ended December 31, 1997 from $3.9 million for the year ended December
31, 1996.
The increase in income was partially offset by a $66.0 million or
412.6% increase in compensation and benefits to $82.1 million for the year ended
December 31, 1997 from $16.0 million for the year ended December 31, 1996, of
which $48.9 million consisted of compensation and benefits relating to the
acquisitions of Mortgage America, CoreWest, Equity Mortgage, American Reduction,
National Lending Center, Central Money Mortgage, Residential Mortgage
Corporation and Alternative Capital Group (collectively, the "Acquisitions") and
the remainder related primarily to the growth of the Company. The increase in
income was also partially offset by a $49.3 million or 315.3% increase in
selling, general and administrative expenses to $65.0
44
<PAGE> 47
million for the year ended December 31, 1997 from $15.7 million for the year
ended December 31, 1996, of which increase $27.9 million consisted of expenses
relating to the Acquisitions for the year ended December 31, 1997 and the
remainder related primarily to the growth of the Company. The increase in income
was further offset by a $12.0 million or 515.1% increase in other interest
expense to $14.3 million for the year ended December 31, 1997 from $2.3 million
for the year ended December 31, 1996. Finally, income for the year ended
December 31, 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 year ended December 31, 1997 from $2.6 million for the year ended
December 31, 1996.
Income before taxes was reduced by a provision for income taxes of
$29.5 million for the year ended December 31, 1997 compared to a pro forma
provision for income taxes of $11.2 million for the year ended December 31,
1996, representing an effective tax rate of approximately 38.1% for the year
ended December 31, 1997. The provisions 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.
Revenues
The following table sets forth information regarding components of the
Company's revenues for the year ended December 31, 1996 and 1997:
<TABLE>
<CAPTION>
For the Year
Ended December 31,
------------------------
1996 1997
-------- ---------
(in thousands)
<S> <C> <C>
Revenues:
Gain on sales of loans .............................. $ 46,230 $ 180,963
Additional securitization transaction expense ....... (4,158) --
-------- ---------
Gain on sale of loans, net ................... 42,072 180,963
-------- ---------
Warehouse interest income ........................... 37,463 123,432
Warehouse interest expense .......................... (24,535) (98,720)
-------- ---------
Net warehouse interest income ............... 12,928 24,712
-------- ---------
Servicing fees ...................................... 6,750 20,593
Other ............................................... 3,904 12,491
-------- ---------
Total revenues ............................. $ 65,654 $ 238,759
======== =========
</TABLE>
Gain on Sale of Loans, Net.
For the year ended December 31, 1997, gain on sale of loans increased
to $181.0 million from $46.2 million for the year ended December 31, 1996, an
increase of 291.4%, reflecting increased loan production and securitizations for
the year ended December 31, 1997. Additional securitization expense decreased to
$0 for the year ended December 31, 1997 from $4.2 million for the year ended
December 31, 1996. For the year ended December 31, 1997, gain on sale of loans,
45
<PAGE> 48
net, increased to $181.0 million from $42.1 million for the year ended December
31, 1996, an increase of 330.1%, reflecting increased loan production and
securitizations in the year ended December 31, 1997.
The total volume of loans produced increased by 232.9% to approximately
$5.9 billion for the year ended December 31, 1997 compared with a total volume
of $1.8 billion for the year ended December 31, 1996. Originations by the
Company's correspondent network increased 174.5% to $4.3 billion for the year
ended December 31, 1997 from $1.6 billion for the year ended December 31, 1996,
while production from the Company's broker network and direct lending operations
increased to $1.6 billion or 725% for the year ended December 31, 1997 from $188
million for the year ended December 31, 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 $1.2
billion in residential mortgage loans originated during the year ended December
31, 1997.
The gain on sale as a percentage of loans sold and securitized
decreased to 3.7% for the year ended December 31, 1997 from 4.4% for the year
ended December 31, 1996. The decrease in the gain on sale percentage was
primarily due to the increase in securitization of adjustable rate mortgage
loans, higher premiums paid on loan production and higher prepayment speed
assumptions used to calculate the gain on sale of securitized loans. In 1996,
less than 2% of the $935 million mortgage loans securitized by the Company were
adjustable rate mortgages. In 1997, approximately $1.7 billion or 34% of the
$4.9 billion mortgage loans securitized by the Company were adjustable rate
mortgages. The prepayment curve utilized by the Company to recognize the gain on
sale of securitized fixed rate loans reaches a maximum CPR of 28% as compared to
the prepayment curve utilized to recognize the gain on sale of adjustable rate
loans, which reaches a maximum CPR of 35%. The higher prepayment assumption for
adjustable rate loans, which is based on historical adjustable rate loan
prepayment patterns, results in the recognition of a lower gain on sale for
adjustable rate loans than for fixed rate loans. The average premium paid for
loan production was 5.0% for the year ended December 31, 1996 compared to 5.3%
for the year ended December 31, 1997. The maximum CPR assumed for fixed mortgage
loans securitized increased from 26% for the year ended December 31, 1996 to 28%
(35% for adjustable rate mortgage loans) for the year ended December 31, 1997.
The decrease in the gain on sale percentage was partially offset by an increase
in retail loan production. Upfront points and origination fees related to retail
loan production are recognized as gain on sale at the time the loan is sold.
Total retail production increased from approximately $67 million for the year
ended December 31, 1996 to approximately $769 million for the year ended
December 31, 1997.
Net Warehouse Interest Income
Net warehouse interest income increased to $24.7 million for the year
ended December 31, 1997 from $12.9 million for the year ended December 31, 1996,
an increase of 91.1%. The increase in the year ended December 31, 1997 reflected
higher interest income resulting primarily from increased mortgage loan
production and mortgage loans held for sale in inventory for longer periods of
time, partially offset by interest expense associated with warehouse facilities.
The
46
<PAGE> 49
mortgage loans held for sale increased to $1.7 billion at December 31, 1997, an
increase of 82.9%, from $914.6 million at December 31, 1996.
The increase in net warehouse interest income was partially offset by
an increase in the securitization of adjustable rate mortgage loans. In a fixed
rate mortgage loan securitization transaction, the Company receives the
pass-through rate of interest on the loans conveyed to the securitization trust
for the period between the cut-off date (generally the first day of the month a
securitization transaction occurs) and the closing date of the securitization
transaction (typically during the third week of the month). The cut-off date
represents the date when interest on the mortgage loans accrues to the
securitization trust rather than the Company. The pass-through rate, which is
less than the weighted average interest rate on the mortgage loans, represents
the interest rate to be received by investors who purchase passthrough
certificates in the securitization trust on the closing date. The Company
continues to incur interest expense on its warehouse financings related to loans
conveyed to the trust until the closing date, at which time the warehouse line
is repaid. In an adjustable rate mortgage loan securitization, the Company
receives no interest on mortgage loans conveyed to the securitization trust for
the period between the cut-off date and the closing date of the securitization.
For the year ended December 31, 1997, the Company incurred warehouse interest
expense of approximately $6.9 million related to the period between the cut-off
date and the closing date of adjustable rate mortgage loan securitizations for
which no corresponding interest income was recognized. The Company had an
insignificant amount of warehouse interest expense related to adjustable rate
mortgage loans securitized in 1996.
Servicing Fees
Servicing fees increased to $20.6 million for the year ended December
31, 1997 from $6.7 million for the year ended December 31, 1996, an increase of
205.1%. Servicing fees for the year ended December 31, 1997 were positively
affected by an increase in mortgage loans serviced over the prior period. The
Company increased its servicing portfolio by $4.9 billion or 233.3% to $7.0
billion as of December 31, 1997 from $2.1 billion as of December 31, 1996.
Other
Other revenues, consisting principally of the recognition of the
increase or accretion of the discounted value of interest on interest-only and
residual certificates, over time, increased to $12.5 million or 220.0% for the
year ended December 31, 1997 from $3.9 million in the year ended December 31,
1996 as a result of increased securitization volume and investment in
interest-only and residual certificates.
47
<PAGE> 50
Expenses
The following table sets forth information regarding components of the
Company's expenses for the year ended December 31, 1996 and 1997:
<TABLE>
<CAPTION>
For the Year
Ended December 31,
---------------------
1996 1997
------- --------
(in thousands)
<S> <C> <C>
Compensation and benefits $16,007 $ 82,051
Selling, general and administrative expenses 15,652 64,999
Other interest expense 2,321 14,280
Sharing of proportionate value of equity 2,555 0
------- --------
Total expenses $36,535 $161,330
======= ========
</TABLE>
Compensation and benefits increased by $66.0 million or 412.6% to $82.1
million for the year ended December 31, 1997 from $16.0 million for the year
ended December 31, 1996, principally due to an increase in the number of
employees related to the Company's increased mortgage loan production, including
$48.9 million of compensation and benefits relating to the Acquisitions,
additions of personnel to service the Company's increased loan servicing
portfolio, and a $2.4 million increase in executive incentive compensation from
$2.6 million for the year ended December 31, 1996 to $5.0 million for the year
ended December 31, 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 $49.3 million
or 315.3% to $65.0 million for the year ended December 31, 1997 from $15.7
million for the year ended December 31, 1996. Excluding $27.9 million of
compensation and benefits relating to the Acquisitions, the increase was
principally due to an increase in underwriting, originating and servicing costs
as a result of an increase in the volume of mortgage loan production, an
increase in amortization expense related to capitalized servicing rights of $4.7
million and a $10.4 million increase in the provision for loan losses.
Other interest expense increased by $12.0 million or 515.3% to $14.3
million for the year ended December 31, 1997 from $2.3 million for the year
ended December 31, 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 year ended December 31,
1997 from $2.6 million for the year ended December 31, 1996. The Company's
obligation to make payments under the Conti VSA terminated in March 1996.
48
<PAGE> 51
Pro Forma Income Taxes
The effective income tax rate for the year ended December 31, 1997 was
approximately 38.1%, which differed from the federal tax rate of 35% primarily
due to state income taxes. The increase in the provision for income taxes of
$18.3 million or 163.6% to $29.5 million for the year ended December 31, 1997
from the pro forma provision for income taxes of $11.2 million for the year
ended December 31, 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.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Pro forma net income for the year ended December 31, 1996 was $17.9
million representing an increase of $13.9 million or 344.7% over pro forma net
income of $4.0 million for the year ended December 31, 1995. 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 pro forma net income resulted principally from
increases in net gain on sale of loans of $27.0 million or 178.0% to $42.1
million for the year ended December 31, 1996 from $15.1 million for the year
ended December 31, 1995. Also contributing to the increase in pro forma net
income was a $11.0 million or 588.5% increase in net warehouse interest income
to $12.9 million for the year ended December 31, 1996 from $1.9 million for the
year ended December 31, 1995, a $5.2 million or 337.4% increase in servicing
fees to $6.7 million for the year ended December 31, 1996 from $1.5 million for
the year ended December 31, 1995 and a $2.8 million or 249.2% increase in other
revenues to $3.9 million for the year ended December 31, 1996 from $1.1 million
for the year ended December 31, 1995.
The increase in income was partially offset by a $10.9 million or
211.4% increase in compensation and benefits to $16.0 million for the year ended
December 31, 1996 from $5.1 million for the year ended December 31, 1995, of
which increase $2.2 million related to the acquisition of Equitystars on January
1, 1996, $2.6 million related to the payment of bonuses to the Company's
executives and the remainder related primarily to the growth of the Company. The
increase in income was also partially offset by a $12.2 million or 350.1%
increase in selling, general and administrative expenses to $15.7 million for
the year ended December 31, 1996 from $3.5 million for the year ended December
31, 1995. The Company expects its compensation and benefits and selling, general
and administrative expenses to increase substantially in 1997 as a result of the
expansion of the business of the Company and its recent acquisitions. The
increase in income was further offset by a $2.0 million or 679.7% increase in
other expense to $2.3 million for the year ended December 31, 1996 from $ 0.3
million for the year ended December 31, 1995. Finally, income was favorably
affected by a $1.6 million or 39.2% decrease in the Conti VSA to $2.6 million
for the year ended December 31, 1996 from $4.2 million for the year ended
December 31, 1995. See " --Transactions with ContiFinancial --Sharing of
Proportionate Value of Equity," and Note 5 of Notes to Consolidated Financial
Statements.
49
<PAGE> 52
Income before taxes was reduced by pro forma provision for income taxes
of $11.2 million for the year ended December 31, 1996 compared to $2.5 million
for the year ended December 31, 1995, representing an effective tax rate of
approximately 38.5%. 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.
Revenues
The following table sets forth information regarding components of the
Company's revenues for the years ended December 31, 1995 and 1996:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
1995 1996
-------- --------
(in thousands)
<S> <C> <C>
Gain on sale of loans ............................ $ 20,681 $ 46,230
Additional securitization transaction expense .... (5,547) (4,158)
-------- --------
Gain on sale of loans, net .............. 15,134 42,072
-------- --------
Warehouse interest income ........................ 7,885 37,463
Warehouse interest expense ....................... (6,007) (24,535)
-------- --------
Net warehouse interest income ........... 1,878 12,928
-------- --------
Servicing fees ................................... 1,543 6,750
Other ............................................ 1,118 3,904
-------- --------
Total revenues .......................... $ 19,673 $ 65,654
======== ========
</TABLE>
Gain on Sale of Loans, Net. For the year ended December 31, 1996, gain
on sale of loans increased to $46.2 million from $20.7 million for the year
ended December 31, 1995, an increase of 123.5%, reflecting increased loan
production and securitizations for the year ended December 31, 1996 and the
adoption of SFAS 122. The total volume of loans produced increased by 184.8% to
$1.8 billion for the year ended December 31, 1996 as compared with a total
volume of $621.6 million for the year ended December 31, 1995. Originations by
the Company's correspondent network increased 191.0% to $1.6 billion for the
year ended December 31, 1996 from $543.6 million for the year ended December 31,
1995, while production from the Company's broker network and direct lending
operations increased to $188.3 million or 141.4% for the year ended December 31,
1996 from $78.0 million for the year ended December 31, 1995. Production volume
increased during the 1996 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 acquisition of the assets and business of
Equitystars in January 1996. For the year ended December 31, 1996, the Company
experienced higher gains as it sold more loans through securitizations.
Securitizations increased by $555 million, an increase of 146.1%, to $935
million for the year ended December 31, 1996 from $380 million for the year
ended December 31, 1995. The number of approved correspondents increased by 161
or 75.6% to 374 at December 31, 1996 from 213 at December 31, 1995 and the
number of brokers increased by 595 or 54.2% to 1,693 at December 31, 1996 from
50
<PAGE> 53
1,098 at December 31, 1995. Additional securitization expense decreased to $4.2
million for the year ended December 31, 1996, a decrease of 25.0%, from $5.5
million for the year ended December 31, 1995. For the year ended December 31,
1996, gain on sale of loans, net, increased to $42.1 million from $15.1 million
for the year ended December 31, 1995, an increase of 178.0%, reflecting
increased loan production and securitizations in the 1996 period.
Net Warehouse Interest Income. Net warehouse interest income increased
to $12.9 million for the year ended December 31, 1996 from $1.9 million for the
year ended December 31, 1995, an increase of 588.5%. The increase in the 1996
period reflected higher interest income resulting from increased mortgage loan
production and mortgage loans held for sale which was partially offset by
interest costs associated with warehouse facilities. The mortgage loans held for
sale increased to $914.6 million at December 31, 1996, an increase of 373.9%,
from $193.0 million at December 31, 1995.
Servicing Fees. Servicing fees increased to $6.7 million for the year
ended December 31, 1996 from $1.5 million for the year ended December 31, 1995,
an increase of 337.4%. Servicing fees for the year ended December 31, 1996 were
positively affected by an increase in mortgage loans serviced over the prior
period. During 1996, the Company increased its servicing portfolio by $1.6
billion or 300.9% to $2.15 billion as of December 31, 1996, from $535.8 million
as of December 31, 1995.
Other. Other revenues, consisting principally of the recognition of the
increase or accretion of the discounted value of interest-only and residual
certificates, increased to $5.3 million or 370.0% in the year ended December 31,
1996 from $1.1 million in the year ended December 31, 1995 as a result of
increased securitization volume.
Expenses
The following table sets forth information regarding components of the
Company's expenses for the years ended December 31, 1995 and 1996.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1996
------- -------
(in thousands)
<S> <C> <C>
Compensation and benefits ........................ $ 5,139 $16,007
Selling, general and administrative expenses ..... 3,478 15,652
Other ............................................ 298 2,321
Sharing of proportionate value of equity ......... 4,204 2,555
------- -------
Total expenses .............................. $13,119 $36,535
======= =======
</TABLE>
Compensation and benefits increased by $10.9 million or 211.4% to $16.0
million for the year ended December 31, 1996 from $5.1 million for the year
ended December 31, 1995, principally due to an increase in the number of
employees to service the Company's increased
51
<PAGE> 54
mortgage loan production, the acquisition of the assets and business of
Equitystars and an increase in executive bonuses. Compensation expense related
to the Equitystars business (which was acquired January 1, 1996) for the year
ended December 31, 1996 was $2.2 million, and executive bonuses increased $2.6
million in 1996. 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 (see
"Management -- Executive Compensation -- Employment Agreements").
Selling, general and administrative expenses increased by $12.2 million
or 350.1% to $15.7 million for the year ended December 31, 1996 from $3.5
million for the year ended December 31, 1995, principally due to an increase in
the volume of mortgage loan production, an additional $2.0 million of marketing
expenses related to the expansion of retail production, the acquisition of the
assets and business of Equitystars, an increase of $2.5 million in the cost to
carry of securities purchased under agreements to resell, an increase in loan
losses of $1.1 million and an increase in amortization expense related to
capitalized mortgage servicing rights of $1.2 million.
Other expenses increased by $2.0 million or 679.7% to $2.3 million for
the year ended December 31, 1996 from $0.3 million for the year ended December
31, 1995 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 $2.6 million or 39.2% for the year
ended December 31, 1996 from $4.2 million for the year ended December 31, 1995.
The Company's obligation to make payments under the Conti VSA terminated in
March 1996.
Pro Forma Income Taxes. The effective pro forma income tax rate for the
year ended December 31, 1996 was approximately 38.5%, which differed from the
federal tax rate of 35% primarily due to state income taxes. The increase in pro
forma provision for income taxes of $8.7 million or 343.7% to $11.2 million for
the year ended December 31, 1996 from $2.5 million for the year ended December
31, 1995 was proportionate to the increase in pre-tax income.
FINANCIAL CONDITION
DECEMBER 31, 1997 COMPARED TO DECEMBER 31, 1996
The Company hedges, in part, its interest rate exposure on fixed-rate
mortgage loans held for sale through the use of securities sold but not yet
purchased and securities purchased under agreements to resell. Securities
purchased under agreements to resell increased $113.1 million or 17.1% from
$659.5 million at December 31, 1996 to $772.6 million at December 31, 1997 and
securities sold but not yet purchased increased $114.3 million or 17.3% from
$661.1 million at December 31, 1996 to $775.3 million at December 31, 1997 due
primarily to the increase in fixed-rate mortgage loans held for sale at December
31, 1997 as compared to December 31, 1996.
52
<PAGE> 55
Mortgage loans held for sale at December 31, 1997 were $1.7 billion,
representing an increase of $758.6 million or 82.9% 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 loans 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.
Accounts receivable increased $18.6 million or 669.1% from $2.8 million
at December 31, 1996 to $21.3 million at December 31, 1997 primarily due to an
increase in servicing advances of $8.0 million, receivables from securitization
transactions of $4.2 million, and $2.6 million related to the Acquisitions.
Receivables from securitization transactions reflect short-term timing
differences in receiving amounts due from the securitization trusts. The
increase in servicing advances was due to an increase in advances by the Company
on loans it services due to an overall dollar increase in delinquencies from
1996 to 1997 as the Company's servicing portfolio increases and matures. As the
servicer for the securitization trusts, the Company is required to advance
certain principal, interest and escrow amounts to the securitization trusts for
delinquent mortgagors. The Company then collects the past due amounts from the
mortgagors or from the proceeds from liquidation of foreclosed properties. The
Company expects the overall dollar amount of delinquencies to increase in future
periods as the servicing portfolio increases and securitization pools continue
to mature.
Interest-only and residual certificates at December 31, 1997 were
$223.3 million, representing an increase of $137.1 million or 158.9% over
interest-only and residual certificates of $86.2 million at December 31, 1996.
This increase was a result of the Company completing eight securitizations
during the twelve months ended December 31, 1997 for an aggregate of $4.9
billion. The increase was offset by the sale on a non-recourse basis of certain
interest-only and residual certificates that had a 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 used the net proceeds to retire or reduce certain term debt.
Capitalized mortgage servicing rights increased $28.3 million or 427.9%
from $6.6 million at December 31, 1996 to $35.0 million at December 31, 1997 due
to the increase in the Company's securitization volume for the year ended
December 31, 1997 compared to December 31, 1996. The increase consists of the
capitalization of $34.3 million of servicing rights offset by amortization of
$5.9 million.
Warehouse financings due from correspondents increased $20.9 million or
413.6% from $5.0 million at December 31, 1996 to $25.9 million at December 31,
1997 due to a $27.5 million increase in committed warehouse financing provided
to correspondents as a result the addition of new correspondents and an increase
in the utilization of such lines by the correspondents.
53
<PAGE> 56
Property, furniture, fixtures and equipment increased $13.2 million or
787.5% from $1.7 million at December 31, 1996 to $14.9 million at December 31,
1997 primarily due to $5.1 million related to the purchase and renovation of the
Company's corporate headquarters building and $5.4 million related to the
Acquisitions.
Goodwill increased $90.1 million from $1.8 million at December 31, 1996
to $92.0 million at December 31, 1997 due to the recording of $87.0 million of
costs in excess of fair value of net assets acquired in acquisition transactions
and $5.8 related to contingent payment accruals related to acquisitions. The
increase was offset by amortization of $2.7 million. Goodwill is being amortized
on a straight-line basis over periods from five to thirty years.
Borrowings under warehouse financing facilities at December 31, 1997
were $1.7 billion, representing an increase of $837.5 million or 93.6% 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 December 31, 1997 was $112.3 million, representing an
increase of $64.9 million or 136.8% 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.
Notes payable increased $18.2 million from $0 at December 31, 1996 to
$18.2 million at December 31, 1997 due to $13.2 million in notes payable issued
related to an acquisition and a $5.0 million mortgage note payable obtained
subsequent to the purchase and renovation of the Company's corporate
headquarters building.
Accounts payable and accrued liabilities increased $23.9 million or
307.7% from $7.8 million at December 31, 1996 to $31.7 million at December 31,
1997 primarily due to accrual of contingent stock payments related to
acquisitions of $5.8 million, accruals for securitization obligations of $5.9
million, a $2.4 million increase in incentive compensation accruals and $6.1
million related to the Acquisitions. Accruals for securitization obligations
represent timing differences on amounts due to the securitization trusts.
The Company's net deferred tax liability increased $13.7 million from a
net deferred tax asset of $2.7 million at December 31, 1996 to a net deferred
tax liability of $10.9 million at December 31, 1997 primarily due to the
structuring of certain securitization transactions to allow debt treatment for
tax purposes.
Stockholders' equity as of December 31, 1997 was $254.1 million,
representing an increase of $164.7 million over stockholders' equity of $89.3
million at December 31, 1996. This increase was primarily a result of proceeds
of approximately $58.0 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 in acquisition transactions and net income for the year ended
December 31, 1997.
54
<PAGE> 57
DECEMBER 31, 1996 COMPARED TO DECEMBER 31, 1995
Mortgage loans held for sale at December 31, 1996 were $914.6 million,
representing an increase of $721.6 million or 373.9% over mortgage loans held
for sale of $193.0 million at December 31, 1995. This increase was a result of
increased loan purchases and originations as the Company expanded into new
states and increased purchasing and origination efforts in states in which the
Company had an existing market presence. This increase was also a result of the
Company's strategy to increase its financial flexibility by increasing its
balance of mortgage loans held for sale.
I/O and residual certificates at December 31, 1996 were $86.2 million,
representing an increase of $72.1 million or 512.9% over I/O and residual
certificates of $14.1 million at December 31, 1995. This increase was a result
of the Company completing four securitizations, one in each of the four quarters
of 1996, for an aggregate of $935.0 million.
Borrowings under warehouse financing facilities at December 31, 1996
were $895.1 million, representing an increase of $705.3 million or 371.6% over
borrowings under warehouse financing facilities of $189.8 million at December
31, 1995. This increase was a result of increased mortgage loans held for sale.
Term debt at December 31, 1996 was $47.4 million, representing an
increase of $36.3 million or 326.5% over term debt of $11.1 million at December
31, 1995. This increase was primarily a result of financing the increase in I/O
and residual certificates.
Stockholders' equity as of December 31, 1996 was $89.3 million,
representing an increase of $83.7 million over stockholders' equity of $5.6
million at December 31, 1995. This increase was primarily a result of the
Company's initial public offering of 7.1 million shares of common stock for
$9.00 per share, the net proceeds of which amounted to $58.2 million, the
conversion of the Conti VSA into the Conti Option of $8.5 million, and net
income for the year ended December 31, 1996, offset by $9.8 million of
distributions to former partners of the Partnership for taxes payable by these
former partners with respect to the income of the Partnership.
LIQUIDITY AND CAPITAL RESOURCES
The Company uses its cash flow from the sale of loans through
securitizations, whole loans 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 substantial amounts of capital.
Adequate credit facilities and other sources of funding, including the ability
of the Company to sell loans through whole loan sales, are essential to the
continuation of the Company's ability to purchase and
55
<PAGE> 58
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 year ended
December 31, 1997, the Company used cash flow for operating activities of $878.4
million, an increase of $101.6 million, or 13.1%, over cash flows used for
operating activities of $776.7 million during the year ended December 31, 1996.
During the year ended December 31, 1997, the Company received cash flows from
financing activities of $916.4 million, an increase of $127.7 million or 16.2%
over cash flows received from financing activities of $788.7 million during the
year ended December 31, 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. Significant
cash outflows are incurred upon the closing of a securitization transaction;
however, the Company does not 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 December 31, 1997, the Company had a $1.25 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 $920.9 million was outstanding under this facility as of December
31, 1997.
At December 31, 1997, the Company had a $1.0 billion uncommitted
warehouse facility with Bear Stearns Home Equity Trust 1996-1. This facility
bears interest at LIBOR plus 0.875%. Approximately $592.1 million was
outstanding under this facility at December 31, 1997.
Additionally, at December 31, 1997, the Company had approximately $865
million available under other warehouse lines of credit. As of December 31,
1997, approximately $219.6 million was outstanding under these lines of credit.
Interest rates ranged from 6.6% to 7.6% as of December 31, 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, warehouse financing due from
correspondents 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 December 31, 1997, the Company had borrowed $70.8 million under its
credit facility with Paine Webber Real Estate Securities, Inc. Outstanding
borrowings bear interest at LIBOR plus 2.0% and are collateralized by the
Company's interest in certain interest-only and residual certificates.
56
<PAGE> 59
Bear, Stearns & Co. Inc. and its affiliates, Bear Stearns Mortgage
Capital Corporation and Bear, Stearns International Limited, provide the Company
with an $85 million credit facility which is collateralized by certain
interest-only and residual certificates owned by the Company. At December 31,
1997, $30 million was outstanding under this credit facility, which bears
interest at 1.75% per annum in excess of LIBOR.
At December 31, 1997, the Company had borrowed $4.7 million under an
agreement which matures August 1998, bears interest at 2.0% per annum in excess
of LIBOR and is collateralized by certain interest-only and residual
certificates.
The Company also has available a $7 million credit facility which
matures July 31, 1999 and bears interest at 10% per annum from an affiliate of a
stockholder. At December 31, 1997, $6.8 million was outstanding under this
credit facility.
The Bank of Boston provides the Company a revolving credit facility
which matures October 1998, bears interest at LIBOR plus 2.75% and provides for
borrowings up to $50 million subject to the following terms: (i) 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
October 1998 of three years; or (ii) for acquisitions or bridge financing. No
amounts were outstanding under this credit facility as of December 31, 1997.
The Bank of Boston, with participation from another financial
institution, provides the Company with a $45 million working capital facility,
which bears interest at LIBOR plus 2.75% and matures October, 1998. No amounts
were outstanding under this facility at December 31, 1997.
Subsequent to December 31, 1997, the Company received from German
American Capital Corporation a $1.0 billion committed warehouse credit facility
to be collateralized by mortgage loans held for sale which includes $100 million
credit facility to be collateralized by interest-only and residual certificates.
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 and establishes 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 twelve months.
Management believes the Company is in compliance with all such covenants under
these agreements.
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
57
<PAGE> 60
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 of 6,300,000
shares of common stock, of which 5,040,000 shares were offered by the Company
and 1,260,000 shares were offered by certain stockholders of the Company. The
Company received approximately $58.0 million from the sale of these shares, net
of underwriting discount and associated expenses.
On November 4, 1997, the Company sold, on a non-recourse basis,
interest-only and residual certificates that had an estimated net book value of
$267 million. The sale was effected through an 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 used the net proceeds to retire or reduce certain
term debt.
The Company's business requires continual access to short- and
long-term sources of debt and equity capital. The Company believes that its
current warehouse and other facilities and internally generated funds will be
sufficient (assuming renewal or replacement of existing warehouse and term debt
facilities as they mature) to fund its liquidity requirements, including the
implementation of its business strategy through 1998. However, the Company has
substantial capital requirements and it anticipates that it may need to arrange
for additional external cash resources through additional excess cashflow
securitizations, financings, or the sale or placement of other debt or equity
securities. There can be no assurance that existing warehouse and term debt
facilities can be extended or refinanced, that the Company will be able to
arrange excess cashflow securitizations in the future on terms the Company would
consider favorable, that other debt or equity sources will be available to the
Company at any given time or as to the favorability of the terms on which such
sources may be available, or that funds generated from operations will be
sufficient to repay its existing debt obligations or meet its operating and
capital requirements. To the extent that the Company is not successful in
maintaining or replacing existing financing, it would not be able to hold a
large volume of loans pending securitization and therefore would have to curtail
its loan production activities or attempt to sell loans through whole loan
sales. There can be no assurance the Company would be successful in selling the
volume of whole loan sales required to sustain operations if the existing
warehouse and term debt facilities can not be renewed, extended, replaced or
refinanced.
RISK MANAGEMENT
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
58
<PAGE> 61
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 with large,
reputable securities firms. 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 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 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 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
59
<PAGE> 62
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 securitization trusts are priced on the basis of
intermediate term rates.
RECENT ACCOUNTING PRONOUNCEMENTS
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" and SFAS No. 131 "Disclosures About Segments of an Enterprise and
Related Information". These statements, which are effective for fiscal years
beginning after December 15, 1997, establish standards for reporting and display
of comprehensive income and disclosure requirements related to segments. The
application of the new rules are not anticipated to have an impact on the
Company's financial position or results of operations.
YEAR 2000
The Company utilizes a number of software systems to originate,
securitize and service its various loan products. The Company has and will
continue to make certain investments in its software systems and applications to
ensure the Company is Year 2000 compliant. The financial impact of becoming year
2000 compliant has not been and is not expected to be material to the Company,
to its financial position or results of operations in a given year.
60
<PAGE> 63
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
IMC MORTGAGE COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants .............................................. 62
Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and 1997 ............... 63
Consolidated Statements of Operations for the years ended December 31,
1995, 1996 and 1997 ................................................... 64
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1995, 1996 and 1997 ...................................... 65
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997 ................................................... 66
Notes to Consolidated Financial Statements ................................. 67
</TABLE>
61
<PAGE> 64
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
IMC MORTGAGE COMPANY AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheets of IMC
Mortgage Company and Subsidiaries as of December 31, 1996 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of IMC Mortgage Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of IMC
Mortgage Company and Subsidiaries as of December 31, 1996 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
As discussed in Note 2, effective January 1, 1996 the Company changed
its method of accounting for mortgage servicing rights.
/S/ COOPERS & LYBRAND L.L.P.
Tampa, Florida
February 20, 1998, except for the fourth paragraph of
Note 4 as to which the date is March 19, 1998.
62
<PAGE> 65
IMC MORTGAGE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31,
--------------------------
ASSETS 1996 1997
---------- ----------
<S> <C> <C>
Cash and cash equivalents .................................. $ 13,289 $ 26,750
Securities purchased under agreements to resell ............ 659,490 772,586
Accrued interest receivable ................................ 8,636 29,272
Accounts receivable ........................................ 2,776 21,349
Mortgage loans held for sale, net .......................... 914,587 1,673,144
Interest-only and residual certificates .................... 86,247 223,306
Warehouse financing due from correspondents ................ 5,045 25,913
Property, furniture, fixtures and equipment, net ........... 1,677 14,884
Capitalized mortgage servicing rights ...................... 6,621 34,954
Income tax receivable ...................................... -- 18,841
Goodwill ................................................... 1,843 91,963
Other assets ............................................... 7,137 12,970
---------- ----------
Total .............................................. $1,707,348 $2,945,932
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse finance facilities ........................... $ 895,132 $1,732,609
Term debt .............................................. 47,430 112,291
Notes payable .......................................... -- 18,189
Securities sold but not yet purchased .................. 661,061 775,324
Accounts payable and accrued liabilities ............... 7,767 31,665
Accrued interest payable ............................... 4,078 10,857
Deferred tax liability ................................. -- 10,933
Income tax payable ..................................... 2,543 --
---------- ----------
Total liabilities ........................... 1,618,011 2,691,868
---------- ----------
Commitments and Contingencies (Note 13)
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; 19,669,666, and 30,710,790
shares issued and outstanding ....................... 197 307
Additional paid-in capital ............................. 76,490 193,178
Retained earnings ...................................... 12,650 60,579
---------- ----------
Total stockholders' equity .......................... 89,337 254,064
---------- ----------
Total ....................................... $1,707,348 $2,945,932
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
63
<PAGE> 66
IMC MORTGAGE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Gain on sales of loans ................................................ $ 20,681 $ 46,230 $ 180,963
Additional securitization transaction
expense (Note 5) ................................................... (5,547) (4,158) --
------------ ------------ ------------
Net gain on sale of loans ...................................... 15,134 42,072 180,963
------------ ------------ ------------
Warehouse interest income ............................................. 7,885 37,463 123,432
Warehouse interest expense ............................................ (6,007) (24,535) (98,720)
------------ ------------ ------------
Net warehouse interest income ................................... 1,878 12,928 24,712
------------ ------------ ------------
Servicing fees ........................................................ 1,543 6,750 20,593
Other revenues ........................................................ 1,118 3,904 12,491
------------ ------------ ------------
Total servicing fees and other .................................. 2,661 10,654 33,084
------------ ------------ ------------
Total revenues .................................................. 19,673 65,654 238,759
------------ ------------ ------------
Expenses:
Compensation and benefits ............................................. 5,139 16,007 82,051
Selling, general and administrative
expenses ........................................................... 3,478 15,652 64,999
Sharing of proportionate value of
equity (Note 5) .................................................... 4,204 2,555 --
Other interest expense ................................................ 298 2,321 14,280
------------ ------------ ------------
Total expenses .................................................. 13,119 36,535 161,330
------------ ------------ ------------
Income before income taxes ............................................ 6,554 29,119 77,429
Provision for income taxes ............................................ -- 4,206 29,500
------------ ------------ ------------
Net income .................................................................. $6,554 $24,913 $ 47,929
============ ============ ============
Unaudited Pro Forma Data (actual data for the year ended December 31, 1997)
giving effect to provision for income taxes:
Income before provision for income
taxes .............................................................. $ 6,554 $ 29,119 $ 77,429
Pro forma provision for income taxes
(Note 2) ........................................................... 2,522 11,190 29,500
------------ ------------ ------------
Pro forma net income .................................................. $ 4,032 $ 17,929 $ 47,929
============ ============ ============
Pro forma net income per
common share:
Basic .......................................................... $ 0.34 $ 1.12 $ 1.76
Diluted ........................................................ $ 0.34 $ 0.92 $ 1.54
Pro forma weighted average shares outstanding:
Basic .......................................................... 12,000,000 15,981,521 27,299,827
Diluted......................................................... 12,000,000 19,539,963 31,147,944
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
64
<PAGE> 67
IMC MORTGAGE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Common Stock Additional
-------------------- Paid-In Retained
Shares Amount Capital Earnings Total
---------- ------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Stockholders' equity at
January 1, 1995 .................... 6,000,000 $ 60 $ 3,825 $ 1,971 $ 5,856
Cash contributions ................... -- -- 20 -- 20
Net income ........................... -- -- -- 6,554 6,554
Distributions for taxes (Note 2) ..... -- -- -- (6,821) (6,821)
---------- ---- --------- -------- ---------
Stockholders' equity at
December 31, 1995 .................... 6,000,000 60 3,845 1,704 5,609
Issuance of options to
ContiFinancial (Note 5) ............ -- -- 8,448 -- 8,448
Common stock issued in public
offering ........................... 3,565,000 36 58,168 -- 58,204
Reclassification of partnership
earnings ........................... -- -- 4,124 (4,124) --
Conversion of convertible
preferred stock .................... 119,833 1 2,005 -- 2,006
Stock options exercised .............. 150,000 2 (2) -- --
Net income ........................... -- -- -- 24,913 24,913
Distributions for taxes (Note 2) ..... -- -- -- (9,843) (9,843)
Two-for-one stock split (Note 1) .... 9,834,833 98 (98) -- --
---------- ---- --------- -------- ---------
Stockholders' equity at
December 31, 1996 .................. 19,669,666 197 76,490 12,650 89,337
Common stock issued in public
offering ........................... 5,040,000 50 57,977 -- 58,027
Common stock issued in
acquisition transactions ........... 5,043,763 50 51,962 -- 52,012
Common stock issued under stock
option and incentive plans and
related tax benefits .............. 957,361 10 6,749 -- 6,759
Net income ........................... -- -- -- 47,929 47,929
---------- ---- --------- -------- ---------
Stockholders' equity at
December 31, 1997 .................... 30,710,790 $307 $ 193,178 $ 60,579 $ 254,064
========== ==== ========= ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
65
<PAGE> 68
IMC MORTGAGE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------------
Operating activities: 1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Net income .................................................................... $ 6,554 $ 24,913 $ 47,929
Adjustments to reconcile net income to net cash used in operating activities:
Sharing of proportionate value of equity ................................ 4,204 2,555 --
Depreciation and amortization ........................................... 164 1,650 10,144
Capitalized mortgage servicing rights ................................... -- (7,862) (34,252)
Net loss in joint venture ............................................... -- 852 1,813
Non-recurring benefit associated with the
conversion of Partnership to C Corporation ............................ -- (3,600) --
Change in deferred taxes ................................................ -- 879 13,654
Net change in operating assets and liabilities, net of effects from
acquisitions:
Increase in mortgage loans held for sale ................................ (164,007) (721,347) (702,927)
Decrease in securities purchased under
agreement to resell and securities sold but
not yet purchased .................................................... 1,142 429 1,167
Increase in accrued interest receivable ................................. (1,653) (6,763) (20,615)
Decrease (increase) in warehouse financing
due from correspondents .............................................. 4 (4,992) (25,674)
Increase in interest-only and residual
certificates ......................................................... (10,669) (72,174) (137,060)
Increase in other assets ............................................... (371) (2,200) (7,495)
Increase in accounts receivable ......................................... (885) (1,596) (16,450)
Increase in income tax receivable ....................................... -- -- (15,241)
Increase in accrued interest payable .................................... 547 3,022 6,779
Decrease in deferred income ............................................. (451) -- --
Increase (decrease) in income tax payable ............................... -- 2,543 (2,543)
Increase in accrued and other liabilities ............................... 142 6,978 2,421
--------- --------- ---------
Net cash used in operating activities ................................... (165,279) (776,713) (878,350)
--------- --------- ---------
Investing activities:
Investment in joint venture ............................................. -- (2,591) (1,781)
Purchase of property, furniture, fixtures and
equipment ........................................................... (391) (1,218) (12,772)
Acquisition of businesses, net of cash acquired
and including other cash payments
associated with the acquisitions .................................... -- -- (10,008)
--------- --------- ---------
Net cash used in investing activities ................................... (391) (3,809) (24,561)
--------- --------- ---------
Financing activities:
Issuance of common stock ................................................ -- 58,203 59,923
Contributions from partners ............................................. 20 -- --
Distributions to partners for taxes ..................................... (5,515) (11,149) --
Net borrowings on warehouse facilities .................................. 162,087 705,313 787,911
Borrowings - term debt .................................................. 11,121 51,066 401,240
Borrowings - notes payable .............................................. -- -- 5,000
Repayments of borrowings - term debt .................................... -- (14,756) (337,702)
--------- --------- ---------
Net cash provided by financing activities ............................... 167,713 788,677 916,372
--------- --------- ---------
Net increase in cash and cash equivalents ............................... 2,043 8,155 13,461
Cash and cash equivalents, beginning of period .......................... 3,091 5,134 13,289
--------- --------- ---------
Cash and cash equivalents, end of period ................................ $ 5,134 $ 13,289 $ 26,750
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
66
<PAGE> 69
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(dollars in thousands, except share data)
1. ORGANIZATION AND BASIS OF PRESENTATION
IMC Mortgage Company and its wholly-owned subsidiaries (the "Company")
purchase and originate mortgage loans made to borrowers who may not otherwise
qualify for conventional loans for the purpose of securitization and sale. The
Company typically securitizes these mortgages into the form of a Real Estate
Mortgage Investment Conduit ("REMIC") or owner trust. A significant portion of
the mortgages are sold on a servicing retained basis.
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 IMC Mortgage Company
(the "Parent") in June 1996 when the limited partners (the "Partners") and the
general partner exchanged their partnership interests for voting common shares
(the "exchange" or "recapitilization") of the Parent. The exchange was
consummated on an historical cost basis as all entities were under common
control. Accordingly, since June 1996, the Parent 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. On December 31, 1997, the Partnership and the general partner were
merged into the Parent. The accompanying consolidated financial statements
include the accounts of the Parent, the Partnership and their wholly owned
subsidiaries, after giving effect to the exchange as if it had occurred at
inception.
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 was transferred from additional
paid-in-capital to the stated value of common stock in connection with the stock
split. This transaction has been recorded herein in the year ended December 31,
1996. 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
except with respect to periods presented in the consolidated statements of
stockholders' equity prior to December 31, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Parent and its wholly-owned subsidiaries after elimination of inter-company
accounts and transactions.
67
<PAGE> 70
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(dollars in thousands, except share data)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and on deposit at
financial institutions and short term investments with original maturities of 90
days or less when purchased.
INTEREST-ONLY AND RESIDUAL CERTIFICATES
The Company originates and purchases mortgages for the purpose of
securitization and whole loan sale. The Company securitizes these mortgages
primarily into the form of a REMIC. A REMIC is a multi-class security with
certain tax advantages which derives its monthly principal paydowns from a pool
of underlying mortgages. The senior class certificates issued by the trust are
sold, with the subordinated classes (or a portion thereof) retained by the
Company. The subordinated classes are in the form of interest-only and residual
certificates. The documents governing the Company's securitizations require the
Company to build over-collateralization levels through payment of distributions
to holders of senior certificates, for a period of time, otherwise payable to
the Company as the residual interest holder. This overcollateralization causes
the aggregate principal amount of the loans in the related pool to exceed the
aggregate principal balance of the outstanding investor certificates. Such
excess amounts serve as credit enhancement for the related trust. To the extent
that borrowers default on the payment of principal or interest on the loans,
losses will reduce the overcollateralization and cash flows otherwise payable to
the residual interest security holder to the extent that funds are available. If
payment defaults exceed the amount of overcollateralization, as applicable, the
insurance policy maintained on certain REMIC trusts will pay any further losses
experienced by holders of the senior interests in those related REMIC trusts or
a subordinated class will bear the loss. The Company does not have any recourse
obligations for credit losses in the trust. During 1995, the Company securitized
$380 million of loans through three trusts; during 1996, the Company securitized
$935 million of loans through four trusts; and during the year ended December
31, 1997, the Company securitized $4.9 billion of loans through eight trusts.
See Note 11.
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 was effective for transfers
of the Company's financial assets made after December 31, 1996. SFAS 125
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),
68
<PAGE> 71
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(dollars in thousands, except share data)
interest-only and residual certificates and servicing rights based on their
relative fair values. The adoption of SFAS 125 did not have a material effect on
the Company's financial position or results of operations.
The Company initially records interest-only and residual certificates
at their allocated cost based upon the present value of the interest in the cash
flows retained by the Company after considering various economic factors,
including interest rates, collateral value and estimates of the value of future
cash flows from the securitized mortgage pools under expected loss and
prepayment assumptions discounted at a market yield. The weighted average rates
used to discount the cash flows range from 11% to 14.5% based on the risks
associated with each REMIC mortgage pool. The Company utilizes prepayment and
loss curves which the Company believes will approximate the timing of
prepayments and losses over the life of the securitized loans. Prepayments on
fixed rate loans securitized by the Company are expected to gradually increase
from a constant prepayment rate ("CPR") of 4% to 28% in the first year of the
loan and remain at 28% thereafter. The Company expects prepayments on adjustable
rate loans to gradually increase from a CPR of 4% to 35% in the first year of
the loan and remain at 35% thereafter. The CPR measures the annualized
percentage of mortgage loans which prepay during a given period. The CPR
represents the annual prepayment rate such that, in the absence of regular
amortization, the total prepayment over the year would equal that percent of the
original principal balance of the mortgage loan. The Company expects losses from
defaults to gradually increase from zero in the first six months of
securitization to 100 basis points after 36 months. The loss curve utilized by
the Company approximates an assumed loss rate of approximately 65 basis points
per year at inception of the securitization.
In accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"), the Company classifies interest-only and residual
certificates as "trading securities" and, as such, they are recorded at fair
value with the resultant unrealized gain or loss recorded in the results of
operations in the period of the change in value. The Company determines fair
value at inception and on an ongoing basis based on a discounted cash flow
analysis. The cash flows are estimated as the excess of the weighted average
coupon on each pool of mortgage loans sold over the sum of the pass-through
interest rate plus a normal servicing fee, a trustee fee, an insurance fee when
applicable and an estimate of annual future credit losses related to the
mortgage loans securitized over the life of the mortgage loans.
These cash flows are projected over the life of the mortgage loans
using prepayment, default, and interest rate assumptions that market
participants would use for similar financial instruments subject to prepayment,
credit and interest rate risk. The fair valuation includes
69
<PAGE> 72
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(dollars in thousands, except share data)
consideration of the following characteristics: loan type, size, interest rate,
date of origination, term and geographic location. The Company also used other
available information such as externally prepared reports on prepayment rates,
interest rates, collateral value, economic forecasts and historical default and
prepayment rates of the portfolio under review.
CAPITALIZED MORTGAGE SERVICING RIGHTS
Effective January 1, 1996, the Company adopted SFAS No. 122 "Accounting
for Mortgage Servicing Rights" ("SFAS 122"), superseded in June 1996 by SFAS
125, which was adopted by the Company effective January 1, 1997. The SFAS's
require that upon sale or securitization of mortgages, companies capitalize the
cost associated with the right to service mortgage loans based on their relative
fair values. The Company determines fair value based on the present value of
estimated net future cash flows related to servicing income. The cost allocated
to the servicing rights is amortized in proportion to and over the period of
estimated net future servicing fee income. Under SFAS 122 and SFAS 125, the
Company capitalized mortgage servicing rights of approximately $7,818 and
$34,252 for the year ended December 31, 1996 and 1997, respectively, and
amortized $1,197 and $5,920 for the same periods. The adoption of SFAS 122
resulted in additional operating income of approximately $6,621 for the year
ended December 31, 1996. The effect on unaudited pro forma net income for the
year ended December 31, 1996 was an increase of $4,050. The effect on pro forma
basic net income per common share and pro forma diluted net income per common
share was $0.25 and $0.21, respectively.
Prior to the adoption of SFAS 122, servicing rights acquired through
loan origination activities were recorded in the period the loans were serviced.
The Company periodically reviews capitalized servicing rights
receivable for impairment. This review is performed on a disaggregated basis for
the predominant risk characteristics of the underlying loans which are loan
type, term, credit quality and, to a lesser extent, interest rate. The Company
generally makes loans to borrowers whose borrowing needs may not be met by
traditional financial institutions due to credit exceptions. The Company has
found that these borrowers tend to be more payment sensitive rather than
interest rate sensitive. Impairment is recognized in a valuation allowance for
each disaggregated stratum in the period of impairment. The carrying amount of
capitalized mortgage servicing rights is deemed to be a reasonable estimate of
their fair value.
70
<PAGE> 73
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(dollars in thousands, except share data)
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL/SECURITIES SOLD BUT NOT YET
PURCHASED
To hedge the interest rate risk on loan purchases, the Company sells
short United States Treasury securities which match the duration of the fixed
rate mortgage loans held for sale and borrows the securities under agreements to
resell.
Securities sold but not yet purchased are recorded on a trade date
basis and are carried at market value. The unrealized gain or loss on these
instruments is deferred and recognized upon securitization as an adjustment to
the carrying value of the hedged mortgage loans. The cost to carry securities
purchased under agreements to resell is recorded as incurred.
Securities purchased under agreements to resell are recorded on a trade
date basis and are carried at the amounts at which the securities will be
resold.
MORTGAGE LOANS HELD FOR SALE, NET
Mortgage loans held for sale are mortgages the Company plans to sell or
securitize. Mortgage loans held for sale are stated at lower of aggregate cost
or market. The cost is net of any deferred hedging gain or loss and deferred
loan origination fees and certain direct costs. Market value is determined by
outstanding commitments from investors, if any, or current investor yield
requirements on the aggregate basis. Included in mortgages held for sale at
December 31, 1996 and 1997 were $8,187 and $53,924, respectively, of mortgage
loans which were not eligible for securitization due to delinquency and other
factors (loans under review). The amount by which cost exceeds market value on
loans under review is accounted for as a valuation allowance. Changes in the
valuation allowance are included in the determination of net income in the
period of change. The valuation allowance at December 31, 1996 and 1997 was
$1,100 and $11,500, respectively.
REVENUE RECOGNITION
Gains on the sale of mortgage loans representing the difference between
the sales price and the net carrying amount (which includes any hedging gains
and losses) are recognized when mortgage loans are sold and delivered to
investors. For securitizations of mortgage loans, the gain on the sale of the
loans represents the present value of the differential (spread) between (i)
interest earned on the portion of loans sold and (ii) interest paid to investors
with related costs over the expected life of the loans, including expected
charge-offs, foreclosure expenses and a normal servicing fee. The spread is
adjusted for estimated prepayments.
71
<PAGE> 74
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(dollars in thousands, except share data)
The increase or accretion of the value of the discounted interest-only
and residual certificates over time is included in other revenues in the
statement of operations and is recognized on the interest method as earned and
deemed collectible. Other income consists primarily of accretion of
interest-only and residual certificates and earnings on deposits. Warehouse
interest income on mortgage loans held for sale is recognized on the accrual
method.
The Company generally retains servicing rights and recognizes servicing
income from fees, prepayment penalties and late payment charges earned for
servicing the loans owned by certificate holders and others. Servicing fees are
generally earned at a rate of approximately 1/2 of 1%, on an annualized basis,
of the unamortized loan balance being serviced. Servicing fee income is
recognized as collected.
PROPERTY, FURNITURE, FIXTURES AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION
Property, furniture, fixtures and equipment are carried at cost and
depreciated on a straight-line basis over the estimated useful lives of the
assets. Leasehold improvements are amortized over the useful life of the
improvements.
ADVERTISING
The Company expenses the production costs of advertising as incurred.
Advertising expense was approximately $150, $499, and $9,023 for the years ended
December 31, 1995, 1996 and 1997.
GOODWILL
Goodwill represents the excess of cost over fair value of net assets
acquired by acquisition. Such excess of cost over fair value of net assets
acquired is being amortized on a straight-line basis over periods from five to
thirty years. Amortization expense approximated $71 and $2,679 for the years
ended December 31, 1996 and 1997, respectively. Accumulated amortization
approximated $71 and $2,750 at December 31, 1996 and 1997.
Management periodically reviews the potential impairment of goodwill on
a non-discounted cash flow basis to assess recoverability. If the estimated
future cash flows are projected to be less than the carrying amount, an
impairment write-down (representing the carrying amount of the goodwill which
exceeds the present value of estimated expected future cash flows) would be
recorded as a period expense.
72
<PAGE> 75
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(dollars in thousands, except share data)
TRANSLATION OF FOREIGN CURRENCY
Assets and liabilities of the Company's Canadian subsidiary, which was
incorporated during the year ended December 31, 1997, are translated at year-end
rates of exchange, and the income statement is translated at weighted average
rates of exchange for the year. For the year ended December 31, 1997, the
financial position and results of operations of the Company's Canadian
subsidiary was not material in relation to the financial position or results of
operations of the Company.
INCOME TAXES
Income tax expense is provided for using the asset and liability
method, under which deferred tax assets and liabilities are determined based
upon the temporary differences between the financial statement and income tax
bases of assets and liabilities, using currently enacted tax rates.
STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123")
encourages, but does not require, companies to record compensation cost for
stock-based employee compensation plans at fair value. The Company has elected
to continue to account for its stock-based compensation plans using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). Under the provisions of
APB 25, compensation cost for stock options is measured as the excess, if any,
of the quoted market price of the Company's common stock at the date of grant
over the amount an employee must pay to acquire the stock.
CONSOLIDATED STATEMENT OF CASH FLOWS - SUPPLEMENTAL DISCLOSURES
The Company paid $5,460, $23,834 and $106,221 for interest during the
years ended December 31, 1995, 1996, and 1997, respectively. Total income taxes
paid were $796 and $33,482 for the years ended December 31, 1996 and 1997,
respectively. During the year ended December 31, 1997, the Company recorded a
receivable of $3,600 for the income tax benefit related to the issuance of
common stock under stock option and incentive plans.
RECENT ACCOUNTING PRONOUNCEMENTS
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
73
<PAGE> 76
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(dollars in thousands, except share data)
no change in existing disclosure requirements and is effective for fiscal years
beginning after December 15, 1997.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information". These statements, which are effective for fiscal years
beginning after December 15, 1997, establish standards for reporting and display
of comprehensive income and disclosure requirements related to segments. The
application of the new rules is not anticipated to have an impact on the
Company's financial position or results of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts in the 1995 and 1996 financial statements have been
reclassified to conform with the 1997 classifications.
UNAUDITED PRO FORMA DATA
The Partnership which is included in the consolidated financial
statements became a wholly owned subsidiary of the Parent after the plan of
exchange described in Note 1 was consummated. The Partnership made no provision
for income taxes since the Partnership's income or losses were passed through to
the partners individually. Under the terms of the partnership agreement, the
Partnership was obligated to make quarterly cash distributions to the partners
equal to 45% of profits (as defined in the partnership agreement) to enable the
partners to pay taxes with respect to their partnership interests. Distributions
to partners for income taxes were $6,821 and $9,843 for the years ended December
31, 1995 and 1996. At December 31, 1995, $1,307 was payable to partners for
income taxes.
The Partnership's income became subject to income taxes at the
corporate level as of June 24, 1996, the effective date of the exchange. The
unaudited pro forma data included in the
74
<PAGE> 77
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(dollars in thousands, except share data)
consolidated statements of operations of the Company includes a pro forma
provision for income taxes to indicate what these taxes would have been had the
exchange occurred in prior periods.
The following unaudited pro forma information reflects the income tax
expense that the Company would have incurred if it had been subject to federal
and state income taxes for the entire year ended December 31, 1995 and 1996.
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1996
-------- -------
<S> <C> <C>
Pro forma current:
Federal ........................ $ 3,904 $ 8,910
State .......................... 649 1,894
-------- -------
4,553 10,804
-------- -------
Pro forma deferred:
Federal ........................ (1,843) 318
State .......................... (188) 68
-------- -------
(2,031) 386
-------- -------
Pro forma provision for income taxes .. $ 2,522 $11,190
======== =======
</TABLE>
The following unaudited pro forma information reflects the
reconciliation between the statutory provision for income taxes and the pro
forma provision relating to the income tax expense the Company would have
incurred had the Partnership been subject to federal and state income taxes.
<TABLE>
<CAPTION>
For the Year Ended
December 31,
--------------------
1995 1996
------ --------
<S> <C> <C>
Income tax at federal statutory rate . $2,272 $ 10,192
State taxes, net of federal benefit .. 232 1,310
Nondeductible expenses ............... 18 36
Other, net ........................... -- (348)
------ --------
Pro forma provision for income taxes . $2,522 $ 11,190
====== ========
</TABLE>
PRO FORMA EARNINGS PER SHARE AND EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings per Share" ("SFAS 128"), which became effective for the
Company for reporting periods ending after December 15, 1997. Under the
provisions of SFAS 128, basic earnings per share is determined using net income,
adjusted for preferred stock dividends, and divided by
75
<PAGE> 78
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(dollars in thousands, except share data)
weighted average shares outstanding. Diluted earnings per share, as defined by
SFAS No. 128, is computed based on the amount of income that would be available
for each common share, assuming all dilutive potential common shares were
issued. All prior period earnings per share data has been restated in accordance
with the provisions of SFAS 128.
Due to the recapitalization described in Note 1, earnings per share for
the years ended December 31, 1996 and 1995 have been computed on a pro forma
basis, assuming the recapitalization occurred at the beginning of 1995. Amounts
used in the determination of basic and diluted earnings per share are shown in
the table below.
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Pro forma net income (actual net income for 1997) ... $ 4,032 $ 17,929 $ 47,929
Less preferred dividends ............................ -- 79 --
----------- ----------- -----------
Income available to common stockholders-basic ....... 4,032 17,850 47,929
Add interest expense attributable to convertible
debentures and accrued preferred dividends ....... -- 97 --
----------- ----------- -----------
Income available to common stockholders-diluted ..... $ 4,032 $ 17,947 $ 47,929
=========== =========== ===========
Weighted average common shares outstanding .......... 12,000,000 15,981,521 27,299,827
Adjustments for dilutive securities:
Stock warrants ................................ -- 2,139,344 2,327,178
Stock options ................................. -- 1,240,553 1,281,995
Contingent shares ............................. -- 9,827 238,944
Preferred stock ............................... -- 115,248 --
Convertible debentures ........................ -- 53,470 --
----------- ----------- -----------
Diluted common shares ............................... 12,000,000 19,539,963 31,147,944
=========== =========== ===========
</TABLE>
3. BUSINESS COMBINATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
On January 1, 1996, the Company acquired certain assets of Mortgage
Central Corp., a Rhode Island corporation ("MCC"), a mortgage banking company
which did business under the name "Equitystars" primarily in Rhode Island, New
York, Connecticut and Massachusetts. The initial purchase price ($2,006) for
certain assets of MCC was paid by delivery to MCC of Series A voting,
convertible preferred stock of the Company, with contingency payments over two
years based on performance. The preferred stock had a liquidation preference of
$100 per share plus preferred dividends accruing at 8% per annum from the date
of issuance until redemption or
76
<PAGE> 79
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(dollars in thousands, except share data)
liquidation. The preferred stock was converted into 239,666 shares of the
Company's common stock upon closing of the Company's initial public offering in
June 1996.
The acquisition was accounted for using the purchase method of
accounting and, accordingly, the purchase price of $2,006 has been allocated to
the assets purchased and the liabilities assumed based upon the fair values at
the date of acquisition. The excess of the purchase price of $2,006 over the
fair values of the assets acquired of approximately $333 and liabilities assumed
of $57 was recorded as goodwill. Additional purchase price consideration of
approximately $480 has been recorded as goodwill related to the contingent
payment terms of the acquisition through December 31, 1997.
The operating results of MCC have been included in the consolidated
statement of income from the date of acquisition on January 1, 1996. On the
basis of an unaudited pro forma consolidation of the results of operations as if
the acquisition had taken place at the beginning of 1995, consolidated total
revenues would have approximated $24,193 for the year ended December 31, 1995.
Consolidated income would not have been materially different from the reported
amount for the year ended December 31, 1995. Such amounts are not necessarily
indicative of what the actual consolidated results of operations might have been
if the acquisition had been effective at the beginning of 1995.
FOR THE YEAR ENDED DECEMBER 31, 1997
Effective January 1, 1997, the Company acquired all of the assets of
Mortgage America, Inc., a non-conforming mortgage lender based in Bay City,
Michigan and Equity Mortgage Co., Inc., a non-conforming mortgage lender based
in Baltimore, Maryland, and all of the outstanding common stock of CoreWest
Banc, 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., a non-conforming mortgage lender based in Owings
Mills, Maryland. Effective July 1, 1997, the Company acquired all of the
outstanding common stock of National Lending Center, Inc., a non-conforming
mortgage lender based in Deerfield Beach, Florida, and substantially all of the
assets of Central Money Mortgage Co., Inc., a non-conforming mortgage lender
based in Baltimore, Maryland. Effective October 1, 1997, the Company acquired
substantially all of the assets of Residential Mortgage Corporation, a
non-conforming mortgage lender based in Cranston, Rhode Island. Effective
November 1, 1997, the Company acquired substantially all of the assets of
Alternative Capital Group, Inc., a non-conforming mortgage lender based in
Dallas, Texas.
77
<PAGE> 80
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(dollars in thousands, except share data)
All acquisitions were accounted for using the purchase method of
accounting and the results of operations have been included with those of the
Company from the dates of the acquisition. The fair value of the acquired
companies' 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 the eight acquisitions completed in 1997 included 5,043,763
shares of common stock, gross cash paid of approximately $20,994, $13,189 of
notes payable to former shareholders and assumption of a stock option plan which
resulted in the issuance of options to acquire 334,596 shares of the Company's
common stock. The aggregate fair value of assets acquired was approximately
$71,223 and liabilities assumed approximated $70,423. The Company recorded
goodwill of approximately $86,993 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. Additional purchase price of approximately $5,569 was recorded
as goodwill during the year ended December 31, 1997 related to the contingent
payment terms of the acquisitions. Any such contingent payments will result in
an increase in the amount of recorded goodwill related to such acquisition.
The pro forma results of operations listed below reflect purchase
accounting adjustments assuming the acquisitions occurred on January 1, 1996.
<TABLE>
<CAPTION>
1996 1997
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Revenues .................... $ 137,920 $ 273,659
Net income .................. 23,765 56,370
Basic earnings per share .... 1.13 1.96
Diluted earnings per share .. 0.97 1.73
</TABLE>
The pro forma results of operations are not necessarily indicative of
what the actual consolidated results of operations would have been if the
acquisitions had been effective at the beginning of 1996.
4. COLLATERALIZED OBLIGATIONS
WAREHOUSE FINANCE FACILITIES
At December 31, 1997, the Company had a $1.25 billion uncommitted
credit facility with Paine Webber Real Estate Securities, Inc. Outstanding
warehouse borrowings, which bear interest
78
<PAGE> 81
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(dollars in thousands, except share data)
at rates ranging from LIBOR (5.7% at December 31, 1997) plus 0.65% to LIBOR plus
0.90%, were approximately $920,896 under this facility at December 31, 1997.
At December 31, 1997, the Company had a $1.0 billion uncommitted
warehouse facility with Bear Stearns Home Equity Trust 1996-1. This facility
bears interest at LIBOR plus 0.875%. Approximately $592,118 was outstanding
under this facility at December 31, 1997.
Additionally, at December 31, 1997, the Company had $865,000 available
under numerous other warehouse lines of credit. As of December 31, 1997,
approximately $219,595 was outstanding under these lines of credit. Interest
rates ranged from 6.6% to 7.6% as of December 31, 1997, and all borrowings
mature within one year.
Subsequent to December 31, 1997, the Company received from German
American Capital Corporation a $1 billion committed warehouse credit facility to
be collateralized by mortgage loans held for sale which includes a $100,000
credit facility to be collateralized by interest-only and residual certificates.
Outstanding borrowings on the Company's warehouse financing facilities
are collateralized by mortgage loans held for sale, warehouse financing due from
correspondents and servicing rights on approximately $250,000 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.
TERM DEBT
At December 31, 1997, the Company had borrowed $70,756 under its credit
facility with Paine Webber Real Estate Securities, Inc. Outstanding borrowings
bear interest at LIBOR plus 2.0% and are collateralized by the Company's
interest in certain interest-only and residual certificates.
Bear, Stearns & Co. Inc. and its affiliates, Bear Stearns Mortgage
Capital Corporation and Bear, Stearns International Limited, provide the Company
with an $85,000 credit facility which is collateralized by certain interest-only
and residual certificates owned by the Company. At December 31, 1997, $30,000
was outstanding under this credit facility, which bears interest at 1.75% per
annum in excess of LIBOR.
At December 31, 1997, the Company had borrowed $4,735 under an
agreement which matures August 1998, bears interest at 2.0% per annum in excess
of LIBOR and is collateralized by certain interest-only and residual
certificates.
79
<PAGE> 82
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(dollars in thousands, except share data)
The Company also has available a $7,000 credit facility which matures
July 31, 1999 and bears interest at 10% per annum from an affiliate of a
stockholder. At December 31, 1997, $6,800 was outstanding under this credit
facility.
The Bank of Boston provides the Company a revolving credit facility
which matures October 1998, bears interest at LBIOR plus 2.75% and provides for
borrowings up to $50,000 subject to the following terms: (i) 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
October 1998 of three years; or (ii) for acquisitions or bridge financing. No
amounts were outstanding under this credit facility as of December 31, 1997.
The Bank of Boston, with participation from another financial
institution, provides the Company with a $45,000 working capital facility, which
bears interest at LIBOR plus 2.75% and matures October 1998. No amounts were
outstanding under this facility at December 31, 1997.
The warehouse notes and term debt have requirements that the Company
maintain certain debt to equity ratios and certain agreements restrict the
Company's ability to pay dividends on common stock. Capital expenditures are
limited by certain agreements. Management believes the Company is in compliance
with all such covenants of these agreements.
NOTES PAYABLE
At December 31, 1997, $5,000 was outstanding under a mortgage note
payable, which bears interest at 8.16% per annum and expires December 2007. The
note is collateralized by the Company's headquarters building.
At December 31, 1997, $13,189 was outstanding under notes payable
issued to shareholders related to an acquisition completed in 1997. See Note 3.
These notes bear interest at prime through July 1, 1998 and prime plus 2.0%
thereafter. The notes mature on July 1, 1999.
Note payable maturities for the next five years are as follows: $500 in
1998; $13,689 in 1999; $500 in 2000; $500 in 2001; and $500 in 2002.
5. STRATEGIC ALLIANCE
The Company, prior to 1997, relied on ContiFinancial Corporation and
its subsidiaries and affiliates ("ContiFinancial") to provide the original
credit facility for funding its loan purchases and originations as well as their
expertise and assistance in loan securitization. In 1995 and 1996,
80
<PAGE> 83
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(dollars in thousands, except share data)
the securitizations were structured so that ContiFinancial received, in exchange
for cash of $18,425 and $8,633, respectively, interest-only and residual
certificates with estimated values of $25,054 and $13,444, respectively. In
addition, ContiFinancial paid $1,082 and $654 in expenses related to
securitizations in 1995 and 1996, respectively. The difference between the
estimated value of the interest-only and residual certificates provided to
ContiFinancial and the total amount of cash received and expenses paid by
ContiFinancial amounts to $5,547 and $4,158 in 1995 and 1996, respectively, and
has been recorded as additional securitization transaction expense.
In August 1993, the Company entered into a five-year agreement ("1993
Agreement") with ContiFinancial which provided the Company with a warehouse line
of credit, a standby credit facility, and certain investment banking services.
Pursuant to the 1993 Agreement, the Company agreed to share the value of the
partnership through a contingent fee based on a percentage of Residual Company
Equity (as defined in the 1993 Agreement) to be paid in cash at the termination
of the agreement. At December 31, 1993, there was no Residual Company Equity and
accordingly no liability was recorded. At December 31, 1994, the Company had
Residual Company Equity and accordingly the Company accrued a liability (sharing
of proportionate value of equity) to reflect the contingent fee payable of
$1,689 at December 31, 1994 with a corresponding charge in the statement of
operations.
On January 12, 1995, the Company and ContiFinancial entered into a
revised ten-year agreement (the "1995 Agreement") which replaced the 1993
Agreement and provided for contingent fees based on the fair market value of the
Company (as defined). The amount of the contingent fee ranged from 15% to 25% of
the fair market value of the Company if ContiFinancial or the Company,
respectively, elected to terminate these arrangements. In the event that the
agreement expired with neither ContiFinancial nor the Company electing to
terminate the arrangements, the fee would have been 20% of the fair market value
of the Company. If the Company made any distributions to the partners other than
those made as tax distributions and returns of partnership equity, the Company
would have been required to distribute an amount to ContiFinancial equal to 25%
of these other distributions. At December 31, 1995, the Company accrued $5,893
(based on an independent appraisal of the fair market value of the Company)
representing the estimated amount that would have been payable to ContiFinancial
had ContiFinancial elected to terminate the 1995 Agreement as of December 31,
1995. The increase in the amount of the accrual at December 31, 1995 related to
the 1995 Agreement over the amount accrued at December 31, 1994 related to the
1993 Agreement was recorded as a charge to earnings for 1995.
In March 1996, the Company and ContiFinancial replaced the 1995
Agreement with an agreement (the 1996 Agreement) which eliminated the ability of
ContiFinancial to obtain or
81
<PAGE> 84
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(dollars in thousands, except share data)
require a cash payment as provided for in the 1993 and 1995 Agreements and
provided ContiFinancial options to acquire an interest in the Company for a
nominal amount. On June 24, 1996, the effective date of the exchange described
in Note 1, the option was converted into a warrant exercisable for a de minimus
amount for 3,000,000 shares of the Company's common stock. The warrant contains
normal anti-dilution provisions. ContiFinancial has certain rights to join in
registration of additional shares of stock and, under certain conditions after
the expiration of a four-year time period, to require that shares subject to
ContiFinancial's warrants be registered by the Company or its successor. The
liability that had been established under the 1995 Agreement was reclassified to
paid in capital in March 1996 in conjunction with the issuance of the
ContiFinancial option. The fair value of the option at the date of grant (March
26, 1996) was estimated to be $8,448 based on an independent appraisal of the
option. The Company recorded expense of $2,555 for the year ended December 31,
1996, representing the excess of the estimated fair value of the option at the
date of grant over the amount accrued at December 31, 1995 pursuant to the 1995
Agreement. At December 31, 1997 the warrant was exercisable for 2,160,000 shares
of the Company's common stock. The warrant expires on March 31, 2011.
6. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Prepaid expenses .............. $ 913 $ 3,106
Real estate owned ............. 460 1,805
Investment in joint venture ... 1,739 1,707
Hedge deposits ................ 589 4,356
Notes receivable .............. -- 1,003
Net deferred tax asset ........ 2,721 --
Other ......................... 715 993
------- -------
$ 7,137 $12,970
======= =======
</TABLE>
In March 1996, the Company entered into an agreement to form a joint
venture (Preferred Mortgages Limited) in the United Kingdom to originate and
purchase mortgages made to borrowers who may not otherwise qualify for
conventional loans for the purpose of securitization and sale. The Company and a
second party each own 45% of the joint venture, and a third party owns the
remaining 10%. The original investment in the joint venture represents the
acquisition of 675,000 shares of the joint venture stock for $1,032 and a note
receivable from the joint venture for $1,032.
82
<PAGE> 85
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(dollars in thousands, except share data)
Additionally, at December 31, 1996 and December 31, 1997, the Company
had loaned to the joint venture $528 and $1,781, respectively. The note and loan
bear interest at 3% per annum above LIBOR. Principal repayment on the note is to
begin when the joint ventures Board of Directors determine the joint venture has
sufficient available profits. The loan is due upon demand. To the extent not
previously repaid, all principal is due December 31, 2040. The investment in the
joint venture is accounted for under the equity method and is included in other
assets.
7. SERVICING PORTFOLIO
The total servicing portfolio of loans was approximately $536 million,
$2.1 billion, and $7.0 billion at December 31, 1995, 1996 and 1997,
respectively.
8. INTEREST-ONLY AND RESIDUAL CERTIFICATES
Activity in interest-only and residual certificates consisted of the
following:
<TABLE>
<CAPTION>
For the year ended
December 31,
------------------------
1996 1997
-------- ---------
<S> <C> <C>
Balance, beginning of year .. $ 14,073 $ 86,247
Additions ................... 77,011 384,971
Cash receipts ............... (4,837) (247,912)
-------- ---------
Balance, end of year ........ $ 86,247 $ 223,306
======== =========
</TABLE>
Cash receipts include gross receipts of approximately $232,444 from the
sale, on a non-recourse basis of interest-only and residual certificates. The
sale was effected through a securitization (the "Excess Cashflow
Securitization") by which the Company sold interest-only and residual
certificates that had an estimated net book value of approximately $266,571 and
received net cash proceeds equal to approximately 85% of the estimated net book
value and a subordinated residual certificate for the remaining balance. The
Company did not recognize any gain or loss as a result of the Excess Cashflow
Securitization, although costs of the transaction of approximately $4,870 were
expensed as incurred. The Company used the net proceeds to retire or reduce
certain term debt.
83
<PAGE> 86
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(dollars in thousands, except share data)
9. PROPERTY, FURNITURE, FIXTURES AND EQUIPMENT
Property, furniture, fixtures and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1997
------- --------
<S> <C> <C>
Building ........................ $ - $ 5,113
Computer systems ................ 1,089 4,430
Office equipment ................ 589 3,603
Furniture ....................... 485 3,465
Leasehold improvements .......... 29 512
Other ........................... 4 335
------- --------
Total .................. 2,196 17,458
Less accumulated depreciation ... (519) (2,574)
------- --------
Property, furniture, fixtures and
equipment, net ............... $ 1,677 $ 14,884
======= ========
</TABLE>
Depreciation expense was $143, $317, and $1,547 for 1995, 1996 and
1997, respectively.
10. INCOME TAXES
The Partnership which is included in the consolidated financial
statements became a wholly owned subsidiary of the Company after the plan of
exchange described in Note 1 was consummated. 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, and began accounting for the
effect of income taxes under SFAS No. 109, "Accounting for Income Taxes," on
that date. Taxable income for 1996 is calculated on the days method whereby the
previous partners are responsible for the tax liability generated through June
24, 1996.
84
<PAGE> 87
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(dollars in thousands, except share data)
The components of the provision for income taxes allocable to the
Company consist of the following:
<TABLE>
<CAPTION>
Current income tax expense: 1996 1997
-------- -------
<S> <C> <C>
Federal .............................. $ 5,713 $13,070
State ................................ 1,214 2,776
-------- -------
6,927 15,846
-------- -------
Deferred income tax expense:
Federal .............................. 725 11,262
State ................................ 154 2,392
-------- -------
879 13,654
-------- -------
Non-recurring benefit associated with the conversion
of Partnership to C Corporation ................. (3,600) --
-------- -------
Total provision for income taxes ................... $ 4,206 $29,500
======== =======
</TABLE>
Total provision for income taxes differs from the amount which would be provided
by applying the statutory federal income tax rate to income before income taxes
as indicated below:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Income tax at federal statutory rate .............................. $ 10,192 $ 27,100
State income taxes, net of federal benefit ........................ 1,310 3,484
Non-recurring benefit associated with the conversion
of the Partnership to a C Corporation ......................... (3,600) --
Goodwill amortization ............................................. -- 817
Other, net ........................................................ (312) (1,901)
Effect of applying statutory federal and state income
tax rates to partnership income ............................... (3,384) --
-------- --------
Total provision for income taxes .................... $ 4,206 $ 29,500
======== ========
</TABLE>
85
<PAGE> 88
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(dollars in thousands, except share data)
The effects of temporary differences that give rise to significant portions of
the deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
Deferred tax assets: 1996 1997
-------- --------
<S> <C> <C>
Stock warrants ...................................... $ 3,003 $ 2,403
Allowance for loan losses ........................... 435 5,095
Interest-only and residual certificates ............. 853 3,722
Deferred fees ....................................... 141 3,269
Joint venture ....................................... 320 1,037
Mortgage servicing rights ........................... 204 1,700
Other ............................................... 105 365
Deferred tax liabilities:
Interest-only and residual certificates ............. (1,228) (27,110)
Mortgage servicing rights ........................... (934) (834)
Other ............................................... (178) (580)
-------- --------
Net deferred tax asset (liability) .................. $ 2,721 $(10,933)
======== ========
</TABLE>
11. FINANCIAL INSTRUMENTS AND OFF BALANCE SHEET ACTIVITIES
FINANCIAL INSTRUMENTS
SFAS No. 105 "Disclosure of Information about Financial Instruments
with Off-Balance Sheet Risks and Financial Instruments with Concentrations of
Credit Risk" and SFAS No. 119, "Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments" require disclosure of the
notional amount or contractual amounts of financial instruments.
The Company regularly securitizes and sells fixed and variable rate
mortgage loan receivables. As part of its interest rate risk management
strategy, the Company may choose to hedge its fixed rate interest rate risk
related to its mortgage loans held for sale by utilizing treasury securities.
The Company classifies these transactions as hedges. The gains and losses
derived from these financial securities are deferred and included in the
carrying amounts of the mortgage loans held for sale and ultimately recognized
in income when the related mortgage loans are sold. Deferred losses on the
United States Treasury securities used to hedge the anticipated transactions
amounted to approximately $1,571, and $2,738 at December 31, 1996 and 1997,
respectively.
86
<PAGE> 89
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(dollars in thousands, except share data)
MARKET RISK
The Company is subject to market risk from financial instruments,
including interest-only and residual certificates and short sales of treasury
securities, in that changes in market conditions can unfavorably affect the
market value of such contracts.
FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Values of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the financial statements, for which it is
practicable to estimate that value. In cases where quoted market prices are not
available, fair values are based upon estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and the estimated future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. SFAS No. 107 excludes certain
financial instruments and all non-financial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts do not represent the
underlying value of the Company.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate the value:
Cash and cash equivalents: The carrying amount of cash and
cash equivalents is considered to be a reasonable estimate of fair
market value.
Accrued interest receivable and accounts receivable: The
carrying amounts are considered to approximate fair value. All amounts
that are assumed to be uncollectible within a reasonable time are
written off.
Securities purchased under agreements to resell and securities
sold but not yet purchased: The carrying amounts approximate fair value
as these amounts are short-term in nature and bear market rates of
interest.
Mortgage loans held for sale: The estimate of fair values is
based on current pricing of whole loan transactions that a purchaser
unrelated to the seller would demand for a similar loan. The fair value
of the mortgage loans held for sale approximated $932,000 and
$1,732,000 at December 31, 1996 and 1997, respectively.
87
<PAGE> 90
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(dollars in thousands, except share data)
Warehouse financing due from correspondents: The carrying
amounts are considered to approximate fair value as the amounts
are short term in nature and bear market rates of interest.
Interest-only and residual certificates: The fair value is
determined by discounting the estimated cash flow over the life
of the certificate using prepayment, default, and interest rate
assumptions that market participants would use for similar
financial instruments subject to prepayment, credit and interest
rate risk. The carrying amount is considered to be a reasonable
estimate of fair market value.
Warehouse finance facilities, term debt and notes payable: The
warehouse finance facilities have maturities of less than one
year and bear interest at market interest rates and, therefore,
the carrying value is a reasonable estimate of fair value. The
carrying amount of outstanding term debt and notes payable, which
bear market rates of interest and approximates fair value.
CREDIT RISK
The Company uses securities purchased under agreements to resell
as part of its interest rate management strategy. These instruments expose the
Company to credit risk which is measured as the loss the Company would record if
counterparties failed to perform pursuant to the terms of their contractual
obligations and the value of the collateral held, if any, was not adequate to
cover such losses. The Company's policy is to keep the securities at the
financial institution which instituted the trade on behalf of the Company. The
Company monitors the market value of the assets acquired to ensure their
adequacy as compared to the amount at which the securities will be resold. The
interest rate of these instruments depends upon, among other things, the
underlying collateral, the term of the agreement and the credit quality of the
counterparty. The Company transacts these resale agreements with institutional
broker/dealers.
The Company is a party to financial instruments with off-balance
sheet credit risk in the normal course of business. These financial instruments
include commitments to extend credit to borrowers and commitments to purchase
loans from correspondents. The Company has a first or second lien position on
all of its loans, and the maximum combined loan-to-value ratio ("CLTV")
permitted by the Company's underwriting guidelines is 100%. The CLTV represents
the combined first and second mortgage balances as a percentage of the lesser of
appraised value or the selling price of the mortgaged property, with the
appraised value determined by an appraiser with appropriate professional
designations. Loans with CLTV in excess of 100% are sometimes originated or
purchased, but generally only if a prior "take-out" commitment for such loans is
88
<PAGE> 91
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(dollars in thousands, except share data)
obtained. The Company has not included any loans with CLTV in excess of 100% in
its securitization pools to date. A title insurance policy is required for all
loans.
As of December 31, 1996 and 1997, the Company had outstanding
commitments to extend credit at fixed rates or purchase loans in the amounts of
$121,000 and $515,000, respectively. Commitments to extend credit or to purchase
a loan are granted for a period of thirty days and are contingent upon the
borrower and the borrower's collateral satisfying the Company's underwriting
guidelines. Since many of the commitments are expected to expire without being
exercised, the total commitment amount does not necessarily represent future
cash requirements or future credit risk.
The Company is exposed to on-balance sheet credit risk related to
its mortgage loans held for sale and interest-only and residual certificates.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents,
mortgages held for sale, securities purchased under agreements to resell, and
securities sold but not yet purchased. The Company places its cash and cash
equivalents with what management believes to be high-quality financial
institutions and thereby limits its exposure to credit risk. As of December 31,
1996 and 1997, a significant amount of mortgage loans with on balance sheet and
off balance sheet risks were collateralized by properties located in the
mid-atlantic region of the United States.
WAREHOUSE EXPOSURE
The Company makes available to certain correspondents warehouse
financing which bear interest at rates ranging from 1.75% to 2.50% per annum in
excess of LIBOR. As of December 31, 1997 the Company had $44,500 of committed
warehousing available to these correspondents, of which $25,912 was outstanding.
There was $5,045 outstanding as of December 31, 1996 under warehouse facilities
due from correspondents. Interest income on these warehouse financing facilities
were $23, $191, and $1,525 for 1995, 1996, and 1997, respectively. The warehouse
commitments are for terms of less than one year. Mortgage loans originated by
the correspondents remain in the warehouse for a period of 30 days at which
point the mortgage loans are either purchased by the Company or sold to another
investor. At December 31, 1997, $8,000 of committed warehouse financing was
available to a director and stockholder of the Company, and no amounts were
outstanding under the warehouse financing facility at December 31, 1997.
89
<PAGE> 92
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(dollars in thousands, except share data)
12. EMPLOYEE BENEFIT PLANS
DEFINED CONTRIBUTION PLANS
The Company adopted a defined contribution plan (401(k)) for all
eligible employees during August 1995. Additionally, the Company assumed many
401(k) plans of acquired subsidiaries and merged these plans into the Company's
plan. Contributions to the plan are in the form of employee salary deferrals
which may be subject to an employer matching contribution up to a specified
limit at the discretion of the Company. The Company's contribution to the plan
amounted to $107, $277 and $960 for 1995, 1996 and 1997, respectively.
The Company's subsidiary, National Lending Center, Inc.
("National Lending Center"), sponsors a 401(k) plan for eligible employees.
National Lending Center's policy is to match 25% of the first 6% of employees'
contributed amounts. Contributions to the plan included in the accompanying
consolidated statement of operations for the year ended December 31, 1997 were
approximately $24.
STOCK AWARD PLANS
Effective October 1997, the Company adopted the Executive Officer
Unregistered Stock Plan (the "Executive Officer Plan") and the Vice-Presidents'
Unregistered Stock Plan (the "Vice Presidents' Plan") which provide compensation
for certain officers of the Company in the form of unregistered shares of the
Company's common stock.
Under the Executive Officer Plan, if the Company achieves an
increase in net earnings per share for two consecutive years of 10% or more,
eligible participants receive a grant of fully-vested unregistered shares of the
Company's common stock at the end of each fiscal year beginning in 1997. The
number of unregistered shares granted to each participant equals the officer's
base salary divided by the closing price of the Company's common stock on the
last calendar day of the year. Each participant also receives a cash payment
equal to the income tax benefit the Company obtains from the issuance of the
common stock. Shares of unregistered stock granted under the Executive Officer
Plan for the year ended December 31, 1997 totaled 104,463, resulting in
compensation expense of $2,981.
Under the Vice-Presidents' Plan, certain vice-presidents as
determined by the Compensation Committee of the Board of Directors may receive a
grant of unregistered shares of the Company's common stock at the end of each
fiscal year beginning with the year ending December 31, 1997. The number of
unregistered shares granted to each designated vice-president
90
<PAGE> 93
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(dollars in thousands, except share data)
shall equal such vice-president's base salary at the year end divided by the
closing price for the Company's common stock on the last day of the fiscal year.
The unregistered shares granted to each vice-president vest over a three year
period with one-third vesting immediately, and an additional one-third vesting
on the last day of each of the next two fiscal years so long as the
vice-president is still employed by the Company on such date. No unregistered
shares were granted under the Vice-Presidents' Plan during the year ended
December 31, 1997.
STOCK OPTION PLANS
On December 11, 1995, the Partnership adopted the Partnership
Option Plan pursuant to which the Partnership was authorized to grant certain
key employees, directors of the General Partner and certain non-employee
advisors (collectively, "Eligible Persons") options to acquire an equity
interest in the Partnership. In April 1996, the Company adopted the Company
Incentive Plan and the Directors Stock Option Plan. All options granted under
the Partnership Option Plan were assumed by the Company pursuant to the Company
Incentive Plan and the Directors Stock Option Plan. The aggregate equity
interest in the Company available under the Company Incentive Plan and the
Director Stock Option Plan is not to exceed 12% of all equity interests in the
Company as of the date the plan was adopted.
In July 1997, the Company adopted the IMC Mortgage Company 1997
Incentive Plan (the "1997 Incentive Plan") pursuant to which the Company is
authorized to grant to eligible employees options to purchase shares of common
stock of the Company. The 1997 Incentive Plan provides that options to acquire a
maximum of 250,000 shares may be granted thereunder at exercise prices of not
less than 100% of the fair market value of the common stock at the date of each
grant. Such options expire ten years after the date of grant. At December 31,
1997, no options had been granted under the 1997 Incentive Plan.
The Company applies APB 25 and related interpretations in
accounting for its plans. SFAS 123 was issued by the FASB in 1995 and, if fully
adopted, changes the method for recognition of cost on plans similar to those of
the Company. The Company has adopted the disclosure alternative established by
SFAS 123. Therefore pro forma disclosures as if the Company adopted the cost
recognition requirements under SFAS 123 are presented below.
The Company's stock option plans provide primarily for the
granting of nonqualified stock options to certain key employees, non-employee
directors and non-employee advisors. Generally, options outstanding under the
Company's stock option plans: (1) are granted at prices which are equal to the
market value of the stock on the date of grant, (2) vest at various rates over a
three or five year period and (3) expire ten years subsequent to award.
91
<PAGE> 94
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(dollars in thousands, except share data)
A summary of the status of the Company's stock options as of
December 31, 1995, 1996 and 1997 and the changes during the year is presented
below:
<TABLE>
<CAPTION>
1995 1996 1997
-------------------------- ----------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- -------- ----------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year ............. 0 1,150,866 $ 2.35 1,511,168 $ 4.18
Granted ...................................... 1,150,866 $ 2.35 360,302 $ 10.00 354,596 $ 4.94
Exercised .................................... 0 0 401,103 $ 3.77
Canceled ..................................... 0 0 0
---------- ----------- -----------
Outstanding at end of year ................... 1,150,866 $ 2.35 1,511,168 $ 4.18 1,464,661 $ 3.59
========== =========== ===========
Options exercisable at end of year ........... 690,520 1,010,456 1,258,820
========== =========== ===========
Options available for future grant ........... 894,588 534,286 179,690
========== =========== ===========
Weighted average fair value of options granted
during year .............................. $ 1.10 $ 5.75 $ 5.92
========== =========== ===========
</TABLE>
The fair value of each option granted during 1996 is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following assumptions: (1) dividend yield of zero, (2) expected volatility of
54%, (3) risk-free interest rate of 5.5% and (4) expected life of 1.3 years.
The 1996 grants included 120,000 employee option shares granted
at exercise prices less than the market price of the stock on the date of grant.
The exercise price of the options, market price of the common shares at grant
date and estimated fair value of such options at grant date were $8.00, $12.00
and $8.11 per share, respectively. The Company records compensation expense for
such grants over their vesting periods in accordance with APB 25. Such expense
totaled approximately $40 and $96 in 1996 and 1997.
The 1996 grants also include 20,000 option shares, which were
granted to advisors to the Company at exercise prices equal to the market price
of the stock at grant date. Expense representing the estimated fair value of
such grants of approximately $20 and $57 has been recognized in 1996 and 1997
under the provisions of SFAS 123.
The Company assumed the stock option plan of its acquired
subsidiary, Mortgage America, Inc. ("Mortgage America"), in accordance with the
terms of the purchase agreement. On January 1, 1997, the effective date of the
acquisition, the fully vested outstanding options under the Mortgage America
stock option plan were converted to fully-vested options to acquire 334,596
92
<PAGE> 95
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(dollars in thousands, except share data)
shares of the Company's common stock (see Note 3). The exercise price of the
options and market price of the common stock at the acquisition date were $4.19
and $16.75, respectively.
The following table summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------- -------------------------
Weighted Number
Number average Weighted exercisable at Weighted
outstanding at remaining average December average
December 31, contractual exercise 31, exercise
1997 life price 1997 price
------------- ----------- ---------- -------------- --------
<S> <C> <C> <C> <C> <C>
Range of exercise prices
$2.35 .................... 1,009,463 8.0 $ 2.35 1,009,463 $ 2.35
$4.00 to $8.00 ........... 385,198 8.6 $ 7.02 233,492 $ 6.39
$12.00 to $20.25 ......... 70,000 8.8 $ 14.14 15,865 $13.63
--------- ---------
Total ............ 1,464,661 8.2 $ 4.14 1,258,820 $ 3.24
========= =========
</TABLE>
Had compensation cost for the Company's 1995, 1996, and 1997 grants for
stock-based compensation plans been determined consistent with SFAS 123, the
Company's pro forma net income and pro forma net income per common share for
1995 and 1996 and net income and net income per common share for 1997 would
approximate the pro forma amounts below.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1995 December 31, 1996 December 31, 1997
--------------------------- ----------------------- ---------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- --------- ----------- ---------
(in millions, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Pro forma (actual for 1997) net income ....... $ 4.0 $ 3.6 $ 17.9 $ 17.3 $ 47.9 $ 47.5
Pro forma (actual for 1997) basic earnings
per share ................................. $ 0.34 $ 0.30 $ 1.12 $ 1.08 $ 1.76 $ 1.74
Pro forma (actual for 1997) diluted
earnings per share ........................ $ 0.34 $ 0.30 $ 0.92 $ 0.88 $ 1.54 $ 1.52
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are
not indicative of future amounts. There were no awards prior to 1995 and
additional awards in future years are anticipated.
93
<PAGE> 96
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(dollars in thousands, except share data)
13. COMMITMENTS AND CONTINGENCIES
INDUSTRY PARTNERS INCENTIVE PLAN
As of December 31, 1997, a majority of the Partners were required
to sell to the Company on prevailing market terms and conditions, an aggregate
of $126.0 million of home equity loans per year. Loans purchased from Partners
during 1995, 1996 and 1997 approximated $148,420, $337,505, and $399,749,
respectively. In 1996, the Company created an incentive plan (the "Industry
Partners Incentive Plan") to encourage partners to sell more mortgage loans to
the Company than required under their commitments. Under that Plan, options
exercisable for five years after grant to acquire a total of 20,000 shares of
Common Stock at $9.00 per share were awarded to Partners for the quarter ending
September 30, 1996. The market price of the stock at date of grant was $16.00
per share. The 20,000 options were allocated among those Partners that doubled
their commitments, pro rata, to the extent the Partners exceeded that doubled
commitment for the quarter. The plan was amended and, for each quarter beginning
December 31, 1996, Industry Partners that double their commitments will be
eligible to receive on a pro rata basis fully paid shares of common stock equal
to $105 divided by the market price of the common stock at the end of each
quarter. The fully paid shares of common stock will be issued among those
Industry Partners that double their commitments, pro rata, to the extent the
Industry Partner exceeded its doubled commitment for the quarter. The Industry
Partners Incentive Plan continues through the quarter ended June 30, 2000.
Expense recorded under the plan in 1996 and 1997 amounted to approximately $257
and $252, respectively.
OPERATING LEASES
The Company leases office space and various office equipment under
operating lease agreements. Rent expense under operating leases was $363, $753,
and $4,090 in 1995, 1996, and 1997.
94
<PAGE> 97
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(dollars in thousands, except share data)
Future minimum lease payments under noncancellable operating
lease agreements at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Years Ending
December 31,
------------
<S> <C>
1998....................................................$ 5,775
1999.................................................... 5,330
2000.................................................... 3,648
2001.................................................... 2,645
2002.................................................... 2,671
-------
$20,069
=======
</TABLE>
EMPLOYMENT AGREEMENTS
Certain members of management entered into employment agreements
expiring through 2001 which, among other things, provide for aggregate annual
compensation of approximately $1,241 plus bonuses ranging from 5% to 15% of base
salary in the relevant year for each one percent by which the increase in net
income on an earnings per share basis of the Company over the prior year exceeds
10%, up to a maximum of 300% of annual compensation. Each employment agreement
contains a restrictive covenant which prohibits the executive from competing
with the Company for a period of 18 months after termination.
SECURITIES SOLD BUT NOT YET PURCHASED
Securities sold but not yet purchased represent obligations of
the Company to deliver specified financial instruments at contracted prices,
thereby creating commitments to purchase the financial instruments in the market
at prevailing prices. Consequently, the Company's ultimate obligation to satisfy
the sale of financial instruments sold but not yet purchased may exceed the
amounts recognized in the consolidated balance sheet.
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
matters, individually or in the aggregate, will have a material adverse effect
on the consolidated financial condition or results of operations of the Company.
95
<PAGE> 98
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(dollars in thousands, except share data)
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Fiscal Quarter
----------------------------------------------------------
1997 First Second Third Fourth
---- ----- ------ ----- ------
<S> <C> <C> <C> <C>
Revenues ................................... $ 38,421 $ 49,773 $ 73,729 $ 76,836
Net income ................................. $ 8,939 $ 10,711 $ 13,468 $ 14,811
Basic earnings per share ................... $ 0.41 $ 0.41 $ 0.45 $ 0.48
Diluted earnings per share ................. $ 0.34 $ 0.36 $ 0.40 $ 0.43
1996
----
Revenues ................................... $ 11,456 $ 14,285 $ 19,766 $ 20,147
Pro forma net income (actual for third and
fourth quarters) ......................... $ 1,625 $ 3,653 $ 6,052 $ 6,599
Pro forma basic earnings per share (actual
for third and fourth quarters) ........... $ 0.13 $ 0.29 $ 0.31 $ 0.34
Pro forma diluted earnings per share (actual
for third and fourth quarters) ........... $ 0.13 $ 0.22 $ 0.26 $ 0.28
</TABLE>
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
96
<PAGE> 99
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the Nasdaq Stock Market ("Nasdaq") under
the symbol "IMCC". The following table sets forth, for the periods indicated,
the high and low sales price for the Common Stock as reported on Nasdaq, and
reflects a two-for-one stock split paid on February 13, 1997 to stockholders of
record on February 6, 1997.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Year Ended December 31, 1996:
Second Quarter (from June 25, 1996)(1)............ $11.50 $ 9.38
Third Quarter..................................... 17.44 10.75
Fourth Quarter.................................... 20.50 13.63
Year Ended December 31, 1997:
First Quarter..................................... $25.00 $ 14.38
Second Quarter.................................... 18.00 11.13
Third Quarter..................................... 18.44 15.38
Fourth Quarter.................................... 19.31 11.50
</TABLE>
- -----------
(1) The Common Stock commended trading on Nasdaq on June 25, 1996.
- - - - - - -
As of April 20, 1998, there were approximately 3,160 holders of
record of the Common Stock.
As the Company intends to retain all of its future earnings to
finance its operations, the Company has not paid, and currently has no intention
to pay, any cash dividends on its Common Stock. Any decision to declare
dividends in the future will be made by the Company's Board of Directors and
will depend upon the Company's future earnings, capital requirements, financial
condition and other factors deemed relevant by the Company's Board of Directors.
In addition, certain agreements to which the Company is a party restrict the
Company's ability to pay dividends on the Common Stock.
97
<PAGE> 100
<TABLE>
<S> <C>
IMC Mortgage Company
DIRECTORS EXECUTIVE OFFICERS
George Nicholas George Nicholas
Chairman Chief Executive Officer
Thomas G. Middleton Thomas G. Middleton
President Chief Operating Officer
Joseph P. Goryeb Stuart D. Marvin
Director Chief Financial Officer
Mitchell W. Legler
Director
Allen D. Wykle
Director
CORPORATE HEADQUARTERS REGISTRAR AND TRANSFER AGENT
IMC Mortgage Company American Stock Transfer
5901 E. Fowler Avenue & Trust Company
Tampa, Florida 33617 40 Wall Street
(813) 984-8801 New York, NY 10005
INDEPENDENT ACCOUNTANTS STOCK LISTING
Coopers & Lybrand L.L.P. IMC Mortgage Company common
101 East Kennedy Boulevard stock is traded on The NASDAQ Stock
Suite 1500 Market under the symbol "IMCC."
Tampa, Florida 33602
LEGAL COUNSEL
Kramer, Levin, Naftalis
& Frankel
919 Third Avenue
New York, NY 10022
</TABLE>
98
