<PAGE> 1
IMC MORTGAGE COMPANY AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1998 and December 31, 1997 1
Condensed Consolidated Statements of Operations
for the three months and the nine months
ended September 30, 1998 and September 30, 1997 2
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1998
and September 30, 1997 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 36
Item 2. Changes in Securities 36
Item 3. Defaults Upon Senior Securities 36
Item 4. Submission of Matters to a Vote of Security Holders 36
Item 5. Other Information 36
Item 6. Exhibits and Reports on Form 8-K 37
<PAGE> 2
PART I. FINANCIAL INFORMATION
<PAGE> 3
IMC MORTGAGE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1998 1997
---------- ----------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 13,368 $ 26,750
Securities purchased under agreements to resell 634,888 772,586
Accrued interest receivable 22,284 29,272
Accounts receivable 34,424 21,349
Mortgage loans held for sale, net 1,599,450 1,673,144
Interest-only and residual certificates 528,464 223,306
Warehouse financing due from correspondents 9,067 25,913
Property, furniture, fixtures and equipment, net 17,510 14,884
Capitalized mortgage servicing rights 58,746 34,954
Goodwill 90,414 91,963
Other assets 35,311 31,811
---------- ----------
Total assets $3,043,926 $2,945,932
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse finance facilities $1,603,429 $1,732,609
Term debt 392,843 130,480
Accrued and other liabilities 28,428 31,665
Accrued interest payable 14,173 10,857
Securities sold but not yet purchased 634,888 775,324
Deferred tax liability 31,600 10,933
---------- ----------
Total liabilities 2,705,361 2,691,868
---------- ----------
Commitments and contingencies
Redeemable preferred stock, Series A, par value $.01 per share;
liquidation value $100 per share; 500,000 shares authorized;
500,000 and 0 shares issued and outstanding 50,000 0
Redeemable preferred stock, Series B, par value $.01 per share;
liquidation value $100 per share; 300,000 shares authorized;
no shares issued and outstanding 0 0
---------- ----------
Total redeemable preferred stock 50,000 0
---------- ----------
Stockholders' equity:
Common stock, par value $.01 per share; 50,000,000
authorized; 33,004,458 and 30,710,790 shares
issued and outstanding 330 307
Additional paid-in capital 194,041 193,178
Retained earnings 94,194 60,579
---------- ----------
Total stockholders' equity 288,565 254,064
---------- ----------
Total liabilities and stockholders' equity $3,043,926 $2,945,932
========== ==========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements
1
<PAGE> 4
IMC MORTGAGE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Gain on sales of loans $ 53,604 $ 59,096 $ 184,743 $ 119,048
------------ ------------ ------------ ------------
Warehouse interest income 47,005 38,437 127,225 91,454
Warehouse interest expense (34,584) (32,080) (101,021) (69,942)
------------ ------------ ------------ ------------
Net warehouse interest income 12,421 6,357 26,204 21,512
------------ ------------ ------------ ------------
Servicing fees 13,916 5,375 33,593 12,224
Other 3,892 2,900 20,467 9,139
------------ ------------ ------------ ------------
Total servicing fees and other 17,808 8,275 54,060 21,363
------------ ------------ ------------ ------------
Total revenues 83,833 73,728 265,007 161,923
------------ ------------ ------------ ------------
Expenses:
Compensation and benefits 29,677 26,373 91,537 54,959
Selling, general and administrative 28,384 20,548 84,193 43,324
Other interest expense 7,137 4,539 17,309 9,521
Hedge loss 14,953 0 14,953 0
------------ ------------ ------------ ------------
Total expenses 80,151 51,460 207,992 107,804
------------ ------------ ------------ ------------
Income before provision for income taxes 3,682 22,268 57,015 54,119
Provision for income taxes 1,500 8,800 23,400 21,000
------------ ------------ ------------ ------------
Net income $ 2,182 $ 13,468 $ 33,615 $ 33,119
============ ============ ============ ============
Net income per common share:
Basic $ 0.07 $ 0.45 $ 1.09 $ 1.27
============ ============ ============ ============
Diluted $ 0.06 $ 0.40 $ 0.93 $ 1.11
============ ============ ============ ============
Weighted average number of shares
outstanding:
Basic 31,518,348 30,216,518 30,792,266 26,153,123
Diluted 39,076,250 33,660,122 36,057,131 29,908,519
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements
2
<PAGE> 5
IMC MORTGAGE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
----------------------------
1998 1997
--------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 33,615 $ 33,119
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 18,386 6,058
Deferred taxes 20,667 (1,479)
Capitalized mortgage servicing rights (36,561) (21,282)
Net loss on joint venture 1,971 1,201
Net change in operating assets and liabilities, net of effects
of acquisitions of businesses:
Decrease (increase) in mortgages loans held for sale 73,694 (848,341)
(Increase) decrease in securities purchased under agreement
to resell and securities sold but not yet purchased (2,738) 655
Decrease (increase) in accrued interest receivable 6,988 (18,388)
Decrease (increase) in warehousing financing due
from correspondents 16,846 (21,467)
Increase in interest-only and residual certificates (305,158) (231,835)
Increase in other assets (1,538) (8,248)
Increase in accounts receivable (13,075) (8,375)
Increase in accrued interest payable 3,316 9,769
Decrease in accrued and other liabilities (3,145) (1,192)
--------- -----------
Net cash used in operating activities (186,732) (1,109,805)
--------- -----------
Investing activities:
Investment in joint venture (3,016) (1,175)
Purchase of property, furniture, fixtures, and equipment (5,228) (10,404)
Acquisitions of businesses, net of cash acquires and including
other cash payments associated with the acquisitions -- (11,868)
Other (683) --
--------- -----------
Net cash used in investing activities (8,927) (23,447)
--------- -----------
Financing activities:
Issuance of common stock 12 59,672
Issuance of preferred stock 49,082 --
Warehouse finance facilities borrowings, net (129,180) 877,878
Term debt and notes payable borrowings 375,312 257,066
Term debt and notes payable repayments (112,949) (63,549)
--------- -----------
Net cash provided by financing activities 182,277 1,131,067
--------- -----------
Net decrease in cash and cash equivalents (13,382) (2,185)
Cash and cash equivalents, beginning of period 26,750 13,289
--------- -----------
Cash and cash equivalents, end of period $ 13,368 $ 11,104
========= ===========
Supplemental disclosure cash flow information:
Cash paid during the period for interest $ 115,015 $ 69,694
========= ===========
Cash paid during the period for taxes $ 293 $ 23,380
========= ===========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements
3
<PAGE> 6
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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 condensed 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 and Report on Form 8-K filed on October 21, 1998.
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 June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133")
"Accounting for Derivative Instruments and Hedging Activities". SFAS 133
is effective for all fiscal quarters of all fiscal years beginning after
June 15, 1999 (January 1, 2000 for the Company). SFAS 133 requires that
all derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives are recorded each period
in current earnings or other comprehensive income, depending on whether a
derivative was designated as part of a hedge transaction and,
4
<PAGE> 7
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
2. RECENT ACCOUNTING PRONOUNCEMENTS, CONTINUED:
if it is, the type of hedge transaction. For fair-value hedge
transactions in which the Company is hedging changes in an asset's,
liability's, or firm commitment's fair value, changes in the fair value
of the derivative instrument will generally be offset in the income
statement by changes in the hedged item's fair value. The ineffective
portion of hedges will be recognized in current-period earnings.
SFAS 133 precludes designation of a nonderivative financial instrument as
a hedge of an asset or liability. The Company has historically hedged its
interest rate risk on loan purchases by selling short United States
Treasury securities which match the duration of the fixed rate mortgage
loans held for sale and borrowing the securities under agreements to
resell. Prior to September 30, 1998 the unrealized gain or loss resulting
from the change in fair value of these instruments has been deferred and
recognized upon securitization as an adjustment to the carrying value of
the hedged mortgage loans. SFAS 133 requires the gain or loss on these
nonderivative financial instruments to be recognized in earnings in the
period of change in fair value without a corresponding adjustment of the
carrying amount of mortgage loans held for sale. Management anticipates
that it may change the financial instruments it has historically used to
hedge the Company's interest rate risk on loan purchases to include
derivative financial instruments which will qualify for hedge accounting
under the provisions of SFAS 133 and thus more appropriately reflect the
economics of its hedging and risk management activities in the financial
statements of the Company.
The actual effect implementation of SFAS 133 will have on the Company's
financial condition and results of operations will depend on various
factors determined at the period of adoption, including whether the
Company is hedging its interest rate risk on loan purchases, the type of
financial instrument used to hedge the Company's interest rate risk on
loan purchases, whether such instruments qualify for hedge accounting
treatment, the effectiveness of the hedging instrument, the amount of
mortgage loans held for sale which the Company intends to hedge, and the
level of interest rates. Accordingly, the Company can not determine at
the present time the impact adoption of SFAS 133 will have on its
statement of operations or balance sheet.
In October 1998, the FASB issued Statement of Financial Accounting
Standards No. 134, "Accounting for Mortgage-Backed Securities Retained
after the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise" ("SFAS 134"). SFAS 134 amends Statement of Financial
Accounting Standards No. 65, "Accounting for Certain Mortgage Backed
Securities" ("SFAS 65"), to require that after an entity that is engaged
in mortgage banking activities has securitized mortgage loans that are
held for sale, it must classify the resulting retained mortgage-backed
securities or other retained interests based on its ability and intent to
sell or hold those investments. However, a mortgage banking enterprise
must classify as trading any retained mortgage-backed securities that it
commits to sell before or during the
5
<PAGE> 8
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
2. RECENT ACCOUNTING PRONOUNCEMENTS, CONTINUED:
securitization process. Previously, SFAS 65 required that after an entity
that is engaged in mortgage banking activities has securitized a mortgage
loan that is held for sale, it must classify the resulting retained
mortgage-backed securities or other retained interests as trading,
regardless of the entity's intent to sell or hold the securities or
retained interest. SFAS 134 is effective for the first fiscal quarter
beginning after December 15, 1998. On the date SFAS 134 is initially
applied, an enterprise may reclassify from "trading" those
mortgage-backed securities and other beneficial interests that were
retained after the mortgage loans were securitized.
The actual effect the adoption of SFAS 134 will have on the Company's
financial condition and results of operations will depend on various
factors, including the amount of interest-only and residual certificates
and the Company's ability and intent to sell or hold those investments.
Accordingly, the Company can not determine at the present time the impact
of the application of the provisions of SFAS 134 will have on its
statement of operations or balance sheet.
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 by
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 and nine months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------------- ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 31,518,348 30,216,518 30,792,266 26,153,123
Adjustments for dilutive securities:
Stock warrants ....................... 1,479,130 2,160,000 1,930,547 2,383,516
Stock options ........................ 1,114,813 1,234,584 1,073,830 1,337,803
Redeemable preferred stock ........... 4,060,470 0 1,368,363 0
Contingent shares .................... 903,489 49,020 892,125 34,077
---------- ---------- ---------- ----------
Diluted common shares .................... 39,076,250 33,660,122 36,057,131 29,908,519
========== ========== ========== ==========
</TABLE>
(See Note 5 "Redeemable Preferred Stock").
6
<PAGE> 9
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
4. WAREHOUSE FINANCE FACILITIES, TERM DEBT AND NOTES PAYABLE:
The Company has available three significant warehouse lines of credit at
September 30, 1998 totaling $3.25 billion and one warehouse line totaling
$125.0 million for an aggregate total of approximately $3.4 billion ($3.0
billion at December 31, 1997) of which at September 30, 1998
approximately $1.6 billion was outstanding ($1.7 billion at December 31,
1997). Of the $3.4 billion available warehouse lines at September 30,
1998, $2.25 billion was uncommitted and $1.125 billion was committed.
Outstanding borrowings under warehouse finance facilities are
collateralized by mortgage loans held for sale, warehouse financing due
from correspondents and servicing rights on approximately $150 million of
mortgage loans. Upon the sale of these loans and repayment of warehouse
financing due from correspondents, the borrowings under these lines are
repaid.
The Company, based on current volatility in equity, debt and asset-backed
markets, among other things, has entered in October 1998 into
intercreditor arrangements with its three largest warehouse lenders which
comprised $3.25 billion of available warehouse lines at September 30,
1998. The intercreditor arrangements provide for the warehouse lenders to
"standstill" and keep outstanding balances under their facilities in
place, subject to certain conditions, for up to 90 days (which expires
mid-January 1999) in order for the Company to explore its financial
alternatives. The intercreditor agreements also provide, subject to
certain conditions, the lenders will not issue any margin calls
requesting additional collateral be delivered to the lenders. The
agreements provide that the lenders will take no actions, as described
above, for 45 days or until the end of November 1998, extending for an
additional 45 days (for a total of 90 days or until mid-January 1999) if
a letter of intent to effectuate a change of control has been entered
into by the Company during the initial 45 day period. (See Note 7 "Other
Events Subsequent to September 30, 1998".)
To induce one of the three significant lenders, which comprised $1.0
billion of the $1.125 billion in committed warehouse lines and $100
million in committed interest-only and residual financing (of which
approximately $44 million of interest-only and residual financing was
drawn) at September 30, 1998, to enter into an intercreditor agreement,
the Company agreed to allow that lender's committed warehouse and
interest-only and residual financing facilities to become uncommitted.
Accordingly, subsequent to September 30, 1998, of the $3.4 billion of
available warehouse facilities, $3.25 billion is on an uncommitted basis
and $125 million is on a committed basis and $56 million of remaining
committed available interest-only and residual financing became
uncommitted.
All three significant warehouse lenders have not formally reduced the
amount available under the facilities and have informally indicated that
they will continue to fund the Company under their uncommitted facilities
and have funded the Company under their uncommitted facilities, but each
of the three warehouse lenders has indicated their desire that the
Company reduce the average amount outstanding on their warehouse
facilities in the future. However, there can be no assurance that they
will continue to fund the Company under their uncommitted facilities in
the future. (See Note 7 "Other Events Subsequent to September 30, 1998".)
The Company also has available term debt and notes payable at September
30, 1998 totaling
7
<PAGE> 10
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
4. WAREHOUSE FINANCE FACILITIES, TERM DEBT AND NOTES PAYABLE, CONTINUED:
approximately $453.6 million ($315.7 million at December 31, 1997) of
which at September 30, 1998 approximately $392.8 million was outstanding
($130.5 million at December 31, 1997). Of the remaining $60.8 million
available at September 30, 1998, $58.1 million relates to uncommitted
interest-only and residual certificate financing facilities. As discussed
above, subsequent to September 30, 1998, $56 million of committed
available interest-only and residual financing became uncommitted.
Term debt and notes payable consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------- --------
(dollars in thousands)
<S> <C> <C>
Interest-only and residual financing $276,013 $105,491
BankBoston revolving credit facility 92,500 0
Unsecured bank revolving credit facility 6,800 6,800
Mortgage note payable 4,625 5,000
Unsecured term note to former owners of
acquired company 12,905 13,189
-------- --------
Total $392,843 $130,480
======== ========
</TABLE>
In October 1998, the Company entered into a forbearance and intercreditor
agreement with BankBoston with respect to its $95 million revolving bank
facility, which matured by its terms in October 1998. That agreement
provides that the bank will take no collection action for 45 days or
until the end of November 1998, extending for an additional 45 days (for
a total of 90 days or until mid-January 1999) if a letter of intent to
effectuate a change of control has been entered into by the Company
during the initial 45 day period. (See Note 7 "Other Events Subsequent to
September 30, 1998").
There can be no assurance that the Company will be able to enter into a
letter of intent relating to a change of control in order to continue the
intercreditor agreements with the significant warehouse lenders and the
forbearance and intercreditor agreement with BankBoston in effect. If a
letter of intent is not executed within 45 days (by the end of November
1998) from the signing of the intercreditor agreements and the
forbearance and intercreditor agreement, the agreements would expire and
the lenders could demand repayment at a time when the Company is without
resources to make such payments. In such event, the Company would be
unable to continue its business.
5. REDEEMABLE PREFERRED STOCK:
On July 14, 1998, Travelers Casualty and Surety Company and Greenwich
Street Capital Partners II, L.P. and certain affiliated entities
(together, the "Purchasers") purchased $50 million of the Company's
Series A redeemable preferred stock (500,000 shares at $100 per share
liquidation value). The Series A redeemable preferred stock was
convertible to non-registered common stock at $10.44 per common share.
The Series A redeemable preferred stock bears no dividend and is
redeemable by the Company over a three-year period commencing in ten
years if not previously converted. As part of the redeemable preferred
stock purchase agreement, the Company shall use its best efforts to cause
two persons designated by the Purchasers to be elected to the Company's
board of directors at each annual meeting of stockholders. The redeemable
preferred stock, under certain conditions, which includes a change of
control, at the option of the holder, may be tendered to the Company for
redemption prior to scheduled maturity at a premium of 10%.
8
<PAGE> 11
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
5. REDEEMABLE PREFERRED STOCK, CONTINUED:
The Purchasers were also granted an option to purchase, within the next
three years, an additional $30 million of Series B redeemable preferred
stock at par (300,000 shares at $100 per share liquidation value) with a
conversion price into common stock of $22.50. At September 30, 1998, this
option had not been exercised.
In conjunction with the $33 million standby revolving credit facility
entered into on October 15, 1998 (see Note 7 "Other Events Subsequent to
September 30, 1998") the terms of the $50 million redeemable preferred
stock issued on July 14, 1998 were amended to, among other things,
eliminate the conversion feature into common. Included in diluted common
shares for the three months ended September 30, 1998 (see Note 3
"Earnings per Share") of 39,076,250 is 4,060,470 diluted securities
representing the $50 million of the Company's redeemable preferred stock
conversion feature into common stock at $10.44 per share from July 14,
1998 to September 30, 1998.
6. HEDGE LOSS
The Company has historically sold Treasury Securities short to hedge
against interest rate movements affecting the mortgage loans held for
sale. In prior quarters, when interest rates decreased, the Company would
experience a devaluation of its hedge position (requiring a cash payment
by the Company to maintain the hedge), which would generally be largely
offset by a corresponding increase in the value of mortgage loans held
for sale and therefore a higher gain on sale of loans at the time of
securitization. Conversely, when interest rates increased, the Company
would experience an increase in the valuation in the hedge position
(providing a cash payment to the Company from the hedge position), which
would generally be largely offset by a corresponding decrease in the
value of mortgage loans held for sale and a lower gain at the time of
securitization.
During the three months ended September 30, 1998, the Company believes
that, primarily due to significant volatility in debt, equity and
asset-backed markets, investors increased investments in United States
Treasury Securities and at the same time demanded wider spreads over
treasuries to acquire newly issued asset-backed securities. The effect of
the increased demand for the treasuries resulted in a devaluation of the
Company's hedge position, resulting in the Company paying approximately
$47.5 million through the time the hedge positions were closed in October
1998 ($40.0 million in the third quarter and $7.5 million which will be
reflected in the fourth quarter), which was not offset by an equivalent
increased gain on sale of loans at the time of securitization as the
investors demanded wider spreads over the treasuries to acquire the
Company's asset-backed securities issued during the quarter. Of the $40
million in hedge devaluation in the third quarter, approximately 63%
(approximately $25 million) was closed at the time the Company priced its
two securitizations and is reflected as an offset to gain on sale and
approximately 37% (approximately $15 million), was marked to market at
September 30, 1998 and charged to the income statement as a hedge loss in
the third quarter. The hedge positions from September 30, 1998 until the
time the hedge positions were closed resulted in an additional
devaluation of $7.5 million
9
<PAGE> 12
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
6. HEDGE LOSS, CONTINUED:
which will be charged to the income statement as a hedge loss in the
fourth quarter. The impact of the above, among other things, is reflected
in the financial results for the three and nine months ended September
30, 1998.
7. OTHER EVENTS SUBSEQUENT TO SEPTEMBER 30, 1998:
On October 15, 1998 the Company reached an agreement for a $33 million
standby revolving credit facility with Greenwich Street Capital Partners,
II, L.P., and certain affiliates ("Greenwich Street"). The facility is
available to provide working capital for a period of up to 90 days,
during which time the Company intends to explore financial and strategic
alternatives including the possible sale of the Company. The terms of the
new facility result in substantial dilution of existing common
stockholders' equity equating to a minimum of 40%, up to a maximum of
90%, on a diluted basis, depending on (among other things) when, or
whether, a change of control transaction occurs.
In view of, among other things, reduction in available cash and credit
resources, the Company has retained Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ") to advise the Company as to financial and
strategic alternatives. The Company is actively working with DLJ to seek
a long-term investor in the Company or a sale or similar transaction
resulting in a change of control of the Company. Although the Company is
actively working with DLJ to seek a long-term investor, in light of
volatile market conditions and the fact the total market capitalization
of the Company's common stock outstanding currently (total common stock
outstanding multiplied by the quoted market price of the Company's common
stock) is below the equity value of the Company at September 30, 1998,
there can be no assurance the Company will be able to execute a change of
control transaction at a price that would be able to recover the equity
value of the Company or execute a change of control transaction at all.
Pursuant to the $33 million Greenwich Street facility, Greenwich Street
received a $3.3 million commitment fee, and exchangeable preferred stock
representing the equivalent of 40% of the fully diluted equity of the
Company, for making the facility available to the Company. The Greenwich
Street facility provides that under certain circumstances, upon the
Company entering into a definitive agreement which effectuates a change
of control of the Company, Greenwich Street may elect either to receive
(a) a repayment of the facility, plus accrued interest at 10% per annum,
and a take-out premium or (b) additional preferred stock.
The amount of any take-out premium is based on the average of the
facility outstanding
10
<PAGE> 13
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
7. OTHER EVENTS SUBSEQUENT TO SEPTEMBER 30, 1998, CONTINUED:
between the facility's effective date and the date of any definitive
agreement for a change of control, multiplied by either 20%, 100% or 200%
as outlined below. If there is no change of control then no take-out
premium is due.
The amount of additional preferred stock potentially issuable to
Greenwich Street is based upon the time elapsed between the effective
date of the facility and the date of any such definitive agreement as
outlined below.
<TABLE>
<CAPTION>
Take-Out Percentage of Cumulative
Days Premium Diluted Equity Issued in the Form of
Elapsed Percentage Additional Preferred Stock
------- ---------- ------------------------------------
(In addition to the initial 40%)
<S> <C> <C>
0-45 20% 0%
46-90 100% 20%
Over 90 200% 50%
</TABLE>
The facility matures at the end of the 90-day commitment period, at which
time, if no definitive agreement for a change of control has been entered
into by that time, it could be exchanged at the holder's election for
preferred stock representing the equivalent of an additional 50% of the
diluted equity. If not exchanged for preferred stock, the facility must
be repaid together with interest.
Also in October 1998, the Company's three most significant warehouse and
interest-only and residual certificate lenders entered into intercreditor
agreements pursuant to which, subject to certain conditions, they will
not take any action, including issuing margin calls, while the Company is
exploring its financial and strategic alternatives (see Note 4 "Warehouse
Finance Facilities, Term Debt and Notes Payable"). The intercreditor
agreements are for an initial period of 45 days or until the end of
November 1998, extending for an additional 45 days or until the middle of
January 1999 (to a total of 90 days) if a letter of intent to effectuate
a change of control is entered into by the Company within the initial
45-day period. These three lenders provide warehouse facilities totaling
$3.25 billion.
To induce one such lender, which comprised approximately 30% of the $3.25
billion available warehouse facilities, to enter into the intercreditor
agreement, the Company agreed to allow that lender's committed warehouse
and interest-only and residual certificate facilities to become
uncommitted (see Note 4 "Warehouse Finance Facilities, Term Debt and
Notes Payable") and issued to the lender warrants exercisable at $1.72
per share to purchase 2.5% of the common stock of the Company on a
diluted basis. To induce another such lender, which comprised
approximately 38% of the available warehouse facilities, to enter into
the intercreditor agreement, the Company reduced the cap on premium
financing (percentage advanced over
11
<PAGE> 14
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
7. OTHER EVENTS SUBSEQUENT TO SEPTEMBER 30, 1998, CONTINUED:
the par value of the mortgage loan) on such lender's uncommitted facility
from 4% over the par of the mortgage loan to 3%.
All three significant warehouse and interest-only and residual
certificate lenders have not formally reduced the amount available under
the facilities and have informally indicated that they will continue to
fund the Company under their uncommitted warehouse facilities, and have
funded the Company under their uncommitted facilities, but each of the
three significant warehouse lenders has indicated their desire that the
Company reduce the average amount outstanding on their warehouse
facilities in the future. However, there can be no assurance that they
will continue to fund the Company under their uncommitted facilities in
the future.
In addition, the Company entered into a forbearance and intercreditor
agreement with respect to its $95 million revolving bank credit facility,
which matured by its terms in October 1998. That agreement provides that
the bank will take no collection action for 45 days or until the end of
November 1998, extending for an additional 45 days or until the middle of
January 1999 (to a total of 90 days) if a letter of intent to effectuate
a change of control has been entered into by the Company during the
initial 45-day period (see Note 4 "Warehouse Finance Facilities, Term
Debt and Notes Payable").
All three of the Company's significant warehouse and interest-only and
residual certificate lenders are to receive a fee of one million dollars
each upon a change of control of the Company, and the bank will receive a
similar fee for its forbearance agreement.
The terms of the above standby revolving credit facility and the
intercreditor agreement will result in both significant interest expense
and stockholder dilution in the fourth quarter of 1998. Interest expense
and dilution with respect to the standby revolving credit facility, in
addition to its 10% terms and $3.3 million commitment fee, is dependent
on whether and to what extent the take out premium becomes effective,
whether a definitive agreement is entered into and if so, the timing of
such agreement and on the value attributable to the preferred stock
issued or to be issued. Interest expense with respect to the
intercreditor agreement may be increased due to the value attributed to
the warrants issued to the lender, exerciseable at $1.72 per share.
Management cannot estimate the amount of interest expense or dilution at
this time due to the variable factors involved, but expects each to be
significant.
12
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following information should be read in conjunction with the condensed
consolidated financial statements and notes included in Item 1 of this Quarterly
Report, 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 and Report on Form 8-K, filed on October 21, 1998. 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 continuing tightening of credit availability
to the subprime mortgage origination industry, early termination of the
intercreditor and forbearance agreements, increased yield requirements by
investors in asset - backed securities' bond yields, risks of margin calls on
credit facilities, lack of continued availability of credit facilities,
reduction in residential real estate values, reduced demand for non-conforming
loans, competitive forces, prepayment speeds, delinquency and default rates,
rapid fluctuations in interest rates, risks related to not hedging against loss
of value of the Company's mortgage loan inventory, changes which influence the
loan securitization and the net interest margin securities (excess cash flow
trust) markets generally, 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
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 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.
In 1996, the Company acquired Mortgage Central Corp., a non-conforming lender
which did business under the name "Equitystars". In 1997, the Company acquired
eight non-conforming mortgage lenders: Mortgage America, Inc., Equity Mortgage
Co., Inc., CoreWest Banc, American Mortgage Reduction, Inc.. National Lending
Center, Inc. ("National Lending Center"), Central Money Mortgage Co., Inc.
("Central Money Mortgage"), Residential Mortgage Corporation, and Alternative
Capital Group, Inc. ("Alternative Capital Group"). These 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.
13
<PAGE> 16
RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 Compared to Three Months September 30,
1997.
Net income for the three months ended September 30, 1998 was $2.2 million
representing a decrease of $11.3 million or 83.8% over net income of $13.5
million for the three months ended September 30, 1997. The decrease in net
income resulted principally from hedge losses related to unrealized losses on
the Company's hedging instruments of $15.0 million for the three months ended
September 30, 1998 and a decrease in gain on sale of loans of $5.5 million or
9.3% to $53.6 million for the three months ended September 30, 1998 from $59.1
million for the three months ended September 30, 1997. Offsetting the decrease
in net income was a $6.1 million or 95.4% increase in net warehouse interest
income to $12.4 million for the three months ended September 30, 1998 from $6.4
million for the three months ended September 30, 1997. Also offsetting the
decrease in net income was a $8.5 million or 158.9% increase in servicing fees
to $13.9 million for the three months ended September 30, 1998 from $5.4 million
for the three months ended September 30, 1997, and a $1.0 million or 34.2%
increase in other revenues to $3.9 million for the three months ended September
30, 1998 from $2.9 million for the three months ended September 30, 1997.
Contributing to the decrease in income was a $3.3 million or 12.5% increase in
compensation and benefits to $29.7 million for the three months ended September
30, 1998 from $26.4 million for the three months ended September 30, 1997, of
which increase $2.4 million related to the compensation and benefits related to
the acquisitions of Residential Mortgage Corporation and Alternative Capital
Group (which occurred during the three months ended December 31, 1997) and the
remainder related primarily to the growth of the Company. Also contributing to
the decrease in income was a $7.8 million or 38.1% increase in selling, general
and administrative expenses to $28.4 million for the three months ended
September 30, 1998 from $20.5 million for the three months ended September 30,
1997, of which increase of $1.5 million related to the acquisitions of
Residential Mortgage Corporation and Alternative Capital Group, which occurred
during the three months ended December 31, 1997 and the remainder related
primarily to the growth of the Company. Contributing to the decrease in income
was also a $2.6 million or 57.2% increase in other interest expense to $7.1
million for the three months ended September 30, 1998, from $4.5 million for the
three months ended September 30, 1997.
Income before taxes was reduced by a provision for income taxes of $1.5 million
for the three months ended September 30, 1998 compared to a provision for income
taxes of $8.8 million for the three months ended September 30, 1997,
representing an effective tax rate of approximately 41%.
REVENUES
The following table sets forth information regarding components of the Company's
revenues for the three months ended September 30, 1998 and 1997:
14
<PAGE> 17
<TABLE>
<CAPTION>
For the Three Months
Ended September 30,
--------------------------
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Gain on sales of loans $ 53,604 $ 59,096
-------- --------
Warehouse interest income 47,005 38,437
Warehouse interest expense (34,584) (32,080)
-------- --------
Net warehouse interest income 12,421 6,357
-------- --------
Servicing fees 13,916 5,375
Other 3,892 2,900
-------- --------
Total revenues $ 83,833 $ 73,728
======== ========
</TABLE>
Gain on Sales of Loans. For the three months ended September 30, 1998, gain on
sales of loans decreased to $53.6 million from $59.1 million for the three
months ended September 30, 1997, a decrease of 9.3%. The total volume of loans
produced was approximately $1.9 billion for the three months ended September 30,
1998 as compared with a total volume of approximately $1.9 billion for the three
months ended September 30, 1997. Originations by the Company's correspondent
network decreased to approximately $1.2 billion for the three months ended
September 30, 1998 from approximately $1.5 billion for the three months ended
September 30, 1997, while production from the Company's broker network and
direct lending operations increased to approximately $665 million for the three
months ended September 30, 1998 from approximately $340 million for the three
months ended September 30, 1997.
The Company sells the loans it purchases or originates through one of two
methods: (i) securitization, which involves the private placement or public
offering of pass-through mortgage-backed securities, and (ii) whole loan sales,
which involve selling blocks of loans to single purchasers. During the three
months ended September 30, 1998, the Company decreased the amount of loans sold
in the securitization market and increased the amount of loans sold in the whole
loan market in order to better manage its cash flow. Mortgage loans delivered to
securitization trusts decreased by $200 million, a decrease of 12.5%, to $1.4
billion for the three months ended September 30, 1998 from $1.6 billion for the
three months ended September 30, 1997. Mortgage loans sold in the whole loan
market increased by approximately $494 million to approximately $524 million for
the three months ended September, 1998 from approximately $30 million for the
three months ended September 30, 1997.
For securitizations of mortgage loans, the gain on the sale of loans represents
the present value of the differential (spread) between (i) interest earned on
the portion of the loans sold and (ii) interest paid to investors with related
costs over the expected life of the loans, including expected losses,
foreclosure expenses and a normal servicing fee. The weighted average rates used
to compute the present value of the spread range from 11% to 14.5% based on the
risks associated with each securitization pool. The spread is adjusted for
estimated prepayments and losses. 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 securitized loans. During the three
months ended
15
<PAGE> 18
September 30, 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 September 30, 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 September 30, 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 per year in the first six
months of securitization to 100 basis points per year after 36 months. During
the three months ended September 30, 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 September 30,
1998 approximates a loss rate of approximately 65 basis points per year at
inception of the securitization.
The net gain on sale of loans as a percentage of loans sold and securitized
approximated 2.7% for the three months ended September 30, 1998 compared to 3.8%
for the three months ended September 30, 1997. The decrease in gain on sale as a
percentage of loans sold and securitized for the three months ended September
30, 1998 as compared to the three months ended September 30, 1997 is primarily
the result of investors demanding wider spreads over treasuries for newly issued
asset-backed securities. The spread over treasuries for the fixed rate
securitization transactions the Company completed during the three months ended
September 30, 1998 increased approximately 70 basis points or 80% from the fixed
rate securitization transaction completed during the three months ended
September 30, 1997. The impact of the widening of the spreads demanded by
asset-backed investors on gains on sale from securitizations was particularly
negative for issuers of asset-backed securities which hedged their exposure to
interest rate risk through the short sale of United States Treasury Securities.
The Company has historically hedged its interest rate risk on its fixed-rate
loan production until the date of securitization. Prior to the three months
ended September 30, 1998, decreased interest rates had resulted in a loss on the
Company's hedge position which was generally largely offset by an increase in
the value of the underlying loans, which resulted in a higher gain on sale at
the time of securitization. However, during the three months ended September 30,
1998, the Company's hedge loss resulting from lower interest rates was not
offset by a higher gain on sale due to the wider spreads demanded by
asset-backed investors. The effect of the increased demand for the treasuries
resulted in a devaluation of the Company's hedge position, resulting in the
Company paying approximately $47.5 million through the time the hedge positions
were closed in October 1998 ($40.0 million in the third quarter and $7.5 million
which will be reflected in the fourth quarter), which was not offset by an
equivalent increased gain on sale of loans at the time of securitization. Of the
$40 million in hedge devaluation in the third quarter, approximately 63%
(approximately $25 million) was closed at the time the Company priced its two
securitizations and is reflected as an offset to gain on sale and approximately
37% (approximately $15 million)
16
<PAGE> 19
was marked to market at September 30, 1998 and charged to the income statement
as a hedge loss in the third quarter. The hedge positions from September 30,
1998 until the time the hedge positions were closed resulted in an additional
devaluation of $7.5 million which will be charged to the income statement in the
fourth quarter as a hedge loss.
As described above, the Company uses discount rates ranging from 11% to 14.5% to
present value the differential (spread) between (i) interest earned on the
portion of the loans sold and (ii) interest paid to investors with related costs
over the expected life of the loans, including expected losses, foreclosure
expenses and a normal servicing fee. Based on market volatility in the
asset-backed markets and the widening of the spreads recently demanded by
asset-backed investors to acquire newly issued asset-backed securities, there
can be no assurance that discount rates utilized by the Company in the future to
present value the spread described above will not increase, particularly if
widening of the spreads demanded by asset-backed investors to acquire newly
issued asset-backed securities continue to increase. An increase in the discount
rates used to present value the spread described above of 1%, 5% or 10% would
result in a corresponding decrease in the value of the interest-only and
residual certificates at September 30, 1998 of approximately 3%, 12% or 22%,
respectively.
Net Warehouse Interest Income. Net warehouse interest income increased to $12.4
million for the three months ended September 30, 1998 from $6.4 million for the
three months ended September 30, 1997, an increase of 95.4%. The increase in net
warehouse interest income was primarily due to a decrease in the cost of funds
and an increase in the average balance of mortgages held for sale. The increase
in the three month period ended September 30, 1998 also reflected a decrease 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 loan 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 September 30, 1998 and 1997, the Company incurred
warehouse interest expense of approximately $0.6 million and $3.4, 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 $13.9 million for the three months
ended September 30, 1998 from $5.4 million for the three months ended September
30, 1997, an increase of 158.9%. Servicing fees for the three months ended
September 30, 1998 were positively affected by an increase in mortgage loans
serviced over the prior period. The Company increased its servicing portfolio by
$4.5 billion or 80.9% to $10.1 billion as of September 30, 1998 from $5.6
billion as of September 30, 1997.
17
<PAGE> 20
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 $3.9 million or 34.2% for the three months ended
September 30, 1998 from $2.9 million in three months ended September 30, 1997 as
a result of increased 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 September 30, 1998 and 1997:
<TABLE>
<CAPTION>
For the Three Months
Ended September 30,
-----------------------
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Compensation and benefits $29,677 $26,373
Selling, general and administrative 28,384 20,548
Other interest expense 7,137 4,539
Hedge loss 14,953 0
------- -------
Total expenses $80,151 $51,460
======= =======
</TABLE>
Compensation and benefits increased by $3.3 million or 12.5% to $29.7 million
for the three months ended September 30, 1998 from $26.4 million for the three
months ended September 30, 1997, principally due to an increase in the number of
employees related to the Company's increased mortgage loan servicing portfolio
and $2.4 million of compensation and benefits relating to the acquisitions of
Residential Mortgage Corporation and Alternative Capital Group (which occurred
during the three months ended December 31, 1997). The increase in compensation
and benefits was partially offset by the reversal of accrued executive bonuses
of $3.2 million during the three months ended September 30, 1998 related to
employment agreements and stock award plans which provide executive bonuses
based on increases in annual net earnings per share.
Selling, general and administrative expenses increased by $7.8 million or 38.1%
to $28.4 million for the three months ended September 30, 1998 from $20.5
million for the three months ended September 30, 1997 due to an increase in
servicing costs as a result of an increase in the mortgage loan servicing
portfolio, $1.5 million relating to the acquisitions of Residential Mortgage
Corporation and Alternative Capital Group (which occurred during the three
months ended December 31, 1997), an increase in the provision for loan losses of
$1.5 million and an increase in amortization expense related to capitalized
mortgage servicing rights of $3.6 million.
Other interest expense increased by $2.6 million or 57.2% to $7.1 million for
the three months ended September 30, 1998 from $4.5 million for the three months
ended September 30, 1997 principally as a result of increased term debt and
notes payable borrowings.
18
<PAGE> 21
Hedge losses, which represent the unrealized loss on the Company's hedging
instruments at September 30, 1998, increased to $15.0 million for the three
months ended September 30, 1998 from $0 for the three months ended September 30,
1997. The Company has historically hedged the interest rate risk on loan
purchases by selling short United States Treasury securities which match the
duration of the fixed rate mortgage loans held for sale and borrowing the
securities under agreements to resell. In October 1998, the Company closed its
short treasury positions, and is not currently hedging its mortgage loans held
for sale. The realized loss in these instruments of approximately $25 million
was recognized upon securitization as an adjustment to the carrying value of the
hedged mortgage loans and is included in the net gain on sale for the three
months ended September 30, 1998. The unrealized loss in these instruments of
$15.0 million at September 30,1998 was recognized as a hedge loss. Prior to the
three months ended September 30, 1998, unrealized losses on hedge instruments
were deferred and recognized upon securitization as an adjustment to the
carrying value of the hedged mortgage loans.
Income Taxes. The effective income tax rate for the three months ended September
30, 1998 was approximately 41%, 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 decrease in the provision for income taxes of $7.3 million or 83.0% to $1.5
million for the three months ended September 30, 1998 from the provision for
income taxes of $8.8 million for the three months ended September 30, 1997 was
proportionate to the decrease in pre-tax income.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997.
Net income for the nine months ended September 30, 1998 was $33.6 million
representing an increase of $.5 million or 1.5% over net income of $33.1 million
for the nine months ended September 30, 1997. The increase in net income
resulted principally from an increase in gain on sale of loans of $65.7 million
or 55.2% to $184.7 million for the nine months ended September 30, 1998 from
$119.0 million for the nine months ended September 30, 1997. Also contributing
to the increase in net income was a $4.7 million or 21.8% increase in net
warehouse interest income to $26.2 million for the nine months ended September
30, 1998 from $21.5 million for the nine months ended September 30, 1997.
Contributing to the increase in net income was also a $21.4 million or 174.8%
increase in servicing fees to $33.6 million for the nine months ended September
30, 1998 from $12.2 million for the nine months ended September 30, 1997, and a
$11.3 million or 124.0% increase in other revenues to $20.5 million for the nine
months ended September 30, 1998 from $9.1 million for the nine months ended
September 30, 1997.
The increase in income was partially offset by a $36.6 million or 66.6% increase
in compensation and benefits to $91.5 million for the nine months ended
September 30, 1998 from $55.0 million for the nine months ended September 30,
1997, of which increase $10.0 million related to the compensation and benefits
related to the acquisitions of Residential Mortgage Corporation and Alternative
Capital Group (which occurred during the three months ended December 31, 1997)
and National Lending Center and Central Money Mortgage (which occurred July 1,
1997) and the remainder related primarily to the growth of the Company. The
increase in income was also partially offset by a $40.9 million or 94.3%
increase in selling, general and administrative expenses to $84.2 million for
the nine months ended September 30, 1998 from $43.3 million for the nine months
ended September 30, 1997,
19
<PAGE> 22
of which increase $5.1 million related to the acquisitions of Residential
Mortgage Corporation and Alternative Capital Group, which occurred during the
three months ended December 31, 1997 and National Lending Center and Central
Money Mortgage, which occurred on July 1, 1997, and the remainder related
primarily to the growth of the Company. The increase in income was further
offset by a $7.8 million or 81.8% increase in other interest expense to $17.3
million for the nine months ended September 30, 1998, from $9.5 million for the
nine months ended September 30, 1997 and a hedge loss related to unrealized
losses on the Company's hedging instruments of $15.0 million for the nine months
ended September 30, 1998.
Income before taxes was reduced by a provision for income taxes of $23.4 million
for the nine months ended September 30, 1998 compared to a provision for income
taxes of $21.0 million for the nine months ended September 30, 1997,
representing an effective tax rate of approximately 41%.
REVENUES
The following table sets forth information regarding components of the Company's
revenues for the nine months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
----------------------------
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Gain on sales of loans $ 184,743 $ 119,048
--------- ---------
Warehouse interest income 127,225 91,454
Warehouse interest expense (101,021) (69,942)
--------- ---------
Net warehouse interest income 26,204 21,512
--------- ---------
Servicing fees 33,593 12,224
Other 20,467 9,139
--------- ---------
Total revenues $ 265,007 $ 161,923
========= =========
</TABLE>
Gain on Sales of Loans. For the nine months ended September 30, 1998, gain on
sales of loans increased to $184.7 million from $119.0 million for the nine
months ended September 30, 1997, an increase of 55.2%, reflecting increased loan
production and securitizations for the nine months ended September 30, 1998. The
total volume of loans produced increased to approximately $5.5 billion for the
nine months ended September 30, 1998 as compared with a total volume of
approximately $4.0 billion for the nine months ended September 30, 1997.
Originations by the Company's correspondent network increased to approximately
$3.7 billion for the nine months ended September 30, 1998 from approximately
$3.2 billion for the nine months ended September 30, 1997, while production from
the Company's broker network and direct lending operations increased to
approximately $1.8 billion for the nine months ended September 30, 1998 from
approximately $813.2 million for the nine months ended September 30, 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
Residential Mortgage Corporation and Alternative Capital Group during the last
three months of 1997, which accounted for approximately $245.7 million in
residential mortgage loans originated during the nine months ended September 30,
1998.
20
<PAGE> 23
The Company sells the loans it purchases or originates through one of two
methods: (i) securitizations, which involves the private or public placement or
public offering of pass-through mortgage-backed securities, and (ii) whole loan
sales, which involve selling blocks of loans to single purchasers. Mortgage
loans delivered to securitization trusts increased by $1.4 billion, an increase
of 45.2%, to $4.5 billion for the nine months ended September 30, 1998 from $3.1
billion for the nine months ended September 30, 1997. During the nine months
ended September 30, 1998, the Company increased the amount of loans sold in the
whole loan market in order to better manage its cash flow. Mortgage loans sold
in the whole loan market increased by approximately $789.0 million to
approximately $898.0 million for the nine months ended September 30, 1998 from
approximately $109.0 million for the nine months ended September 30, 1997.
For securitizations of mortgage loans, the gain on the sale of loans represents
the present value of the differentiatial (spread) between (i) interest earned on
the portion of the loans sold and (ii) interest paid to investors with related
costs over the expected life of the loans, including expected losses,
foreclosure expenses and a normal servicing fee. The weighted average rates used
to compute the present value of the spread range from 11% to 14.5% based on the
risks associated with each securitization pool. The spread is adjusted for
estimated prepayments and losses. The Company utilizes assumed prepayment and
loss curves that the Company believes will approximate the timing of prepayments
and losses over the life of the securitized loans. During the nine months ended
September 30, 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 nine
months ended September 30, 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
nine months ended September 30, 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 per year in the first six
months of securitization to 100 basis points per year after 36 months. During
the nine months ended September 30, 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 nine months ended September 30,
1998 approximates a loss rate of 65 basis points per year at inception of the
securitization.
The net gain on sales as a percentage of loans sold and securitized was 3.4% for
the nine months ended September 30, 1998 compared to 3.7% for the nine months
ended September 30, 1997. The decrease in gain on sale as a percentage of loans
sold and securitized for the nine months ended September 30, 1998 as compared to
the nine months ended September 30, 1997 is primarily the result of investors
demanding wider spreads over treasuries for newly issued asset-backed securities
during the third quarter of 1998. The spread over treasuries for the Company's
fixed-rate securitization transactions
21
<PAGE> 24
completed by the Company during the three months ended September 30, 1998
increased approximately 70 basis points or 80% from the fixed-rate
securitization transaction completed during the three months ended September 30,
1997. The impact of the widening of the spreads demanded by asset-backed
investors on gains on sale from securitizations was particularly negative for
issuers of asset-backed securities who hedged their exposure to interest rate
risk through the short sale of United States Treasury Securities.
The Company has historically hedged its interest rate risk on its fixed-rate
loan production until the date of securitization. Prior to the third quarter of
1998, decreased interest rates have resulted in a loss on the Company's hedge
position which was generally largely offset by an increase in the value of the
underlying loans, which resulted in a higher gain on sale at the time of
securitization. However, during the third quarter of 1998, the Company's hedge
loss resulting from lower interest rates was not offset by a higher gain on sale
due to the wider spreads demanded by asset-backed investors.
As described above, the Company uses discount rates ranging from 11% to 14.5% to
present value the differential (spread) between (i) interest earned on the
portion of the loans sold and (ii) interest paid to investors with related costs
over the expected life of the loans, including expected losses, foreclosure
expenses and a normal servicing fee. Based on market volatility in the
asset-backed markets and the widening of the spreads recently demanded by
asset-backed investors to acquire newly issued asset-backed securities, there
can be no assurance that discount rates utilized by the Company in the future to
present value the spread described above will not increase, particularly if
widening of the spreads demanded by asset-backed investors to acquire newly
issued asset-backed securities continue to increase. An increase in the discount
rates used to present value the spread described above of 1%, 5% or 10% would
result in a corresponding decrease in the value of the interest-only and
residual certificates at September 30, 1998 of approximately 3%, 12% or 22%,
respectively.
Net Warehouse Interest Income. Net warehouse interest income increased to $26.2
million for the nine months ended September 30, 1998 from $21.5 million for the
nine months ended September 30, 1997, an increase of 21.8%. The increase in net
warehouse interest income was primarily due to a decrease in the cost of funds
and an increase in the average balance of mortgage loans held for sale. The
increase in the nine-month period ended September 30, 1998 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 nine months ended September 30, 1998 and
1997, the Company incurred warehouse interest expense of approximately $7.6
million and $3.4, respectively, 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.
Servicing Fees. Servicing fees increased to $33.6 million for the nine months
ended September 30, 1998 from $12.2 million for the nine months ended September
30, 1997, an increase of 174.8%. Servicing fees for the nine months ended
September 30, 1998 were positively affected by an increase in mortgage loans
serviced over the prior period. The Company increased its servicing portfolio by
$4.5 billion or 80.9% to $10.1 billion as of September 30, 1998 from $5.6
billion as of September 30, 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 $20.5 million or 124.0% for the nine months ended
September 30, 1998 from $9.1 million in nine months ended
22
<PAGE> 25
September 30, 1997 as a result of increased securitization volume and increased
investment in interest-only and residual certificates.
EXPENSES
The following table sets forth information regarding components of the Company's
expenses for the nine months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
--------------------------
1998 1997
(in thousands)
<S> <C> <C>
Compensation and benefits $ 91,537 $ 54,959
Selling, general and administrative 84,193 43,324
Other interest expense 17,309 9,521
Hedge loss 14,953 0
-------- --------
Total expenses $207,992 $107,804
======== ========
</TABLE>
Compensation and benefits increased by $36.6 million or 66.6% to $91.5 million
for the nine months ended September 30, 1998 from $55.0 million for the nine
months ended September 30, 1997, principally due to an increase in the number of
employees related to the Company's increased mortgage loan production, including
$10.0 million of compensation and benefits relating to the acquisitions of
Residential Mortgage Corporation and Alternative Capital Group (which occurred
during the three months ended December 31, 1997) and National Lending Center and
Central Money Mortgage (which occurred July 1, 1997), and additions of personnel
to service the Company's increased loan servicing portfolio.
Selling, general and administrative expenses increased by $40.9 million or 94.3%
to $84.2 million for the nine months ended September 30, 1998 from $43.3 million
for the nine months ended September 30, 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 $5.1 million relating to the
acquisitions of Residential Mortgage Corporation and Alternative Capital Group
(which occurred during the three months ended December 31, 1997) and National
Lending Center and Central Money Mortgage (which occurred July 1, 1997), an
increase in the provision for loan losses of $7.87 million and an increase in
amortization expense related to capitalized mortgage servicing rights of $9.6
million.
Other interest expense increased by $7.8 million or 81.8% to $17.3 million for
the nine months ended September 30, 1998 from $9.5 million for the nine months
ended September 30, 1997 principally as a result of increased term debt and
notes payable borrowings.
Hedge losses, which represent the unrealized loss on the Company's hedging
instruments at September 30, 1998, increased to $15.0 million for the nine
months ended September 30, 1998 from $0 for the nine months ended September 30,
1997. The Company has historically hedged the interest rate risk on loan
purchases by selling short United States Treasury securities which match the
duration of the fixed rate mortgage loans held for sale and borrowing the
securities under agreements to resell. The realized loss in these instruments
was recognized upon securitization as an adjustment to the carrying value of the
hedged mortgage loans and is included in the net gain on sale for the nine
months ended
23
<PAGE> 26
September 30,1998. The unrealized loss on these instruments of $15.0 million at
September 30, 1998 was recognized as a hedge loss. Prior to September 30, 1998,
unrealized losses on hedge instruments were deferred and recognized upon
securitization as an adjustment to the carrying value of the hedged mortgage
loans.
Income Taxes. The effective income tax rate for the nine months ended September
30, 1998 was approximately 41%, 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 $2.4 million or 11.4% to $23.4
million for the nine months ended September 30, 1998 from the provision for
income taxes of $21.0 million for the nine months ended September 30, 1997 was
proportionate to the increase in pre-tax income and amortization expense related
to goodwill.
FINANCIAL CONDITION
September 30, 1998 Compared to December 31, 1997
Prior to October 1998, the Company hedged, 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 decreased $137.7 million or
17.8% from $772.6 million at December 31, 1997 to $634.9 million at September
30, 1998 and securities sold but not yet purchased decreased $140.4 million or
18.1% from $775.3 million at December 31, 1997 to $634.9 million at September
30, 1998. The Company stopped hedging its new loan production during the third
quarter of 1998 and in October 1998 the Company closed its short treasury
positions and is not currently hedging its mortgage loans held for sale. The
hedge positions which were being carried at September 30, 1998 were closed in
October 1998, which resulted in a $7.5 million devaluation from September 30,
1998 until the time the hedge positions were closed which will be charged to the
income statement in the fourth quarter as a hedge loss.
Mortgage loans held for sale at September 30, 1998 were $1.60 billion,
representing a decrease of $7.4 million or 4.4% over mortgage loans held for
sale of $1.67 billion at December 31, 1997. Included in mortgages held for sale
at September 30, 1998 and December 31, 1997 were $93.5 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
September 30, 1998 and December 31, 1997 was $18.0 million and $11.5 million,
respectively.
Interest-only and residual certificates at September 30, 1998 were $528.5
million, representing an increase of $305.2 million or 136.7% over interest-only
and residual certificates of $223.3 million at December 31, 1997 and capitalized
mortgage servicing rights increased $23.8 million or 68.1% from $35.0 million at
December 31, 1997 to $58.7 million at September 30, 1998. The increases in
interest-only and residual certificates and capitalized mortgage servicing
rights resulted primarily from the delivery of $4.5 billion in mortgage loans
into six securitizations during the nine months ended September 30, 1998.
24
<PAGE> 27
Borrowings under warehouse financing facilities at September 30, 1998 were $1.60
billion, representing a decrease of $129.2 million or 7.5% over warehouse
financing facilities of $1.73 billion at December 31, 1997.
Term debt and notes payable at September 30, 1998 were $392.8 million,
representing an increase of $262.4 million or 201.1% 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 $92.5 million in outstanding borrowings under the Company's
working capital line of credit. At September 30, 1998, the Company's working
capital line of credit had an outstanding balance of $92.5 million.
Redeemable preferred stock was $50.0 million at September 30, 1998 compared to
$0 at December 31, 1997. The redeemable preferred stock was sold in July 1998
and was convertible into non-registered common stock at $10.44 per share. As
described hereafter, the convertible feature which allowed the redeemable
preferred stock holder to convert into common stock was eliminated subsequent to
September 30, 1998.
Stockholders' equity as of September 30, 1998 was $288.6 million, representing
an increase of $34.5 million over stockholders' equity of $254.1 million at
December 31, 1997. This increase was primarily a result of net income for the
nine months ended September 30, 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 and term debt facilities 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, maintaining hedge
positions, meeting margin calls (if any), operating expenses, income taxes,
acquisitions when acquired for cash and capital expenditures.
During the three months ended September 30, 1998 debt, equity and asset-backed
markets were significantly volatile, effectively denying the Company access to
publicly traded debt and equity markets to fund cash needs. Additionally, the
spread demanded over treasury securities to acquire newly issued asset-backed
securities by investors widened resulting in less profitable gain on sales of
loans sold through securitization. The Company has responded by reducing the
premium the Company pays to correspondents and brokers to acquire loans, but
there can be no assurance the reduction of premiums in the future will offset
the wider spreads demanded by investors, or investors will continue to invest in
asset-backed securities at all.
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 nine months ended September 30, 1998, the
Company used cash flows in operating
25
<PAGE> 28
activities of $186.7 million, a decrease of $923.1 million, or 83.2%, over cash
flows used in operating activities of $1.1 billion during the nine months ended
September 30, 1997. During the nine months ended September 30, 1998, the Company
received cash flows from financing activities of $182.3 million, a decrease of
$948.8 million or 83.9% over cash flows received from financing activities of
$1.1 billion during the nine months ended September 30, 1997. The cash flows
used in operating activities related primarily to securitization activities and
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.
The Company, based on current volatility in equity, debt and asset-backed
markets, among other things, has entered in October 1998 into intercreditor
arrangements with its three largest warehouse lenders which comprised $3.25
billion of available warehouse lines at September 30, 1998. The intercreditor
arrangements provide for the warehouse lenders to "standstill" and keep
outstanding balances under their facilities in place, subject to certain
conditions (including the requirement that the Company enter into a letter of
intent to effectuate a change of control by the 45th day (or the end of November
1998) of the standstill period) for up to 90 days (which expires mid-January
1999) in order for the Company to explore its financial alternatives. The
intercreditor agreements also provide, subject to certain conditions, the
lenders will not issue any margin calls requesting additional collateral be
delivered to the lenders (see Note 4 "Warehouse Finance Facilities, Term Debt
and Notes Payable" of the Notes to the Condensed Consolidated Financial
Statements).
All three significant warehouse lenders have not formally reduced the amount
available under the facilities and have informally indicated that they will
continue to fund the Company under their uncommitted facilities, but each of the
three warehouse lenders has indicated their desire that the Company reduce the
average amount outstanding on their warehouse facilities in the future. However,
there can be no assurance that they will continue to fund the Company under
their uncommitted facilities in the future (see Note 7 "Other Events Subsequent
to September 30, 1998" of the Notes to the Condensed Consolidated Financial
Statements).
At September 30, 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 $818 million was outstanding under this warehouse
facility as of September 30, 1998.
At September 30, 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 0.75%. Approximately $322 million was outstanding under
this facility at September 30, 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
26
<PAGE> 29
Holding Corp. The facility provided for $1.0 billion in committed warehousing
for mortgage loans held for sale including a $100.0 million credit facility to
be collateralized by interest-only and residual certificates. Approximately
$372 million was outstanding under this warehouse and residual financing
facility at September 30, 1998.
Subsequent to September 30, 1998, to induce German American Capital Corporation
to enter the intercreditor agreement, the Company allowed German American
Capital Corporation's committed warehouse and residual facility to become
uncommitted (see Note 4 "Warehouse Finance Facilities, Term Debt and Notes
Payable" and Note 7 "Other Events Subsequent to September 30, 1998" of the Notes
to the Condensed Consolidated Financial Statements).
Additionally, at September 30, 1998, the Company had approximately $175 million
available under numerous other warehouse lines of credit. As of September 30,
1998, approximately $135 million was outstanding under these lines of credit.
Interest rates ranged from LIBOR plus 0.65% to LIBOR plus 1.50% as of September
30, 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 $150 million of mortgage
loans. Upon the sale of these loans and the repayment of warehouse financing due
from correspondents, the borrowings under these lines are repaid.
At September 30, 1998, the Company had borrowed $131.7 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
residual financing credit facility which is collateralized by certain
interest-only and residual certificates owned by the Company. At September 30,
1998, $97.7 million was outstanding under this credit facility, which bears
interest at 1.75% per annum in excess of LIBOR.
At September 30, 1998, the Company had borrowed $2.4 million under a residual
financing credit facility which matured 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 is currently discussing an extension of this
facility, but there can be no assurance an extension can be obtained.
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 September 30, 1998, $6.8 million was outstanding under this credit facility.
Subsequent to September 30, 1998, the $7 million credit facility was amended to
provide for repayment of principal and interest over 36 months and, based on
certain circumstances, a partial prepayment of principal may be required on July
31, 1999.
BankBoston provides the Company a revolving credit facility which matured
October 1998, bears interest at prime 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 BankBoston with a maximum amortization period after October 1998 of three
years; or (ii) for
27
<PAGE> 30
acquisitions or bridge financing. BankBoston, with participation from another
financial institution, provides the Company with a $45 million working capital
facility, which bears interest at prime. At September 30, 1998, $92.5 million
was outstanding under these credit facilities.
BankBoston has advised the Company that the bank does not intend to renew or
extend the facility. Accordingly, the Company entered into a forbearance and
intercreditor agreement with Bank Boston with respect to its $95 million
revolving bank facility, which matured by its terms in October 1998. That
agreement provides that the bank will take no collection action for 45 days, or
until the end of November 1998 extending for an additional 45 days (to total of
90 days or until mid-January 1999) if a letter of intent to effectuate a change
of control has been entered into by the Company during the initial 45 day period
(see Note 7 "Other Events Subsequent to September 30, 1998" of the Notes to the
Condensed Consolidated Financial Statements).
The Company's current warehouse lines generally are subject to one-year terms.
Certain warehouse lines have automatic renewal features subject to the absence
of defaults and permit the lender to terminate the facility on notice to the
Company. There can be no assurance either that the Company's current creditors
will renew their facilities as they expire or that the Company will be able to
obtain additional credit lines.
On July 14, 1998, Travelers Casualty and Surety Company and Greenwich Street
Capital Partners II, L.P. and certain affiliated entities (together, the
"Purchasers") purchased $50 million of the Company's Series A redeemable
preferred stock. The Series A redeemable preferred stock was convertible to
non-registered common stock at $10.44 per share. The Series A redeemable
preferred stock bears no dividend and is redeemable by the Company over a
three-year period commencing in ten years if not previously converted. As part
of the preferred stock purchase agreement, the Company shall use its best
efforts to cause two persons designated by the Purchasers to be elected to the
Company's board of directors. The Purchasers were also granted an option to
purchase, within the next three years, an additional $30 million of Series B
redeemable preferred stock at par with a conversion price into common stock of
$22.50. Subsequent to September 30, 1998, the terms of the $50 million
redeemable preferred stock were amended to eliminate the preferred stock feature
to convert into common (see Note 5 "Redeemable Preferred Stock" of the Notes to
the Condensed Consolidated Financial Statements).
On October 15, 1998 the Company reached an agreement for a $33 million standby
revolving credit facility with Greenwich Street Capital Partners, II, L.P., and
certain affiliates ("Greenwich Street"). The facility is available to provide
working capital for a period of up to 90 days, or until the middle of January
1999 during which time the Company intends to explore financial and strategic
alternatives including the possible sale of the Company. The terms of the new
facility result in substantial dilution of existing common stockholders' equity
equating to a minimum of 40%, up to a maximum of 90%, on a diluted basis,
depending on (among other things) when, or whether, a change of control
transaction occurs.
28
<PAGE> 31
Pursuant to the $33 million Greenwich Street facility, Greenwich Street received
a $3.3 million commitment fee, and exchangeable preferred stock representing the
equivalent of 40% of the fully diluted equity of the Company, for making the
facility available to the Company. The Greenwich Street facility provides that
under certain circumstances, upon the Company entering into a definitive
agreement which effectuates a change of control of the Company, Greenwich Street
may elect either to receive (a) a repayment of the facility, plus accrued
interest at 10% per annum, and a take-out premium or (b) additional exchangeable
preferred stock.
The amount of any take-out premium is based on the average of the facility
outstanding between the facility's effective date and the date of any definitive
agreement for a change of control, multiplied by either 20%, 100% or 200% as
outlined below. If there is no change of control then no take-out premium is
due.
The amount of additional exchangeable preferred stock potentially issuable to
Greenwich Street is based upon the time elapsed between the effective date of
the facility and the date of any such definitive agreement as outlined below.
<TABLE>
<CAPTION>
Take-Out Percentage of Cumulative
Days Premium Diluted Equity Issued in the Form of
Elapsed Percentage Additional Preferred Stock
- - - ------- ---------- ------------------------------------
(In addition to the initial 40%)
<S> <C> <C>
0-45 20% 0%
46-90 100% 20%
Over 90 200% 50%
</TABLE>
The facility matures at the end of the 90-day commitment period, at which time,
it could be exchanged at the holder's election for preferred stock representing
the equivalent of an additional 50% of the diluted equity. If not exchanged for
preferred stock, the facility must be repaid together with interest.
The terms of the above standby revolving credit facility and the intercreditor
agreement will result in both significant interest expense and stockholder
dilution in the fourth quarter of 1998. Interest expense and dilution with
respect to the standby revolving credit facility in addition to its 10% terms
and $3.3 million commitment fee, is dependent on whether and to what extent the
take out premium becomes effective, whether a definitive agreement is entered
into and if so, the timing of such agreement and on the value attributable to
the preferred stock issued or to be issued. Interest expense with respect to the
intercreditor agreement will be increased due to the value attributed to the
warrants issued. Management cannot estimate the amount of interest expense or
dilution at this time due to the variable factors involved, but expects each to
be significant.
29
<PAGE> 32
The Company's business requires continual access to short and long-term sources
of capital. In view of, among other things, reduction in available cash and
credit resources, the Company has retained Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ") to advise the Company as to financial and
strategic alternatives. The Company is actively working with DLJ to seek a
long-term investor in the Company or a sale or similar transaction resulting in
a change of control of the Company. Although the Company is actively working
with DLJ to seek a long-term investor, in light of volatile market conditions
and the fact the total market capitalization of the Company's common stock
outstanding currently (total common stock outstanding multiplied by the quoted
market price of the Company's common stock) is below the equity value of the
Company at September 30, 1998, there can be no assurance the Company will be
able to execute a change of control transaction at a price that would be able to
recover the equity value of the Company or execute a change of control
transaction at all.
The Company has substantial capital requirements and it anticipates that it will
need to arrange for additional external cash resources through the sale or
securitization of interest-only and residual certificates, increased credit
facilities or the sale or placement of debt, preferred stock or equity
securities. There can be no assurance that existing warehouse and interest-only
and residual certificate lenders will continue to fund the Company under their
uncommitted and committed facilities, 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 loan sales to the level required to
sustain operations.
Additionally, there can be no assurance that the Company will be able to enter
into a letter of intent relating to a change of control in order to continue the
intercreditor agreements with the significant warehouse lenders and the
forbearance and intercreditor agreement with BankBoston in effect. If a letter
of intent is not executed within 45 days (by the end of November 1998) from the
signing of the intercreditor agreements and the forbearance and intercreditor
agreement, the agreements would expire and the lenders could demand repayment at
a time when the Company is without resources to make such payments. In such
event the Company would be unable to continue its business.
CERTAIN ACCOUNTING CONSIDERATIONS
The Company sells loans through securitizations and retains a residual interest
in the loans and, on occasion, also retains an interest-only certificate. The
interest-only and residual certificates are recorded at fair value and changes
in fair value are recorded in the results of operations in the period of the
change in value. The Company determines fair value 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, and
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 Company uses 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.
If actual prepayment speed or credit losses of a loan portfolio materially and
adversely vary from the Company's original assumptions over time, the Company
would be required to adjust the value of the
30
<PAGE> 33
interest-only and residual certificates, and such adjustment could have a
material adverse effect on the Company's financial condition and results of
operations. Higher than anticipated rates of loan prepayments or credit losses
over a substantial period of time would require the Company to write down the
value of the interest-only and residual certificates, adversely affecting
earnings. There can be no assurance that the Company's assumptions as to
prepayment speeds and credit losses will prove to be reasonable. To the
Company's knowledge, there is a limited market for the sale of interest-only and
residual classes of certificates and there can be no assurance that these assets
can be sold for the value reflected on the balance sheet.
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). Historically, when 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, in quarters prior to October 1998, the Company
hedged a portion of the value of the loans through the short sale of Treasury
Securities. Prior to hedging, the Company performed 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 would be effectively
hedged. The Company executed the sale of the Treasury Securities with large,
reputable securities firms and used the proceeds received to acquire Treasury
Securities under repurchase agreements. These securities were designated as
hedges in the Company's records and were closed out when the loans were sold.
Historically, when the value of the hedges decreased, offsetting an increase in
the value of the loans, the Company, upon settlement with its counterparty,
would 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 increased, offsetting a decrease in the
value of the loans, the Company, upon settlement with its counterparty, would
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 were
substantially similar in purpose, scope and execution to customary hedging
activities using Treasury securities engaged in
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<PAGE> 34
by several of its competitors.
During the three months ended September 30, 1998, due to significant volatility
in debt, equity and asset-backed markets, investors increased investments in
Treasury Securities and at the same time demanded wider spreads over Treasury
Securities to acquire newly issued asset-backed securities. The effect of the
increased demand for the Treasury Securities resulted in a devaluation of the
Company's hedge position, resulting in the Company paying approximately $47.5
million through the time the hedge positions were closed in October 1998 ($40
million in the third quarter and $7.5 million which will be reflected in the
fourth quarter), which was not offset by an equivalent increased gain on sale of
loans at the time of securitization as the investors demanded wider spreads over
the Treasury Securities to acquire the Company's asset-backed securities issued
during the quarter. During the three months ended September 30, 1998, the
Company stopped hedging its interest rate risk on loan purchases and in October
1998 the Company closed all of its open hedge positions (see Note 6 "Hedge
Losses" of the Notes to the Condensed Consolidated Financial Statements).
The Company uses discount rates ranging from 11% to 14.5% to present value the
differential (spread) between (i) interest earned on the portion of the loans
sold and (ii) interest paid to investors with related costs over the expected
life of the loans, including expected losses, foreclosure expenses and a normal
servicing fee. Based on market volatility in the asset-backed markets and the
widening of the spreads recently demanded by asset-backed investors to acquire
newly issued asset-backed securities, there can be no assurance that discount
rates utilized by the Company in the future to present value the spread
described above will not increase, particularly if widening of the spreads
demanded by asset-backed investors to acquire newly issued asset-backed
securities continues to increase. An increase in the discount rates used to
present value the spread described above of 1%, 5% or 10% would result in a
corresponding decrease in the value of the interest-only and residual
certificates at September 30, 1998 of approximately 3%, 12% or 22%,
respectively.
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
32
<PAGE> 35
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 June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133 ("SFAS 133") "Accounting for
Derivative Instruments and Hedging Activities". SFAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999 (January 1,
2000 for the Company). SFAS 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative was designated as part of a hedge
transaction and, if it is the type of hedge transaction. For fair-value hedge
transactions in which the Company is hedging changes in an asset's, liability's,
or firm commitment's fair value, changes in the fair value of the derivative
instrument will generally be offset in the income statement by changes in the
hedged item's fair value. The ineffective portion of hedges will be recognized
in current-period earnings.
The actual effect implementation of SFAS 133 will have on the Company's
financial condition and results of operations will depend on various factors
determined at the period of adoption, including whether the Company is hedging
its interest rate risk loan purchases, the type of financial instrument used to
hedge the Company's interest rate risk on loan purchases, whether such
instruments qualify for hedge accounting treatment, the effectiveness of the
hedging instrument, the amount of mortgage loans held for sale which the Company
intends to hedge, and the level of interest rates. Accordingly, the Company can
not determine at the present time the impact adoption of SFAS 133 will have on
its statement of operations or balance sheet.
In October 1998, the FASB issued Statement of Financial Accounting Standards No.
134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise"
("SFAS 134"). SFAS 134 amends Statement of Financial Accounting Standards No.
65, "Accounting for Certain Mortgage Backed Securities" ("SFAS 65"), to require
that after an entity that is engaged in mortgage banking activities has
securitized mortgage loans that are held for sale, it must classify the
resulting retained mortgage-backed securities or other retained interests based
on its ability and intent to sell or hold those investments. However, a mortgage
banking enterprise must classify as trading any retained mortgage-backed
securities that it commits to sell before or during the securitization process.
Previously, SFAS 65 required that after an entity that is engaged in mortgage
banking activities has securitized a mortgage loan that is held for sale, it
must classify the resulting retained mortgage-backed securities or other
retained interests as trading, regardless of the entity's intent to sell or hold
the securities or retained interest. SFAS 134 is effective for the first fiscal
quarter beginning after December 15, 1998. On the date SFAS 134 is initially
applied, an enterprise may reclassify from
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<PAGE> 36
"trading" those mortgage-backed securities and other beneficial interests that
were retained after the mortgage loans were securitized.
The actual effect the adoption of SFAS 134 will have on the Company's financial
condition and results of operations will depend on various factors, including
the amount of interest-only and residual certificates and the Company's ability
and intent to sell or hold those investments. Accordingly, the Company can not
determine at the present time the impact the application of the provisions of
SFAS 134 will have on its statement of operations or balance sheet.
YEAR 2000
The year 2000 (Y2K) problem is the result of computer programs being written
using two digits rather than four to define the applicable year. Thus the year
1998 is represented by the number "98" in many software applications.
Consequently, on January 1, 2000, the year will jump back to "00" in accordance
with many non-Y2K compliant applications. To systems that are non-Y2K compliant,
the time will seem to have reverted back 100 years. So, when computing basic
lengths of time, the Company's computer programs, certain building
infrastructure components (including, elevators, alarm systems, telephone
networks, sprinkler systems and security access systems) and many additional
time-sensitive software that are non-Y2K compliant may recognize a date using
"00" as the year 1900. This could result in system failures or miscalculations
which could cause personal injury, property damage, disruption of operations,
and/or delays in payments from borrowers, any or all of which could materially
adversely effect the Company's business, financial condition, or results of
operations.
During 1998 the Company implemented an internal Y2K compliance task force. The
goal of the task force is to minimize the disruptions to the Company's business
which could result from the Y2K problem, and to minimize other liabilities which
the Company might incur in connection with the Y2K problem. The task force
consists of existing employees of the Company and an outside consultant hired
specifically to address the Company's internal Y2K issues.
The Company is in the process of conducting a company-wide assessment of its
computer systems and operations infrastructure, including systems being
developed to improve business functionality, to identify computer hardware,
software, and process control systems that are not Y2K compliant. The Company
presently believes that its business-critical computer systems which are not
presently Y2K-compliant will have been replaced, upgraded or modified in the
normal replacement cycle prior to 2000.
The Company has also initiated communications with third parties whose computer
systems' functionality could impact the Company. These communications will
facilitate coordination of Y2K solutions and will permit the Company to
determine the extent to which the Company may be vulnerable to failures of the
third parties to address their own Y2K issues. However, as to the systems of the
third parties that are linked to the Company, there can be no guarantee that
such systems that are not now Y2K compliant will be timely converted to Y2K
compliance.
The costs of the Company's Y2K compliance efforts are being funded with cash
flows from operations. In total, these costs are not expected to be
substantially different from the normal, recurring costs that
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<PAGE> 37
are incurred for systems development, implementation and maintenance. As a
result, these costs are not expected to have a material adverse effect on the
Company's overall results of operations or cash flows.
Additionally, there can be no guarantee that third parties of business
importance to the Company will successfully and timely reprogram or replace, and
test, all of their own computer hardware, software and process control systems.
The failure of these third parties to achieve Y2K compliance by the year 2000
would have a significant adverse effect on the Company's business, financial
position, results of operations and cash flows.
The Company does not yet have a comprehensive contingency plan with respect to
the Y2K problem, but intends to establish such a plan during 1999 as part of its
ongoing Y2K compliance effort.
The foregoing assessment of the impact of the Y2K problem on the Company is
based on management's best estimates at the present time, and could change
substantially. The assessment is based upon numerous assumptions as to future
events. There can be no guarantee that these estimates will prove accurate, and
actual results could differ from those estimated if these assumptions prove
inaccurate.
35
<PAGE> 38
PART II. OTHER INFORMATION
<PAGE> 39
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is party to various legal proceedings arising out of the
ordinary course of its business. Management believes that none of these
actions, individually or in the aggregate, will have a material adverse
effect on the results of operations or financial condition of the
Company.
Item 2. Changes in Securities
On July 14, 1998, the Company sold 500,000 shares of its Series A
redeemable preferred stock, the net proceeds of which approximated
$49.1 million. The Series A redeemable preferred stock has a par value
of $0.01 per share, bears no dividends, and has a liquidation value of
$100 per share. The Series A redeemable preferred stock was convertible
to non-registered common stock at $10.44 per share and is redeemable by
the Company over a three year period commencing in ten years if not
previously converted. As part of the preferred stock purchase
agreement, the Company shall use its best efforts to cause two persons
designated by the purchasers to be elected to the Company's board of
directors at each annual meeting of stockholders. On October 15,
1998, the terms of the redeemable preferred stock were amended to,
among other things, eliminate the conversion feature into common.
The proceeds from the sale of the Series A redeemable preferred stock
were used to fund loan purchases and originations, to support
securitization transactions and for general corporate purposes.
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None.
Item 5. Other Information - None
36
<PAGE> 40
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
27 Financial Data Schedule (for SEC use only)
B. Reports on Form 8-K
On October 21, 1998, the Company filed a current report on Form
8-K to announce an agreement for a $33 million standby revolving
credit facility to provide working capital for a period up to 90
days, during which time the Company intends to explore financial
and strategic alternatives including the possible sale of the
Company.
37
<PAGE> 41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 16, 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
38
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF IMC MORTGAGE COMPANY FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 13,368
<SECURITIES> 0
<RECEIVABLES> 56,708
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 17,510
<DEPRECIATION> 6,836
<TOTAL-ASSETS> 3,043,926
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
50,000
<COMMON> 330
<OTHER-SE> 288,565
<TOTAL-LIABILITY-AND-EQUITY> 3,043,926
<SALES> 184,743
<TOTAL-REVENUES> 265,007
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 190,683
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 118,330
<INCOME-PRETAX> 57,015
<INCOME-TAX> 23,400
<INCOME-CONTINUING> 33,615
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,615
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 0.93
</TABLE>
