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SECURITIES EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURUTIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO _______ TO ________
COMMISSION FILE NO. 333-3954
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IMC MORTGAGE COMPANY
(Exact name of issuer as specified in its charter)
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Florida 59-3350574
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5901 E. Fowler Avenue
Tampa, Florida 33617
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (813) 984-8801
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filer pursuant to Item
405 of Regulation 2-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
The aggregate market value of Common Stock held by nonaffiliates of the
registrant, based on the closing price of Common Stock as reported by the Nasdaq
National Market on March 26, 1999, was $6,072,684. For purposes of this
computation, all officers, directors and 10% beneficial owners of the registrant
are deemed to be affiliates. Such determination should not be deemed an
admission that such officers, directors or 10% beneficial owners are, in fact,
affiliates of the registrant. As of March 26, 1999, 34,104,590 shares of Common
Stock were outstanding.
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<PAGE>
INDEX
PART I.
Item 1. Business.............................................................1
Item 2. Properties..........................................................26
Item 3. Legal Proceedings...................................................26
Item 4. Submission of Matters to a Vote of Security Holders.................26
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters..............................................27
Item 6. Selected Financial Data.............................................29
Item 7. Management's Discussion and Analysis of Financial Condition
and Results Of Operations........................................32
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..........62
Item 8. Financial Statements and Supplementary Data.........................64
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures...........................................103
PART III.
Item 10. Directors and Executive Officers of the Registrant.................105
Item 11. Executive Compensation.............................................108
Item 12. Security Ownership of Certain Beneficial Owners and Management.....114
Item 13. Certain Relationships and Related Transactions.....................116
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....118
Signatures.........................................................119
<PAGE>
PART I
Forward Looking Statements
Certain statements in this Annual Report on Form 10-K are "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. You can identify forward looking statements by the use of such words as
"expect", "estimate", "intend", "project", budget", "forecast", "anticipate",
"plan","in the process of" and similar expressions. Forward looking statements
include all statements regarding IMC's expected financial position, results of
operations, cash flows, financing plans, business strategies, budgets, capital
and other expenditures, competitive positions, plans and objectives of
management and markets for stock. All forward looking statements involve risks
and uncertainties. In particular, any statements contained herein regarding the
consummation and benefits of the proposed transaction with Greenwich Street
Capital Partners II, L.P. and certain related funds (the "Greenwich Funds"), as
well as expectations with respect to future sales, operating efficiencies and
product and product expansion, are subject to known and unknown risks,
uncertainties and contingencies, many of which are beyond the control of IMC,
which may cause actual results, performance or achievements to differ materially
from anticipated results, performance or achievements. Factors that might affect
such forward looking statements include, among other things, overall economic
and business conditions, the demand for IMC's services, competitive factors in
the industry in which IMC competes, changes in government regulation, continuing
tightening of credit availability to the subprime mortgage industry, early
termination of the amended and restated intercreditor agreements or the
standstill periods relating to certain of IMC's creditors, increased yield
requirements by asset-backed investors, lack of continued availability of IMC's
credit facilities, reduction in real estate values, reduced demand for
non-conforming loans, changes in underwriting criteria applicable to such loans,
prepayment speeds, delinquency and default rates of mortgage loans owned or
serviced by IMC, rapid fluctuation in interest rates, risks related to not
hedging against loss of value of IMC's mortgage loan inventory, changes which
influence the loan securitization and the net interest margin securities (excess
cashflow trust) markets generally, lower than expected performance of companies
acquired by IMC, market forces affecting the price of IMC's common stock and
other uncertainties associated with IMC's current financial difficulties and the
proposed transaction with the Greenwich Funds, and other risks identified in IMC
Mortgage Company's Securities and Exchange Commission filings.
Item 1. Business
IMC Mortgage Company ("IMC" or 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 refinance debt, to finance
home improvements, to pay educational expenses and for a variety of other uses.
By focusing on individuals with impaired credit profiles and by 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. References herein to "IMC" or the "Company" mean
IMC Mortgage Company, a Florida corporation, and its subsidiaries on a
consolidated basis, unless the context otherwise requires.
IMC purchases and originates non-conforming home equity loans through a
diversified network of correspondents and mortgage loan brokers and on a retail
basis through its direct consumer lending effort. As of December 31, 1998, IMC
had in excess of 500 approved correspondents, 1,500 approved mortgage loan
brokers and 80 Company-owned retail branches. IMC has experienced growth in loan
production from total purchases and originations of approximately $5.9 billion
for the year ended December 31, 1997 to $6.2 billion for the year ended December
31, 1998. The growth in loan production from total purchases and originations
for the year ended December 31, 1998 resulted primarily from activities through
the nine months ended September 30, 1998, before
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the volatility in the equity, debt and asset-backed capital markets materially
and adversely affected the business of the Company. See "Management's Discussion
and Analysis of Financial Conditions and Results of Operations" and "Liquidity
and Capital Resources". The loan production from purchases and originations for
the three months ended December 31, 1998 was the lowest loan production of any
fiscal quarter in 1998. See "Loan Purchases and Originations". IMC's network of
correspondents accounted for approximately 73.7% and 62.1% of loan production in
1997 and 1998, respectively. Through its network of mortgage brokers, IMC
generated approximately 13.3% and 22.6% of its loan production in 1997 and 1998,
respectively. IMC's direct consumer lending effort contributed approximately
13.0% and 15.3% of loan production in 1997 and 1998, respectively.
The Company's total revenues increased from $238.8 million for the year
ended December 31, 1997 to $321.2 million for the year ended December 31, 1998,
while net income decreased from $47.9 million for the year ended 1997 to a net
loss of $100.5 million for the year ended December 31, 1998. Gain on sale of
loans, net, represented $181.0 million, or 75.8% of total revenues, for the year
ended 1997 and $205.9 million, or 64.1% of total revenues, for the year ended
December 31, 1998. Servicing income, net warehouse interest income and other
revenues in the aggregate increased from $57.8 million, or 24.2% of total
revenues, for the year ended 1997 to $115.3 million, or 35.9% of total revenues,
for the year ended December 31, 1998.
IMC sold the majority of its loans through September 30, 1998 through its
securitization program and retained the right to service such loans. Since
September 30, 1998, the Company has focused on selling its loans through whole
loan sales to third parties for cash primarily on a servicing released basis due
to volatility in asset-backed capital markets and to improve cash flow from
operations. The whole loan sales may be on a servicing retained basis (in which
IMC retains the right to service the loans after the sale) or a servicing
released basis (in which IMC sells the right to service the loan with the loan
sold). Through December 31, 1998, IMC had completed twenty-three securitizations
totaling $11.4 billion of loans. The Company earns servicing fees on the loans
the Company services at a rate of 0.50% per year, which fees are payable on a
monthly basis, and ancillary fees on the loans it services. As of December 31,
1997 and 1998, IMC had a servicing portfolio, including mortgage loans held for
sale, of $7.0 billion and $8.9 billion, respectively.
IMC was formed in 1993 by a team of executives experienced in the
non-conforming home equity loan industry. IMC was originally structured as a
partnership (the "Partnership"), with the limited partners consisting of
originators of non-conforming home equity loans (the "Industry Partners") and
certain members of management. The original Industry Partners included: Approved
Financial Corp. (formerly American Industrial Loan Association) ("Approved");
Champion Mortgage Co. Inc. ("Champion"); Cityscape Corp.; Equitysafe, a Rhode
Island general partnership ("Equitystars"); Investors Mortgage, a Washington
limited partnership ("Investors Mortgage"); Mortgage America Inc. ("Mortgage
America"); Residential Money Centers; First Government Mortgage and Investors
Corp.; Investaid Corp.; and New Jersey Mortgage and Investment Corp. In 1994,
TMS Mortgage Inc., a wholly-owned subsidiary of The Money Store Inc. ("The Money
Store"), and Equity Mortgage, a Maryland limited partnership ("Equity
Mortgage"), became Industry Partners. Branchview, Inc., a wholly-owned
subsidiary of Lakeview Savings Bank ("Lakeview"), became an Industry Partner in
1995.
Recent Developments
Consummation of Stock Purchase by the Greenwich Funds
The Company, like several companies in the sub-prime mortgage industry, is
being materially and adversely affected by significant and adverse conditions in
the equity, debt and asset-backed capital markets. IMC's ability to access
equity, debt and asset-backed capital markets has become severely restricted.
These market conditions resulted in several other companies in the sub-prime
mortgage industry filing for bankruptcy protection, such as Southern Pacific
Funding (October 1, 1998), Wilshire Financial Services Group, Inc. (March 3,
1999), MCA Financial Corp. (February 11,1999), United Companies (March 2,1999)
and certain subsidiaries of First Plus Financial (March 6, 1999).
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<PAGE>
The Company's $95 million revolving credit facility with BankBoston, N.A.
matured in mid-October 1998 and BankBoston was unwilling to extend the facility.
In addition, beginning in September 1998, the Company's residual lenders, which
had advanced approximately $276 million to the Company collateralized by its
interest-only and residual certificates, proposed to reduce their exposure by
making cash margin calls. Certain of the Company's warehouse lenders holding
more than $2 billion in mortgage loans also threatened to make margin calls on
their credit lines during September and October 1998. During this period, the
Company's traditional strategy of minimizing the risks of interest rate
fluctuations through a program of short selling United States Treasury
securities subjected the Company to margin calls of approximately $47.5 million
in cash as a "flight to quality" following the devaluation of the Russian ruble
and concerns over economic conditions in the emerging markets generally
disrupted the Company's anticipated hedging strategy.
As a consequence, in October 1998, the Company, faced with the prospect of
a forced liquidation of its assets or bankruptcy and the absence of other
alternative sources of capital, entered into a $33 million standby revolving
credit facility with Greenwich Street Capital Partners II, L.P. ("GSCP") and
certain of the other Greenwich Funds. The facility provided IMC with interim
financing for a period of 90 days, which enabled the Company to continue to
operate while it sought a substantial source of capital which would either
invest funds in the Company or acquire the Company. In return for providing the
facility, the Greenwich Funds received a $3.3 million commitment fee and
non-voting Class C exchangeable preferred stock representing the equivalent of
40% of the common equity of the Company. The Class C exchangeable preferred
stock is exchangeable after March 31, 1999 for Class D preferred stock, which
has voting rights equivalent to 40% of the voting power of the Company. Under
the loan facility, the Greenwich Funds may exchange the loans for additional
shares of Class C exchangeable preferred stock or shares of Class D preferred
stock in an amount up to the equivalent of 50% of the common equity of the
Company (in addition to the preferred stock received for providing the facility)
(the "Exchange Option"). In addition, upon certain changes in control of the
Company, the Greenwich Funds could elect either to (i) receive payment of the
facility, plus accrued interest and a take-out premium of up to 200% of the
average principal amount of the loans outstanding or (ii) exercise the Exchange
Option. The Company and the Greenwich Funds also entered into intercreditor
agreements with the Company's significant creditors requiring such creditors to
"standstill" for up to 90 days.
On February 19, 1999, the Company entered into a merger agreement with the
Greenwich Funds. On March 31, 1999, the merger agreement was terminated and
recast as an acquisition agreement with the Greenwich Funds on substantially the
same economic terms. The Company's entrance into the merger agreement and the
acquisition agreement was unanimously approved by the Board of Directors of the
Company, acting on the unanimous recommendation of a special committee of the
Board consisting solely of disinterested directors. Under the acquisition
agreement, the Company agreed to issue common stock to the Greenwich Funds
representing approximately 93.5% of the outstanding common stock following such
issuance. In return for such common stock issuance, the Greenwich Funds agreed
to surrender their Class C exchangeable preferred stock and amend the loan
agreement (i) to provide for an additional $35 million of working capital loans
to the Company, (ii) to forego the Exchange Option, (iii) to reduce the takeout
premium payable in certain events from 200% of the average principal amount
outstanding from October 1998 to the prepayment date, to 10% of the average
principal amount outstanding from the closing of the acquisition to the
prepayment date and (iv) to extend the maturity of the loans thereunder until
the third anniversary of the acquisition. The Company also entered into amended
intercreditor agreements with certain of its creditors in February 1999 which
provide an additional standstill period through the consummation of the
acquisition by the Greenwich Funds and for 12 months thereafter, provided the
acquisition occurs within five months, and subject to earlier termination in
certain events as provided in the intercreditor agreements. The closing of the
acquisition by the Greenwich Funds is subject to a number of conditions,
including obtaining the approval of the shareholders of the Company for the
transaction.
The Company is in the process of preparing to call a special meeting of its
shareholders to authorize the issuance of 93.5% of the common stock of IMC to
the Greenwich Funds. The Board of Directors has approved the stock purchase by
the Greenwich Funds and will request shareholders to vote in favor of the stock
purchase to
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<PAGE>
allow the Company to attempt to continue to operate, repay its creditors in an
orderly manner, regain access to capital markets and preserve some value for its
shareholders.
Business Strategy
Improvement of Cash Flow from Operations
The Company has typically operated on negative cash flows from operations
since inception. The Company, prior to September 30, 1998, had been able to
access the capital markets and borrowings to support operations. Since September
30, 1998, the Company has had only limited access to asset-backed and debt
markets, both of which were on terms that were not as favorable to the Company
as the terms previously available. The Company is attempting to improve the cash
flow required to fund operations and reduce its dependence on capital markets by
selling loans to institutional investors instead of securitizing, and reducing
the cost of its operations. To reduce the costs of its operation, the Company
has reduced the number of employees and is in the process of identifying and
reducing non-essential expenditures. There can be no assurance the Company can
achieve a reduction of cash flow used in operations or that its attempt to
reduce non-essential expenditures will be successful.
Maintenance of Underwriting Quality and Loan Servicing
The Company's underwriting and servicing staff have extensive experience in
the non-conforming home equity loan industry. The management of IMC believes
that the depth and experience of its underwriting and servicing staff provide
the Company with the infrastructure necessary to sustain and maintain its
commitment to high standards in its underwriting and loan servicing. The Company
is committed to applying consistent underwriting procedures and criteria and to
training and retaining experienced underwriting staff.
Loans
Overview
IMC's consumer finance activities consist primarily of purchasing,
originating, selling and servicing mortgage loans. The vast majority of these
loans are non-conforming mortgage loans that are secured by first or second
mortgages on one- to four-family residences. Once loan applications have been
received, the underwriting process completed and the loans funded, IMC typically
packages the loans in a portfolio and sells the portfolio, either through a
securitization or on a whole loan basis directly to institutional purchasers.
IMC typically retains the right to service the loans that it securitizes and may
retain or release the right to service the loans it sells through whole loan
sales.
Loan Purchases and Originations
As of December 31, 1998, IMC purchased and originated loans through in
excess of 500 approved correspondents, 1,500 approved brokers and 80 retail
branch offices.
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<PAGE>
The following table shows channels of loan purchases and originations for
the periods shown:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Correspondent:
Principal balance (in millions) ...................... $233 $544 $1,582 $4,342 $3,839
Average principal balance per loan (in thousands) .... 66 62 66 73 67
Weighted average loan-to-value ratio (1)(2) .......... 69.2% 70.6% 72.8% 75.6% 76.9%
Weighted average interest rate ....................... 11.2% 12.1% 11.5% 11.0% 10.7%
Broker:
Principal balance (in millions) ...................... $49 $67 $121 $782 $1,393
Average principal balance per loan (in thousands) .... 56 47 54 71 72
Weighted average loan-to-value ratio (1)(2) .......... 71.8% 72.6% 73.4% 76.9% 78.9%
Weighted average interest rate ....................... 12.0% 12.0% 11.5% 10.7% 10.3%
Direct consumer loan originations:
Principal balance (in millions) ...................... $1 $11 $67 $769 $945
Average principal balance per loan (in thousands) .... 88 49 58 68 71
Weighted average loan-to-value ratio (1)(2) .......... 80.0% 72.6% 72.5% 71.9% 74.5%
Weighted average interest rate ....................... 11.3% 11.7% 10.7% 10.7% 9.6%
Total loan purchases and originations:
Principal balance (in millions) ...................... $283 $622 $1,770 $5,893 $6,177
Average principal balance per loan (in thousands) .... 64 60 65 71 69
Weighted average loan-to-value ratio (1)(2)(3) ....... 69.7% 70.9% 72.9% 75.3% 77.0%
Weighted average interest rate ....................... 11.4% 12.1% 11.5% 10.9% 10.4%
</TABLE>
(1) The weighted average loan-to-value ratio of a loan secured by a first
mortgage is determined by dividing the amount of the loan by the lesser of
the purchase price or the appraised value of the mortgaged property at
origination. The weighted average loan-to-value ratio of loans secured by a
second mortgage is determined by taking the sum of the loans secured by the
first and second mortgages and dividing by the lesser of the purchase price
or the appraised value of the mortgaged property at origination.
(2) The weighted average loan-to-value ratio has increased due to increasing
competition in the non-conforming home equity loan market and an increase
since 1995 in the percentage of the Company's loans in the "A" Risk
category (see "-- Loans -- Loan Underwriting"). "A" Risk loans are
generally made to more creditworthy borrowers and therefore typically carry
less credit risk and involve higher loan-to-value ratios than other
categories of non-conforming loans.
(3) Includes loans with loan-to-value ratios between 80% and 100% in the amount
of approximately $173 million, or 28%, $700 million, or 40%, $2.8 billion,
or 48%, and $3.4 billion, or 55%, of total purchases and originations , for
the years ended December 31, 1995, 1996, 1997 and 1998, respectively. The
increase in loan purchases and originations with loan-to-value ratios
between 80% and 100% since 1995 primarily related to the increase in
purchases and originations of "A" Risk loans as a percentage of total loans
purchased and originated.
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<PAGE>
The following table shows channels of loan purchases and originations on a
quarterly basis for the fiscal quarters shown:
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------------
March 31, June 30, September 30, December 31
1997 1997 1997 1997
-------- -------- ------------- -----------
<S> <C> <C> <C> <C>
Correspondent:
Principal balance (in millions) ...................... $631 $1,096 $1,440 $1,175
Average principal balance
per loan (in thousands) ........................... 69 73 77 70
Weighted average loan-to-
value ratio(1)(2) ................................. 74.2% 74.9% 72.3% 76.1%
Weighted average interest rate ....................... 11.3% 11.0% 10.8% 11.0%
Broker:
Principal balance (in millions) ...................... $53 $105 $270 $354
Average principal balance
per loan (in thousands) ........................... 69 72 67 74
Weighted average loan-to-
value(1)(2) ....................................... 73.9% 75.0% 77.4% 77.5%
Weighted average interest rate ....................... 10.6% 10.6% 11.0% 10.6%
Direct consumer loan originations:
Principal balance (in millions) ...................... $135 $191 $198 $245
Average principal balance per
loan (in thousands) ............................... 66 67 64 73
Weighted average loan-to-value
ratio(1)(2) ....................................... 69.8% 71.0% 72.3% 73.5%
Weighted average interest rate ....................... 10.8% 10.9% 10.8% 10.3%
Total loan purchases and originations:
Principal balance (in millions) ...................... $819 $1,392 $1,908 $1,774
Average principal balance
per loan (in thousands) ........................... 69 72 74 71
Weighted average loan-to-
value ratio(1)(2)(3) .............................. 73.5% 74.4% 76.0% 76.0%
Weighted average interest
rate .............................................. 11.2% 10.9% 10.8% 10.8%
<CAPTION>
Three Months Ended
--------------------------------------------------------------------------
March 30, June 30, September 30, December 31,
1998 1998 1998 1998
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Correspondent:
Principal balance (in millions) ...................... $1,161 $1,309 $1,248 $121
Average principal balance
per loan (in thousands) ........................... 67 68 67 65
Weighted average loan-to-
value ratio(1)(2) ................................. 76.6% 76.9% 77.0% 76.7%
Weighted average interest rate ....................... 10.9% 10.7% 10.6% 10.5%
Broker:
Principal balance (in millions) ...................... $315 $376 $403 $299
Average principal balance
per loan (in thousands) ........................... 75 78 72 75
Weighted average loan-to-
value(1)(2) ....................................... 77.2% 78.0% 80.0% 79.6%
Weighted average interest rate ....................... 10.3% 10.3% 10.4% 10.2%
Direct consumer loan originations:
Principal balance (in millions) ...................... $221 $251 $262 $211
Average principal balance per
loan (in thousands) ............................... 81 77 72 75
Weighted average loan-to-value
ratio(1)(2) ....................................... 72.7% 72.6% 76.7% 76.8%
Weighted average interest rate ....................... 9.8% 9.8% 9.6% 9.2%
Total loan purchases and originations:
Principal balance (in millions) ...................... $1,697 $1,936 $1,913 $631
Average principal balance
per loan (in thousands) ........................... 69 71 69 72
Weighted average loan-to-
value ratio(1)(2)(3) .............................. 76.2% 76.6% 77.6% 78.1%
Weighted average interest
rate .............................................. 10.6% 10.5% 10.5% 9.9%
</TABLE>
(1) The weighted average loan-to-value ratio of a loan secured by a first
mortgage is determined by dividing the amount of the loan by the lesser of
the purchase price or the apppraised value of the mortgaged property at
origination. The weighted average loan-to-value ratio of loans secured by a
second mortgage is determined by taking the sum of the loans secured by
thefirst and second mortgages and dividing by the lesser of the purchaser
price or the appraised value of the mortgaged property at origination.
(2) The weighted average loan-to-value ratio has increased due to increasing
competition in the non-conforming home equity loan market and an increase
since 1995 in the percentage of the Company's loans in the "A" Risk
category (see "-- Loans -- Loan Underwriting"). "A" Risk loans are
generally made to more creditworthy borrowers and therefore typically carry
less credit risk and involve higher loan-to-value ratios than other
categories of non-conforming loans.
(3) Includes loans with loan-to-value ratios between 80% and 100% in the amount
of approximately $173 million, or 28%, $700 million, or 40%, $2.8 billion,
or 48%, and $3.4 billion, or 55% of total purchases and originations for
the years ended December 31,1995, 1996, 1997 and 1998, respectively. The
increase in loan purchases and originations with loan-to-value ratios
between 80% and 100% since 1995 is primarily related to the increase in
purchases and originations of "A" Risk loans as a percentage of total loans
purchased and originated.
- 6 -
<PAGE>
The following table shows lien position, weighted average interest rates
and loan-to-value ratios for the periods shown.
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------------------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
First mortgages:
Percentage of total purchases and originations ........ 82.4% 77.0% 90.3% 92.1% 92.8%
Weighted average interest rate ........................ 11.3 12.1 11.4 10.8 10.3
Weighted average loan-to-value ratio(1) ............... 69.8 70.7 72.6 75.2 76.7
Second mortgages:
Percentage of total purchases and originations ........ 17.6% 23.0% 9.7% 7.9% 7.2%
Weighted average interest rate ........................ 11.7 12.4 12.2 12.4 11.9
Weighted average loan-to-value ratio(1) ............... 68.8 71.7 75.6 78.5 81.6
</TABLE>
(1) The weighted average loan-to-value ratio of a loan secured by a first
mortgage is determined by dividing the amount of the loan by the lesser of
the purchase price or the appraised value of the mortgaged property at
origination. The weighted average loan-to-value ratio of loans secured by a
second mortgage is determined by taking the sum of the loans secured by the
first and second mortgages and dividing by the lesser of the purchase price
or the appraised value of the mortgaged property at origination.
Correspondents. The largest percentage of IMC's loan volume through
September 30, 1998 was purchased through correspondents. For the three-month
period ending December 31, 1998 loan volume purchased from correspondents
decreased significantly due to the lack of liquidity available to IMC. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Liquidity and Capital Resources". For the years ended December
31, 1994, 1995, 1996, 1997 and 1998, IMC purchased loans through its mortgage
correspondent network totaling approximately $233 million, $544 million, $1.6
billion, $4.3 billion, and $3.8 billion, respectively. Total loans originated
through correspondents represented 82.5%, 87.5%, 89.4%, 73.7% and 62.1% of IMC's
total purchases and originations for the years ended December 31, 1994, 1995,
1996, 1997 and 1998, respectively. The Industry Partners contributed
approximately $116 million, or 41.0%, $148 million, or 23.9%, $338 million, or
19.1%, $400 million, or 6.8%, and approximately $252 million, or 4.1%, of IMC's
total loan purchases and originations for the years ended December 31, 1994,
1995, 1996, 1997 and 1998, respectively.
IMC has a list of approved correspondents from which it will purchase loans
on a wholesale basis. Prior to approving a financial institution or mortgage
banker as a loan correspondent, IMC performs an investigation of, among other
things, the proposed correspondent's lending operations, its licensing or
registration and the performance of its previously originated loans. The
investigation typically includes contacting the agency that licenses or
registers such loan correspondent and other purchasers of the correspondent's
loans and reviewing the correspondent's financial statements. IMC requires that
the correspondent remain current on all licenses required by federal and state
laws and regulations and that it maintains sufficient equity to fund its loan
operations. IMC periodically reviews and updates the information it has relating
to each approved correspondent to ensure that all legal requirements are current
and that lending operations continue to meet IMC's standards.
Before purchasing loans from correspondents, IMC requires that each loan
correspondent enter into a purchase and sale agreement with customary
representations and warranties regarding such loans. Correspondents will then
sell loans to IMC either on a flow basis or through block sales. IMC will make a
flow basis purchase when a correspondent approaches IMC with the application of
a prospective borrower. Because the correspondent has not yet granted a loan,
IMC has the opportunity to preapprove the loan. In the preapproval process, the
correspondent provides IMC with information about the borrower and the
collateral for the potential loan, including the applicant's credit, employment
history, current assets and liabilities, a copy of recent tax returns and the
estimated property value of the collateral. If IMC preapproves the loan, the
correspondent lends to the borrower pursuant to certain
- 7 -
<PAGE>
IMC guidelines. After the correspondent has made the loan, IMC purchases the
loan from the correspondent. A block purchase occurs when the correspondent has
made numerous loans without seeking preapproval from IMC. The correspondent
offers a block of loans to IMC and IMC will purchase those loans in the block
that meet its underwriting standards. At the time of purchase, IMC generally
pays the correspondent a premium, representing a value in excess of the par
value of the loans (par value representing the unpaid balance of the loan
amount). In its purchase agreements with its correspondents, IMC requires its
correspondents to rebate premium payments if loans sold to IMC are prepaid
within a specified period of time after the sale. As of December 31, 1997 and
1998, premium rebates due to IMC were $4.1 million and $4.3 million,
respectively.
Brokers. For the years ended December 31, 1994, 1995, 1996, 1997 and 1998,
IMC originated approximately $49 million, $67 million, $121 million, $782
million and $1.4 billion, respectively, of loans through broker transactions.
Total loans purchased and originated through broker transactions represented
17.3%, 10.7%, 6.8%, 13.3% and 22.6% of the total loans IMC purchased and
originated for the years ended December 31, 1994, 1995, 1996, 1997 and 1998,
respectively. As with correspondents, IMC maintains an approved list of brokers.
Brokers become part of IMC's network after IMC performs a thorough license and
credit check. If a broker is approved, IMC will accept loan applications from
the broker for prospective borrowers. Because brokers may submit loan
applications to several prospective lenders simultaneously, IMC makes every
effort to provide a quick response. IMC will process each application obtained
by a broker from a prospective borrower and grant or deny preliminary approval
of the application generally within one business day. In the case of an
application denial, IMC will make all reasonable attempts to ensure that there
is no missing information concerning the borrower that might change the decision
on the loan. In addition, IMC emphasizes service to the broker and loan
applicant by having loan processors follow the loan from the time of the initial
application, through the underwriting verification and audit process to the
funding and closing process. IMC believes that consistent underwriting, quick
response times and personal service are critical to successfully originating
loans through brokers.
Direct Consumer Loans. For the years ended December 31, 1994, 1995, 1996,
1997 and 1998, IMC originated approximately $1 million, $11 million, $67
million, $769 million and $945 million of loans, respectively. Total loans
originated directly to borrowers through its retail branch offices represented
less than 1%, 1.8%, 3.8%, 13.0% and 15.3% of the total loans purchased or
originated for the years ended December 31, 1994, 1995, 1996, 1997 and 1998,
respectively. As of December 31, 1998, IMC had in excess of 80 retail offices.
IMC uses the branch office network for marketing to and meeting with individual
borrowers, local brokers and referral sources such as accountants, attorneys and
financial planners.
Because borrowers may submit loan applications to several prospective
lenders simultaneously, IMC attempts to provide a quick response. IMC will
process each application from a borrower and grant or deny preliminary approval
for the application generally within one business day from receipt of the
application. In addition, the borrower usually has direct contact with an
underwriter who follows the loan from the application to the closing process.
IMC believes that consistent underwriting, quick response times and personal
service are critical to successfully originating loans directly with potential
borrowers.
Geographic Distribution of Loans. Although IMC is licensed or registered in
all 50 states, the District of Columbia and Puerto Rico, it has historically
concentrated its business in the Mid-Atlantic States. While this concentration
has declined, New York contributed 11.7%, 12.4%, 14.0%, 12.6% and 8.8% of IMC's
total loan purchase and origination volume for the years ended December 31,
1994, 1995, 1996, 1997 and 1998, respectively.
- 8 -
<PAGE>
The following table shows geographic distribution of loan purchases and
originations for the periods shown.
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------------------------------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
States:
New York ............................ 11.7% 12.4% 14.0% 12.6% 8.8%
Michigan ............................ 7.3 8.8 7.8 7.1 8.2
Florida ............................. 4.2 6.2 6.7 7.3 7.6
California .......................... 0.0 0.3 3.0 7.4 6.3
Illinois ............................ 2.0 3.0 4.3 5.9 6.0
Ohio ................................ 4.9 4.7 4.3 4.9 6.0
Pennsylvania ........................ 5.3 4.3 3.8 5.1 5.3
New Jersey .......................... 6.6 9.9 7.6 4.5 3.9
Maryland ............................ 18.6 12.8 7.3 5.2 3.1
All other states .................... 39.4 37.6 41.2 40.0 44.8
</TABLE>
Loan Underwriting
IMC's origination volume has typically been generated primarily from
correspondents selling loans to IMC either on a flow basis or through block
sales. For correspondents and brokers that originate loans on a flow basis, IMC
provides them with its underwriting guidelines. Loan applications received from
correspondents and brokers on a flow basis are classified according to certain
characteristics including available collateral, loan size, debt ratio,
loan-to-value ratio and the credit history of the applicant. Loan applicants
with less favorable credit ratings generally are offered loans with higher
interest rates and lower loan-to-value ratios than applicants with more
favorable credit ratings. IMC also purchases loans on a block sale basis, in
which a correspondent makes several loans without the preapproval of the Company
and offers them to the Company for block purchase. Because IMC only chooses
loans that meet its underwriting requirements and reunderwrites them, block
loans follow the same underwriting guidelines as flow loan purchases.
IMC maintains a staff of experienced underwriters strategically placed
across the country. IMC's loan application and approval process generally is
conducted via facsimile submission of the credit application to IMC's
underwriters. An underwriter reviews the applicant's credit history based on the
information contained in the application and reports available from credit
reporting bureaus in order to determine if the applicant's credit history is
acceptable under IMC's underwriting guidelines. Based on this review, the
underwriter assigns a preliminary rating to the application. The proposed terms
of the loan are then communicated to the correspondent or broker responsible for
the application who in turn discusses the proposal with the loan applicant. When
a potential borrower applies for a loan through a branch office, the underwriter
will discuss the proposal directly with the applicant. IMC endeavors to respond,
and in most cases does respond, to the correspondent, broker or borrower within
one business day after the application is received. If the applicant accepts the
proposed terms, the underwriter will contact the broker or the loan applicant to
gather additional information necessary for the closing and funding of the loan.
All loan applicants must have an appraisal of their collateral property
prior to closing the loan. IMC requires correspondents and brokers to use
licensed appraisers that are listed on or qualify for IMC's approved appraiser
list. IMC approves appraisers based upon a review of sample appraisals,
professional experience, education, membership in related professional
organizations, client recommendations and review of the appraiser's experience
with the particular types of properties that typically secure IMC's loans. In
the case of loans purchased
- 9 -
<PAGE>
in blocks, if an appraiser that is not approved by IMC performed an appraisal,
IMC will review the appraisal and accept it if the appraisal meets its
underwriting standards.
The decision to provide a loan to an applicant is based upon the value of
the underlying collateral, the applicant's creditworthiness and IMC's evaluation
of the applicant's ability and intent to repay the loan. A number of factors
determine a loan applicant's creditworthiness, including debt ratios (the
borrower's average monthly expenses for debts, including fixed monthly expenses
for housing, taxes and installment debt, as a percentage of gross monthly
income), payment history on existing mortgages and the combined loan-to-value
ratio for all existing mortgages on a property.
Assessment of the applicant's ability to pay is one of the principal
elements in distinguishing IMC's lending specialty from methods employed by
traditional lenders, such as thrift institutions and commercial banks. All
lenders utilize debt ratios and loan-to-value ratios in the approval process.
Many lenders simply use software packages to score an applicant for loan
approval and fund the loan after auditing the data provided by the borrower. In
contrast, IMC employs experienced non-conforming mortgage loan underwriters to
scrutinize an applicant's credit profile and to evaluate whether an impaired
credit history is a result of previous adverse circumstances or a continuing
inability or unwillingness to meet credit obligations in a timely manner.
Personal circumstances including divorce, family illnesses or deaths and
temporary job loss due to layoffs and corporate downsizing will often impair an
applicant's credit record. Among IMC's specialties is the ability to identify
and assist this type of borrower in the establishment of improved credit. Upon
completion of the loan's underwriting and processing, the closing of the loan is
scheduled with a closing attorney or agent approved by IMC. The closing attorney
or agent is responsible for completing the loan transaction in accordance with
applicable law and IMC's operating procedures. Title insurance that insures
IMC's interest as mortgagee and evidence of adequate homeowner's insurance
naming IMC as an additional insured are required on all loans.
IMC has established classifications with respect to the credit profiles of
loans based on certain of the applicant's characteristics. Each loan applicant
is placed into one of four letter ratings "A" through "D," with subratings
within those categories. Ratings are based upon a number of factors including
the applicant's credit history, the value of the property and the applicant's
employment status, and are subject to the discretion of IMC's trained
underwriting staff. Terms of loans made by IMC, as well as the maximum
loan-to-value ratio and debt service-to-income coverage (calculated by dividing
fixed monthly debt payments by gross monthly income), vary depending upon the
classification of the borrower. Borrowers with lower credit ratings generally
pay higher interest rates and loan origination fees. The general criteria
currently used by IMC's underwriting staff in classifying loan applicants are
set forth below:
- 10 -
<PAGE>
<TABLE>
<CAPTION>
Loan Classification Criteria
"A" Risk "B" Risk "C" Risk "D" Risk
-------- -------- -------- --------
<S> <C> <C> <C> <C>
General repayment ...... Has repaid Has generally repaid May have May have
installment or installment or experienced experienced
revolving debt revolving credit significant past credit significant past credit
problems problems
Existing mortgage Current at application Current at application May not be current at Must be paid full
loans................... time and a maximum time and a maximum application time and from loan proceeds
of two-30-day late of three 30-day late a maximum of one and no more than
payments in the last payments in the last 60-day late payment 149 days delinquent
12 months 12 months in the last 12 months at closing and an
explanation is
required
Non-mortgage credit..... Minor derogatory Some prior defaults Significant prior Significant prior
items allowed with a allowed but major delinquencies may defaults may have
letter of explanation; credit or installment have occurred, but if occurred, but most
no open collection debt paid as agreed major credit or demonstrate an
accounts or charge- may offset some installment debt in ability to maintain
offs, judgments or delinquency; open recent periods have regularity in payment
liens charge-offs, been paid as agreed, of credit
judgements or liens may offset some
are permitted on a significant prior
case-by-case basis delinquency
obligations in the
past
Bankruptcy filings...... Discharged more Discharged more Discharged more Discharged prior to
than two years prior than two years prior than one year prior closing
to closing and credit to closing and credit to closing and credit
reestablished reestablished reestablished
Debt service-to-
income ratio............ Generally 50% of Generally 50% of Generally 50% of Generally 50% of
less less less less
Maximum loan-to-value
ratio:
Owner-occupied.......... Up to 100% for a Generally 80% (or Generally 75% (or Generally 65% (or 70%
one- to two-family 85%*) for a one- to 80% for first liens*) for first liens*) for
residence; 75% for a two-family residence; for a one- to two-family a one- to two-family
condominium and for 70% for residence; 60% for a residence; 60% for a
a three-to four-family condominium and for three- to four-family three- to four-family
residence a three- to four- residence or condominium residence or
family residence condominium
Non-owner-occupied...... Generally 70% for a Generally 70% for a Generally 70% for a N/A
one- to four-family one- to two-family one- to two-family
residence residence residence
</TABLE>
* On an exception basis.
-------------------------------
The Company uses the foregoing categories and characteristics as guidelines
only. On a case-by-case basis, the Company may determine that the prospective
borrower warrants an exception. Exceptions may generally be allowed if the
application reflects certain compensating factors such as loan-to-value ratio,
debt ratio, length of
- 11 -
<PAGE>
employment and other factors. For example, a higher debt ratio may be acceptable
with a lower loan-to-value ratio. Accordingly, the Company may classify in a
more favorable risk category certain mortgage loans that, in the absence of such
compensating factors, would satisfy only the criteria of a less favorable risk
category.
The following table sets forth certain information with respect to IMC's
loan purchases and originations by borrower classification, along with weighted
average coupons, for the periods shown.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------------------
1994 1995 1996
----------------------------- ----------------------------- -----------------------------
Weighted Weighted Weighted
Borrower % of Average % of Average % of Average
Classification Total Total Coupon Total Total Coupon Total Total Coupon
- - -------------- ----- ----- ------ ----- ----- ------ ----- ----- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
A Risk ............. $ 156 55.0% 10.6% $ 276 44.4% 11.4% $ 883 49.9% 10.9%
B Risk ............. 74 26.3 11.6 177 28.5 12.0 443 25.0 11.5
C Risk ............. 38 13.5 13.0 126 20.2 13.0 338 19.1 12.3
D Risk ............. 15 5.2 14.4 43 6.9 14.4 106 6.0 13.6
------ ------ ------ ------ ------ ------
Total $ 283 100.0% 11.4 $ 622 100.0% 12.1 $1,770 100.0% 11.5
====== ====== ====== ====== ====== ======
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1997 1998
----------------------------- -----------------------------
Weighted Weighted
Borrower % of Average % of Average
Classification Total Total Coupon Total Total Coupon
- - -------------- ------ ----- ------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
A Risk ............. $3,156 53.6% 10.4% $3,405 55.1% 9.9%
B Risk ............. 1,377 23.4 10.9 1,487 24.1% 10.6%
C Risk ............. 1,092 18.5 11.7 1,079 17.5% 11.3%
D Risk ............. 268 4.5 13.1 206 3.3% 12.6%
------ ------ ------ ------
Total $5,893 100.0% 10.9% $6,177 100.0% 10.4%
====== ====== ====== ======
</TABLE>
The weighted average loan-to-value ratio of the Company's loans has
increased due to increasing competition in the non-conforming home equity loan
market and an increase since 1995 in the percentage of the Company's loans in
the "A" Risk category. Loans with loan-to-value ratios in excess of 80% amounted
to approximately $173 million, or 28%, $700 million, or 40%, $2.8 billion, or
48%, and $3.4 billion, or 55%, of total purchases and originations, for the
years ended December 31, 1995, 1996, 1997 and 1998, respectively. The increase
in loan purchases and originations with loan-to-value ratios between 80% and
100% since 1995 is primarily related to the increase in purchases and
originations of "A" Risk loans as a percentage of total loans purchased and
originated.
Loan Sales
Typically, IMC 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. This dual approach
typically allows IMC the flexibility to better manage its cash flow, take
advantage of favorable conditions in either the securitization or whole loan
market when selling its loan production, and attempt to diversify its exposure
to the potential volatility of the capital markets. Due to volatility in
asset-backed capital markets, since September 30, 1998, IMC has focused on
selling its loans through whole loan sales to third parties for cash to improve
cash flow from operations. For the years ended December 31, 1994, 1995, 1996,
1997 and 1998, IMC sold approximately $262 million, $459 million, $1.1 billion,
$5.0 billion and $6.7 billion of loan production, respectively.
- 12 -
<PAGE>
The following table sets forth certain information with respect to IMC's
channels of loan sales by type of sale for the periods shown.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
---------------- ---------------- ---------------- ---------------- ----------------
% of % of % of % of % of
Total Total Total Total Total Total Total Total Total Total
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securitizations ...... $ 82 31.2% $ 388 84.7% $ 935 87.9% $4,858 97.1% $5,117 77.0%
Whole loan sales ..... 180 68.8 71 15.3 129 12.1 145 2.9 1,530 23.0
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total loan sales ... $ 262 100.0% $ 459 100.0% $1,064 100.0% $5,003 100.0% $6,647 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
Securitizations. Through December 31, 1998, the Company completed
twenty-three securitizations totaling approximately $11.4 billion. During the
year ended December 31, 1998, IMC sold $5.1 billion of its loan volume through
securitizations. The majority of loans sold through securitizations during the
year ended December 31, 1998 were sold during the first nine months of the year
prior to the significant volatility in the asset-backed and other capital
markets. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Liquidity and Capital Resources." IMC sells its loan
inventory through securitization when management believes that employing this
strategy will create greater long-term economic benefit to IMC stockholders and
it has access to liquidity to support the securitization process. IMC intends to
continue to conduct loan sales through securitizations, either in private
placements or in public offerings, when market conditions and availability of
financing permit such loan sales on favorable terms. See "Liquidity and Capital
Resources." When IMC securitizes loans, it typically sells a portfolio of loans
to a "real estate mortgage investment conduit" (a "REMIC") or owner trust that
issues classes of certificates representing undivided ownership interests in the
income stream to the trust. IMC may be required either to repurchase or to
replace loans which do not conform to the representations and warranties made by
IMC in the pooling and servicing agreements entered into when a portfolio of
loans is sold through a securitization. In its capacity as servicer for a
securitization trust, the Company collects and remits principal and interest
payments to the appropriate trust, which in turn passes through payments to
certificate owners. IMC typically retains the servicing rights and an interest
in the interest-only and residual classes of certificates of the trust.
The purchasers of trust certificates receive a credit-enhanced security.
Credit enhancement is generally achieved by subordination of a subsidiary class
of bonds to senior classes or an insurance policy issued by a monoline insurance
company. As a result, each offering of the senior REMIC pass-through
certificates has received ratings of AAA from Standard & Poor's and Aaa from
Moody's Investors Service. In addition, credit enhancement is provided by
over-collateralization, which is intended to result in receipts and collections
on the loans in excess of the amounts required to be distributed to certificate
holders of the senior interests. Although expected loss is calculated into the
pricing of the sale of loans to the trust, to the extent that borrowers default
on the payment of principal and interest above the expected rate of default,
such loss will reduce the value of the Company's interest-only and residual
class certificate. If payment defaults exceed the amount of
over-collateralization, the insurance policy maintained by the trust will pay
any further losses experienced by certificate holders of the senior interests in
the trust or a subordinate class will bear the loss.
Whole Loan Sales. Whole loan sales as a percent of total sales declined
from 68.8% for the year ended December 31, 1994 to 15.3%, 12.1% and 2.9% for the
years ended December 31, 1995, 1996 and 1997, respectively, but increased as a
percent of total sales to 23.0% for the year ended December 31, 1998. Beginning
in the fourth quarter of 1998, IMC began selling more loans on a whole loan sale
basis to attempt to partially offset its inability during this time to favorably
access the capital markets. See "Management's Discussion and Analysis
- 13 -
<PAGE>
of Financial Conditions and Results of Operations" and "Liquidity and Capital
Resources." Upon the sale of a loan portfolio, IMC generally receives a premium,
representing a value in excess of the par value of the loans (par value
representing the unpaid balance of the loan amount). IMC attempts to maximize
its premium on whole loan sale revenue by closely monitoring institutional
investors' requirements and focusing on originating the types of loans that meet
those requirements and for which institutional purchasers tend to pay higher
prices.
IMC typically sells its loans to various institutional investors on a
non-recourse basis with customary representations and warranties covering loans
sold. IMC may be required to repurchase a loan in the event that its
representations and warranties with respect to such loans prove to be
inaccurate. Occasionally, IMC will agree to rebate a portion of the premium
earned if a loan is prepaid during a limited period of time after sale, usually
six months and no more than one year.
Loan Servicing and Collections
IMC has been servicing loans since April 1994. IMC's loan servicing
operation is divided into three departments: (i) collections; (ii) customer
service for both borrowers and investors; and (iii) tax, insurance and tax and
insurance escrow. These departments monitor loans, collect current payments due
from borrowers, remit principal and interest payments to current owners of loans
and pay taxes and insurance. The collections department furnishes reports and
enforces the holder's rights, including recovering delinquent payments,
instituting loan foreclosures and liquidating the underlying collateral. IMC
retained the servicing rights to approximately $401 million, $963 million, $4.9
billion and $4.5 billion, or 87.3%, 90.5%, 97.1% and 68.0% of the loans it sold
in 1995, 1996, 1997 and 1998, respectively.
As of December 31, 1998, IMC was servicing loans representing an aggregate
of approximately $8.9 billion. Revenues generated from loan servicing amounted
to 7.8%, 8.5%, 7.2% and 14.1% of IMC's total revenues for the years ended
December 31, 1995 and 1996 and 1997 and 1998, respectively. Management believes
that the Company's loan servicing provides a consistent revenue stream to
augment its loan purchasing and originating activities.
IMC's collections policy is designed to identify payment problems early to
permit IMC to address delinquency problems quickly and, when necessary, to act
to preserve equity before a property goes into foreclosure. IMC believes that
these policies, combined with the experience level of independent appraisers
engaged by IMC, help to reduce the incidence of charge-offs on first or second
mortgage loans.
Collection procedures commence upon identification of a past due account by
IMC's automated servicing system. If the first payment due is delinquent,
generally a collector will telephone to remind the borrower of the payment. Five
days after any payment is due, generally a written notice of delinquency is sent
to the borrower. Eleven days after payment is due, generally the account is
automatically placed in the appropriate collector's queue and the collector will
send a late notice to the borrower. During the delinquency period, the collector
will continue to frequently contact the borrower. Company collectors have
computer access to telephone numbers, payment histories, loan information and
all past collection notes. All collection activity, including the date
collection letters were sent and detailed notes on the substance of each
collection telephone call, is entered into a permanent collection history for
each account.
IMC's loan servicing software also tracks and maintains homeowners'
insurance information. Expiration reports are generated weekly listing all
policies scheduled to expire within 30 days. When policies lapse, a letter is
issued advising the borrower of the lapse and that IMC will obtain force-placed
insurance at the borrower's expense. IMC also has an insurance policy in place
that provides coverage automatically for IMC in the event that IMC fails to
obtain force-placed insurance.
- 14 -
<PAGE>
Notwithstanding the above, charge-offs occur. Prior to a foreclosure sale,
IMC performs a foreclosure analysis with respect to the mortgaged property to
determine the value of the mortgaged property and the bid that IMC will make at
the foreclosure sale. This analysis includes: (i) a current valuation of the
property obtained through a drive-by appraisal conducted by an independent
appraiser; (ii) an estimate of the sale price of the mortgaged property obtained
by sending two local realtors to inspect the property; (iii) an evaluation of
the amount owed, if any, to a senior mortgagee and for real estate taxes; and
(iv) an analysis of marketing time, required repairs and other costs, such as
real estate broker fees, that will be incurred in connection with the
foreclosure sale.
All foreclosures are assigned to outside counsel located in the same state
as the secured property. Bankruptcies filed by borrowers are also assigned to
appropriate local counsels who are required to provide monthly reports on each
loan file.
- 15 -
<PAGE>
The following table provides certain delinquency and default experience as
a percentage of outstanding principal balances of IMC's servicing portfolio for
the periods shown.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Servicing portfolio (in thousands) ........... $ 92,003 $ 535,798 $ 2,148,068 $ 6,956,905 $ 8,887,163
Delinquency percentages(1):
30-59 days .................... 0.72% 2.54% 3.01% 2.35% 4.15%
60-89 days .................... 0.15 0.59 1.01 1.21 1.25
90+ days ...................... 0.00 0.30 1.28 1.84 1.15
----------- ----------- ----------- ----------- -----------
Total delinquency ............. 0.87% 3.43% 5.30% 5.40% 6.55%
----------- ----------- ----------- ----------- -----------
Default percentages(2):
Foreclosure ................... 0.00% 0.75% 0.94% 1.42% 4.84%
Bankruptcy .................... 0.12 0.25 0.53 0.73 2.30
----------- ----------- ----------- ----------- -----------
Total default ................. 0.12% 1.00% 1.47% 2.15% 7.14%
----------- ----------- ----------- ----------- -----------
Total delinquency and default ................ 0.99% 4.43% 6.77% 7.55% 13.69%
=========== =========== =========== =========== ===========
</TABLE>
(1) Represents the percentages of account balances contractually past due,
exclusive of loans in foreclosure, bankruptcy and real estate owned.
(2) Represents the percentages of account balances on loans in foreclosure and
bankruptcy, exclusive of real estate owned.
- 16 -
<PAGE>
The following table provides certain delinquency and default experience as
a percentage of outstanding principal balance for the eight quarters ended
December 31, 1998, if applicable, for each of the Company's securitization
trusts completed through December 31, 1998, prior to any potential recoveries:
Delinquency and Defaults for the Company's Securitizations(1)(2)(3)
(dollars in thousands)
<TABLE>
<CAPTION>
1994-1 1995-1 1995-2 1995-3
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As of March 31, 1997:
Delinquency:
30-59 days ........................... $1,394 3.10% $1,576 2.89% $2,666 3.82% $4,157 4.23%
60-89 days ........................... 205 0.46 353 0.65 868 1.24 770 0.78
90 days and over ..................... 776 1.73 425 0.78 1,136 1.63 1,305 1.33
------ ----- ------ ------ ------ ----- ------ -----
Total ............................. $2,375 5.29% $2,354 4.32% $4,670 6.69% $6,232 6.34%
====== ===== ====== ====== ====== ===== ====== =====
Total defaults ....................... $2,422 5.38% $2,710 4.98% $3,942 5.64% $3,711 3.78%
====== ===== ====== ====== ====== ===== ====== =====
As of June 30, 1997:
Delinquency:
30-59 days ........................... $ 817 1.99% $2,545 5.21% $2,126 3.35% $2,365 2.63%
60-89 days ........................... 148 0.36 104 0.21 835 1.32 632 0.70
90 days and over ..................... 5 0.01 221 0.45 419 0.66 167 0.19
------ ----- ------ ------ ------ ----- ------ -----
Total .......................... $ 970 2.36% $2,870 5.87% $3,380 5.33% $3,164 3.52%
====== ===== ====== ====== ====== ===== ====== =====
Total defaults ....................... $2,900 7.08% $3,041 6.23% $4,789 7.55% $4,202 4.67%
====== ===== ====== ====== ====== ===== ====== =====
As of September 30, 1997:
Delinquency:
30-59 days ........................... $ 867 2.32% $ 925 2.03% $1,926 3.32% $2,804 3.50%
60-89 days ........................... 293 0.79 642 1.40 1,375 2.37 633 0.79
90 days and over ..................... 211 0.57 72 0.16 1,314 2.26 712 0.89
------ ----- ------ ------ ------ ----- ------ -----
Total .......................... $1,371 3.68% 1,639 3.59% $4,615 7.95% $4,149 5.18%
====== ===== ====== ====== ====== ===== ====== =====
Total defaults ....................... $3,239 8.68% $3,512 7.69% $4,378 7.54% $4,938 6.17%
====== ===== ====== ====== ====== ===== ====== =====
As of December 31, 1997:
Delinquency:
30-59 days ........................... $ 661 1.89% $1,358 3.26% $1,223 2.33% $ 953 1.28%
60-89 days ........................... 294 0.84 523 1.26 837 1.59 1,556 2.10
90 days and over ..................... 1,114 3.19 1,043 2.51 2,723 5.19 1,774 2.39
------ ----- ------ ------ ------ ----- ------ -----
Total .......................... $2,069 5.92% $2,924 7.03% $4,783 9.11% $4,283 5.77%
====== ===== ====== ====== ====== ===== ====== =====
Total defaults ....................... $2,831 8.11% $2,469 5.94% $4,316 8.22% $4,428 5.96%
====== ===== ====== ====== ====== ===== ====== =====
As of March 31, 1998:
Delinquency:
30-59 days ........................... $1,087 3.46% $1,146 2.99% $1,086 2.26% $1,329 1.94%
60-89 days ........................... 190 0.60 727 1.89 410 0.85% 932 1.36
90+days .............................. 567 1.81 1,161 3.02 1,518 3.16 1,423 2.08
------ ----- ------ ------ ------ ----- ------ -----
Total .......................... $1,844 5.87% $3,034 7.90% $3,014 6.27% $3,684 5.37%
====== ===== ====== ====== ====== ===== ====== =====
Total defaults ....................... $2,242 7.14% $2,365 6.16% $5,194 10.80% $4,507 6.57%
====== ===== ====== ====== ====== ===== ====== =====
</TABLE>
- 17 -
<PAGE>
<TABLE>
<CAPTION>
1994-1 1995-1 1995-2 1995-3
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As of June 30, 1998:
Delinquency:
30-59 days ......................... $ 1,060 3.75% 757 2.16% $ 1,452 3.35% $ 1,410 2.26%
60-89 days ......................... 367 1.30 521 1.48 926 2.14 527 0.85
90+ days ........................... 480 1.70 774 2.21 1,603 3.70 932 1.50
------- ---- ------- ----- ------- ---- ------- ----
Total ........................ $ 1,907 6.75% $ 2,052 5.85% $ 3,981 9.19% $ 2,869 4.61%
======= ==== ======= ===== ======= ==== ======= ====
Total defaults ..................... $ 1,992 7.05% $ 2,178 6.21% $ 4,559 10.52% $ 4,724 7.59%
======= ==== ======= ===== ======= ==== ======= ====
As of September 30, 1998:
Delinquency:
30-59 days ......................... $ 639 2.46% $ 1,095 3.45% $ 1,077 2.75% $ 1,234 2.17%
60-89 days ......................... 179 0.69 339 1.07 350 0.89 571 1.00
90+ days ........................... 308 1.19 637 2.00% 697 1.78% 935 1.64%
------- ---- ------- ----- ------- ---- ------- ----
Total ........................ $ 1,126 4.34% $ 2,071 6.52% $ 2,124 5.42% $ 2,740 4.81%
======= ==== ======= ===== ======= ==== ======= ====
Total defaults ..................... $ 2,169 8.37% $ 2,794 8.79% $ 4,585 11.70% $ 4,780 8.40%
======= ==== ======= ===== ======= ==== ======= ====
As of December 31, 1998:
Delinquency:
30-59 days ......................... $ 1,644 6.69% $ 1,809 6.27% $ 978 2.78% $ 2,011 3.81%
60-89 days ......................... 144 0.59 278 0.96 327 0.93 575 1.09
90+ days ........................... 432 1.76 572 1.98 917 2.60 983 1.86
------- ---- ------- ----- ------- ---- ------- ----
Total .............................. $ 2,220 9.04% $ 2,659 9.21% $ 2,222 6.31% $ 3,569 6.76%
======= ==== ======= ===== ======= ==== ======= ====
Total defaults ..................... $ 2,048 8.34 $ 3,086 10.69% $ 4,540 12.89% $ 4,809 9.10%
======= ==== ======= ===== ======= ==== ======= ====
<CAPTION>
1996-1 1996-2 1996-3 1996-4
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As of March 31, 1997:
Delinquency:
30-59 days ......................... $ 4,089 3.27% $ 8,329 5.35% $ 4,742 2.20% $ 8,189 2.92%
60-89 days ......................... 1,424 1.14 1,656 1.06 1,727 0.80 2,355 0.84
90 days and over ................... 2,111 1.69 1,074 0.69 4,186 1.95 4,471 1.59
------- ---- ------- ----- ------- ---- ------- ----
Total ........................ $ 7,624 6.10% $11,059 7.10% $10,655 4.95% $15,015 5.35%
======= ==== ======= ===== ======= ==== ======= ====
Total defaults ................... $ 4,973 3.97% $ 6,164 3.96% $ 6,304 2.43% $ 5,573 1.98%
======= ==== ======= ===== ======= ==== ======= ====
As of June 30, 1997:
Delinquency:
30-59 days ......................... $ 3,721 3.25% $ 5,952 4.19% $ 6,644 3.41% $ 8,009 3.11%
60-89 days ......................... 1,206 1.05 1,700 1.20 2,757 1.42 3,029 1.18
90 days and over ................... 430 0.38 154 0.11 334 0.17 1,676 0.65
------- ---- ------- ----- ------- ---- ------- ----
Total ........................ $ 5,357 4.68% $ 7,806 5.50% $ 9,735 5.00% $12,714 4.94%
======= ==== ======= ==== ======= ==== ======= ====
Total defaults ..................... $ 6,549 5.72% $ 8,104 5.71% $10,997 5.65% $10,117 3.93%
======= ==== ======= ==== ======= ==== ======= ====
As of September 30, 1997:
Delinquency:
30-59 days ......................... $ 2,630 2.50% $ 4,184 3.19% $ 3,538 1.99% $ 8,275 3.58%
60-89 days ......................... 911 0.87 1,242 0.95 1,590 0.90 3,436 1.49
90 days and over ................... 1,794 1.71 1,163 0.89 934 0.53 3,714 1.60
------- ---- ------- ---- ------- ---- ------- ----
Total ........................ $ 5,335 5.08% $ 6,589 5.03% $ 6,062 3.42% $15,425 6.67%
======= ==== ======= ==== ======= ==== ======= ====
Total defaults ..................... $ 7,649 7.29% $ 8,534 6.51% $13,091 7.38% $12,662 5.47%
======= ==== ======= ==== ======= ==== ======= ====
As of December 31, 1997:
Delinquency:
30-59 days ......................... $ 1,658 1.72% 3,794 3.20% $ 3,887 2.39% $ 5,686 2.69%
60-89 days ......................... 1,445 1.50 2,135 1.80 2,224 1.36 2,420 1.14
90 days and over ................... 2,788 2.90 2,267 1.91 3,680 2.26 4,263 2.02
------- ---- ------- ---- ------- ---- ------- ----
Total ........................ $ 5,891 6.12% $ 8,196 6.91% $ 9,791 6.01% $12,369 5.85%
======= ==== ======= ==== ======= ==== ======= ====
Total defaults ..................... $ 7,279 7.57% $ 8,660 7.30% $ 9,605 5.90% $14,014 6.63%
======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
- 18 -
<PAGE>
<TABLE>
<CAPTION>
1996-1 1996-2 1996-3 1996-4
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As of March 31, 1998:
Delinquency:
30-59 days ......................... $ 1,871 2.14% $ 2,471 2.27% $ 3,350 2.21% $ 4,131 2.13%
60-89 days ......................... 1,135 1.30 1,902 1.74 1,606 1.06 3,227 1.66
90+ days ........................... 1,862 2.13 3,067 2.81 3,025 2.00 5,085 2.62
------- ---- ------- ---- ------- ---- ------- -----
Total ........................ $ 4,868 5.56% $ 7,440 6.82% $ 7,981 5.27% $12,443 6.42%
======= ==== ======= ==== ======= ==== ======= =====
Total defaults ..................... $ 6,719 7.67% $ 7,832 7.18% $ 9,624 6.36% $12,856 6.63%
======= ==== ======= ==== ======= ==== ======= =====
As of June 30, 1998:
Delinquency:
30-59 days ......................... $ 2,182 2.74% $ 2,544 2.56% $ 3,643 2.66% 4,451 2.55%
60-89 days ......................... 638 0.80 1,259 1.27 1,623 1.18 2,442 1.40
90+ days ........................... 1,913 2.40 2,303 2.32 5,596 4.08 4,823 2.76
------- ---- ------- ---- ------- ---- ------- -----
Total ........................ $ 4,733 5.94% $ 6,106 6.14% $10,862 7.93% $11,716 6.72%
======= ==== ======= ==== ======= ==== ======= =====
Total defaults ..................... $ 6,510 8.17% $ 7,635 7.68% $ 6,434 4.70% $14,544 8.34%
======= ==== ======= ==== ======= ==== ======= =====
As of September 30, 1998:
Delinquency:
30-59 days ......................... $ 2,099 2.86% $ 3,894 4.33% $ 2,679 2.16% $ 4,942 3.14%
60-89 days ......................... 1,216 1.66 1,134 1.26 1,276 1.03 2,342 1.49
90+ days ........................... 1,802 2.46 1,632 1.81 1,584 1.27 2,984 1.90
------- ---- ------- ---- ------- ---- ------- -----
Total ........................ $ 5,117 6.98% $ 6,660 7.40% $ 5,539 4.46% $10,268 6.53%
======= ==== ======= ==== ======= ==== ======= =====
Total defaults ..................... $ 6,999 9.54% $ 7,901 8.78% $10,052 8.09% $16,363 9.47%
======= ==== ======= ==== ======= ==== ======= =====
As of December 31, 1998:
Delinquency:
30-59 days ......................... $ 3,595 5.38% $ 3,293 3.95% $ 2,916 2.56% $ 9,728 6.77%
60-89 days ......................... 758 1.13 1,453 1.74 1,513 1.33 2,056 1.43
90+days ............................ 703 1.05 951 1.14 2,135 1.87 2,436 1.70
------- ---- ------- ---- ------- ---- ------- -----
Total ........................ $ 5,056 7.57% $ 5,697 6.84% $ 6,564 5.75% $14,220 9.90%
======= ==== ======= ==== ======= ==== ======= =====
Total defaults ..................... $ 7,912 11.84% $ 9,322 11.19% $ 9,340 8.19% $15,769 10.97%
======= ==== ======= ==== ======= ==== ======= =====
<CAPTION>
1997-1 1997-2 1997-3 1997-4
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As of March 31, 1997:
Delinquency:
30-59 days ......................... $ 9,414 3.01% $10,561 2.67%
60-89 days ......................... 3,594 1.15 4,641 1.17
90 days and over ................... 5,217 1.67 843 0.21
------- ---- ------- ----
Total ........................... $18,225 5.83% $16,045 4.05%
======= ==== ======= ====
Total defaults ..................... $ 1,170 0.37% $ 369 0.09%
======= ==== ======= ====
As of June 30, 1997:
Delinquency:
30-59 days ......................... $10,117 3.45% $ 9,817 2.62% $29,002 3.67%
60-89 days ......................... 2,463 0.84 2,863 0.76 6,201 0.78
90 days and over ................... 5,631 1.92 3,971 1.06 927 0.12
------- ---- ------- ---- ------- ----
Total ........................ $18,211 6.21% $16,651 4.44% $36,130 4.57%
======= ==== ======= ==== ======= ====
Total defaults ..................... $ 4,533 1.55 $ 4,248 1.13% $ 241 0.03%
======= ==== ======= ==== ======= ====
As of September 30, 1997:
Delinquency:
30-59 days ......................... $ 7,452 2.78% $ 9,753 2.81% $22,580 2.98% $12,446 2.22%
60-89 days ......................... 2,507 0.94 3,420 0.98 7,906 1.04 5,525 0.99
90 days and over ................... 7,163 2.68 5,925 1.71 14,067 1.85 4,627 0.83
------- ---- ------- ---- ------- ---- ------- -----
Total ........................ $17,122 6.40% $19,098 5.50% $44,553 5.87% $22,598 4.04%
======= ==== ======= ==== ======= ==== ======= =====
Total defaults ..................... $ 8,796 3.29% $10,848 3.13% $ 7,040 0.93% $ 798 0.14%
======= ==== ======= ==== ======= ==== ======= =====
</TABLE>
- 19 -
<PAGE>
<TABLE>
<CAPTION>
1997-1 1997-2 1997-3 1997-4
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Delinquency:
30-59 days ......................... $ 6,182 2.56% $ 9,823 3.13% $18,556 2.58% $ 8,691 1.63%
60-89 days ......................... 2,918 1.21 4,646 1.48 9,243 1.29 5,398 1.02
90 days and over ................... 5,369 2.22 5,067 1.61 21,463 2.99 10,659 2.00
------- ---- ------- ----- ------- ----- ------- ----
Total ........................ $14,462 5.99% $19,536 6.22% $49,262 6.86% $24,748 4.65%
======= ==== ======= ===== ======= ===== ======= ====
Total defaults ..................... $13,589 5.63% $16,574 5.28% $16,467 2.32% $ 4,765 0.90%
======= ==== ======= ===== ======= ===== ======= ====
As of March 31, 1998:
Delinquency:
30-59 days ......................... $ 5,082 2.36% $ 6,455 2.26% $16,418 2.46% $10,057 2.04%
60-89 days ......................... 3,147 1.46 3,046 1.07 9,904 1.49 6,282 1.27
90 days and over ................... 5,482 2.55 7,382 2.59 18,208 2.73 7,097 1.44
------- ---- ------- ----- ------- ----- ------- ----
Total ........................ $13,711 6.38% $16,883 5.92% $44,530 6.68% $23,436 4.75%
======= ==== ======= ===== ======= ===== ======= ====
Total defaults ..................... $13,938 6.48% $16,247 5.70% $27,276 4.09% $13,346 2.71%
======= ==== ======= ===== ======= ===== ======= ====
As of June 30, 1998:
Delinquency:
30-59 days ......................... $ 7,154 3.72% $ 7,196 2.82% $12,192 2.01% $ 8,607 1.95%
60-89 days ......................... 1,664 0.87 4,280 1.68 6,172 1.02 2,866 0.65
90 days and over ................... 4,282 2.23 5,760 2.26 12,916 2.13 3,778 0.86
------- ---- ------- ----- ------- ----- ------- ----
Total ........................ $13,100 6.82% $17,236 6.76% $31,280 5.17% $15,251 3.46%
======= ==== ======= ===== ======= ===== ======= ====
Total defaults ..................... $14,319 7.46% $19,844 7.79% $38,627 6.38% $21,135 4.79%
======= ==== ======= ===== ======= ===== ======= ====
As of September 30, 1998:
Delinquency:
30-59 days ......................... $ 6,642 3.85% $ 9,213 3.98% $17,851 3.23% $15,362 3.92%
60-89 days ......................... 1,514 0.88 2,469 1.07 6,684 1.21 3,007 0.77
90 days and over ................... 2,725 1.58 3,061 1.32 9,373 1.69 2,305 0.59
------- ---- ------- ----- ------- ----- ------- ----
Total ........................ $10,881 6.31% $14,743 6.37% $33,908 6.13% $20,674 5.28%
======= ==== ======= ===== ======= ===== ======= ====
Total defaults ..................... $16,363 9.47% $24,404 10.54% $45,138 8.16% $24,105 6.15%
======= ==== ======= ===== ======= ===== ======= ====
As of December 31, 1998:
Delinquency:
30-59 days ......................... $10,131 6.48% $10,026 4.70% $29,033 5.74% $15,832 4.47%
60-89 days ......................... 2,447 1.57 3,520 1.65 7,743 1.53 4,663 1.32
90 days and over ................... 3,051 1.95 4,043 1.89 7,258 1.43 3,037 0.86
------- ---- ------- ----- ------- ----- ------- ----
Total ........................ $15,629 10.00% $17,589 8.24% $44,034 8.70% $23,532 6.64%
======= ==== ======= ===== ======= ===== ======= ====
Total defaults ..................... $15,815 10.12% $24,495 11.48% $53,514 10.58% $25,218 7.12%
======= ==== ======= ===== ======= ===== ======= ====
<CAPTION>
1997-5 1997-6 1997-7 1997-8
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As of September 30, 1997:
Delinquency:
30-59 days ......................... $34,046 3.52%
60-89 days ......................... 5,176 0.53
90 days and over ................... 764 0.08
------- ----
Total ........................ $39,986 4.13%
======= ====
Total defaults ..................... $ 150 0.16%
======= ====
As of December 31, 1997:
Delinquency:
30-59 days ......................... $17,978 1.92% $17,015 2.50% $30,032 4.00% $ 7,904 2.59%
60-89 days ......................... 11,256 1.20 10,046 1.48 12,353 1.64 2,975 0.98
90 days and over ................... 23,104 2.47 15,325 2.25 5,266 0.70 794 0.26
------- ---- ------- ---- ------- ---- ------- ----
Total ........................ $52,338 5.59% $42,386 6.23% $47,651 6.34% $11,673 3.83%
======= ==== ======= ==== ======= ==== ======= ====
Total defaults ..................... $ 3,254 0.35% $ 3,659 0.54% $ 0 0% $ 0 0%
======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
- 20 -
<PAGE>
<TABLE>
<CAPTION>
1997-5 1997-6 1997-7 1997-8
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As of March 31, 1998:
Delinquency:
30-59 days ......................... $14,416 1.61% $14,155 2.18% $11,048 1.49% $ 3,647 1.24%
60-89 days ......................... 9,541 1.07 5,824 0.90 6,713 0.91 2,795 0.95
90 days and over ................... 12,144 1.36 11,600 1.79 18,006 2.43 4,400 1.49
------- ---- ------- ---- ------- ---- ------- ----
Total ........................ $36,101 4.04% $31,579 4.87% $35,767 4.84% $10,842 3.68%
======= ==== ======= ==== ======= ==== ======= ====
Total defaults ..................... $24,842 2.78% $17,358 2.68% $ 5,085 0.69% $ 2,096 0.71%
======= ==== ======= ==== ======= ==== ======= ====
As of June 30, 1998:
Delinquency:
30-59 days ......................... $17,801 2.14% $12,423 2.07% $13,752 1.95% $ 5,262 1.89%
60-89 days ......................... 10,478 1.26 6,705 1.12 6,842 0.97 2,474 0.89
90 days and over ................... 10,140 1.22 7,043 1.17 10,158 1.44 2,233 0.80
------- ---- ------- ---- ------- ---- ------- ----
Total ........................ $38,419 4.62% $26,171 4.36% $30,752 4.36% $ 9,969 3.58%
======= ==== ======= ==== ======= ==== ======= ====
Total defaults ..................... $37,962 4.57% $27,957 4.66% $22,228 3.15% $ 6,613 2.37%
======= ==== ======= ==== ======= ==== ======= ====
As of September 30, 1998:
Delinquency:
30-59 days ......................... $24,358 3.23% 20,991 3.99% $17,497 2.69% $ 7,296 2.87%
60-89 days ......................... 7,345 0.97 6,032 1.15 5,159 0.79 1,950 0.77
90 days and over ................... 6,139 0.81 3,654 0.69 4,300 0.66 1,442 0.57
------- ---- ------- ---- ------- ---- ------- ----
Total ........................ $37,842 5.01% $30,677 5.83% $26,956 4.14% 10,688 4.21%
======= ==== ======= ==== ======= ==== ======= ====
Total defaults ..................... $49,919 6.61% $35,475 6.74% $35,269 5.42% 10,917 4.29%
======= ==== ======= ==== ======= ==== ======= ====
As of December 31, 1998:
Delinquency:
30-59 days ......................... $34,998 5.10% $20,975 4.47% $24,574 4.15% $ 7,731 3.40%
60-89 days ......................... 10,605 1.54 7,314 1.56 7,034 1.19 3,178 1.40
90 days and over ................... 11,019 1.60 3,676 0.78 7,768 1.31 2,508 1.10
------- ---- ------- ---- ------- ---- ------- ----
Total ........................ $56,622 8.24% $31,965 6.82% $39,376 6.66% $13,417 5.89%
======= ==== ======= ==== ======= ==== ======= ====
Total defaults ..................... $51,917 7.56% $42,484 9.06% $38,454 6.50% $11,996 5.27%
======= ==== ======= ==== ======= ==== ======= ====
<CAPTION>
1998-1 1998-2 1998-3 1998-4
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As of March 31, 1998:
Delinquency:
30-59 days ......................... $23,065 2.63% $17,703 3.54%
60-89 days ......................... 8,098 0.92 7,163 1.43
90 days and over ................... 803 0.09 0 0.00
------- ---- ------- ----
Total ........................ $31,966 3.65% $24,866 4.97%
======= ==== ======= ====
Total defaults ..................... $ 144 0.02% $ 47 0.01%
======= ==== ======= ====
As of June 30, 1998:
Delinquency:
30-59 days ......................... $12,677 1.33% $ 7,395 1.13% $22,454 2.63% $15,258 3.10%
60-89 days ......................... 7,145 0.75 5,497 0.84 7,319 0.86 4,762 0.97
90 days and over ................... 7,790 0.81 6,930 1.06 932 0.11 1,789 0.36
------- ---- ------- ---- ------- ---- ------- ----
Total ........................ $27,612 2.89% $19,822 3.03% $30,705 3.60% $21,809 4.43%
======= ==== ======= ==== ======= ==== ======= ====
Total defaults ..................... $ 9,116 0.95% $ 7,810 1.19% $ 157 0.02% $ 829 0.02%
======= ==== ======= ==== ======= ==== ======= ====
As of September 30, 1998:
Delinquency:
30-59 days ......................... $22,049 2.42% $19,202 3.21% $19,725 2.07% $13,815 2.43%
60-89 days ......................... 8,284 0.91 6,581 1.10% 7,358 0.77% 6,160 1.08
90 days and over ................... 4,586 0.50 3,795 0.64% 3,667 0.39% 2,761 0.48
------- ---- ------- ---- ------- ---- ------- ----
Total ........................ $34,919 3.83% $29,578 4.95% $30,750 3.23% $22,736 3.99%
======= ==== ======= ==== ======= ==== ======= ====
Total defaults ..................... $23,585 2.59% $20,586 3.45% $15,765 1.66% $11,743 2.06%
======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
- 21 -
<PAGE>
<TABLE>
<CAPTION>
1998-1 1998-2 1998-3 1998-4
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Delinquency:
30-59 days ......................... $34,541 4.10% $28,357 5.24% $35,041 3.89% $15,830 2.98%
60-89 days ......................... 10,248 1.22 8,408 1.55 9,236 1.02 6,244 1.17
90 days and over ................... 6,994 0.83 2,204 0.41 3,666 0.41 2,277 0.43
---- ------- ---- ------- ---- ------- ----
Total ........................ $51,783 6.15% $38,969 7.20% $47,943 5.32% $24,351 4.58%
======= ==== ======= ==== ======= ==== ======= ====
Total defaults ..................... $32,722 3.89% $31,148 5.76% $27,815 3.09% $24,197 4.55%
======= ==== ======= ==== ======= ==== ======= ====
<CAPTION>
1998-5 1998-6
----------------- -----------------
<S> <C> <C> <C> <C>
As of September 30, 1998:
Delinquency:
30-59 days ......................... $10,787 2.19% $20,095 2.88%
60-89 days ......................... 3,915 0.79 4,167 0.60
90 days and over ................... 477 0.10 174 0.02
------- ---- ------- ----
Total ........................ $15,179 3.08% $24,436 3.50%
======= ==== ======= ====
Total defaults ..................... $ 500 0.10% $ ,212 0.03%
======= ==== ======= ====
As of December 31,1998:
Delinquency:
30-59 days ......................... $17,227 3.63% $25,606 3.81%
60-89 days ......................... 5,841 1.23 7,869 1.17
90 days and over ................... 1,254 0.26 2,266 0.34
------- ---- ------- ----
Total ........................ $24,322 5.12% $35,741 5.32%
======= ==== ======= ====
Totals defaults .................... $ 7,973 1.68% $11,637 1.73%
======= ==== ======= ====
</TABLE>
(1) Delinquency is the dollar value of account balances contractually past due,
excluding loans in foreclosure, bankruptcy and real estate owned.
(2) Defaults are the dollar value of account balances contractually past due on
loans in foreclosure and bankruptcy, exclusive of real estate owned.
(3) The percentage of loans with loan-to-value ratios between 80% and 100%
included in the 1994-1, 1995-1, 1995-2, 1995-3, 1996-1, 1996-2, 1996-3,
1996-4, 1997-1, 1997-2, 1997-3, 1997-4, 1997-5, 1997-6, 1997-7, 1997-8,
1998-1,1998-2, 1998-3, 1998-4, 1998-5 and 1998-6 securitization trusts, as
of the closing date of each securitization, was 24.2%, 32.4%, 26.6%, 10.4%,
11.0% 12.2%, 15.7%, 18.3%, 18.0%, 20.4%, 24.2%, 21.92%, 29.08%, 29.56%,
29.55%, 30.38%, 27.3%, 24.4%, 31.2%, 26.5%, 32.1% and 28.8%, respectively.
The LTV's are calculated as of the origination date of each mortgage loan
based on the appraised value at the time of origination.
The following table describes certain loan loss experience of IMC's servicing
portfolio of home equity loans for the fiscal years ended December 31, 1994,
1995, 1996, 1997 and 1998.
<TABLE>
<CAPTION>
Year ended
December 31,
--------------------------------------------------------------------------
1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Average amount outstanding(1) ...................... $ 52,709 $ 294,252 $1,207,172 $4,315,238 $9,073,680
Losses(2) .......................................... -- 279 1,580 6,274 22,272
Annualized losses as a percentage of average
amount outstanding .............................. 0.00% 0.09% 0.13% 0.15% 0.27%
</TABLE>
(1) Average amount outstanding during the period is the arithmetic average of
the principal balances of home equity loans outstanding serviced by the
Company on the last business day of each month during the period.
(2) Losses are actual losses incurred on liquidated properties for each
respective period. Losses include all principal, foreclosure costs and
accrued interest.
- 22 -
<PAGE>
Marketing
Correspondent and Broker Networks. Marketing to correspondents and brokers
is conducted through IMC's business development representatives who establish
and maintain relationships with IMC's principal sources of loan purchases and
originations, including financial institutions and mortgage bankers. The
business development representatives provide various levels of information and
assistance to correspondents and brokers and are principally responsible for
maintaining IMC's relationships with its networks. Business development
representatives endeavor to increase the volume of loan originations from
brokers and correspondents located within the geographic territory assigned to
that representative. The representatives visit customers' offices, attend trade
shows and supervise advertisements in broker trade magazines. The
representatives also provide IMC with information relating to correspondents,
borrowers and brokers and products and pricing offered by competitors and new
market entrants, all of which assist IMC in refining its programs in order to
offer competitive products. The business development representatives are
typically compensated with a base salary and commissions based on the volume of
loans that are purchased or originated as a result of their efforts.
Direct Consumer Lending. As of December 31, 1998, IMC marketed its direct
consumer lending services through more than 80 branch offices. IMC's direct
consumer loan strategy involves: (i) targeting cities where the population
density and economic indicators are favorable for home equity lending, the
foreclosure rate is within reasonable ranges and the non-conforming loan market
has been undeserved; (ii) testing the target market prior to the establishment
of a branch office; (iii) if test marketing is positive, establishing a small
branch office, generally with an initial staff of two business development
representatives; and (iv) setting up branch offices in executive office space
with short-term leases, which eliminates high startup costs for office
equipment, furniture and leasehold improvement and allows IMC to exit the market
easily if the office does not meet expectations. The branch office network is
used for marketing to and meeting with IMC's local borrowers and brokers.
Acquisitions and Strategic Alliances
The Company had actively pursued a strategy of acquiring originators of
non-conforming home equity loans. IMC's acquisition strategy focused on entities
that originate non-conforming mortgages either directly from the consumer or
through broker networks. In 1996, IMC acquired Equitystars and in January and
February 1997 completed the acquisitions of Mortgage America, CoreWest Banc
("CoreWest"), Equity Mortgage, and American Mortgage Reduction Inc. ("American
Reduction"). In July 1997, IMC acquired National Lending Center Inc. ("National
Lending Center") and Central Money Mortgage Co., Inc. ("Central Money
Mortgage"). In October and November 1997, IMC acquired Residential Mortgage
Corporation and Alternative Capital Group, Inc. ("Alternative Capital Group").
Equitystars, Mortgage America and Equity Mortgage were Industry Partners. There
were no acquisitions of originators of non-conforming home equity loans during
1998. As a result of the volatility of the capital markets and severely reduced
or unavailable liquidity, IMC is not likely to acquire any originators of
non-conforming home equity loans for the foreseeable future. The Company is
currently focusing on reducing the cost of loan originations of each of the
companies it has acquired. To reduce costs, the Company closed certain
non-productive retail and broker offices and reduced the number of employees.
The Company is in the process of identifying and reducing non-essential costs.
The Company anticipates that certain additional retail and broker offices will
be closed and entire operations of some of the acquired companies may be sold or
shut down. There can be no assurance the Company can achieve a reduction of cash
flow used in operations or that its attempt to reduce non-essential expenditures
will be successful.
Each of the foregoing acquisitions made in 1996 and 1997 has been accounted
for under the purchase method of accounting and the results of operations have
been included with those of the Company from the dates of acquisition. The fair
value of the acquired Companies' assets approximated the liabilities assumed
and, accordingly, the majority of the initial purchase prices has been recorded
as goodwill which is being amortized on a straight line basis for periods of up
to thirty (30) years. The initial purchase price for all of the assets of
- 23 -
<PAGE>
Equitystars was 239,666 shares of common stock. The aggregate purchase price for
the eight acquisitions completed in 1997 included gross cash of approximately
$20.9 million, approximately 5.0 million shares of common stock, $13.2 million
of notes payable to former owners of the acquired companies and assumption of a
stock option plan which resulted in the issuance of options to acquire 334,596
shares of the Company's common stock. The aggregate fair value of assets
acquired was approximately $71.2 million and liabilities assumed approximated
$70.4 million. The Company recorded goodwill of approximately $87.0 million
related to these acquisitions. Most of the acquisitions include earn-out
arrangements that provide for additional consideration if the acquired company
achieves certain performance targets after the acquisition. Additional purchase
price of approximately $5.6 million and $1.6 million was recorded as goodwill
during the years ended December 31, 1997 and 1998, respectively, related to the
contingent payment terms of the acquisitions. Any such contingent payments will
result in an increase in the amount of recorded goodwill related to such
acquisition.
Strategic Alliances
In order to increase the Company's volume and diversify its sources of loan
originations, the Company had entered into three strategic alliances with
selected mortgage lenders, pursuant to which the Company provided working
capital not exceeding $800,000, provided warehouse financing and received
commitments to purchase qualifying loans. In return, the Company received a more
predictable flow of loans and, in some cases, an option or obligation to acquire
an equity interest in the related strategic participant.
International Operations
In April 1996, the Company together with two partners formed Preferred
Mortgages, a United Kingdom joint venture. The Joint Venture Partners are IMC,
Foxgard Limited ("Foxgard") and Financial Security Assurance Inc. ("FSA").
Preferred Mortgages is owned 45% by IMC, 45% by Foxgard and 10% by FSA.
Preferred Mortgages lends to borrowers in the United Kingdom with impaired
credit profiles similar to the Company's domestic customers. As of December 31,
1998, Preferred Mortgages had a $78.9 million line of credit from National
Westminster Bank, Plc for the purchase and origination of mortgage loans (the
"NatWest Facility"), and FSA has provided an insurance policy as credit
enhancement for the NatWest Facility.
In June 1997, the Company's wholly-owned subsidiary IMC Mortgage Company,
Canada Ltd. ("IMC Canada") began operations in the Canadian Province of Ontario
to serve the non-conforming home equity market in the Toronto marketplace.
Based on market conditions and limited access to liquidity, the Company is
evaluating its international operations, in the United Kingdom and Canada and
presently anticipates the sale of IMC's joint venture interest in Preferred
Mortgages and either the sale or closing of IMC Canada. See "Management's
Discussion and Analysis of Financial Conditions and Results of Operations" and
"Liquidity and Capital Resources".
Competition
As a purchaser and originator of mortgage loans the proceeds of which are
used for a variety of purposes, including to consolidate debt, refinance debt,
to finance home improvements and to pay educational expenses, the Company faces
intense competition primarily from other mortgage banking companies and
commercial banks, credit unions, thrift institutions, credit card issuers and
finance companies. Many of these competitors are substantially larger and have
more capital and other resources than the Company. Some of the Company's
competitors may, in some locations, also include the Industry Partners.
Furthermore, numerous large national finance companies and originators of
conforming mortgages have expanded from their conforming origination programs
and have allocated resources to the origination of non-conforming loans. In
addition, many of these larger mortgage companies and commercial banks have
begun to offer products similar to those offered by the Company, targeting
customers similar to those of the Company. The entrance of these competitors
into the Company's market requires the Company to
- 24 -
<PAGE>
pay higher premiums for loans it purchases, increases the likelihood of earlier
prepayments through refinancings and could have a material adverse effect on the
Company's results of operations and financial condition. In addition,
competition could also result in the purchase or origination of loans with lower
interest rates and higher loan-to-value ratios, which could have a material
adverse effect on the Company's results of operations and financial condition.
Premiums paid to correspondents as a percentage of loans purchased from
correspondents by the Company remained constant at 5.3% for the years ended
December 31, 1997 and 1998; however, during the fourth quarter of 1998, the
Company to a large extent curtailed its purchases from correspondents and
significantly reduced the premiums paid to correspondents as a percent of loans
from correspondents. The weighted average interest rate for loans purchased or
originated by the Company decreased from 12.1% for the year ended December 31,
1995 to 11.5% for the year ended December 31, 1996 to 10.9% for the year ended
December 31, 1997 and to 10.4% for the year ended December 31, 1998. The
combined weighted average loan-to-value ratio of loans purchased or originated
by the Company increased from 70.9% for the year ended December 31, 1995 to
72.9% for the year ended December 31, 1996 to 75.3% for the year ended December
31, 1997 and to 77.0% for the year ended December 31, 1998.
Competition takes many forms, including convenience in obtaining a loan,
service, marketing and distribution channels and interest rates. Furthermore,
the level of gains currently realized by the Company and its competitors on the
sale of the type of loans purchased and originated is attracting additional
competitors into this market, including at least one quasi-governmental agency,
with the effect of lowering the gains that may be realized by the Company on
future loan sales. Competition may be affected by fluctuations in interest rates
and general economic conditions. During periods of rising rates, competitors
which have "locked-in" low borrowing costs may have a competitive advantage.
During periods of declining rates, competitors may solicit the Company's
borrowers to refinance their loans. During economic slowdowns or recessions, the
Company's borrowers may have new financial difficulties and may be receptive to
offers by the Company's competitors.
The Company depends largely on brokers, financial institutions and other
mortgage bankers for its purchases and originations of new loans. The Company's
competitors also seek to establish relationships with the Company's brokers and
financial institutions and other mortgage bankers. The Company's future results
may become more exposed to fluctuations in the volume and cost of its wholesale
loans resulting from competition from other purchasers of such loans, market
conditions and other factors.
Regulation
IMC's business is subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities and is subject to
various laws and judicial and administrative decisions imposing requirements and
restrictions on part or all of its operations. IMC's consumer lending activities
are subject to the Federal Truth-in-Lending Act and Regulation Z (including the
Home Ownership and Equity Protection Act of 1994), ECOA, the Fair Credit
Reporting Act of 1994, as amended, RESPA, and Regulation X, the Home Mortgage
Disclosure Act and the Federal Debt Collection Practices Act, as well as other
federal and state statutes and regulations affecting IMC's activities. IMC is
also subject to the rules and regulations of and examinations by HUD and state
regulatory authorities with respect to originating, processing, underwriting,
selling and servicing loans. These rules and regulations, among other things,
impose licensing obligations on IMC, establish eligibility criteria for mortgage
loans, prohibit discrimination, provide for inspections and appraisals of
properties, require credit reports on loan applicants, regulate assessment,
collection, foreclosure and claims handling, investment and interest payments on
escrow balances and payment features, mandate certain disclosures and notices to
borrowers and, in some cases, fix maximum interest rates, fees and mortgage loan
amounts. Failure to comply with these requirements can lead to loss of approved
status, termination or suspension of servicing contracts without compensation to
the servicer, demands for indemnification or mortgage loan repurchases, certain
rights of rescission for mortgage loans, class action lawsuits and
administrative enforcement actions. IMC believes, however, that it is in
compliance in all material respects with applicable federal and state laws and
regulations.
- 25 -
<PAGE>
Environmental Matters
To date, IMC has not been required to perform any investigation or clean up
activities, nor has it been subject to any environmental claims. There can be no
assurance, however, that this will remain the case. In the ordinary course of
its business, IMC from time to time forecloses on properties securing loans.
Although IMC primarily lends to owners of residential properties, there is a
risk that IMC could be required to investigate and clean up hazardous or toxic
substances or chemical releases at such properties after acquisition by IMC, and
could be held liable to a governmental entity or to third parties for property
damage, personal injury and investigation and cleanup costs incurred by such
parties in connection with the contamination. In addition, the owner or former
owners of a contaminated site may be subject to common law claims by third
parties based on damages and costs resulting from environmental contamination
emanating from such property.
Employees
As of December 31, 1998, IMC had a total of 2,585 employees, 539 of whom
worked in its Tampa, Florida headquarters. As of March 15, 1999, IMC had a total
of 2,120 employees, 470 of whom were in its Tampa, Florida headquarters. The
reduction of employees from December 31, 1998 to March 15, 1999 was a direct
result of adverse market conditions and the Company's efforts to deal with its
limited liquidity. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Liquidity and Capital Resources." None
of IMC's employees is covered by a collective bargaining agreement. IMC
considers its relations with its employees to be satisfactory under the current
adverse market conditions in which the Company operates. Several members of
senior management have previously worked as a team at other lending
institutions. Many employees have been associated with senior management in
previous employment positions.
Item 2. Properties
The Company's corporate headquarters are located in an approximately 83,000
square foot building at 5901 E. Fowler Avenue, Tampa, Florida 33617. The
building was purchased in January 1997 for $2.6 million and through December 31,
1998, the Company spent in excess of $3 million to renovate the building.
At December 31, 1998, IMC maintained short-term leases for regional
full-service offices and retail branch offices in executive spaces in a number
of locations throughout the United States. See also Note 15 of Notes to
Consolidated Financial Statements.
Item 3. Legal Proceedings
IMC is a 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 IMC.
On December 23, 1998, the former shareholders of CoreWest sued IMC in
Superior Court of the State of California for the County of Los Angeles claiming
IMC agreed to pay them $23.8 million in cancellation of the contingent "earn
out" payment, if any, payable by IMC in connection with IMC's purchase of all of
the outstanding shares of CoreWest. The case is in the early stages of pleading;
however, IMC's management believes there is no merit in the plaintiffs' claims.
Item 4. Submission of Matters to a Vote of Security Holders
None.
- 26 -
<PAGE>
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock is traded on the Nasdaq Stock Market ("Nasdaq")
under the symbol "IMCC". The following table sets forth, for the periods
indicated, the high and low sales price for the Common Stock as reported on
Nasdaq, and reflects a two-for-one stock split paid on February 13, 1997 to
stockholders of record on February 6, 1997.
High Low
---- ---
Year Ended December 31, 1997:
First Quarter ............................ $25.00 $14.38
Second Quarter ........................... 18.00 11.13
Third Quarter ............................ 18.44 15.38
Fourth Quarter ........................... 19.31 11.50
Year Ended December 31, 1998:
First Quarter ............................ 13.63 7.50
Second Quarter ........................... 18.06 10.00
Third Quarter (1) ........................ 13.75 1.97
Fourth Quarter (1) ....................... 2.88 0.25
Year Ending December 31, 1999:
First Quarter (through March 26) (1) ..... 0.56 0.16
(1) See "Management's Discussions and Analysis of Financial Condition and
Results of Operations" and "Liquidity and Capital Resources".
----------
As of March 18, 1999, there were approximately 5,900 holders of record of
the Common Stock.
On January 13, 1999 Nasdaq notified the Company that IMC had failed to
maintain a closing bid price of greater than or equal to $1.00 per share in
accordance with Marketplace Rule 4450 and that IMC's stock would be delisted
from the Nasdaq Stock Market if its stock price does not trade above $1.00 per
share for a period of at least 10 consecutive trading days before April 13,
1999. IMC does not believe that the common stock will trade above $1.00 for the
requisite period. As a result, IMC believes that its common stock will be
delisted from the Nasdaq Stock Market on April 13, 1999.
The Company has not paid, and currently has no intention to pay, any cash
dividends on its Common Stock. Any decision to declare dividends in the future
will be made by the Company's Board of Directors and will depend upon the
Company's future earnings, capital requirements, financial condition and other
factors deemed relevant by the Company's Board of Directors. In addition,
certain agreements to which the Company is a party restrict the Company's
ability to pay dividends on the Common Stock.
Unregistered Sales of Securities
On October 15, 1998, the Company issued 23,760.758 shares of its Class C
exchangeable preferred stock in conjunction with a $33 million standby revolving
credit facility provided by certain of the Greenwich Funds. The Class C
exchangeable preferred stock has a par value of $0.01 per share, participates in
dividends declared on
- 27 -
<PAGE>
the common stock, at a rate per share of Class C exchangeable preferred stock
equal to 1,000 times the dividend per share of common stock and has a
liquidation value equal to the greater of $10 per share and any liquidating
distribution payable in respect of 1,000 shares of common stock per share of
Class C exchangeable preferred stock. The Class C exchangeable preferred stock
is exchangeable for an equivalent number of shares of Class D preferred stock in
certain events and represents the equivalent of 40% of the common equity of the
Company. The Class C exchangeable preferred stock is subject to redemption at
the option of the holder, under certain circumstances, upon a change of control.
On July 14, 1998, the Company sold to Travelers Casualty and Surety Company
and certain of the Greenwich Funds 500,000 shares of its Class 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, pays no
dividends and has a liquidation value of $100 per share. The Class A redeemable
preferred stock was convertible into common stock at $10.44 per share and is
redeemable by the Company over a three year period commencing July 2008. On
October 15, 1998, the Class A redeemable preferred stock was amended to, among
other things, eliminate the conversion feature.
The shares of Class C exchangeable preferred stock and the shares of Class
A redeemable preferred stock were issued to fewer than 10 institutional
investors in transactions not involving a public offering within the meaning of
Section 4(2) of the Securities Act of 1933, as amended.
- 28 -
<PAGE>
Item 6. Selected Financial Data
The historical Statement of Operations and Balance Sheet data set forth
below as of and for the fiscal years ended December 31, 1994, 1995, 1996, 1997
and 1998 have been derived from the Consolidated Financial Statements and Notes
thereto of the Company. This data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Liquidity and Capital Resources" and the Consolidated Financial
Statements and Notes thereto (dollars in thousands, except share data).
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------------------------------------------------------
1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Statement of Operation Data:
Revenues
Gain on sales of loans (1)(2) $8,583 $20,681 $46,230 $180,963 $205,924
Additional securization transacton expense (3) (560) (5,547) (4,158) -- --
---------- ---------- ---------- ---------- ----------
Gain on sale of loans, net 8,023 15,134 42,072 180,963 205,924
---------- ---------- ---------- ---------- ----------
Warehouse interest income 2,510 7,885 37,463 123,432 147,937
Warehouse interest expense (1,611) (6,007) (24,535) (98,720) (118,345)
---------- ---------- ---------- ---------- ----------
Net warehouse interest income 899 1,878 12,928 24,712 29,592
---------- ---------- ---------- ---------- ----------
Servicing fees 99 1,543 5,562 17,072 45,382
Other 1,073 1,118 5,092 16,012 40,311
---------- ---------- ---------- ---------- ----------
Total servicing fees and other 1,172 2,661 10,654 33,084 85,693
---------- ---------- ---------- ---------- ----------
Total revenues 10,094 19,673 65,654 238,759 321,209
---------- ---------- ---------- ---------- ----------
Expenses
Compensation and benefits 3,348 5,139 16,007 82,051 124,234
Selling, general and administrative expenses (2) 2,000 3,478 15,652 64,999 130,547
Other 14 298 2,321 14,280 28,434
Hedge loss (4) -- -- -- -- 22,351
Market valuation adjustment (5) -- -- -- -- 84,638
Interest expense - Greenwich Funds (6) -- -- -- -- 30,795
Sharing of proportionate value of equity (7) 1,689 4,204 2,555 -- --
========== ========== ========== ========== ==========
Total Expense 7,051 13,119 36,535 161,330 420,999
========== ========== ========== ========== ==========
Pre-tax income (loss) before income taxes 3,043 6,554 29,119 77,429 (99,790)
Pro forma provision for income taxes (8)(9)(10) 1,187 2,522 11,190 29,500 679
========== ========== ========== ========== ==========
Pro forma net income (loss)(2)(9)(10) $1,856 $4,032 $17,929 $47,929 $(100,469)
========== ========== ========== ========== ==========
Pro forma basic net income (loss) per common share (10)(11) $0.15 $0.34 $1.12 $1.76 $(3.21)
Pro forma diluted net income (loss) per common shares (10)(11) $0.15 $0.34 $0.92 $1.54 $(3.21)
Pro forma basic average common shares outstanding (10)(11) 12,000,000 12,000,000 15,981,521 27,299,827 31,745,575
Pro forma diluted average common shares outstanding (10)(11) 12,000,000 12,000,000 19,539,963 31,147,944 31,745,575
Balance Sheet Data:
Mortgage loans held for sale $28,996 $193,003 $914,587 $1,673,144 $946,446
Interest-only and residual certificates 3,404 14,073 86,247 223,306 468,841
Borrowings under warehouse finance facilities 27,732 189,819 895,132 1,732,609 984,571
</TABLE>
- 29 -
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Term debt and notes payable -- 11,121 47,430 130,480 432,737
Redeemable preferred stock -- -- -- -- 37,333
Shareholders' equity 5,856 5,609 89,337 254,064 210,610
Total assets 36,642 354,551 1,707,348 2,945,932 1,683,639
Operating Data (dollars in millions):
Loans purchased or originated $283 $622 $1,770 $5,893 $6,177
Loans sold through securitization 82 388 935 4,858 5,117
Whole loan sales 180 71 129 145 1,530
Serviced loan portfolio (period end) 92 536 2,148 6,957 8,887
Delinquency Data:
Total delinquencies as a percentage of loans serviced 0.87% 3.43% 5.30% 5.40% 6.55%
(period end)(12)(13)
Defaults as a percentage of loans serviced 0.12 1.00 1.47 2.15 7.14
(period end)(13)(14)
Net annualized losses as a percentages of average 0.0 0.09 0.13 0.15 0.27
loans serviced for period (13)
</TABLE>
(1) Prior to June 1996, includes interest-only and residual certificates
received by ContiFinancial in connection with IMC's agreement with
ContiFinancial. See Item 7. -"Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Transactions with
ContiFinancial - Additional Securitization Transaction Expense."
(2) Beginning January 1, 1996, the Company adopted SFAS 122, which resulted in
additional gain on sale of $7.8 million, and additional amortization
expense of $1.2 million for the year ended December 31, 1996. The effect on
unaudited pro forma net income and pro forma net income per common share
for the year ended December 31, 1996 was an increase of $4.1 million and
$0.21, respectively.
(3) In 1994, 1995 and 1996, ContiFinancial received interest-only and residual
certificates with estimated values of $3.0 million, $25.1 million and $13.4
million in exchange for cash payments of $2.1 million, $18.4 million and
$8.6 million, respectively. In addition, ContiFinancial paid IMC $0.4
million, $1.1 million and $0.7 million in 1994, 1995 and 1996,
respectively, in expenses related to securitizations. See Item 7. -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations --Transactions with ContiFinancial - Additional Securitization
Transaction Expense."
(4) Reflects losses incurred from selling short U.S. Treasury Securities. The
Company historically sold U.S. Treasury Securities short to hedge against
interest rate movements affecting mortgages held for sale. In 1998, the
Company paid approximately $47.5 million due to devaluation of the
Company's hedge position, which was not offset by an equivalent increased
gain on sale of loans at the time of securitization. Of the approximately
$47.5 million hedge devaluation, approximately $25 million was closed at
the time the Company priced two securitizations and was reflected as an
offset to gain on sale and approximately $22 million was charged to hedge
loss. See Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Discussion of Events During the Year
Ended December 31, 1998," "-Results of Operations - Year Ended December 31,
1998 Compared to the Year Ended December 31, 1997" and - "Risk Management"
and Note 5 of Notes to Consolidated Financial Statements.
(5) Reflects a decrease in the estimated fair value of the interest only and
residual certificates resulting from revised loss curve assumptions used to
approximate the timing of losses over the life of the securitized loans and
a revised discount rate used to present value the projected cash flows
retained by the Company. See Item 7.-"Management's Discussion and Analysis
of Financial Condition and Results of Operations - Certain Accounting
Considerations" and Note 10 of Notes to Consolidated Financial Statements.
(6) Reflects interest expense related to a $33 million standby revolving credit
facility with Greenwich Funds. Interest expense recognized includes accrued
interest at 10%, amortization of a $3.3 million commitment fee, and the
value attributable to the preferred stock issued and the preferred stock
issuable to Greenwich Funds under the terms of the agreement. See Notes 3
and 4 of Notes to the Consolidated Financial Statements.
(7) Reflects expenses recorded in connection with the value sharing arrangement
with ContiFinancial (the "Conti VSA") which terminated in March 1996. The
Company's pre-tax income before the Conti VSA for 1994, 1995 and 1996 was
$4.7 million, $10.8 million and $31.7 million, respectively. See Item 7. -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations
- 30 -
<PAGE>
-- Transactions with ContiFinancial - Sharing of Proportionate Value of
Equity" and Note 5 of Notes to Consolidated Financial Statements.
(8) Prior to its initial public offering in June 1996, IMC was organized as a
partnership. That Partnership, which is included in the Consolidated
Financial Statements, became a wholly-owned subsidiary of the Company after
the plan of exchange described in Note 1 of Notes to Consolidated Financial
Statements was consummated. The Partnership made no provision for income
taxes since the Partnership's income or losses were passed through to the
partners individually. The Partnership's income became subject to income
taxes at the corporate level as of June 24, 1996, the effective date of the
exchange described in Note 1 of Notes to Consolidated Financial Statements.
(9) Pro forma data reflects a provision for income taxes to indicate what these
taxes would have been had the exchange described in Note 1 of Notes to
Consolidated Financial Statements occurred in prior years.
(10) Amounts are actual for the years ended December 31, 1997 and 1998.
(11) Pro forma per share data reflects the weighted average number of common and
dilutive common share equivalents outstanding during the period after
giving effect to the recapitalization described in Note 1 of Notes to
Consolidated Financial Statements.
(12) Represents the percentages of account balances contractually past due 30
days or more, exclusive of loans in foreclosure, bankruptcy and real estate
owned.
(13) Total delinquencies, defaults and net annualized losses as a percentage of
average loans serviced have each trended upward, in part, as a result of
the aging of the Company's loan portfolios.
(14) Represents the percentages of account balances of loans in foreclosure and
bankruptcy, exclusive of real estate owned.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following management's discussion and analysis of the Company's financial
condition and results of operations contain forward-looking statements, which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors discussed in the first paragraph on page 1 of this
Annual Report on Form 10-K. The following discussion should be read in
conjunction with the Consolidated Financial Statements of the Company and the
Notes thereto.
General
The Company is a specialized consumer finance company engaged in purchasing,
originating, servicing and selling home equity loans secured primarily by first
liens on on-to-four family residential properties. The Company focuses on
lending to individuals whose borrowings 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 refinance debt, to finance home improvements, to pay
educational expenses and for a variety of other uses. By focusing on individuals
with impaired credit profiles and providing prompt responses to their borrowing
requests, the Company has been able to charge higher interest rates for its loan
products than typically are charged by conventional mortgage lenders.
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., Central Money Mortgage Co., Inc., Residential Mortgage
Corporation, and Alternative Capital Group, Inc. (collectively, the
"Acquisitions"). These acquisitions were accounted for using the purchase method
of accounting and the results of operations have been included in those of the
Company from the dates of acquisition.
Discussion of Events During the Year Ended December 31, 1998
As a result of increased loan purchases and originations and its
securitization program, IMC has typically operated with negative cash flows from
operations. IMC has obtained cash for its operations through a combination of
access to the equity capital markets (sales of common stock), asset-backed
capital markets and borrowings. The borrowings have taken three principal forms:
(i) warehouse loans secured by IMC's inventory of mortgage loans held for sale,
(ii) loans against interest-only and residual certificates retained by IMC as a
result of its securitizations of mortgage loans and (iii) working capital loans.
In September 1998, financial difficulties primarily in Russia and Asia
formed the catalyst for material volatility in capital markets resulting, in
part, from a build-up of concern over economic conditions generally in emerging
markets. Those concerns in turn gave rise to a general de-leveraging in the
capital markets and a "flight to quality" causing a reduction in demand for
asset-backed securities and an increase in demand for United States Treasury
securities. These factors, among others, resulted in upheaval in the capital
markets, severely restricting IMC's ability to access capital through its
traditional sources.
Moreover, several other factors, primarily related to volatility in the
equity, debt and asset-backed capital markets, contributed to a liquidity crisis
for IMC since September 1998.
o First, IMC's $95 million revolving credit facilities with BankBoston,
N.A. matured in mid- October 1998. While IMC was working with
BankBoston to renew and increase the credit
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facilities, it became apparent to IMC in late September that
BankBoston would not renew the credit facilities, causing the entire
amount outstanding under the facilities to become due in mid-October.
The BankBoston facility was secured by a pledge of certain
interest-only and residual certificates, the common stock of most of
IMC's subsidiaries, IMC's servicing rights and substantially all of
IMC's other assets.
o Second, IMC's lenders, which had advanced approximately $276 million
at Sepember 30, 1998 to IMC collaterized by its interest-only and
residual certificates, proposed to reduce their exposure by making
cash margin calls on IMC.
o Third, IMC's lenders which had advanced more than $2 billion to IMC
collaterized by mortgage loans also made or threatened to make margin
calls on those warehouse lines to reduce their exposure to IMC.
o Fourth, at the same time, IMC's traditional strategy of minimizing
risks of interest rate fluctuations through a hedging program of short
selling United States Treasury Securities required that IMC satisfy
margin calls of approximately $47.5 million in cash. This occurred at
a time when IMC lacked the ability to recover that cash through sales
of its inventory of whole loans, since the same upheaval in the
capital markets had made sales of loans either as whole-loan sales or
through securitizations at a price sufficient to generate positive
cash flow virtually impossible for IMC.
IMC's Board of Directors held a series of meetings during September 1998
and determined that IMC needed to locate a substantial source of capital which
would either invest funds in IMC or acquire IMC in order to provide IMC the
liquidity necessary to deal with its immediate capital requirements and to
continue to operate. In September 1998 a special committee of independent
directors of IMC's Board of Directors was formed to advise the full Board of
Directors of IMC with respect to any change in control transactions regarding
IMC. The special committee engaged J.P. Morgan Securities, Inc. (J.P. Morgan) as
its financial advisor and retained legal counsel. On October 6, 1998, IMC hired
Donaldson, Lufkin & Jenrette Securities Corporation (DLJ) as its financial
advisor to assist it in locating such capital sources.
During late September and early October 1998, IMC continued discussions
with BankBoston to extend the maturity of the BankBoston loan facility and with
IMC's interest-only and residual lenders and warehouse lenders to obtain
additional credit. As a result of these discussions, it became clear that these
lenders would forbear from exercising their rights under their respective
facilities only if IMC could obtain cash to maintain operations during the
proposed standstill period. Under the pressures associated with the impending
maturity of the BankBoston loans and repeated demands from IMC's interest-only
and residual lenders and warehouse lenders to reduce their exposure to IMC or
face margin calls, which IMC would likely not be able to satisfy, IMC entered
into negotiations with certain of the Greenwich Funds. Certain of the Greenwich
Funds and a related entity, Travelers Casualty and Surety Company ("Travelers"),
had previously purchased $50 million of IMC Class A preferred stock in July
1998, which was convertible into IMC common stock. The Greenwich Funds had
conducted a substantial due diligence investigation of IMC in connection with
the July 1998 investment. Despite IMC's and DLJ's efforts to procure additional
financing sources or financing alternatives for IMC, the Greenwich Funds were
the only parties willing to extend funds to IMC to enable it to continue to
operate.
As a result of these negotiations with the Greenwich Funds and IMC's
lenders, on October 15, 1998, IMC entered into a loan agreement dated as of
October 12, 1998 with some of the Greenwich Funds under which agreement IMC
could borrow up to $33 million for a period of up to 90 days. The loan agreement
provided IMC
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with interim financing which enabled IMC to continue to operate while it sought
a substantial source of capital which would either invest funds in IMC or
acquire IMC. The facility was guaranteed by IMC and IMC's subsidiaries and
collateralized by subordinated liens on substantially all of IMC's and its
subsidiaries' assets and a pledge of the common stock of IMC's subsidiaries. The
facility bore interest at 10% per year and matured in 90 days. In return for
providing the facility, certain of the Greenwich Funds received a $3.3 million
commitment fee and non-voting IMC Class C exchangeable preferred stock
representing the equivalent of 40% of the common equity of IMC. The Class C
exchangeable preferred stock is exchangeable after March 31, 1999 for Class D
preferred stock, which has voting rights equivalent to 40% of the voting power
of the Company. Under the loan facility, the Greenwich Funds may exchange the
loans for additional shares of Class C exchangeable preferred stock or Class D
preferred stock in an amount of up to the equivalent of 50% of the common equity
of IMC (in addition to the Class C exchangeable preferred stock representing the
equivalent of 40% of the common equity of IMC received for providing the
facility). In addition, upon certain changes in control of IMC, the Greenwich
Funds could elect either to (i) receive repayment of the facility, plus accrued
interest and a take-out premium of up to 200% of the average principal amount of
the loan outstanding or (ii) exercise the Exchange Option. The Greenwich Funds'
willingness to provide the interim financing was contingent on IMC negotiating
intercreditor agreements with its significant creditors to standstill for an
interim period. In connection with the Greenwich Funds loan agreement, the IMC
Class A preferred stock was amended to eliminate its right to convert into IMC
common stock.
At the same time as IMC entered into the loan agreement with certain of the
Greenwich Funds, IMC entered into intercreditor agreements with its three
largest mortgage warehouse lenders. These three lenders together held total
available warehouse financing facilities with IMC of approximately $3.25 billion
collateralized by mortgage loans owned by IMC and held for sale. The
intercreditor agreements provided that, subject to certain conditions, these
lenders would "stand still" and take no action, including issuing margin calls,
with respect to their loan facilities for 45 days. The standstill period would
extend for an additional 45 days or until the second week of January 1999 if
within the first 45-day time period IMC entered into a letter of intent to
effect a change in control of IMC with a third party. BankBoston entered into a
similar intercreditor agreement at about the same time on similar terms. Without
the forbearance provided by the intercreditor agreements, IMC's lenders could
have foreclosed upon their collateral or forced IMC into bankruptcy. IMC agreed
to pay $1 million to each of the lenders that executed an intercreditor
agreement, agreed to provide several of the lenders preferred rights as to any
future IMC securitizations and agreed to issue to one of the lenders warrants to
purchase 2.5% of the common stock at an exercise price of $1.72 per share.
Throughout October and November 1998 DLJ contacted more than 70 parties on
behalf of IMC, and obtained confidentiality agreements from and distributed
information to more than twenty parties, of which four parties engaged in due
diligence investigations of IMC at its Tampa headquarters.
In late October 1998, IMC received a draft of a letter of intent from a
private equity group relating to a proposed acquisition of certain assets and
liabilities of IMC. The IMC Board of Directors determined that the terms of such
proposed transaction were unsatisfactory and were insufficient to maintain the
intercreditor agreements in place. The private equity group withdrew the draft
letter of intent and never made a formal offer to IMC.
During October and November 1998, IMC had direct substantive discussions
with Commercial Credit, an affiliate of Travelers, with respect to a potential
acquisition of IMC by Commercial Credit. During this period, Commercial Credit
conducted an extensive due diligence investigation of IMC. As the end of the
initial 45-day standstill period approached (that is, November 27, 1998), IMC
believed that Commercial Credit would offer a letter of intent for the
acquisition of IMC. However, on November 25, 1998, Commercial Credit informed
IMC that it would not offer a letter of intent at that time.
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IMC's Board of Directors met on November 25, November 26 and November 27,
1998 to review IMC's situation. Those meetings were attended not only by the
directors but also by, among others, representatives of DLJ and representatives
of J.P. Morgan. The IMC Board of Directors determined that, among other things,
IMC might have to seek protection under the United States Bankruptcy Code if it
did not by the deadline of November 27, 1998 enter into a letter of intent that
met the requirements to maintain the intercreditor agreements in effect.
On the morning of November 27, 1998, a private equity group specializing in
investments in distressed companies proposed a transaction to IMC in which it
would acquire IMC. However, the group rescinded its proposed offer to IMC that
same day.
Despite the efforts of IMC and DLJ, at the end of the initial 45-day
standstill period, no potential acquiror had emerged that was willing to enter
into a letter of intent to effect a change of control in IMC. At that time, the
Greenwich Funds indicated that they would enter into a letter of intent to
invest additional capital in IMC and contemplated arranging for credit
facilities to permit IMC to refinance its existing bank loans and credit
facilities, if required. The Greenwich Funds proposed a transaction in which
they would obtain newly issued common stock equal to approximately 95% of the
outstanding equity interests of IMC on a fully diluted basis, leaving IMC's
existing common shareholders with 5% of the outstanding equity of IMC and the
possibility of existing common shareholders receiving warrants for additional
common equity on terms to be negotiated.
As no other investor had come forward which was willing to enter into a
letter of intent with IMC that would satisfy the requirements of the
intercreditor agreements, the IMC Board of Directors, based in part on advice
and analyses provided by DLJ and J.P. Morgan, believed that the proposal by the
Greenwich Funds was superior to any other alternative available to IMC. Based on
the recommendation of the special committee of independent directors, and
approved by the IMC Board of Directors, the IMC Board of Directors directed IMC
to enter into the letter of intent with the Greenwich Funds at that time so long
as the Greenwich Funds would agree that IMC could continue its marketing efforts
to seek a transaction more favorable to IMC's shareholders and creditors than
that proposed by the Greenwich Funds. The Greenwich Funds accepted that
condition and the Greenwich Funds and IMC executed a letter of intent on
November 27, 1998. Entering into the letter of intent at that time satisfied the
conditions of the intercreditor agreements, and the standstill period with IMC's
warehouse lenders and BankBoston was extended to mid-January 1999.
After IMC entered into the letter of intent with the Greenwich Funds on
November 27, 1998, DLJ continued its efforts to locate an alternative
transaction that would be more favorable to IMC's shareholders and creditors
than the transaction outlined in the letter of intent with the Greenwich Funds.
In an effort to locate a more favorable transaction, DLJ again contacted the
entities previously contacted by DLJ that were deemed to be suitable and that
had shown an interest. At the same time, IMC, the special committee of
independent directors and its Board of Directors, in consultation with J.P.
Morgan and DLJ, continued to analyze other alternatives to effecting the
transaction proposed by the Greenwich Funds including, among other things, the
possibilities of selling IMC's assets or divisions and of liquidating IMC in
both bankruptcy and non-bankruptcy scenarios. From the time IMC's liquidity
crisis was identified in September 1998 through the date IMC entered into an
agreement with the Greenwich Funds, IMC's Board of Directors met more than 15
times to consider those issues.
In the final stages of negotiations, the Greenwich Funds agreed to reduce
the percentage of the total outstanding equity interest in IMC that the
Greenwich Funds would receive as a result of the transaction from 95% to about
93.5% in exchange for the elimination of any right of IMC common shareholders to
receive warrants to acquire additional equity in IMC following the completion of
the transaction.
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At the same time that IMC was negotiating an agreement with the Greenwich
Funds, IMC and the Greenwich Funds were also negotiating amended and restated
intercreditor agreements with IMC's three largest mortgage warehouse lenders and
with BankBoston. Negotiations between IMC and the Greenwich Funds were delayed
while the Greenwich Funds went through extensive negotiations with IMC's largest
mortgage warehouse lenders and BankBoston concerning the terms on which they
would be willing to continue the intercreditor agreements following the signing
of an agreement for a change of control.
During the same period, IMC took all steps necessary to prepare a filing
for protection under Chapter 11 of the United States Bankruptcy Code, which the
special committee of independent directors and the IMC Board of Directors
believed would be required if the Greenwich Funds did not reach resolution with
IMC's creditors and IMC did not enter into a definitive agreement with the
Greenwich Funds. On February 11, 1999, the Greenwich Funds and IMC entered into
an amendment to the loan agreement with the Greenwich Funds which made an
additional $5 million available to IMC for working capital purposes. The
Greenwich Funds and BankBoston did not agree on terms satisfactory to both
parties for a continuation of the interceditor agreement with BankBoston, and on
February 18, 1999, the Greenwich Funds purchased, at a discount, $87.5 million
of secured indebtedness then owed by IMC to BankBoston.
On February 18, 1999, IMC entered into amended and restated intercreditor
agreements with its three largest mortgage warehouse lenders and with the
Greenwich Funds relating to the revolving credit facility, the loan agreement
with the Greenwich Funds and the amendment to the loan agreement. Under these
agreements, as amended, the lenders agreed to keep their respective facilities
in place through the acquisition and for twelve months thereafter, if the
acquisition by the Greenwich Funds is consummated within five months, subject to
earlier termination in certain events as provided in the intercreditor
agreements. If the proposed transaction with the Greenwich Funds is not
consummated within such five-month period, after that period, those lenders
would no longer be subject to the requirements of the amended and restated
intercreditor agreements and would be free to exercise remedies, if desired,
under their respective loan agreements.
On February 16, 17 and 18, 1999, IMC's special committee of independent
directors and IMC's Board of Directors held meetings in which they reviewed
alternatives to the Greenwich Funds proposed transaction with IMC's management,
DLJ and J.P. Morgan. As a result of that review, and after receiving a fairness
opinion from J.P. Morgan, the special committee of independent directors
determined that entering into a definitive agreement with the Greenwich Funds
was the best alternative available to IMC from the viewpoint of both IMC's
shareholders and creditors and that no other alternative was available that was
more likely to provide some value for IMC's shareholders, and to result in
payment in full to IMC's creditors over time, and recommended to IMC's Board of
Directors that it approve the proposed transaction with the Greenwich Funds. As
a result of the special committee's recommendation and discussions with DLJ, and
after receiving a fairness opinion from DLJ, IMC's Board of Directors determined
that entering into a definitive agreement with the Greenwich Funds was the best
alternative available to IMC from the viewpoint of both IMC's shareholders and
creditors and that no other alternative was available that was more likely to
provide some value for IMC's shareholders, and to result in payment in full to
IMC's creditors over time. The Board of Directors then approved a merger between
IMC and a subsidiary wholly owned by the Greenwich Funds and adopted the merger
agreement and recommended that the merger agreement be submitted to a vote of
IMC's shareholders. IMC entered into the merger agreement with the Greenwich
Funds on February 19, 1999. The merger agreement was terminated and recast as an
acquisition agreement on March 31, 1999. The Acquisition Agreement provides for
the issuance to the Greenwich Funds of the same percentage of shares of common
stock directly and not pursuant to the merger transaction contemplated by the
merger agreement and otherwise on economic terms that are substantially the
same.
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Also, on February 19, 1999, IMC entered into an amended and restated
consulting and fee agreement with an affiliate of the Greenwich Funds. In July
1998, in connection with the initial investment by certain of the Greenwich
Funds in $40 million of Class A preferred stock of IMC, IMC entered into a
consulting and fee agreement with such affiliate, under which the affiliate
would provide financial and managerial advisory consulting services in return
for an annual fee of $400,000 per year. Under the amended consulting agreement,
the Greenwich Funds affiliate will be entitled to receive an additional fee of
$125,000 for the period ending July 14, 1999 and $700,000 per year thereafter.
IMC also entered into a consulting agreement with Commercial Credit, an
affiliate of Travelers. Under this agreement, Commercial Credit provides advice
and recommendations to the management and Board of Directors of IMC with respect
to various aspects of IMC's business, including business plans and loan
underwriting criteria. Under the consulting agreement, Commercial Credit
receives fees equal to 150% of its actual costs of providing such services.
Certain Accounting Considerations
Interest-only and Residual Certificates
The Company purchases and originates loans for the purpose of sale through
securitizations and whole loan sales to institutional investors. In a
securitization transaction, the Company sells a pool of mortgages to a trust
which simultaneously sells senior interests to third-party investors. The
Company retains the residual interests (or a portion thereof) represented by
residual class certificates and interest-only certificates. The Company
typically retains the rights to service the pool of mortgages owned by the
trust. In addition, by retaining the residual class certificates, the Company is
entitled to receive the excess cash flows generated by the securitized loans
calculated as the difference between (a) the monthly interest payments from the
loans and (b) the sum of (i) pass-through interest paid to third-party
investors, (ii) trustee fees, (iii) third-party credit enhancement fees, and
(iv) servicing fees. The Company's right to receive this excess cash flow stream
begins after the satisfaction of certain over-collateralization requirements
that are used to provide credit enhancement that is specific to each
securitization transaction.
The Company initially records these securities at their allocated cost based
upon the present value of the interest in the cash flows retained by the Company
after considering various economic factors, including interest rates, collateral
value and estimates of the value of future cash flows from the securitized
mortgage pools under expected loss and prepayment assumptions discounted at a
market yield. The weighted average rate used to discount the cash flows was 16%
at December 31, 1998 based on the risks associated with each securitized
mortgage pool. The rates used to discount the cash flows increased from a range
of 11% to 14.5% prior to October 1, 1998 to 16% after September 30, 1998 based
on the adverse market conditions and volatility in asset-backed and other
capital markets. See Note 17 of Notes to Consolidated Financial Statements. The
Company utilizes prepayment and loss curves, which the Company believes will
approximate the timing of prepayments and losses over the life of the
securitized loans. Prepayments on fixed rate loans securitized by the Company
are expected to gradually increase from a constant prepayment rate ("CPR") of 4%
to 28% in the first year of the loan and remain at 28% thereafter. The Company
currently expects prepayments on adjustable rate loans to increase gradually
from a CPR of 4% to 35% in the first year of the loan and remain at 35%
thereafter. The CPR measures the annualized percentage of mortgage loans which
will be prepaid during a given period. The CPR represents the annual prepayment
rate over the year, expressed as a percentage of the principal amount
outstanding at the beginning of the period, without giving effect to regularly
scheduled amortization payments. In 1998, the Company revised its loss curve
assumption used to approximate the timing of losses over the life of the
securitized loans. The Company expects losses from defaults to gradually
increase from zero in the first six months of the loan to 175 basis points after
36 months. Prior to October 1998, the loss curve assumption gradually increased
from zero in the first six months of
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the loan to 100 basis points after 36 months. The revised loss curve and
discount rate assumptions resulted in a decrease in the estimated fair value of
the Company's interest-only and residual certificates of approximately $32.3
million and $52.3 million, respectively, which comprise the market valuation
adjustment of $84.6 million for the year ended December 31, 1998.
Mortgage Servicing Rights
Effective January 1, 1996, the Company adopted SFAS 122. Because SFAS 122
prohibited retroactive application, the historical accounting results for the
periods ended December 31, 1994 and 1995 have not been restated and,
accordingly, the accounting results for the year ended December 31, 1996 are not
comparable to any previous period. In June 1996, the FASB released SFAS 125,
which superseded SFAS 122 and was adopted by the Company January 1, 1997.
SFAS 122 required that a mortgage banking entity recognize as a separate asset
the rights to service mortgage loans for others. Mortgage banking entities that
acquire or originate loans and subsequently sell or securitize those loans and
retain the mortgage servicing rights are required to allocate the total cost of
the loans between the mortgage servicing rights and the mortgage loans. The
Company was also required to assess capitalized mortgage servicing rights for
impairment based upon the fair value of those rights. The impact of the adoption
of SFAS 122 on the Company's Statement of Operations for the year ended December
31, 1996 resulted in additional gain on sales of loans of approximately $6.6
million and an additional pro forma provision for income tax expense of
approximately $2.6 million. The effect on unaudited pro forma net income and pro
forma net income per common share for the year ended December 31, 1996 was an
increase of $4.1 million and $0.21 per share, respectively.
SFAS 125 addresses the accounting for all types of securitization transactions,
securities lending and repurchase agreements, collateralized borrowing
arrangements and other transactions involving the transfer of financial assets.
SFAS 125 distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. SFAS 125 is generally effective for
transactions that occur after December 31, 1996 and has been applied
prospectively. SFAS 125 requires the Company to allocate the total cost of
mortgage loans sold among the mortgage loans sold (servicing released),
interest-only and residual certificates and servicing rights based on their
relative fair values. The Company is required to assess the interest-only and
residual certificates and servicing rights for impairment based upon the fair
value of those assets. SFAS 125 also requires the Company to provide additional
disclosure about the interest-only and residual certificates in its
securitizations and to account for these assets each quarterly reporting period
at fair value in accordance with SFAS 115. The application of the provisions of
SFAS 125 did not cause earnings to differ materially from the results, which
would have been reported under SFAS 122.
Gain on Sale of Loans, Net
Gain on sale of loans, net, which arises primarily from securitizations and
loans sold to third parties, includes all related revenues and direct costs,
including the proceeds from sales of residual class certificates, the value of
such certificates, hedging gains or losses and underwriting fees and other
related securitization expenses and fees. See " -- Transactions with
ContiFinancial -- Additional Securitization Transaction Expense."
Net Warehouse Interest Income
Net warehouse interest income is interest earned from the Company's mortgage
loans, which generally carry long-term interest rates, less interest expense on
borrowings to finance the funding of such mortgage loans. The Company generally
sells loans in its inventory within 180 days and finances such loans under its
warehouse finance facilities, which bear short-term interest rates. Ordinarily,
short-term interest rates are lower than long-term interest
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rates, and the Company earns net interest income from this difference, or
spread, during the period the mortgage loans are held by the Company.
Servicing Fees
The Company generally retains servicing rights and recognizes servicing income
from fees and late payment charges earned for servicing the loans owned by
certificate holders and others. Servicing fees are generally earned at a rate of
approximately 1/2 of 1%, on an annualized basis, of the unamortized loan balance
being serviced.
Other Revenues
Other revenues consists primarily of the recognition of the increase or
accretion of the discounted value of interest-only and residual certificates
over time and prepayment penalties received from borrowers.
Transactions with ContiFinancial
Additional Securitization Transaction Expense
The Company, in conjunction with the start up of its operations, maintained an
investment banking relationship with ContiFinancial from August 1993 to June
1996. As part of this relationship, ContiFinancial provided warehouse and
revolving credit facilities to the Company and acted as placement agent and
underwriter of certain securitizations. In addition, as part of its cash flow
management strategy, the first six securitizations were structured so that
ContiFinancial received, in exchange for cash, a portion of the interest-only
and residual interest in such securitizations. These transactions reduced the
Company's gain on sale of loans by approximately $5.5 million in 1995 and $4.2
million in 1996. ContiFinancial also held a warrant to purchase 3.0 million
shares of Common Stock (subject to certain adjustments) for a de minimis amount,
of which 3.0 million shares have been issued.
Sharing of Proportionate Value of Equity
Prior to March 26, 1996, the Company's financing and investment banking
agreements with ContiFinancial included the ContiFinancial Value Sharing
Arrangement ("Conti VSA"). The existence of the Conti VSA had no cash impact on
the Company, but resulted in reductions of $4.2 million and $2.6 million in the
Company's pre-tax income for the years ended December 31, 1995 and 1996,
respectively. The Conti VSA was converted on March 26, 1996 into an option
entitling ContiFinancial on exercise to approximately 18% of the equity of the
Partnership for a de minimus amount (the "Conti Option"). Consequently,
subsequent to March 26, 1996, no liability has been reflected on the Company's
balance sheet, and no expense has been reflected on the Company's income
statement with respect to the Conti VSA subsequent to that date.
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Results of Operations
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997.
Net loss for the year ended December 31, 1998 was $100.5 million representing a
decrease of $148.4 million or 309.8% from net income of $47.9 million for the
year ended December 31, 1997.
The decrease in income resulted principally from an $84.6 million mark-to-market
adjustment in the value of the Company's interest-only and residual
certificates, of which $52.3 million resulted from an increase to 16% in the
discount rate utilized and $32.3 million resulted from an increase in loss
assumptions. The Company revised the loss assumption used to approximate the
timing of losses over the life of the securitized loans and the discount rate
used to present value the projected cash flow retained by the Company as a
result of adverse market conditions and emerging trends in the Company's
serviced loan portfolio. Also contributing to the decrease in net income were
$30.8 million of interest expense associated with the transaction with the
Greenwich Funds and $22.4 million of hedge losses related to realized losses on
the Company's hedging instruments. Offsetting the decrease in net income was an
increase in gain on sale of loans of $24.9 million or 13.8% to $205.9 million
for the year ended December 31, 1998 from $181.0 million for the year ended
December 31, 1997 and a $4.9 million or 19.8% increase in net warehouse interest
income to $29.6 million for the year ended December 31, 1998 from $24.7 million
for the year ended December 31, 1997. Also offsetting the decrease in net income
was a $28.3 million or 165.8% increase in servicing fees to $45.4 million for
the year ended December 31, 1998 from $17.1 million for the year ended December
31, 1997 and a $24.3 million or 151.8% increase in other revenues to $40.3
million for the year ended December 31, 1998 from $16.0 million for the year
ended December 31, 1997.
Contributing to the decrease in net income was a $42.2 million or 51.4% increase
in compensation and benefits to $124.2 million for the year ended December 31,
1998 from $82.1 million for the year ended December 31, 1997, of which $15.0
million related to the compensation and benefits related to the acquisitions of
National Lending Center and Central Money Mortgage (which occurred in July 1997)
and Residential Mortgage Corporation and Alternative Capital Group (which
occurred during October and November 1997, respectively) and the remainder
related primarily to the growth of the Company through the nine months ended
September 30, 1998. Also contributing to the decrease in net income was a $65.5
million or 100.8% increase in selling, general and administrative expenses to
$130.5 million for the year ended December 31, 1998 from $65.0 million for the
year ended December 31, 1997, of which $6.5 million related to the acquisitions
of National Lending Center, Central Money Mortgage, Residential Mortgage
Corporation and Alternative Capital Group and the remainder related primarily to
the growth of the Company through the nine months ended September 30, 1998.
Contributing to the decrease in net income was also a $14.2 million or 99.1%
increase in other interest expense to $28.4 million for the year ended December
31, 1998 from $14.3 million for the year ended December 31, 1997.
Net loss before taxes was increased by a provision for income taxes of $679,000
for the year ended December 31, 1998 compared to a provision for income taxes of
$29.5 million for the year ended December 31, 1997. No income tax benefit has
been applied to the net loss for the year ended December 31, 1998 as the Company
determined it cannot be assured that the income tax benefit could be realized in
the future.
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<PAGE>
Revenues
The following table sets forth information regarding components of the Company's
revenues for the years ended December 31, 1997 and 1998:
For the Year
Ended December 31,
------------------------
1997 1998
--------- ---------
(in thousands)
Gain on sales of loans $180,963 $205,924
Warehouse interest income 123,432 147,937
Warehouse interest expense (98,720) (118,345)
-------- --------
Net warehouse interest income 24,712 29,592
-------- --------
Servicing fees 17,072 45,382
Other 16,012 40,311
-------- --------
Total revenues $238,759 $321,209
======== ========
Gain on Sales of Loans. For the year ended December 31, 1998, gain on sales of
loans increased to $205.9 million from $181.0 million for the year ended
December 31, 1997, an increase of 13.8%. The total volume of loans produced
increased by $284.0 million or 4.8% to approximately $6.2 billion for the year
ended December 31, 1998 compared to a total volume of approximately $5.9 billion
for the year ended December 31, 1997. During the year ended December 31, 1998,
as a result of its acquisitions in the year ended December 31, 1997, the Company
increased its loan production from direct lending. During the fourth quarter of
1998, the Company decreased its correspondent lending activities to better
manage its cash flow. Originations by the Company's correspondent network
decreased by $503.0 million or 11.6% to approximately $3.8 billion for the year
ended December 31, 1998 from approximately $4.3 billion for the year ended
December 31, 1997, while production from the Company's broker network and direct
lending operations increased by $787.0 million or 50.7% to approximately $2.3
billion for the year ended December 31, 1998 from approximately $1.6 billion for
the year ended December 31, 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 year ended December 31, 1998, the Company increased the amount of
loans sold in the whole loan market to better manage its cash flow. Mortgage
loans sold in the whole loan market increased by approximately $1.4 billion to
approximately $1.5 billion or 955.2% for the year ended December 31, 1998
compared to approximately $145 million for the year ended December 31, 1997.
Mortgage loans delivered to securitization trusts increased by $259 million, an
increase of 5.3% to $5.1 billion for the year ended December 31, 1998 from $4.9
billion for the year ended December 31, 1997.
The gain on the sale of loans in a securitization represents the present value
of the difference (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 by the Company to
compute the present value of the spread ranged from 11% to 14.5% during 1997 and
the nine months ended September 30, 1998 and was 16% for the fourth quarter of
1998. The spread is adjusted for estimated prepayments and losses. The Company
utilizes assumed prepayment and loss curves, which the
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<PAGE>
Company believes will approximate the timing of prepayments and losses over the
life of the securitized loans. During the year ended December 31, 1998,
prepayment assumptions used to calculate the gain on sales of securitized loans
reflect the Company's expectations 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 that 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 first six months
of the year ended December 31, 1997, the maximum CPR used to compute gain on
sales of fixed and adjustable rate securitized loans was 27% and 30%,
respectively. The CPR measures the annualized percentage of mortgage loans which
prepay during a given period. The CPR represents the annual prepayment rate over
the year, expressed as a percentage of the principal balance of the mortgage
loan outstanding at the beginning of the period, without giving effect to
regularly scheduled amortization payments. During the three months ended
December 31, 1998, the loss assumption used to calculate the gain on sales of
securitized loans reflects the Company's expectations that losses from defaults
would gradually increase from zero per year in the first six months of the loan
to 175 basis points per year after 36 months. During the nine months ended
September 30, 1998 and the year ended December 31, 1997, the assumed loss
assumption used to calculate gain on sales of securitized loans reflected the
Company's expectation that losses from defaults would gradually increase from
zero in the first six months of the loan to 100 basis points per year after 36
months. See Note 10 of Notes to Consolidated Financial Statements.
The net gain on sale of loans as a percentage of loans sold and securitized
approximated 3.1% for the year ended December 31, 1998 compared to 3.7% for the
year ended December 31, 1997. The decrease in gain on sale as a percentage of
loans sold and securitized for the year ended December 31, 1998 compared to the
year ended December 31, 1997 is primarily the result of investors demanding
wider spreads over treasuries for newly issued asset-backed securities and a
greater percentage of whole-loan sales in the year ended December 31, 1998. The
weighted average spread over treasuries for the securitization fixed rate
transactions the Company completed during the year ended December 31, 1998
increased approximately 47 basis points or 59% from the fixed rate
securitization transactions the Company completed during the year ended December
31, 1997. The spread over treasuries for the securitization transaction the
Company completed in December 1998 was the most unfavorable of the fifteen
securitizations that the Company has completed in the past two years. The impact
on gain on sales of loans of the widening of the spreads demanded by
asset-backed investors 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. See Note 5 of Notes to Consolidated
Financial Statements.
The Company has historically sold United States Treasury securities short to
hedge against interest rate movements affecting the mortgage loans held for
sale. Prior to September 1998, 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.
In September, 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, requiring the Company to pay approximately
$47.5 million. This devaluation was not offset by an equivalent increase in the
gain on sale of loans at the time of securitization because investors demanded
wider spreads over the treasuries to acquire the Company's asset-backed
securities. Of the $47.5 million in hedge devaluation, approximately $25 million
was closed at the
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<PAGE>
time the Company priced two securitizations and was reflected as an offset to
gain on sales of loans and approximately $22.4 million was charged to operations
as a hedge loss. At December 31, 1998, the Company had no open hedge positions.
As described above, through September 30, 1998 the Company has used discount
rates ranging from 11% to 14.5% to present value the difference (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. As a result of
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, the discount rates utilized by the Company to present value the
spread described above were increased to 16% in the fourth quarter of 1998,
resulting in a mark to market adjustment of $52.3 million. A change in the
discount rate of 16% used to present value the spread described above of plus or
minus 1%, 3% or 5% would result in a corresponding change in the value of the
interest only and residual certificates at December 31, 1998 of approximately
2.0%, 6.0% and 9.5%, respectively.
Net Warehouse Interest Income. Net warehouse interest income increased by $4.9
million or 19.8% to $29.6 million for the year ended December 31, 1998 from
$24.7 million for the year ended December 31, 1997. 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 average
cost of warehouse funds decreased during 1998 by approximately 6% primarily as a
result of a reduction in the spread over LIBOR charged by the Company's
warehouse lenders and a decline in the average LIBOR during the year ended
December 31, 1998 compared to the average LIBOR during the year ended December
31, 1997.
Servicing Fees. Servicing fees increased to $45.4 million for the year ended
December 31, 1998 from $17.1 million for the year ended December 31, 1997, an
increase of 165.8%. Servicing fees for the year ended December 31, 1998 were
positively affected by an increase in mortgage loans serviced over the prior
period. The Company increased its average servicing portfolio by $4.8 billion
and $1.9 billion, or 223.9% and 27.7%, during the years ended December 31, 1997
and 1998, respectively.
Other. Other revenues increased to $40.3 million or 151.8% for the year ended
December 31, 1998 from $16.0 million for the year ended December 31, 1997
primarily as a result of increased accretion income attributable to increased
investment in interest-only and residual certificates and increased prepayment
penalties from borrowers who prepay the outstanding balance of their mortgage.
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<PAGE>
Expenses
The following table sets forth information regarding components of the Company's
expenses for the year ended December 31, 1997 and 1998:
For the Year
Ended December 31,
-----------------------
1997 1998
-------- --------
(in thousands)
Compensation and benefits $ 82,051 $124,234
Selling, general and administrative 64,999 130,547
Other interest expense 14,280 28,434
Hedge loss -- 22,351
Market valuation adjustment -- 84,638
Interest expense - Greenwich Funds -- 30,795
-------- --------
Total expenses $161,330 $420,999
======== ========
Compensation and benefits increased by $42.2 million or 51.4% to $124.2 million
for the year ended December 31, 1998 from $82.1 million for the year ended
December 31, 1997, principally due to an increase in the number of employees
related to the Company's increased mortgage loan servicing portfolio and $15.0
million of compensation and benefits relating to the acquisitions of National
Lending Center and Central Money Mortgage (which occurred in July 1997) and
Residential Mortgage Corporation and Alternative Capital Group (which occurred
in October and November 1997, respectively). The increase in compensation and
benefits was partially offset by a decrease in executive bonuses of $3.2 million
during the year ended December 31, 1998 payable under 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 $65.5 million or
100.8% to $130.5 million for the year ended December 31, 1998 from $65.0 million
for the year ended December 31, 1997 principally due to an increase in servicing
costs as a result of an increase in mortgage loan servicing portfolio, $6.5
million relating to the acquisitions of National Lending Center, Central Money
Mortgage, Residential Mortgage Corporation and Alternative Capital Group, an
increase in the provision for loan losses of $12.5 million and an increase in
amortization expense related to capitalized mortgage servicing rights of $12.6
million.
Other expense increased by $14.2 million or 99.1% to $28.4 million for the year
ended December 31, 1998 from $14.3 million for the year ended December 31, 1997
principally as a result of increased interest expense due to increased interest
only and residual borrowings.
Hedge losses, which represent the realized loss on the Company's hedging
instruments for the year ended December 31, 1998, increased to $22.4 million for
the year ended December 31, 1998 from $0 for the year ended December 31, 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.
Approximately $25 million of the realized loss in these
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<PAGE>
hedge transactions in September 1998 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 year ended December 31, 1998. Realized losses in
these instruments of $22.4 million related to hedge positions which were closed
in September and October 1998 unrelated to a securitization transaction and were
recognized as a hedge loss. Prior to September, 1998, unrealized losses on hedge
instruments were deferred and recognized upon securitization as an adjustment to
the carrying value of the hedged mortgage loans.
Market valuation adjustment, which represents the realized loss on the Company's
interest-only and residual certificates for the year ended December 31, 1998,
increased to $84.6 million for the year ended December 31, 1998 from $0 for the
year ended December 31, 1997.
In 1998, the Company revised the loss assumption used to approximate the timing
of losses over the life of the securitized loans and the discount rate used to
present value the projected cash flow retained by the Company. Previously the
Company expected losses from defaults to gradually increase from zero in the
first six months of securitization to 100 basis points after 36 months. During
the fourth quarter of 1998, as a result of adverse market conditions in the
non-conforming mortgage industry and emerging trends in the Company's serviced
loan portfolio, the Company revised its loss curve so that expected defaults
gradually increase from zero in the first six months of securitization to 175
basis points after 36 months. The Company believes the adverse market conditions
affecting the non-conforming mortgage industry may limit the Company's
borrowers' ability to refinance existing delinquent mortgage loans serviced by
IMC with other non-conforming mortgage lenders that market their products to
borrowers that are less credit-worthy and may increase the frequency of
defaults. Previously, the Company discounted the present value of projected cash
flows retained by the Company at discount rates ranging from 11% to 14.5%.
During the fourth quarter of 1998, as a result of adverse market conditions, the
Company adjusted to 16% the discount rate used to present value the projected
cash flow retained by the Company (see Notes 3, 5 and 17 of Notes to
Consolidated Financial Statements). The revised loss curve and discount rate
assumptions resulted in a decrease in the estimated fair value of the
interest-only and residual certificates of approximately $32.3 million and $52.3
million, respectively, which comprises the market valuation adjustment of $84.6
million for the year ended December 31, 1998.
Interest expense - Greenwich Funds represents costs associated with a $33
million standby revolving credit facility dated as of October 12, 1998 and
entered into by Greenwich Funds and the Company on October 15, 1998. Interest
expense related to the transaction with the Greenwich Funds includes accrued
interest at 10%, amortization of a $3.3 million commitment fee, amortization of
the value attributable to the Class C exchangeable preferred stock issued, and
amortization of the value assigned to the beneficial conversion feature
associated with the Exchange Option in favor of the Greenwich Funds under the
terms of the standby revolving credit facility (See Notes 3 and 4 of Notes to
Consolidated Financial Statements).
Income Taxes. The provision for income taxes for the year ended December 31,
1998 was approximately $679,000 or 0%, which differed from the federal tax rate
35% primarily due to state income taxes, the non-deductibility for tax purposes
of a portion of interest expense - Greenwich Funds, amortization expenses
related to goodwill and a full valuation allowance established against the
deferred tax asset (see Note 12 of Notes to Consolidated Financial Statements).
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<PAGE>
Year Ended December 31,1997 Compared to Year Ended December 31, 1996
Net income for the year ended December 31, 1997 was $47.9 million representing
an increase of $30.0 million or 167.3% over pro forma net income of $17.9
million for the year ended December 31, 1996. Pro forma net income is calculated
on the basis of historical net income, adjusted for a pro forma income tax
expense as if the Company had been taxable as a corporation since its inception.
The increase in net income resulted principally from increases in net gain on
sale of loans of $138.9 million or 330.1% to $181.0 million for the year ended
December 31, 1997 from $42.1 million for the year ended December 31, 1996. Also
contributing to the increase in net income was an $11.8 million or 91.1%
increase in net warehouse interest income to $24.7 million for the year ended
December 31, 1997 from $12.9 million for the year ended December 31, 1996, a
$11.5 million or 206.9% increase in servicing fees to $17.1 million for the year
ended December 31, 1997 from $5.6 million for the year ended December 31, 1996
and an $10.9 million or 214.5% increase in other revenues to $16.0 million for
the year ended December 31, 1997 from $5.1million for the year ended December
31, 1996.
The increase in income was partially offset by a $66.0 million or 412.6%
increase in compensation and benefits to $82.1 million for the year ended
December 31, 1997 from $16.0 million for the year ended December 31, 1996, of
which $48.9 million consisted of compensation and benefits relating to the
acquisitions of Mortgage America, CoreWest, Equity Mortgage, American Reduction,
National Lending Center, Central Money Mortgage, Residential Mortgage
Corporation and Alternative Capital Group (collectively, the "Acquisitions") and
the remainder related primarily to the growth of the Company. The increase in
income was also partially offset by a $49.3 million or 315.3% increase in
selling, general and administrative expenses to $65.0 million for the year ended
December 31, 1997 from $15.7 million for the year ended December 31, 1996, of
which increase $27.9 million consisted of expenses relating to the Acquisitions
for the year ended December 31, 1997 and the remainder related primarily to the
growth of the Company. The increase in income was further offset by a $12.0
million or 515.1% increase in other interest expense to $14.3 million for the
year ended December 31, 1997 from $2.3 million for the year ended December 31,
1996. Finally, income for the year ended December 31, 1997 was favorably
affected by a $2.6 million or 100% decrease in the sharing of proportionate
value of equity representing the Conti VSA to $0 for the year ended December 31,
1997 from $2.6 million for the year ended December 31, 1996.
Income before taxes was reduced by a provision for income taxes of $29.5 million
for the year ended December 31, 1997 compared to a pro forma provision for
income taxes of $11.2 million for the year ended December 31, 1996, representing
an effective tax rate of approximately 38.1% for the year ended December 31,
1997. The provisions for income taxes prior to June 24, 1996 are pro forma
amounts because prior to that date the Company operated as a partnership and did
not pay income taxes.
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<PAGE>
Revenues
The following table sets forth information regarding components of the Company's
revenues for the year ended December 31, 1996 and 1997:
For the Year
Ended December 31,
------------------------
1996 1997
--------- ---------
(in thousands)
Revenues:
Gain on sales of loans $ 46,230 $ 180,963
Additional securitization transaction expense (4,158) --
--------- ---------
Gain on sale of loans, net 42,072 180,963
--------- ---------
Warehouse interest income 37,463 123,432
Warehouse interest expense (24,535) (98,720)
---------
Net warehouse interest income 12,928 24,712
--------- ---------
Servicing fees 5,562 17,072
Other 5,092 16,012
--------- ---------
Total revenues $ 65,654 $ 238,759
========= =========
Gain on Sale of Loans, Net.
For the year ended December 31, 1997, gain on sale of loans increased to $181.0
million from $46.2 million for the year ended December 31, 1996, an increase of
291.4%, reflecting increased loan production and securitizations for the year
ended December 31, 1997. Additional securitization expense decreased to $0 for
the year ended December 31, 1997 from $4.2 million for the year ended December
31, 1996. For the year ended December 31, 1997, gain on sale of loans, net,
increased to $181.0 million from $42.1 million for the year ended December 31,
1996, an increase of 330.1%, reflecting increased loan production and
securitizations in the year ended December 31, 1997.
The total volume of loans produced increased by 232.9% to approximately $5.9
billion for the year ended December 31, 1997 compared with a total volume of
$1.8 billion for the year ended December 31, 1996. Originations by the Company's
correspondent network increased 174.5% to $4.3 billion for the year ended
December 31, 1997 from $1.6 billion for the year ended December 31, 1996, while
production from the Company's broker network and direct lending operations
increased to $1.6 billion or 725% for the year ended December 31, 1997 from $188
million for the year ended December 31, 1996. Production volume increased during
the 1997 period due to : (i) the Company's expansion program; (ii) the increase
of its securitization activity; (iii) the growth of its loan servicing
capability; and (iv) the Acquisitions, which accounted for approximately $1.2
billion in residential mortgage loans originated during the year ended December
31, 1997.
The gain on sale as a percentage of loans sold and securitized decreased to 3.7%
for the year ended December 31, 1997 from 4.4% for the year ended December 31,
1996. The decrease in the gain on sale percentage was primarily due to the
increase in securitization of adjustable rate mortgage loans, higher premiums
paid on loan production and higher prepayment speed assumptions used to
calculate the gain on sale of securitized loans. In 1996, less than 2% of the
$935 million mortgage loans securitized by the Company were adjustable rate
mortgages. In 1997, approximately $1.7 billion or 34% of the $4.9 billion
mortgage loans securitized by the Company were adjustable rate mortgages. The
prepayment curve utilized by the Company to recognize the gain on sale of
securitized fixed
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<PAGE>
rate loans reaches a maximum CPR of 28% as compared to the prepayment curve
utilized to recognize the gain on sale of adjustable rate loans, which reaches a
maximum CPR of 35%. The higher prepayment assumption for adjustable rate loans,
which is based on historical adjustable rate loan prepayment patterns, results
in the recognition of a lower gain on sale for adjustable rate loans than for
fixed rate loans. The average premium paid for loan production was 5.0% for the
year ended December 31, 1996 compared to 5.3% for the year ended December 31,
1997. The maximum CPR assumed for fixed mortgage loans securitized increased
from 26% for the year ended December 31, 1996 to 28% (35% for adjustable rate
mortgage loans) for the year ended December 31, 1997. The decrease in the gain
on sale percentage was partially offset by an increase in retail loan
production. Upfront points and origination fees related to retail loan
production are recognized as gain on sale at the time the loan is sold. Total
retail production increased from approximately $67 million for the year ended
December 31, 1996 to approximately $769 million for the year ended December 31,
1997.
Net Warehouse Interest Income
Net warehouse interest income increased to $24.7 million for the year ended
December 31, 1997 from $12.9 million for the year ended December 31, 1996, an
increase of 91.1%. The increase in the year ended December 31, 1997 reflected
higher interest income resulting primarily from increased mortgage loan
production and mortgage loans held for sale in inventory for longer periods of
time, partially offset by interest expense associated with warehouse facilities.
The mortgage loans held for sale increased to $1.7 billion at December 31, 1997,
an increase of 82.9%, from $914.6 million at December 31, 1996.
The increase in net warehouse interest income was partially offset by an
increase in the securitization of adjustable rate mortgage loans. In a fixed
rate mortgage loan securitization transaction, the Company receives the
pass-through rate of interest on the loans conveyed to the securitization trust
for the period between the cut-off date (generally the first day of the month a
securitization transaction occurs) and the closing date of the securitization
transaction (typically during the third week of the month). The cut-off date
represents the date when interest on the mortgage loans accrues to the
securitization trust rather than the Company. The pass-through rate, which is
less than the weighted average interest rate on the mortgage loans, represents
the interest rate to be received by investors who purchase passthrough
certificates in the securitization trust on the closing date. The Company
continues to incur interest expense on its warehouse financings related to loans
conveyed to the trust until the closing date, at which time the warehouse line
is repaid. In an adjustable rate mortgage loan securitization, the Company
receives no interest on mortgage loans conveyed to the securitization trust for
the period between the cut-off date and the closing date of the securitization.
For the year ended December 31, 1997, the Company incurred warehouse interest
expense of approximately $6.9 million related to the period between the cut-off
date and the closing date of adjustable rate mortgage loan securitizations for
which no corresponding interest income was recognized. The Company had an
insignificant amount of warehouse interest expense related to adjustable rate
mortgage loans securitized in 1996.
Servicing Fees
Servicing fees increased to $17.1 million for the year ended December 31, 1997
from $5.6 million for the year ended December 31, 1996, an increase of 206.9%.
Servicing fees for the year ended December 31, 1997 were positively affected by
an increase in mortgage loans serviced over the prior period. The Company
increased its servicing portfolio by $4.9 billion or 233.3% to $7.0 billion as
of December 31, 1997 from $2.1 billion as of December 31, 1996.
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<PAGE>
Other
Other revenues, consisting principally of the recognition of the increase or
accretion of the discounted value of interest on interest-only and residual
certificates, over time, and prepayment penalties, increased to $16.0 million or
214.5% for the year ended December 31, 1997 from $5.1 million in the year ended
December 31, 1996 as a result of increased securitization volume and investment
in interest-only and residual certificates.
Expenses
The following table sets forth information regarding components of the Company's
expenses for the year ended December 31, 1996 and 1997:
For the Year
Ended December 31,
---------------------
1996 1997
-------- --------
(in thousands)
Compensation and benefits $ 16,007 $ 82,051
Selling, general and administrative expenses 15,652 64,999
Other interest expense 2,321 14,280
Sharing of proportioante value of equity 2,555 0
-------- --------
Total expenses $ 36,535 $161,330
======== ========
Compensation and benefits increased by $66.0 million or 412.6% to $82.1 million
for the year ended December 31, 1997 from $16.0 million for the year ended
December 31, 1996, principally due to an increase in the number of employees
related to the Company's increased mortgage loan production, including $48.9
million of compensation and benefits relating to the Acquisitions, additions of
personnel to service the Company's increased loan servicing portfolio, and a
$2.4 million increase in executive incentive compensation from $2.6 million for
the year ended December 31, 1996 to $5.0 million for the year ended December 31,
1997. The Company's compensation and benefits should increase if the Company
expands; however, the amount of executive bonuses is directly related to
increases in the Company's earnings per share.
Selling, general and administrative expenses increased by $49.3 million or
315.3% to $65.0 million for the year ended December 31, 1997 from $15.7 million
for the year ended December 31, 1996. Excluding $27.9 million of compensation
and benefits relating to the Acquisitions, the increase was principally due to
an increase in underwriting, originating and servicing costs as a result of an
increase in the volume of mortgage loan production, an increase in amortization
expense related to capitalized servicing rights of $4.7 million and a $10.4
million increase in the provision for loan losses.
Other interest expense increased by $12.0 million or 515.3% to $14.3 million for
the year ended December 31, 1997 from $2.3 million for the year ended December
31, 1996 principally as a result of increased term debt borrowings.
The sharing of proportionate value of equity, representing the amount payable
under the Conti VSA, decreased to $0 for the year ended December 31, 1997 from
$2.6 million for the year ended December 31, 1996. The Company's obligation to
make payments under the Conti VSA terminated in March 1996.
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Pro Forma Income Taxes
The effective income tax rate for the year ended December 31, 1997 was
approximately 38.1%, which differed from the federal tax rate of 35% primarily
due to state income taxes. The increase in the provision for income taxes of
$18.3 million or 163.6% to $29.5 million for the year ended December 31, 1997
from the pro forma provision for income taxes of $11.2 million for the year
ended December 31, 1996 was proportionate to the increase in pre-tax income. The
provision for income taxes prior to June 24, 1996 is a pro forma amount because
prior to that date the Company operated as a partnership and did not pay any
income taxes.
Financial Condition
December 31, 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 $772.6 million or 100%
from $772.6 million at December 31, 1997 to $0 million at December 31, 1998 and
securities sold but not yet purchased decreased $775.3 million or 100.0% from
$775.3 million at December 31, 1997 to $0 million at December 31, 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.
Mortgage loans held for sale at December 31, 1998 were $946.4 million, a
decrease of $726.7 million or 43.4% from mortgage loans held for sale of $1.7
billion at December 31, 1997. Included in mortgages held for sale at December
31, 1998 and December 31, 1997 were $84.6 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 allowances at December 31,
1998 and December 31, 1997 were $24.0 million and $11.5 million, respectively.
Accounts receivable increased $23.3 million or 109.2% from $21.3 million at
December 31, 1997 to $44.7 million at December 31, 1998, primarily due to an
increase in servicing advances of $21.5 million. The increase in servicing
advances was due to an overall dollar increase in delinquencies from 1997 to
1998 as the Company's servicing portfolio increases and matures. As the servicer
for the securitization trusts, the Company is required to advance certain
principal, interest and escrow amounts to the securitization trust for
delinquent mortgagors and to pay expenses related to foreclosure activities. The
Company then collects the amounts from the mortgagors or from the proceeds from
liquidation of foreclosed properties. The Company expects the total dollar
amount of delinquencies to increase in future periods as the servicing portfolio
increases and securitization pools continue to mature.
Interest-only and residual certificates at December 31, 1998 were $468.8
million, representing an increase of $245.5 million or 110.0% from interest-only
and residual certificates of $223.3 million at December 31, 1997. Mortgage
servicing rights increased $17.4 million or 49.9% from $35.0 million at December
31, 1997 to $52.4 million at December 31, 1998. The increase in mortgage
servicing rights consists of capitalization of $35.9 million of servicing
rights, offset by amortization of $18.5 million. The increases in interest-only
and residual certificates and mortgage servicing rights resulted primarily from
the securitization of $5.1 billion in mortgage loans in seven transactions
during the year ended December 31, 1998. The increase in interest-only and
residual certificates was offset by a market valuation adjustment of $84.6
million resulting from the Company's revision of the loss curve assumption used
to approximate the timing of losses over the life of the securitized loans and
an increase in the
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discount rate used to present value the projected cash flow retained by the
Company. See Note 10 of Notes to Consolidated Financial Statements.
Warehouse financings due from correspondents decreased $23.1 million or 89.2%
from $25.9 million at December 31, 1997 to $2.8 million at December 31, 1998 due
to a decrease in committed warehouse financing the Company provided to
correspondents as a result of the Company's severely reduced liquidity.
Goodwill decreased $2.3 million from $92.0 million at December 31, 1997 to $89.6
million at December 31, 1998 due to amortization of $4.0 million partially
offset by contingent earnout payments of $1.6 million primarily related to
Mortgage Central Corp. and National Lending Center. Goodwill is being amortized
on a straight-line basis over periods from five to thirty years. The Company
reviews the potential impairment of goodwill on a non-discounted cash flow basis
to assess recoverability. The Company determined that there was no impairment of
goodwill at December 31, 1998 based on the projected cash flows of the acquired
companies. However, potential impairment in future periods may result from
several factors, including the proposed transaction with the Greenwich Funds,
the discontinuation of operations or sale of certain acquired companies, or
other factors including turmoil in the financial markets in which the acquired
companies and the Company operate.
Borrowings under warehouse financing facilities at December 31, 1998 were $984.6
million, a decrease of $748.0 million or 43.2% from warehouse financing
facilities of $1.7 billion at December 31, 1997. This decrease was a result of
decreased mortgage loans held for sale, caused by IMC's significant lenders
imposing restrictions on the availability of fundings to IMC. See " - Liquidity
and Capital Resources" and Note 3 of Notes to Consolidated Financial Statements.
Term debt and notes payable at December 31, 1998 was $432.7 million,
representing an increase of $302.3 million or 231.7% from 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, an
increase of $87.5 million in outstanding borrowings under the Company's working
capital line of credit, and $27.6 million outstanding under the $33 million
credit facility provided by the Greenwich Funds, net of a $3.0 million discount
related to the issuance of Class C preferred stock.
Accounts payable and accrued liabilities decreased $16.4 million or 51.7% from
$31.7 million at December 31, 1997 to $15.3 million at December 31, 1998,
primarily due to payment of accrued contingent stock payments related to
acquisitions and a $3.2 million decrease in accrued incentive compensation.
The Company's net deferred tax asset of $33.6 million was offset by a full
valuation allowance and after the offset, represents a decrease of $10.9 million
from a deferred tax liability of $10.9 million at December 31, 1997 to a
deferred tax asset, after valuation allowance, of $0 at December 31, 1998. The
decrease is primarily due to temporary differences in the recognition of market
valuation adjustments, income related to the Company's interest-only and
residual certificates for income tax purposes and a full valuation allowance on
the deferred tax asset.
Redeemable preferred stock, consisting of Class A ($19.0 million) and Class C
($18.3 million), was $37.3 million at December 31, 1998 compared to $0 at
December 31, 1997. In July 1998, the Company sold $50 million of Class A
redeemable preferred stock to certain of the Greenwich Funds and Travelers. The
Class A redeemable preferred stock was convertible into non-registered common
stock at $10.44 per share. As described in Note 4 of Notes to Consolidated
Financial Statements, the conversion feature was eliminated in October 1998. The
elimination of the conversion feature resulted in a discount to the Class A
redeemable preferred stock of approximately $32 million,
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which was charged to paid in capital and is being accreted to preferred stock
until the mandatory redemption dates beginning in 2008.
In October 1998, the Company issued 23,760.758 shares of Class C exchangeable
preferred stock to certain of the Greenwich Funds in conjunction with a $33
million credit facility provided by certain of the Greenwich Funds as described
in Note 4 of Notes to Consolidated Financial Statements. The preferred stock was
recorded at $18.3 million based on an allocation of the proceeds from the $33
million credit facility.
Stockholders' equity as of December 31, 1998 was $210.6 million, a decrease of
$43.5 million over stockholders' equity of $254.1 million at December 31, 1997.
Stockholders equity primarily increased for the year ended December 31, 1998 for
common stock issued under earn-out arrangements of $7.1 million, issuance of
debt with beneficial conversion feature of $18.2 million and elimination of the
conversion feature on the Class A preferred stock of $32.4 million, and
decreased as a result of a net loss of $100.5 million.
December 31, 1997 Compared to December 31, 1996
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 increased $113.1 million or 17.1% from $659.5 million at
December 31, 1996 to $772.6 million at December 31, 1997 and securities sold but
not yet purchased increased $114.3 million or 17.3% from $661.1 million at
December 31, 1996 to $775.3 million at December 31, 1997 due primarily to the
increase in fixed-rate mortgage loans held for sale at December 31, 1997 as
compared to December 31, 1996.
Mortgage loans held for sale at December 31, 1997 were $1.7 billion,
representing an increase of $758.6 million or 82.9% over mortgage loans held for
sale of $914.6 million at December 31, 1996. This increase was a result of the
Company's strategy at the time to increase its net warehouse interest income by
increasing its balance of mortgage loans held for sale. The increase in the
volume of loan originations, allowing the Company to increase its net warehouse
interest income, was a result of increased loans purchases and originations as
the Company expanded into new states, loan originations from the Acquisitions
since their effective dates and increased purchasing and origination efforts in
states in which the Company had an existing market presence.
Accounts receivable increased $18.6 million or 669.1% from $2.8 million at
December 31, 1996 to $21.3 million at December 31, 1997 primarily due to an
increase in servicing advances of $8.0 million, receivables from securitization
transactions of $4.2 million, and $2.6 million related to the Acquisitions.
Receivables from securitization transactions reflect short-term timing
differences in receiving amounts due from the securitization trusts. The
increase in servicing advances was due to an increase in advances by the Company
on loans it services due to an overall dollar increase in delinquencies from
1996 to 1997 as the Company's servicing portfolio increases and matures. As the
servicer for the securitization trusts, the Company is required to advance
certain principal, interest and escrow amounts to the securitization trusts for
delinquent mortgagors. The Company then collects the past due amounts from the
mortgagors or from the proceeds from liquidation of foreclosed properties. The
Company expects the overall dollar amount of delinquencies to increase in future
periods as the servicing portfolio increases and securitization pools continue
to mature.
Interest-only and residual certificates at December 31, 1997 were $223.3
million, representing an increase of $137.1 million or 158.9% over interest-only
and residual certificates of $86.2 million at December 31, 1996. This increase
was a result of the Company completing eight securitizations during the twelve
months ended December 31, 1997 for an aggregate of $4.9 billion. The increase
was offset by the sale on a non-recourse basis of certain interest-only and
residual certificates that had a net book value of $267 million. The sale was
effected through a securitization
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(the "Excess Cashflow Securitization") by which the Company received
approximately $228 million of net cash proceeds, or approximately 85% of the
estimated net book value, and retained a subordinated residual certificate for
the remaining balance. The Company used the net proceeds to retire or reduce
certain term debt. Mortgage servicing rights increased $28.3 million or 427.9%
from $6.6 million at December 31, 1996 to $35.0 million at December 31, 1997 due
to the increase in the Company's securitization volume for the year ended
December 31, 1997 compared to December 31, 1996. The increase consists of the
capitalization of $34.3 million of servicing rights offset by amortization of
$5.9 million.
Warehouse financings due from correspondents increased $20.9 million or 413.6%
from $5.0 million at December 31, 1996 to $25.9 million at December 31, 1997 due
to a $27.5 million increase in committed warehouse financing provided to
correspondents as a result the addition of new correspondents and an increase in
the utilization of such lines by the correspondents.
Property, furniture, fixtures and equipment increased $13.2 million or 787.5%
from $1.7 million at December 31, 1996 to $14.9 million at December 31, 1997
primarily due to $5.1 million related to the purchase and renovation of the
Company's corporate headquarters building and $5.4 million related to the
Acquisitions.
Goodwill increased $90.1 million from $1.8 million at December 31, 1996 to $92.0
million at December 31, 1997 due to the recording of $87.0 million of costs in
excess of fair value of net assets acquired in acquisition transactions and $5.8
related to contingent payment accruals related to acquisitions. The increase was
offset by amortization of $2.7 million. Goodwill is being amortized on a
straight-line basis over periods from five to thirty years.
Borrowings under warehouse financing facilities at December 31, 1997 were $1.7
billion, representing an increase of $837.5 million or 93.6% over warehouse
financing facilities of $895.1 million at December 31, 1996. This increase was a
result of increased mortgage loans held for sale and higher utilization of
warehouse financing facilities which fund a portion of the premiums paid on
loans purchased.
Term debt at December 31, 1997 was $112.3 million, representing an increase of
$64.9 million or 136.8% over term debt of $47.4 million at December 31, 1996.
This increase was primarily a result of financing the increase in interest-only
and residual certificates.
Notes payable increased $18.2 million from $0 at December 31, 1996 to $18.2
million at December 31, 1997 due to $13.2 million in notes payable issued
related to an acquisition and a $5.0 million mortgage note payable obtained
subsequent to the purchase and renovation of the Company's corporate
headquarters building.
Accounts payable and accrued liabilities increased $23.9 million or 307.7% from
$7.8 million at December 31, 1996 to $31.7 million at December 31, 1997
primarily due to accrual of contingent stock payments related to acquisitions of
$5.8 million, accruals for securitization obligations of $5.9 million, a $2.4
million increase in incentive compensation accruals and $6.1 million related to
the Acquisitions. Accruals for securitization obligations represent timing
differences on amounts due to the securitization trusts.
The Company's net deferred tax liability increased $13.7 million from a net
deferred tax asset of $2.7 million at December 31, 1996 to a net deferred tax
liability of $10.9 million at December 31, 1997 primarily due to the structuring
of certain securitization transactions to allow debt treatment for tax purposes.
Stockholder's equity as of December 31, 1997 was $254.1 million, representing an
increase of $164.7 million over stockholders equity of $89.3 million at December
31, 1996. This increase was primarily a result of proceeds of approximately
$58.0 million from the sale of 5,040,000 shares of common stock (net of
underwriting discount and
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expenses associated with the offering), common stock issued in acquisition
transactions and net income for the year ended December 31, 1997.
Liquidity and Capital Resources
During 1998, the Company used 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
during 1998 included the funding of loan purchases and originations, payment of
interest costs, funding of over-collateralization requirements for
securitizations, maintaining hedge positions (prior to October 1998), meeting
margin calls, operating expenses, income taxes and capital expenditures.
The Company has an ongoing need for substantial amounts of capital. Adequate
credit facilities and other sources of funding are essential to the continuation
of the Company's ability to purchase and originate loans. The Company typically
has operated, and expects to continue to operate, on a negative operating cash
flow basis. During the year ended December 31, 1998, the Company received cash
flows from operating activities of $390.3 million, an increase of $1.3 billion,
or 144.4%, from cash flows used in operating activities of $878.4 million during
the year ended December 31, 1997. During the year ended December 31, 1998, cash
flows used by the Company in financing activities were $391.0 million, a
decrease of $1.3 billion or 142.7% from cash flows received from financing
activities of $916.4 billion during the year ended December 31, 1997. The cash
flows received from operating activities related primarily to the sale of
mortgage loans held for sale and cash flows used in financing activities related
primarily to the repayment of warehouse finance facilities borrowings.
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.
During the year ended December 31, 1998, debt, equity and asset-backed markets
were extremely volatile, effectively denying the Company access to publicly
traded debt and equity markets to fund cash needs. Additionally, the spread over
treasury securities demanded by investors to acquire newly issued asset-backed
securities 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 the reduction
of premiums in the future may not offset the wider spreads demanded by
investors. Investors may not continue to invest in asset-backed securities at
all.
As a result of these adverse market conditions, among other things, in October
1998 the Company entered into intercreditor arrangements with Paine Webber Real
Estate Securities, Inc. (Paine Webber), Bear Stearns Home Equity Trust 1996-1
(Bear Stearns) and Aspen Funding Corp. and German American Capital Corporation,
subsidiaries of Deutsche Bank of North America Holding Corp. (DMG)
(collectively, the "Significant Lenders"), which held $3.25 billion of the
Company's available warehouse lines and $294.2 of the Company's interest-only
and residual financing at December 31, 1998. The intercreditor arrangements
provided for the Significant Lenders to "standstill" and keep outstanding
balances under their facilities in place, subject to certain conditions, for up
to 90 days (which expired mid-January 1999) in order for the Company to explore
its financial alternatives. The intercreditor agreements also provided, subject
to certain conditions, that the lenders would not issue any margin calls
requesting additional collateral be delivered to the lenders. See Note 3 of
Notes to Consolidated Financial Statements.
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In mid-January 1999, the original intercreditor agreements expired; however, on
February 19, 1999, concurrent with the execution of the Acquisition Agreement
described in Note 17 of Notes to Consolidated Financial Statements, the Company
entered into amended and restated intercreditor agreements with the Significant
Lenders. Under the amended and restated intercreditor agreements, the
Significant Lenders agreed to keep their respective facilities in place through
the closing under the Acquisition Agreement if the closing occurs within five
months and for twelve months thereafter, subject to earlier termination in
certain events. If the acquisition is not consummated within a five month
period, after that period, those lenders would not be required to refrain from
exercising remedies. The intercreditor agreements require the Company to make
various amortization payments on the underlying debt before, upon and after the
closing of the acquisition. Failure to make the required payments would permit
the Significant Lenders to terminate the standstill period under the
intercreditor agreements and to exercise remedies. The Company anticipates using
the proceeds of the additional loans to be made under the Greenwich Funds
facility upon closing of the acquisition to fund certain of these payments.
None of the three Significant Lenders has formally reduced the amount available
under its facilities, but each has informally indicated its desire that the
Company keep the average amount outstanding on the warehouse facilities well
below the amount available. There can be no assurance that the Significant
Lenders will continue to fund the Company under their uncommitted facilities.
See Notes 3 and 17 of Notes to Consolidated Financial Statements.
At December 31, 1998, the Company had a $1.25 billion uncommitted warehouse and
residual financing facility with Paine Webber. This warehouse facility bears
interest at rates ranging from LIBOR plus 0.65% to LIBOR plus 0.90%.
Approximately $110 million was outstanding under this warehouse facility as of
December 31, 1998. The Company has informally requested that Paine Webber permit
funding of an additional $200 million under its warehouse facilities, but has
not yet been notified if the request has been approved.
At December 31, 1998, the Company also had a $1.0 billion uncommitted warehouse
facility with Bear Stearns. This facility bears interest at LIBOR plus 0.75%.
Approximately $496.0 million was outstanding under this facility at December 31,
1998. Bear Stearns has requested that the Company maintain outstanding amounts
under this warehouse facility at no more than $500 million.
At December 31, 1998, the Company had a $1.0 billion credit facility with DMG,
which includes a $100 million credit facility collateralized by interest-only
and residual certificates. Approximately $369.0 million was outstanding under
this warehouse and residual financing facility at December 31, 1998. DMG has
indicated to the Company that additional fundings will be on an "as requested"
basis. To induce DMG to enter the intercreditor agreement in October 1998, the
Company consented to convert DMG's committed warehouse and residual facility to
an uncommitted facility. See Note 3 of Notes to Consolidated Financial
Statements.
Additionally, at December 31, 1998, the Company had other warehouse lines of
credit which totaled approximately $154.0 million. Interest rates ranged from
LIBOR plus 0.65% to LIBOR plus 1.50% and all borrowings mature within one year.
Outstanding borrowings under the Company's warehouse financing facilities are
collateralized by mortgage loans held for sale, warehouse financing due from
correspondents and servicing rights on approximately $250.0 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.
The Company is attempting to enter into arrangements to obtain warehouse
facilities from lenders that are not currently providing warehouse financing to
IMC, but has not yet been successful.
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As a result of the DMG warehouse facility becoming uncommitted and the adverse
market conditions currently being experienced by the Company and other mortgage
companies in the industry, the Company's ability to continue to operate is
almost entirely dependent upon the Significant Lenders discretion to provide
warehouse funding to the Company. The Significant Lenders may not approve the
Company's warehouse funding requests.
At December 31, 1998, the Company had borrowed $153.0 million under its residual
financing credit facility with Paine Webber. 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 the Company's
interest in certain interest-only and residual certificates. At December 31,
1998, $98.0 million was outstanding under this credit facility, which bears
interest at 1.75% per annum in excess of LIBOR.
At December 31, 1998, outstanding interest-only and residual financing
borrowings under the Company's credit facility with DMG were $43.2 million.
Outstanding borrowings bear interest at LIBOR plus 2% and are collateralized by
the Company's interest in certain interest-only and residual certificates.
At December 31, 1998, the Company had borrowed $2.2 million under a residual
financing credit facility which matured in August 1998, bears interest at 2.0%
per annum in excess of LIBOR and is collateralized by the Company's interest in
certain interest-only and residual certificates. The Company is currently
discussing an extension of this facility, but there can be no assurance an
extension will be obtained.
At December 31, 1998 the Company also has outstanding $6.2 million under a
credit facility with an affiliate of a shareholder of the Company which bears
interest at 10% per annum. That credit facility provides 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 provided the Company with a revolving credit facility which matured
in October 1998, bore interest at LIBOR plus 2.75% and provided for borrowings
up to $50 million to be used to finance interest-only and residual certificates,
or for acquisitions or bridge financing. BankBoston with participation from
another financial institution also provided the company with a $45 million
working capital facility, which bore interest at LIBOR plus 2.75% and matured in
October 1998. The Company was unable to repay these credit facilities when they
matured and in October 1998, the Company entered into a forbearance and
intercreditor agreement with BankBoston with respect to these credit facilities.
At December 31, 1998, $87.5 million was outstanding under these credit
facilities. The forbearance and intercreditor agreement provided that the bank
would take no collection action, subject to certain conditions, for up to 90
days (which expired in mid-January 1999) in order for the Company to explore its
financial alternatives.
In mid-January 1999, the forbearance and intercreditor agreement with BankBoston
expired. On February 19, 1999, the Greenwich Funds purchased, at a discount,
from BankBoston its interest in the credit facilities and entered into an
amended intercreditor agreement relating to these facilities with the Company.
Under the amended intercreditor agreement, the Greenwich Funds agreed to keep
these facilities in place for a period of twelve months after the acquisition of
IMC common stock described in the Acquisition Agreement is consummated if the
consummation occurs within a five month period, subject to earlier termination
in certain events provided in the amended intercreditor agreement.
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The Company's current warehouse lines generally are subject to one-year terms.
The Company's current creditors may not renew their facilities as they expire
and the Company may not be able to obtain additional credit lines.
On July 14, 1998, Travelers Casualty and Surety Company and certain of the
Greenwich Funds (together, the "Purchasers") purchased $50 million of the
Company's Class A preferred stock. The Class A preferred stock was convertible
into common stock at $10.44 per share. The Class A preferred stock bears no
dividend and is redeemable by the Company over a three-year period commencing in
July 2008. As part of the preferred stock purchase agreement, the Company agreed
to 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. The Class B preferred stock was
convertible into common stock at $22.50 per share. In October 1998, the terms of
the $50 million Class A preferred stock and the terms of the Class B preferred
stock were amended to eliminate the right to convert into common stock. See Note
4 of Notes to Condensed Consolidated Financial Statements.
On October 15, 1998 the Company reached an agreement for a $33 million standby
revolving credit facility with certain of the Greenwich Funds. The facility was
available to provide working capital for a period of up to 90 days, or until
mid- January 1999. The terms of the standby revolving credit facility resulted
in substantial dilution of existing common stockholders' equity equal 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
mid-January 1999, the $33 million standby revolving credit facility matured. On
February 16, 1999, the Greenwich Funds provided an additional $5 million of
loans under the facility. On February 19, 1999, the Company and the Greenwich
Funds entered into an amended and restated intercreditor agreement, whereby the
Greenwich Funds agreed to keep the facility in place for a period through the
closing under the Acquisition Agreement if the closing occurs within a five
month period and for twelve months thereafter, subject to earlier termination in
certain events as provided in the amended and restated intercreditor agreement.
On February 19, 1999, the Company entered into a merger agreement with the
Greenwich Funds which was terminated and recast as an acquisition agreement on
March 31, 1999. Under the Acquisition Agreement, the Greenwich Funds will
receive newly issued common stock of the Company equal to 93.5% of the
outstanding common stock after such issuance, leaving the existing common
shareholders of the Company with 6.5% of the common stock outstanding. No
payment will be made to the Company's common shareholders in this transaction.
Upon the closing, certain of the Greenwich Funds will surrender all of the
outstanding Class C exchangeable preferred stock for cancellation and enter into
an amendment and restatement of their existing loan agreement with IMC, pursuant
to which the Greenwich Funds will make available to IMC an additional $35
million in working capital loans.
The acquisition by the Greenwich Funds is subject to a number of conditions,
including approval by the Company's shareholders. There can be no assurance that
the acquisition will be consummated. If the Acquisition Agreement is terminated
or the acquisition is not consummated within five months from the signing of the
amended and restated intercreditor agreements, the standstills would expire or
could be terminated and the Significant Lenders could exercise remedies. In such
an event, the Company most likely would be unable to continue its business.
The Company has substantial capital requirements and it anticipates that it will
need to arrange for additional external cash resources through either the sale
or securitization of interest-only and residual certificates, increased credit
facilities and the sale or placement of debt, preferred stock or equity
securities if the acquisition under the Acquisition Agreement with the Greenwich
Funds is not consummated. Also, there can be no assurance that existing
warehouse and interest-only and residual certificate lenders will continue to
fund the Company under their uncommitted facilities, that existing credit
facilities can be increased, extended or refinanced, that the Company will
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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, if at
all, that the Company will be able to sell debt, preferred stock or equity
securities at any given time or on terms the Company would consider favorable,
or at all, or that funds generated from operations will be sufficient to repay
the Company's 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 selling debt, preferred stock or
other equity securities, the Company would not be able to hold a large volume of
loans pending securitization or whole loan sale and therefore would have to
curtail its loan production activities to attempt to sustain operations. The
Company may not be successful in sustaining operations.
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 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 accurate. To the Company's knowledge, there is a limited market for
the sale of interest-only and residual classes of certificates and these assets
may not be sold for the value reflected on the Company's balance sheet.
Risk Management
The Company purchases and originates mortgage loans and then sells them through
securitizations and whole loan sales. At the time of securitization 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
United States 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 ended prior to October 1998, the
Company hedged a portion of the value of the loans through the short sale of
United States 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
United States Treasury security to sell short so that
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the risk to the value of the loans would be effectively hedged. The Company
executed the sale of the United States Treasury securities with large, reputable
securities firms and used the proceeds received to acquire United States
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, generally largely
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
generally 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, generally largely 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 generally corresponding decrease in the value of the
loans through a reduction in the value of the related interest-only and residual
certificates.
The Company believes that its hedging activities using United States Treasury
securities were substantially similar in purpose, scope and execution to
customary hedging activities using United States Treasury securities engaged in
by several of its competitors.
In September 1998, the Company believes that, primarily due to significant
volatility in debt, equity and asset-backed markets, investors demanded wider
spreads over United States Treasury securities to acquire newly issued
asset-backed securities. The effect of the increased demand for the United
States Treasury Securities resulted in a devaluation of the Company's hedge
position, requiring the Company to pay approximately $47.5 million through the
time the hedge positions were closed in October 1998. This devaluation was not
offset by an equivalent increase in the gain on sale of loans at the time of
securitization because investors demanded wider spreads over the United States
Treasury securities to acquire the Company's asset-backed securities. Of the
$47.5 million in hedge devaluation, approximately $25.3 million was closed at
the time the Company priced two securitizations and was reflected as an offset
to gain on sale and approximately $22.4 million was charged to operations as a
hedge loss. In September 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 "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" and Note
5 of Notes to Consolidated Financial Statements. At December 31, 1998 the
Company had no open hedge positions.
The Company uses a discount rate of 16% to present value the difference (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 to present value the spread described above will not change in
the future, particularly if 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 plus
or minus 1%, 3% or 5% would result in a corresponding decrease in the value of
the interest-only and residual certificates at December 31, 1998 of
approximately 2.0%, 6.0% and 9.5%, respectively.
Inflation
Inflation historically has had no material effect on the Company's results of
operations. Inflation affects the Company primarily 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.
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Profitability may be directly affected by the level and fluctuation in interest
rates, which affect the Company's ability to earn a spread between interest
received on its loans and the costs of its borrowings. The profitability of the
Company is likely to be adversely affected during any period of unexpected or
rapid changes in interest rates. A substantial and sustained increase in
interest rates could adversely affect the ability of the Company to purchase and
originate loans and affect the mix of first and second mortgage loan products.
Generally, first mortgage production increases relative to second mortgage
production in response to low interest rates and second mortgage production
increases relative to first mortgage production during periods of high interest
rates. A significant decline in interest rates could decrease the size of the
Company's loan servicing portfolio by increasing the level of loan prepayments.
Additionally, to the extent servicing rights and interest-only and residual
certificates have been capitalized on the books of the Company, higher than
anticipated rates of loan prepayments or losses could require the Company to
write down the value of such servicing rights and interest-only and residual
certificates which could have a material adverse effect on the Company's results
of operations and financial condition. Conversely, lower than anticipated rates
of loan prepayments or lower losses could allow the Company to increase the
value of interest-only and residual certificates, which could have a favorable
effect on the Company's results of operations and financial condition.
Fluctuating interest rates also may affect the net interest income earned by the
Company from the difference between the yield to the Company on loans held
pending sales and the interest paid by the Company for funds borrowed under the
Company's warehouse facilities. In addition, inverse or flattened interest yield
curves could have an adverse impact on the profitability of the Company because
the loans pooled and sold by the Company have long-term rates, while the senior
interests in the related securitization trusts are priced on the basis of
intermediate term rates. The Company's decision to cease its hedging activities
(See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Risk Management") could result in substantial losses in the value
of the Company's mortgage loans held for sale without an offsetting gain on the
Company's hedging transaction.
Recent Accounting Pronouncements
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 "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
statements 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.
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
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effective for fiscal quarters of 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 hedges changes in the fair
value of an asset, liability or firm commitment, 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 statements 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 statements of operations or
balance sheets.
In 1998, the Company adopted SFAS No. 130 "Reporting Comprehensive Income" and
SFAS No. 131 "Disclosures About Segments of an Enterprise and Related
Information." These statements establish standards for reporting and display of
comprehensive income and disclosure requirements related to segments. The
application of the provisions of these statements did not have an impact on the
Company's financial position or results of operations.
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 revert 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 has conducted a company-wide assessment of its computer systems and
operations infrastructure, and is currently testing its systems to determine
their Y2K compliance. The Company presently believes those business-critical
computer systems which are not presently Y2K-compliant will have been replaced,
upgraded or modified prior to 2000.
During 1998, the Company 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
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<PAGE>
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 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 financial
position, results of operations or cash flows. The Company anticipates that Y2K
expenses through December 31, 1999 will be less than $1.0 million.
The Company has currently identified two material potential risks related to its
Y2K issues. The first risk is that the Company's primary lenders, depository
institutions and collateral custodians do not become Y2K compliant before year
end 1999, which could materially impact the Company's ability to access funds
and collateral necessary to operate its businesses. The Company is currently
assessing the risks related to these and other Y2K risks, and has received some
assurances that the computer systems of its lenders, depository institutions and
collateral custodians, many of whom are among the largest financial institutions
in the country, will be Y2K compliant by year end 1999.
The second risk is that the external servicing system on which the Company
relies to service mortgage loans does not become Y2K compliant before year-end
1999. Failure on the part of the servicing system could materially impact the
Company's servicing operations. As of February 5, 1999, the Company received
confirmation that the servicing system had achieved Y2K compliance.
The Company is developing contingency plans for all non-Y2K compliant internal
systems. Contingency plans include identifying alternative processing platforms
and alternative sources for services and businesses provided by critical non-Y2K
compliant financial depository institutions, vendors and collateral custodians.
However, there can be no assurance that the Company's lenders, depository
institutions, custodians and vendors will resolve their own Y2K compliance
issues in a timely manner. The failure by these other parties to resolve such
issues could have a significant effect on the Company's operations and financial
condition.
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. The disclosure in this Section, "Year 2000," contains
forward-looking statements, which involve risks and uncertainties. Reference is
made to the first paragraph on page 1 of this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The primary market risk facing the Company is interest rate risk. 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
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the Company's loan servicing portfolio by increasing the level of loan
prepayments. Additionally, to the extent servicing rights and interest-only and
residual certificates have been capitalized on the books of the Company, higher
than anticipated rates of loan prepayments or losses could require the Company
to write down the value of such servicing rights and interest-only and residual
certificates which could have a material adverse effect on the Company's results
of operations and financial condition. Conversely, lower than anticipated rates
of loan prepayments or lower losses could allow the Company to increase the
value of interest-only and residual certificates, which could have a favorable
effect on the Company's results of operations and financial condition.
Fluctuating interest rates also may affect the net interest income earned by the
Company from the difference between the yield to the Company on loans held
pending sales and the interest paid by the Company for funds borrowed under the
Company's warehouse facilities. In addition, inverse or flattened interest yield
curves could have an adverse impact on the profitability of the Company because
the loans pooled and sold by the Company have long-term rates, while the senior
interests in the related securitization trusts are priced on the basis of
intermediate term rates.
As discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Risk Management," during the third and fourth quarters
of 1998 the Company's traditional strategy of minimizing the risks of interest
rate fluctuations through a program of shorting United States Treasury
securities subjected the Company to margin calls of approximately $47.5 million
as a result of significant volatility in the debt, equity and asset-backed
markets, which disrupted the Company's anticipated hedging strategy. In
September 1998, the Company stopped hedging its interest rate risk on mortgage
loan purchases and originations and in October 1998 the Company closed all of
its open hedge positions. The Company's decision to cease its hedging activity
could result in substantial losses in the value of mortgage loans held for sale
by the Company which are not offset by gains from the Company's hedging
transactions.
The Company performs sensitivity analyses that quantify the net financial impact
of changes in interest rates on its interest rate-sensitive financial
instruments. These analyses are performed for various interest rate scenarios to
capture the expected economic change in market value of interest rate-sensitive
financial instruments. Various discounted cash flow models are employed to value
these interest-rate sensitive financial instruments. The primary assumptions
used in the discounted cash flow models used to value capitalized mortgage
servicing rights and interest-only and residual certificates are prepayment
rates, discount rates and credit losses. The Company generally makes mortgage
loans to borrowers whose borrowing needs may not be met by traditional financial
institutions due to credit exceptions. The Company has found that these
borrowers tend to be more payment sensitive than interest rate sensitive and
that changes in interest rates affect prepayment rates to a lesser extent than
other factors such as competition, loan type and credit quality.
Utilizing this sensitivity analysis, as of December 31, 1998, the Company
estimates that an instantaneous increase in interest rates of 50 basis points,
or .50%, all else being constant, would result in a decrease in the fair value
of its interest-rate sensitive financial instruments of approximately $13
million. These sensitivity analyses are limited by the fact that they are
performed at a particular point in time and do not incorporate other factors
that would impact the value of the Company's interest-rate sensitive financial
instruments in such a scenario. Consequently, the preceding estimates should not
be viewed as indicative of the actual changes in the values of interest
rate-sensitive financial instruments that would occur in a rate environment
equivalent to the one described in this paragraph.
For additional information, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Risk Management and - Inflation"
and Note 13 of Notes to Consolidated Financial Statements.
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Item 8. Financial Statements and Supplementary Data
IMC MORTGAGE COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants.......................... 65
Report of Independent Accountants........................................... 66
Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and 1998............ 67
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998...................................... 68
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1996, 1997 and 1998................................ 69
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998...................................... 70
Notes to Consolidated Financial Statements.............................. 71
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<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
IMC MORTGAGE COMPANY AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheet of IMC Mortgage
Company and Subsidiaries as of December 31, 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of IMC Mortgage
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of IMC Mortgage
Company and Subsidiaries as of December 31, 1998 and the consolidated results of
their operations and their consolidated cash flows for the year then ended in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Notes 3 and
17 to the consolidated financial statements, the Company is being significantly
and adversely affected by market conditions beyond its control and its access to
debt, equity and asset-backed capital markets is severely limited. As a result,
during the year ended December 31, 1998 the Company sustained a net loss of
approximately $100.5 million and has an accumulated deficit of $41.3 million.
These matters raise substantial doubt about the Company's ability to continue as
a going concern. Management plans in regard to this matter are also described in
Notes 3 and 17. These plans include obtaining common shareholder approval for an
acquisition transaction with Greenwich Funds and obtaining additional capital.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/S/ Grant Thornton L.L.P.
Tampa, Florida
March 31,1999
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
IMC Mortgage Company and Subsidiaries
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash flows
for each of the two years in the period ended December 31, 1997 present fairly,
in all material respects, the financial position of IMC Mortgage Company and
Subsidiaries at December 31, 1997, and the results of their operations and their
cash flows for each of the two years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits on these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of IMC Mortgage
Company and Subsidiaries for any period subsequent to December 31, 1997.
/S/ PricewaterhouseCoopers LLP
Tampa, Florida
February 20, 1998
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<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1998
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents ................................ $ 26,750 $ 15,454
Securities purchased under agreements to resell .......... 772,586 --
Accrued interest receivable .............................. 29,272 10,695
Accounts receivable ...................................... 21,349 44,661
Mortgage loans held for sale, net ........................ 1,673,144 946,446
Interest-only and residual certificates .................. 223,306 468,841
Warehouse financing due from correspondents .............. 25,913 2,810
Property, furniture, fixtures and equipment, net ......... 14,884 17,119
Mortgage servicing rights ................................ 34,954 52,388
Income tax receivable .................................... 18,841 12,914
Goodwill ................................................. 91,963 89,621
Other assets ............................................. 12,970 22,690
----------- -----------
Total ............................................ $ 2,945,932 $ 1,683,639
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse finance facilities ............................. $ 1,732,609 $ 984,571
Term debt ................................................ 112,291 415,331
Notes payable ............................................ 18,189 17,406
Securities sold but not yet purchased .................... 775,324 --
Accounts payable and accrued liabilities ................. 31,665 15,302
Accrued interest payable ................................. 10,857 3,086
Deferred tax liability ................................... 10,933 --
----------- -----------
Total liabilities .................................. 2,691,868 1,435,696
----------- -----------
Commitments and contingencies (Note 15)
Redeemable preferred stock (redeemable at maturity
at $100 per share and, under certain circumstances,
upon a change of control) (Note 4) ..................... -- 37,333
Stockholders' equity:
Common stock, par value $.01 per share; 50,000,000
authorized; 30,710,790 and 34,139,790
shares issued and outstanding ......................... 307 341
Additional paid-in capital ............................... 193,178 251,633
Retained earnings (accumulated deficit) .................. 60,579 (41,364)
----------- -----------
Total stockholders' equity ........................... 254,064 210,610
----------- -----------
Total ................................................ $ 2,945,932 $ 1,683,639
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Gain on sales of loans .......................... $46,230 $180,963 $205,924
Additional securitization transaction
expense (Note 7) ............................... (4,158) -- --
------------ ------------ ------------
Net gain on sale of loans ................... 42,072 180,963 205,924
------------ ------------ ------------
Warehouse interest income ....................... 37,463 123,432 147,937
Warehouse interest expense ...................... (24,535) (98,720) (118,345)
------------ ------------ ------------
Net warehouse interest income ............... 12,928 24,712 29,592
------------ ------------ ------------
Servicing fees .................................. 5,562 17,072 45,382
Other revenues .................................. 5,092 16,012 40,311
------------ ------------ ------------
Total servicing fees and other .............. 10,654 33,084 85,693
------------ ------------ ------------
Total revenues .............................. 65,654 238,759 321,209
------------ ------------ ------------
Expenses:
Compensation and benefits ....................... 16,007 82,051 124,234
Selling, general and administrative expenses .... 15,652 64,999 130,547
Sharing of proportionate value of equity (Note 7) 2,555 -- --
Other interest expense .......................... 2,321 14,280 28,434
Hedge loss (Note 5) ............................. -- -- 22,351
Market valuation adjustment (Note 10) ........... -- -- 84,638
Interest expense - Greenwich Funds (Note 3) ..... -- -- 30,795
------------ ------------ ------------
Total expenses ........................... 36,535 161,330 420,999
------------ ------------ ------------
Income (loss) before income taxes ............... 29,119 77,429 (99,790)
Provision for income taxes ...................... 4,206 29,500 679
------------ ------------ ------------
Net income (loss) ................................... $24,913 $47,929 $(100,469)
============ ============ ============
Earnings per share data (unaudited pro forma data
for the year ended December 31, 1996 giving
effect to provision for income taxes):
Net income (loss) ............................... $17,929 $47,929 $(100,469)
============ ============ ============
Net income (loss) per common share:
Basic ....................................... $1.12 $1.76 $(3.21)
Diluted ..................................... $0.92 $1.54 $(3.21)
Weighted average shares outstanding:
Basic ....................................... 15,981,521 27,299,827 31,745,575
Diluted ..................................... 19,539,963 31,147,944 31,745,575
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 68 -
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings
------------------------- Paid-In (Accumulated
Shares Amount Capital Deficit) Total
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Stockholders' equity at
January 1, 1996 ...................... 6,000,000 $60 $3,845 $1,704 $5,609
Issuance of options to
ContiFinancial (Note 7) ............ -- -- 8,448 -- 8,448
Common stock issued in public
offering ........................... 3,565,000 36 58,168 -- 58,204
Reclassification of partnership
earnings ........................... -- -- 4,124 (4,124) --
Conversion of convertible
preferred stock .................... 119,833 1 2,005 -- 2,006
Stock options exercised .............. 150,000 2 (2) -- --
Net income ........................... -- -- -- 24,913 24,913
Distributions for taxes (Note 2) ..... -- -- -- (9,843) (9,843)
Two-for-one stock split (Note 1) ..... 9,834,833 98 (98) -- --
---------- ---------- ---------- ---------- ----------
Stockholders' equity at
December 31, 1996 .................. 19,669,666 197 76,490 12,650 89,337
Common stock issued in public
offering ........................... 5,040,000 50 57,977 -- 58,027
Common stock issued in
acquisition transactions ........... 5,043,763 50 51,962 -- 52,012
Common stock issued under stock
option and incentive plans and
related tax benefits ............... 957,361 10 6,749 -- 6,759
Net income ........................... -- -- -- 47,929 47,929
---------- ---------- ---------- ---------- ----------
Stockholders' equity at
December 31, 1997 .................. 30,710,790 307 193,178 60,579 254,064
Common stock issued under
stock option and incentive
plans and related tax benefits ..... 34,121 -- 441 -- 441
Exercise of stock warrants and
related tax benefits ............... 2,159,998 22 2,663 -- 2,685
Common stock issued under
contingent earnouts ................ 1,234,881 12 7,082 -- 7,094
Issuance of debt with beneficial
conversion feature ................. -- -- 14,719 -- 14,719
Issuance of stock warrants ........... -- -- 1,128 -- 1,128
Elimination of Class A preferred stock
conversion feature (Note 4) ........ -- -- 32,422 -- 32,422
Accretion of Class A preferred stock . -- -- -- (1,474) (1,474)
Net loss ............................. -- -- -- (100,469) (100,469)
---------- ---------- ---------- ---------- ----------
Stockholders equity at
December 31, 1998 .................. 34,139,790 $341 $251,633 $(41,364) $210,610
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
- 69 -
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net income (loss) .................................................... $ 24,913 $ 47,929 $(100,469)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Interest expense - Greenwich Funds .................... -- -- 27,500
Issuance of stock warrants ............................ -- -- 1,128
Sharing of proportionate value of equity .............. 2,555 -- --
Depreciation and amortization ......................... 1,650 10,144 25,937
Mortgage servicing rights ............................. (7,862) (34,252) (35,911)
Net loss in joint venture ............................. 852 1,813 2,579
Non-recurring benefit associated with the conversion
of Partnership to C Corporation ..................... (3,600) -- --
Change in deferred taxes .............................. 879 13,654 (10,933)
Net change in operating assets and liabilities, net of
Effects from acquisitions:
Decrease (increase) in mortgage loans held
for sale ............................................ (721,347) (702,927) 726,698
Decrease (increase) in securities purchased
under agreement to resell and securities
sold but not yet purchased .......................... 429 1,167 (2,738)
Decrease (increase) in accrued interest receivable .... (6,763) (20,615) 18,577
Decrease (increase) in warehouse financing due
from correspondents ................................. (4,992) (25,674) 23,103
Increase in interest-only and residual certificates ... (72,174) (137,060) (245,535)
Increase in other assets .............................. (2,200) (7,495) (7,274)
Increase in accounts receivable ....................... (1,596) (16,450) (23,312)
Decrease (increase) in income tax receivable .......... -- (15,241) 8,611
Increase (decrease) in accrued interest payable ....... 3,022 6,779 (7,771)
Increase (decrease) in income tax payable ............. 2,543 (2,543) --
Increase (decrease) in accrued and other liabilities .. 6,978 2,421 (9,853)
--------- --------- ---------
Net cash provided by (used in) operating activities ... (776,713) (878,350) 390,337
--------- --------- ---------
Investing activities:
Investment in joint venture ........................... (2,591) (1,781) (4,260)
Purchase of property, furniture, fixtures and equipment (1,218) (12,772) (5,665)
Acquisition of businesses, net of cash acquired and
including other cash payments associated with
the acquisitions .................................... -- (10,008) --
Other ................................................. -- -- (672)
--------- --------- ---------
Net cash used in investing activities ................. (3,809) (24,561) (10,597)
--------- --------- ---------
Financing activities:
Issuance of common stock .............................. 58,203 59,923 12
Issuance of preferred stock ........................... -- -- 49,232
Distributions to partners for taxes ................... (11,149) -- --
Net borrowings (repayments) on warehouse facilities ... 705,313 787,911 (748,038)
Borrowings - term debt ................................ 51,066 401,240 324,473
Borrowings - notes payable ............................ -- 5,000 --
Repayments of borrowings - term debt .................. (14,756) (337,702) (15,932)
Repayments of borrowings - notes payable .............. -- -- (783)
--------- --------- ---------
Net cash provided by (used in) financing activities ... 788,677 916,372 (391,036)
--------- --------- ---------
Net increase (decrease) in cash and
cash equivalents .................................... 8,155 13,461 (11,296)
Cash and cash equivalents, beginning of period ........ 5,134 13,289 26,750
--------- --------- ---------
Cash and cash equivalents, end of period .............. $ 13,289 $ 26,750 $ 15,454
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 70 -
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
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 has typically securitized these mortgages into the form of a Real Estate
Mortgage Investment Conduit ("REMIC") or owner trust. A significant portion of
the mortgages historically have been sold on a servicing retained basis.
The Company was formed in 1993 by a team of executives experienced in the
non-conforming home equity loan industry. The Company was originally structured
as a partnership, Industry Mortgage Company, L.P. (the "Partnership"), which
became a wholly owned subsidiary of IMC Mortgage Company (the "Parent") in June
1996 when the limited partners (the "Partners") and the general partner
exchanged their partnership interests for voting common shares (the "exchange"
or "recapitilization") of the Parent. The exchange was consummated on a
historical cost basis as all entities were under common control. Accordingly,
since June 1996, the Parent has owned 100% of the limited partnership interests
in the Partnership and 100% of the general partnership interest in the
Partnership. At the time of the exchange, the retained earnings previously
reflected by the Partnership were transferred to additional paid-in capital. On
December 31, 1997, the Partnership and the general partner were merged into the
Parent. The accompanying consolidated financial statements include the accounts
of the Parent, the Partnership and their wholly owned subsidiaries, after giving
effect to the exchange as if it had occurred at inception.
On January 27, 1997, the Board of Directors declared a two-for-one split of
common stock payable on February 13, 1997 to stockholders of record as of
February 6, 1997. A total of $98,000 was transferred from additional
paid-in-capital to the stated value of common stock in connection with the stock
split. This transaction has been recorded herein in the year ended December 31,
1996. The par value of the common stock remains unchanged.
As discussed in Note 17 "Significant Events and Events Subsequent to
December 31, 1998", on February 19,1999, the Company entered into a merger
agreement with the Greenwich Funds that was terminated and recast as an
acquisition agreement (the "Acquisition Agreement") on March 31, 1999. Under the
Acquisition Agreement, the Greenwich Funds will receive newly issued common
stock equal to 93.5% of the outstanding common stock of the Company after such
issuance. Upon the consummation of the proposed acquisition by the Greenwich
Funds, the Greenwich Funds will surrender their Class C exchangeable preferred
stock of the Company for cancellation and amend and restate the existing loan
agreement with the Company described in Note 3 "Warehouse Finance Facilities,
Term Debt and Notes Payable", pursuant to which the Greenwich Funds will make
available to the Company an additional $35 million in working capital loans.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Parent
and its wholly-owned subsidiaries after elimination of intercompany accounts and
transactions.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and on deposit at
financial institutions and short term investments with original maturities of 90
days or less when purchased.
- 71 -
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
Interest-only and Residual Certificates
The Company originates and purchases mortgages for the purpose of securitization
and whole loan sale. The Company securitizes these mortgages primarily into the
form of a REMIC or owner trust that issues classes of certificates representing
undivided ownership interests in the income stream payable to the Trust. A REMIC
is a multi-class security with certain tax advantages which derives its monthly
principal paydowns from a pool of underlying mortgages. The senior class
certificates issued by the trust, which are credit enhanced, are sold, with the
subordinated classes (or a portion thereof) retained by the Company. The
subordinated classes are in the form of interest-only and residual certificates.
Credit enhancement is generally achieved by subordination of a subsidiary class
of bonds to senior classes or an insurance policy issued by a monoline insurance
company. The documents governing the Company's securitizations require the
Company to build overcollateralization levels through payment to holders of
senior certificates, for a period of time, of distributions otherwise payable to
the Company as the residual interest holder. This overcollateralization causes
the aggregate principal amount of the loans in the related pool to exceed the
aggregate principal balance of the outstanding investor certificates. Such
excess amounts serve as additional credit enhancement for the related trust. To
the extent that borrowers default on the payment of principal or interest on the
loans, the losses incurred in the REMIC will reduce the overcollateralization
and cash flows otherwise payable to the residual interest security holder to the
extent that funds are available. If payment defaults exceed the amount of
overcollateralization, as applicable, the insurance policy maintained on certain
REMIC trusts will pay any further losses experienced by holders of the senior
interests in those related REMIC trusts or a subordinated class will bear the
loss. The Company does not have any recourse obligations for credit losses in
the trusts. During 1996, 1997 and 1998, the Company securitized $935 million,
$4.9 billion and $5.1 billion of loans through four, eight, and seven trusts,
respectively. See Note 10 "Interest Only and Residual Certificates."
On January 1, 1997, the Company adopted the Financial Accounting Standards
Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" ("SFAS 125"), which was effective for transfers of the Company's
financial assets made after December 31, 1996. SFAS 125 addresses the accounting
for all types of securitization transactions, securities lending and repurchase
agreements, collateralized borrowing arrangements and other transactions
involving the transfer of financial assets. SFAS 125 distinguishes transfers of
financial assets that are sales from transfers that are secured borrowings. SFAS
125 requires the Company to allocate the total cost of mortgage loans sold among
the mortgage loans sold (without servicing rights), interest-only and residual
certificates and servicing rights based on their relative fair values. The
adoption of SFAS 125 did not have a material effect on the Company's financial
position or results of operations.
The Company initially records interest-only and residual certificates at
their allocated cost based upon the present value of the interest in the cash
flows retained by the Company after considering various economic factors,
including interest rates, collateral value and estimates of the value of future
cash flows from the REMIC mortgage pools under expected loss and prepayment
assumptions discounted at a market yield.
In accordance with the provisions of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"), the Company classifies
interest-only and residual certificates as "trading securities" and, as such,
they are recorded at fair value with the resultant unrealized gain or loss
recorded in the results of operations in the period of the change in value. The
Company determines fair value on an ongoing basis based on a discounted cash
flow analysis. The cash flows are estimated as the excess of the weighted
average coupon on each pool of mortgage loans sold over the sum of the
pass-through interest rate plus a servicing fee, a trustee fee, an insurance fee
when applicable and an estimate of annual future credit losses and prepayments
related to the mortgage loans securitized over the life of the mortgage loans.
- 72 -
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
These cash flows are projected over the life of the mortgage loans using
prepayment, default and interest rate assumptions that the Company perceives
market participants would use for similar financial instruments subject to
prepayment, credit and interest rate risk. The fair valuation includes
consideration of the following characteristics: loan type, size, interest rate,
date of origination, term and geographic location. The Company also used other
available information such as externally prepared reports and information on
prepayment rates, interest rates, collateral value, economic forecasts and
historical default and prepayment rates of the portfolio under review.
Prior to the fourth quarter of 1998, the rates used to discount the cash
flows ranged from 11% to 14.5% based on the perceived risks associated with each
REMIC or owner trust mortgage pool. During the fourth quarter of 1998, as a
result of adverse market conditions (see Note 3 "Warehouse Finance Facilities,
Term Debt and Notes Payable," Note 5 "Hedge Loss" and Note 17 "Significant
Events and Events Subsequent to December 31, 1998") the Company adjusted to 16%
the discount rate used to present value the projected cash flows retained by the
Company. See Note 10 "Interest-Only and Residual Certificates." The Company
utilizes prepayment and loss curves which the Company believes will approximate
the timing of prepayments and losses over the life of the securitized loans.
Prepayments on fixed rate loans securitized by the Company are expected to
gradually increase from a constant prepayment rate ("CPR") of 4% to 28% in the
first year of the loan and remain at 28% thereafter. The Company expects
prepayments on adjustable rate loans to gradually increase from a CPR of 4% to
35% in the first year of the loan and remain at 35% thereafter. The CPR measures
the annualized percentage of mortgage loans which prepay during a given period.
The CPR represents the annual prepayment rate over the year, expressed as a
percentage of the principal balance of the mortgage loan outstanding at the
beginning of the period, without giving effect to regularly scheduled
amortization payments. Prior to the fourth quarter of 1998, the Company expected
losses from defaults to increase from zero in the first six months of the loan
to 100 basis points after 36 months. During the fourth quarter of 1998, as a
result of emerging trends in the Company's serviced loan portfolio and adverse
market conditions, the Company revised the loss curve assumption used to
approximate the timing of losses over the life of the securitized loans to
increase from zero in the first six months of the loan to 175 basis points after
36 months. See Note 10 "Interest-Only and Residual Certificates."
Mortgage Servicing Rights
Effective January 1, 1996, the Company adopted SFAS No. 122 "Accounting for
Mortgage Servicing Rights" ("SFAS 122"), superseded in June 1996 by SFAS 125,
which was adopted by the Company effective January 1, 1997. The SFAS's require
that upon sale or securitization of mortgages, companies capitalize the cost
associated with the right to service mortgage loans based on its relative fair
value. The Company determines fair value based on the present value of
estimated net future cash flows related to servicing income. The cost allocated
to the servicing rights is amortized in proportion to and over the period of
estimated net future servicing income. Under SFAS 122 and SFAS 125, the Company
capitalized mortgage servicing rights of approximately $7.8 million, $34.3
million and $35.9 million for the years ended December 31, 1996, 1997 and 1998,
respectively, and amortized $1.2 million, $5.9 million and $18.5 million for the
same periods.
The Company periodically reviews mortgage servicing rights for impairment.
This review is performed on a disaggregated basis for the predominant risk
characteristic of the underlying loans which the Company believes to be loan
type (i.e., fixed vs. adjustable rate). The Company does not consider interest
rate to be a predominant risk characteristic. The Company generally makes loans
to borrowers whose borrowing needs may not be met by traditional financial
institutions due to credit exceptions. The Company has found that these
borrowers tend to be more payment sensitive than interest rate sensitive.
Impairment is recognized in a valuation allowance for each disaggregated stratum
in the period of impairment. The carrying amount of mortgage servicing rights is
deemed to be a reasonable estimate of their fair value.
- 73 -
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
Securities Purchased Under Agreements to Resell/Securities Sold But Not Yet
Purchased
Prior to October 1998, the Company hedged the interest rate risk on loan
purchases by selling short United States Treasury Securities which matched the
duration of the fixed rate mortgage loans held for sale and borrowed the
securities under agreements to resell.
Securities sold but not yet purchased were recorded on a trade date basis
and carried at market value. The unrealized gain or loss on these instruments
was deferred and recognized upon securitization as an adjustment to the carrying
value of the hedged mortgage loans. The cost to carry securities purchased under
agreements to resell was recorded as incurred.
Securities purchased under agreements to resell were recorded on a trade
date basis and carried at the amounts at which the securities would be resold.
In October 1998, the Company closed all of its open hedge positions and at
December 31, 1998, there were no open hedge positions. See Note 5 "Hedge Loss."
Mortgage Loans Held for Sale, Net
Mortgage loans held for sale are mortgages the Company plans to sell or
securitize. Mortgage loans held for sale are stated at lower of aggregate cost
or market. The cost is net of any deferred loan origination fees, certain direct
costs and deferred hedging gain or loss. Market value is determined by
outstanding commitments from investors, if any, or current investor yield
requirements on the aggregate basis. Included in mortgages held for sale at
December 31, 1997 and 1998 were approximately $54 million and $85 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 allowances at December 31,
1997 and 1998 were $11.5 million and $24.0 million, respectively.
Revenue Recognition
Gains on the sale of mortgage loans represent the difference between the
sales price and the net carrying amount (which includes any hedging gains and
losses) and are recognized when mortgage loans are sold and delivered to
investors. For securitizations of mortgage loans, the gain on the sale of the
loans represents the present value of the difference (spread) between (i)
interest earned on the portion of loans sold and (ii) interest paid to
investors, including related costs over the expected life of the loans,
including expected charge-offs, foreclosure expenses and a servicing fee. The
spread is adjusted for estimated prepayments.
The increase or accretion of the value of the discounted interest-only and
residual certificates over time is recognized on the interest method as earned.
Prepayment penalties received from borrowers are recorded in income when
collected and included in other revenue in the Statement of Operations at the
time of early prepayments. Warehouse interest income on mortgage loans held for
sale is recognized on the accrual method.
The Company has typically retained servicing rights and recognizes
servicing income from fees and late payment charges earned for servicing the
loans owned by certificate holders and others. Servicing fees are generally
earned at a rate of approximately 1/2 of 1%, on an annualized basis, of the
outstanding loan balance being serviced. Servicing fee income is recognized as
collected.
- 74 -
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
Property, Furniture, Fixtures and Equipment, Net of Accumulated Depreciation
Property, furniture, fixtures and equipment are carried at cost and
depreciated on a straight-line basis over the estimated useful lives of the
assets. Leasehold improvements are amortized over the useful life of the
improvements.
Advertising
The Company expenses the production costs of advertising as incurred.
Advertising expense was approximately $499,000, $9.0 million and $15.3 million
for the years ended December 31, 1996, 1997 and 1998, respectively.
Goodwill
Goodwill represents the excess of cost over fair value of net assets
acquired by acquisition. Such excess of cost over fair value of net assets
acquired is being amortized on a straight-line basis over periods from five to
thirty years. Amortization expense approximated $71,000, $2.7 million and $4.0
million for the years ended December 31, 1996, 1997 and 1998, respectively.
Accumulated amortization approximated $2.8 million and $6.8 million at December
31, 1997 and 1998, respectively.
Management periodically reviews the potential impairment of goodwill on a
non-discounted cash flow basis to assess recoverability. The cash flows are
projected on a pre-tax basis over the estimated useful lives assigned to
goodwill. If the estimated future cash flows are projected to be less than the
carrying amount, an impairment write-down (representing the carrying amount of
the goodwill which exceeds the present value of estimated expected future cash
flows) would be recorded as a period expense.
Translation of Foreign Currency
Assets and liabilities of the Company's Canadian subsidiary, which was
incorporated during the year ended December 31, 1997, are translated at year-end
rates of exchange, and the income statement is translated at weighted average
rates of exchange for the year. For the years ended December 31, 1997 and 1998,
the financial position and results of operations of the Company's Canadian
subsidiary was not material in relation to the financial position or results of
operations of the Company.
Income Taxes
Income tax expense is provided for using the asset and liability method,
under which deferred tax assets and liabilities are determined based upon the
temporary differences between the financial statement and income tax bases of
assets and liabilities, using enacted tax rates currently in effect. Deferred
tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.
- 75 -
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123")
encourages, but does not require, companies to record compensation cost for
stock-based employee compensation plans at fair value. The Company has elected
to continue to account for its stock-based compensation plans using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). Under the provisions of
APB 25, compensation cost for stock options is measured as the excess, if any,
of the quoted market price of the Company's common stock at the date of grant
over the amount an employee must pay to acquire the stock.
Consolidated Statement of Cash Flows - Supplemental Disclosures
The Company paid $23.8 million, $106.2 million and $157.8 million for
interest during the years ended December 31, 1996, 1997 and 1998, respectively.
Total income taxes paid were $796,000, $33.5 million and $4.1 million for the
years ended December 31, 1996, 1997 and 1998, respectively. During the years
ended December 31, 1997 and 1998, the Company recorded a benefit of $3.6 million
and $2.7 million, respectively, for the income tax related to the issuance of
common stock under stock option and incentive plans and stock warrants.
Recent Accounting Pronouncements
In October 1998, the FASB issued SFAS 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
"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 statements 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.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for
fiscal quarters of 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 hedges changes in the fair value of an asset,
liability or firm commitment, 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.
- 76 -
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
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 changes in fair value without a corresponding
adjustment of the carrying amount of mortgage loans held for sale. Management
anticipates that if the Company uses derivative financial instruments to hedge
the Company's interest rate risk on loan purchases the Company will use
derivative financial instruments which qualify for hedge accounting under the
provisions of SFAS 133.
The actual effect implementation of SFAS 133 will have on the Company's
statements 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 statements of operations
or balance sheets.
Effective January 1, 1998, the Company adopted SFAS No. 130 "Reporting
Comprehensive Income" and SFAS No. 131 "Disclosure About Segments of an
Enterprise and Related Information". These statements establish standards for
reporting and display of comprehensive income and disclosure requirements
related to segments. The application of the provisions of these statements did
not have an impact on the Company's financial position or results of operations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates, and those
differences could be material.
Reclassifications
Certain amounts in the 1996 and 1997 financial statements have been
reclassified to conform with the 1998 classifications.
Unaudited Pro Forma Data
The Partnership which is included in the consolidated financial statements
became a wholly owned subsidiary of the Parent after the plan of exchange
described in Note 1 was consummated. The Partnership made no provision for
income taxes since the Partnership's income or losses were passed through to the
partners individually. Under the terms of the partnership agreement, the
Partnership was obligated to make quarterly cash distributions to the partners
equal to 45% of profits (as defined in the partnership agreement) to enable the
partners to pay taxes with respect to their partnership interests. Distributions
to partners for income taxes were $9.8 million for the year ended December 31,
1996.
- 77 -
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
The Partnership's income became subject to income taxes at the corporate
level as of June 24, 1996, the effective date of the exchange. The unaudited pro
forma data included in the consolidated statements of operations of the Company
includes a pro forma provision for income taxes for the year ended December 31,
1996 to indicate what these taxes would have been had the exchange occurred
prior to January 1, 1996.
The following unaudited pro forma information reflects the Company's net
income for the year ended December 31, 1996 had the Partnership been subject to
federal and state income taxes for the entire year ended December 31, 1996:
(in thousands)
Income before income taxes .......................... $29,119
Pro forma provision for income taxes ................ 11,190
-------
Pro forma net income ................................ $17,929
=======
The following unaudited pro forma information reflects the income tax
expense that the Company would have incurred if it had been subject to federal
and state income taxes for the entire year ended December 31, 1996.
(in thousands)
Pro forma current:
Federal ............................... $ 8,910
State ................................. 1,894
-------
10,804
-------
Pro forma deferred:
Federal ............................... 318
State ................................. 68
-------
386
-------
Pro forma provision for income taxes ................ $11,190
=======
The following unaudited pro forma information reflects the reconciliation
between the statutory provision for income taxes and the pro forma provision
relating to the income tax expense the Company would have incurred had the
Partnership been subject to federal and state income taxes for the entire year
ended December 31, 1996.
(in thousands)
Income tax at federal statutory rate .............. $ 10,192
State taxes, net of federal benefit ............... 1,310
Nondeductible expenses ............................ 36
Other, net ........................................ (348)
--------
Pro forma provision for income taxes .............. $ 11,190
========
Pro Forma Earnings Per Share and Earnings per Share
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share" ("SFAS
128"), which became effective for the Company for reporting periods ending after
December 15, 1997. Under the provisions of SFAS 128, basic earnings per share is
determined using net income, adjusted for preferred stock dividends and
accretion of preferred stock, and divided by weighted average shares
outstanding. Diluted earnings per share, as defined by SFAS No. 128, is computed
based on the amount of income that would be available for each common share,
assuming all dilutive potential common shares were issued. All prior period
earnings per share data have been restated in accordance with the provisions of
SFAS 128.
- 78 -
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
Due to the recapitalization described in Note 1, earnings per share for the
years ended December 31, 1996 have been computed on a pro forma basis, assuming
the recapitalization occurred at the beginning of 1996. Amounts used in the
determination of basic and diluted earnings per share are shown in the table
below.
<TABLE>
<CAPTION>
(in thousands, except share data)
-----------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net income (loss) (pro forma net income for 1996) .... $ 17,929 $ 47,929 $ (100,469)
Less preferred dividends ............................. (79) -- --
Less accretion of preferred stock .................... -- -- (1,474)
------------ ------------ ------------
Income (loss) available to common stockholders-basic . 17,850 47,929 (101,943)
Add interest expense attributable to convertible
debentures and accrued preferred dividends .. 97 -- --
------------ ------------ ------------
Income (loss) available to common stockholders-diluted $ 17,947 $ 47,929 $ (101,943)
============ ============ ============
Weighted average common shares outstanding ........... 15,981,521 27,299,827 31,745,575
Adjustments for dilutive securities:
Stock warrants .............................. 2,139,344 2,327,178 --
Stock options ............................... 1,240,553 1,281,995 --
Contingent shares ........................... 9,827 238,944 --
Convertible preferred stock ................. 115,248 -- --
Convertible debentures ...................... 53,470 -- --
------------ ------------ ------------
Diluted common shares ................................ 19,539,963 31,147,944 31,745,575
============ ============ ============
</TABLE>
For the year ended December 31, 1998, there were no adjustments for stock
warrants, stock options, contingently issuable shares and convertible preferred
stock in computing the diluted weighted average number of shares outstanding as
their effect was antidilutive.
- 79 -
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
3. Warehouse Finance Facilities, Term Debt and Notes Payable
Warehouse Finance Facilities
In October 1998, as a result of volatility in equity, debt, and
asset-backed markets, among other things, the Company entered into intercreditor
arrangements with Paine Webber Real Estate Securities, Inc. ("Paine Webber"),
Bear Stearns Home Equity Trust 1996-1 ("Bear Stearns"), Aspen Funding Corp. and
German American Capital Corporation, subsidiaries of Deutsche Bank of North
America Holding Corp ("DMG") collectively (the "Significant Lenders"). The
intercreditor arrangements provided 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 expired mid-January 1999) in order
for the Company to explore its financial alternatives. The intercreditor
agreements also provided, subject to certain conditions, that the lenders would
not issue any margin calls requesting additional collateral be delivered to the
lenders. To induce DMG to enter the intercreditor agreement, the Company was
required to permit DMG's committed warehouse and interest-only and residual
facilities to become uncommitted and issued to DMG warrants exercisable at $1.72
per share to purchase 2.5% of the common stock of the Company on a diluted
basis. Issuance of the stock warrants resulted in an increase to paid-in capital
of $1.1 million and a corresponding charge to interest expense included in other
interest expense in the accompanying Statement of Operations for the year ended
December 31, 1998.
In mid-January 1999, the intercreditor agreements expired; however, on
February 19, 1999, concurrent with the execution of the Acquisition Agreement
described in Note 17 "Significant Events and Events Subsequent to December 31,
1998", the Company entered into amended and restated intercreditor agreements
with the Significant Lenders. Under the amended and restated intercreditor
agreements, the Significant Lenders agreed to keep their respective facilities
in place until the closing of the acquisition and for twelve months thereafter
provided that the closing of the acquisition occurs within five months, subject
to earlier termination in certain events. If the acquisition is not consummated
within a five-month period, after that period, the Significant Lenders would not
be subject to the requirements of the amended and restated intercreditor
agreements.
The Acquisition Agreement is subject to a number of conditions, including
approval by the Company's shareholders. There can be no assurance that the
acquisition will be consummated. If the acquisition by the Greenwich Funds is
not consummated within five months from the signing of the amended and restated
intercreditor agreements, the standstill period thereunder would expire and the
Significant Lenders could exercise remedies. In such an event, it is likely that
the Company would be unable to continue its business.
None of the three Significant Lenders has formally reduced the amount
available under its facilities, but each has informally indicated its desire
that the Company keep the average amount outstanding on the warehouse facilities
well below the amount available. There can be no assurance that the Significant
Lenders will continue to fund the Company under their uncommitted facilities.
See Note 17 "Significant Events and Events Subsequent to December 31, 1998". The
Significant Lenders are to receive a fee of $1 million each upon consummation of
the acquisition. The intercreditor agreements also provide for periodic payments
to be made before, upon and after the acquisition.
At December 31, 1998, the Company had a $1.25 billion uncommitted credit
facility with Paine Webber. Outstanding warehouse borrowings, which bear
interest at rates ranging from LIBOR (5.1% at December 31, 1998) plus 0.65% to
LIBOR plus 0.90%. Approximately $110.0 million was outstanding under this
facility at December 31, 1998. The Company has informally requested that Paine
Webber permit funding of an additional $200 million under its warehouse
facilities, but has not yet been notified if the request has been approved.
- 80 -
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
At December 31, 1998, the Company had a $1.0 billion uncommitted credit
facility with DMG which includes a $100.0 million credit facility collateralized
by interest-only and residual certificates. At December 31, 1998, $369.0 million
was outstanding under this facility at December 31, 1998. DMG has indicated to
the Company that additional funding will be on an "as-requested" basis.
At December 31, 1998, the Company had a $1.0 billion uncommitted warehouse
facility with Bear Stearns. This facility bears interest at LIBOR plus 0.75%. At
December 31, 1998, $496.2 million was outstanding under this facility. Bear
Stearns has requested that the Company maintain outstanding amounts under this
warehouse facility at no more than $500 million.
Additionally, at December 31, 1998, the Company had other warehouse lines
of credit which totaled $154.0 million. Interest rates ranged from LIBOR plus
0.65% to LIBOR plus 1.50% as of December 31, 1998, and all borrowings mature
within one year.
Outstanding borrowings under the Company's warehouse financing facilities
are collateralized by mortgage loans held for sale, warehouse financing due from
correspondents and servicing rights on approximately $250 million of mortgage
loans. Upon the sale of these loans and the repayment of warehouse financing due
from correspondents, the borrowings under these lines will be repaid.
The Company is attempting to enter into arrangements to obtain warehouse
facilities from lenders that are not currently providing warehouse facilities to
IMC, but has not yet been successful.
As a result of the DMG warehouse facility becoming uncommitted and the
adverse market conditions currently being experienced by the Company and other
mortgage companies in the industry, the Company's ability to continue to operate
is dependent upon the Significant Lenders' discretion to provide warehouse
funding to the Company. There can be no assurance the Significant Lenders will
approve the Company's warehouse funding requests.
Term Debt
At December 31, 1998, outstanding interest-only and residual financing
borrowings were $153.3 million under the Company's credit facility with Paine
Webber. Outstanding borrowings bear interest at LIBOR plus 2.0% and are
collateralized by the Company's interest in certain interest-only and residual
certificates.
Bear, Stearns & Co. Inc. and its affiliates, Bear Stearns Mortgage Capital
Corporation and Bear, Stearns International Limited, provide the Company with an
$100 million credit facility which is collateralized by the Company's interest
in certain interest-only and residual certificates. At December 31, 1998, $97.7
million was outstanding under this credit facility, which bears interest at
1.75% per annum in excess of LIBOR.
At December 31, 1998, outstanding interest-only and residual financing
borrowings under the Company's credit facility with DMG were $43.2 million.
Outstanding borrowings bear interest at LIBOR plus 2.0% and are collateralized
by the Company's interest in certain interest-only and residual certificates.
The interest-only and residual financing facilities described above are
subject to the intercreditor agreements and amended and restated intercreditor
agreements described under "Warehouse Finance Facilities" above.
- 81 -
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
At December 31, 1998, the Company had borrowed $2.2 million under an
agreement which matured in August 1998, bears interest at 2.0% per annum in
excess of LIBOR and is collateralized by the Company's interest in 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.
At December 31, 1998, the Company also has outstanding a $6.2 million
credit facility with an affiliate of the Company which bears interest at 10% per
annum. The credit facility provides 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 provided the Company with a revolving credit facility which
matured in October 1998, bore interest at LIBOR plus 2.75% and provided for
borrowings up to $50.0 million to be used to finance interest-only and residual
certificates or for acquisitions or bridge financing. At December 31, 1998,
$42.5 million was outstanding under this credit facility. BankBoston, with
participation from another financial institution, provided the Company with a
$45.0 million working capital facility, which bore interest at LIBOR plus 2.75%
and matured in October 1998. At December 31, 1998, $45.0 million was outstanding
under this facility. The Company was unable to repay either of these BankBoston
facilities when they matured.
In October 1998, the Company entered into a forbearance and intercreditor
agreement with BankBoston with respect to its combined $95.0 million facilities.
That agreement provided that the bank would take no collection action, subject
to certain conditions, for up to 90 days (which expired in mid-January 1999) in
order for the Company to explore its financial alternatives.
In mid-January, 1999 the forbearance and intercreditor agreement with
BankBoston expired. On February 19,1999 the Greenwich Funds purchased, at a
discount, from BankBoston its interest in the credit facilities, and entered
into an amended intercreditor agreement with the Company relating to the
combined $95.0 million facilities. Under the amended intercreditor agreement,
the Greenwich Funds have agreed to keep its facilities in place for a period of
12 months thereafter, if the acquisition described in Acquisition Agreement,
discussed below, is consummated within five months, subject to earlier
termination in certain events as provided in the intercreditor agreements. If
the acquisition by the Greenwich Funds is not consummated within a five month
period, after that, the Greenwich Funds would no longer be required to
standstill.
On October 15, 1998, the Company entered into an agreement for a $33.0
million standby revolving credit facility with certain of the Greenwich Funds
(the "Greenwich Loan Agreement"). The facility was available to provide working
capital for a period of up to 90 days. The terms of the facility result in
substantial dilution of existing common stockholders' equity equal to a minimum
of 40%, up to a maximum of 90%, on a diluted basis, depending on (among other
thing) when, or whether the Company entered into a definitive agreement for a
transaction which could result in a change of control. In mid-January, 1999, the
$33.0 million standby revolving credit facility matured. On February 16, 1999,
the Greenwich Funds made additional loans available totaling $5.0 million under
the facility.
The terms of the Greenwich Loan Agreement resulted in significant expense
and stockholder dilution during the year ended December 31, 1998. Interest
expense of $30.8 million was recognized with respect to the Greenwich Loan
Agreement which includes accrued interest at 10%, amortization of the $3.3
million commitment fee and the value attributable to the Class C preferred stock
issued and the additional preferred stock issuable to the Greenwich Funds in
exchange for its loan under the terms of the agreement as described in Note 4
"Redeemable Preferred Stock."
- 82 -
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
On February 19, 1999, the Company entered into a merger agreement with the
Greenwich Funds that was terminated and recast as an acquisition agreement on
March 31, 1999. Under the Acquisition Agreement, the Greenwich Funds will
receive newly issued common stock of the Company equal to 93.5% of the common
stock outstanding after such issuance, leaving the existing common shareholders
of the Company with 6.5% of the common stock outstanding. No payment will be
made to the Company's common shareholders in this transaction. Upon the
consummation of the acquisition, the Greenwich Funds will surrender for
cancellation their Class C exchangeable preferred stock and enter into an
amendment and restatement of its existing loan agreement with the Company,
pursuant to which the Greenwich Funds will make available to the Company an
additional $35 million in working capital loans, extend the maturity of the
loans to three years from such consummation and forego their right to exchange
their loans for additional preferred stock as described in Note 4.
The Acquisition Agreement is subject to a number of conditions, including
approval by the Company's shareholders. There can be no assurance that the
Acquisition Agreement will be consummated. If the acquisition is not consummated
within five months from the signing of the amended and restated intercreditor
agreements, the standstill thereunder would expire and Significant Lenders and
the Greenwich Funds could exercise remedies.
The warehouse notes and term debt have requirements that the Company
maintain certain debt to equity ratios and certain agreements restrict the
Company's ability to pay dividends on common stock. Capital expenditures are
limited by certain agreements.
Notes Payable
At December 31, 1998, $4.5 million was outstanding under a mortgage note
payable, which bears interest at 8.16% per annum and expires December 2007. The
note is collateralized by the Company's headquarters building.
At December 31, 1998, $12.9 million was outstanding under notes payable to
shareholders related to an acquisition completed in 1997. These notes bore
interest at prime (7.75% at December 31, 1998) plus 2.0% and mature on July 1,
1999.
Note payable maturities for the next five years are as follows: $13.4
million in 1999; $500,000 in 2000; $500,000 in 2001; $500,000 in 2002; and
$500,000 in 2003.
- 83 -
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
4. Preferred Stock:
Preferred stock consisted of the following at December 31, 1998:
(in thousands)
Redeemable preferred stock, Class A,
par value $.01 per share; liquidation
value $100 per share; 500,000 shares
authorized; 500,000 shares issued and
outstanding ............................................... 19,052
Redeemable preferred stock, Class B,
par value $.01 per share; liquidation
value $100 per share; 300 shares
authorized; no shares issued and
outstanding ............................................... --
Exchangeable preferred stock, Class C,
par value $.01 per share; liquidation
value $10 per share, 800,000
shares authorized, 23,760.758
shares issued and outstanding ............................. 18,281
Preferred stock, Class D,
par value $.01 per share; liquidation
value $10 per share; 800,000 shares
authorized; no shares issued or outstanding ............... --
-------
Total preferred stock .............................. $37,333
=======
There was no preferred stock issued or outstanding at December 31, 1997.
On July 14,1998, Travelers Casualty and Surety Company and certain of the
Greenwich Funds (together, the "Purchasers") purchased $50.0 million of the
Company's Class A redeemable preferred stock (500,000 shares at $100 per share
liquidation value). The Class A redeemable preferred stock was initially
convertible into non-registered common stock at $10.44 per common share. The
Class A redeemable preferred stock bears no dividend and is redeemable by the
Company over a three-year period commencing in July 2008. The Class A redeemable
preferred stock, under certain conditions, which includes a change of control,
may be tendered to the Company at the option of the holder for redemption prior
to scheduled maturity at a premium of 10%.
The Purchasers were also granted an option to purchase an additional $30.0
million of Class 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
December 31, 1998, this option had not been exercised. The option may be
exercised until July 2001.
In conjunction with the Greenwich Loan Agreement entered into on October
15, 1998 (see Note 3 "Warehouse Finance Facilities, Term Debt and Notes
Payable"), the terms of the Class A redeemable preferred stock issued on July
14, 1998 and the terms of the Class B preferred stock were amended to, among
other things, eliminate the conversion feature into common stock.
The elimination of the conversion feature of the Class A redeemable
preferred stock resulted in an increase to additional paid-in capital of $32.4
million representing the discount associated with the Class A redeemable
- 84 -
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
preferred stock. In subsequent periods, the Class A redeemable preferred stock
will be accreted to the redemption amount of $50 million. The amount of periodic
accretion will be charged against retained earnings. Accretion related to the
Class A redeemable preferred shares was $1.5 million for the year ended December
31, 1998. The Company used a 10% discount rate to estimate the value of the
Class A preferred stock.
On October 15, 1998, the Company issued 23,760.758 shares of its Class C
exchangeable preferred stock in conjunction with the Greenwich Loan Agreement
described in Note 3, "Warehouse Finance Facilities, Term Debt and Notes
Payable." The Class C exchangeable preferred stock has a par value of $0.01 per
share, participates in any dividends paid in the common stock on the basis of a
dividend per share equal to 1,000 times the dividend paid on the common stock
and has a liquidation value equal to the greater of $10 per share and 1,000
times the liquidating distribution otherwise payable on a share of common stock.
The Class C exchangeable preferred stock is exchangeable into an equal number of
shares of Class D preferred stock in certain events and represents the
equivalent of 40% of the common equity of the Company. The Class C exchangeable
preferred stock is subject to redemption at the option of the holder, under
certain circumstances, upon a change of control.
The carrying value of the Class C exchangeable preferred stock was based on
an allocation of the proceeds from the Greenwich Loan Agreement, which resulted
in a discount on the term debt associated with the Greenwich Loan Agreement of
$18.3 million. As of December 31, 1998, $15.2 million of this discount has been
amortized to interest expense and is included in "Interest expense - Greenwich
Funds" in the accompanying Consolidated Statements of Operations. The remaining
discount of $3.1 million will be amortized to interest expense over the
remaining term of the Greenwich Loan Agreement, which expired in January 1999.
See Note 3 "Warehouse Finance Facilities, Term Debt and Notes Payable."
Under the terms of the Greenwich Loan Agreement, after the end of the 90
day commitment period, if no definitive agreement which would result in a change
of control has been entered into, the loans outstanding thereunder may be
exchanged, at the holder's election, for Class C exchangeable preferred stock or
Class D preferred stock representing the equivalent of 50% of the diluted equity
of the Company. The Company valued this beneficial conversion feature based on
the market capitalization of the Company at the effective date of the Greenwich
Loan Agreement. The value assigned to the beneficial conversion feature of $14.7
million, which resulted in a discount on the term debt associated with the
Greenwich Loan Agreement, and is being amortized to expense over the 90-day
commitment period of the Greenwich Loan Agreement. As of December 31, 1998,
$12.3 million of this discount has been amortized to interest expense and is
included in "Interest Expense - Greenwich Funds" in the accompanying
Consolidated Statements of Operations. The remaining amount of $2.4 million will
be amortized to interest expense over the remaining term of the Greenwich Loan
Agreement which matured in January 1999.
5. Hedge Loss:
The Company has historically sold United States Treasury securities short
to hedge against interest rate movements affecting the mortgage loans held for
sale. Prior to September 1998, 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.
- 85 -
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
In September, 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, 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. Of the $47.5
million in hedge devaluation, approximately $25.1 million was closed at the time
the Company priced two securitizations and was reflected as an offset to gain on
sale and approximately $22.4 million was charged to hedge loss in the Statement
of Operations. At December 31, 1998, the Company had no open hedge positions.
6. Business Combinations
For the Year Ended December 31, 1996
On January 1, 1996, the Company acquired assets of Mortgage Central Corp.,
a Rhode Island corporation ("MCC"), a mortgage banking company which did
business under the name "Equitystars" primarily in Rhode Island, New York,
Connecticut and Massachusetts. The initial purchase price ($2.0 million) for
certain assets of MCC was paid by delivery to MCC of Series A voting,
convertible preferred stock of the Company, with contingency payments over two
years based on performance. The preferred stock had a liquidation preference of
$100 per share plus preferred dividends accruing at 8% per annum from the date
of issuance until redemption or liquidation. The preferred stock was converted
into 239,666 shares of the Company's common stock upon closing of the Company's
initial public offering in June 1996.
The acquisition was accounted for using the purchase method of accounting
and, accordingly, the purchase price of $2.0 million has been allocated to the
assets purchased and the liabilities assumed based upon the fair values at the
date of acquisition. The excess of the purchase price of $2.0 million over the
fair values of the assets acquired of approximately $333,000 and liabilities
assumed $57,000 was recorded as goodwill. Additional purchase price
consideration of approximately $480,000 has been recorded as goodwill related to
the contingent payment terms of the acquisition through December 31, 1997.
The operating results of MCC have been included in the Consolidated Statement of
Operations from the date of acquisition on January 1, 1996.
For the Year Ended December 31, 1997
Effective January 1, 1997, the Company acquired all of the assets of
Mortgage America, Inc., a non-conforming mortgage lender based in Bay City,
Michigan and Equity Mortgage Co., a non-conforming mortgage lender based in
Baltimore, Maryland, and all of the outstanding common stock of Corewest Banc, a
non-conforming mortgage lender based in Los Angeles, California. Effective
February 1, 1997, the Company acquired all of the assets of American Mortgage
Reduction, Inc., a non-conforming mortgage lender based in Owings Mills,
Maryland. Effective July 1, 1997, the Company acquired all of the outstanding
common stock of National Lending Center, Inc., a non-conforming mortgage lender
based in Deerfield Beach, Florida, and substantially all of the assets of
Central Money Mortgage Co., Inc., a non-conforming mortgage lender based in
Baltimore, Maryland. Effective October 1, 1997, the Company acquired
substantially all of the assets of Residential Mortgage Corporation, a
non-conforming mortgage lender based in Cranston, Rhode Island. Effective
November
- 86 -
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
1, 1997, the Company acquired substantially all of the assets of Alternative
Capital Group, Inc., a non-conforming lender based in Dallas, Texas.
All acquisitions were accounted for using the purchase method of accounting
and the results of operations have been included in those of the Company from
the dates of the acquisition. The fair value of the acquired companies' assets
approximated the liabilities assumed and, accordingly, the majority of the
initial purchase prices has been recorded as goodwill which is being amortized
on a straight-line basis for periods from five to 30 years. The aggregate
purchase price for the eight acquisitions completed in 1997 included 5,043,763
shares of common stock, gross cash paid of approximately $21.0 million, $12.9
million of notes payable to former owners of the acquired companies and
assumption of a stock option plan which resulted in the issuance of options to
acquire 334,596 share of the Company's common stock. The aggregate fair value of
assets acquired in these acquisitions was approximately $71.2 million and
liabilities assumed approximated $70.4 million. The Company recorded goodwill of
approximately $87.0 million related to these acquisitions. Most of the
acquisitions include earn-out arrangements that provide for additional
consideration if the acquired company achieves certain performance targets after
the acquisition. Additional purchase price of approximately $5.6 million and
$1.6 million was recorded as goodwill during the years ended December 31, 1997
and 1998, respectively, related to the contingent payment terms of the
acquisitions. Any such contingent payments will result in an increase in the
amount of recorded goodwill related to such acquisition.
The Company reviewed the potential impairment of goodwill on a
non-discounted cash flow basis to assess recoverability. The Company determined
that there was no impairment of goodwill at December 31, 1998 based on the
projected cash flows of the acquired companies. However, potential impairment in
future periods may result from several factors, including the consummation of
the proposed transaction with the Greenwich Funds, the discontinuation of
operations or sale of certain acquired companies, or other factors including
turmoil in the financial markets in which the acquired companies and the Company
operate. See Note 3 "Warehouse Finance Facilities, Term Debt and Notes Payable",
Note 5 "Hedge Loss" and Note 17 "Significant Events and Events Subsequent to
December 31, 1998."
The pro forma results of operations listed below reflect purchase
accounting adjustments assuming the acquisitions occurred on January 1, 1997.
1997
-----------
(unaudited)
(in thousands)
Revenues ...................................... $ 273,659
Net Income .................................... 56,370
Basic earnings per share ...................... 1.96
Diluted earnings per share .................... 1.73
The pro forma results of operations are not necessarily indicative of what
the actual consolidated results of operations would have been if the
acquisitions had been effective at the beginning of 1997.
- 87 -
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
7. Strategic Alliance
The Company, prior to 1997, relied on ContiFinancial Corporation and its
subsidiaries and affiliates ("ContiFinancial") to provide the original credit
facility for funding its loan purchases and originations as well as expertise
and assistance in loan securitization. In 1996, the securitizations were
structured so that ContiFinancial received, in exchange for cash of $8.6
million, interest-only and residual certificates with estimated values of $13.4
million. In addition, ContiFinancial paid $654,000 in expenses related to
securitizations in 1996. The difference between the estimated value of the
interest-only and residual certificates provided to ContiFinancial and the total
amount of cash received and expenses paid by ContiFinancial amounted to $4.2
million in 1996, and has been recorded as additional securitization transaction
expense.
In August 1993, the Company entered into a five-year agreement ("1993
Agreement") with ContiFinancial which provided the Company with a warehouse line
of credit, a standby credit facility, and certain investment banking services.
Pursuant to the 1993 Agreement, the Company agreed to share the value of the
partnership through a contingent fee based on a percentage of Residual Company
Equity (as defined in the 1993 Agreement) to be paid in cash at the termination
of the agreement. At December 31, 1993, there was no Residual Company Equity and
accordingly no liability was recorded. At December 31, 1994, the Company had
Residual Company Equity and accordingly the Company accrued a liability (sharing
of proportionate value of equity) to reflect the contingent fee payable of $1.7
million at December 31, 1994 with a corresponding charge in the statement of
operations.
On January 12, 1995, the Company and ContiFinancial entered into a revised
ten-year agreement (the "1995 Agreement") which replaced the 1993 Agreement and
provided for contingent fees based on the fair market value of the Company (as
defined). The amount of the contingent fee ranged from 15% to 25% of the fair
market value of the Company if ContiFinancial or the Company, respectively,
elected to terminate these arrangements. In the event that the agreement expired
with neither ContiFinancial nor the Company electing to terminate the
arrangements, the fee would have been 20% of the fair market value of the
Company. If the Company made any distributions to the partners other than those
made as tax distributions and returns of partnership equity, the Company would
have been required to distribute an amount to ContiFinancial equal to 25% of
these other distributions. At December 31, 1995, the Company accrued $5.9
million (based on an independent appraisal of the fair market value of the
Company) representing the estimated amount that would have been payable to
ContiFinancial had ContiFinancial elected to terminate the 1995 Agreement as of
December 31, 1995. The increase in the amount accrued at December 31, 1995
related to the 1995 Agreement over the amount accrued at December 31, 1994
related to the 1993 Agreement was recorded as a charge to earnings for the year
ended December 31, 1995.
In March 1996, the Company and ContiFinancial replaced the 1995 Agreement
with an agreement (the 1996 Agreement) which eliminated the ability of
ContiFinancial to obtain or require a cash payment as provided for in the 1993
and 1995 Agreements and provided ContiFinancial options to acquire an interest
in the Company for a nominal amount. On June 24, 1996, the effective date of the
exchange described in Note 1, the option was converted into a warrant
exercisable for a de minimus amount for 3,000,000 shares of the Company's common
stock. The warrant contained customary anti-dilution provisions. ContiFinancial
had certain rights to join in registration of additional shares of stock and,
under certain conditions after the expiration of a four-year time period, to
require that shares subject to ContiFinancial's warrants be registered by the
Company or its successor. The liability that had been established under the 1995
Agreement was reclassified to paid-in capital in March 1996 in conjunction with
the issuance of the ContiFinancial option. The fair value of the option at the
date of grant (March 26, 1996) was estimated to be $8.4 million based on an
independent appraisal of the option. The Company recorded
- 88 -
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
expense of $2.6 million for the year ended December 31, 1996, representing the
excess of the estimated fair value of the option at the date of grant over the
amount accrued at December 31, 1995 pursuant to the 1995 Agreement. As of
December 31, 1998 Conti Financial had exercised the warrant for the entire
3,000,000 shares.
8. Other Assets
Other assets consist of the following:
(in thousands)
1997 1998
------- -------
Prepaid expenses ..................... $ 3,106 $10,319
Real estate owned .................... 1,805 6,088
Investment in joint venture .......... 1,707 3,388
Hedge deposits ....................... 4,356 --
Notes receivable ..................... 1,003 950
Other ................................ 993 1,945
------- -------
$12,970 $22,690
======= =======
In March 1996, the Company entered into an agreement to form a joint
venture (Preferred Mortgages Limited) in the United Kingdom to originate and
purchase mortgages made to borrowers who may not otherwise qualify for
conventional loans for the purpose of securitization and sale. The Company and a
second party each own 45% of the joint venture, and a third party owns the
remaining 10%. The original investment in the joint venture represents the
acquisition of 675,000 shares of the joint venture stock for $1.0 million and a
note receivable from the joint venture for $1.0 million.
Additionally, at December 31, 1997 and December 31, 1998, the Company had
loaned to the joint venture $1.8 million and $4.3 million, respectively. The
note and loan bear interest at 3% per annum above LIBOR. Principal repayment on
the note is to begin when the joint venture's Board of Directors determine the
joint venture has sufficient available profits. The loan is due upon demand. To
the extent not previously repaid, all principal is due December 31, 2040. The
investment in the joint venture is accounted for under the equity method and is
included in other assets.
9. Servicing Portfolio
The total servicing portfolio of loans was approximately $2.1 billion, $7.0
billion and $8.9 billion at December 31, 1996, 1997 and 1998, respectively.
- 89 -
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
10. Interest-Only and Residual Certificates
Activity in interest-only and residual certificates consisted of the
following:
For the year ended
December 31,
--------------------------
1997 1998
--------- ---------
(in thousands)
Balance, beginning of year ......... $ 86,247 $ 223,306
Additions .......................... 384,971 365,353
Cash receipts ...................... (247,912) (35,180)
Market valuation adjustment ........ -- (84,638)
--------- ---------
Balance, end of year ............... $ 223,306 $ 468,841
========= =========
In 1998, the Company revised the loss curve assumption used to approximate
the timing of losses over the life of the securitized loans and the discount
rate used to present value the projected cash flows retained by the Company.
Previously, the Company expected losses from defaults to increase from zero in
the first six months of the loan to 100 basis points after 36 months. During the
fourth quarter of 1998, as a result of emerging trends in the Company's serviced
loan portfolio and adverse market conditions (see Note 3 "Warehouse Finance
Facilities, Term Debt, and Notes Payable," Note 5 "Hedge Loss" and Note 17
"Significant Events and Other Events Subsequent to December 31, 1998"), the
Company revised its loss curve so that expected defaults gradually increase from
zero in the first six months of the loan to 175 basis points after 36 months.
The Company believes the adverse market conditions affecting the non-conforming
mortgage industry may limit the Company's borrowers' ability to refinance
existing delinquent loans serviced by IMC with other non-conforming mortgage
lenders that market their products to borrowers that are less creditworthy,
which IMC believes may increase the frequency of defaults. Previously, the
Company discounted the present value of projected cash flows retained by the
Company at discount rates ranging from 11% to 14.5%. During the fourth quarter
of 1998, as a result of adverse market conditions, the Company adjusted to 16%
the discount rate used to present value the projected cash flow retained by the
Company. The revised loss curve and discount rate assumption resulted in a
decrease to the estimated fair value of the interest-only and residual
certificates of approximately $32.3 million and $52.3 million, respectively. The
total decrease in fair value of the interest-only and residual certificates of
$84.6 million is reflected as a market valuation adjustment in the accompanying
Consolidated Statement of Operations for the year ended December 31, 1998.
Cash receipts in 1997 include gross receipts of approximately $232.4
million from the sale, on a non-recourse basis of interest-only and residual
certificates. The sale was effected through a securitization (the "Excess
Cashflow Securitization") in which the Company sold interest-only and residual
certificates that had an estimated net book value of approximately $266.6
million and received net cash proceeds equal to approximately 85% of the
estimated net book value and a subordinated residual certificate for the balance
of the estimated net book value. The Company did not recognize any gain or loss
as a result of the Excess Cashflow Securitization, although costs of the
transaction of approximately $4.9 million were expensed as incurred. The Company
used the net proceeds to retire or reduce certain term debt.
- 90 -
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
11. Property, Furniture, Fixtures and Equipment
Property, furniture, fixtures and equipment consists of the following:
December 31,
------------------------
1997 1998
-------- --------
(in thousands)
Building ............................. $ 5,113 $ 5,113
Computer systems ..................... 4,430 6,991
Office equipment ..................... 3,603 4,395
Furniture ............................ 3,465 5,350
Leasehold improvements ............... 512 732
Other ................................ 335 648
-------- --------
Total ........................ 17,458 23,229
Less accumulated depreciation ........ (2,574) (6,110)
-------- --------
Property, furniture, fixtures and
equipment, net .................... $ 14,884 $ 17,119
======== ========
Depreciation expense was $317,000, $1.5 million and $3.5 million for the
years ended December 31, 1996, 1997 and 1998, respectively.
- 91 -
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
12. Income Taxes
The Partnership which is included in the consolidated financial statements
became a wholly owned subsidiary of the Company after the plan of exchange
described in Note 1 was consummated. The Partnership made no provision for
income taxes since the Partnership's income or losses were passed through to the
partners individually. The Partnership became subject to income taxes as of June
24, 1996, the effective date of the exchange, and began accounting for the
effect of income taxes under SFAS No. 109, "Accounting for Income Taxes," on
that date. Taxable income for 1996 is calculated on the days method whereby the
previous partners are responsible for the tax liability generated through June
24, 1996.
The components of the provision for income taxes allocable to the Company
consist of the following:
<TABLE>
<CAPTION>
(in thousands)
Current income tax expense: 1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Federal .............................. $ 5,713 $ 13,070 $ 9,578
State ................................ 1,214 2,776 2,034
-------- -------- --------
6,927 15,846 11,612
-------- -------- --------
Deferred income tax expense (benefit):
Federal .............................. 725 11,262 (9,018)
State ................................ 154 2,392 (1,915)
-------- -------- --------
879 13,654 (10,933)
-------- -------- --------
Non-recurring benefit associated with the conversion
of Partnership to C Corporation ................. (3,600) -- --
-------- -------- --------
Total provision for income taxes ................... $ 4,206 $ 29,500 $ 679
======== ======== ========
The income tax benefits related to the exercise of certain warrants reduces
taxes currently payable and is credited to additional paid in capital. Such
income tax benefit for 1998 was approximately $2.7 million.
</TABLE>
Total provision (benefit) for income taxes differs from the amount which would
be provided by applying the statutory federal income tax rate to income (loss)
before income taxes as indicated below:
<TABLE>
<CAPTION>
(in thousands)
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Income tax (benefit) at federal statutory rate ...... $ 10,192 $ 27,100 $(34,927)
State income tax (benefit), net of federal benefit .. 1,310 3,484 (4,490)
Interest expense - Greenwich Funds .................. -- -- 4,845
Non-recurring benefit associated with the conversion
of the Partnership to a C Corporation ............ (3,600) -- --
Goodwill amortization ............................... -- 817 1,345
Other, net .......................................... (312) (1,901) 281
Valuation allowance ................................. -- -- 33,625
Effect of applying statutory federal and state income
tax rates to partnership income .................. (3,384) -- --
-------- -------- --------
Total provision for income taxes ...... $ 4,206 $ 29,500 $ 679
======== ======== ========
</TABLE>
- 92 -
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
The effects of temporary differences that give rise to significant portions of
the deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
(in thousands)
1997 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Stock warrants ..................................... $ 2,403 $ --
Allowance for loan losses .......................... 5,095 10,334
Interest-only and residual certificates ............ 3,722 69,323
Joint venture ...................................... 1,037 2,068
Mortgage servicing rights .......................... 866 8,159
Other .............................................. 3,634 4,346
Deferred tax liabilities:
Interest-only and residual certificates ............ (27,110) (59,611)
Other .............................................. (580) (994)
-------- --------
Net deferred tax asset (liability) before
valuation allowance .............................. (10,933) 33,625
Valuation allowance ................................ -- (33,625)
-------- --------
Net deferred tax asset (liability) ................. $(10,933) $ --
======== ========
</TABLE>
The asset and liability method of accounting for income taxes requires that
a valuation allowance be recorded against tax assets which are not likely to be
realized. Specifically, due to the timing of the expected reversal of the
Company's temporary differences, realization is dependent upon the Company
achieving sufficient future earnings to achieve the tax benefits. Due to the
uncertain nature of their ultimate realization based upon past performance, the
Company has established a full valuation allowance against the deferred tax
assets and is recognizing the deferred tax asset only as reassessment
demonstrates that the assets are realizable. Realization is entirely dependent
upon future earnings in specific tax jurisdictions. While the need for this
valuation allowance is subject to periodic review, if the allowance is reduced,
the tax benefits from these deferred tax assets will be recorded in future
operations as a reduction of the Company's income tax provision.
13. Financial Instruments and Off Balance Sheet Activities
Financial Instruments
The Company regularly securitizes and sells fixed and variable rate
mortgage loans. Prior to October 1998, as part of its interest rate risk
management strategy, the Company hedged its fixed rate interest rate risk
related to its mortgage loans held for sale by utilizing United States Treasury
securities. The Company classified these transactions as hedges. The gains and
losses derived from these financial securities were deferred and included in the
carrying amounts of the mortgage loans held for sale and ultimately recognized
in income when the related mortgage loans were sold. Deferred losses on the
United States Treasury Securities used to hedge the anticipated transactions
amounted to approximately $2.7 million at December 31, 1997. The Company did not
hedge its fixed rate interest rate risk related to mortgage loans held for sale
at December 31, 1998. See Note 5 "Hedge Loss".
- 93 -
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
Market Risk
The Company is subject to market risk from interest-only and residual
certificates and was subject to market risk from short sales of United States
Treasury securities prior to October 1998, in that changes in market conditions
can and could unfavorably affect the market value of such contracts.
Fair Values of Financial Instruments
SFAS No. 107, "Disclosures about Fair Values of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the financial statements, for which it is
practicable to estimate that value. In cases where quoted market prices are not
available, fair values are based upon estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and the estimated future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. SFAS No. 107 excludes certain
financial instruments and all non-financial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts do not represent the
underlying value of the Company.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
the value:
Cash and cash equivalents: The carrying amount of cash and cash
equivalents is considered to be a reasonable estimate of fair market value.
Accrued interest receivable and accounts receivable: The carrying
amounts are considered to approximate fair value. All amounts that are
assumed to be uncollectible within a reasonable time are written off.
Securities purchased under agreements to resell and securities sold
but not yet purchased: The carrying amounts approximate fair value as these
amounts are short-term in nature and bear market rates of interest.
Mortgage loans held for sale: The estimate of fair values is based on
current pricing of whole loan transactions that a purchaser unrelated to
the seller would demand for a similar loan. The fair value of the mortgage
loans held for sale approximated $1.7 billion and $970.0 million at
December 31, 1997 and 1998, respectively.
Warehouse financing due from correspondents: The carrying amounts are
considered to approximate fair value as the amounts are short term in
nature and bear market rates of interest.
Interest-only and residual certificates: The fair value is determined
by discounting the estimated cash flow over the life of the certificate
using prepayment, default and interest rate assumptions that the Company
believes market participants would use for similar financial instruments
subject to prepayment, credit and interest rate risk. The carrying amount
is considered to be a reasonable estimate of fair market value.
- 94 -
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
Warehouse finance facilities, term debt and notes payable: The
warehouse finance facilities have maturities of less than one year and bear
interest at market interest rates and, therefore, the carrying value is a
reasonable estimate of fair value. The carrying amount of outstanding term
debt and notes payable bear market rates of interest and approximates fair
value.
Credit Risk
The Company is a party to financial instruments with off-balance sheet
credit risk in the normal course of business. These financial instruments
include commitments to extend credit to borrowers and commitments to purchase
loans from correspondents. The Company has a first or second lien position on
all of its loans, and the maximum combined loan-to-value ratio ("CLTV")
permitted by the Company's underwriting guidelines is 100%. The CLTV represents
the combined first and second mortgage balances as a percentage of the lesser of
appraised value or the selling price of the mortgaged property, with the
appraised value determined by an appraiser with appropriate professional
designations. A title insurance policy is required for all loans.
As of December 31, 1997 and 1998, the Company had outstanding commitments
to extend credit at fixed rates to purchase loans in the amounts of $515.0
million and $101.0 million, respectively. Commitments to extend credit or to
purchase a loan are granted for a period of thirty days and are contingent upon
the borrower and the borrower's collateral satisfying the Company's underwriting
guidelines. Since many of the commitments are expected to expire without being
exercised, the total commitment amount does not necessarily represent future
cash requirements or future credit risk.
The Company is exposed to on-balance sheet credit risk related to its
mortgage loans held for sale and interest-only and residual certificates.
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash and cash equivalents
and mortgages held for sale. The Company places its cash and cash equivalents
with what management believes to be high-quality financial institutions and
thereby limits its exposure to credit risk. As of December 31, 1996, 1997 and
1998 a large amount of mortgage loans with on balance sheet and off balance
sheet risks were collateralized by properties located in the mid-Atlantic region
of the United States.
Warehouse Exposure
The Company makes available to certain correspondents warehouse financing
which bear interest at rates ranging from 1.75% to 2.50% per annum in excess of
LIBOR, of which $25.9 million and $2.8 million were outstanding at December 31,
1997 and 1998, respectively. Interest income on these warehouse financing
facilities were $191,000, $1.5 million and $1.2 million for the years ended
December 31, 1996, 1997 and 1998, respectively. The warehouse commitments are
for terms of less than one year. Mortgage loans originated by the correspondents
remain in the warehouse for a period of 30 days at which point the mortgage
loans are either purchased by the Company or sold to another investor.
14. Employee Benefit Plans
Defined Contribution Plans
The Company adopted a defined contribution plan (401(k)) for all eligible
employees during August 1995. Additionally, the Company assumed many 401(k)
plans of acquired subsidiaries and merged these plans into the
- 95 -
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
Company's plan. Contributions to the plan are in the form of employee salary
deferrals, which may be subject to an employer matching contribution up to a
specified limit at the discretion of the Company. The Company's contribution to
the plan amounted to $277,000, $960,000 and $1.9 million for the years ended
December 31, 1996, 1997 and 1998, respectively.
The Company's subsidiary, National Lending Center, Inc. ("National Lending
Center"), sponsors a 401(k) plan for eligible employees. National Lending
Center's policy is to match 25% of the first 6% of employees' contributed
amounts. Contributions to the plan included in the accompanying consolidated
statement of operations for the years ended December 31, 1997 and 1998 were
approximately $24,000 and $89,000, respectively.
Stock Award Plans
Effective October 1997, the Company adopted the Executive Officer
Unregistered Stock Plan (the "Executive Officer Plan") and the Vice-Presidents'
Unregistered Stock Plan (the "Vice Presidents' Plan") which provide compensation
for certain officers of the Company in the form of unregistered shares of the
Company's common stock.
Under the Executive Officer Plan, if the Company achieves an increase in
net earnings per share for two consecutive years of 10% or more, eligible
participants receive a grant of fully-vested unregistered shares of the
Company's common stock at the end of each fiscal year beginning with the fiscal
year ended December 31, 1997. The number of unregistered shares granted to each
participant equals the officer's base salary divided by the closing price of the
Company's common stock on the last calendar day of the year. Each participant
also receives a cash payment equal to the income tax benefit the Company obtains
from the issuance of the common stock. A total of 104,463 shares of unregistered
stock were granted under the Executive Officer Plan for the year ended December
31, 1997, resulting in compensation expense of $3.0 million. No unregistered
shares were granted under the executive officer plan during the year ended
December 31, 1998.
Under the Vice-Presidents' Plan, certain vice-presidents as determined by
the Compensation Committee of the Board of Directors may receive a grant of
unregistered shares of the Company's common stock at the end of each fiscal year
beginning with the year ended December 31, 1997. The number of unregistered
shares granted to each designated vice-president shall equal such
vice-president's base salary at the year end divided by the closing price for
the Company's common stock on the last day of the fiscal year. The unregistered
shares granted to each vice-president vest over a three year period with
one-third vesting immediately, and an additional one-third vesting on the last
day of each of the next two fiscal years so long as the vice-president is still
employed by the Company on such date. No unregistered shares were granted under
the Vice-Presidents' Plan during the years ended December 31, 1997 and 1998.
Stock Option Plans
On December 11, 1995, the Partnership adopted the Partnership Option Plan
pursuant to which the Partnership was authorized to grant to certain key
employees, directors of the General Partner and certain non-employee advisors
(collectively, "Eligible Persons") options to acquire an equity interest in the
Partnership. In April 1996, the Company adopted the Company Incentive Plan and
the Directors Stock Option Plan. All options granted under the Partnership
Option Plan were assumed by the Company pursuant to the Company Incentive Plan
and the Directors Stock Option Plan. The aggregate equity interest in the
Company available under the Company Incentive Plan and the Director Stock Option
Plan may not exceed 12% of all equity interests in the Company as of the date
the plan was adopted.
- 96 -
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
In July 1997, the Company adopted the IMC Mortgage Company 1997 Incentive
Plan (the "1997 Incentive Plan") pursuant to which the Company is authorized to
grant to eligible employees options to purchase shares of common stock of the
Company. The 1997 Incentive Plan provides that options to acquire a maximum of
250,000 shares may be granted thereunder at exercise prices of not less than
100% of the fair market value of the common stock at the date of each grant.
Such options expire ten years after the date of grant. As of December 31, 1998,
127,500 options had been granted under the 1997 Incentive Plan.
The Company applies APB 25 and related interpretations in accounting for
its plans. SFAS 123 was issued by the FASB in 1995 and, if fully adopted,
changes the method for recognition of cost with respect to plans similar to
those of the Company. The Company has adopted the disclosure alternative
established by SFAS 123. Therefore pro forma disclosures as if the Company
adopted the cost recognition requirements under SFAS 123 are presented below.
The Company's stock option plans provide primarily for the granting of
nonqualified stock options to certain key employees, non-employee directors and
non-employee advisors. Generally, options outstanding under the Company's stock
option plans: (1) are granted at prices which are equal to the market value of
the stock on the date of grant, (2) vest at various rates over a three or five
year period and (3) expire ten years subsequent to award.
A summary of the status of the Company's stock options as of December 31,
1996, 1997 and 1998 and the changes during the year is presented below:
<TABLE>
<CAPTION>
1996 1997 1998
----------------------- ----------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year ............. 1,150,866 $ 2.35 1,511,168 $ 4.18 1,464,661 $ 4.18
Granted ...................................... 360,302 $10.00 354,596 $ 4.94 139,932 $ 8.29
Exercised .................................... 0 401,103 $ 3.77 5,173 $ 2.35
Canceled ..................................... 0 0 63,032 $11.49
--------- ---------- ----------
Outstanding at end of year ................... 1,511,168 $ 4.18 1,464,661 $ 3.59 1,536,388 $ 4.54
========== ========== ==========
Options exercisable at end of year ........... 1,010,456 1,258,820 1,325,075
========== ========== ==========
Options available for future grant ........... 534,286 429,690 343,092
========== ========== =========
Weighted average fair value of options granted
during year .............................. $ 5.75 $ 5.92 $ 6.64
========== ========== ==========
</TABLE>
The fair value of stock options at date of grant was estimated using the
Black-Scholes option pricing model utilizing the following weighted average
assumptions:
1996 1997 1998
------ ------ ------
Risk-free interest rate .......... 5.7% 5.5% 5.6%
Expected option life in years .... 4.2 1.3 6.0
Expected stock price volatility .. 53.2% 54.1% 96.6%
Expected dividend yield .......... -- -- --
The 1996 grants included options to purchase 120,000 shares of common stock
granted to employees at exercise prices less than the market price of the stock
on the date of grant. The exercise price of the options,
- 97 -
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
market price of the common stock at grant date and estimated fair value of such
options at grant date were $8.00, $12.00 and $8.11 per share, respectively. The
Company records compensation expense for such grants over their vesting periods
in accordance with APB 25. Such expense totaled approximately $40,000, $96,000
and $96,000 in the years ended December 31, 1996, 1997 and 1998, respectively.
The 1996 grants also include options to purchase 20,000 shares of common
stock, which were granted to advisors to the Company at exercise prices equal to
the market price of the stock at grant date. Expense representing the estimated
fair value of such grants of approximately $20,000, $57,000 and $96,000 has been
recognized in the years ended December 31, 1996, 1997 and 1998, respectively,
under the provisions of SFAS 123.
The Company assumed the stock option plan of its acquired subsidiary,
Mortgage America, Inc. ("Mortgage America") in accordance with the terms of the
purchase agreement. On January 1, 1997, the effective date of the acquisition,
the fully vested outstanding options under the Mortgage America stock option
plan were converted to fully-vested options to acquire 334,596 shares of the
Company's common stock (see Note 6). The exercise price of the options and
market price of the common stock at the acquisition date were $4.19 and $16.75,
respectively.
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------- --------------------------
Weighted Number
Number average Weighted exercisable at Weighted
outstanding at remaining average December average
December 31, contractual exercise 31, exercise
1998 life price 1998 price
-------------- ----------- --------- -------------- -------
<S> <C> <C> <C> <C> <C>
Range of exercise prices
$2.35 .................... 994,592 7.0 $ 2.35 994,592 $ 2.35
$4.00 to $8.00 ........... 458,865 7.9 $ 7.08 300,052 $ 6.72
$12.00 to $20.25 82,931 8.6 $10.99 30,431 $11.20
--------- ---------
Total ............... 1,536,388 7.4 $ 4.23 1,325,075 $ 3.54
========= =========
</TABLE>
Had compensation cost for the Company's 1996, 1997 and 1998 grants for
stock-based compensation plans been determined consistent with SFAS 123, the
Company's pro forma net income and pro forma net income per common share for the
year ended December 31, 1996 and net income (loss) and net income (loss) per
common share for the years ended December 31, 1997 and 1998 would approximate
the pro forma amounts below.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1997 December 31, 1998
------------------------- ------------------------- ---------------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- --------- ----------- ---------
(in millions except per share data)
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) (pro forma for 1996) $ 17.9 $ 17.3 $ 47.9 $ 47.5 $ (100.5) $ (100.7)
Basic earnings (loss) per share
(pro forma for 1996) .............. $ 1.12 $ 1.08 $ 1.76 $ 1.74 $ (3.21) $ (3.22)
Diluted earnings per share
(pro forma for 1996) ............... $ 0.92 $ 0.88 $ 1.54 $ 1.52 $ (3.21) $ (3.22)
</TABLE>
- 98 -
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts and additional awards in future years are
anticipated.
15. Commitments and Contingencies
Industry Partners Incentive Plan
In 1996, the Company created an incentive plan (the "Industry Partners
Incentive Plan") to encourage partners to sell more mortgage loans to the
Company than required under their commitments. Under that Plan, options
exercisable for five years after grant to acquire a total of 20,000 shares of
common stock of the Company at $9.00 per share were awarded to Partners for the
quarter ended September 30, 1996. The market price of the stock at date of grant
was $16.00 per share. The 20,000 options were allocated among those Partners
that doubled their commitments, pro rata, to the extent the Partners exceeded
that doubled commitment for the quarter. The plan was amended and, for each
quarter beginning with the quarter ended December 31, 1996, Industry Partners
that double their commitments will be eligible to receive on a pro rata basis
fully paid shares of common stock equal to $105,000 divided by the market price
of the common stock at the end of each quarter. The fully paid shares of common
stock will be issued among those Industry Partners that double their
commitments, pro rata, to the extent the Industry Partner exceeded its doubled
commitment for the quarter. The Industry Partners Incentive Plan continues
through the quarter ended June 30, 2000. Expense recorded under the plan in the
years ended December 31, 1996, 1997 and 1998 amounted to approximately $257,000,
$252,000 and $189,000, respectively.
Operating Leases
The Company leases office space and various office equipment under
operating lease agreements. Rent expense under operating leases was $753,000,
$4.1 million and $7.9 million in the years ended December 31, 1996, 1997 and
1998, respectively.
Future minimum lease payments under noncancellable operating lease
agreements at December 31, 1998 are as follows:
Years Ending
December 31, (in thousands)
------------
1999....................................... 6,305
2000....................................... 4,889
2001....................................... 3,896
2002....................................... 2,729
-------
$17,819
=======
Employment Agreements
Certain members of management entered into employment agreements expiring
through 2001 which, among other things, provide for aggregate annual
compensation of approximately $1.4 million plus bonuses ranging from 5% to 15%
of base salary in the relevant year for each one percent by which the increase
in net earnings per share of the Company over the prior year exceeds 10%, up to
a maximum of 300% of annual compensation. Each employment agreement contains a
restrictive covenant, which prohibits the executive from competing with the
Company for a period of 18 months after termination.
- 99 -
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
Legal Proceedings
The Company is party to various legal proceedings arising in the ordinary
course of its business. Management believes that none of these matters,
individually or in the aggregate, will have a material adverse effect on the
consolidated financial condition or results of operations of the Company.
On December 23, 1998, certain former shareholders of CoreWest sued the
Company in Superior Court of the State of California for the County of Los
Angeles claiming the Company agreed to pay them $23.8 million in cancellation of
the contingent "earn out" payment, if any, payable by the Company in connection
with the Company's purchase of all of the outstanding shares of CoreWest. The
case is in the early stages of pleading; however, the Company's management
believes there is no merit in the plaintiffs' claims.
Year 2000
The Year 2000 issue relates to limitations in computer systems and
applications that may prevent proper recognition of the Year 2000. The potential
effect of the Year 2000 issue on the Company and its business partners will not
be fully determinable until the Year 2000 and thereafter. If Year 2000
modifications are not properly completed either by the Company or entities with
which the Company conducts business, the Company's revenues and financial
condition could be adversely impacted.
16. Quarterly Results of Operations (Unaudited)
(in millions, except per share data)
Fiscal Quarter
----------------------------------------
1998 First Second Third Fourth
---- ------ ------ ----- ------
Revenues ......................... $ 83.9 $ 97.3 $ 83.8 $ 56.2
Net income (loss) ................ $ 15.1 $ 16.3 $ 2.2 $(134.1)
Basic earnings per share ......... $ 0.49 $ 0.53 $ 0.07 $ (4.00)
Diluted earnings per share ....... $ 0.44 $ 0.47 $ 0.06 $ (4.00)
1997
----
Revenues ....................... $ 38.4 $ 49.8 $ 73.7 $ 76.8
Net income ..................... $ 8.9 $ 10.7 $ 13.5 $ 14.8
Basic earnings per share ....... $ 0.41 $ 0.41 $ 0.45 $ 0.48
Diluted earnings per share ..... $ 0.34 $ 0.36 $ 0.40 $ 0.43
- 100 -
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
17. Significant Events and Events Subsequent to December 31, 1998:
The Company, like several companies in the sub-prime mortgage industry, has
been significantly and adversely affected by market conditions beyond their
control. Along with many companies in the industry, the Company's access to
debt, equity and asset-backed markets has become virtually impossible. These
market conditions have resulted in many companies in the industry filing for
bankruptcy protection, such as Southern Pacific Funding (October 1,1998),
Wilshire Financial Services Group, Inc. (March 3,1999) MCA Financial Corp
(February 1,1999), United Companies (March 2,1999) and certain subsidiaries of
First Plus Financial (March 6, 1999). As a result of these unprecedented market
conditions, the Company has closed certain retail offices, reduced total number
of employees, significantly reduced all loan sales through securitization,
focused significantly on loan sales to institutional investors and is in the
process of identifying and reducing non-essential costs of operations. The
Company, based on these unprecedented market conditions, has entered into an
Acquisition Agreement to provide the Company with a reasonable opportunity to
avoid having to file bankruptcy protection like many of its competitors.
As described in Note 3 "Warehouse Finance Facilities, Term Debt and Notes
Payable", on October 15, 1998, the Company entered into the Greenwich Loan
Agreement that provided the Company a $33 million standby revolving credit
facility for a period of up to 90 days. In consideration for providing the
facility, the Greenwich Funds received Class C exchangeable preferred stock
representing the equivalent of 40% of the Company's common equity and under
certain conditions the Greenwich Funds could elect either to (a) receive
repayment of the loan facility, plus accrued interest at 10% per annum, and a
take-out premium of up to 200% of the average principal amount outstanding or
(b) exchange its loans for additional preferred stock, representing the
equivalent of an additional 50% of the Company's common equity.
On February 19, 1999, the Company entered into a merger agreement with the
Greenwich Funds which was terminated and recast as an acquisition agreement on
March 31, 1999. Under the Acquisition Agreement, the Greenwich Funds will
receive newly issued common stock of the Company equal to 93.5% of the
outstanding common stock after such issuance, leaving the existing common
shareholders of the Company with 6.5% of the common stock outstanding. No
payment will be made to the Company's common shareholders in this transaction.
Upon the consummation of the acquisition, the Greenwich Funds will surrender
Class C exchangeable preferred stock for cancellation and enter into an
amendment and restatement of the Greenwich Loan Agreement, pursuant to which the
Greenwich Funds will make available to the Company an additional $35 million in
working capital loans. See Note 3, "Warehouse Finance Facilities, Term Debt and
Notes Payable."
The Acquisition Agreement is subject to a number of conditions including
approval by the Company's shareholders. There is no assurance that this
transaction will be consummated.
The Company is in the process of preparing to call a special meeting of its
shareholders to authorize the issuance of common stock to the Greenwich Funds.
On February 19, 1999, the Greenwich Funds purchased, at a discount, from
BankBoston its interests in the revolving credit facilities.
Simultaneously with the execution of the merger agreement, the Company
entered into amended and restated intercreditor agreements with its three major
warehouse lenders and with the Greenwich Funds relating to the revolving credit
bank facility and the Greenwich Loan Agreement, as amended. Under those
agreements, the lenders agreed to keep their respective facilities in place
through the closing of the acquisition and for twelve months
- 101 -
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
thereafter if acquisition by the Greenwich Funds is consummated within five
months, subject to earlier termination in certain events as provided in the
intercreditor agreements. If the acquisition is not consummated within a five
month period, after that period, those lenders would no longer be required to
stand still and could exercise remedies. In such an event, it is likely that the
Company would be unable to continue its business. The financial statements have
been prepared assuming the Company will continue as a going concern, the
shareholders will approve the acquisition by the Greenwich Funds of 93.5% of the
common stock to be outstanding and the intercreditor agreements will remain in
effect for a period of up to seventeen months. In the event the Acquisition
Agreement is terminated or the acquisition is not consummated within five
months, the lenders subject to the requirements of the amended and restated
intercredior agreements would no longer be required to refrain from exercising
remedies. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
- 102 -
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Change in Certifying Accountants
On February 16, 1999, IMC appointed Grant Thornton LLP ("Grant Thornton")
the independent accounting firm to audit the financial statements of IMC for the
year ended December 31, 1998 and dismissed PricewaterhouseCoopers LLP ("PWC").
The decision to dismiss PWC was approved by the Audit Committee of IMC's Board
of Directors on February 16, 1999.
IMC's decision was made after discussions with and in accordance with
directions from the SEC. The SEC announced on January 14,1999 that the
Securities and Exchange Commission ("SEC") had brought and settled charges
against PWC for engaging in improper professional conduct by violating SEC
independence rules. The SEC issued an Order Instituting Proceedings and Opinion
and Order Pursuant to Rule 102(e) of the SEC's Rules of Practice ("SEC Order")
issued by the SEC under the Securities Exchange Act of 1934 (Release
40945/January 14, 1999 and Accounting and Auditing Enforcement Release No.
10981/January 14, 1999 Administration Proceedings File No. 2-9809).
Specifically, the SEC Order details activities by a PWC Senior Tax
Associate with securities of a company identified in the SEC Order as "Company
A". Based on communications with the SEC and PWC, IMC believes that it is the
company identified in the SEC Order as "Company A". The SEC Order states that
the PWC Senior Tax Associate performed preliminary work involved in transferring
certain engagements for Company A from PWC's Jacksonville, Florida office to its
Tampa Office. The SEC Order also states that the PWC Senior Tax Associate did
not own Company A securities while he performed services for "Company A."
However, his ownership of Company A securities occurred during the period that
PWC was designated as Company A's independent public accountant.
PWC has stated to IMC that they believe this violation had no effect on
either the quality or integrity of any audit or the reliability of any opinion
rendered in connection with its audit engagement with IMC. IMC also firmly
believes in the quality and integrity of its financial statements as of their
respective dates and in the reliability of PWC's audit opinions.
The SEC has acknowledged that IMC had no knowledge or reason to know of
PWC's lack of compliance with the SEC's independence standards. The conduct of
PWC is not consistent with the standards regarding compliance with SEC
regulations that IMC expects and demands from its independent public accountant.
Before IMC became aware of the violations of the independence standards,
IMC was satisfied with its relationship with PWC and, in the absence of the
violations described in the SEC Order, would not have elected to replace PWC.
PWC's reports on IMC's consolidated financial statements for 1997 and 1996
did not contain an adverse opinion or disclaimer of opinion, and was not
qualified or modified as to uncertainty, audit scope or accounting principles.
During IMC's two most recent fiscal years and the period from the end of its
most recent fiscal year through February 16, 1999, there were no disagreements
with PWC on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which if not resolved to
PWC's satisfaction would have caused PWC to make reference to the subject matter
of the disagreement in connection with its reports. In addition, during IMC's
two most recent fiscal years and the period from the end of its most recent
fiscal year through February 16, 1999, there have been no reportable events, as
such term is defined in Item 304(a) of Regulation S-K promulgated under the
Securities Act.
During IMC's two most recent fiscal years and the subsequent interim period
preceding the engagement of Grant Thornton, neither IMC nor anyone on its behalf
consulted Grant Thornton regarding (i.) the application of accounting principles
to specific completed or proposed transactions, or the type of audit opinion
that might be
- 103 -
<PAGE>
rendered on IMC's financial statements, which consultation resulted in the
providing of a written report or oral advice concerning the same to IMC that
Grant Thornton concluded was an important factor considered by IMC in reaching a
decision as to the accounting, auditing or financial reporting issue; or (ii.)
any matter that was either the subject of a disagreement (as defined in Rule
304(a)(1)(iv.) of Regulation S-K or a reportable event (as defined in Rule
304(a)(1)(v.) of Regulation S-K.
- 104 -
<PAGE>
PART III.
Item 10. Directors and Executive Officers of the Registrant
The executive officers of the Company and their ages and positions as of
the date of this Annual Report on Form 10-K are set forth below:
<TABLE>
<CAPTION>
Name (Age) Position and Business Experience
- - ---------- --------------------------------
<S> <C>
George Nicholas (56) Chief Executive Officer, Chairman of the Board, and
Assistant Secretary, Member of the Compensation and
Executive Committees
Thomas G. Middleton (52) President and Chief Operating Officer, Member of the
Compensation and Executive Committees
Stuart D. Marvin (39) Chief Financial Officer
Joseph P. Goryeb (68) Director, Member of the Audit and Option Commitees
Mitchell W. Legler (57) Director, Member of the Compensation and Audit Committees
Mark W. Lorimer (40) Director, Member of the Compensation and Audit Committees
</TABLE>
George Nicholas has served as Chief Executive Officer and Chairman of the Board
of IMC since the formation of the Company in December 1995 and as Assistant
Secretary of the Company since April 1996. Since his founding of the Partnership
in August 1993, Mr. Nicholas has served as Chief Executive Officer of the
Partnership and Chairman of the Board and sole stockholder of its general
partner. The Company became the successor of the Partnership in June 1996. Mr.
Nicholas' experience in the lending business spans 34 years. He has previously
held positions at General Electric Credit Corp., Household Finance Corp., and
American Financial Corporation of Tampa ("AFC"), a company of which he was the
owner and Chief Executive Officer from its formation in February 1986 until it
was acquired by Equibank in 1988. From February 1988 until May 1992, Mr.
Nicholas was President of AFC, a subsidiary of Equibank, which was a wholesale
lending institution specializing in the purchase of non-conforming mortgage
loans. From June 1992 until July 1993, Mr. Nicholas was an independent mortgage
industry consultant. In 1993, Mr. Nicholas organized the original Industry
Partners and led negotiations with investment bankers in connection with the
formation of the Partnership.
Thomas G. Middleon has served as Director and President of the Company since
December 1995 and as Assistant Secretary of the Company since April 1996. Mr.
Middleton has served as Chief Operating Officer of the Partnership since August
1993 and as President of the Partnership since July 1995. Mr. Middleton has 28
years of experience in the lending business. From April 1992 until August 1993,
Mr. Middleton was Senior Vice-President of Shawmut National Corporation and from
February 1991 until April 1992, Mr. Middleton was Managing Director of STG
Financial Inc. Mr. Middleton served as Executive Vice-President and Chief Credit
Officer of Equimark Corp. from June 1987 until February 1991.
Stuart D. Marvin has served as Chief Financial Officer since August 1, 1996. Mr.
Marvin is a certified public accountant and prior to joining the Company was a
partner in the Jacksonville, Ft. Lauderdale, and Miami, Florida offices of
Coopers & Lybrand L.L.P. (now PricewaterhouseCoopers LLP).
Joseph P. Goryeb has served as a director of the Company since April 1996. Mr.
Goryeb is the Chairman and Chief Executive Officer of Champion Mortgage Co.,
Inc., a leading non-conforming residential mortgage institution that was founded
by Mr. Goryeb in 1981. His 40 years of experience in the consumer lending
industry include previous positions with Beneficial Finance Company and Suburban
Finance Company.
Mitchell W. Legler has served as a director of the Company since April 1996. Mr.
Legler is the sole stockholder of Mitchell W. Legler, P.A. and has been general
counsel to the Company since August 1995. Mr. Legler is currently a director of
Stein Mart, Inc., a Nasdaq listed company. From January 1991 to August 1995, Mr.
Legler
- 105 -
<PAGE>
was a partner of Foley & Lardner, prior to which he was a partner of Commander,
Legler, Werber, Dawes, Sadler & Howell, P.A., attorneys at law in Jacksonville,
Florida.'
Mark W. Lorimer has served as the Executive Vice President and Chief Operating
Officer of Auto-By-Tel Corporation, a leading international online buying
service for automotive purchasing, financing and insurance, since May 1997. Mr.
Lorimer served as Vice President and General Counsel of Auto-By-Tel Corporation
from December 1996 until May 1997. Prior to joining Auto-By-Tel Corporation, Mr.
Lorimer was a partner of and, from March 1989 to January 1996, was an associate
with, the law firm of Dewey Ballantine.
Terms of Directors and Officers
The Company's Articles of Incorporation provide that the Company's Board of
Directors consists of such number of persons as shall be fixed by the Board of
Directors from time to time by resolution and is divided into three classes,
with each class to be as nearly equal in number of directors as possible. The
Company's Bylaws provide that the Board of Directors shall consist of no fewer
than one nor more than ten persons. Currently there are five directors. The term
of office of the directors in each of the three classes expires at the annual
meeting of stockholders in 1999 through 2001, respectively. Messrs. Nicholas and
Middleton serve until their term ends at the Annual Meeting of Stockholders to
be held in 1999. Mr. Legler serves until his term ends at the Annual Meeting of
Stockholders to be held in the year 2000. Messrs. Goryeb and Lorimer serve until
their term ends at the Annual Meeting of Stockholders to be held in 2001. At
each annual meeting, the successors to the class of directors whose term expires
at that time are to be elected to hold office for a term of three years, and
until their respective successors are elected and qualified, so that the term of
one class of directors expires at each such annual meeting. In the case of any
vacancy on the Board of Directors, including a vacancy created by an increase in
the number of directors, the vacancy shall be filled by the Board of Directors,
with the director so elected to serve until the next Annual Meeting of
Stockholders. Any newly created directorships or decreases in directorships are
to be assigned by the Board of Directors so as to make all classes as nearly
equal in number as possible. Directors may be removed only for cause. Officers
are elected annually by the Board of Directors and serve at the discretion of
the Board of Directors.
Committees and Meetings of the Board of Directors
The Board of Directors of the Company held 18 meetings in 1998. During such
year, each Director attended more than 75% of the meetings held by the Board of
Directors and the committees on which he served. The Company's Board of
Directors also acts from time to time by unanimous written consent in lieu of
meetings.
The Company has an Audit Committee, a Compensation Committee, an Option
Committee, an Executive Committee and a 1997 Incentive Plan Committee.
Audit Committee. During 1998 the Audit Committee consisted of Messrs.
Goryeb, Legler and Lorimer. The Audit Committee makes recommendations concerning
the engagement of independent public accountants, reviews with the independent
public accountants the plans and results of the audit engagement, approves
professional services provided by the independent public accountants, reviews
the independence of the independent public accountants, considers the range of
audit and non-audit fees, and reviews the adequacy of the Company's internal
accounting controls. The Audit Committee held meetings on June 2 and December
22, 1998.
Compensation Committee. The Compensation Committee consists of Messrs.
Nicholas, Middleton and Legler. The Compensation Committee determines the
compensation of the Company's executive officers. The Compensation Committee met
once during 1998 on February 9, 1998.
Option Committee. During 1998 the Option Committee consisted of Mr. Goryeb
and Mr. Wykle, a director who did not stand for reelection at the Company annual
meeting in June, 1998. The Option Committee has the
- 106 -
<PAGE>
authority to administer the Company's stock option plans and to grant options
thereunder. The Option Committee did not meet during 1998.
Executive Committee. The Executive Committee consists of Messrs. Nicholas,
Middleton, and any one other member of the Board of Directors. The Executive
Committee did not meet during 1998.
1997 Incentive Plan Committee. The 1997 Incentive Plan Committee consists
of Messrs. Nicholas and Middleton and has the authority to grant options to
eligible employees under the IMC Mortgage 1997 Incentive Plan. The 1997
Incentive Plan Committee did not meet during 1998.
Other Committees. The Board of Directors may establish other committees as
deemed necessary or appropriate from time to time.
The Company does not have a nominating committee. The functions customarily
performed by a nominating committee are performed by the Board of Directors as a
whole. Any stockholder who wishes to make a nomination at an annual or special
meeting for the election of directors must do so in compliance with the
applicable procedures set forth in the Company's Bylaws. The Company will
furnish Bylaw provisions upon written request to Laurie Williams at the
Company's principal executive offices at 5901 E. Fowler Avenue, Tampa, FL
33617-2362.
Director Compensation
Directors who are not employees of the Company received stock options
pursuant to the Directors' Stock Option Plan (the "Directors' Plan"). Messrs.
Goryeb and Legler each received ten-year options to purchase 12,932 shares of
Common Stock pursuant to the Directors' Plan at $2.35 per share. Mr. Lorimar
received ten-year options to purchase 12,932 shares of Common Stock pursuant to
the Directors' Plan at $10.00 per share. The Company pays non-employee directors
$5,000 per quarter. All directors receive reimbursement of reasonable
out-of-pocket expenses incurred in connection with meetings of the Board of
Directors. No director who is an employee of the Company receives compensation
for services rendered as a director.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Board of Directors consists of Messrs.
Nicholas, Middleton and Legler. Messrs. Nicholas and Middleton are Executive
Officers of the Company (see "Executive Compensation"). Mr. Legler is the sole
stockholder in Mitchell W. Legler, P.A., which is retained by the Company as its
general counsel. No interlocking relationship exists between the Company's Board
of Directors or officers responsible for compensation decisions and the board of
directors or compensation committee of any other company, nor has any such
interlocking relationship existed in the past.
- 107 -
<PAGE>
Item 11. Executive Compensation
Summary Compensation Table. The following table sets forth compensation earned,
whether paid or deferred, by the Company's Chief Executive Officer and other
executive officers whose compensation exceeded $100,000 during the year ended
December 31, 1998 for all services rendered in all capacities as employees of
the Company during the years ended December 31, 1996, 1997 and 1998. Information
is provided for each fiscal period during which such persons were employed by
the Company.
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation Awards
------------------------------------------------------------- ------------------------------
Other Securities Issuance
Annual Underlying of
Name and Principal Position Year Salary Bonus Compensation(1) Options(2) Securities(3)
- - --------------------------- ---- ---------- ---------- --------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
George Nicholas, Chairman 1998 $ 574,750 $ -- $ 21,676 -- --
of the Board, Chief 1997 522,500 1,567,500 373,344 -- 13,003
Executive Officer ............ 1996 475,000 1,425,000 6,500 -- --
Thomas G. Middleton, 1998 459,800 -- 21,676 -- --
President, Chief Operating 1997 418,000 1,254,000 300,575 -- 10,331
Officer ...................... 1996 380,000 1,140,000 9,500 -- --
1998 330,000 -- 21,676 -- --
Stuart D. Marvin, Chief 1997 256,250 300,000 227,638 -- 2,513
Financial Officer (4) ........ 1996 111,677 93,750 -- 96,000 --
</TABLE>
- - ----------
(1) Consists of payments made in cash to Executive Officers for the tax benefit
realized by the Company as a result of the issuance of common stock as a
part of their annual compensation, payments for automobile allowances and
matching contributions by IMC under the IMC Savings Plan, a defined
contribution plan under Section 401(k) of the Internal Revenue Code, as
amended.
(2) Options for Mr. Nicholas and Mr. Middleton are fully vested. Mr. Marvin was
granted 120,000 options on August 1, 1996 to purchase 120,000 shares of
common stock at $8.00 per share. These options vest over five years at a
rate of 1 2/3 % per month. Mr. Marvin exercised 24,000 of these options in
1997. See "Aggregate Option Exercises and Year-End Option Values".
(3) Issued to executive officers as part of annual compensation. Amounts shown
are net of shares withheld by Company at the request of the Executive
Officer to pay federal income taxes. Shares withheld were 30,997, 24,869
and 22,751 for Messrs. Nicholas, Middleton and Marvin, respectively.
(4) Compensation from commencement of employment on August 1, 1996; includes
reimbursement of $17,927 for relocation costs to Tampa, Florida.
Stock Options and Stock Appreciation Rights Grants. No stock options were
granted to any executive officer or director of the Company during the year
ended December 31, 1998 except that Mr. Lorimer was granted options to purchase
12, 932 shares of common stock at a price of $10 per share when he became a
director in June 1998. No stock appreciation rights have ever been granted to
any executive officers.
- 108 -
<PAGE>
Aggregate Option Exercises and Year-End Option Values. The following table sets
forth information concerning the value of unexercised options held by each of
the executive officers at December 31, 1998. No stock options were exercised by
any executive officers during the year ended December 31, 1998.
Value of
Number of securities Unexercised In-the-
underlying unexercised Money Options at
options at Fiscal Year Fiscal Year End/
End/ Un-exercisable & Un-exercisable &
Exercisable(1) Exercisable (1)
-------------- ---------------
Name
----
George Nicholas 475,732 $0
Thomas G. Middelton 282,866 0
Stuart D. Marvin 96,000 0
(1) Based on the closing price of $0.28 per share of the Common Stock on Nasdaq
on December 31, 1998, the last trading day of the Company's fiscal year.
All options held by Mr. Nicholas and Mr. Middleton are fully vested and are
exercisable at $2.35 per share. Mr. Marvin was granted 120,000 options on
August 1, 1996 to purchase 120,000 shares of common stock at $8.00 per
share. These options vest over five years at a rate of 1 2/3 % per month,
of which he exercised 24,000 during 1997.
Employment Agreements
The Company has employment agreements with George Nicholas, its Chairman
and Chief Executive Officer, Thomas G. Middleton, its President and Chief
Operating Officer, and Stuart D. Marvin, its Chief Financial Officer
("Employment Agreements"). In addition to the Employment Agreements described
below, in September of 1997, the Board of Directors established the Executive
Officer Unregistered Share Plan. See "Compensation Committee Report - Executive
Officer Unregistered Share Plan" for a description of this plan.
Mr. Nicholas' Employment Agreement commenced on January 1, 1996 and
terminates on December 31, 2001 (subject to automatic five-year extensions,
unless either the Company or Mr. Nicholas gives a notice of termination six
months prior to the extension). The Employment Agreement provides for an annual
salary of $574,750 for the year of 1998, plus an increase each subsequent year
equal to the greater of (i) the change in the cost of living in Tampa, Florida,
and (ii) an amount equal to 10% of the base salary for the prior year, but only
if the Company has achieved an increase in net income per share of 10% or more
in that year. In addition, the Employment Agreement provides for payment of a
bonus equal to 15% of the base salary of the relevant year for each one percent
by which the increase in net income per share exceeds 10% up to a maximum of
300% of his base salary. For example, if the increase in net income per share
for a particular year were 20%, the bonus payment would equal 150% of the base
salary for such year. The Employment Agreement also provides that the Company
shall use its best efforts to elect Mr. Nicholas to the Company's Board of
Directors and to its Executive Committee. Mr. Nicholas' employment may be
terminated by the Company at any time for "cause" (including material breach of
the Employment Agreement, certain criminal or intentionally dishonest and
misleading acts, and breaches of confidentiality and failure to follow
directives of the Board). If Mr. Nicholas is terminated for cause or voluntarily
terminates his employment (in the absence of a Company breach or a "change of
control") he does not receive any deferred compensation. Mr. Nicholas is
entitled to deferred compensation upon (i) his termination by the Company
without cause, (ii) the Company's failure to renew his Employment Agreement on
expiration, (iii) death or disability, (iv) voluntary termination by Mr.
Nicholas after a material breach by the Company, and (v) voluntary termination
after a "change of control" (defined as any (A) acquisition of 25% or more of
the voting power or equity of the Company, (B) change in a majority of the
members of the Board excluding any change approved by
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the Board, or (C) approval by the Company's stockholders of a liquidation or
dissolution of the Company, the sale of substantially all of its assets, or a
merger in which the Company's stockholders own a minority interest of the
surviving entity). The amount, if any, of deferred compensation payable to Mr.
Nicholas will be determined at the time of termination equal to the greater of
(i) his base salary for the remainder of the then-current term of the Employment
Agreement, and (ii) an amount equal to 150% of the highest annualized total
compensation (including bonus) earned by him during the preceding three years.
Receipt of deferred compensation is Mr. Nicholas' sole remedy in the event of a
wrongful termination by the Company. Mr. Nicholas' Employment Agreement contains
a restrictive covenant prohibiting him, for a period of 18 months following the
termination of his employment for any reason, from competing with the Company
within the continental United States or from soliciting any employees from the
Company who are earning in excess of $50,000 per year. However, this restrictive
covenant is not applicable if Mr. Nicholas is terminated without cause or if the
Company defaults in the payment of deferred compensation to Mr. Nicholas or
otherwise materially breaches the Employment Agreement. The Employment Agreement
also provides that the Company shall indemnify Mr. Nicholas for any and all
liabilities to which he may be subject as a result of his services to the
Company.
Mr. Middleton's Employment Agreement commenced on January 1, 1996 and
contains terms that are substantially the same as those of Mr. Nicholas'
Employment Agreement, except that Mr. Middleton's annual salary for the year
1998 is $459,800, plus increases as provided therein.
Mr. Marvin's Employment Agreement, as amended on October 3, 1997 and on
April 1, 1998, commenced on August 1, 1996 and extends until December 31, 2001.
Mr. Marvin's employment agreement contains terms that are substantially the same
as those of Mr. Nicholas' employment agreement, except that Mr. Marvin's base
salary for 1998 was $330,000, plus increases as provided, and except that in
determining any deferred compensation payable to Mr. Marvin, Mr. Marvin's bonus
for 1997 is deemed to be three times his 1997 base salary of $300,000 that was
in effect at the end of 1997.
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Board of Directors has furnished the
following report on executive compensation for inclusion in this Annual Report
on Form 10-K:
Compensation Philosophy. Base salaries and bonus for executive officers
shown on the summary compensation table set forth above under "Executive
Compensation" were established by employment agreements that were entered into
prior to the Company's initial public offering in June of 1996 and continue
through 2001, except in the case of Stuart Marvin, the Company's Chief Financial
Officer, whose employment agreement was executed in August of 1996 when he
joined the Company, and amended on October 3, 1997 and April 1, 1998, and
extends until December 31, 2001. The employment agreements are described in more
detail above and the Compensation Committee believes that those agreements
established base salaries, which are reasonable when compared the Company's
industry peers. The employment agreements provide for bonuses that can be as
much as three times base salary.
As the bonuses for the Company's executive officers are a direct function
of increases in earnings per share, the Compensation Committee believes that the
compensation plan and employment agreements for the Company's executive officers
are in line with the Company's dual goals of rewarding performance and
establishing compensation arrangements which align the interests of officers and
other key employees with those of the Company's shareholders. As the Company
suffered a material decrease in earnings per share in 1998 compared to 1997, no
bonus was paid to any executive officer with respect to 1998.
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Long Term Compensation Incentive Plans.
Employee Stock Option Plan and IMC Mortgage Company 1997 Incentive Plan.
The Company has an Employee Stock Option Plan and the IMC Mortgage Company 1997
Incentive Plan ("The Option Plans"). The purpose of The Option Plans is to
provide long-term incentive to the Company's key employees. The Compensation
Committee believes that The Option Plans are a principal vehicle for motivating
management and employees to work toward long-term growth and shareholder value.
During 1998, 127,000 options were awarded under The IMC Mortgage Company 1997
Incentive Plan.
The Option Plans reflect the Company's philosophy that officers' and
employees' incentive compensation should reflect the same long-term interests as
those of the Company's shareholders. To encourage continued service with the
Company, the options granted under The Option Plans typically vest over a
five-year period of employment with the Company. Additional increases in the
value of the Common Stock, which benefit all shareholders, will thus serve as a
primary incentive to officers and key employees.
Executive Officer Unregistered Share Plan. On October 3, 1997, the Board of
Directors adopted the Executive Officer Unregistered Share Plan pursuant to
which each of the Company's Chief Executive Officer, Chief Operating Officer and
Chief Financial Officer could receive an annual bonus payable solely in
unregistered shares of the Company's Common Stock if the Company achieved at
least a ten percent (10%) growth in net income per share for the year then
ending over the net income per share for the prior fiscal year. In each case,
the bonus would equal the officer's base salary then in effect. The number of
unregistered shares issued to each Executive Officer is calculated by dividing
the base salary for each Executive Officer by the closing price of the Company's
shares on NASDAQ at the end of the year as to which the bonus relates. The
Company will "gross-up" each bonus for taxes saved by the Company on the
issuance of the shares and taxes may be paid by withholding of shares. The plan
also allows Executive Officers to surrender shares or options for shares of the
Company's Common Stock owned by them to satisfy income tax obligations arising
from any compensation received from the Company for the calendar year. No shares
were awarded pursuant to this plan for 1998.
Vice-President Unregistered Share Plan. On October 3, 1997, the Board of
Directors adopted the Vice-President Unregistered Share Plan pursuant to which
certain of the Company's officers could receive an annual bonus payable solely
in unregistered shares of the Company's Common Stock. The number of unregistered
shares is calculated by dividing the base salary of the employee by the closing
price of the Company's shares on NASDAQ at the end of the year to which the
bonus relates. The unregistered shares granted vest over a period of three
years, with one-third vesting immediately and one-third vesting on the last day
of each of the next two fiscal years so long as the officer is still employed by
the Company on such date. The Company will "gross-up" each bonus for taxes saved
by the Company on the issuance of the shares and taxes may be paid by
withholding of shares. No shares were awarded pursuant to this Plan for 1998.
CEO Compensation. George Nicholas, Chairman and Chief Executive Officer,
received an option grant from the Company's predecessor, Industry Mortgage
Company, L.P., a Delaware limited partnership (the "Partnership"), and that
grant was approved by all partners of the Partnership. Mr. Nicholas'
compensation is pursuant to his employment agreement commencing on January 1,
1996. Mr. Nicholas is a member of the Compensation Committee. See "Employment
Agreements" and "Compensation Philosophy".
IMC MORTGAGE COMPANY COMPENSATION
COMMITTEE:
Mitchell W. Legler, Secretary
George Nicholas
Thomas G. Middleton
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Stock Performance Graph
The following graph depicts the cumulative total return on the Company's Common
Stock compared to the cumulative total return for The Nasdaq Composite Index
("Nasdaq Composite") and the Nasdaq Other Financial Index, a peer group selected
by the Company on an industry and line-of-business basis, commencing June 25,
1996 and ending December 31, 1998. The graph assumes an investment of $100 on
June 25, 1996, when the Company's stock was first traded in a public market.
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<PAGE>
[GRAPH OMITTED]
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Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information, as of March 1, 1999, concerning
the common stock of the Company beneficially owned (i) by each director of the
Company, (ii) by the Company's executive officers, (iii) by all executive
officers and directors as a group, and (iv) by each shareholder known by the
Company to be the beneficial owner of more than five percent of the outstanding
common stock. Unless otherwise indicated in the footnotes to the table, the
beneficial owners named have, to the knowledge of the Company, sole voting and
dispositive power with respect to shares beneficially owned, subject to
community property laws where applicable.
Name and Address of Beneficial Owner Shares Percent (1)
------ -----------
Neal Henschel (2) 2,382,581 6.53%
700 W. Hillsboro Boulevard
Building 1, Suite 204
Deerfield Beach , Fl 33441
ContiTrade Services Corporation (3) 2,174,998 6.00%
277 Park Avenue
New York, NY 10172
George Nicholas (4) 1,489,645 4.19%
5901 E. Fowler Avenue
Tampa, FL 33617
Joseph P. Goryeb (5) 534,692 1.54%
Waterview Corporate Centre
20 Waterview Boulevard
Parsippany, NJ 07054-1267
Thomas G. Middleton (6) 472,471 1.37%
5901 E. Fowler Avenue
Tampa, FL 33617
Mitchell W. Legler (7) (8) 108,734 *
300A Wharfside Way
Jacksonville, FL 32202
Stuart D. Marvin (9) 45,386 *
5901 E. Fowler Avenue
Tampa, FL 33617
Mark W. Lorimer (7) 12,932 *
18872 McArthur Blvd
Irvine, CA 92612
All directors and executive officers 2,673,423 7.66%
as a group (4) (5) (6) (7) (8) (9)
- - ----------
* Represents less than one percent (1%)
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(1) Based on the number of shares of the Company's Common Stock outstanding as
of March 1, 1999.
(2) Excludes 265,349 shares owned by Mr. Henschel's adult child.
(3) Source of ownership information: SEC Form 13 G filed as an amendment on
February 11, 1999. Ownership reported includes 2,159,998 shares of common
stock owned by ContiTrade Services Corporation, an affiliate of Continental
Grain Company, which represent shared voting and disposition powers. The
13-G filing includes 15,000 shares owned by Paul J. Fribourg, President and
Chairman of Continental Grain Company. Mr. Fribourg has sole voting and
disposition power over 15,000 shares and shared voting and disposition
power over the 2,159,998 shares issuable upon exercise of the warrants.
(4) Includes 475,732 shares of Common Stock issuable upon the exercise of
options.
(5) Excludes 504,119 shares of Common Stock owned by Mr. Goryeb's adult
children.
(6) Includes 282,866 shares of Common Stock issuable upon the exercise of
options.
(7) Includes 12,932 shares of Common Stock issuable upon the exercise of
options.
(8) Includes 62,026 shares of Common Stock issuable upon exercise of options,
27,776 shares held by Mr. Legler jointly with his spouse and 6,000 shares
held in his IRA.
(9) Includes 44,136 shares of Common Stock issuable upon the exercise of vested
options.
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<PAGE>
Item 13. Certain Relationships and Related Transactions
Since its inception, IMC has had business relationships and engaged in
certain transactions with affiliated companies and parties as described below.
See also "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Discussion of Events During the Year Ended December 31,
1998." It is the policy of IMC to engage in transactions with related parties
only on terms that, in the opinion of IMC, are no less favorable to IMC than
could be obtained from unrelated parties and each of the transactions described
below conforms to that policy.
IMC Associates. IMC Associates, Inc. leases skybox suites in various arenas for
professional sporting events. IMC purchases tickets for sporting events from IMC
Associates for an aggregate amount equal to the annual lease cost of the
skyboxes. IMC Associates is owned by George Nicholas, the Chairman of the Board
and Chief Executive Officer of IMC.
General Counsel. IMC has an arrangement with Mitchell W. Legler, P.A., which is
solely owned by Mr. Legler who serves as IMC's general counsel. Mr. Legler is
also a member of IMC's Board of Directors and was paid $20,000 during 1998 for
services rendered in his capacity as a Board member. IMC paid Mr. Legler's law
firm $345,000 during 1998 for Mr. Legler's services as general counsel. In
addition, Mitchell W. Legler, P.A. is entitled to a contingent cash fee for
acting in the primary role in identifying potential acquisition candidates and
in analyzing, negotiating, and closing acquisitions of other non-conforming
lenders and strategic alliances with other non-conforming lenders. The
contingent fees are based on a percentage of the expected increase in IMC's
earnings per share resulting from an acquisition or strategic alliance based on
the first year following the closing of the acquisition and based on the first
three years following the closing of a strategic alliance.
The contingency fees are capped at $750,000 in cash on a running two-year
average. Any contingency fees earned in excess of the cash cap are to be paid in
unregistered shares of the IMC's common stock, subject to a cap on unregistered
shares paid on a running two-year average of $550,000 in value of such shares.
During 1997 IMC completed eight acquisitions and during 1998 IMC completed no
acquisitions. As a result of the acquisitions in 1997, Mr. Legler's law firm
received approximately $433,000 in cash contingency fees in 1998. No shares of
unregistered common stock of IMC were issued to Mr. Legler in 1998 in connection
with acquisitions completed during 1997.
Lakeview Savings Bank. In January 1996 IMC entered into a loan facility with
Lakeview Savings Bank, an affiliate of Branchview, Inc., one of the original
partners in Industry Mortgage Company, L.P. The Lakeview credit facility had an
original principal balance of $7 million and was scheduled to mature on July 31,
1999 bearing interest at 10% per annum. On October 28, 1998, the credit facility
was modified to provide for repayment in 36 consecutive equal installments. A
mandatory prepayment under the credit facility is scheduled for July 31, 1999 in
such amount, if any, as is necessary so that the outstanding principal balance
due at the close of business on that date will not exceed the then legal lending
rate of Lakeview Savings Bank at that date. At December 31, 1998, $6,231,550 was
outstanding under this credit facility.
Mortgage America. Effective January 1, 1997, IMC acquired all of the assets of
Mortgage America, one of the Industry Partners. Thomas LaPorte and Mary Reid are
husband and wife and were the primary owners of Mortgage America prior to the
acquisition. The purchase price for all of the assets of Mortgage America was an
initial payment of 1,790,000 share of IMC common stock and assumption of a stock
option plan which could result in the issuance of an additional 334,596 shares
of IMC common stock and a contingent payment of up to 2,770,000 additional
shares of IMC common stock at the end of three years based on the growth and
profitability of Mortgage America during that period. As a condition of the
acquisition agreement, Tom LaPorte and Jon LaPorte, his adult child, have
employment agreements, as amended, with IMC ending on December 31, 2001 and May
30, 2006, respectively. The employment agreements include a non-compete clause.
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<PAGE>
Thomas LaPorte is President of Mortgage America. Since January 1, 1997, the
effective date of IMC's acquisition of Mortgage America, IMC has leased
administrative and executive offices from MA Real Estate and Investments,
L.L.C., which is owned by Mr. LaPorte,, under non-cancelable leases expiring
December 31, 2006 and from LaPorte, Inc., a company owned by Mr. LaPorte's
brother. Combined annual rent payments to these two entities in 1998 was
$273,700, in addition to total leasehold improvements made by IMC of $96,675.
From June 1997 until October 14, 1998, Mortgage America leased a corporate
jet from Tomahawk Aviation, L.L.C., which is owned by Mr. LaPorte. Total lease
payments from January 1, 1998 through October 14, 1998, the date the lease was
terminated, were $442,000.
Industry Partners' Incentive Plan. To encourage the Industry Partners to
continue to sell more mortgage loans than required under their original
commitments, IMC created an incentive plan for Industry Partners in March 1996.
Under that plan, Industry Partners that doubled their loan sale commitments per
quarter are eligible to receive on a pro rata basis fully paid shares of IMC
common stock equal to $105,000 divided by the market price of the IMC common
stock at the end of that quarter. The fully paid shares of IMC common stock are
issued pro rata among those Industry Partners that doubled their commitments to
the extent the Industry Partner exceeded its doubled commitment amount for the
quarter. A total of 71,124 shares were earned under the plan for the year of
1998. IMC expects to discontinue this plan.
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PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this Report.
(1) Financial Statements
See Item 8. "Financial Statements and Supplementary Data"
(2) Financial Statement Schedules
No Financial Statement Schedules are included because of the
absence of the conditions under which they are required or
because the information is included in the financial statements
or notes thereto.
(3) Exhibits
The exhibits are listed on the Exhibit Index attached hereto.
(b) Reports filed on Form 8-K.
On March 3, 1999, the Company filed a Current Report on Form 8-K to
report that the Company had entered into an Agreement and Plan of
Merger with Greenwich Funds.
On February 23, 1999, the Company filed a Current Report on Form 8-K
to report that the Company had appointed Grant Thornton L.L.P. as the
independent accounting firm to audit the financial statements of the
Company for the year ended December 31, 1998 and dismissed
PricewaterhouseCoopers L.L.P.
On February 26, 1999, the Company filed a Current Report on Form 8-KA
with respect to the Current Report on Form 8-K filed on February 23,
1999.
On November 27, 1998, the Company filed a Current Report on Form 8-K
to report that the Company had entered into a non-binding letter of
intent with Greenwich Street Capital Partners II, L.P. ("Greenwich
Street") on November 27,1998 whereby Greenwich Street would invest
sufficient additional equity in the Company and arrange for credit
facilities to permit the Company to repay in full its existing bank
loans and credit facilities, and Greenwich Street would obtain newly
issued stock equal to 95% of the total outstanding equity interest of
the Company on a diluted basis, leaving existing common shareholders
with 5% of the outstanding equity.
On October 21, 1998, the Company filed a Current Report on Form 8-K to
report that an agreement for a $33 million standby revolving credit
facility to provide working capital for a period up to 90 days.
(c) Exhibits.
See (a) (3) above.
(d) Financial statement schedule.
See (a) (2) above.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Annual Report on Form 10-K to be signed by the
undersigned, thereunto duly authorized.
IMC MORTGAGE COMPANY
By /S/ THOMAS G. MIDDLETON
-------------------------
Thomas G. Middleton,
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed by the following persons on behalf of
the registrant and in the capacities indicated on March 31, 1999.
Signature Title
--------- -----
/s/ George Nicholas Chairman of the Board and Chief Executive
- - ------------------------------- Officer (Principal Executive Officer)
(George Nicholas)
/s/ STUART D. MARVIN Chief Financial Officer (Principal Accounting
- - ------------------------------- Officer and Principal Financial Officer)
(Stuart D. Marvin)
/s/ MITCHELL W. LEGLER Director
- - -------------------------------
(Mitchell W. Legler)
/s/ THOMAS G. MIDDLETON Director
- - -------------------------------
(Thomas G. Middleton)
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<PAGE>
EXHIBIT INDEX
Unless otherwise indicated, all Exhibits are incorporated by reference to
the same exhibit to the Company's Registration Statement of Form S-1 declared
effective by the Securities and Exchange Commission on June 25,1996
(Registration No. 333-3954).
2.1 - Pre-IPO Agreement between the Partnership, the General Partners and
each Limited Partner.
3.1 - Articles of Incorporation of the Company, as amended, incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998.
3.2 - Bylaws of the Company, as amended.
3.3 - Amended and Restated Articles of Amendment Designating the
Preferences, Rights and Limitations of Class A Preferred Stock, Class
B Preferred Stock, Class C Exchangeable Preferred Stock and Class D
Preferred Stock of the Company, incorporated by reference to the
Registrant's Current Report on Form 8-K dated October 15, 1998.
4.1 - Specimen of Certificate for Common Stock.
4.2 - Indenture Agreement between the Partnership and ContiTrade Services
Corporation.
4.3 - Substitution Agreement between the Partnership and ContiTrade Services
Corporation.
4.4 - Incentive Plan of the Company and related assumption agreements.
4.5 - Outside Directors' Option Plan of the Company and related assumption
agreements.
4.6 - Form of Common Stock Warrant issued to ContiTrade Services
Corporation.
4.7 - Form of Stock Purchase Warrant issued to German American Capital
Corporation, incorporated by reference to the Company's Current Report
on Form 8-K dated October 15, 1998.
10.1 - Employment Agreement dated January 1, 1996 between the Partnership and
George Nicholas, as amended.
10.2 - Employment Agreement dated January 1, 1996 between the Partnership and
Thomas G. Middleton, as amended.
10.3 - Employment Agreement dated January 1, 1996 between the Partnership and
David MacDonald.
10.4 - Lease Agreements between the Partnership and CLW Realty Asset Group,
Inc.
10.5 - Share Subscription and Shareholders' Agreement between the Partnership
and Foxgard Limited, Financial Security Assurance Holdings, Inc. and
Preferred Mortgages Limited.
10.6 - Transfer Agreement between the Partnership and Curzon Equity Finance
Corporation Limited, Preferred Mortgages Limited, Rotch Property Group
Limited, Foxgard Limited and Financial Security Assurance Holdings,
Inc.
10.7 - Side letter relating to the Share Subscription and Shareholders'
Agreement between the Partnership and Foxgard Limited, Financial
Security Assurance Holdings, Inc. and Preferred Mortgage Limited.
10.8 - Asset Purchase Agreement and Plan of Reorganization between the
Partnership, IMC Acquisition, Inc., Mortgage Central Corp. and the
shareholders of Mortgage Central Corp.
10.9 - Registration Rights Agreement between the Partnership and the
shareholders of Mortgage Central Corp.
10.10 - Investment Banking Services Agreement between the Partnership and
ContiTrade Services Corporation.
10.11 - Standby Facility Agreement between the Partnership and ContiTrade
Services Corporation and Supplement thereto.
10.12 - Amended and Restated Loan and Security Agreement between the
Partnership and ContiTrade Services Corporation.
10.13 - Secured Note from the Partnership to ContiTrade Services Corporation.
10.14 - Amended and Restated Custodial Agreement among the Partnership,
ContiTrade Services Corporation and Bank of Boston.
10.15 - 1995 Agreement between the Partnership and ContiTrade Services
Corporation.
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10.16 - Assignment, Assumption and Consent Agreement among the Partnership,
ContiTrade, ContiTrade Services LLC and First National Bank of Boston.
10.17 - Master Repurchase Agreement Governing Purchase and Sales of Mortgage
Loans between the Partnership and Nomura Asset Capital Corporation and
related Power of Attorney.
10.18 - Master Repurchase Agreement between the Partnership and Nomura
Securities International, Inc.
10.19 - Global Master Repurchase Agreement between the Partnership and Nomura
Grand Cayman, Ltd.
10.20 - Custodial Agreement among the Partnership, the First National Bank of
Boston and Nomura Asset Capital Corporation.
10.21 - Loan and Security Agreement between the Partnership and First National
Bank of Boston and amendments thereto.
10.22 - Interim Loan and Security Agreement between the Partnership and
National Westminster Bank PLC, New York Branch.
10.23 - Custodial Agreement among the Partnership, National Westminster Bank
PLC and First National Bank of Boston.
10.24 - Promissory Note between the Partnership and Lakeview Savings Bank.
10.25 - Security Agreement Collateralizing Promissory Note between the
Partnership and Lakeview Savings Bank.
10.26 - Master Repurchase Agreement among the Partnership and Bear Stearns
Home Equity Trust 1996-1.
10.27 - Custody Agreement among the Partnership, IMC Corporation of America,
Bear Stearns Home Equity Trust 1996-1 and Bank of Boston.
10.28 - Warehousing Credit and Security Agreement among the Partnership, IMC
Corporation of America and Residential Funding Corporation, as
amended.
10.29 - Custodial Agreement among the First National Bank of Boston, the
Partnership, IMC Corporation of America and Residential Funding
Corporation.
10.30 - Loan and Security Agreement between the Partnership and Approved
Financial Corp., Approved Residential Mortgage, Inc. and Armada
Residential Mortgage, LLC
10.31 - Loan and Security Agreement between the Partnership and Mortgage
Central Corp.
10.32 - Custodial Agreement among the Partnership, Mortgage Central Corp. and
the First National Bank of Boston.
10.33 - Custodial Agreement among the Partnership, American Industrial Loan
Association, Approved Residential Mortgage, Inc., Armada Residential
Mortgage, LLC and the First National Bank of Boston.
10.34 - Employment Agreement dated August 1, 1996 between the Company and
Stuart D. Marvin, incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996.
10.35 - Asset Purchase Agreement and Plan of Reorganization between the
Company, Mortgage America, Inc. and the shareholders of Mortgage
America, Inc., incorporated by reference to the same exhibit to the
Company's Registration Statement on Form S-1 (Registration No.
33-21823) filed by the Company with the Commission.
10.36 - First Amendment to the Asset Purchase Agreement and Plan of
Reorganization between the Company, Mortgage America, Inc. and the
shareholders of Mortgage America, Inc., incorporated by reference to
the same exhibit to the Company's Registration Statement on From S-1
(Registration No. 33-21823) filed by the Company with the Commission.
10.37 - Form of Registration Rights Agreement between the Company and the
Shareholders of Mortgage America, Inc., incorporated by reference to
the same exhibit to the Company's Registration Statement on Form S-1
(Registration No. 33-21823) filed by the Company with the Commission.
10.38 - Agreement and Plan of Reorganization between the Company, CWB
Acquisitions, Inc., CoreWest Banc and the shareholders of CoreWest
Banc, incorporated by reference to the same exhibit to the Company's
Registration Statement on Form S-1 (Registration No. 33-21823) filed
by the Company with the Commission.
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<PAGE>
10.39 - Registration Rights Agreement between the Company and the shareholders
of CoreWest Banc., incorporated by reference to the same exhibit to
the Company's Registration Statement on Form S-1 (Registration No.
33-21823) filed by the Company with the Commission.
10.40 - Form of Amended and Restated Loan Agreement between the Company, the
Partnership, IMC Corporation of America and Nomura Asset Capital
Corporation, incorporated by reference to the same exhibit to the
Company's Registration Statement on Form S-1 (Registration No.
33-21823) filed by the Company with the Commission.
10.41 - Form of Custodial Agreement between the Company, the Partnership, IMC
Corporation of America, Nomura Asset Capital Corporation and LaSalle
National Bank, incorporated by reference to the same exhibit to the
Company's Registration Statement on Form S-1 (Registration No.
33-21823) filed by the Company with the Commission.
10.42 - Form of Loan and Security Agreement among the Company, the Partnership
and The First National Bank of Boston, incorporated by reference to
the same exhibit to the Company's Registration Statement on Form S-1
(Registration No. 33-21823) filed by the Company with the Commission.
10.43 - Form of Asset Purchase Agreement between the Company, American
Mortgage Reduction, Inc., and the Shareholders of American Mortgage
Reduction, Inc., incorporated by reference to the same exhibit tot the
Company's Registration Statement on Form S-1 (Registration No.
33-21823) filed by the Company with the Commission.
10.44 - Form of Asset Purchase Agreement between the Company and Equity
Mortgage Co., Inc., incorporated by reference to the same exhibit to
the Company's Registration Statement on Form S-1 (Registration No.
33-21823) filed by the Company with the Commission.
10.45 - Employment Agreement dated as of January 1, 1997 between the Company
and Mark J. Greenberg, incorporated by reference to the same exhibit
to the Company's Registration Statement on Form S-1 (Registration No
33-21823) filed by the Company with the Commission.
10.46 - Form of Warehouse Security Agreement among the Company, the
Partnership and GE Capital Mortgage Services, Inc., incorporated by
reference to the same exhibit to the Company's Registration Statement
on Form S-1 (Registration No. 33-21823) filed by the Company with the
Commission.
10.47 - Form of Warehouse Credit Agreement among the Company, the Partnership
and GE Capital Mortgage Services, Inc., incorporated by reference to
the same exhibit to the Company's Registration Statement on Form S-1
(Registration No. 33-21823) filed by the Company with the Commission.
10.48 - Loan and Security Agreement among the Company, IMC Corporation of
America, the Partnership, IMC Investment Corp., CoreWest Banc and
Paine Webber Real Estate Securities Inc., incorporated by reference to
the same exhibit to the Company's Registration Statement on Form S-1
(Registration No 33-21823) filed by the Company with the Commission.
10.49 - IMC Mortgage Company 1997 Incentive Plan, incorporated by reference to
the Company's Proxy Statement dated June 12, 1997.
10.50 - IMC Mortgage Company Executive Officer Unregistered Stock Plan,
incorporated by reference to the Company's Annual Report on Form 10K
for the year ended December 31, 1997.
10.51 - IMC Mortgage Company Vice President Unregistered Stock Plan,
incorporated by reference to the Company's Annual Report on Form 10K
for the year ended December 31, 1997.
10.52 - First Amendment to Employment Agreement dated August 1, 1996 between
the Company and Stuart D. Marvin, incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 31,
1997.
10.53 - First Amendment and Restatement of Contingency Fee Compensation
Arrangement between the Company and Mitchell W. Legler, incorporated
by reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998.
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<PAGE>
10.54 - Second Amendment to Employment Agreement dated August 1, 1996 between
the Company and Stuart D. Marvin, incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998.
10.55 - Preferred Stock Purchase and Option Agreement dated July 14, 1998
between the Company and Greenwich Street Capital Partners II, L.P.,
GSCP Offshore Fund, L.P., Greenwich Fund, L.P. and Travelers Casualty
and Surety Company, incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
10.56 - Letter Agreement dated October 15, 1998 between BankBoston, N.A. and
the Company regarding a Line of Credit, incorporated by reference to
the Company's Current Report on Form 8-K dated October 15, 1998.
10.57 - Forbearance and Intercreditor Agreement dated as of October 12, 1998
among the Company, BankBoston, N.A., Greenwich Street Capital Partners
II L.P., Greenwich Fund, L.P. and GSCP Offshore Fund, L.P.,
incorporated by reference to the Company's Current Report on Form 8-K
dated October 15, 1998.
10.58 - Intercreditor Agreement dated as of October 12, 1998 among the
Company, Bear Stearns Home Equity Trust, Bear Stearns International
Limited, Greenwich Street, L.P. and GSCP Offshore Fund, L.P.,
incorporated by reference to the Company's Current Report on Form 8-K
dated October 15, 1998.
10.59 - Intercreditor Agreement dated as of October 12, 1998 among the
Company, Paine Webber Real Estate Securities, Inc., Greenwich Street
Capital Partners II L.P., Greenwich Street, L.P. and GSCP Offshore
Fund, L.P., incorporated by reference to the Company's Current Report
on Form 8-K dated October 15, 1998.
10.60 - Intercreditor Agreement dates as of October 12, 1998 among the
Company, German American Capital Corporation, Aspen Funding Corp.,
Greenwich Street Capital Partners II L.P., Greenwich Street, L.P. and
GSCP Offshore Fund, L.P., incorporated by reference to the Company's
Current Report on Form 8-K dated October 15, 1998.
10.61 - Loan Agreement dated as of October 12, 1998 among the Company,
Greenwich Street Capital Partners IIL.P. Greenwich Street, L.P. and
GSCP Offshore Fund, L.P., incorporated by reference to the Company's
Current Report on Form 8-K dated October 15, 1998.
10.62 - Borrower Security Agreement dated as of October 12, 1998 among the
Company, Greenwich Street Capital Partners II L.P., Greenwich Street,
L.P. and GSCP Offshore Fund, L.P. and Greenwich Street Capital
Partners II L.P., as collateral agent incorporated by reference to the
Company's Current Report on Form 8-K dated October 15, 1998.
10.63 - Registration Rights Agreement among the Company, Greenwich Street
Capital Partners II L.P., Greenwich Street, L.P. and GSCP Offshore
Fund, L.P., incorporated by reference to the Company's Current Report
on Form 8-K dated October 15, 1998.
10.64 - Letter of intent dated November 27, 1998 between the Company and GSCP,
Inc., incorporated by reference to the same exhibit to the Company's
current report on Form 8-K dated November 27, 1998.
10.65 - Agreement and Plan of Merger as of February 19, 1999 among the
Company, Greenwich Street Capital Partners II L.P. and IMC 1999
Acquisition Co., Inc. incorporated by reference to the same exhibit to
the Company's Current Report on Form 8-K dated February 19, 1999.
10.66 - Amendment No. 1 dated as of February 11, 1999 to the Loan Agreement
dated as of October 12, 1998 among the Company, Greenwich Street
Capital Partners II L.P., Greenwich Fund, L.P. and GSCP Offshore
Funds, L.P. incorporated by reference to the same exhibit to the
Company's Current Report on Form 8-K dated February 19, 1999.
10.67 - Amendment No 1 dated as of February 11, 1999 to the Borrower Security
Agreement dated as of October 12, 1998 among the Company, Greenwich
Street Capital Partners II L.P., Greenwich Fund, L.P. and GSCP
Offshore Fund, L.P. and Greenwich Street Capital Partners II L.P., as
collateral agent, incorporated by reference to the same exhibit to the
Company's Current Report on Form 8-K dated February 19, 1999.
- 123 -
<PAGE>
10.68 - Amended and Restated Intercreditor Agreement dated as of February 17,
1999 among the Company, Bear Stearns Home Equity Trust, Bear Stearns
International Limited, Greenwich Street Capital Partners II L.P.,
Greenwich Fund, L.P. and GSCP Offshore Fund, L.P., incorporated by
reference to the same exhibit to the Company's Current Report on Form
8-K dated February 19, 1999.
10.69 - Amended and Restated Intercreditor Agreement dated as of February 17,
1999 among the Company, Paine Webber Real Estate Securities, Inc.,
Greenwich Street Capital Partners II L.P., Greenwich Fund, L.P. and
GSCP Offshore Fund, L.P., incorporated by reference to the same
exhibit to the Company's Current Report on Form 8-K dated February 19,
1999.
10.70 - Amended and Restated Intercreditor Agreement dated as of February 17,
1999 among the Company, German American Capital Corporation, Aspen
Funding Corp., Greenwich Street Capital Partners II L.P., Greenwich
Fund, L.P. and GSCP Offshore Fund, L.P., incorporated by reference to
the same exhibit to the Company's Current Report on Form 8-K dated
February 19, 1999.
10.71 - Amended and Restated Forbearance and Intercreditor Agreement dated as
of February 17, 1999 among the Company, Greenwich Street Capital
Partners II L.P., Greenwich Fund, L.P. and GSCP Offshore Fund, L.P.,
incorporated by reference to the same exhibit to the Company's Current
Report on Form 8-K dated February 19, 1999.
10.72 - Acquisition Agreement dated as of February 19, 1999 among the Company,
Greenwich Street Capital Partners II L.P., Greenwich Fund L.P., GSCP
Offshore Funds L.P., Greenwich Street Employees Fund, L.P. and TRV
Executive Fund, L.P.*
10.73 - Commitment Letter re: Amended and Restated Loan Agreement dated March
31, 1999 among the Company, Greenwich Street Capital Partners II L.P.,
Greenwich Fund L.P., GSCP Offshore Fund L.P., Greenwich Street
Employees Fund, L.P. and TRV Executive Fund, L.P.*
11.1 - Statement re computation of earnings per share (See Note 2 of the
Notes to the Consolidated Financial Statements).
16.1 - Letter dated April, 1996 from Deloitte & Touche, LLP to the Company.
16.2 - Letter from PricewaterhouseCoopers LLP to the Securities and Exchange
Commission dated February 25, 1999, incorporated by reference to
Exhibit 16.1 to the Company's Current Report on Form 8-K/A dated
February 16, 1999.
21.1 - Subsidiaries of the Company.*
27.1 - Financial Data Schedule.*
99.1 - Third Amended and Restated Agreement of Limited Partnership.
- - ----------
Confidential treatment granted with respect to certain provisions.
* Filed as an exhibit hereto.
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EXHIBIT 21.1
LIST OF SUBSIDIARIES OF THE COMPANY
LIST OF SUBSIDIARIES OF THE COMPANY AS OF DECEMBER 31, 1998:
IMC Corporation of America
IMC Credit Card, Inc.
IMC Mortgage Company, Canada LTD.
IMC Securities, Inc.
IMC Investment Corp.
IMC Investment Limited Partnership
ACG Financial Services (IMC), Inc.
American Mortgage Reduction, Inc.
Central Money Mortgage Co. (IMC), Inc.
CoreWest Banc
Equity Mortgage Co. (IMC), Inc.
Mortgage America (IMC), Inc.
American Home Equity Corporation
National Lending Center, Inc.
National Lending Center TILT, Inc.
National Lending Group, Inc.
Residential Mortgage Corporation (IMC), Inc.
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ACQUISITION AGREEMENT
ACQUISITION AGREEMENT, dated as of February 19, 1999, by and
among Greenwich Street Capital Partners II, L.P., a Delaware limited partnership
("GSCP"), GSCP Offshore Fund, L.P., a Cayman Islands exempted limited
partnership ("Offshore"), Greenwich Fund, L.P., a Delaware limited partnership
("GF", and together with GSCP and Offshore, the "Initial GSCP Funds"), Greenwich
Street Employees Fund, L.P., a Delaware limited partnership ("GSEF"), and TRV
Executive Fund, L.P., a Delaware limited partnership ("TRV", and, together with
the Initial GSCP Funds and GSEF, the "GSCP Funds"), and IMC Mortgage Company, a
Florida corporation (the "Company").
WHEREAS, GSCP previously entered an Agreement and Plan of Merger
(the "Merger Agreement"), dated as of February 19, 1999, by and among GSCP, IMC
1999 Acquisition Co., Inc., a Delaware corporation and a wholly owned subsidiary
of the GSCP Funds ("IMC Acquisition") and the Company, pursuant to which IMC
Acquisition would be merged with and into the Company (the "Merger"), the GSCP
Funds would be issued common stock of the surviving corporation of the Merger
representing approximately 93.5% of the outstanding common stock of the
surviving corporation of the Merger and the 23,760.758 shares (the "Class C
Preferred Shares") of Class C Exchangeable Preferred Stock, par value $.01 per
share, of the Company (the "Class C Preferred Stock") held by the GSCP Funds
would be canceled and retired and would cease to exist.
WHEREAS, in connection with the Merger Agreement, (i) the Initial
GSCP Funds have entered into Amendment No. 1, dated February 11, 1999
("Amendment No. 1"), to the Loan Agreement, dated as of October 12, 1998 (the
"Initial Loan Agreement"), between the Company and the Initial GSCP Funds,
providing for the Initial GSCP Funds to extend to the Company additional
commitments (the "Interim Commitments") to loan in the aggregate an additional
$5,000,000 (the "Interim Loans") and (ii) the GSCP Funds have entered a
commitment letter (as amended, the "Commitment Letter") with IMC Acquisition,
dated as of February 19, 1999, obligating the GSCP Funds to enter into an
amendment and restatement of the Initial Loan Agreement (the "Amendment and
Restatement of the Loan Agreement"), pursuant to which the GSCP Funds would
agree to extend to the surviving corporation of the Merger commitments to loan
an additional $35,000,000 (the "Additional Advance"), subject to the terms and
conditions set forth in the Initial Loan Agreement, as amended and restated (the
"Loan Agreement").
<PAGE>
WHEREAS, the GSCP Funds, IMC Acquisition and the Company desire
to terminate the Merger Agreement pursuant to Section 9.1 thereof in order to
enter into this Agreement and to consummate the transactions contemplated
hereby.
WHEREAS, the GSCP Funds and the Company desire that the GSCP
Funds transfer and deliver to the Company for cancellation the Class C Preferred
Shares and enter into the Amendment and Restatement of the Loan Agreement and
fund the Additional Advance, in consideration of which the Company will issue
and deliver to the GSCP Funds, common stock, par value $0.001 per share, of the
Company (the "Company Common Stock") representing approximately 93.5% of the
Company Common Stock outstanding after such issuance (the "Acquisition").
WHEREAS, the GSCP Funds, IMC Acquisition and the Company desire
to amend and restate the Commitment Letter and certain agreements related
thereto to substitute the Company for IMC Acquisition as party thereto and
otherwise to provide for this Agreement and the termination of the Merger
Agreement.
WHEREAS, the Board of Directors of the Company, acting upon the
unanimous recommendation of a special committee (the "Special Committee")
comprised solely of "disinterested directors" (as defined in Section 607.0901 of
the Florida 1989 Business Corporation Act (the "FBCA")) of the Company, which
Board consists solely of "disinterested directors", have each adopted this
Agreement and approved the Restated Articles of Incorporation (as hereinafter
defined), the Amendment (as hereinafter defined), the Restated Bylaws (as
hereinafter defined), the Acquisition, the termination of the Merger Agreement
and the other transactions contemplated hereby.
NOW, THEREFORE, in consideration of the foregoing and the
respective representations, warranties, covenants and agreements set forth
herein, the parties hereto agree as follows:
ARTICLE I
THE ACQUISITION
Section 1.1 The Acquisition. Upon the terms and subject to the
conditions hereof, at the Closing (as hereinafter defined), the Company shall
issue and deliver to the GSCP Funds, and the GSCP Funds shall acquire from the
Company, as further set forth in Schedule 1.1 hereto, an aggregate of
491,604,500 shares of Company Common Stock representing approximately 93.5% of
the Company Common Stock outstanding after the Acquisition and the GSCP Funds
shall transfer and deliver to the Company for cancellation the Class C Preferred
Shares and perform their obligations under the Commitment Letter to enter into
the Amendment and Restatement of the Loan Agreement and fund the Additional
Advance thereunder.
<PAGE>
Section 1.2 Closing. The Company shall as promptly as practicable
notify GSCP, and the GSCP Funds shall as promptly as practicable notify the
Company, when the conditions to such parties' obligations to consummate the
Acquisition contained in Article VII have been satisfied. The closing of the
Acquisition (the "Closing") shall take place at the offices of Debevoise &
Plimpton, 875 Third Avenue, New York, New York 10022, at 10:00 a.m., New York
time, on the third business day after the later of these notices has been given
(the "Closing Date"), unless another date or place is agreed to in writing by
the parties hereto; provided, however, that the parties hereto agree to use all
reasonable efforts to consummate the Closing by June 30, 1999 or as soon as
practicable thereafter.
Section 1.3 Closing Deliveries. Upon the terms and subject to the
conditions hereof, at the Closing, (i) the Company shall deliver to each of the
GSCP Funds good and valid title to the number of duly authorized, validly
issued, fully paid and non assessable shares of Company Common Stock provided
for in Section 1.1 hereof subject to adjustment as provided in Section 1.6
hereof, by issuing to the GSCP Funds certificates for such shares registered in
such names and evidencing such number of shares as set forth in Schedule 1.1
hereto, free and clear of any liens, charges, encumbrances, security interests,
options or rights or claims of others with respect thereto; (ii) the GSCP Funds
shall transfer and deliver to the Company the Class C Preferred Shares, free and
clear of any liens, charges, encumbrances, security interests, options or rights
or claims of others with respect thereto, by delivering to the Company the
certificates representing such shares, duly endorsed in blank or accompanied by
stock powers or other proper instruments of assignment duly executed in blank,
and having all requisite stock transfer stamps attached; and (iii) the GSCP
Funds and the Company shall, pursuant to the Commitment Letter, enter into the
Amendment and Restatement of the Loan Agreement and perform their obligations
thereunder to fund the Additional Advance.
Section 1.4 Articles of Incorporation and By-Laws of the Company.
The Board of Directors of the Company, acting upon the unanimous recommendation
of the Special Committee, has approved (i) the amendment and restatement of the
Articles of Incorporation of the Company to read in their entirety as set forth
in the form attached hereto as Exhibit A (as so amended and restated, the
"Restated Articles of Incorporation"), (ii) the amendment to the Restated
Articles of Incorporation as set forth in the form attached hereto as Exhibit B
(the "Amendment"), and (iii) the amendment and restatement of the Bylaws of the
Company to read in their entirety as set forth in the form attached hereto as
Exhibit C (as so amended and restated, the "Restated Bylaws"). Upon the terms
and subject to the conditions hereof, including, without limitation, obtaining
the Shareholder Approval (as hereinafter defined), at, but not prior to, the
Closing the Company shall cause the Restated Articles of Incorporation to be
duly filed with the Secretary of State of Florida. If the Amendment shall have
been approved by the shareholders of the Company pursuant to the FBCA, upon the
terms and subject to the conditions hereof, at, but not prior to, the Closing
the Company shall cause the
<PAGE>
Amendment to be duly filed with the Secretary of State of Florida immediately
after the filing of the Restated Articles of Incorporation.
Section 1.5 Directors and Officers of the Company. At the
Closing, the directors of the Company listed as resigning directors in a letter
from the GSCP Funds to the Company delivered prior to the Closing shall resign
(the "Resigning Directors"), and the directors remaining in office shall fill
the vacancies created thereby by electing the individuals listed as new
directors in a letter from the GSCP Funds to the Company delivered prior to the
Closing (the "New Directors") as directors of the Company to serve until their
successors shall have been duly elected or appointed and qualified or until
their earlier death, resignation or removal in accordance with the Articles of
Incorporation and Bylaws of the Company. The election of the New Directors shall
be conducted in accordance with the requirements of Section 607.0901(1)(h) of
the FBCA such that the New Directors shall be "disinterested directors" as
defined therein and pursuant thereto. At the Closing, the Resigning Directors
shall deliver to the Company their resignations effective as of the Closing.
Section 1.6 Certain Adjustments. If after the date hereof and on
or prior to the Closing the outstanding shares of Company Common Stock shall be
changed into a different number of shares by reason of any reclassification,
recapitalization, split-up, combination or exchange of shares, or any dividend
payable in stock or other securities shall be declared thereon with a record
date within such period, or any similar event shall occur (any such action, an
"Adjustment Event"), the number of shares to be issued to the GSCP Funds
pursuant to Section 1.1 hereof shall be adjusted to provide to the GSCP Funds
and the holders of Company Common Stock the same proportionate ownership as
contemplated by this Agreement prior to such Adjustment Event.
Section 1.7 Merger Agreement. GSCP and the Company hereby
terminate the Merger Agreement pursuant to Section 9.1 thereof.
ARTICLE II
SHAREHOLDER APPROVAL
Section 2.1 Shareholder Meeting. In order to consummate the
transactions contemplated hereby, the Company, acting through its Board of
Directors, shall, in accordance with applicable law, duly call, give notice of,
convene and hold a special meeting of its shareholders (the "Special Meeting"),
as soon as practicable, for the purpose of voting upon the adoption and approval
of this Agreement, the Restated Articles of Incorporation, the Amendment, the
Acquisition and the other transactions contemplated by this Agreement (the
"Shareholder Approval"). The Company shall include in the Proxy Statement (as
hereinafter defined) the recommendation of the Board of Directors of the
Company, acting upon the unanimous recommendation of the Special
<PAGE>
Committee, that shareholders of the Company vote in favor of the adoption and
approval of this Agreement, the Restated Articles of Incorporation, the
Amendment, the Acquisition and the other transactions contemplated by this
Agreement. The GSCP Funds agree to vote all shares of capital stock of the
Company that they own and that may vote on such matters in favor of the adoption
and approval of this Agreement, the Restated Articles of Incorporation, the
Amendment, the Acquisition and the other transactions contemplated by this
Agreement.
Section 2.2 Proxy Statement. In connection with the solicitation
of the Shareholder Approval, the Company shall as promptly as practicable
prepare and file with the Securities and Exchange Commission (the "SEC") a
preliminary proxy statement relating to the Acquisition, the Restated Articles
of Incorporation, the Amendment, this Agreement and the other transactions
contemplated hereby and use all reasonable efforts to obtain and furnish the
information required to be included by the SEC in the Proxy Statement. The
Company, after consultation with GSCP, shall respond as promptly as reasonably
practicable to any comments made by the SEC with respect to the preliminary
proxy statement and shall cause a definitive proxy statement to be filed with
the SEC and mailed to its shareholders at the earliest reasonably practicable
date (such proxy statement is referred to herein as the "Proxy Statement"). The
GSCP Funds shall furnish all information concerning the GSCP Funds and the New
Directors as may reasonably be requested by the Company in connection with such
filings. The Company, after consulta tion with GSCP, shall also take any action
required to be taken, and make any other filings required, under the Securities
Act of 1933, as amended (the "Securities Act"), the Securities Exchange Act of
1934, as amended (the "Exchange Act") and applicable state securities laws in
connection with the issuance of the Company Common Stock in connection with the
Acquisition, and the GSCP Funds shall furnish all information concerning the
GSCP Funds as may be reasonably requested by the Company in connection with such
actions and filings.
Section 2.3 No False or Misleading Statements. The information
provided and to be provided by each of the GSCP Funds and the Company
specifically for use in the Proxy Statement and any other filings with the SEC
shall not, with respect to the information supplied by such party, in the case
of the Proxy Statement, on the date the Proxy Statement becomes effective, and,
in the case of the Proxy Statement and any other filings with the SEC, on the
date upon which the Proxy Statement is mailed to the shareholders of the Company
or on the date upon which approval of this Agreement by the shareholders of the
Company is obtained, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading. Each of the GSCP Funds and the Company agrees to correct
as promptly as reasonably practicable any such information provided by it that
shall have become false or misleading in any material respect. The Company shall
as promptly as practicable take all steps reasonably necessary to file with the
SEC and have cleared by the SEC any
<PAGE>
amendment or supplement to the Proxy Statement so as to correct the same and to
cause the Proxy Statement as so corrected to be disseminated to the Company's
shareholders to the extent required by applicable law. The Proxy Statement shall
comply as to form in all material respects with the provisions of the Exchange
Act and other applicable law.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE GSCP FUNDS
Except as otherwise disclosed to the Company in a letter
delivered to it prior to the execution hereof (which letter contains appropriate
references to identify the representations and warranties to which the
information in such letter relates and which letter is incorporated herein and
made a part hereof) (the "GSCP Disclosure Letter"), the GSCP Funds represent and
warrant to the Company as follows:
Section 3.1 Organization. GSCP, GF, GSEF and TRV are limited
partnerships duly organized, validly existing and in good standing under the
laws of the State of Delaware, and Offshore is an exempted limited partnership
duly organized, validly existing and in good standing under the laws of the
Cayman Islands, each with the limited partnership power and authority and all
necessary governmental approvals to own, lease and operate its properties and to
carry on its business as it is now being conducted or presently proposed to be
conducted. Each of the GSCP Funds is duly qualified to do business, and is in
good standing, in each jurisdiction where the character of its properties owned
or held under lease or the nature of its activities makes such qualification
necessary, except where the failure to be so qualified would not, individually
or in the aggregate, reasonably be expected to have a material adverse effect on
the business, assets, liabilities, results of operations or financial condition
of any of the GSCP Funds, or materially adversely affect the ability of any of
the GSCP Funds to consummate the transactions contemplated hereby (a "GSCP
Material Adverse Effect").
Section 3.2 Authority Relative to This Agreement. The GSCP Funds
have the limited partnership power and authority to enter into this Agreement
and to carry out their obligations hereunder. The execution, delivery and
performance of this Agree ment by the GSCP Funds and the consummation by the
GSCP Funds of the transactions contemplated hereby have been duly authorized by
the managing general partner of each of the GSCP Funds, and no other proceedings
on the part of any of the GSCP Funds are necessary to authorize this Agreement
or the transactions contemplated hereby. This Agreement has been duly and
validly executed and delivered by the GSCP Funds and (assuming this Agreement
constitutes a valid and binding obligation of the Company) constitutes a valid
and binding agreement of each of the GSCP Funds, enforceable against each of the
GSCP Funds in accordance with its terms, subject to applicable bankruptcy,
reorganization, insolvency, moratorium and other laws affecting creditors'
rights generally from time to time in effect and to general equitable
principles.
<PAGE>
Section 3.3 Consents and Approvals; No Violations. Except (a) for
applicable requirements of the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"), the Securities Act, the Exchange Act, state or
foreign laws relating to takeovers, state securities or blue sky laws and the
regulations promulgated thereunder, state banking statutes and other state laws
in respect of change of control of mortgage bankers, mortgage loan originators
or mortgage loan servicers and the regula tions promulgated thereunder, and
similar matters (collectively, the "Governmental Requirements"), or (b) where
the failure to make any filing with, or to obtain any permit, authorization,
consent or approval of, any court or tribunal or administrative, government al
or regulatory body, agency, commission, division, department, public body or
other authority (a "Government Entity") would not prevent or delay the
consummation of the Acquisition, or otherwise prevent the GSCP Funds from
performing their obligations under this Agreement, and would not individually or
in the aggregate reasonably be expected to have a GSCP Material Adverse Effect,
no filing with, and no permit, authorization, consent or approval of, any
Governmental Entity is necessary for the execution, delivery and performance of
this Agreement by the GSCP Funds and the consummation of the transactions
contemplated hereby. Neither the execution, delivery or performance of this
Agreement by the GSCP Funds, nor the consummation by the GSCP Funds of the
Acquisition and the other transactions contemplated hereby, nor compliance by
the GSCP Funds with any of the provisions hereof, will (i) conflict with or
result in any breach of any provisions of the organizational documents of the
GSCP Funds, (ii) result in a violation or breach of, or constitute (with or
without due notice or lapse of time or both) a default (or give rise to any
right of termination, cancellation, acceleration, vesting, payment, exercise,
suspension or revocation) under, any of the terms, conditions, or provisions of
any note, bond, mortgage, deed of trust, security interest, indenture, license,
contract, agreement, plan or other instrument or obligation to which the GSCP
Funds are a party or by which any of them or any of their properties or assets
may be bound, (iii) violate any order, writ, injunction, decree, statute, rule
or regulation applicable to the GSCP Funds or any of their properties or assets,
(iv) result in the creation or imposition of any Encumbrance on any asset of the
GSCP Funds, or (v) cause the suspension or revocation of any permit, license,
governmental authorization, consent or approval necessary for the GSCP Funds to
conduct their businesses as currently conducted, except in the case of clauses
(ii), (iii), (iv) and (v) for violations, breaches, defaults, terminations,
cancellations, accelerations, vestings, payments, exercises, creations,
impositions, suspensions or revocations which would not individually or in the
aggregate reasonably be expected to have a GSCP Material Adverse Effect.
"Encumbrance" shall mean any mortgage, pledge, lien, charge, encumbrance,
defect, security interest, claim, option or restriction of any kind.
Section 3.4 Litigation. Except as set forth in Section 3.4 of the
GSCP Disclosure Letter, there is no suit, action, proceeding or investigation
(whether at law or equity, before or by any federal, state or foreign court,
tribunal, commission, board, agency or instrumentality, or before any
arbitrator) pending or, to the knowledge of the
<PAGE>
GSCP Funds, threatened against or affecting the GSCP Funds, which, individually
or in the aggregate, would reasonably be expected to have a GSCP Material
Adverse Effect, nor is there any judgment, decree, injunction, rule or order of
any court, governmental department, commission, agency, instrumentality or
arbitrator outstanding against the GSCP Funds having, or which, insofar as can
reasonably be foreseen, in the future would reasonably be expected to have a
GSCP Material Adverse Effect.
Section 3.5 No Default. Except as set forth in Section 3.5 of the
GSCP Disclosure Letter, none of the GSCP Funds are in violation or breach of, or
default under (and no event has occurred which with notice or the lapse of time
or both would constitute a violation or breach of, or a default under) any term,
condition or provision of (a) its organizational documents, (b) any note, bond,
mortgage, deed of trust, security interest, indenture, license, agreement, plan,
contract, lease, commitment or other instrument or obligation to which any of
the GSCP Funds is a party or by which any of them or any of their properties or
assets may be bound or affected, (c) any order, writ, injunction, decree,
statute, rule or regulation applicable to any of the GSCP Funds or any of their
properties or assets, or (d) any permit, license, governmental authorization,
consent or approval necessary for any of the GSCP Funds to conduct their
respective businesses as currently conducted, except in the case of clauses (b),
(c) and (d) above for breaches, defaults or violations which would not,
individually or in the aggregate, reasonably be expected to have a GSCP Material
Adverse Effect.
Section 3.6 Information in Proxy Statement. None of the
information supplied by any of the GSCP Funds for inclusion or incorporation by
reference in the Proxy Statement will, at the date mailed to shareholders and at
the time of the Special Meeting, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading.
Section 3.7 Brokers. No person is entitled to any brokerage,
financial advisory, finder's or similar fee or commission payable by the GSCP
Funds in connection with the Acquisition or the other transactions contemplated
by this Agreement based upon arrangements made by and on behalf of the GSCP
Funds.
Section 3.8 Disclosure. No representation or warranty by any of
the GSCP Funds contained in or made pursuant to this Agreement, contains or will
contain any untrue statement of a material fact or omits or will omit to state
any material fact necessary, in light of the circumstances under which it was
made, to make the statements herein or therein not misleading. There is no fact
known to any of the GSCP Funds which would reasonably be expected to have an
GSCP Material Adverse Effect which has not been set forth in this Agreement,
including the GSCP Disclosure Letter.
<PAGE>
Section 3.9 Funds Available. The GSCP Funds have available,
without resort to financing, all the capital resources necessary in order to
effect the transactions contemplated by this Agreement and will keep such funds
available until the Closing.
Section 3.10 Investment Representation. (a) Each of the GSCP
Funds is either (i) an accredited investor as such term is defined in Rule 501
promulgated under the Securities Act, or (ii) by reason of its business or
financial experience, a sophisticated investor who has the capacity to protect
its interest in connection with the transactions contemplated hereunder and has
both appropriate knowledge and experience with the current business operations
and prospects of the Company and its Subsidiaries and in financial and business
matters to evaluate the merits and risks of the Company Common Stock and the
related transactions contemplated hereunder.
(b) The Company Common Stock is being acquired by each of the
GSCP Funds for its own account and not for any other Person, for investment only
and with no present intention of distributing or reselling such shares or any
part thereof or interest therein in any transaction that would violate the
securities laws of the United States of America or any state, without prejudice,
however, to the rights of each of the GSCP Funds at all times to sell or
otherwise dispose of all or any part of the Company Common Stock under an
effective registration statement or applicable exemption from registration under
the Securities Act and any applicable state securities law. "Person" or "person"
shall mean any natural person, firm, partnership, association, corporation,
company, trust, business trust, Governmental Entity (as hereinafter defined) or
other entity.
(c) The Company has made available to the GSCP Funds the
opportunity to ask questions of and receive answers from the Company concerning
the Company and the terms and conditions under which Company Common Stock will
be issued to them and to obtain any additional information which the Company
possesses or can acquire without unreasonable effort or expense that is
necessary to verify the accuracy of information furnished in connection with
this Agreement or in response to any request for information.
(d) To the extent the Company Common Stock is not registered
under the Securities Act, the Company may affix to the certificates evidencing
such shares legends in connection with the foregoing.
(e) Nothing in Subsection (a) or (c) of this Section 3.10 shall
change, modify or otherwise affect any other provision of this Agreement,
including without limitation the representations and warranties in Article IV
hereof.
<PAGE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as otherwise disclosed to the GSCP Funds in a letter
delivered to them prior to the execution hereof (which letter contains
appropriate references to identify the representations and warranties herein to
which the information in such letter relates and which letter is incorporated
herein and made a part hereof) (the "Company Disclosure Letter"), the Company
represents and warrants to the GSCP Funds as follows:
Section 4.1 Organization. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Florida and has the corporate power and authority and all necessary governmental
approvals to own, lease and operate its properties and to carry on its business
as it is now being conducted or presently proposed to be conducted, except for
such government approvals, the failure of which to have, individually or in the
aggregate, would not reasonably be expected to have a Company Material Adverse
Effect (as hereinafter defined). The Company is duly qualified as a foreign
corporation to do business, and is in good standing, in each jurisdiction where
the character of its properties owned or held under lease or the nature of its
activities makes such qualification necessary, except where the failure to be so
qualified would not, individually or in the aggregate, reasonably be expected to
have a material adverse effect on the business, assets, liabilities, results of
operations or financial condition of the Company and the Company Subsidiaries,
taken as a whole, or materially adversely affect the ability of Company to
consummate the transactions contemplated hereby (a "Company Material Adverse
Effect"); provided, however, that Company Material Adverse Effect shall not
include any adverse effect resulting from (i) changes in general economic
conditions prior to the date of this Agreement, (ii) changes or developments in
the mortgage loan industry, generally, prior to the date of this Agreement, or
(iii) GSCP's unreasonably withholding its consent to any action by the Company
or a Company Subsidiary that is otherwise prohibited by Section 5.1 following a
request by the Company to take such action.
Section 4.2 Capitalization. As of the date hereof: (i) the
authorized capital stock of the Company consisted of 50,000,000 shares of
Company Common Stock and 10,000,000 shares of preferred stock, par value $.01
per share, of the Company (the "Company Preferred Stock"), of which 500,000
shares have been designated Class A Preferred Stock, 300,000 have been
designated Class B Preferred Stock, 800,000 have been designated Class C
Exchangeable Preferred Stock and 800,000 have been designated Class D Preferred
Stock, (ii) 34,104,590 shares of Company Common Stock and 523,760.758 shares of
Company Preferred Stock were issued and outstanding, consisting of 500,000
shares of Class A Company Preferred Stock and 23,760.758 shares of Class C
Exchangeable Company Preferred Stock, (iii) stock options to acquire 1,556,384
shares of Company Common Stock were issued and outstanding under the stock
incentive plans of the Company (the "Company Stock Options"), and (iv) such
rights to acquire shares in
<PAGE>
order to effect a conversion of preferred stock into shares as exist in favor of
GSCP and its affiliates pursuant to the Initial Loan Agreement, as amended by
Amendment No. 1, and the transactions contemplated thereby. All of the issued
and outstanding shares of Company Common Stock are validly issued, fully paid
and nonassessable and free of preemptive rights. Except as set forth above and
as set forth in Section 4.2 of the Company Disclosure Letter, there are no
shares of capital stock of the Company issued or outstanding, no options,
warrants or rights for, or other securities convertible into, capital stock of
the Company, and no agreements or commitments obligating the Company to issue,
sell or acquire any shares of its capital stock.
Section 4.3 Company Common Stock; Company Subsidiaries. (a) All
of the shares of Company Common Stock to be transferred and delivered to the
GSCP Funds in accordance with this Agreement will be, when so transferred and
delivered, duly authorized, validly issued, fully paid and nonassessable and
free of preemptive rights. Upon the delivery of such shares of Company Common
Stock to the GSCP Funds at the Closing, as provided for in this Agreement, the
Company will transfer to the GSCP Funds good and valid title to such shares,
free and clear of any lien, pledge, charge, security interest, encumbrance,
title retention agreement, adverse claim, option or other restriction
whatsoever, except such restrictions placed thereon by any of the GSCP Funds or
any person claiming by, through or under any of the GSCP Funds.
(b) Section 4.3(b) of the Company Disclosure Letter sets forth
the name of each subsidiary of the Company (collectively, the "Company
Subsidiaries") and the state or jurisdiction of its incorporation or
organization. Each Company Subsidiary is a corporation or other entity duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation or organization and has the corporate or other
similar power and authority and all necessary governmental approvals to own,
lease and operate its properties and to carry on its business as now being
conducted, except where any failure of the aforementioned to be the case would
not, individually or in the aggregate, reasonably be expected to have a Company
Material Adverse Effect. Each Company Subsidiary is duly qualified or licensed
and in good standing to do business in each jurisdiction in which the property
owned, leased or operated by it or the nature of the business conducted by it
makes such qualification or licensing necessary, except in such jurisdictions
where any failure of the aforementioned to be the case would not, individually
or in the aggregate, reasonably be expected to have a Company Material Adverse
Effect.
(c) Except as set forth in Section 4.3(c) of the Company
Disclosure Letter, the Company is, directly or indirectly, the record and
beneficial owner of all of the outstanding shares of capital stock of each of
the Company Subsidiaries, there are no proxies with respect to any such shares,
and no equity securities of any Company Subsidiary are or may become required to
be issued, and there are no understandings or arrangements by which the Company
or any Company Subsidiary is or may be bound to issue, redeem, purchase or sell
additional shares of capital stock of any Company
<PAGE>
Subsidiary or securities convertible into or exchangeable or exercisable for any
such shares. Except as set forth in Section 4.3(c) of the Company Disclosure
Letter, all of such shares so owned by the Company are validly issued, fully
paid and nonassessable and are owned by it free and clear of any Encumbrances or
restrictions with respect to the transferability or assignability thereof (other
than restrictions on transfer imposed by federal or state securities laws).
(d) Except for the Company Subsidiaries or as described in
Section 4.3(d) of the Company Disclosure Letter, the Company does not directly
or indirectly own any equity or similar interest in, or any interest convertible
into or exchangeable or exercisable for any equity or similar interest in, any
corporation, partnership, joint venture or other business association or entity
that directly or indirectly conducts any activity which is material to the
Company.
Section 4.4 Authority Relative to This Agreement. The Company has
the corporate power and authority to enter into this Agreement and to carry out
its obligations hereunder. The execution, delivery and performance of this
Agreement by the Company and the consummation by the Company of the transactions
contemplated hereby have been duly authorized by the Board of Directors of the
Company, acting upon the unanimous recommendation of the Special Committee, and
no other corporate proceed ings on the part of the Company, other than the
Company obtaining the Shareholder Approval pursuant to Section 2.1, are
necessary to authorize this Agreement, the Restated Articles of Incorporation,
the Amendment, the Restated Bylaws, the Acquisition or the other transactions
contemplated hereby. Subject to the foregoing, this Agreement has been duly and
validly executed and delivered by the Company and (assuming this Agreement
constitutes a valid and binding obligation of each of the GSCP Funds)
constitutes a valid and binding agreement of the Company, enforceable against
the Company in accordance with its terms, subject to applicable bankruptcy,
reorganization, insolvency, moratorium and other laws affecting creditors'
rights generally from time to time in effect and to general equitable
principles.
Section 4.5 Consents and Approvals: No Violations. Except (a) for
the Governmental Requirements, (b) for the filings, permits, authorizations,
consents or approvals with, of or by Government Entities listed in Section 4.5
of the Company Disclosure Letter or (c) where the failure to make any filing
with, or to obtain any permit, authorization, consent or approval of, any
Governmental Entity would not prevent or delay the consummation of the
Acquisition, or otherwise prevent the Company from performing its obligations
under this Agreement, and would not, individually or in the aggregate,
reasonably be expected to have a Company Material Adverse Effect, no filing
with, and no permit, authorization, consent or approval of, any Governmental
Entity is necessary for the execution, delivery and performance of this
Agreement by the Company and the consummation by the Company of the Acquisition
and the other transactions contemplated by this Agreement. Except as set forth
in Section 4.5 of the Company
<PAGE>
Disclosure Letter, no consent or approval of any other party (including, but not
limited to, any party to any Company Contracts (as defined below)) is required
to be obtained by the Company or any Company Subsidiary for the execution,
delivery or performance of this Agreement or the performance by the Company of
the transactions contemplated hereby, except for such consents the failure of
which to obtain would not, individually or in the aggregate, reasonably be
expected to have a Company Material Adverse Effect. Except as set forth in
Section 4.5 of the Company Disclosure Letter, neither the execution, delivery or
performance of this Agreement by the Company, nor the consummation by the
Company of the transactions contemplated hereby, nor compliance by the Company
with any of the provisions hereof, will (i) conflict with or result in any
breach of any provisions of the Articles of Incorporation or Bylaws of the
Company, or similar organizational documents of any of the Company Subsidiaries,
(ii) result in a violation or breach of, or constitute (with or without due
notice or lapse of time or both) a default (or give rise to any right of
termination, cancellation, vesting, payment, exercise, acceleration, suspension
or revocation) under, any of the terms, conditions or provisions of any note,
bond, mortgage, deed of trust, security interest, indenture, license, contract,
agreement, plan or other instrument or obligation to which the Company or any of
the Company Subsidiaries is a party or by which any of them or any of their
properties or assets are bound, (iii) violate any order, writ, injunction,
decree, statute, rule or regulation applicable to the Company or the Company
Subsidiaries or any of their properties or assets, (iv) result in the creation
or imposition of any Encumbrance on any asset of the Company or any Company
Subsidiary or (v) cause the suspension or revocation of any certificate of
authority, permit, license, governmental authorization, consent or approval
necessary for the Company or any of the Company Subsidiaries to conduct its
business as currently conducted, except in the case of clauses (ii), (iii), (iv)
and (v) for violations, breaches, defaults, terminations, cancellations,
accelerations, vestings, payments, exercises, creations, impositions,
suspensions or revocations which would not, individually or in the aggregate,
reasonably be expected to have a Company Material Adverse Effect.
Section 4.6 Company SEC Reports. The Company has filed with the
SEC and made available to GSCP true and complete copies of each registration
statement, report and proxy or information statement (including exhibits and any
amendments thereto) filed or required to be filed by the Company with the SEC
since January 1, 1997 (collectively, the "Company SEC Reports"). As of the
respective dates the Company SEC Reports were filed with the SEC or amended,
each of the Company SEC Reports (i) complied as to form in all material respects
with all applicable requirements of the Securities Act and Exchange Act, and the
rules and regulations promulgated thereunder and (ii) did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. Each of the
audited consolidated financial statements and unaudited interim consolidated
financial statements of the Company (including any related notes and schedules)
included (or incorporated by reference) in the Company SEC Reports fairly
presents in all material
<PAGE>
respects, in conformity with generally accepted accounting principles ("GAAP")
applied on a consistent basis (except as may be indicated in the notes thereto),
the consolidated financial position of the Company and the Company Subsidiaries
as of the dates thereof and the consolidated results of their operations and
changes in their financial position for the periods then ended (subject to
normal year-end adjustments, in the case of any unaudited interim financial
statements) except (x) as set forth in Section 4.6 of the Company Disclosure
Letter, and (y) that the interim, financial statements do not include complete
footnotes required by GAAP.
Section 4.7 Absence of Certain Changes. Since September 30, 1998,
except as set forth in Section 4.7 of the Company Disclosure Letter, there has
been no event, condition or set of circumstances which, individually or in the
aggregate, has had or is reasonably likely to result in a Company Material
Adverse Effect, and the Company and the Company Subsidiaries have in all
material respects conducted their businesses in the ordinary course.
Section 4.8 Litigation. Except as set forth in Section 4.8 of the
Company Disclosure Letter, there is no suit, action, proceeding or investigation
(whether at law or equity, before or by any federal, state or foreign court,
tribunal, commission, board, agency or instrumentality, or before any
arbitrator) pending or, to the knowledge of the Company, threatened against the
Company or any of the Company Subsidiaries, which, individually or in the
aggregate, would reasonably be expected to have a Company Material Adverse
Effect, nor is there any judgment, decree, injunction, rule or order of any
court, governmental department, commission, agency, instrumentality or
arbitrator outstanding against the Company or any of the Company Subsidiaries
having, or which, insofar as can reasonably be foreseen, in the future may
reasonably be expected to have, a Company Material Adverse Effect.
Section 4.9 Absence of Undisclosed Liabilities. Except for
liabilities or obligations (i) which are accrued or reserved against in the
Company's financial statements (or reflected in the notes thereto) included in
the Company's Quarterly Report on Form 10-Q for the nine months ended September
30, 1998 or (ii) disclosed in Section 4.9 of the Company Disclosure Letter, the
Company and the Company Subsidiaries do not have any liabilities or obligations
of any nature whatsoever (whether absolute, accrued, contingent or otherwise)
("Liabilities") required by GAAP to be set forth on the balance sheet of the
Company or any Company Subsidiary, other than Liabilities arising since
September 30, 1998 in the ordinary course of business that, individually or in
the aggregate, are not reasonably likely to have a Company Material Adverse
Effect.
Section 4.10 No Default. Except as set forth in Section 4.10 of
the Company Disclosure Letter, neither the Company nor any of the Company
Subsidiaries is in violation or breach of, or default under (and no event has
occurred which with notice or the lapse of time or both would constitute a
violation or breach of, or a default under) any
<PAGE>
term, condition or provision of (a) its Articles or Certificate of
Incorporation, as the case may be, or Bylaws, (b) any note, bond, mortgage, deed
of trust, security interest, indenture, license, agreement, plan, contract,
lease, commitment or other instrument or obligation to which the Company or any
of the Company Subsidiaries is a party or by which they or any of their
properties or assets are bound, (c) any order, writ, injunction, decree,
statute, rule or regulation applicable to the Company or any of the Company
Subsidiaries or any of their properties or assets, or (d) any permit, license,
governmental authorization, consent or approval necessary for the Company or any
of the Company Subsidiaries to conduct their respective businesses as currently
conducted, except in the case of clauses (b), (c) and (d) above for breaches,
defaults or violations which would not, individually or in the aggregate,
reasonably be expected to have a Company Material Adverse Effect.
Section 4.11 Taxes. Except as set forth in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997 or Section 4.11 of the
Company Disclosure Letter, to the knowledge of the Company:
(a) (i) all material Tax Returns relating to the Company and the
Company Subsidiaries required to be filed have been filed, (ii) all such Tax
Returns are true and correct in all material respects, (iii) all Taxes shown as
due and payable on such Tax Returns, and all material Taxes (whether or not
reflected on such Tax Returns) relating to the Company or any of the Company
Subsidiaries required to be paid have been paid, (iv) adequate reserves have
been made on the most recent financial statements included in the Company SEC
Reports in accordance with GAAP for all Taxes relating to the Company and the
Company Subsidiaries for all taxable periods or portions thereof accrued through
the date of such financial statements, and (v) the Company and the Company
Subsidiaries have duly and timely withheld all material Taxes required to be
withheld and such withheld Taxes have been either duly and timely paid or
properly set aside in accounts for such purpose and will be duly and timely
paid.
(b) no written agreement or other written document waiving or
extending, or having the effect of waiving or extending, the statute of
limitations or the period of assessment or collection of any Taxes relating to
the Company or any of the Company Subsidiaries and no power of attorney with
respect to any such Taxes has been filed or entered into with any taxing
authority. The time for filing any Tax Return relating to the Company or any of
the Company Subsidiaries has not been extended to a date later than the date of
this Agreement.
(c) (i) no audits or other administrative proceedings or court
proceed ings are presently pending with regard to any Taxes or Tax Return of the
Company or any of the Company Subsidiaries as to which any taxing authority has
asserted in writing any claim which, if adversely determined, would reasonably
be expected to have a Company Material Adverse Effect, and (ii) no taxing
authority is now asserting in writing any
<PAGE>
deficiency or claim for Taxes or any adjustment to Taxes with respect to which
the Company or any of the Company Subsidiaries may be liable with respect to
income and other material Taxes which has not been fully paid or finally
settled.
(d) none of the Company and the Company Subsidiaries (i) is a
party to or bound by or has any obligation under any written Tax sharing, Tax
indemnity or similar agreement or arrangement (including, without limitation,
the Tax indemnification provisions of any acquisition or disposition agreement),
(ii) is or has been a member of any consolidated, combined or unitary group for
purposes of filing Tax Returns or paying Taxes (other than such a group the
common parent of which is the Company) or (iii) has entered into a closing
agreement pursuant to Section 7121 of the Code, or any predecessor provision or
any similar provision of state or local law.
(e) none of the assets of the Company or any of the Company
Subsidiaries are subject to any Tax lien (other than liens for Taxes that are
not yet due or that are being contested in good faith by appropriate proceedings
and which have been properly reserved for in the books and records of the
Company).
(f) neither the Company nor any of the Company Subsidiaries is
subject to an election to have the provisions of Section 341(f) of the Code
apply.
(g) "Taxes" shall mean all federal, state, local or foreign
income, alternative minimum, accumulated earnings, personal holding company,
franchise, capital stock, profits, windfall profits, gross receipts, sales, use,
value added, transfer, registra tion, stamp, premium, excise, customs duties,
severance, environmental (including taxes under Section 59A of the Code), real
property, personal property, ad valorem, occupancy, license, occupation,
employment, payroll, social security, disability, unemployment, workers'
compensation, withholding, estimated or other similar taxes, duties, fees,
assess ments or other governmental charges or deficiencies thereof (including
all interest and penalties thereon and additions thereto). "Tax Returns" shall
mean all federal, state, local and foreign tax returns, declarations,
statements, reports, schedules, forms and informa tion returns and any
amendments to any of the foregoing relating to Taxes.
Section 4.12 Property. (a) Except as set forth in Section 4.12(a)
of the Company Disclosure Letter, each of the Company and the Company
Subsidiaries (i) has good and valid title to all of its properties, assets and
other rights that do not constitute real property free and clear of all
Encumbrances, except for such Encumbrances that are not, individually or in the
aggregate, reasonably expected to have a Company Material Adverse Effect, and
(ii) owns, has valid leasehold interests in or valid contractual rights to use,
(x) each of the assets identified in Schedule 5.1(f) and (y) all of the assets,
tangible and intangible, used by, or necessary for the conduct of, its business,
except where the failure to have such valid leasehold interests or such valid
contractual rights are not,
<PAGE>
individually or in the aggregate, reasonably be expected to have a Company
Material Adverse Effect.
(b) Except as set forth in Section 4.12(b) of the Company
Disclosure Letter or as would not reasonably be expected to result in a Company
Material Adverse Effect, each of the Company and the Company Subsidiaries owns
and has good and valid title to the real property owned by such party and used
in its business, free and clear of all Encumbrances, except for (A) minor
imperfections of title, easements and rights of way, none of which, individually
or in the aggregate, materially detracts from the value of or impairs the use of
the affected property or impairs the operation of the Company or any of the
Company Subsidiaries and (B) liens for current taxes not yet due and payable.
(c) Section 4.12(c) of the Company Disclosure Letter sets forth a
list, which is accurate and complete in all material respects, of each material
real property lease under which the Company or any of the Company Subsidiaries
is a tenant, and the Company has made a true and complete copy of each such
lease available to GSCP. The Company and each Company Subsidiary is in peaceful
and undisturbed possession of the space and/or estate under each lease under
which it is a tenant, and there are no defaults by it as tenant thereunder,
except for such disturbances or defaults that would not, individually or in the
aggregate, reasonably be expected to have a Company Material Adverse Effect.
Section 4.13 Compliance with Laws; Authorizations. (a) The
business of the Company and each of the Company Subsidiaries is being conducted
in compliance with all applicable laws, including, without limitation, all
insurance codes, laws, usury, truth in lending, real estate settlement
procedures, consumer credit protection, equal credit opportunity, disclosure
laws, ordinances, rules, regulations, decrees and orders of any Governmental
Entity, and any other codes, laws, ordinances, rules, regulations, decrees and
orders of any Governmental Entity relating to the offer and sale of the
Company's and the Company Subsidiaries' products or services, the marketing of
any such products or services to potential purchasers or subscribers thereto, or
any joint venture with any other party relating to the foregoing, and all
material notices, reports, documents and other information required to be filed
thereunder within the last three years were properly filed and were in
compliance with such laws, except, in each case, for such non-compliance as
would not, individually or in the aggregate, reasonably be expected to have a
Company Material Adverse Effect. The representations and warranties contained in
this Section 4.13 do not cover any matters covered by Sections 4.18, 4.19 or
4.20.
(b) The Company, and each of the Company Subsidiaries, has all
certificates of authority, approvals, authorizations, permits and licenses,
including, without limitation, mortgage banking licenses, the use and exercise
of which are necessary for the conduct of its business as now conducted
("Authorizations"), other than such Authorizations the absence of which would
not, individually or in the aggregate,
<PAGE>
reasonably be expected to have a Company Material Adverse Effect. The business
of the Company and each of the Company Subsidiaries has been and is being
conducted in compliance with all such Authorizations, except for such
non-compliance as would not, individually or in the aggregate, reasonably be
expected to have a Company Material Adverse Effect. To the knowledge of the
Company after due inquiry or as would not reasonably be likely, individually or
in the aggregate, to result in a Company Material Adverse Effect, all such
Authorizations are in full force and effect, and there is no proceeding or
investigation pending or threatened and no communication, whether written or
oral, which would reasonably be expected to lead to the revocation, amendment,
failure to renew, limitation, suspension or restriction of any such
Authorization. Section 4.13(b) of the Company Disclosure Letter sets forth a
list of each material Authorization.
(c) Except as set forth in Section 4.13(c) of the Company
Disclosure Letter, neither the Company nor any Company Subsidiary has entered
into any agreements or stipulations with any Governmental Entity, and no
judgments, decrees, injunctions, fines or orders of any Governmental Entity have
been issued with respect to the Company and the Company Subsidiaries, which,
individually or in the aggregate, has had or would reasonably be expected to
have a Company Material Adverse Effect.
Section 4.14 Regulatory Filings. The Company has made available
for inspection by GSCP complete copies of all material registrations, filings
and submissions made since January 1, 1997 by the Company or any of the Company
Subsidiaries with any Governmental Entity and any reports of examinations issued
since January 1, 1997 by any such Governmental Entity that relate to the Company
or any of the Company Subsidiaries. The Company and the Company Subsidiaries
have filed all reports, statements, documents, registrations, filings or
submissions required to be filed by any of them with any Governmental Entity,
except where the failure to file, in the aggregate, would not reasonably be
expected to have a Company Material Adverse Effect; and all such reports,
statements, documents, registrations, filings or submissions were true, complete
and accurate and complied with applicable law when filed except for such
inaccuracies and noncompliance as would not, individually or in the aggregate,
reasonably be expected to have a Company Material Adverse Effect and, except as
set forth in Section 4.14 of the Company Disclosure Letter, no material
deficiencies have been asserted by any such Governmental Entity with respect to
such reports, statements, documents, registrations, filings or submissions that
have not been satisfied, except for such deficiencies as would not, individually
or in the aggregate, reasonably be expected to have a Company Material Adverse
Effect.
Section 4.15 Investments. (a) Section 4.15 of the Company
Disclosure Letter sets forth a materially accurate and complete list of
investments, including, without limitation, any securities, derivative
instruments, repurchase agreements, options, forwards, futures or hybrid
securities ("Company Investments") owned by the Company and the Company
Subsidiaries as of September 30, 1998, together with the cost basis,
<PAGE>
book or amortized value, as the case may be, and investment rating as of
September 30, 1998 of each such Company Investment. Except as set forth in
Section 4.15 of the Company Disclosure Letter, the Company and the Company
Subsidiaries have good and marketable title to the Company Investments.
Section 4.16 Information in Proxy Statement. None of the
information supplied by the Company for inclusion or incorporation by reference
in the Proxy Statement will, and the Proxy Statement (or any amendment thereof
or supplement thereto) will not, at the date it becomes effective and at the
time of the Special Meeting, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading , except that no representation is made by the
Company with respect to statements made therein based on information supplied by
the GSCP Funds in writing for inclusion in the Proxy Statement. The Proxy
Statement will comply as to form in all material respects with the provisions of
the Exchange Act and the rules and regulations thereunder.
Section 4.17 Brokers. Except as set forth in Section 4.17 of the
Company Disclosure Letter, no person is entitled to any brokerage, financial
advisory, finder's or similar fee or commission payable by the Company or any
Company Subsidiary in connection with the Acquisition or the other transactions
contemplated hereby based upon arrangements made by and on behalf of the
Company.
Section 4.18 Employee Benefit Plans; ERISA. (a) Section 4.18(a)
of the Company Disclosure Letter sets forth a complete and accurate list of: (i)
all severance, employment, consulting, change of control, retention and all
other similar agreements between the Company or any Company Subsidiary and any
current or former employee, agent, independent contractor, officer or director,
(ii) all severance programs, policies and practices of the Company and each of
the Company Subsidiaries, (iii) all plans or arrangements of the Company and
each of the Company Subsidiaries relating to its respective current or former
employees, agents, independent contractors, officers or directors that contain
change in control provisions, including in all cases any and all amendments
thereto, and (iv) all Company Benefit Plans. For purposes of this Agreement,
"Company Benefit Plan" shall mean any pension, post-retirement benefit, profit
sharing, deferred compensation, incentive compensation, stock ownership, stock
purchase, stock option, phantom stock, equity-based award, retirement, vacation,
disability, death benefit, hospitalization or other medical, dental, accident,
disability, life or other insurance, supplemental unemployment benefits,
material bonus, fringe and other welfare benefit plan, program, policy,
agreement or arrangement, and each other employee benefit plan, program,
agreement, arrangement or understanding providing benefits to any current or
former employee, agent, independent contractor, officer or director of the
Company or any of the Company Subsidiaries, whether written or unwritten, that
is or has been maintained or established by the Company or any other Person
that, together with the
<PAGE>
Company, is treated as a single employer under Section 414 of the Code (each a
"Company Commonly Controlled Entity"), or to which the Company or any Company
Commonly Controlled Entity contributes or is obligated or required to contribute
or with regard to which the Company or any of its Company Commonly Controlled
Entities has knowledge of any event, transaction or condition that would
reasonably be expected to result in any material liability at the Closing.
(b) With respect to each Company Benefit Plan, to the extent
applic able, the Company and the Company Subsidiaries have heretofore made
available or have caused to be made available to GSCP true and complete copies
of the following documents: (i) a copy of each written Company Benefit Plan and
a summary of the essential terms of each unwritten Company Benefit Plan, (ii) a
copy of the most recent annual report on Form 5500 and actuarial report, if
required under the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), (iii) a copy of the most recent Summary Plan Description required
under ERISA with respect thereto, (iv) if the Company Benefit Plan is funded
through a trust or any third party funding vehicle, a copy of the trust or other
funding agreement and the latest financial statements thereof, and (v) the most
recent determination letter received from the IRS with respect to each Company
Benefit Plan intended to qualify under Section 401 of the Code.
(c) Except as set forth in Section 4.18(c) of the Company
Disclosure Letter, (i) with respect to the Company Benefit Plans, no event has
occurred and there exists no condition or set of circumstances, in connection
with which the Company or any Company Commonly Controlled Entity could be
subject to any liability under ERISA, the Code or any other applicable law
(either directly or indirectly, including as a result of an indemnification
obligation or any joint and several liability obligations) that, individually or
in the aggregate, would result in a material liability to the Company or any of
the Company Subsidiaries, (ii) no Company Benefit Plan is a multi-employer plan
within the meaning of Section 3(37) of ERISA, (iii) each Company Benefit Plan
has been administered substantially in accordance with its terms, and all the
Company Benefit Plans have been operated and are in material compliance with the
applicable provisions of ERISA, the Code and all other applicable laws and the
terms of all applicable collective bargaining agreements except in so far as a
failure to so comply, whether individually or collectively, would not result in
a material liability to the Company or any of the Company Subsidiaries, (iv)
with respect to each plan intended to be a qualified plan under Section 401(a)
of the Code, the IRS has issued a favorable determination letter with respect to
the qualification of each such Company Benefit Plan and its related trust, if
any, and the IRS has not taken any action to revoke any such letter and the
Company knows of no event that has occurred since the date of such determination
that would reasonably be expected to result in the disqualification of such plan
and (v) there are no pending or, to the knowledge of the Company, threatened or
anticipated actions, suits, claims, assessments, complaints, proceedings or
investigations of any kind in any court or governmental agency with respect to
any Company Benefit Plan (other than routine claims for benefits) that
<PAGE>
could reasonably be expected to result in a material liability to the Company or
the Company Subsidiaries.
(d) Except as set forth in Section 4.18(d) of the Company
Disclosure Letter, (i) no Company Benefit Plan provides for medical benefits
(whether or not insured) to be made available with respect to current or former
employees, agents, officers, directors or independent contractors (or any
dependent of any of them) after retirement or other termination of service
(other than (x) coverage mandated by applicable law or (y) benefits the full
cost of which is borne by the current or former employee, agent, officer,
director or independent contractor), and (ii) the consummation of the
transactions contemplated by this Agreement will not (x) entitle any current or
former employee, agent, independent contractor, director or officer of the
Company or any of the Company Subsidiaries or any Company Commonly Controlled
Entity to severance pay, golden parachute payment, or any other payment from the
Company or a Company Subsidiary, except as expressly provided in this Agreement,
(y) accelerate the time of payment or vesting, or increase the amount of
compensation due any such employee, agent, independent contractor, director or
officer, or (z) constitute a "change in control" under any Company Benefit Plan.
(e) Section 4.18(e) of the Company Disclosure Letter sets forth a
complete and accurate list of all Company Stock Options outstanding as of the
date of this Agreement (including the name of the Company Stock Option holder
and such person's relationship to the Company and the Company Subsidiaries, the
vesting schedules, exercise periods and exercise prices thereof and of all
Company stock appreciation rights ("Company SAR's") outstanding as of the date
of this Agreement (including the name of the Company SAR holder and such
person's relationship to the Company and the Company Subsidiaries) and the
reference market prices thereof.
Section 4.19 Labor and Employee Relations. Except as disclosed in
Section 4.19 of the Company Disclosure Letter, none of the employees of the
Company or the Company Subsidiaries are represented by any labor organization
and, to the knowledge of the Company, no union claims to represent these
employees have been made. Neither the Company nor any of the Company
Subsidiaries is a party to any collective bargaining or other labor union
contract applicable to persons employed by the Company or any of the Company
Subsidiaries, and no collective bargaining agreement is being negotiated by the
Company or Company Subsidiaries. There is no labor dispute, strike or work
stoppage against the Company or Company Subsidiaries pending, or to the
knowledge of the Company, threatened except for such routine disputes and
grievances as would not, individually or in the aggregate, reasonably be
expected to have a Company Material Adverse Effect. To the knowledge of the
Company, the Company and Company Subsidiaries are not, and have not been,
engaged in any unfair labor practices as defined in the National Labor Relations
Act or similar applicable law, ordinance or regulation, nor is
<PAGE>
there pending any unfair labor practice charge, except for such as would not,
individually or in the aggregate, reasonably be expected to have a Company
Material Adverse Effect.
Section 4.20 Environmental Matters. (a) Except as disclosed in
Section 4.20(a) of the Company Disclosure Letter or as would not reasonably be
likely to have a Company Material Adverse Effect, (i) each of the Company and
the Company Subsidiaries is and has been in compliance in all respects with and,
has no existing liabilities under, and (ii) there are no written claims or
notice by any person received by the Company or any of the Company Subsidiaries
that any of the Company or the Company Subsidiaries has not been in compliance
in all respects with or has any existing liabilities under all applicable laws,
rules, regulations, common law, ordinances, decrees, orders and other binding
legal requirements relating to pollution, the preservation of the environment,
and the exposure to materials in the environment or the work place
("Environmental Laws") with respect to property owned, leased or operated by the
Company or any of the Company Subsidiaries. Except as would not reasonably be
likely to have a Company Material Adverse Effect, neither the Company nor any of
the Company Subsidiaries is subject to any decrees, orders, decisions of
arbitrators or judgments that impose requirements, restrictions or liabilities
under, or penalties for violations of, any Environmental Laws or the
aforementioned requirements or restrictions.
(b) Except as disclosed in Section 4.20(b) of the Company
Disclosure Letter, with respect to currently owned property and all property
formerly owned, leased or operated by the Company or any of the Company
Subsidiaries, including foreclosure property, to the knowledge of the Company
after due inquiry, there are no past or present actions, conditions or
occurrences that could form the basis of any claim under Environmental Laws
against, or liability under such laws of, the Company or any of the Company
Subsidiaries, except for such claims or liabilities which in the aggregate would
not reasonably be expected to result in a Company Material Adverse Effect.
Section 4.21 Opinion of Financial Advisor. The Company has
received a written opinion from Donaldson, Lufkin & Jenrette Securities
Corporation and the Special Committee of the Board of Directors has received a
written opinion from J.P. Morgan Securities Inc., both dated as of the date
hereof, and acknowledgements of such opinions, both dated March 31, 1999, to the
effect that the investment to be made by the GSCP Funds in the Company pursuant
to the terms of this Agreement, the Initial Loan Agreement, Amendment No. 1 and
the Loan Agreement is fair to the public shareholders of the Company from a
financial point of view, and the Company has received the permission of
Donaldson, Lufkin & Jenrette Securities Corporation and J.P. Morgan Securities
Inc. to include such opinions in the Proxy Statement.
Section 4.22 Contracts. (a) Section 4.22 of the Company
Disclosure Letter sets forth a list of all contracts, agreements, arrangements
or understandings (written or oral) ("Contracts") to which the Company or any of
the Company Subsidiaries
<PAGE>
is a party or by which it or any of them is bound and which are not set forth as
exhibits to any of the Company SEC Reports and which:
(i) require the payment by or to the Company or the Company
Subsidiaries of amounts in excess of $50,000 per annum or are joint venture or
strategic alliance or similar agreements, except for (x) mortgage loans
purchased or originated in the ordinary course of business, (y) Contracts of the
types specified in clauses (i) - (iv) of Section 4.18(a), or (z) agency, dealer,
correspondent, sales representative, marketing and similar agreements entered
into in the ordinary course of business;
(ii) restrict the Company or any of the Company Subsidiaries from
engaging in any line of business in any geographic area or competing with any
person or entity or restricting the ability of the Company or the Company
Subsidiaries to acquire equity securities of any person or entity;
(iii) are employment, consulting or severance contracts
applicable to any employee, officer, director, consultant or shareholder of the
Company or the Company Subsidiaries, other than any contract which by its terms
the Company or any Company Subsidiary may terminate on not more than 60 days'
notice without liability;
(iv) were entered into in connection with an acquisition, sale,
lease, license, disposition or similar agreement of or regarding another entity,
block of business, real property or other assets or property by the Company or
any Company Subsidiary either not in the ordinary course of business (separately
identifying any such Contract which includes a continuing payment or indemnity
obligation), or which pertain to any such assets or property which have a value
greater than $500,000, except for mortgage loans purchased or originated in the
ordinary course of business;
(v) is an evidence of any indebtedness for borrowed money of the
Company or any of the Company Subsidiaries, including without limitation, any
note, bond, mortgage, deed of trust, credit agreement, loan agreement, security
agreement, or indenture;
(vi) is an intercompany agreement, including without limitation,
any tax sharing, expense sharing, employee leasing or other similar agreement;
(vii) were entered into in connection with securitizations or
pools of mortgage loans, including, without limitation, any mortgage sale
agreement or mortgage servicing agreement to which the Company or any Company
Subsidiary is a party (the "Mortgage Servicing Agreements") relating thereto and
any documentation evidencing the rights in respect of interest only or residual
certificates owned by the Company or any Company Subsidiary; any such agreements
described in the preceding clause that were entered into in the ordinary course
of business may be described in Section 4.22 of the
<PAGE>
Company Disclosure Letter in summary form but shall be subject to Section
4.22(b) hereof; or
(viii) is a management, administrative services, data processing
or software licensing Contract, excluding off-the-shelf software licenses; (the
contracts in clause (i)-(viii), together with the Contracts filed as exhibits to
the Company SEC Reports, collectively, the "Company Contracts").
(b) With respect to each of the Company Contracts, to the
knowledge of the Company, except as disclosed in Section 4.22 of the Company
Disclosure Letter: such contract is (assuming due power and authority of, and
due execution and delivery by, the other party or parties thereto) valid and
binding upon the Company or any Company Subsidiary party thereto and, to the
Company's knowledge, the other party thereto and is in full force and effect.
Section 4.23 Intellectual Property. The Company and/or each of
the Company Subsidiaries owns, or is licensed or otherwise possesses legally
enforceable rights to use all patents, trademarks, trade names, service marks,
copyrights, and any applications therefor, technology, know-how, computer
software programs or applications, and tangible or intangible proprietary
information or materials that are used in the business of the Company and the
Company Subsidiaries as currently conducted, except for any such failures to
own, be licensed or possess that are not, individually or in the aggregate,
reasonably likely to have a Company Material Adverse Effect, and to the
knowledge of the Company all patents, trademarks, trade names, service marks and
copyrights held by the Company and/or the Company Subsidiaries are valid and
subsisting. The Company does not know of any claim or any infringement or
similar violation that could give rise to any claim against the use by the
Company or any of the Company Subsidiaries of any trademarks, trade names, trade
secrets, copyrights, patents, technology, know-how or computer software programs
and applications used in the business of the Company or any of the Company
Subsidiaries as currently conducted or as proposed to be conducted which would
reasonably be expected, individually or in the aggregate, to have a Company
Material Adverse Effect.
Section 4.24 Voting Requirements; Takeover Statutes. (a) The only
votes of the holders of any class or series of the Company's capital stock
necessary to approve and adopt this Agreement, the Restated Articles of
Incorporation, the Acquisition and the other transactions contemplated by this
Agreement excluding the Amendment are as follows: (i) if a quorum consisting of
the majority of the voting power of the Company Common Stock exists, the votes
of the Company Common Stock that favor approval and adoption exceeding the votes
cast opposing approval and adoption in accordance with Sections 607.0725 and
607.1003 of the FBCA; and (ii) the affirmative votes of the holders of at least
66 2/3% of the Company's Class A Preferred Stock and Class C Preferred Stock,
voting separately as a class. The only vote of the holders of any class or
series of
<PAGE>
the Company's capital stock necessary to approve and adopt the Amendment is, if
a quorum exists, the majority of the voting power of the Company Common Stock,
excluding any voting shares held by the GSCP Funds, their affiliates and
associates, in accordance with Section 607.0901(5)(c) of the FBCA.
(b) The Board of Directors of the Company, acting on the
unanimous recommendation of the Special Committee, has approved the terms of
this Agreement, the Restated Articles of Incorporation, the Amendment, the
Restated Bylaws, the consummation of the Acquisition and the other transactions
contemplated by this Agreement, and such approval is sufficient to render
inapplicable to this Agreement, the Acquisition and the other transactions
contemplated hereby the provisions of Sections 607.0901 and 607.0902 of the
FBCA. No other state takeover statute or similar statute or regulation applies
or purports to apply to this Agreement, the Restated Articles of Incorporation,
the Amendment, the Restated Bylaws, the Acquisition or any of the other
transactions contemplated hereby, and no provision of the Articles of
Incorporation, Bylaws or other governing instruments of the Company or any of
the Company Subsidiaries would, directly or indirectly, restrict or impair the
ability of the GSCP Funds to vote, or otherwise to exercise the rights of
shareholders with respect to, shares of the Company and the Company Subsidiaries
that may be acquired or controlled by the GSCP Funds.
Section 4.25 Disclosure. To the Company's knowledge, no
representa tion or warranty by the Company or the Company Subsidiaries contained
in or made in any certificate delivered pursuant to this Agreement contains or
will contain any untrue statement of a material fact or omits or will omit to
state any material fact necessary, in light of the circumstances under which it
was made, to make the statements herein or therein not misleading.
Section 4.26 Transactions with Affiliates. Except as set forth in
Section 4.26 of the Company Disclosure Letter or as disclosed in any of the
Company SEC Reports, neither the Company nor any Company Subsidiary has entered
into any material transaction, contract or arrangement with an Affiliate (other
than the Company, any Company Subsidiary or the GSCP Funds) (i) since January 1,
1998 or (ii) prior to January 1, 1998 and in respect of which either the Company
or a Company Subsidiary has or may in the future have continuing obligations.
"Affiliate" or "affiliate" shall mean a Person that directly or
indirectly through one or more intermediaries, controls, is controlled by, or is
under common control with, the first Person, including but not limited to a
subsidiary of the first Person, a Person of which the first Person is a
subsidiary, or another subsidiary of a Person of which the first Person is also
a subsidiary. "Control" (including the terms "controls" "controlled by" and
"under common control with") means the possession, directly or indirectly, of
the power to direct or cause the direction of the management policies of a
Person, whether
<PAGE>
through the ownership of voting securities, by contract or credit arrangement,
as trustee or executor, or otherwise.
Section 4.27 Discontinued Operations. Section 4.27 of the Company
Disclosure Letter accurately describes all of the businesses and operations that
(i) have been dissolved, sold, transferred or otherwise disposed of by the
Company, any Company Subsidiary or any former subsidiary of the Company, any
Company Subsidiary, or any predecessor thereto and (ii) were businesses and
operations of the Company, any Company Subsidiary or any former subsidiary of
the Company or any predecessor thereto, in either case, in respect of which any
of them may have any continuing material liability or obligation.
ARTICLE V
CONDUCT OF BUSINESS PENDING THE ACQUISITION
Section 5.1 Conduct of Business by the Company Pending the
Acquisition. From the date hereof until the Closing, unless GSCP shall otherwise
agree in writing, or except as set forth in Section 5.1 of the Company
Disclosure Letter or as otherwise contemplated by this Agreement, the Company
and the Company Subsidiaries shall conduct their respective businesses solely in
the ordinary course and shall use all commercially reasonable efforts to
preserve intact their business organizations and relationships with third
parties (including but not limited to their respective relationships with
policyholders and agents), to keep available the services of their present
officers and key employees, subject to the terms of this Agreement. Except as
set forth in Section 5.1 of the Company Disclosure Letter or as otherwise
provided in this Agreement, from the date hereof until the Closing, without the
prior written consent of GSCP:
(a) the Company shall not and shall not permit any Company
Subsidiary to adopt or propose any change in its Articles of Incorporation or
Bylaws;
(b) the Company shall not declare, set aside or pay any dividend
or other distribution with respect to or acquire any shares of capital stock of
the Company, or split, combine or reclassify any of the Company's capital stock,
and the Company and the Company Subsidiaries shall not repurchase, redeem or
otherwise acquire any shares of capital stock or other securities of, or other
ownership interests in, the Company;
(c) the Company shall not, and shall not permit any Company
Subsidiary to, merge or consolidate with any other person or (except in the
ordinary course of business after notice to GSCP) acquire a material amount of
assets of any other person;
<PAGE>
(d) the Company shall not, and shall not permit any Company
Subsidiary to, enter into or terminate any material contract, agreement,
commitment, or understanding other than agreements entered into with
unaffiliated third parties, on an arms-length basis and in the ordinary course
of business constituting marketing affiliation and sales agreements on terms
comparable with its existing agreements of such nature;
(e) the Company shall not, and shall not permit any Company
Subsidiary to, sell, lease, license or otherwise surrender, relinquish or
dispose of (i) any material facility owned or leased by the Company or any
Company Subsidiary or (ii) any assets or property which are material to the
Company and the Company Subsidiaries, taken as a whole, except pursuant to
existing contracts or commitments, or in the ordinary course of business after
notice to GSCP;
(f) the Company shall not, and shall not permit any Company
Subsidiary to, sell, lease, license or otherwise surrender, relinquish or
dispose of the assets described on Schedule 5.1(f) hereto;
(g) the Company shall not, and shall not permit any Company
Subsidiary to, settle any material audit, make or change any material Tax
election or file amended Tax Returns unless required by law or such settlement
results in a refund to the Company and in each case the Company notifies GSCP at
least five days prior to the date any such action is taken;
(h) the Company and the Company Subsidiaries shall not issue any
capital stock or other securities or enter into any amendment of any material
term of any outstanding security of the Company, except upon the exercise of
stock options existing on the date hereof, and the Company and the Company
Subsidiaries shall not incur any material indebtedness except in the ordinary
course of business pursuant to existing credit facilities or arrangements, amend
or otherwise increase, accelerate the payment or vesting of the amounts payable
or to become payable under or fail to make any required contribu tion to, any
Company Benefit Plan or materially increase any non-salary benefits payable to
any employee or former employee, except in the ordinary course of business
consistent with past practice, as required by applicable law or as otherwise
permitted by this Agreement;
(i) except in the ordinary course of business consistent with
past practice, as may be required by applicable law or as may be necessary for
compliance under Section 401(a) of the Code, if applicable, the Company shall
not, and shall not permit any Company Subsidiary to (i) grant Options, Company
SAR's or other equity-related awards; (ii) grant any increase in the
compensation, bonus, severance, termination pay or other benefits of any former
or current employee, agent, consultant, officer or director of the Company or
any Company Subsidiary; (iii) enter into or amend any employment agreement,
deferred compensation, consulting, severance, termination,
<PAGE>
indemnification or any other such agreement with any such former or current
employee, agent, consultant, officer or director of the Company or any Company
Subsidiary; or (iv) amend, adopt or terminate any Company Benefit Plan;
(j) the Company shall not change any method of accounting or
accounting practice by the Company or any Company Subsidiary, except for any
such change required by GAAP;
(k) the Company shall not, and shall not permit any Company
Subsidiary to, conduct material transactions in Company Investments except in
compliance in all material respects with the investment policies of the Company
and any such Company Subsidiary established from time to time in the ordinary
course of business and in all material respects all applicable laws and
regulations;
(l) the Company shall not, and shall not permit any Company
Subsidiary to, enter into any agreement to purchase, or to lease for a term in
excess of one year, any real property, provided that the Company, or any Company
Subsidiary, (i) may as a tenant, or a landlord, renew any existing lease for a
term not to exceed eighteen months and (ii) nothing herein shall prevent the
Company, in its capacity as a landlord, from renewing any lease pursuant to an
option granted prior to the date hereof;
(m) the Company shall not, and shall not permit any Company
Subsidiary to, enter into any transaction, contract or arrangement whatsoever
with an Affiliate (other than the Company or any Company Subsidiary), except
transactions in the ordinary course of business consistent with past practice
pursuant to pre-existing contracts disclosed in Section 4.26 of the Company
Disclosure Letter or disclosed in the Company SEC Reports;
(n) the Company shall not release any third party from any
material obligation, or grant any consent, under any confidentiality or other
agreement, or fail to fully enforce any such agreement, except in the ordinary
course of business;
(o) without the prior consent of GSCP, which shall not be
unreasonably withheld or delayed, enter into any securitization or pool of
mortgage loans purchased, originated or serviced by the Company or any Company
Subsidiary ("Mortgage Loans") or sale of whole Mortgage Loans in bulk
transactions; and
(p) the Company shall not, and shall not permit any Company
Subsidiary to, agree or commit to do any of the foregoing.
<PAGE>
ARTICLE VI
ADDITIONAL AGREEMENTS
Section 6.1 Access and Information. The Company shall afford to
GSCP and its financial advisors, legal counsel, accountants, consultants,
financing sources, and other authorized representatives access upon reasonable
notice and during normal business hours throughout the period prior to the
Closing to all of the books, records, properties, plants and personnel of the
Company and the Company Subsidiaries and, during such period, shall furnish as
promptly as practicable to GSCP (a) a copy of each report, schedule and other
document filed or received by it pursuant to the requirements of federal
securities laws, and (b) all other information as such other party reasonably
may request, provided that no investigation pursuant to this Section 6.1 shall
affect any representations or warranties made herein or the conditions to the
obligations of the GSCP Funds to consummate the Acquisition and the other
transactions contemplated hereby.
Section 6.2 Solicitation. (a) Unless the Company complies with
Section 6.2(c), the Company shall not, nor shall it permit any of the Company
Subsidiaries to, nor shall it authorize or permit any officer, director or
employee of or any investment banker, attorney or other advisor or
representative of, the Company or any of the Company Subsidiaries to, directly
or indirectly, (i) solicit, initiate or encourage the submission of any Takeover
Proposal (as defined in Section 6.2(e)), (ii) enter into any agreement with
respect to any Takeover Proposal or give any approval of the type referred to in
Section 4.24(b) with respect to any Takeover Proposal or (iii) continue or
participate in any discussions or negotiations regarding, or furnish to any
person any information with respect to, or take any other action to facilitate
any inquiries or the making of any proposal that constitutes, or may reasonably
be expected to lead to, any Takeover Proposal. At any time prior to, but at no
time subsequent to, the receipt of the Shareholder Approval, the Company may,
subject to compliance with Section 6.2(c), (i) solicit, initiate or encourage a
Takeover Proposal of the sort referred to in clause (x) of Section 6.2(e) that
involves consideration to the Company's shareholders with a value that the
Company's Board of Directors reasonably believes, based on advice from the
Company's independent outside financial advisor, is superior to the
consideration to the Company provided for pursuant to this Agreement, and (ii)
furnish information with respect to the Company pursuant to a customary
confidentiality agreement to any person making such proposal and (iii)
participate in negotiations or discussions regarding, or furnish to any person
any information with respect to, or take any other action to facilitate any
inquiries or the making of any proposal that constitutes, or may reasonably be
expected to lead to, any Takeover Proposal.
(b) Neither the Board of Directors of the Company nor any
committee thereof (including the Special Committee) shall (x) withdraw or
modify, or propose to withdraw or modify, in a manner adverse to any of the GSCP
Funds, the approval or
<PAGE>
recommendation by such Board of Directors or such committee (including the
Special Committee) of this Agreement or the Acquisition or (y) approve or
recommend, or propose to approve or recommend, any Takeover Proposal except in
connection with a Superior Proposal (as defined in Section 6.2(e)) and then only
at or after the termination of this Agreement pursuant to and in accordance with
Section 8.3.
(c) In addition to the obligations of the Company set forth in
paragraphs (a) and (b) of this Section 6.2, the Company promptly shall advise
GSCP orally and in writing of any Takeover Proposal, the identity of the person
making any such Takeover Proposal, and all the material terms and conditions
thereof and promptly shall provide GSCP with a true and complete copy of such
Takeover Proposal, if in writing. The Company shall keep GSCP fully informed of
the status and material details (including material amendments or proposed
amendments) of any such Takeover Proposal.
(d) Nothing contained in this Section 6.2 shall prohibit the
Company from taking and disclosing to its shareholders a position contemplated
by Rule 14e-2(a) promulgated under the Exchange Act; provided, however, neither
the Company nor its Board of Directors nor any committee thereof (including the
Special Committee) shall, except as permitted by Section 6.2(b), withdraw or
modify, or propose to withdraw or modify, its position with respect to this
Agreement or the Acquisition or approve or recommend, or propose to approve or
recommend, a Takeover Proposal.
(e) As used in this Agreement: "Superior Proposal" means a bona
fide written Takeover Proposal (x) to acquire, directly or indirectly, for
consideration consist ing of cash and/or securities and/or the contribution or
combination of assets by merger or otherwise, more than 50% of the shares and/or
voting power of Company Common Stock then outstanding or all or substantially
all the assets of the Company, (y) otherwise on terms which the Board of
Directors of the Company decides in its good faith reasonable judgment to be
more favorable to the Company's shareholders than the transactions provided for
pursuant to this Agreement (based on the advice with only customary
qualifications, of the Company's independent financial advisor that the value of
the consideration provided for in such proposal is superior to the value of the
consideration provided for in the transactions provided for pursuant to this
Agreement), for which financing, to the extent required, is then committed or
which, in the good faith reasonable judgment of the Board of Directors, based on
advice from the Company's independent financial advisor, is reasonably capable
of being obtained by such third party and (z) which the Board of Directors
determines, in its good faith reasonable judgment, is reasonably likely to be
consummated without undue delay; and "Takeover Proposal" means any written
proposal for a merger, consolidation or other business combination involving the
Company or any proposal or offer to acquire in any manner, directly or
indirectly, an equity interest in any more than 15% of the voting power of, or a
substantial portion of the assets of, the Company and/or the Company
Subsidiaries, taken as a whole, other than the Acquisition and the other
transactions contemplated by this Agreement.
<PAGE>
Section 6.3 Filings; Other Action. Subject to the terms and
conditions herein provided, as promptly as practicable, the Company and the GSCP
Funds shall: (i) promptly make all filings and submissions under the HSR Act and
all filings required by the regulatory authorities of any of the several states,
the District of Columbia and the Commonwealth of Puerto Rico, and deliver
notices and consents to jurisdiction to Governmental Entities, each as
reasonably may be required to be made in connection with this Agreement, the
Acquisition and the other transactions contemplated hereby, (ii) use all
reasonable efforts to cooperate with each other in (A) determining which filings
are required to be made prior to the Closing with, and which material consents,
approvals, permits, notices or authorizations are required to be obtained prior
to the Closing from, Governmental Entities of the United States, the several
states or the District of Columbia, the Commonwealth of Puerto Rico and foreign
jurisdictions in connection with the execution and delivery of this Agreement
and the consummation of the Acquisition and the other transactions contemplated
hereby and (B) timely making all such filings and timely seeking all such
consents, approvals, permits, notices or authorizations, and (iii) use all
reasonable efforts to take, or cause to be taken, all other action and do, or
cause to be done, all other things necessary or appropriate to consummate the
Acquisition and the other transactions contemplated hereby as soon as
practicable. In connection with the foregoing, the Company will, and will cause
each Company Subsidiary to, provide GSCP, and the GSCP Funds will provide the
Company, with copies of correspondence, filings or communications (or memoranda
setting forth the substance thereof) between such party or any of its
representatives, on the one hand, and any Governmental Entity or members of
their respective staffs, on the other hand, with respect to this Agreement, the
Acquisition and the other transactions contemplated hereby and thereby. Each of
the GSCP Funds and the Company acknowledge that certain actions may be necessary
with respect to the foregoing in making notifications and obtaining clearances,
consents, approvals, waivers or similar third party actions which are material
to the consummation of the Acquisition and the other transactions contemplated
hereby, and each of the GSCP Funds and the Company agree to take such action as
is necessary to complete such notifications and obtain such clearances,
approvals, waivers or third party actions, provided, however, that nothing in
this Section 6.3 or elsewhere in this Agreement shall require any party hereto
to incur expenses in connection with the Acquisition and the other transactions
contemplated hereby which are not reasonable under the circumstances in relation
to the size of the Acquisition and the other transactions contemplated hereby or
require the GSCP Funds, the Company or any Company Subsidiary to hold separate,
or make any divestiture of, any asset or otherwise agree to any material
restriction on their operations in order to obtain any waiver, consent or
approval required by this Agreement if, in the case of the Company or any
Company Subsidiary, such divestiture or restriction would reasonably be likely
to have a Company Material Adverse Effect.
Section 6.4 Public Announcements. The GSCP Funds, on the one
hand, and the Company, on the other hand, agree that they will not issue any
press release or otherwise make any public statement with respect to this
Agreement and the transactions
<PAGE>
contemplated hereby without the prior approval of the other party (which
approval will not be unreasonably withheld or delayed), except as may be
required by applicable law.
Section 6.5 Company Indemnification Provision. The GSCP Funds and
the Company agree that all rights to indemnification existing in favor of the
present or former directors, officers, employees, fiduciaries and agents of the
Company or any of the Company Subsidiaries (collectively, the "Indemnified
Parties") as provided in the Company's Articles of Incorporation or Bylaws or
the Certificate or Articles of Incorpora tion, Bylaws or similar organizational
documents of any of the Company Subsidiaries as in effect as of the date hereof
or pursuant to the terms of any indemnification agreements entered into between
the Company and any of the Indemnified Parties with respect to matters occurring
prior to the Closing shall survive the Closing and shall continue in full force
and effect (without modification or amendment, except as required by applicable
law or except to make changes permitted by law that would enlarge the
Indemnified Parties' right of indemnification), to the fullest extent and for
the maximum term permitted by law, and shall be enforceable by the Indemnified
Parties against the Company. At the Closing the Company shall expressly and
directly assume by written instrument all such obliga tions. The GSCP Funds and
the Company shall cause to be maintained in effect for not less than six years
from the Closing the current policies of the directors' and officers' liability
insurance maintained by the Company (provided that the Company may substitute
therefor policies of at least equivalent coverage containing terms and
conditions which are not materially less advantageous) with respect to matters
occurring prior to the Closing, provided that in no event shall the GSCP Funds
or the Company be required to expend to maintain or procure insurance coverage
pursuant to this Section 6.6 any amount per annum in excess of 300% of the
aggregate premiums paid in 1998 on an annualized basis for such policies. In the
event the payment of such amount for any year is insufficient to maintain such
insurance or equivalent coverage cannot otherwise be obtained, the Company shall
purchase as much insurance as may be purchased for the amount indicated. The
provisions of this Section 6.6 shall survive the Closing and expressly are
intended to benefit each of the Indemnified Parties.
Section 6.6 Comfort Letter. The Company shall use all reasonable
efforts to cause PricewaterhouseCoopers LLP or their successor and Grant
Thornton LLP, the Company's independent accountants, and/or any other relevant
auditors, to deliver to the GSCP Funds a letter dated as of the date of the
Proxy Statement and addressed to the GSCP Funds, in form and substance
reasonably satisfactory to GSCP, in connection with the procedures undertaken by
them with respect to the financial statements and other financial information of
the Company and the Company Subsidiaries contained in the Proxy Statement and
the other matters contemplated by AICPA Statement No. 72 and customarily
included in comfort letters relating to transactions similar to the transactions
contemplated hereby.
<PAGE>
Section 6.7 Additional Matters. (a) Subject to the terms and
conditions herein provided, each of the parties hereto agrees to use all
reasonable efforts to take, or cause to be taken, all action and to do, or cause
to be done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement, including using all reasonable efforts to obtain all necessary
waivers, consents and approvals in connection with the Governmental Requirements
and any other third party consents and to effect all necessary registrations and
filings. In case at any time after the Closing any further action is necessary
or desirable to carry out the purposes of this Agreement, the proper officers
and/or directors of the GSCP Funds and the Company shall take all such necessary
action.
(b) At all times prior to the Closing, (i) the Company shall
promptly notify GSCP in writing of any fact, condition, event or occurrence that
could reasonably be expected to result in the failure of any of the conditions
contained in Sections 7.1 and 7.3 to be satisfied, promptly upon becoming aware
of the same and (ii) GSCP shall promptly notify the Company in writing of any
fact, condition, event or occurrence that could reasonably be expected to result
in the failure of any of the conditions contained in Sections 7.1 and 7.2 to be
satisfied, promptly upon becoming aware of the same.
Section 6.8 Shareholder Litigation. Each of the Company and the
GSCP Funds shall give the other the reasonable opportunity to participate at its
sole cost and expense in the defense of any shareholder litigation against the
Company or the GSCP Funds, as applicable, and its directors relating to the
transactions contemplated by this Agreement.
Section 6.9 Funding of the Loan Agreement. The GSCP Funds shall,
at the Closing, enter into the Amendment and Restatement of the Loan Agreement
with the Company pursuant to the Commitment Letter and perform their respective
obligations thereunder to fund the Additional Advance.
Section 6.10 Disclosure Letters. From time to time prior to the
Closing, each of the GSCP Funds and the Company may supplement or amend the GSCP
Disclosure Letter or the Company Disclosure Letter, as the case may be, with
respect to any matter hereafter arising that, if existing or occurring at the
date of this Agreement, would have been required to be set forth or described
therein or that is necessary to complete or correct any information therein that
is or has been rendered untrue, inaccurate, incomplete or misleading. Delivery
of such supplements shall be for informational purposes only and shall not
expand or limit the rights or affect the obligations of any party hereunder, and
such supplements shall not constitute a part of the GSCP Disclosure Letter or
Company Disclosure Letter, as the case may be, for purposes of this Agreement.
<PAGE>
Section 6.11 Amendment to Preferred Stock Agreement. At or prior
to the Closing, the Company and the GSCP Funds shall enter into Amendment No. 1
to the Preferred Stock Purchase and Option Agreement, dated July 14, 1998, among
GSCP, GSCP Offshore Fund, L.P., Greenwich Fund, L.P., Travelers Casualty and
Surety Company and the Company, which shall be in the form attached hereto as
Exhibit C.
Section 6.12 Dissenters Statute. If dissenters' rights are
provided with respect to the transactions contemplated hereby, in accordance
with Sections 607.1301, 607.1302 and 607.1303 of the FBCA (the "Dissenters
Statute"), the Company shall give GSCP (i) prompt notice of any written notice
or demand under the Dissenters Statute with respect to any Company Common Stock,
any withdrawal of any such notice or demand, and any other instruments delivered
pursuant to the Dissenters Statute and received by the Company, including in
each case details regarding the number of dissenting shares and the holders
thereof, and (ii) the right to participate in all negotiations and proceedings
with respect to any demands under the Dissenters Statute with respect to any
Company Common Stock. The Company shall cooperate with GSCP concerning, and
shall not, except with the prior written consent of GSCP, voluntarily make any
payment with respect to, or offer to settle or settle, any such demands.
Section 6.13 Filing Restated Articles of Incorporation and
Amendment. Even if the Company obtains Shareholder Approval for the Restated
Articles of Incorporation or the Amendment, as the case may be, the Company
shall not cause the Restated Articles of Incorporation and/or the Amendment to
be filed with the Secretary of State of Florida unless the Closing occurs. This
Section 6.13 shall survive any termination of this Agreement.
ARTICLE VII
CONDITIONS TO CONSUMMATION OF THE ACQUISITION
Section 7.1 Conditions to Each Party's Obligation to Effect the
Acquisition. The respective obligations of each party to effect the Acquisition
shall be subject to the satisfaction, or written waiver by such party, at or
prior to the Closing of the following conditions:
(a) any waiting period applicable to the consummation of the
Acquisition under the HSR Act shall have expired or been terminated, and no
action shall have been instituted by the Department of Justice or Federal Trade
Commission challenging or seeking to enjoin the consummation of this
transaction, which action shall not have been withdrawn or terminated;
(b) no statute, rule, regulation, executive order, decree, ruling
or preliminary or permanent injunction shall have been enacted, entered,
promulgated or
<PAGE>
enforced by any federal or state court or governmental authority having
jurisdiction which prohibits, restrains, enjoins or restricts consummation of
the Acquisition;
(c) each of the Company, the Company Subsidiaries and GSCP shall
have made such filings, and obtained such material permits, authorizations,
consents, or approvals, required by Governmental Requirements to consummate the
transactions contemplated hereby, and the appropriate forms shall have been
executed, filed and approved as required by the Governmental Requirements; and
(d) this Agreement, the Restated Articles of Incorporation, the
Acquisition and the other transactions contemplated hereby shall have been
adopted and approved by the requisite vote of the shareholders of the Company in
accordance with the applicable provisions of the FBCA (the "Requisite Vote"),
provided, however, that the obligations of the parties hereto shall not be
conditioned on the approval of the Amendment by the shareholders of the Company.
Section 7.2 Conditions to Obligation of the Company to Effect the
Acquisition. The obligation of the Company to effect the Acquisition shall be
subject to the satisfaction at or prior to the Closing of the following
additional condition:
Each of the GSCP Funds shall have performed in all material
respects their obligations under this Agreement required to be performed by them
at or prior to the Closing, including the obligations pursuant to Section 6.10
hereof; the representations and warranties of each of the GSCP Funds contained
in this Agreement which are qualified with respect to materiality shall be true
and correct in all respects, and such representations and warranties that are
not so qualified shall be true and correct in all material respects, in each
case as of the date of this Agreement and at and as of the Closing as if made at
and as of such time except as contemplated by the GSCP Disclosure Letter and
this Agreement; and the Company shall have received a certificate of the
Chairman of the Board, the President or the Chief Financial Officer of the
general partner of each of the GSCP Funds as to the satisfaction of this
condition.
Section 7.3 Conditions to Obligations of the GSCP Funds to Effect
the Acquisition. The obligations of the GSCP Funds to effect the Acquisition
shall be subject to the satisfaction at or prior to the Closing of the following
additional conditions:
(a) the Company shall have performed in all material respects its
obligations under this Agreement required to be performed by it at or prior to
the Closing; and the representations and warranties of the Company contained in
this Agreement which are qualified with respect to materiality shall be true and
correct in all respects, and such representations and warranties that are not so
qualified shall be true and correct in all material respects, in each case as of
the date of this Agreement and at and as of the Closing as if made at and as of
such time, except as contemplated by the Company
<PAGE>
Disclosure Letter or this Agreement and except that representations and
warranties that are made as of a specific date shall have been true and correct
in all material respects as of such specified date; and GSCP shall have received
a certificate of the Chairman of the Board, the President or the Chief Financial
Officer of the Company as to the satisfaction of this condition;
(b) the GSCP Funds shall have received favorable opinions,
addressed to the GSCP Funds and dated as of the Closing, from each of Kramer
Levin Naftalis & Frankel LLP, special counsel to the Company, and special
Florida counsel to the Company satisfactory to the GSCP Funds, to the effect set
forth in Exhibit E and Exhibit F hereto, respectively, and otherwise
satisfactory in substance and form to the GSCP Funds.
(c) the Resigning Directors shall have delivered to the Company
an irrevocable resignation from such position, effective as of the Closing, and
the New Directors shall have been duly elected as directors of the Company;
(d) since the date of this Agreement, there shall not have
occurred or be continuing any event, condition or set of circumstances which,
individually or in the aggregate, has had or is reasonably likely to result in a
Company Material Adverse Effect;
(e) the third party consents listed on Schedule 7.3(e) hereto
shall have been obtained and all other third party consents shall have been
obtained other than consents the failure of which to be obtained would not
reasonably be expected to have a Company Material Adverse Effect;
(f) there shall not have been an exercise of dissenters' rights
by delivery of notice to the Company of an intent to demand payment for such
shares pursuant to the Dissenters Statute by holders of Company Common Stock
representing, in the aggregate, more than 10% of the Company Common Stock
outstanding;
(g) the Company shall have entered into employment agreements
with the employees identified on Schedule 7.3(g) hereto effective as of the
Closing, in form and substance satisfactory to GSCP; and
(h) each of the Amended and Restated Intercreditor Agreements
listed on Schedule 7.3(h) hereto shall remain in full force and effect and the
Standstill Period (as defined therein) shall not have terminated, and there
shall not have occurred any event which, after notice or passage of time or
both, would permit the termination of the Standstill Period thereunder.
<PAGE>
ARTICLE VIII
TERMINATION
Section 8.1 Termination by Mutual Consent. This Agreement may be
terminated at any time prior to the Closing by mutual written agreement of GSCP
and the Company.
Section 8.2 Termination by Either GSCP or the Company. This
Agreement may be terminated and the Acquisition and the other transactions
contemplated hereby may be abandoned by action of either GSCP or the Board of
Directors of the Company if (a) (x) this Agreement, the Acquisition and the
other transaction contemplated hereby or (y) the Restated Articles of
Incorporation shall fail to receive the Requisite Vote for approval and adoption
by the shareholders of the Company at the Special Meeting, provided, however,
that the parties may not terminate this Agreement if the shareholders of the
Company fail to approve the Amendment, (b) the Acquisition shall not have been
consummated on or before June 30, 1999; provided, however, that this Agreement
may be extended (i) by the mutual written agreement of GSCP and the Company, or
(ii) by written notice of either GSCP or the Company to a date no later than
September 30, 1999, if the Acquisition shall not have been consummated as a
direct and principal result of the conditions in Sections 7.1(a) or 7.1(c) not
having been satisfied by such date, or (c) a United States federal or state
court of competent jurisdiction or United States federal or state governmental,
regulatory or administrative agency or commission shall have issued an order,
decree or ruling or taken any other action permanently restraining, enjoining or
otherwise prohibiting the transactions contemplated by this Agreement and such
order, decree, ruling or other action shall have become final and
non-appealable; provided, that the party seeking to terminate this Agreement
pursuant to clause (b) shall not be in material violation of any of its
representations, warranties or covenants set forth in this Agreement, and the
party seeking to terminate this Agreement pursuant to clause (c) shall have used
all reasonable efforts to remove such injunction, order or decree.
Section 8.3 Termination by the Company. This Agreement may be
terminated and the Acquisition and the other transactions contemplated hereby
may be abandoned at any time prior to the Closing, before or after the adoption
and approval of the Acquisition and this Agreement by the shareholders of the
Company referred to in Section 2.1, by action of the Board of Directors of the
Company, if prior to the Special Meeting, the Board of Directors of the Company
has withdrawn, or modified or changed in a manner adverse to GSCP its approval
or recommendation of this Agreement or the Acquisition in order to approve and
permit the Company to execute a definitive agreement relating to a Superior
Proposal; provided, however, that prior to any such withdrawal, modification,
change or termination, the Company shall, and shall cause its respective
financial and legal advisors to, negotiate in good faith with the GSCP Funds to
make such adjustments in the terms and conditions of this Agreement as would
enable the Company to proceed with the transactions contemplated herein on such
adjusted terms.
<PAGE>
Section 8.4 Termination by GSCP. This Agreement may be terminated
and the Acquisition may be abandoned at any time prior to the Closing by action
of GSCP, if (a) there has been a breach by the Company or a Company Subsidiary
of any representation or warranty contained in this Agreement which would have
or would reasonably be likely to have a Company Material Adverse Effect and is
not cured, if curable within thirty (30) days after notice; (b) there has been a
material breach of any of the covenants or agreements set forth in this
Agreement on the part of the Company or a Company Subsidiary, which breach is
not curable or, if curable, is not cured within thirty (30) days after written
notice of such breach given by GSCP to the Company; or (c) the Board of
Directors of the Company shall have withdrawn, modified or changed in a manner
adverse to GSCP its approval or recommendation of this Agreement or the
Acquisition or shall have recommended a Takeover Proposal, or shall have
executed an agreement in principle (or similar agreement) or definitive
agreement providing for a Takeover Proposal or other business combination with a
person or entity other than GSCP.
Section 8.5 Effect of Termination and Abandonment. (a) In the
event of termination of this Agreement and the abandonment of the Acquisition
pursuant to this Article VIII, written notice thereof shall as promptly as
practicable be given to the other party to this Agreement and this Agreement
shall terminate and the transactions contem plated hereby shall be abandoned,
without further action by any of the parties hereto. If this Agreement is
terminated as provided herein: (i) there shall be no liability or obligation on
the part of the GSCP Funds, the Company or the Company Subsidiaries or their
respective officers and directors, and all obligations of the parties shall
terminate, except for the obligations of the parties pursuant to this Section
8.5, except for the provisions of Sections 3.7, 4.17, 6.4, 6.13, 9.4, 9.5, 9.6,
9.10, 9.11 and 9.12 and except that a party who is in material breach of its
representations, warranties, covenants or agreements set forth in this Agreement
shall be liable for damages occasioned by such breach, including without
limitation any expenses incurred by the other party in connection with this
Agreement and the transactions contemplated hereby, and (ii) all filings,
applications and other submissions made pursuant to the transactions
contemplated by this Agreement shall, to the extent practicable, be withdrawn
from the agency or person to which made.
ARTICLE IX
GENERAL PROVISIONS
Section 9.1 Survival of Representations, Warranties and
Agreements. No representations, warranties, covenants or agreements in this
Agreement or in any instrument delivered pursuant to this Agreement, shall
survive beyond the Closing, other than those covenants and agreements which by
their express terms apply in whole or in part after the Closing.
<PAGE>
Section 9.2 Notices. All notices, claims, demands and other
communi cations hereunder shall be in writing and shall be deemed given upon (a)
confirmation of receipt of a facsimile transmission, (b) confirmed delivery by a
standard overnight carrier or when delivered by hand or (c) the expiration of
five business days after the day when mailed by registered or certified mail
(postage prepaid, return receipt requested), addressed to the respective parties
at the following addresses (or such other address for a party as shall be
specified by like notice):
(a) If to the GSCP Funds, to:
Greenwich Street Capital Partners II, L.P.
c/o Greenwich Street Capital Partners Inc.
388 Greenwich Street, 36th Floor
New York, New York 10013
Telecopy: (212) 816-0166
Attention: Sanjay Patel
With copy to:
Debevoise & Plimpton
875 Third Avenue
New York, New York 10022
Telecopy: (212) 909-6836
Attention: Steven Ostner, Esq.
(b) If to the Company, to:
IMC Mortgage Company
5901 E. Fowler Avenue
Tampa, Florida 33617
Telecopy: (813) 984-2593
Attention: President
With copies to:
Mitchell W. Legler, Esq.
300A Wharfside Way
Jacksonville, Florida 32207
Telecopy: (904) 346-3299
-and-
<PAGE>
Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, New York 10022
Telecopy: (212) 715-8000
Attention: Peter S. Kolevzon, Esq.
Section 9.3 Descriptive Headings. The headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
Section 9.4 Entire Agreement; Assignment. This Agreement
(including the Exhibits, the Schedules, the Company Disclosure Letter, the GSCP
Disclosure Letter and the other documents and instruments referred to herein)
constitutes the entire agree ment and supersedes all other prior agreements and
understandings, both written and oral, among the parties or any of them, with
respect to the subject matter hereof, including, without limitation, any
transaction between or among the parties hereto. This Agreement shall not be
assigned by operation of law or otherwise.
Section 9.5 Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York without
giving effect to the provisions thereof relating to conflicts of law, except to
the extent that it is mandatorily governed by the laws of the State of Florida.
Section 9.6 Expenses. Except as provided in Section 8.5, whether
or not the Acquisition is consummated, all costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby and
thereby shall be paid by the Company.
Section 9.7 Amendment. This Agreement may not be amended except
by an instrument in writing signed on behalf of each of the parties hereto.
Section 9.8 Waiver. At any time prior to the Closing, the parties
hereto may (a) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (c) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
Section 9.9 Counterparts; Effectiveness. This Agreement may be
executed in two or more counterparts, each of which shall be deemed to be an
original but all of which shall constitute one and the same agreement. This
Agreement shall become
<PAGE>
effective when each party hereto shall have received counterparts hereof signed
by all of the other parties hereto.
Section 9.10 Severability; Validity; Parties in Interest. If any
provision of this Agreement, or the application thereof to any person or
circumstance, is held invalid or unenforceable, the remainder of this Agreement,
and the application of such provision to other persons or circumstances, shall
not be affected thereby, and to such end, the provisions of this Agreement are
agreed to be severable. Nothing in this Agreement, express or implied, is
intended to confer upon any person not a party to this Agreement any rights or
remedies of any nature whatsoever under or by reason of this Agreement.
Section 9.11 Enforcement of Agreement. The parties hereto agree
that irreparable damage would occur in the event that any provision of this
Agreement was not performed in accordance with its specific terms or was
otherwise breached. It is accord ingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any court of competent
jurisdiction, this being in addition to any other remedy to which they are
entitled at law or in equity.
Section 9.12 WAIVER OF JURY TRIAL. EACH PARTY ACKNOWLEDGES AND
AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO
INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH SUCH PARTY HEREBY
IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL
BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR
RELATING TO THIS AGREEMENT, OR THE BREACH, TERMINATION OR VALIDITY OF THIS
AGREEMENT, OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY
CERTIFIES AND ACKNOWLEDGES THAT (A) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY
OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD
NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (B) EACH
SUCH PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (C)
EACH SUCH PARTY MAKES THIS WAIVER VOLUNTARILY, AND (D) EACH SUCH PARTY HAS BEEN
INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS
AND CERTIFICATIONS IN THIS SECTION 9.12.
<PAGE>
IN WITNESS WHEREOF, each of GSCP, Offshore, GF, GSEF, TRV and the
Company has caused this Agreement to be executed as of the date first above
written.
GREENWICH STREET CAPITAL PARTNERS II, L.P.
GSCP OFFSHORE FUND, L.P.
GREENWICH FUND, L.P.
GREENWICH STREET EMPLOYEES FUND, L.P.
TRV EXECUTIVE FUND, L.P.
By: Greenwich Street Investments II, L.L.C., their General
Partner
By:
Name:
Title: Managing Member
IMC MORTGAGE COMPANY
By:
Name:
Title:
<PAGE>
TABLE OF DEFINED TERMS
Acquisition ..............Recitals
Additional Advance ..............Recitals
Adjustment Event ...........Section 1.6
Affiliate ..........Section 4.26
Amendment ...........Section 1.4
Amendment and Restatement of the Loan Agreement ..............Recitals
Amendment No. 1 ..............Recitals
Authorizations .......Section 4.13(b)
Closing ...........Section 1.2
Class C Preferred Shares ..............Recitals
Class C Preferred Stock ..............Recitals
Closing Date ...........Section 1.2
Code ..............Recitals
Company ..............Preamble
Company Benefit Plan .......Section 4.18(a)
Company Commonly Controlled Entity .......Section 4.18(a)
Company Common Stock ..............Recitals
Company Contracts .......Section 4.22(a)
Company Disclosure Letter ............Article IV
Company Investments ..........Section 4.15
Company Material Adverse Effect ...........Section 4.1
Company Preferred Stock ...........Section 4.2
Company SAR's .......Section 4.18(e)
Company SEC Reports ...........Section 4.6
Company Stock Options ...........Section 4.2
Company Subsidiaries ........Section 4.3(b)
Contracts .......Section 4.22(a)
Control ..........Section 4.26
Dissenters Statute ..........Section 6.14
Encumbrance ...........Section 3.3
Environmental Laws .......Section 4.20(a)
ERISA .......Section 4.18(b)
Exchange Act ...........Section 2.2
FBCA ..............Recitals
GAAP ...........Section 4.6
GF ..............Preamble
Governmental Requirements ...........Section 3.3
Government Entity ...........Section 3.3
<PAGE>
GSCP ..............Preamble
GSCP Disclosure Letter ...........Article III
GSC Funds ..............Preamble
GSC Material Adverse Effect ...........Section 3.1
GSEF ..............Preamble
HSR Act ...........Section 3.3
IMC Acquisitions ..............Recitals
Indemnified Parties ...........Section 6.6
Initial GSCP Funds ..............Preamble
Initial Loan Agreement ..............Recitals
Interim Commitments ..............Recitals
Interim Loans ..............Recitals
Liabilities ...........Section 4.9
Loan Agreement ..............Recitals
Merger ..............Recitals
Mortgage Servicing Agreements .......Section 4.22(a)
Mortgage Loan ........Section 5.1(o)
New Directors ...........Section 1.5
Offshore ..............Preamble
Person .......Section 3.10(b)
Proxy Statement ...........Section 2.2
Requisite Vote ........Section 7.1(d)
Resigning Directors ...........Section 1.5
Restated Articles of Incorporation ...........Section 1.4
Restated Bylaws ...........Section 1.4
SEC ...........Section 2.2
Securities Act ...........Section 2.2
Shareholder Approval ...........Section 2.1
Special Committee ..............Recitals
Special Meeting ...........Section 2.1
Superior Proposal ........Section 6.2(e)
Takeover Proposal ........Section 6.2(e)
Taxes .......Section 4.11(g)
Tax Returns .......Section 4.11(g)
TRV .............Preamble
EXHIBIT 10.73
March 31, 1999
IMC Mortgage Company
5901 E. Fowler Avenue
Tampa, Florida 33617
Amended and Restated Loan Agreement
Ladies and Gentlemen:
Reference is made to the Acquisition Agreement, dated as of
February 19, 1999, among Greenwich Street Capital Partners II, L.P., a Delaware
limited partnership ("GSCP"), Greenwich Fund, L.P., a Delaware limited
partnership, GSCP Offshore Fund, L.P., a Cayman Islands exempted limited
partnership, Greenwich Street Employees Fund, L.P., a Delaware limited
partnership, and TRV Executive Fund, L.P., a Delaware limited partnership
(collectively, together with GSCP, the "GSCP Funds") and IMC Mortgage Company, a
Florida corporation ("IMC"), pursuant to which GSCP and its affiliates would (i)
transfer and deliver to IMC for cancellation the 23,760.758 shares of Class C
Exchangeable Preferred Stock, par value $.01 per share, of IMC held by the GSCP
Funds, and (ii) enter into an amendment and restatement of the loan agreement
and fund $35 million of additional advances thereunder, in consideration of
which IMC agreed to issue and deliver to the GSCP Funds, common stock, par value
$0.001 per share, of IMC (the "Common Stock") representing approximately 93.5%
of the Common Stock outstanding after such issuance (the "Acquisition").
Each of the GSCP Funds hereby agrees, simultaneously with
consummation of the Acquisition, to (i) enter into the Amended and Restated Loan
Agreement in the form attached hereto as Exhibit A (the "Loan Agreement") and
(ii) fund the Additional Advances (as defined in the Loan Agreement), on the
terms and subject to the conditions set forth in the Loan Agreement.
<PAGE>
This Letter Agreement may not be assigned or otherwise
transferred to any other person without the prior written consent of the
undersigned. The terms of this Letter Agreement may not be modified or otherwise
amended, or waived, except pursuant to a written agreement signed by IMC and the
undersigned. This Letter Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York. This Letter
Agreement may be executed in any number of counterparts, each of which shall be
an original, but all of which shall constitute one instrument.
Very truly yours,
GREENWICH STREET CAPITAL PARTNERS II, L.P.
GSCP OFFSHORE FUND, L.P.
GREENWICH FUND, L.P.
GREENWICH STREET EMPLOYEES FUND, L.P.
TRV EXECUTIVE FUND, L.P.
By: GREENWICH STREET
INVESTMENTS II, L.L.C.,
their General Partner
By:_________________________________
Name:
Title: Managing Member
Agreed to as of the date first above written.
IMC MORTGAGE COMPANY
By:____________________________
Name:
Title:
-2-
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