<PAGE> 1
SECURITIES EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Act
- ------- of 1934 for the quarterly period ended March 31, 1998.
Transition Report Pursuant to Section 13 or 15(d) of the Securities
- ------- Exchange Act of 1934.
Commission file No. 333-3954
--------
IMC MORTGAGE COMPANY
(Exact name of issuer as specified in its Charter)
Florida 59-3350574
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification number)
5901 E. FOWLER AVENUE
TAMPA, FLORIDA 33617
(Address of Principal Executive Offices)
Issuer's telephone number, including area code: (813) 984-8801
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing for the past 90 days.
Yes X No
----- -----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Title of each Class: Outstanding at May 14, 1998
- -------------------------------------- ---------------------------
Common Stock, par value $.01 per share 30,766,538
----------
<PAGE> 2
IMC MORTGAGE COMPANY AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 1998 and December 31, 1997 1
Consolidated Statements of Operations
for the three months ended
March 31, 1998 and March 31, 1997 2
Consolidated Statements of Cash Flows
for the three months ended March 31, 1998
and March 31, 1997 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 6
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
<PAGE> 4
IMC MORTGAGE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 16,877 $ 26,750
Securities purchased under agreements to resell 877,280 772,586
Accrued interest receivable 23,454 29,272
Accounts receivable 19,434 21,349
Mortgage loans held for sale, net 1,762,714 1,673,144
Interest-only and residual certificates 327,755 223,306
Warehouse financing due from correspondents 19,790 25,913
Property, furniture, fixtures and equipment, net 15,474 14,884
Capitalized mortgage servicing rights 42,681 34,954
Goodwill 91,341 91,963
Other assets 28,985 31,811
---------- ----------
Total assets $3,225,785 $2,945,932
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse finance facilities $1,818,062 $1,732,609
Term debt and notes payable 196,427 130,480
Accounts payable and accrued liabilities 36,797 31,665
Accrued interest payable 13,535 10,857
Securities sold but not yet purchased 875,751 775,324
Deferred tax liability 15,701 10,933
---------- ----------
Total liabilities 2,956,273 2,691,868
---------- ----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01 per share; 10,000,000
shares authorized; none issued and outstanding 0 0
Common stock, par value $.01 per share; 50,000,000
authorized; and 30,750,870 and 30,710,790 shares
issued and outstanding 308 307
Additional paid-in capital 193,521 193,178
Retained earnings 75,683 60,579
---------- ----------
Total stockholders' equity 269,512 254,064
---------- ----------
Total liabilities and stockholders' equity $3,225,785 $2,945,932
========== ==========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
1
<PAGE> 5
IMC MORTGAGE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Revenues:
Gain on sales of loans $ 59,980 $ 27,720
----------- -----------
Warehouse interest income 41,235 20,708
Warehouse interest expense (33,494) (14,755)
----------- -----------
Net warehouse interest income 7,741 5,953
----------- -----------
Servicing fees 9,011 3,041
Other 7,139 1,708
----------- -----------
Total servicing fees and other 16,150 4,749
----------- -----------
Total revenues 83,871 38,422
----------- -----------
Expenses:
Compensation and benefits 28,438 12,328
Selling, general and administrative 24,940 9,592
Other interest expense 4,889 1,863
----------- -----------
Total expenses 58,267 23,783
----------- -----------
Income before provision for income taxes 25,604 14,639
Provision for income taxes 10,500 5,700
----------- -----------
Net income $ 15,104 $ 8,939
=========== ===========
Net income per common share:
Basic $ 0.49 $ 0.41
=========== ===========
Diluted $ 0.44 $ 0.34
=========== ===========
Weighted average number of shares outstanding:
Basic 30,750,870 21,949,144
Diluted 34,695,591 26,147,609
</TABLE>
See accompanying notes to Consolidated Financial Statements.
2
<PAGE> 6
IMC MORTGAGE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 15,104 $ 8,939
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 5,131 1,113
Deferred taxes 4,768 371
Capitalized mortgage servicing rights (11,128) (4,998)
Net loss on joint venture 704 252
Net change in operating assets and liabilities, net of effects of
acquisitions of businesses:
Increase in mortgages loans held for sale, net (89,570) (27,007)
Increase in securities purchased under agreements
to resell and securities sold but not yet purchased (4,267) (7,785)
Decrease in accrued interest receivable 5,818 166
Decrease (increase) in warehousing financing due
from correspondents 6,123 (6,949)
Increase in interest-only and residual certificates (104,449) (58,864)
Decrease (increase) in other assets 3,515 (299)
Decrease (increase) in accounts receivable 1,915 (2,796)
Increase in accrued interest payable 2,678 1,340
Increase in accounts payable and accrued liabilities 5,476 7,599
--------- ---------
Net cash used in operating activities (158,182) (88,918)
--------- ---------
Investing activities:
Investment in joint venture (1,393) (127)
Purchase of property, furniture, fixtures, and equipment (1,322) (3,313)
Acquisitions of businesses -- (8,211)
Other (376) --
--------- ---------
Net cash used in investing activities (3,091) (11,651)
--------- ---------
Financing activities:
Warehouse finance facilities borrowings, net 85,453 58,475
Term debt and notes payable borrowings 138,750 53,806
Term debt and notes payable repayments (72,803) --
--------- ---------
Net cash provided by financing activities 151,400 112,281
--------- ---------
Net increase (decrease) in cash and cash equivalents (9,873) 11,712
Cash and cash equivalents, beginning of period 26,750 13,289
--------- ---------
Cash and cash equivalents, end of period $ 16,877 $ 25,001
========= =========
Supplemental disclosure cash flow information:
Cash paid during the period for interest $ 35,705 $ 15,278
========= =========
Cash paid during the period for taxes $ 312 $ 2,164
========= =========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
3
<PAGE> 7
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
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 an owner trust.
A significant portion of the mortgages are sold on a servicing retained
basis.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All intercompany
transactions have been eliminated in the accompanying consolidated
financial statements.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the interim periods are not necessarily indicative
of financial results for the full year. These unaudited condensed
consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997. The year-end balance sheet data was derived from
audited financial statements, but does not include all disclosures
required by generally accepted accounting principles.
Certain reclassifications have been made to the presentations to conform
to current period presentations.
2. 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 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 displaying of comprehensive income and disclosure requirements related
to segments. The application of the new rules did not impact the Company's
financial position or results of operations.
4
<PAGE> 8
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
3. 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 dividing
net income, adjusted for preferred stock dividends, by weighted average
shares outstanding. Diluted earnings per share, as defined by SFAS No.
128, is computed 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.
Weighted average number of shares outstanding are as follows for the three
months ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
Weighted average common shares outstanding 30,750,870 21,949,144
Adjustments for dilutive securities:
Stock warrants ..................... 2,160,000 2,700,000
Stock options ...................... 940,920 1,478,248
Contingent shares .................. 843,801 20,217
---------- ----------
Diluted common shares .................... 34,695,591 26,147,609
========== ==========
</TABLE>
4. WAREHOUSE FINANCE FACILITIES, TERM DEBT AND NOTES PAYABLE:
In March 1998, the Company entered into a $1.0 billion committed warehouse
and residual financing facility with German American Capital Corporation,
a subsidiary of Deutsche Bank North America Holding Corp. The facility
provides for $1.0 billion in committed available warehouse financing
including $100.0 million of interest-only and residual certificate
financing. No amounts were outstanding under the facility at March 31,
1998.
The Company has available numerous other warehouse lines of credit at
March 31, 1998 totaling approximately $3.09 billion ($3.04 billion at
December 31, 1997) of which at March 31, 1998 approximately $1.82 billion
was outstanding ($1.73 billion at December 31, 1997). Outstanding
borrowings under warehouse finance 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 repayment of warehouse financing due from
correspondents, the borrowings under these lines will be repaid.
The Company also has available term debt and notes payable at March 31,
1998 totaling approximately $409.9 million ($315.7 million at December 31,
1997) of which at March 31, 1998 approximately $196.4 million was
outstanding ($130.5 million at December 31, 1997).
5
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following information should be read in conjunction with the consolidated
financial statements and notes included in Item 1 of this Quarterly Report, and
the financial statements and the notes thereto and Management's Discussion and
Analysis of Financial Condition and Results of Operations included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997. The following management's discussion and analysis of the Company's
financial condition and results of operations contains forward-looking
statements which involve risks and uncertainties. The Company's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of important factors such as reduced demand for
non-conforming loans, competitive forces, prepayment speeds, delinquency and
default rates, rapid fluctuations in interest rates, lower than expected
performance by acquired companies, limitations on available funds, market forces
affecting the price of the Company's shares and other risks identified in the
Company's Securities and Exchange Commission filings. In addition, it should be
noted that past financial and operational performance of the Company is not
necessarily indicative of future financial and operational performance.
GENERAL
IMC is a specialized consumer finance company engaged in purchasing,
originating, servicing and selling home equity loans secured primarily by first
liens on one- to four-family residential properties. The Company focuses on
lending to individuals whose borrowing needs are generally not being served by
traditional financial institutions due to such individuals' impaired credit
profiles and other factors. Loan proceeds typically are used by such individuals
to consolidate debt, to finance home improvements, to pay educational expenses
and for a variety of other uses. By focusing on individuals with impaired credit
profiles and providing prompt responses to their borrowing requests, the Company
has been able to charge higher interest rates for its loan products than
typically are charged by conventional mortgage lenders.
Pursuant to the Company's acquisition strategy, effective January 1, 1997, the
Company acquired all of the assets of Mortgage America, Inc., 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 substantially all of the assets of National
Lending Center, Inc. ("National Lending Center"), a non-conforming mortgage
lender based in Deerfield Beach, Florida, and Central Money Mortgage Co., Inc.
("Central Money Mortgage"), a non-conforming mortgage lender based in Baltimore,
Maryland. 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.
("Alternative Capital Group"), a non-conforming mortgage lender based in Dallas,
Texas.
These eight acquisitions (collectively, the "Acquisitions") were 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
6
<PAGE> 10
assets approximated the liabilities assumed, and accordingly, the majority of
the initial purchase prices was recorded as goodwill which is amortized on a
straight-line basis for periods up to 30 years.
The majority of the acquisitions include earn-out arrangements that provide the
sellers with additional consideration if the acquired company reaches certain
performance targets after the acquisition. Any such contingent payments will
result in an increase in the amount of goodwill recorded on the Company's
balance sheet related to each acquisition. Goodwill represents the excess of
cost over fair market value of the net assets acquired in each acquisition and
is amortized through periodic charges to earnings for up to 30 years.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997.
Net income for the three months ended March 31, 1998 was $15.1 million
representing an increase of $6.2 million or 69.0% over net income of $8.9
million for the three months ended March 31, 1997. The increase in net income
resulted principally from increases in gain on sale of loans of $32.3 million or
116.4% to $60.0 million for the three months ended March 31, 1998 from $27.7
million for the three months ended March 31, 1997. Also contributing to the
increase in net income was a $1.8 million or 30.0% increase in net warehouse
interest income to $7.7 million for the three months ended March 31, 1998 from
$6.0 million for the three months ended March 31, 1997, a $6.0 million or 196.3%
increase in servicing fees to $9.0 million for the three months ended March 31,
1998 from $3.0 million for the three months ended March 31, 1997, and a $5.4
million or 318.0% increase in other revenues to $7.1 million for the three
months ended March 31, 1998 from $1.7 million for the three months ended March
31, 1997.
The increase in income was partially offset by a $16.1 million or 130.7%
increase in compensation and benefits to $28.4 million for the three months
ended March 31, 1998 from $12.3 million for the three months ended March 31,
1997, of which increase $5.8 million related to the compensation and benefits
related to the acquisitions of National Lending Center, Central Money Mortgage,
Residential Mortgage Corporation and Alternative Capital Group (which occurred
during the six months ended December 31, 1997) and the remainder related
primarily to the growth of the Company. The increase in income was also
partially offset by a $15.3 million or 160.0% increase in selling, general and
administrative expenses to $24.9 million for the three months ended March 31,
1998 from $9.6 million for the three months ended March 31, 1997, of which
increase of $2.1 million related to the acquisitions of National Lending Center,
Central Money Mortgage, Residential Mortgage Corporation and Alternative Capital
Group, which occurred during the six months ended December 31, 1997 and the
remainder related primarily to the growth of the Company. The increase in income
was further offset by a $3.0 million or 162.4% increase in other interest
expense to $4.9 million for the three months ended March 31, 1998, from $1.9
million for the three months ended March 31, 1997.
Income before taxes was reduced by a provision for income taxes of $10.5 million
for the three months ended March 31, 1998 compared to a provision for income
taxes of $5.7 million for the three months ended March 31, 1997, representing an
effective tax rate of approximately 41.0%.
7
<PAGE> 11
REVENUES
The following table sets forth information regarding components of the Company's
revenues for the three months ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-----------------------
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Gain on sales of loans $ 59,980 $ 27,720
-------- --------
Warehouse interest income 41,235 20,708
Warehouse interest expense (33,494) (14,755)
-------- --------
Net warehouse interest income 7,741 5,953
-------- --------
Servicing fees 9,011 3,041
Other 7,139 1,708
-------- --------
Total revenues $ 83,871 $ 38,422
======== ========
</TABLE>
Gain on Sales of Loans. For the three months ended March 31, 1998, gain on sales
of loans increased to $60.0 million from $27.7 million for the three months
ended March 31, 1997, an increase of 116.4%, reflecting increased loan
production and securitizations for the three months ended March 31, 1998. The
total volume of loans produced increased by 107.3% to approximately $1.7 billion
for the three months ended March 31, 1998 as compared with a total volume of
approximately $819 million for the three months ended March 31, 1997.
Originations by the Company's correspondent network increased 84.0% to
approximately $1.2 billion for the three months ended March 31, 1998 from
approximately $631 million for the three months ended March 31, 1997, while
production from the Company's broker network and direct lending operations
increased by 185.4% to approximately $537 million for the three months ended
March 31, 1998 from approximately $188 million for the three months ended March
31, 1997. Production volume increased during the 1998 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 of
National Lending Center, Central Money Mortgage, Residential Mortgage
Corporation and Alternative Capital Group during the last six months of 1997,
which accounted for approximately $455 million in residential mortgage loans
originated during the three months ended March 31, 1998. Mortgage loans sold and
delivered to securitization trusts increased by $700 million, an increase of
96.6%, to $1.4 billion for the three months ended March 31, 1998 from $725
million for the three months ended March 31, 1997.
The gain on sales as a percentage of loans sold and securitized increased to
4.2% for the three months ended March 31, 1998 from 3.8% for the three months
ended March 31, 1997. The increase in the gain on sale percentage was primarily
due to the increase in securitization of 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 upfront points and origination fees
recognized as gain on sale of securitized retail loan production increased from
approximately $140,000 for the three months ended March 31, 1997 to
approximately $3.9 million for the three months ended March 31, 1998.
The increase in the gain on sale percentage was partially offset by higher
prepayment speed and expected loss assumptions used during the three months
ended March 31, 1998 to calculate the gain on sale of securitized loans. The
Company utilizes assumed prepayment and loss curves which the Company believes
will approximate the timing of prepayments and losses over the life of the
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<PAGE> 12
securitized loans. During the three months ended March 31, 1998, prepayment
assumptions used to calculate the gain on sales of securitized loans reflect the
Company's expectation that prepayments on fixed rate loans will gradually
increase from a constant prepayment rate ("CPR") of 4% to 28% in the first year
of the loan and remain at 28% thereafter and expected prepayments on adjustable
rate loans will gradually increase from a CPR of 4% to 35% in the first year of
the loan and remain at 35% thereafter. During the three months ended March 31,
1997, the maximum CPR used to compute gain on sales of fixed and adjustable rate
securitized loans was 27% and 30%, respectively. 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. During the three months ended
March 31, 1998, the loss assumption used to calculate the gain on sales of
securitized loans reflects the Company's expectations that losses from defaults
will gradually increase from zero in the first six months of securitization to
100 basis points after 36 months. During the three months ended March 31, 1997,
the assumed loss rate used to calculate gain on sales of securitized loans was
50 basis points per year. The loss curve utilized by the Company during the
three months ended March 31, 1998 approximates a loss rate of 65 basis points
per year at inception of the securitization.
Net Warehouse Interest Income. Net warehouse interest income increased to $7.7
million for the three months ended March 31, 1998 from $6.0 million for the
three months ended March 31, 1997, an increase of 30.0%. The increase in the
three month period ended March 31, 1998 reflected higher interest income
resulting primarily from a decrease in the cost of funds, increased mortgage
loan production and mortgage loans being held for sale in inventory for longer
periods of time, partially offset by interest expense associated with warehouse
facilities. The mortgage loans held for sale increased to $1.8 billion at March
31, 1998, an increase of 84.4%, from $955.7 million at March 31, 1997.
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 or fourth 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
pass-through 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 three months ended March 31, 1998 and 1997,
the Company incurred warehouse interest expense of approximately $2.9 million
and $550,000, respectively, related to the period between the cut-off date and
the closing date of adjustable rate mortgage rate mortgage loan securitizations
for which no corresponding interest income was recognized.
Servicing Fees. Servicing fees increased to $9.0 million for the three months
ended March 31, 1998 from $3.0 million for the three months ended March 31,
1997, an increase of 196.3%. Servicing fees for the three months ended March 31,
1998 were positively affected by an increase in mortgage loans
9
<PAGE> 13
serviced over the prior period. The Company increased its servicing portfolio by
$5.6 billion or 215.4% to $8.2 billion as of March 31, 1998 from $2.6 billion as
of March 31, 1997.
Other. Other revenues, consisting principally of the recognition of the increase
or accretion of the discounted value of interest-only and residual certificates
over time, increased to $7.1 million or 318.0% for the three months ended March
31, 1998 from $1.7 million in three months ended March 31, 1997 as a result of
increased securitization volume and investment in interest-only and residual
certificates.
EXPENSES
The following table sets forth information regarding components of the Company's
expenses for the three months ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
--------------------
1998 1997
------- -------
(in thousands)
<S> <C> <C>
Compensation and benefits $28,438 $12,328
Selling, general and administrative 24,940 9,592
Other interest expense 4,889 1,863
------- -------
Total expenses $58,267 $23,783
======= =======
</TABLE>
Compensation and benefits increased by $16.1 million or 130.7% to $28.4 million
for the three months ended March 31, 1998 from $12.3 million for the three
months ended March 31, 1997, principally due to an increase in the number of
employees related to the Company's increased mortgage loan production, including
$5.8 million of compensation and benefits relating to the acquisitions of
National Lending Center, Central Money Mortgage, Residential Mortgage
Corporation and Alternative Capital Group (which occurred during the six months
ended December 31, 1997), additions of personnel to service the Company's
increased loan servicing portfolio and a $1.5 million increase in executive and
management incentive compensation from $1.3 million for the three months ended
March 31, 1997 to $2.7 million for the three months ended March 31, 1998. It is
anticipated that the Company's compensation and benefits will increase as the
Company expands; however, the amount of executive bonuses is directly related to
increases in the Company's earnings per share.
Selling, general and administrative expenses increased by $15.3 million or
160.0% to $24.9 million for the three months ended March 31, 1998 from $9.6
million for the three months ended March 31, 1997 principally due to an increase
in underwriting, originating and servicing costs as a result of an increase in
the volume of mortgage loan production, including $2.1 million relating to the
acquisitions of National Lending Center, Central Money Mortgage, Residential
Mortgage Corporation and Alternative Capital Group (which occurred during the
six months ended December 31, 1997), an increase in the provision for loan
losses of $4.6 million and an increase in amortization expense related to
capitalized mortgage servicing rights of $2.7 million.
Other interest expense increased by $3.0 million or 162.4% to $4.9 million for
the three months ended March 31, 1998 from $1.9 million for the three months
ended March 31, 1997 principally as a result of increased term debt and notes
payable borrowings.
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<PAGE> 14
Income Taxes. The effective income tax rate for the three months ended March 31,
1998 was approximately 41.0%, which differed from the federal tax rate of 35%
primarily due to state income taxes and the non-deductibility for tax purposes
of amortization expense related to goodwill recognized for certain acquisitions.
The increase in the provision for income taxes of $4.8 million or 84.2% to $10.5
million for the three months ended March 31, 1998 from the provision for income
taxes of $5.7 million for the three months ended March 31, 1997 was
proportionate to the increase in pre-tax income and amortization expense related
to goodwill.
FINANCIAL CONDITION
March 31, 1998 Compared to December 31, 1997
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 $104.7 million or 13.6% from $772.6 million at
December 31, 1997 to $877.3 million at March 31, 1998 and securities sold but
not yet purchased increased $100.4 million or 13.0% from $775.3 million at
December 31, 1997 to $875.8 million at March 31, 1998 due primarily to the
increase in fixed-rate mortgage loans held for sale at March 31, 1998 as
compared to December 31, 1997.
Mortgage loans held for sale at March 31, 1998 were $1.8 billion, representing
an increase of $89.6 million or 5.4% over mortgage loans held for sale of $1.7
billion at December 31, 1997. This increase was a result of the Company's
strategy to increase its financial flexibility by maintaining a sufficient
balance of mortgage loans held for sale. Included in mortgages held for sale at
March 31, 1998 and December 31, 1997 were $74.3 million and $53.9 million,
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 March 31, 1998
and December 31, 1997 was $13.1 million and $11.5 million, respectively.
Interest-only and residual certificates at March 31, 1998 were $327.8 million,
representing an increase of $104.4 million or 46.8% over interest-only and
residual certificates of $223.3 million at December 31, 1997 and capitalized
mortgage servicing rights increased $7.7 million or 22.1% from $35.0 million at
December 31, 1997 to $42.7 million at March 31, 1998. The increases in
interest-only and residual certificates and capitalized mortgage servicing
rights resulted primarily from the delivery of $1.4 billion in mortgage loans
into two securitizations totaling $1.7 billion during the three months ended
March 31, 1998.
Borrowings under warehouse financing facilities at March 31, 1998 were $1.8
billion, representing an increase of $85.5 million or 4.9% over warehouse
financing facilities of $1.7 billion at December 31, 1997. This increase was a
result of increased mortgage loans held for sale.
Term debt and notes payable at March 31, 1998 was $196.4 million, representing
an increase of $65.9 million or 50.5% over term debt and notes payable of $130.5
million at December 31, 1997. This increase was primarily a result of financing
the increase in interest-only and residual certificates and an increase of $8.0
million in outstanding borrowings under the Company's working capital line of
credit. At March 31, 1998, the Company's working capital line of credit had an
outstanding balance of $8.0 million.
11
<PAGE> 15
Stockholders' equity as of March 31, 1998 was $269.5 million, representing an
increase of $15.4 million over stockholders' equity of $254.1 million at
December 31, 1997. This increase was primarily a result of net income for the
three months ended March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company uses its cash flow from the sale of loans through securitizations,
whole loan sales, loan origination fees, processing fees, net interest income,
servicing fees and borrowings under its warehouse facilities and term debt to
meet its working capital needs. The Company's cash requirements include the
funding of loan purchases and originations, payment of interest costs, funding
of over-collateralization requirements for securitizations, operating expenses,
income taxes, acquisitions when acquired for cash and capital expenditures.
The Company has an ongoing need for substantial amounts of capital. Adequate
credit facilities and other sources of funding are essential to the continuation
of the Company's ability to purchase and originate loans. As a result of
increased loan purchases and originations and its growing securitization
program, the Company has operated, and expects to continue to operate, on a
negative cash flow basis. During the three months ended March 31, 1998, the
Company used cash flows in operating activities of $158.2 million, an increase
of $69.2 million, or 77.9%, over cash flows used in operating activities of
$88.9 million during the three months ended March 31, 1997. During the three
months ended March 31, 1998, the Company received cash flows from financing
activities of $151.4 million, an increase of $39.1 million or 34.8% over cash
flows received from financing activities of $112.3 million during the three
months ended March 31, 1997. The cash flows used in 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 increasing amount of loans sold through securitizations has resulted in an
increase in the amount of gain on sales 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 March 31, 1998, the Company had a $1.25 billion uncommitted warehouse and
residual financing facility with Paine Webber Real Estate Securities, Inc.
This warehouse facility bears interest at rates ranging from LIBOR plus 0.65% to
LIBOR plus .90%. Approximately $814.3 million was outstanding under this
warehouse facility as of March 31, 1998.
At March 31, 1998, the Company also 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 $640.7 million was outstanding
under this facility at March 31, 1998.
In March 1998, the Company entered into a $1.0 billion committed warehouse and
residual financing facility with German American Capital Corporation, a
subsidiary of Deutsche Bank North American Holding Corp. The facility provides
for $1.0 billion in committed warehousing for mortgage loans
12
<PAGE> 16
held for sale including a $100.0 million credit facility to be collateralized by
interest-only and residual certificates. No amounts were outstanding under this
warehouse and residual financing facility at March 31, 1998.
Additionally, at March 31, 1998, the Company had approximately $915.0 million
available under numerous other warehouse lines of credit. As of March 31, 1998,
approximately $363.1 million was outstanding under these lines of credit.
Interest rates ranged from LIBOR plus 0.65% to LIBOR plus 1.50% as of March 31,
1998, 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 March 31, 1998, the Company had borrowed $70.8 million under its residual
financing 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 a
$100.0 million credit facility which is collateralized by certain interest-only
and residual certificates owned by the Company. At March 31, 1998, $88.8 million
was outstanding under this credit facility, which bears interest at 1.75% per
annum in excess of LIBOR.
At March 31, 1998, the Company had borrowed $4.3 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 March 31, 1998, $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. 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. At March 31, 1998, $8.0 million was
outstanding under this credit facility.
The Company's warehouse lines and term debt contain various affirmative and
negative covenants customary for credit arrangements of their type and which the
Company believes will not have a material effect on its operations, growth and
financial flexibility. The credit facility with Bank of Boston also contains
certain financial covenants requiring the maintenance of certain debt-to-equity
or debt-to-net worth ratios, as well as establishing limits on the ability of
the Company to incur unsecured indebtedness. The Company does not believe that
the existing financial covenants will restrict its operations within the next 12
months. Management believes the Company is in compliance with all such covenants
under these agreements.
13
<PAGE> 17
The Company's current warehouse lines generally are subject to one-year terms.
Certain warehouse lines have automatic renewal features subject to the absence
of defaults and permit the lender to terminate the facility on notice to the
Company. There can be no assurance either that the Company's current creditors
will renew their facilities as they expire or that the Company will be able to
obtain additional credit lines.
The Company's business requires continual access to short- and long-term sources
of 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 plans to arrange for additional external cash resources prior to the end
of 1998. Such additional external resources may include the sale or
securitization of interest-only and residual certificates, increased credit
facilities and the sale or placement of debt, preferred stock or equity
securities. There can be no assurance that existing credit facilities can be
increased, extended or refinanced, that the Company will be able to arrange for
the sale or securitization of interest-only and residual certificates in the
future on terms the Company would consider favorable, that debt, preferred stock
or equity sources will be available to the Company at any given time or on terms
the Company would consider favorable 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
increasing, maintaining or replacing existing credit facilities, in selling or
securitizing interest-only and residual certificates or in the placement of
debt, preferred stock or equity securities, the Company 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 increase the volume of
whole loan sales to sustain operations. There can be no assurance the Company
would be successful in increasing whole loans sales to the level required to
sustain operations.
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 loans are priced at securitization, the
spread narrows, resulting in a loss in value of the loans. To protect against
such losses, the Company hedges a portion of the value of the loans through the
short sale of Treasury securities. Prior to hedging, the Company performs an
analysis of its loans taking into account, among other things, interest rates
and maturities to determine the amount, type, duration and proportion of each
Treasury security to sell short so that the risk to the value of the loans is
effectively hedged. The Company executes the sale of the Treasury securities
with large, reputable securities firms and uses the proceeds received to acquire
Treasury securities under repurchase agreements. These securities are designated
as hedges in the Company's records and are closed out when the loans are sold.
If the value of the hedges decreases, offsetting an increase in the value of the
loans, the Company, upon settlement with its counterparty, will pay the hedge
loss in cash and realize the corresponding increase in the value of the loans as
part of its interest-only and residual certificates. Conversely, if the value
14
<PAGE> 18
of the hedges increases, offsetting a decrease in the value of the loans, the
Company, upon settlement with its counterparty, will receive the hedge gain in
cash and realize the corresponding decrease in the value of the loans through a
reduction in the value of the corresponding interest-only and residual
certificates.
The Company believes that its hedging activities using Treasury securities are
substantially similar in purpose, scope and execution to customary hedging
activities using Treasury securities engaged in by many of its competitors.
INFLATION
Inflation 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 could have a material adverse effect on the Company's results
of operations and financial condition. Conversely, lower than anticipated rates
of loan prepayments or lower losses could allow the Company to increase the
value of interest-only and residual certificates which could have a favorable
effect on the Company's results of operations and financial condition.
Fluctuating interest rates also may affect the net interest income earned by the
Company from the difference between the yield to the Company on loans held
pending sales and the interest paid by the Company for funds borrowed under the
Company's warehouse facilities. In addition, inverse or flattened interest yield
curves could have an adverse impact on the profitability of the Company because
the loans pooled and sold by the Company have long-term rates, while the senior
interests in the related 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 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,
15
<PAGE> 19
which are effective for fiscal years beginning after December 15, 1997,
establish standards for reporting and displaying of comprehensive income and
disclosure requirements related to segments. The application of the new rules
did not impact 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 completely evaluated, but is not expected to be material
to the Company, to its financial position or results of operations in a given
year.
16
<PAGE> 20
PART II. OTHER INFORMATION
<PAGE> 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K - None
17
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: May 15, 1998 IMC MORTGAGE COMPANY
By: /s/ Thomas G. Middleton
Thomas G. Middleton, President, Chief Operating Officer, Assistant
Secretary and Director
By: /s/ Stuart D. Marvin
Stuart D. Marvin, Chief Financial Officer
18
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