PRELIMINARY COPY
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
Amendment No. 1 to
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant |X|
Filed by a party other than the Registrant |_|
Check the appropriate box:
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|_| Definitive proxy statement
|_| Definitive additional materials
|_| Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
IMC MORTGAGE COMPANY
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
|X| No fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
|_| Fee paid previously with preliminary materials.
|_| Check box if any part of the fee is offset as provided by Exchange
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fee was paid previously. Identify the previous filing by
registration statement number, or the form or schedule and the date
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(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
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PRELIMINARY COPY
SALE OF ASSETS TO CITIFINANCIAL MORTGAGE COMPANY
YOUR VOTE IS VERY IMPORTANT
[IMC LOGO]
The Board of Directors of IMC has recommended and approved a transaction
in which IMC will sell certain assets, primarily its mortgage loan servicing
business and substantially all of its mortgage loan origination business and the
real property used in conducting these businesses, to CitiFinancial Mortgage
Company for $100 million. IMC is seeking your vote for this important
transaction.
IMC is a specialized consumer finance company engaged in purchasing,
originating, servicing and selling home equity loans secured primarily by first
liens on one- to four- family residential properties. CitiFinancial Mortgage
Company is an indirectly wholly owned subsidiary of Citigroup Inc. Citigroup
Inc. is a diversified holding company whose businesses provide a broad range of
financial services to consumer and corporate customers around the world.
If you approve the proposed sale of assets to CitiFinancial, IMC will
receive $100 million ($96 million in cash at closing and $2 million in cash on
each of the first and second anniversaries of the closing) in exchange for its
mortgage loan servicing rights, with a recorded value of $42.5 million at June
30, 1999, substantially all of IMC's correspondent and broker mortgage loan
origination business conducted in Tampa, Florida, Ft. Washington, Pennsylvania,
Cherry Hill, New Jersey and Cincinnati, Ohio, with no recorded value at June 30,
1999, and the real and personal property used in conducting these businesses,
with a recorded value of $10.8 million at June 30, 1999. In conjunction with the
transaction, CitiFinancial will assume a mortgage note payable by IMC, for which
the real property is pledged as collateral, with a recorded value of $4.3
million at June 30, 1999. The proceeds from the proposed sale of assets to
CitiFinancial will be used to repay certain indebtedness of IMC, which is
secured by IMC's assets.
After the proposed sale of assets to CitiFinancial, IMC will essentially
have no ongoing operating business, but will continue to own assets consisting
primarily of cash, accounts receivable, mortgage loans held for sale,
interest-only and residual certificates and other assets that are pledged as
collateral for warehouse finance facilities and term debt. The assets remaining
after the proposed sale of assets to CitiFinancial will be either held or sold
by IMC to attempt to realize the maximum value for these assets and repay its
obligations, including the warehouse finance facilities and term debt. If IMC
receives sufficient proceeds from these remaining assets to repay its
obligations, any remaining proceeds will be used first to redeem IMC's
outstanding preferred stock and then to make payments to IMC's common
shareholders.
IMC does not expect any payment to be made to its common shareholders
upon consummation of the sale of assets to CitiFinancial, and IMC believes that
any payment in the future is unlikely, but will ultimately depend upon the
proceeds received from the assets remaining after consummation of the
CitiFinancial transaction. If any proceeds remain for IMC's common shareholders,
these proceeds would be available only after the repayment of IMC's obligations
and the redemption of IMC's preferred stock, which are not expected to be made
for several years.
Although the proposed sale of assets to CitiFinancial will not result in
any proceeds to IMC's common shareholders upon consummation and is unlikely to
result in proceeds to IMC's common shareholders in the future, IMC believes that
if you do not approve this transaction and IMC does not receive the $100 million
in proceeds, IMC will not be able to satisfy its creditors and will be forced to
seek protection immediately by filing for bankruptcy. A bankruptcy would not
result in any assets remaining for common shareholders. Accordingly, IMC
believes the approval and consummation of the sale of assets to CitiFinancial
offers the best chance for any ultimate payment to its common shareholders.
However, there can be no assurance that even if you approve the proposed sale of
assets to CitiFinancial, IMC will be able to maximize the value of its remaining
assets and have adequate
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proceeds and resources to satisfy its creditors. As a result, IMC may in any
event be required to seek bankruptcy protection in the future.
YOUR VOTE IS VERY IMPORTANT. Whether or not you plan to attend the
special meeting of shareholders, please take the time to vote by completing and
mailing the enclosed proxy card to us. If you sign, date and mail your proxy
card without indicating how you want to vote, your proxy will be counted as a
vote in favor of the sale of assets to CitiFinancial described in the
accompanying proxy statement. If you fail to return your card, unless you appear
in person at the IMC special meeting, the effect may be that a quorum will not
be present at the special meeting and no business will be able to be conducted.
The date, time and place of the special meeting are as follows:
October _, 1999
10:00 a.m. (local time)
[insert location]
This Proxy Statement provides you with detailed information about the
proposed transactions. You may also obtain information about IMC from documents
filed with the Securities and Exchange Commission. We encourage you to read this
document completely and carefully.
See "Risk Factors" beginning on page 8 for a discussion of material
risks which should be considered by shareholders with respect to the proposed
transaction with CitiFinancial.
This Proxy Statement is dated September __, 1999 and is first being
mailed to shareholders on or about September __, 1999.
Sincerely,
GEORGE NICHOLAS
Chairman and Chief Executive Officer
Tampa, Florida
September __, 1999
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IMC Mortgage Company
5901 E. Fowler Avenue
Tampa, Florida 33617
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NOTICE OF SPECIAL MEETING
TO BE HELD ON OCTOBER ____, 1999
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To the Shareholders of IMC Mortgage Company:
Notice is hereby given that a special meeting of shareholders of IMC
Mortgage Company, a Florida corporation, will be held at 10:00 a.m., local time,
on October ___, 1999, at [insert meeting place], to consider and act upon the
following proposals of IMC Mortgage Company:
1. a proposal recommended and approved by the IMC Board of
Directors to approve the Asset Purchase Agreement, dated as of
July 13, 1999, by and between CitiFinancial Mortgage Company and
IMC, and the transactions contemplated thereby, which, among
other matters, provides for the sale by IMC of its mortgage loan
servicing business and substantially all of its mortgage
origination business to CitiFinancial for $100 million (the
"Asset Sale Proposal"); and
2. the transaction of such other business that may properly come
before the special meeting or any adjournment or postponement of
the special meeting.
Only shareholders of record at the close of business on September ___,
1999 are entitled to notice of and to vote at the IMC special meeting or any
adjournment or postponement of the special meeting.
All shareholders are cordially invited to attend the IMC special
meeting. To ensure your representation at the special meeting, please complete
and promptly mail your proxy in the return envelope enclosed. This will not
prevent you from voting in person, but will help to secure a quorum and avoid
added solicitation costs. Your proxy may be revoked at any time before it is
voted. Please review the Proxy Statement accompanying this notice for more
complete information regarding the Asset Sale Proposal.
THE BOARD OF DIRECTORS OF IMC UNANIMOUSLY RECOMMENDS THAT IMC
SHAREHOLDERS VOTE "FOR" THE PROPOSAL TO APPROVE THE ASSET PURCHASE AGREEMENT AND
THE TRANSACTIONS CONTEMPLATED THEREBY. YOUR COOPERATION IS APPRECIATED.
By Order of the Board of Directors
LAURIE S. WILLIAMS
Vice President and Secretary
Tampa, Florida
September ___, 1999
IMPORTANT
Please mark, sign, date and return your proxy promptly, whether or not
you plan to attend the IMC special meeting.
If you use the enclosed envelope addressed to IMC,
no postage is required.
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TABLE OF CONTENTS
Page
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QUESTIONS AND ANSWERS ABOUT
THE PROPOSALS...........................................................1
SUMMARY.......................................................................3
The Companies...........................................................3
The Special Meeting.....................................................4
The Proposed Sale of Assets.............................................4
Reasons for the Proposed Sale of Assets.................................7
Recommendation to Shareholders..........................................7
RISK FACTORS..................................................................8
FORWARD LOOKING INFORMATION..................................................10
SELECTED FINANCIAL DATA OF IMC ..............................................11
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL
INFORMATION............................................................15
IMC SPECIAL MEETING..........................................................17
Date, Time and Place of Special Meeting................................17
Purpose of the IMC Special Meeting.....................................17
Solicitation of Proxies................................................17
Record Date; Voting Rights; Proxies....................................17
Quorum.................................................................18
Certifying Accountants.................................................18
Other Information......................................................18
PROPOSAL 1:
THE PROPOSED SALE OF ASSETS..................................................20
Background of the Transaction..........................................20
Reasons of IMC for the Transaction.....................................25
Recommendation of the Board of Directors of
IMC...............................................................26
Opinion of Financial Advisor to IMC's Board of
Directors.........................................................27
Interests of Certain Persons...........................................31
Material Legal Matters.................................................33
Dissenter's Rights.....................................................33
MATERIAL PROVISIONS OF THE ASSET
PURCHASE AGREEMENT...........................................................35
Consummation of the Transaction........................................35
Representations and Warranties.........................................36
Conduct of Business of IMC.............................................36
No Solicitation........................................................36
Non-Competition Agreement..............................................37
Other Covenants........................................................37
Conditions to the Transaction..........................................39
Indemnification........................................................40
Termination............................................................41
Amendment; Parties in Interest.........................................41
MARKET PRICES AND DIVIDENDS..................................................43
BUSINESS OF IMC..............................................................44
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS..........................................................69
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND
MANAGEMENT........................................................... 100
OTHER MATTERS; SHAREHOLDER
PROPOSALS.............................................................103
CHANGES IN IMC'S INDEPENDENT
CERTIFYING ACCOUNTANTS................................................103
INDEPENDENT CERTIFYING ACCOUNTANTS..........................................103
WHERE TO FIND MORE INFORMATION..............................................103
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS............................................................F-1
ANNEXES
Annex A--Asset Purchase Agreement
Annex B--Opinion of Donaldson, Lufkin & Jenrette
Securities Corporation
Annex C--Dissenter's Rights Provisions under the
Florida Business Corporation Act
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QUESTIONS AND ANSWERS ABOUT THE PROPOSALS
Q: Why am I receiving these materials?
A: The Board of Directors of IMC Mortgage Company is providing these proxy
materials to give you information to determine how to vote in connection with a
special meeting of shareholders which will take place on October __, 1999 at
- -----.
Q: What will be voted on at the special meeting?
A: Whether to approve an Asset Purchase Agreement pursuant to which IMC
will sell its mortgage loan servicing business and substantially all of its
mortgage loan origination business to CitiFinancial for $100 million.
Q: Why has the Board of Directors approved the Asset Purchase Agreement?
A: Because the IMC Board of Directors believed that the sale of assets to
CitiFinancial, if completed, might ultimately yield some value to IMC's
shareholders. The Board of Directors believed that, if the transaction with
CitiFinancial were not completed, IMC would have no alternative but to file for
bankruptcy, which would yield no value for IMC shareholders. While there can be
no assurance, it is possible, although unlikely, that the remaining assets owned
by IMC after the sale of assets to CitiFinancial can be held or disposed of in a
manner that might result in some value to IMC's common shareholders in the
future.
Q: Will any other matters be voted on at the special meeting?
A: No.
Q: Who can vote?
A: All shareholders of record as of the close of business on September __,
1999.
Q: What should I do now?
A: Please vote. You are invited to attend the special meeting. However,
you should mail your signed and dated proxy card in the enclosed envelope as
soon as possible, so that your shares will be represented at the special meeting
in case you are unable to attend. No postage is required if the proxy card is
returned in the enclosed postage prepaid envelope and mailed in the United
States.
Q: What does it mean if I receive more than one proxy or voting
instruction card?
A: It means your shares are registered differently or are held in more
than one account. Please provide voting instructions for each proxy card that
you receive.
Q: How can I vote shares held in my broker's name?
A: If your broker holds your shares in its name (or in what is commonly
called "street name"), then you should give your broker instructions on how to
vote. You should follow the directions provided by your broker regarding how to
instruct your broker to vote your shares. Without instructions, your broker is
not entitled to vote your shares and your shares will not be voted.
Q: Can I change my vote?
A: You may change your proxy instructions at any time prior to the vote at
the special meeting. For shares held directly in your name, you may accomplish
this by completing a new proxy or by attending the special meeting and voting in
person. Attendance at the special meeting alone will not cause your previously
granted proxy to be revoked unless you vote in person. For shares held in
"street name," you may accomplish this by submitting new voting instructions to
your broker or nominee.
Q: What vote is required to approve the Asset Sale Proposal?
A: A majority of all the votes entitled to be cast are required to approve
the Asset Sale Proposal.
In addition, the Asset Purchase Agreement requires the affirmative vote of
(i) a majority of the outstanding common stock of IMC other than shares held by
IMC management or Greenwich Street Capital Partners II L.P. and its affiliates
and (ii) two-thirds of the outstanding IMC preferred stock to approve the Asset
Sale Proposal.
IMC management has been informed by Greenwich Street Capital Partners II
L.P. and its affiliates, which in the aggregate own 80% of the outstanding IMC
Class A preferred stock and 100% of the outstanding IMC Class C exchangeable
preferred stock, that they intend to vote in favor of the approval of the Asset
Sale Proposal.
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Q: When will the proposed sale of assets take effect?
A: IMC and CitiFinancial expect that the proposed sale of assets will be
completed promptly after IMC shareholders approve the transaction at the special
meeting, provided that the necessary regulatory approvals have been obtained.
Q: Will I have dissenter's rights?
A: Yes. You will be entitled to dissenter's rights as a result of the
proposed sale of assets.
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SUMMARY
This summary highlights selected information from this Proxy Statement and
may not contain all of the information that is important to you. To better
understand the proposed sale of assets and for a more complete description of
the terms of the Asset Sale Proposal, you should read completely and carefully
this Proxy Statement and the documents to which you have been referred.
The Companies
In this Proxy Statement:
o we refer to IMC Mortgage Company and, where applicable, its
consolidated subsidiaries as "IMC"
o we refer to CitiFinancial Mortgage Company as "CitiFinancial"
IMC Mortgage Company
5901 E. Fowler Avenue
Tampa, Florida 33617
IMC, a Florida corporation, 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.
IMC 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, such as the requested loan size, the
ratio of loan amount to property value or the ratio of borrower income to total
debt payments. By focusing on individuals with impaired credit profiles and by
providing prompt responses to their borrowing requests, IMC has been able to
charge higher interest rates for its loan products than typically are charged by
conventional mortgage lenders.
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. Until September 30, 1998 IMC
had experienced considerable growth in loan production. Since September 30,
1998, IMC has experienced a significant reduction in loan production in each of
the correspondent, loan broker and retail networks. For the three months ended
December 31, 1998, IMC originated total loan production of $121 million, $299
million and $211 million from its network of correspondents, mortgage loan
brokers and on a retail basis, respectively, representing a decrease of $1.1
billion or 90%, $55 million or 16%, and $34 million or 14%, respectively,
compared to the same period in the prior year. For the three months ended March
31, 1999, IMC originated total loan production of $9 million, $202 million and
$141 million from its network of correspondents, mortgage loan brokers and on a
retail basis, respectively, representing a decrease of $1.2 billion or 99%, $113
million or 36%, and $80 million or 36%, respectively, compared to the same
period in the prior year. For the three months ended June 30, 1999, IMC
originated total loan production of $39 million, $209 million and $94 million
from its network of correspondents, mortgage loan brokers and on a retail basis,
respectively, representing a decrease of $1.3 billion or 97%, $167 million or
47%, and $158 million or 63%, respectively, compared to the same period in the
prior year. Total loan originations for the three months ended March 31, 1998,
June 30, 1998, September 30, 1998, December 31, 1998, March 31, 1999 and June
30, 1999 were $1.7 billion, $1.9 billion, $1.9 billion, $631 million, $352
million, and $342 million, respectively.
IMC sells the loans it purchases or originates through one of two methods:
(i) a securitization sale, which involves the private placement or public
offering of pass-through mortgage-backed securities, whereby IMC retains the
right to service such loans, and (ii) whole loan sales, which involve selling
blocks of loans to single purchasers. As of June 30, 1997, 1998 and 1999, IMC
had a servicing portfolio, including mortgage loans held for sale, of
approximately $4.0 billion, $9.4 billion and $7.3 billion, respectively.
IMC typically operates on a negative operating cash flow basis and has an
ongoing need for substantial amounts of capital to fund its operations. During
the three months ended September 30, 1998, debt, equity and asset-backed markets
were extremely volatile, which prevented IMC from funding its cash needs in
these markets. At the same time, demand for United States treasury securities,
which IMC used to hedge its interest rate risk, increased but demand for
asset-backed securities, including the securities that IMC sells, decreased. As
a result IMC suffered losses totaling $47.5 million in its hedging program. In
October 1998, IMC's revolving credit facility became due, and IMC's other
lenders, which had advanced funds to IMC secured by IMC's loans and
securitizations, threatened to make cash margin calls on IMC. As a result, IMC
has been in protracted negotiations with its significant lenders and has needed
to alter many of its business practices to adapt to its present circumstances.
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During the nine months ended September 30, 1998, IMC consummated six
securitizations totaling $4.5 billion. Since September 30, 1998, IMC has
consummated only one securitization totaling $600 million. Since September 30,
1998, IMC has not been profitable, and experienced a net loss of $134.1 million
for the three months ended December 31, 1998 and a net loss of $200.3 million
for the six months ended June 30, 1999.
For further information concerning the business and results of operations
of IMC, see "Business of IMC" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
CitiFinancial Mortgage Company
300 St. Paul Place
Baltimore, Maryland 21202
CitiFinancial is an indirect wholly owned subsidiary of Citigroup Inc.
Citigroup Inc. is a diversified holding company whose businesses provide a broad
range of financial services to consumer and corporate customers around the
world.
Travelers Casualty and Surety Company ("TCSC") and certain related
insurance companies, which are indirect subsidiaries of Citigroup and sister
companies to CitiFinancial, in the aggregate have a significant interest in
Greenwich Street Capital Partners II, L.P. ("GSCP"), a private investment fund.
GSCP, together with certain related investment funds, owns shares of IMC's Class
A preferred stock and Class C exchangeable preferred stock and is a secured
creditor of IMC. TCSC also owns shares of IMC's Class A preferred stock. Certain
officers and directors of Citigroup and its subsidiaries are also investors in
GSCP and/or certain of its related investment funds. In this Proxy Statement, we
refer to GSCP and its related investment funds as the "Greenwich Funds".
For further information regarding IMC, the Greenwich Funds, TCSC and
CitiFinancial, see "Proposal 1: The Proposed Sale of Assets - Background of the
Transaction."
The Special Meeting (page 17)
The special meeting of the IMC shareholders will be held on October ___,
1999 at 10:00 a.m. local time at [location].
The record date for IMC shareholders entitled to receive notice of and to
vote at the IMC special meeting is September ____, 1999. At the close of
business on that date, there were ____________ shares of IMC common stock,
500,000 shares of IMC Class A preferred stock and 23,760.758 shares of IMC Class
C exchangeable preferred stock outstanding.
The Proposed Sale of Assets (page 20)
The legal document that governs the proposed sale of assets is the Asset
Purchase Agreement between IMC and CitiFinancial. The Asset Purchase Agreement
is attached to the back of this Proxy Statement as Annex A (the "Asset Purchase
Agreement"). You are encouraged to read this document completely and carefully.
Consequences of the Proposed Sale of Assets
Pursuant to the Asset Purchase Agreement, IMC will receive from
CitiFinancial $100 million for the sale of its mortgage servicing rights related
to the mortgage loans which have been securitized, real property consisting of
IMC's Tampa, Florida headquarters and IMC's leased facilities at its Ft.
Washington, Pennsylvania, Cherry Hill, New Jersey and Cincinnati, Ohio offices.
Additionally, all furniture, fixtures and equipment and other personal property
located at these premises will be included in the sale. See "Material Provisions
of the Asset Purchase Agreement" for a more detailed description of the assets
that IMC will sell to CitiFinancial.
If the sale of these assets is completed, it will result in the sale of
IMC's mortgage loan servicing business and substantially all its correspondent
and broker origination loan business conducted in Tampa, Florida, Ft.
Washington, Pennsylvania, Cherry Hill, New Jersey, and Cincinnati, Ohio. The
remaining loan origination business, which primarily consists of broker and
direct originations, is performed by eight operating subsidiaries. Since the
Asset Purchase Agreement entered into on July 13, 1999 did not include these
subsidiaries, in July 1999, the IMC Board of Directors approved a formal plan to
dispose of them. IMC is currently in the process of disposing or discontinuing
the operations of these subsidiaries, and through August 1, 1999 has closed two
of these subsidiaries. These alternatives are intended to reduce the use of
working capital by these subsidiaries. However, none of these alternatives is
expected to increase the value of IMC's equity securities.
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After the proposed sale of assets to CitiFinancial and the disposition of
these subsidiaries, IMC will essentially have no ongoing operating business, but
will continue to own assets consisting primarily of cash, accounts receivable,
mortgage loans held for sale, interest-only and residual certificates and other
assets that are pledged as collateral for warehouse finance facilities and term
debt. The assets remaining after the proposed sale of assets to CitiFinancial
will be either held or sold by IMC to attempt to realize the maximum value for
these assets and repay its obligations, including the warehouse finance
facilities and term debt. If IMC receives sufficient proceeds from these
remaining assets to repay its obligations, any remaining proceeds will be used
first to redeem IMC's outstanding preferred stock and then to make payments to
IMC's common shareholders.
IMC does not expect any payment to be made to its common shareholders upon
the consummation of the sale of assets to CitiFinancial, and IMC believes that
any payment in the future is unlikely but will ultimately depend upon the
proceeds received from the assets remaining after consummation of the
CitiFinancial transaction. If any proceeds remain for IMC's common shareholders,
these proceeds would be available only after the repayment of IMC's obligations
and the redemption of IMC's preferred stock, which are not expected to be made
for several years. There can be no assurance that IMC will be able to maximize
the value of its remaining assets and have adequate proceeds and resources to
satisfy its creditors and provide any value to IMC common shareholders or that
IMC will not seek bankruptcy protection in the future.
Shareholder Vote Required
Assuming a quorum (more than 50% of the outstanding shares of IMC common
stock, more than 50% of the IMC Class A preferred stock and more than 50% of the
IMC Class C exchangeable preferred stock) is present in person or represented by
proxy at the special meeting:
(1) The Florida Business Corporation Act requires a majority of all the
votes entitled to be cast to approve the Asset Sale Proposal; and
(2) In addition, the Asset Purchase Agreement requires that the Asset Sale
Proposal be approved by:
(a) the affirmative vote of a majority of the outstanding common
stock of IMC other than the shares held by management of IMC or the
Greenwich Funds, their affiliates and associates; and
(b) the affirmative vote of more than 66 2/3% of the outstanding IMC
Class A preferred stock and the outstanding IMC Class C exchangeable
preferred stock, voting separately.
IMC management has been informed by the Greenwich Funds, which in the
aggregate own 80% of the outstanding IMC Class A preferred stock and 100% of the
outstanding IMC Class C exchangeable preferred stock, that they intend to vote
their shares of IMC preferred stock in favor of the approval of the Asset Sale
Proposal.
If you fail to return your proxy card, unless you appear in person at the
IMC special meeting, the effect may be that a quorum will not be present at the
special meeting and no business will be able to be conducted.
Interests of Officers and Directors in the Proposed Transaction
In considering the recommendation of the IMC Board of Directors in favor
of the Asset Sale Proposal, IMC shareholders should be aware that certain
members of the Board of Directors of IMC and certain members of its senior
management have employment agreements with IMC, and Mitchell W. Legler, a
director of IMC, has an engagement agreement with IMC, that permit each of them,
in certain circumstances, including a change of control, to voluntarily
terminate their employment with, or retention by, IMC and become entitled to
receive deferred compensation. Consummation of the Asset Sale Proposal will
constitute a change of control, as defined in these agreements, which will
entitle them to receive deferred compensation. In order to provide value to
IMC's creditors and potentially some value to IMC's shareholders, the members of
senior management and Mitchell W. Legler, who have these agreements, have
entered into mutual general and irrevocable releases with IMC, which release IMC
from the payment of deferred compensation aggregating approximately $10 million
and certain other claims and obligations, including those in the employment and
engagement agreements, in consideration for aggregate payments of $400,000 plus
an additional aggregate payment of $420,000 to be paid over a period of up to
twelve months. The payments commenced upon execution of the release for the
member of senior management who is not also a director and will commence upon
consummation of the proposed sale of assets, if the Asset Sale Proposal is
approved by IMC shareholders, for members of the IMC Board of Directors,
including Mr. Legler. Each member of senior management and Mr. Legler who has
entered into a release is thereafter employed or
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engaged "at will" and may be terminated by IMC at any time without any
additional benefits.
For further details, including a description of the employment and
engagement agreements and the definition of "change of control" in these
agreements, see "Proposal 1: The Proposed Sale of Assets--Interests of Certain
Persons."
Conditions of the Proposed Sale of Assets
The consummation of the proposed sale of assets depends upon satisfaction
of a number of conditions, including:
o approval of the Asset Purchase Agreement by IMC shareholders;
o approval of the Asset Purchase Agreement by more than 90% of IMC's
creditors, based upon the amount due;
o absence of legal restraints to the consummation of the transaction;
o receipt of any required regulatory approvals;
o receipt of any required third party consents;
o receipt of title surveys and title insurance commitments;
o the acceptance of employment with CitiFinancial by certain employees
and officers of IMC;
o receipt of a valuation opinion with respect to the transaction;
o absence of an event, condition or circumstance resulting in a
material adverse effect with respect to IMC; and
o execution of a transition services agreement.
For further details, see "Material Provisions of the Asset Purchase
Agreement--Conditions to the Transaction."
Termination of the Asset Purchase Agreement
Either IMC or CitiFinancial may terminate the Asset Purchase Agreement if:
o both parties consent in writing;
o the transaction is not completed by October 15, 1999;
o legal restraints prevent the transaction; or
o IMC shareholders do not approve the proposed transaction with
CitiFinancial.
CitiFinancial may also terminate the proposed transaction if:
o there is a material adverse change in IMC's mortgage loan
origination and servicing business or the assets relating to that business
or in the condition, financial or otherwise, of IMC; or
o IMC knows any event or issue that would lead to the reasonable
belief that IMC can not obtain a valuation opinion with respect to the
transaction.
IMC may also terminate the proposed transaction if the IMC Board of
Directors withdraws, modifies or changes its approval of the Asset Purchase
Agreement so that IMC can enter into an agreement relating to a transaction that
the IMC Board of Directors believes is more favorable to the IMC shareholders.
However, if IMC terminates the Asset Purchase Agreement for this reason, IMC
will have to pay CitiFinancial $10 million.
For further details, see "Certain Provisions of the Asset Purchase
Agreement--Termination."
Regulatory Approvals
The Bank Holding Company Act of 1956, as amended, prohibits IMC and
CitiFinancial from consummating the proposed sale of assets until Citigroup has
either filed an application with, or given prior notice to, the Board of
Governors of the Federal Reserve System regarding this transaction. Citigroup
intends to file such application or notice as soon as practicable. There can be
no assurance that the Board of Governors of the Federal Reserve System will not
object to this transaction or take any action in connection with this
transaction.
Opinion of IMC's Financial Advisor
IMC's financial advisor, Donaldson, Lufkin & Jenrette Securities
Corporation, has given a written opinion dated July 30, 1999 to the IMC Board of
Directors as to the fairness to IMC from a financial point of view of the
consideration to be received from CitiFinancial for the sale of assets. The full
text of the written opinion of DLJ is attached to this Proxy Statement as Annex
B and should be read completely and carefully. The opinion of Donaldson, Lufkin
& Jenrette Securities Corporation is directed to the IMC Board of Directors,
will not be updated and does not constitute a recommendation to any shareholder
as to how such shareholder should vote on the proposed sale of assets.
- 6 -
<PAGE>
Dissenter's Rights
IMC shareholders have dissenter's rights by reason of the sale of assets.
Florida law permits holders of IMC common stock to dissent from the sale of
assets and to have the fair value of their stock appraised by a court and paid
to them in cash. To do this, holders of dissenting shares must follow required
procedures, including filing notices with IMC and either abstaining or voting
against approval of the Asset Sale Proposal. If you dissent from the sale of
assets and follow the required procedures, your shares of IMC common stock will
be converted into the right to receive the appraised value of your shares in
cash. We have attached the applicable provisions of Florida law related to
dissenter's rights to this Proxy Statement as Annex C. Because it will be
unclear for several years whether there are any assets available for
distribution to holders of IMC common stock, IMC intends to take the position in
any dissenters rights action that the fair value of the IMC common stock is
negligible and that no payment should be made to dissenters.
Reasons for the Proposed Sale of Assets (page 25)
For IMC, the proposed sale of assets will provide IMC with an opportunity
to avoid having to file for bankruptcy protection. Although the proposed
transaction with CitiFinancial will not result in any proceeds for IMC common
shareholders, the IMC Board of Directors believes that the only other
alternative for IMC at this point would be to file for bankruptcy protection. A
bankruptcy would not result in any assets remaining for common shareholders. In
the judgment of the IMC Board of Directors, the proposed transaction with
CitiFinancial will maximize the value of IMC's assets. While there can be no
assurance, it is possible, although unlikely, that the remaining assets of IMC
can be held or disposed of in a manner that might allow IMC to satisfy its
creditors and result in some value to IMC's common shareholders in the future.
To review the reasons for the proposed sale of assets, see "Proposal 1:
The Proposed Sale of Assets--Reasons of IMC for the Transaction."
Recommendation to Shareholders (page 26)
The IMC Board of Directors has recommended the proposed sale of assets and
approved the Asset Purchase Agreement. The IMC Board of Directors believes that
the proposed sale of assets to CitiFinancial is a better alternative than filing
for bankruptcy protection because a bankruptcy would not result in any assets
remaining for common shareholders, but the proposed transaction with
CitiFinancial should permit IMC to attempt to realize the maximum value of IMC's
assets. See "Proposal 1: The Proposed Sale of Assets--Reasons of IMC for the
Transaction." The IMC Board of Directors unanimously recommends that you vote
"FOR" the proposal to approve the Asset Sale Proposal.
In reaching its recommendations in favor of approving the Asset Sale
Proposal, the IMC Board of Directors considered the risks associated with and
the benefits anticipated from, but in no case assured by, the proposed sale of
assets. These risks and benefits are further described in "Risk Factors"
beginning on page 8 and "Proposal 1: The Proposed Sale of Assets--Reasons of IMC
for the Transaction" beginning on page 25.
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<PAGE>
RISK FACTORS
In evaluating IMC and IMC's business, the Asset Purchase Agreement and the
transactions contemplated by the Asset Purchase Agreement, IMC shareholders
should carefully focus on the following risks, as well as other information
included in or incorporated by reference into this Proxy Statement:
Our lenders may foreclose or force us into bankruptcy after their
intercreditor agreements expire. There is no assurance that if the standstill
provisions under the intercreditor agreements terminate or expire, IMC's
lenders, including the Greenwich Funds, will continue to forebear from
exercising their rights to make margin calls, foreclose on the collateral or to
file an involuntary bankruptcy case against IMC. The standstill provisions under
the intercreditor agreements have been extended until September 16, 1999. IMC
expects that the standstill periods will be extended for at least another 30
days beyond that date and will negotiate with its lenders for these extensions.
There can be no assurance, however, that these standstill provisions will be
extended. In addition, the standstill provisions under the intercreditor
agreements may be terminated sooner for various reasons, including the failure
of IMC to make required payments, the failure of IMC shareholders to approve the
proposed sale of assets or in certain other events as provided in the
intercreditor agreements. If the standstill provisions under the intercreditor
agreements are not extended, IMC will need to refinance the loans with its
current lenders or other lenders. There is substantial doubt that IMC would be
able to refinance the loans if the standstill provisions under the intercreditor
agreements are not extended and there can be no assurance that sources of
capital will be available to IMC to permit such refinancing. IMC has had
significant difficulty finding such sources of capital over the past year.
If the Asset Sale Proposal is not approved by IMC shareholders, IMC will
have to file for bankruptcy. If the Asset Sale Proposal is not approved, the
transaction cannot be consummated. A proposed transaction with the Greenwich
Funds was terminated upon execution of the Asset Purchase Agreement. IMC
currently has no other potential transaction available to it and has experienced
significant losses since September 1998. If the transaction with CitiFinancial
is not completed, IMC will have no alternative available other than to file for
bankruptcy.
After consummation of the sale of assets, our lenders may still foreclose
or force us into bankruptcy. After the consummation of the proposed transaction
with CitiFinancial, IMC will essentially have no ongoing operating business, but
will continue to own assets consisting primarily of cash, accounts receivable,
mortgage loans held for sale, interest-only and residual certificates and other
assets which are pledged as collateral for warehouse finance facilities and term
debt. The assets remaining after the proposed asset sale to CitiFinancial will
be either held or sold by IMC to attempt to realize the maximum value and repay
liabilities, including the warehouse finance facilities and term debt.
IMC does not expect any payment to be made to its common shareholders upon
consummation of the sale of assets to CitiFinancial, and IMC believes that any
payment in the future is unlikely, but will ultimately depend upon the proceeds
received from the assets remaining after consummation of the CitiFinancial
transaction. If any proceeds remain for IMC's common shareholders, these
proceeds would be available only after the repayment of IMC's obligations and
the redemption of IMC's preferred stock, which are not expected to be made for
several years.
Although the proposed transaction with CitiFinancial will not result in
any proceeds to IMC's common shareholders at closing and is unlikely to result
in proceeds to IMC's common shareholders in the future, IMC believes that, if
the proposed sale of assets is not approved by IMC shareholders and IMC does not
receive the $100 million in proceeds from the sale of assets to CitiFinancial,
IMC will not be able to satisfy its creditors and will be forced to seek
protection immediately by filing for bankruptcy. A bankruptcy would not result
in any assets remaining for common shareholders. There can be no assurance that,
even if the proposed asset sale to CitiFinancial is approved by the IMC
shareholders, IMC will be able to maximize the value of the remaining assets and
have adequate proceeds and resources to satisfy its creditors or that IMC will
not seek bankruptcy protection in the future.
We may not be able to continue operating after consummation of the sale of
assets. After consummation of the sale of assets, IMC will own other assets
consisting primarily of cash, accounts receivable, mortgage loans held for sale,
the interest-only and residual certificates and other assets that are used as
collateral for warehouse finance facilities and term debt. IMC will essentially
have no ongoing operating business, but will continue to have a substantial
amount of indebtedness and other obligations. The assets remaining after the
proposed sale of assets to CitiFinancial will be either held or sold by IMC to
attempt to realize the maximum value for these assets and to
- 8 -
<PAGE>
be able to repay its obligations. There can be no assurance that these assets
will have any substantial value or that IMC will be able to achieve any value
from the collection, sale or other disposition of those assets which will exceed
the amount of IMC's remaining obligations to creditors.
Now that IMC Common Stock has been delisted from Nasdaq, it will be more
difficult to trade. IMC received a letter from Nasdaq dated January 13, 1999
indicating 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. According
to the letter, IMC's stock would be delisted from the Nasdaq National Market if
its stock price did not trade above $1.00 per share for a period of at least 10
consecutive trading days before April 13, 1999. Since IMC's common stock did not
trade above $1.00 for the requisite period, and IMC was also unable to satisfy
the continued listing requirements of the Nasdaq SmallCap Market, IMC's common
stock was delisted from the Nasdaq Stock Market.
Trading in IMC's common stock is now conducted in the over-the-counter
market on the NASD's "OTC Electronic Bulletin Board." The liquidity of IMC's
common stock may be impaired not only in the number of shares of common stock
which can be bought and sold, but also through delays in the timing of the
transactions, reduction in security analysts' and the news media's coverage of
IMC and lower prices for IMC's common stock than might otherwise be attained.
In addition, IMC's common stock may be subject to Rule 15g-9 under the
Securities Exchange Act of 1934, as amended (as used herein, "Exchange Act"),
which imposes additional sales practice requirements on broker-dealers which
sell such securities to persons other than established customers and "accredited
investors" (generally, individuals with a net worth in excess of $1,000,000 or
an annual income in excess of $200,000, or $300,000 together with their
spouses). For transactions covered by this rule, a broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. Consequently, the
rule may adversely affect the ability of broker-dealers to sell IMC's common
stock and, therefore, the price of IMC's common stock may be adversely affected.
The Securities and Exchange Commission has adopted regulations which
define a "penny stock" to be an equity security that has a market price (as
therein defined) of less than $5.00 per share or with an exercise price of less
than $5.00 per share, subject to certain exceptions. For any transaction
involving penny stock, unless exempt, the rules require delivery, prior to any
transaction in a penny stock, of a disclosure schedule prepared by the
Securities and Exchange Commission relating to the penny stock market.
Disclosure is also required to be made about the commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements are required to be sent disclosing
recent price information for the penny stock held in the account and information
on the limited market in penny stocks. IMC common stock may be deemed to be a
penny stock.
IMC's business has seriously deteriorated. IMC's business has suffered
serious deterioration since late August 1998 due to a number of factors,
including turmoil in the financial markets in which IMC participates; losses
from hedging transactions; and a dramatic reduction in the availability of
equity, debt and asset-backed capital to fund IMC's operations. As a result, IMC
has reported a significant loss from operations for the year ended December 31,
1998 and for the six months ended June 30, 1999. IMC has suffered damage to its
reputation and its operations that are difficult to repair, including losses of
customers, suppliers and employees.
The historical performance of IMC is no indication of its future
performance. The historical share price and earnings performance of IMC prior to
October 1, 1998 were achieved prior to a general de-leveraging in the capital
markets and a "flight to quality" causing a reduction in the demand for
asset-backed securities. These factors, among others, resulted in upheaval in
the capital markets and severely restricted IMC's ability to access capital
through traditional sources. See "Proposal 1: The Proposed Sale of Assets --
Background of the Transaction." Because of the liquidity crisis affecting IMC,
its recent financial results and the delisting of IMC's common stock from the
Nasdaq Stock Market, IMC believes that the historical share price and earnings
performance of IMC are not indicative of IMC's future share price or earnings
results.
- 9 -
<PAGE>
FORWARD LOOKING INFORMATION
Certain statements in this Proxy Statement 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," "hope," "in the process of" and similar expressions. Forward looking
statements include all statements regarding IMC's expected financial position,
results of operations, cash flows, dividends, 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 sale of
assets are subject to known and unknown risks, uncertainties and contingencies,
many of which are beyond the control of IMC, which may cause IMC not to realize
the benefits hoped for as a result of the proposed transaction. Furthermore,
known and unknown risks 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,
the risks enumerated in "Risk Factors," early termination of the amended and
restated intercreditor agreements or the standstill periods relating to certain
of IMC's creditors, 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 available to
the sub-prime mortgage industry, 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, 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 cash flow trust)
markets generally and other uncertainties associated with IMC's current
financial difficulties and the proposed sale of assets to CitiFinancial
described herein. For additional information about certain of these matters, you
are urged to refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in this Proxy Statement and IMC's Annual
Report on Form 10-K for the year ended December 31, 1998 and IMC's Quarterly
Report on Form 10-Q for the six months ended June 30, 1999 filed with the
Securities and Exchange Commission.
- 10 -
<PAGE>
SELECTED FINANCIAL DATA OF IMC
The following information is being provided to assist you in
analyzing the financial aspects of the proposed sale of assets and is only a
summary. 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 our audited consolidated financial statements
and the notes thereto. The historical Statement of Operations and Balance Sheet
data set forth below as of and for the six months ended June 30, 1998 and 1999
have been derived from our unaudited consolidated financial statements that have
been prepared on the same basis as our audited consolidated financial statements
and include all adjustments, consisting of normal recurring accruals that IMC
considers necessary for a fair presentation of the financial position and
results of operations for such periods. Operating results for the six months
ended June 30, 1999 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1999. 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. References in this Proxy
Statement to "$" mean United States dollars.
<TABLE>
<CAPTION>
Year Ended
December 31,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operation Data: (dollars in thousands, except share data)
Revenues
Gain on sales of loans (1)(2) $8,583 $20,681 $46,230 $180,963 $205,924
Additional securitization transaction 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 37,463 123,432 147,938
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 interest expense 14 298 2,321 14,280 28,434
Loss on short sales of United States Treasury
securities (4) -- -- -- -- 22,351
Market valuation adjustment (5) -- -- -- -- 84,638
Interest expense - Greenwich Funds (6) -- -- -- -- 30,795
Goodwill impairment charge (7) -- -- -- -- --
Other charges (8) -- -- -- -- --
Sharing of proportionate value of equity (9) 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 (10)(11)(12) 1,187 2,522 11,190 29,500 679
---------- ---------- ---------- ---------- ----------
Pro forma net income (loss)(2)(11)(12) $1,856 $4,032 $17,929 $47,929 $(100,469)
========== ========== ========== ========== ==========
Pro forma basic net income (loss) per common share (12)(13) $0.15 $0.34 $1.12 $1.76 $(3.21)
Pro forma diluted net income (loss) per common shares (2)(12)(13) $0.15 $0.34 $0.92 $1.54 $(3.21)
Pro forma basic average common shares outstanding (12)(13) 12,000,000 12,000,000 15,981,521 27,299,827 31,745,575
Pro forma diluted average common shares outstanding (12)(13) 12,000,000 12,000,000 19,539,963 31,147,944 31,745,575
<CAPTION>
Six Months
Ended June 30,
-----------------------------------------
1998 1999
---- ----
<S> <C> <C>
Statement of Operation Data:
Revenues
Gain on sales of loans (1)(2) $131,139 $31,639
Additional securitization transaction expense (3) -- --
---------- ----------
Gain on sale of loans, net 131,139 31,639
---------- ----------
Warehouse interest income 80,220 35,165
Warehouse interest expense (66,438) (23,211)
---------- ----------
Net warehouse interest income 13,782 11,954
---------- ----------
Servicing fees 19,677 25,130
Other 16,575 14,820
---------- ----------
Total servicing fees and other 36,252 39,950
---------- ----------
Total revenues 181,173 83,543
---------- ----------
Expenses
Compensation and benefits 61,859 53,097
Selling, general and administrative expenses (2) 55,809 49,477
Other interest expense 10,173 15,789
Loss on short sales of United States Treasury
securities (4) -- --
Market valuation adjustment (5) -- 62,876
Interest expense - Greenwich Funds (6) -- 15,379
Goodwill impairment charge (7) -- 77,446
Other charges (8) -- 5,179
Sharing of proportionate value of equity (9) -- --
---------- ----------
Total expense 127,841 279,243
---------- ----------
Pre-tax income (loss) before income taxes 53,332 (195,700)
Pro forma provision for income taxes (10)(11)(12) 21,900 4,647
---------- ----------
Pro forma net income (loss)(2)(11)(12) $31,432 $(200,347)
========== ==========
Pro forma basic net income (loss) per common share (12)(13) $1.02 $(5.90)
Pro forma diluted net income (loss) per common shares (2)(12)(13) $0.90 $(5.90)
Pro forma basic average common shares outstanding (12)(13) 30,775,154 34,211,493
Pro forma diluted average common shares outstanding (12)(13) 34,828,065 34,211,493
</TABLE>
- 11 -
<PAGE>
<TABLE>
<CAPTION>
December 31, June 30,
------------------------------------------------------- -----------------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data (dollars in thousands):
Mortgage loans held for sale $28,996 $193,003 $914,587 $1,673,144 $946,446 $1,717,727 $610,181
Interest-only and residual certificates 3,404 14,073 86,247 223,306 468,841 445,577 352,544
Borrowings under warehouse finance facilities 27,732 189,819 895,132 1,732,609 984,571 1,813,870 633,488
Term debt and notes payable -- 11,121 47,430 130,480 432,737 279,390 436,695
Redeemable preferred stock -- -- -- -- 37,333 -- 38,807
Shareholders' equity 5,856 5,609 89,337 254,064 210,610 286,355 9,061
Total assets 36,642 354,551 1,707,348 2,945,932 1,683,639 3,441,422 1,136,627
<CAPTION>
Year Ended Six Months
December 31, Ended June 30,
------------------------------------------------------- -----------------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data (dollars in millions):
Loans purchased or originated $283 $622 $1,770 $5,893 $6,177 $3,633 $694
Loans sold through securitization 82 388 935 4,858 5,117 3,059 --
Whole loan sales 180 71 129 145 1,530 375 950
Serviced loan portfolio (period end) 92 536 2,148 6,957 8,887 9,399 7,274
Delinquency Data:
Total delinquencies as a percentage of 0.87% 3.43% 5.30% 5.40% 6.55% 4.33% 6.01%
loans serviced (period end)(14)(15)
Defaults as a percentage of loans serviced 0.12% 1.00% 1.47% 2.15% 7.14% 3.10% 7.26%
(period end)(15)(16)
Net annualized losses as a percentage of 0.00% 0.09% 0.13% 0.15% 0.25% 0.24% 0.97%
average loans serviced for period (15)
</TABLE>
(1) Prior to June 1996, includes interest-only and residual certificates
received by ContiFinancial in connection with IMC's agreement with
ContiFinancial. See "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 "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 loss
on short sales of United States Treasury securities. See "Management's
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<PAGE>
Discussion and Analysis of Financial Condition and Results of Operations -
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 assumptions used to project
cash flows over the life of the mortgage loans. The market valuation
adjustment for the year ended December 31, 1998 resulted 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. The market valuation
adjustment for the six months ended June 30, 1999 also resulted from
revised loss curve assumptions. See "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 $38 million standby revolving
credit facility with the Greenwich Funds. Interest expense recognized
includes interest charges, amortization of a $3.3 million commitment fee,
and the value attributable to the preferred stock issued and the preferred
stock issuable to the Greenwich Funds under the terms of the agreement.
Also includes interest expense and commitment fees for the six months
ended June 30, 1999 related to Note Purchase Agreements and the $95.0
million credit facilities that the Greenwich Funds purchased from
BankBoston on February 19, 1999. See Notes 3 and 4 of Notes to
Consolidated Financial Statements.
(7) Represents the writedown of goodwill resulting from the Company's
evaluation of the goodwill associated with the Company's eight operating
subsidiaries at June 30, 1999. The Board of Directors' approval, on July
26, 1999, of a formal plan to dispose of the eight operating subsidiaries
led the Company to determine that the useful lives assigned to goodwill
should be reduced to less than one year, and the resulting evaluation of
the goodwill associated with the eight operating subsidiaries resulted in
a goodwill impairment charge of $77.4 million for the six months ended
June 30, 1999. See Notes 6 and 17 of Notes to Consolidated Financial
Statements.
(8) Other charges represent losses from the disposal of investments in
international operations and the closing of the Company's Rhode Island
branch location. On June 30, 1999, the Company entered into an agreement
to sell to one of its joint venture partners its 45% interest in a joint
venture in the United Kingdom. The sale resulted in a loss of
approximately $2.6 million, which is included in other charges for the six
months ended June 30, 1999. See Note 8 of Notes to Consolidated Financial
Statements. On June 30, 1999, the Company terminated operations at its
branch office in Rhode Island, which consisted of the assets of Mortgage
Central Corp. ("MCC"), a mortgage banking company acquired by the Company
on January 1, 1996. The carrying amount of the goodwill that arose from
the acquisition of MCC was eliminated and the assets to be disposed of
were adjusted to their estimated net fair value at June 30, 1999. The
resulting loss on disposal of the assets of MCC of $2.6 million is
included in other charges for the six months ended June 30, 1999. See Note
6 of Notes to Consolidated Financial Statements.
(9) 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 "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Transactions with ContiFinancial -
Sharing of Proportionate Value of Equity" and Note 5 of Notes to
Consolidated Financial Statements.
(10) 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.
- 13 -
<PAGE>
(11) 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.
(12) Amounts are actual for the years ended December 31, 1997 and 1998 and the
six months ended June 30, 1998 and 1999.
(13) 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.
(14) Represents the percentages of account balances contractually past due 30
days or more, exclusive of home equity loans in foreclosure, bankruptcy
and real estate owned.
(15) 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.
(16) Represents the percentages of account balances of loans in foreclosure and
bankruptcy, exclusive of real estate owned.
The quarterly results of operations of the Company for each quarter of the
fiscal years ended December 31, 1997 and 1998 and the six months ended June 30,
1999 are set forth in Note 16 of Notes to Consolidated Financial Statements.
- 14 -
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The accompanying unaudited pro forma condensed consolidated information
gives pro forma effect to the proposed sale of assets to CitiFinancial described
in this Proxy Statement as if it had occurred on June 30, 1999. The accompanying
pro forma information is presented for illustrative purposes only and is not
necessarily indicative of the financial position which would actually have been
reported had the proposed sale of assets to CitiFinancial occurred at June 30,
1999, or which may be reported in the future. The pro forma adjustments are
described in the accompanying notes and are based upon available information and
certain assumptions that IMC believes are reasonable. The unaudited pro forma
condensed consolidated financial information has been prepared in accordance
with generally accepted accounting principles. These principles require
management to make extensive use of estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements. Actual
results will differ from those estimates.The accompanying unaudited pro forma
condensed consolidated financial information should be read in conjunction with
the Consolidated Financial Statements and the Notes thereto included elsewhere
in this Proxy Statement.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
Consolidated IMC Pro Forma
as Reported, Prior to Adjustments for IMC Pro Forma, After
Proposed Transaction Proposed Transaction Proposed Transaction
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Assets:
Cash and cash equivalents $ 14,846 $ 16,000(1) $ 30,846
Accrued interest and accounts receivable 62,230 4,000 66,230
Mortgages loans held for sale 610,181 610,181
Interest-only and residual certificates 352,544 352,544
Furniture, fixtures and equipment, net 16,042 (10,773)(2) 5,269
Capitalized mortgage servicing rights 42,498 (42,498)(2) --
Goodwill 8,454 8,454
Other assets 29,832 29,832
---------- ----------
Total assets $1,136,627 ($ 33,271) $1,103,356
========== ========== ==========
Liabilities:
Warehouse finance facilities $ 633,448 $ 588,448 $ (45,000) (1)
Term debt and notes payable 436,695 (25,000)(1) 411,695
Accrued interest payable and other liabilities 18,616 (10,000)(1) 8,616
---------- ---------- ----------
Total liabilities 1,088,759 (80,000) 1,008,759
---------- ---------- ----------
Preferred stock 38,807 38,807
Stockholders' equity 9,061 46,729(2) 55,790
---------- ---------- ----------
Total liabilities and stockholders' equity $1,136,627 ($ 33,271) $1,103,356
========== ========== ==========
</TABLE>
- 15 -
<PAGE>
Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet
(1) The net proceeds to be received by the Company from the proposed sale
of assets to CitiFinancial are estimated to be $100 million, of which
$96 million will be paid at closing. Use of proceeds from the
proposed sale of assets to CitiFinancial are estimated as follows:
Repayment of warehouse lenders $45,000
Repayment of term debt and notes payable 25,000
Payment of taxes 10,000
Working capital 16,000
-------
$96,000
=======
(2) Reflects sale of assets to CitiFinancial as follows:
Gross transaction proceeds $100,000
Assets sold:
Mortgage servicing rights 42,498
Property and equipment 10,773
-------
Gain on sale $46,729
=======
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<PAGE>
IMC SPECIAL MEETING
Date, Time and Place of Special Meeting
The special meeting of the IMC shareholders will be held on October __,
1999 at 10:00 a.m. local time at [location].
Purpose of the IMC Special Meeting
At the special meeting, holders of IMC common stock, IMC Class A preferred
stock and IMC Class C exchangeable preferred stock will consider and vote upon:
(1) a proposal to approve the Asset Purchase Agreement, dated as of July 13,
1999, by and between CitiFinancial and IMC, providing for, among other things,
the sale of IMC's mortgage loan servicing business and substantially all of its
mortgage loan origination business to CitiFinancial for $100 million, and the
other transactions contemplated thereby and (2) such other matters that may
properly come before the special meeting or any adjournment or postponement
thereof.
The IMC Board of Directors unanimously recommends that IMC shareholders
vote "FOR" approval of the Asset Sale Proposal. See "Proposal 1: The Proposed
Sale of Assets."
Only shareholders of record at the close of business on September ___,
1999 are entitled to notice of and to vote at the IMC special meeting or any
adjournment or postponement of the special meeting.
Solicitation of Proxies
The solicitation of proxies in the form enclosed is made on behalf of the
IMC Board of Directors. The expenses of the solicitation of proxies, including
preparing, handling, printing and mailing the proxy soliciting material, will be
borne by IMC. Solicitation will be made by use of the mails and, if necessary,
by electronic telecommunications or in person. IMC has retained the services of
a professional proxy solicitation firm to assist in connection with the
soliciting of proxies for a fee plus out-of-pocket expenses. In soliciting
proxies, IMC management may use the services of its directors, officers and
employees, who will not receive any additional compensation therefor, but who
will be reimbursed for their out-of-pocket expenses. IMC will reimburse banks,
brokers, nominees, custodians and fiduciaries for their expenses in forwarding
copies of the proxy soliciting material to the beneficial owners of the stock
held by such persons and in requesting authority for the execution of proxies.
Record Date; Voting Rights; Proxies
Only shareholders of record of IMC common stock, IMC Class A preferred
stock and IMC Class C exchangeable preferred stock at the close of business on
September __, 1999 (the "Record Date") are entitled to notice of and to vote at
the special meeting of shareholders or any adjournment or postponement thereof.
As of the Record Date, there were _____________ issued and outstanding
shares of IMC common stock held by approximately __ holders of record, each of
which is entitled to one vote per share on any matter that properly comes before
the IMC special meeting. In addition, as of the Record Date, there were 500,000
issued and outstanding shares of IMC Class A preferred stock held by four
holders of record and 23,760.758 issued and outstanding shares of IMC Class C
exchangeable preferred stock held by three holders of record, each of which is
entitled to vote as a separate class and is entitled to one vote per share on
the Asset Sale Proposal.
Assuming a quorum (more than a majority of the outstanding shares of IMC
common stock, more than a majority of IMC Class A preferred stock and more than
a majority of IMC Class C exchangeable preferred stock) is present in person or
represented by proxy at the special meeting:
(1) The Florida Business Corporation Act requires a majority of all
the votes entitled to be cast to approve the Asset Sale Proposal and the
transactions contemplated thereby; and
(2) In addition, the Asset Purchase Agreement requires that the
Asset Purchase Agreement be approved by:
- 17 -
<PAGE>
(a) the affirmative vote of a majority of the outstanding common
stock of IMC other than the shares held by management of IMC or the
Greenwich Funds, their affiliates and associates; and
(b) the affirmative vote of more than 66 2/3% of the outstanding IMC
Class A preferred stock and the outstanding IMC Class C exchangeable
preferred stock, voting separately.
All shares of IMC common stock and preferred stock represented by properly
executed proxies will, unless such proxies have been previously revoked, be
voted in accordance with the instructions indicated in such proxies. If no
instructions are indicated on such proxies, such shares of IMC common stock or
preferred stock will be voted in favor of approval of the Asset Sale Proposal.
IMC does not know of any matters that are to come before the special
meeting other than the proposal to approve the Asset Sale Proposal. If any other
matter or matters are properly presented for action at the special meeting,
including a motion to adjourn the meeting to another time or place, the persons
named in the enclosed form of proxy will have the discretion to vote on such
matters in accordance with their best judgment, unless such authorization is
withheld by notation on the proxy. A shareholder who has given a proxy may
revoke it at any time prior to its exercise by giving written notice of
revocation to the Secretary of IMC, by signing and returning a later dated
proxy, or by voting in person at the special meeting. However, mere attendance
at the special meeting will not, in and of itself, have the effect of revoking
the proxy.
Votes cast by proxy or in person at the special meeting will be tabulated
by the election inspectors appointed for the meeting, who will determine whether
or not a quorum is present. The election inspectors will treat abstentions as
shares that are present and entitled to vote for purposes of determining the
presence of a quorum but as unvoted for purposes of determining the approval of
any matter submitted to the shareholders for a vote. Accordingly, since Florida
law requires the affirmative vote of a majority of the votes entitled to be cast
by the holders of common stock, an abstention will constitute a vote against
approval of the Asset Purchase Agreement. If a broker indicates on the proxy
that it does not have authority to vote certain shares on a particular matter,
those shares will be counted for purposes of determining the presence of a
quorum but will not be entitled to vote on such matter. Without instruction from
the beneficial owner, brokers will not have authority to vote shares held in
"street name" at the special meeting.
Quorum
The presence in person or by properly executed proxy of holders of a
majority of the issued and outstanding shares of IMC common stock and a majority
of the issued and outstanding shares of each class of IMC preferred stock
entitled to vote is necessary to constitute a quorum at the IMC special meeting.
Certifying Accountants
Representatives of IMC's independent accountants will (i) be present at
the special meeting, (ii) have an opportunity to make a statement if they
request, and (iii) be available to respond to appropriate questions.
Other Information
On the Record Date, the executive officers and directors of IMC, including
their affiliates, had voting power with respect to an aggregate of ______ shares
of IMC common stock or approximately ___% of the shares of IMC common stock then
outstanding. IMC currently expects that such directors and officers will vote
all of such shares in favor of the approval of the Asset Sale Proposal. In
addition, on the Record Date, the Greenwich Funds owned 400,000 shares of IMC
Class A preferred stock and 23,760.758 shares of IMC Class C exchangeable
preferred stock or 80% of the Class A and 100% of the Class C preferred stock
then outstanding. IMC management has been informed by the Greenwich Funds that
they intend to vote their shares of IMC preferred stock in favor of the approval
of the Asset Sale Proposal. On the Record Date, Travelers Casualty and Surety
Company owned 100,000 shares of IMC Class A preferred stock, representing 20% of
the Class A preferred stock then outstanding.
- 18 -
<PAGE>
The matters to be considered at the special meeting are of great
importance to the IMC shareholders. Accordingly, IMC shareholders are urged to
read completely and carefully consider the information presented in this Proxy
Statement, and to complete, sign, date and promptly return the enclosed proxy in
the enclosed postage pre-paid return envelope.
- 19 -
<PAGE>
Proposal 1:
THE PROPOSED SALE OF ASSETS
This section of the Proxy Statement, as well as the next section of the
Proxy Statement entitled "Certain Provisions of the Asset Purchase Agreement,"
describe the material aspects of the proposed sale of assets to CitiFinancial.
Refer to the Asset Purchase Agreement, which is attached as Annex A to this
Proxy Statement, and to the other agreements and documents that are attached as
annexes to this Proxy Statement for additional information. You should read the
Asset Purchase Agreement completely and carefully as it is the legal document
that governs the sale of assets to CitiFinancial.
Background of the Transaction
As a result of increased loan purchases and originations and its
securitization program, IMC has historically operated with negative cash flows
from operations. IMC has obtained cash for its operations through a combination
of access to the equity capital markets, 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.
On July 14, 1998, certain of the Greenwich Funds and Travelers Casualty
and Surety Company, an indirect subsidiary of Citigroup, a sister company to
CitiFinancial and a significant investor in GSCP, purchased $50 million of IMC's
Class A preferred stock. The Class A preferred stock was convertible into common
stock at $10.44 per share. The conversion feature was eliminated in October
1998. The Class A preferred stock bears no dividend and is redeemable by IMC
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 those Greenwich Funds and TCSC to be elected to IMC's
board of directors. Certain of the Greenwich Funds and TCSC 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. At the time the Class A
preferred stock was issued, IMC was not experiencing any liquidity problems.
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 cash 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 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 September 30, 1998 to IMC collateralized by its interest-only and
residual certificates, indicated to IMC that because of adverse
market conditions they were uncomfortable with their collateral and
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
collateralized by mortgage loans, made approximately $20 million in
margin calls and threatened to make additional margin calls in
excess of $25 million on those warehouse lines to reduce their
exposure to IMC.
- 20 -
<PAGE>
o Fourth, at the same time, IMC's traditional strategy of minimizing
risks of interest rate fluctuations through a hedging program of
shorting 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. Also during September 1998, IMC met with Donaldson, Lufkin
& Jenrette Securities Corporation (referred to in this Proxy Statement as "DLJ")
concerning their potential retention by IMC to assist in obtaining financing. At
a meeting on September 26, 1998, the Board of Directors determined that its
efforts to find a capital partner for IMC to provide necessary capital to
support IMC's operations might give rise to change in control issues for IMC.
Accordingly, on that date the Board of Directors caused a committee, consisting
of Joseph Goryeb and Mark Lorimer, to be formed to serve as a special committee
of independent directors to advise the full Board of Directors of IMC with
respect to any change in control transactions regarding IMC. Since the full
Board of Directors was already working with DLJ and it seemed appropriate to the
Board of Directors to continue that relationship, the special committee engaged
a separate investment bank, J.P. Morgan Securities Inc. (referred to in this
Proxy Statement as "J.P. Morgan"), as its financial advisor on October 2, 1998
and retained legal counsel. On October 6, 1998, IMC formally hired DLJ as its
financial advisor to assist it in locating such capital sources. At this time,
the sole interest of the Greenwich Funds in IMC consisted of $40 million of
Class A preferred stock and the option to acquire Class B preferred stock.
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. Faced with the impending maturity of the BankBoston
credit facilities 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. 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 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, in value, the equivalent of 40% of the common equity of IMC. The
Class C exchangeable preferred stock was 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 representing, in value, up to the equivalent of
50% of the common equity of IMC (in addition to the Class C exchangeable
preferred stock representing, in value, the equivalent of 40% of the common
equity of IMC received for providing the facility) (the "Exchange Option"). In
addition, upon certain changes in control of IMC, the Greenwich Funds could
elect to (i) receive repayment of the loan 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 Greenwich Funds'
willingness to provide the interim financing was contingent on IMC negotiating
intercreditor agreements with its significant creditors to refrain from
exercising remedies 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.
- 21 -
<PAGE>
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 provided to IMC
total available warehouse financing facilities 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 Company, an affiliate of CitiFinancial and TCSC, 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.
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 then 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
- 22 -
<PAGE>
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 identify 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.
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 intercreditor agreement with BankBoston, and
on February 18, 1999, the Greenwich Funds purchased, at a discount,
approximately $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 was 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 was 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 proposed transaction with the Greenwich Funds 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 then
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. At the request of IMC's Board of Directors, DLJ provided a
fairness opinion addressed to the Board of Directors that, based in part on
information and assumptions provided by IMC's management, the consideration to
be received pursuant to the
- 23 -
<PAGE>
merger agreement with the Greenwich Funds was fair to the IMC shareholders from
a financial point of view. As a result of the special committee's
recommendation, the fairness opinions of J.P. Morgan and DLJ and after a review
of the alternatives to the proposed transaction with the Greenwich Funds and
discussions related thereto, 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 then 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 Greenwich Funds
on February 19, 1999. The merger agreement was terminated and recast as an
acquisition agreement on March 31, 1999. The acquisition agreement provided 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. As a result of its termination as described below, the acquisition
agreement is no longer an alternative available to IMC and is not the subject of
this proxy statement or the vote by IMC shareholders. See "--Reasons of IMC for
the Transaction."
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 issuance of $50 million of Class A preferred stock
of IMC, IMC entered into consulting and fee agreements with an affiliate of GSCP
and with TCSC, under which the affiliate and TCSC would provide financial and
managerial advisory consulting services in return for an annual fee of $400,000
and $100,000, respectively, per year. Under the amended consulting agreement,
the GSCP affiliate received an additional fee of $125,000 for the period ended
July 14, 1999 and would receive an annual fee of $700,000 thereafter.
IMC also entered into a consulting agreement with Commercial Credit. From
February 1999 to May 1999, under this agreement, Commercial Credit provided
advice and recommendations to the management of IMC and IMC's Board of Directors
with respect to various aspects of IMC's business, including business plans and
loan underwriting criteria. Under the consulting agreement, Commercial Credit is
entitled to receive fees equal to 150% of its actual costs of providing such
services.
From April through July, 1999, IMC periodically borrowed additional funds
from the Greenwich Funds and repaid them.
In July 1999, the Greenwich Funds indicated to IMC that they believed that
a condition to their obligation to close under the acquisition agreement could
not be satisfied because they believed that the business of IMC had materially
deteriorated since the date of the acquisition agreement. IMC's Board of
Directors believed that, in light of such information, the Greenwich Funds would
not consummate the proposed acquisition. See " - Reasons of IMC for the
Transaction."
In June 1999, Commercial Credit submitted a non-binding letter of intent
to IMC to purchase IMC's mortgage loan servicing business and a substantial
portion of IMC's mortgage loan origination business. IMC's Board of Directors
met on June 14, July 2 and July 8, 1999 to discuss a transaction with Commercial
Credit or an affiliate of Commercial Credit and to consider other alternatives
from the perspective of IMC's creditors and shareholders, including filing for
bankruptcy, liquidation and other potential sales. See " - Reasons of IMC for
the Transaction." IMC and Commercial Credit negotiated the terms of an agreement
until July 13, 1999 when IMC and CitiFinancial entered into the Asset Purchase
Agreement, subject to the approval of their respective boards of directors.
On July 19, 1999, IMC, its major warehouse lenders and the Greenwich Funds
amended the amended and restated intercreditor agreements to extend the terms of
these agreements, which expire on the earlier of August 16, 1999 or termination
of the Asset Purchase Agreement or as otherwise provided in the agreements.
IMC's Board of Directors also met on July 23, July 28 and July 30, 1999 to
review the results of various analyses provided by DLJ. See " - Opinion of
Financial Advisor to IMC's Board of Directors." At the board meeting on July 23,
the IMC Board of Directors determined, based upon the advice of its special
counsel and counsel to the special committee, that the potential transaction
with CitiFinancial did not necessitate a special committee of independent
directors, and released the special committee. On July 26, 1999, Mark Lorimer
resigned
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<PAGE>
from the IMC Board of Directors. On July 30, 1999, the IMC Board of Directors
terminated the acquisition agreement and approved the Asset Purchase Agreement.
Because the IMC Board of Directors approved the Asset Purchase Agreement, the
acquisition agreement with the Greenwich Funds was terminated.
The transactions contemplated by the Asset Purchase Agreement were
approved by the boards of directors of CitiFinancial and Citigroup prior to July
31, 1999.
See "--Opinion of Financial Advisor to IMC's Board of Directors" for a
description of other events and factors leading to IMC's decision to approve the
proposed sale of assets and related matters.
Reasons of IMC for the Transaction
At a meeting of the IMC Board of Directors held on July 30, 1999, after
careful consideration and consultation with DLJ and counsel to IMC, the IMC
Board of Directors unanimously (i) approved the sale of assets to CitiFinancial
and the Asset Purchase Agreement and the transactions contemplated thereby, (ii)
determined that the value that IMC would receive from CitiFinancial for the sale
of assets is fair value for the assets being sold and (iii) recommended that
holders of shares of IMC common stock and IMC preferred stock vote FOR approval
of the Asset Purchase Agreement and the sale of assets and the other
transactions contemplated by the Asset Purchase Agreement.
In reaching its decision to approve the proposed sale of assets to
CitiFinancial and to recommend the same to the holders of IMC's common stock and
preferred stock, IMC's Board of Directors considered the status of the proposed
transaction with the Greenwich Funds. The Greenwich Funds had indicated to IMC
that they believed that a condition to their obligation to close under the
acquisition agreement could not be satisfied because they believed that the
business of IMC had materially deteriorated since the date of the acquisition
agreement. IMC's Board of Directors believed that, in light of such information,
the Greenwich Funds would not consummate the proposed acquisition. In addition,
at the time of their meetings, IMC was indebted to senior creditors for in
excess of $250 million, which debt was secured by a lien on IMC's interest-only
and residual certificates. IMC was also indebted to warehouse lenders for in
excess of $600 million and was operating at a substantial negative monthly cash
flow without access to funds to cover that cash flow deficit. These senior
creditors and warehouse lenders would be free to demand payment on their loans
and exercise their remedies if IMC did not either consummate the agreement with
the Greenwich Funds or enter into another transaction. If the transaction with
the Greenwich Funds were not consummated, IMC would not have any resources or
access to other financing to enable it to meet its obligations to these
creditors and lenders. Accordingly, IMC's Board of Directors determined that
bankruptcy was the only practical alternative. However, CitiFinancial presented
the Board of Directors with an additional alternative. Based on information
presented by management and its financial advisors, the IMC Board of Directors
determined that the proposed transaction with CitiFinancial was more likely to
maximize the value of IMC's assets than filing for bankruptcy.
In reaching its decision to approve the proposed sale of assets to
CitiFinancial and to recommend the same to the holders of IMC's common stock and
preferred stock, IMC's Board of Directors also considered many other factors,
including but not limited to the following:
1. alternatives to proceeding with the proposed transaction with
CitiFinancial, including other sales of assets and a liquidation of
IMC;
2. the unsuccessful results of efforts by IMC's financial advisor to
solicit potential interest from a number of other third parties and
the fact that other parties should have known that IMC would
consider a possible business combination;
3. the prospects for effecting such transactions in the current
environment, both outside a bankruptcy proceeding and in a
bankruptcy proceeding; the availability of debtor-in-possession
financing adequate to sustain IMC's operations in a bankruptcy
proceeding; and the ability of IMC to retain ownership and control
of its principal assets in a bankruptcy proceeding;
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<PAGE>
4. the amount of debt of IMC and the terms and conditions of the
documents evidencing such debt, including a takeout premium payable
in the event of a change in control, the expiration date of the
standstill agreements, as well as the prospects of refinancing or
otherwise repaying the debt;
5. the impact of a bankruptcy proceeding on the prospects of IMC's
shareholders and creditors realizing value for their interests in or
claims against IMC;
6. the impact on IMC and its business of the uncertainties associated
with its financial problems, including risks that customers and
suppliers would stop doing business with IMC on customary trade
terms and that employees might leave; and the increased risk that if
IMC was forced to seek protection from its creditors under the
bankruptcy laws, it might not be able to continue in business;
7. presentations from, and discussions with, senior executives of IMC,
representatives of DLJ and representatives of IMC's outside counsel
regarding the business, financial and accounting aspects and a
review of the terms and conditions of the Asset Purchase Agreement;
8. the financial and other analysis presented by DLJ and the oral
opinion of DLJ (subsequently confirmed in writing) as to the
fairness to IMC from a financial point of view of the consideration
to be received from CitiFinancial for the sale of assets. A copy of
the opinion, dated July 30, 1999, setting forth the assumptions and
qualifications made, facts considered and the scope of the review
undertaken is attached to this Proxy Statement as Annex B.
Shareholders of IMC are encouraged to read the opinion of DLJ
carefully and completely;
9. information concerning the financial condition, results of
operations, prospects and business of IMC, including the revenue and
profitability of IMC;
10. the recommendation of IMC's management that the proposed transaction
with CitiFinancial be approved; and
11. the recognition by IMC's Board of Directors that certain of its
members and members of IMC's management may have interests in the
proposed transaction that are in addition to the interests of
holders of IMC common stock, which the Board of Directors considered
in connection with its approval of the proposed transaction with
CitiFinancial. See "--Interests of Certain Persons."
IMC's Board of Directors also considered (i) the risk that the proposed
transaction with CitiFinancial would not be consummated, (ii) the substantial
management time and effort that will be required to consummate the proposed
transaction, (iii) the possibility that certain provisions of the Asset Purchase
Agreement and IMC's arrangements with its creditors might have the effect of
discouraging other persons potentially interested in acquiring IMC from pursuing
such an opportunity and (iv) other matters described under "Forward Looking
Information" and "Risk Factors." In the judgment of IMC's Board of Directors,
the potential benefits of the proposed transaction outweighed these
considerations.
This discussion of the information and factors considered and weight given
to such factors by IMC's Board of Directors is not intended to be exhaustive. In
view of the variety of factors considered in connection with their evaluation of
the proposed transaction, IMC's Board of Directors did not find it practicable
to and did not quantify or otherwise assign relative weights to the specific
factors considered in reaching their respective determinations. In addition,
individual members of IMC's Board of Directors may have given different weights
to different factors. For a discussion of the interests of certain members of
IMC's management and Board of Directors in the proposed sale of assets, see
"--Interests of Certain Persons."
Recommendation of the Board of Directors of IMC
IMC'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF IMC
COMMON STOCK VOTE "FOR" APPROVAL OF THE ASSET SALE PROPOSAL.
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<PAGE>
Opinion of Financial Advisor to IMC's Board of Directors
In its role as financial advisor to IMC, DLJ was asked to render an
opinion to the IMC Board of Directors as to the fairness to IMC, from a
financial point of view, of the consideration to be received by IMC from the
sale of the Businesses to CitiFinancial pursuant to the terms of the Asset
Purchase Agreement. For purposes of its opinion, DLJ defined "Businesses" to
include certain portions of IMC's mortgage origination business and its mortgage
servicing business, and the assumption of certain obligations in connection with
those businesses, as more fully described in the Asset Purchase Agreement. DLJ
was not retained as an advisor or agent to IMC's shareholders, securityholders,
creditors or any other person, other than as an advisor to the IMC Board of
Directors. DLJ delivered an oral opinion, subsequently confirmed in writing,
dated July 30, 1999, that as of the date of such opinion, and based upon and
subject to the assumptions, limitations and qualifications set forth in such
opinion, the consideration to be received by IMC from the sale of the Businesses
to CitiFinancial was fair to IMC from a financial point of view. References to
DLJ's opinion are to its written opinion attached as Annex B.
A COPY OF THE DLJ OPINION DATED JULY 30, 1999, WHICH WILL NOT BE UPDATED,
IS ATTACHED HERETO AS ANNEX B AND IS INCORPORATED HEREIN BY REFERENCE. IMC
SHAREHOLDERS ARE URGED TO READ THE DLJ OPINION CAREFULLY AND COMPLETELY FOR
ASSUMPTIONS MADE, PROCEDURES FOLLOWED, OTHER MATTERS CONSIDERED AND LIMITS OF
THE REVIEW BY DLJ.
DLJ's opinion was prepared for the IMC Board of Directors and is directed
only to the fairness to IMC of the consideration to be received by IMC from the
sale of the Businesses from a financial point of view. DLJ explicitly expressed
no opinion as to any transaction related to the sale of the Businesses,
including any use of the proceeds of the sale. DLJ's opinion does not address
the merits of the underlying decision by IMC to engage in the sale or other
business strategies considered by the IMC Board of Directors, and DLJ's opinion
also does not address the fairness from a financial point of view to IMC's
stockholders, securityholders, creditors or any other person except IMC itself.
DLJ's opinion does not constitute a recommendation to any IMC shareholder as to
how such shareholder should vote at the special meeting.
In arriving at its opinion, DLJ reviewed, among other things, the Asset
Purchase Agreement. DLJ also reviewed financial and other information that was
publicly available or furnished to it by IMC, including information provided
during discussions with IMC's management. Included in the information provided
to DLJ were certain financial projections prepared by IMC's management. IMC does
not publicly disclose internal management projections of the type provided to
DLJ in connection with their engagement and, accordingly, such projections were
not prepared with a view toward public disclosure. The projections so provided
were based upon numerous variables and assumptions which are inherently
uncertain, including, without limitation, factors related to general economic
and competitive conditions. See "Forward-Looking Information". In addition, DLJ
compared certain financial and securities data of IMC with various other
companies whose securities are traded in public markets, reviewed prices and
premiums paid in certain other sale transactions and conducted such other
financial studies, analyses and investigations as DLJ deemed appropriate for
purposes of rendering its opinion.
In rendering its opinion, DLJ relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
it from public sources, that was provided to it by IMC or IMC's representatives,
or that was otherwise reviewed by DLJ. DLJ also assumed that the financial
projections supplied to it were reasonably prepared on bases reflecting the best
currently available estimates and judgments of IMC's management as to our future
operating and financial performance. DLJ has not assumed any responsibility for
making any independent evaluation or appraisal of IMC's assets or liabilities,
nor did DLJ independently verify the information reviewed by it.
DLJ's opinion is necessarily based on economic, market, financial and
other conditions as they existed on, and on the information made available to
DLJ as of, the date of its opinion. It should be understood that, although
subsequent developments may affect its opinion, DLJ does not have any obligation
to update, revise or reaffirm its opinion as a result of changes in such
conditions or otherwise.
The following is a summary of the analysis presented by DLJ to the IMC
Board of Directors on July 30, 1999.
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<PAGE>
For purposes of determining a range of values for the Businesses, DLJ
analyzed each of the Businesses separately. For purposes of determining whether
the consideration to be received by IMC for the sale of the Businesses was fair
to IMC from a financial point of view, DLJ considered the sale of the Businesses
as one transaction, and it evaluated the fairness of the consideration to be
received by IMC in the transaction from a financial point of view on a 1)
combined, overall basis, and 2) on a basis in which each of the Businesses was
considered separately.
Certain Considerations. As part of its analysis, DLJ took into account
certain considerations. Among those considerations were the fact that despite
IMC's efforts, IMC has not been able to find any other buyers interested in the
Businesses at the price offered by CitiFinancial, and that if IMC does not sell
the Businesses, it has advised DLJ that, due to its severely constrained
liquidity position and its lack of access to capital, IMC would be forced to
shut down its mortgage origination and servicing businesses and might be forced
to file for bankruptcy.
Comparable Trading Multiple Analysis: Mortgage Origination Business. To
derive comparable market valuation information, DLJ compared selected historical
and projected earnings, and balance sheet, operating and financial ratios of
IMC's mortgage origination business to the corresponding data and ratios and
common stock prices of certain comparable companies whose securities are
publicly traded. The comparable companies were chosen because they possess
general business, operating and financial characteristics representative of
companies in the industry in which we operate. The comparable companies
consisted of:
o Aames Financial Corporation
o Advanta Corp.
o Delta Financial Corp.
o New Century Financial Corp.
DLJ compared the projected net income of IMC's mortgage origination
business--as supplied by IMC's management--for fiscal 1999 and 2000, to the
price per share and projected net income--as reported by First Call Research
Network--for the comparable companies in an effort to derive value indications
for IMC's mortgage origination business. Based on a negative projected net
income for IMC's mortgage origination business for each of fiscal 1999 and 2000,
DLJ determined that this analysis as it related to IMC was not meaningful. DLJ
also prepared an analysis of the total market capitalization to the annualized
amount of mortgage originations for IMC and the comparable companies. The median
ratio of the total market capitalization to the annualized amount of mortgage
originations for the comparable companies was 10.7%. Applying this ratio to
IMC's year-to-date annualized mortgage originations resulted in an implied value
of $27.9 million for IMC's mortgage origination business to be sold to
CitiFinancial pursuant to the Asset Purchase Agreement. DLJ also reviewed the
ratio of price per share to book and tangible book value for the comparable
companies, but because this information was not available for IMC's mortgage
origination business on a stand-alone basis, no meaningful value indications
could be derived.
Although the comparable trading multiple analysis is a standard valuation
methodology for home equity mortgage companies, DLJ stated that it believed this
analysis was not meaningful for IMC. This was due to the fact that IMC's
mortgage origination business has no liquidity or access to capital, while the
other companies to which IMC was compared were not so constrained and had
prospects for continued growth. As a result, DLJ ascribed relatively little
value to this analysis.
Comparable Trading Multiple Analysis: Loan Servicing Business. To derive
comparable market valuation information, DLJ compared selected historical and
projected earnings, and balance sheet, operating and financial ratios of IMC's
loan servicing business to the corresponding data and ratios and common stock
prices of certain comparable companies whose securities are publicly traded. DLJ
selected Advanta Corp. and Ocwen Financial Corp. as comparable companies because
they were the only publicly-traded companies that, to DLJ's knowledge, derived a
meaningful portion of their revenues from the servicing of sub-prime mortgage
loans and because of their other general business, operating and financial
characteristics.
DLJ compared projected net income of IMC's loan servicing business--as
supplied by IMC's management--for fiscal 1999 and 2000, to the price per share
and projected net income--as reported by First Call Research Network--for the
comparable companies in an effort to derive value indications for IMC's mortgage
servicing business. The price per share used of the comparable companies was as
of July 23, 1999. DLJ also
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<PAGE>
reviewed the ratio of price per share to book and tangible book value for the
comparable companies, but because this information was not available for IMC's
mortgage servicing business on a stand-alone basis, no meaningful value
indications could be derived.
The comparable trading multiple analysis was used by DLJ because it is a
standard valuation methodology for loan servicing companies. However, due to the
fact that IMC's loan servicing business has no access to liquidity, and is
subject to continued fixed costs related to servicing a mortgage portfolio even
as the size of the portfolio--and therefore the amount of revenues that can be
derived from the portfolio--diminishes, the comparison to other mortgage
servicers that are not so constrained is less meaningful than in similar
analyses for other companies.
Summary of Comparable Trading Multiple Analysis: Loan Servicing Business
($ in thousands) IMC Parameter Implied IMC Trading
Value Multiples:
(Median)
Price(1)/Projected 1999 $7,971(3) $64,724 8.12x
Net Income(2)
Price/Projected 2000 $1,622(3) $10,867 6.70x
Net Income(2)
- ----------
1 Price per share based on July 23, 1999 quotes.
2 Projected net income for comparable companies as reported by First Call.
3 Projected net income from management projections.
Comparable Acquisition Multiple Analysis: Mortgage Origination Business.
To derive comparable market valuation information, DLJ also compared the sale of
the mortgage origination business to the corresponding data, ratios and
projections, based on First Call Research Network estimates, of certain
comparable acquisitions. The comparable acquisitions were chosen because they
involved target companies with general business, operating and financial
characteristics representative of companies in the industry in which IMC
operates. The comparable acquisitions consisted of:
o Acquisition of Headlands Mortgage Company by GreenPoint Financial
Corp.
o Controlling investment in Aames Financial Corporation by Capital Z
Partners Ltd.
DLJ compared the projected net income of IMC's mortgage origination
business--as supplied by IMC's management--for fiscal 1999 and 2000, to the
price per share and projected net income--as reported by First Call Research
Network--for the comparable target companies in an effort to derive value
indications for IMC's mortgage origination business. Based on a negative
projected net income for IMC's mortgage origination business for each of fiscal
1999 and 2000, DLJ determined that this analysis as it related to IMC yielded
indications of value that were not meaningful. DLJ also prepared an analysis of
the acquisition price to the annualized amount of mortgage originations for
IMC's mortgage origination business and the comparable companies. The median
ratio of the acquisition price to the annualized amount of mortgage originations
for the comparable companies was 7.1%. Applying this ratio to IMC's year-to-date
annualized mortgage originations resulted in an implied value of $18.5 million
for IMC's mortgage origination business to be sold to CitiFinancial pursuant to
the Asset Purchase Agreement. DLJ also reviewed the ratio of price per share to
book and tangible book value, but because this information was not available for
IMC's mortgage origination business on a stand-alone basis, no meaningful value
indications could be derived.
Although the comparable acquisition multiple analysis is a standard
valuation methodology for home equity mortgage companies, DLJ stated that it
believed this analysis was not meaningful for IMC. This was due to the fact that
IMC's mortgage origination business has no liquidity or access to capital, while
the other companies to which IMC was compared were not so constrained and had
prospects for continued growth. As a result, DLJ ascribed relatively little
value to this analysis.
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<PAGE>
No publicly available comparable sales of companies that derive a
substantial portion of their revenues from the servicing of sub-prime mortgage
loans could be identified. For this reason, DLJ did not conduct a comparable
acquisition analysis for the sale of IMC's mortgage servicing business.
Discounted Cash Flow Analysis: Mortgage Origination Business. DLJ
performed a discounted cash flow analysis for the five-and-one-half year period
ending with fiscal year 2004 on a stand-alone unlevered free cash flow basis for
the mortgage origination business, using financial projections provided by IMC's
management. The projections were based on certain key assumptions for the
mortgage origination business provided by IMC, including volume projections, all
loans being sold on a whole loan basis at a premium and IMC's keeping its
existing organizational infrastructure in place.
Due to a number of factors present at the mortgage origination business,
including the lack of short- and long-term financing to support the mortgage
origination business, and the lack of any substantial forward loan sale
agreements, the prospects for growth are slight. Although IMC provided DLJ with
projections reflective of current market conditions, IMC's competitive position
and its severely constrained liquidity position, DLJ noted that it was IMC's
belief that if its lack of access to the capital markets were to continue or if
whole loan premiums did not increase materially, IMC would be forced to shut
down its mortgage origination business. Because of the low volume of
originations and high expenses projected for IMC's mortgage origination
business, the quarterly cash flows for the projection period were negative, as
were both the terminal earnings and book value. Thus, the value indications
arrived at using the discounted cash flow analysis were all negative, indicating
no financial value for the mortgage origination business.
Discounted Cash Flow Analysis: Loan Servicing Business. DLJ performed a
discounted cash flow analysis for the life of IMC's outstanding securitizations
on a stand-alone unlevered free cash flow basis for the mortgage servicing
business, using financial projections provided by IMC's management. The
projections were based on certain key assumptions provided by IMC, including the
contractual servicing fee paid by the securitization trusts and the rights to
ancillary fees that may be collected by IMC in connection with the loan
servicing business, as well as performance assumptions estimated by IMC when it
values the mortgage servicing rights, including IMC's cost to service the
mortgage loan pools and the prepayment rates of the mortgage loan pools.
DLJ applied various discount rates to IMC's mortgage servicing rights to
gauge their sensitivity. Based on this sensitivity analysis, DLJ determined that
using a range of discount rates from 13% to 23%, the present value of the
mortgage servicing rights was from a high of $42.5 million--the approximate
current book value of IMC's mortgage servicing rights--to a low of $32.9
million.
Summary of Analyses. In combining the analyses summarized above, and
applying only the analyses for which a positive result was available, DLJ
determined that the combined expected values for the Businesses ranged from
$32.9 million to $92.7 million.
Valuation Summary
($ in millions)
<TABLE>
<CAPTION>
Mortgage Origination Servicing Business Total
Business
<S> <C> <C> <C>
Trading Multiple Analysis $18.6-$27.9 $47.9-$64.7 $66.5-$92.7
M&A Multiple Analysis $7.7-$18.5 Not applicable Not applicable
Discounted Cash Flow
Analysis Not meaningful $32.9-$42.5 $32.9-$42.5
</TABLE>
In summarizing its analyses, DLJ stated that no company utilized in its
analyses of certain comparable publicly traded companies is identical to IMC.
Accordingly, its analyses necessarily involve complex considerations and
judgments concerning differences in IMC's financial and operating
characteristics and other factors that could affect the value of the Businesses
and the other companies included in such analyses. In addition, DLJ noted in its
analyses, particularly as it related to the mortgage origination business, that
due to current market conditions, and IMC's competitive position and severely
constrained liquidity position, IMC's
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<PAGE>
prospects for growth are slight. Therefore, the prospects for the sale of the
Businesses should be viewed in light of the low to median valuation multiple
comparisons, and not against the high comparisons.
The summary set forth above does not purport to be a complete description
of the analyses performed by DLJ, but describes, in summary form, the principal
elements of the presentation made by DLJ to the IMC Board of Directors on July
30, 1999. The preparation of a fairness opinion involves various determinations
as to the most appropriate and relevant methods of financial analysis and the
application of these methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to summary description. Each of the
analyses conducted by DLJ was carried out in order to provide a different
perspective on the transaction and add to the total mix of information
available. DLJ did not form a conclusion as to whether any individual analysis,
considered in isolation, supported or failed to support an opinion as to
fairness of the consideration to be received by IMC from the sale of the
Businesses from a financial point of view. Rather, in reaching its conclusion,
DLJ considered the results of the analyses in light of each other and ultimately
reached its opinion based on the results of all analyses taken as a whole. DLJ
did not place particular reliance or weight on any individual analysis, but
instead concluded that its analyses, taken as a whole, supported its
determination. Accordingly, notwithstanding the separate factors summarized
above, DLJ believes that its analyses must be considered as a whole and that
selecting portions of its analysis and the factors considered by it, without
considering all analyses and factors, could create an incomplete or misleading
view of the evaluation process underlying its opinion.
In performing its analyses, DLJ made numerous assumptions with respect to
industry performance, business and economic conditions and other matters. The
analyses performed by DLJ are not necessarily indicative of actual values or
future results, which may be significantly more or less favorable than suggested
by such analyses.
Pursuant to the terms of an engagement letter dated October 6, 1998, as
amended in August 1999, IMC agreed to pay DLJ (1) a fee of $1.0 million,
$300,000 of which has already been paid, $350,000 of which is payable no later
than August 15, 1999 and $350,000 of which is payable no later than the day
prior to the date of mailing of the proxy statement, and (2) an additional
success fee of $750,000 payable upon consummation of the sale of the Businesses.
IMC also agreed to reimburse DLJ promptly for the reasonable fees and
out-of-pocket expenses (subject to a specified maximum) of counsel to DLJ in
connection with its engagement, and to indemnify DLJ and certain related persons
against certain liabilities in connection with its engagement, including
liabilities under the federal securities laws. The terms of the fee arrangement
with DLJ, which IMC and DLJ believe are customary in transactions of this
nature, were negotiated at arm's length between IMC and DLJ, and the IMC Board
of Directors was aware of such arrangement, including the fact that a
significant portion of the aggregate fee payable to DLJ is contingent upon
consummation of the sale of the Businesses.
During the past two years, IMC has not engaged or paid DLJ for any other
services. In the ordinary course of business, DLJ may actively trade the
securities of IMC for its own account and for the accounts of its customers and,
accordingly, may at any time hold a long or short position in such securities.
Interests of Certain Persons
General. Certain IMC executive officers and certain members of the IMC
Board of Directors may be deemed to have interests in the proposed transaction
with CitiFinancial that are in addition to their interests as shareholders of
IMC generally. The IMC Board of Directors was aware of these interests and
considered them, among other matters, in approving the Asset Purchase Agreement
and the transactions contemplated thereby.
In order to provide value to IMC's creditors and potentially some value to
IMC's common shareholders, each of the members of senior management who has an
employment agreement with IMC that provides for deferred compensation in certain
circumstances, including upon a change of control, and Mitchell W. Legler who
has an engagement agreement with IMC that provides for deferred compensation in
certain circumstances, including upon a change of control, have entered into a
mutual general and irrevocable release with IMC. The releases release IMC from
payment of deferred compensation aggregating approximately $10 million and
certain other claims and obligations, including those in the employment and
engagement agreements, in consideration for an initial payment of $100,000
($400,000 in the aggregate) plus an additional payment of $10,000 per month over
a period of twelve months or, in the case of Mr. Legler, six months ($420,000 in
the
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aggregate). Consummation of the Asset Sale Proposal will constitute a change of
control, as defined in these agreements, which will entitle them to receive
deferred compensation. The payments commenced upon execution of the release for
the member of senior management who is not also a director and will commence
upon consummation of the proposed sale of assets, if the Asset Sale Proposal is
approved by IMC shareholders, for members of the IMC Board of Directors,
including Mr. Legler. Each member of senior management and Mr. Legler who has
entered into a release is thereafter employed or engaged "at will" and may be
terminated by IMC at any time without any additional benefits.
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.
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 within 18 months after a "change of control" (defined as any (A)
acquisition of 25% or more of the voting power or equity of the Company, (B)
change in a majority of the members of the Board excluding any change approved
by the Board, or (C) approval by the Company's stockholders of a liquidation or
dissolution of the Company, the sale of substantially all of its assets, such as
the Asset Sale Proposal, 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 was $459,800, plus increases as provided therein.
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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 (i) Mr. Marvin's
base salary for 1998 was $330,000, plus increases as provided, (ii) 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, and (iii) Mr. Marvin is entitled to deferred
compensation upon a "change of control" if he voluntarily terminates his
employment agreement within six months after a change in control.
IMC also has an engagement letter with Mitchell W. Legler, P.A., a law
firm controlled by Mr. Legler, a member of the IMC Board of Directors. That
engagement agreement provides that, among other things, Mr. Legler may terminate
the agreement upon a change of control and receive deferred compensation equal
to 150% of the highest compensation received by Mr. Legler and his law firm from
the Company in any of the three calendar years preceding the event giving rise
to the need to calculate deferred compensation.
Material Legal Matters
CitiFinancial and IMC have given each other a commitment to use all
reasonable efforts to take whatever actions are required to obtain necessary
regulatory approvals.
The Bank Holding Company Act of 1956, as amended, prohibits IMC and
CitiFinancial from consummating the proposed sale of assets until Citigroup has
either filed an application with, or given prior notice to, the Board of
Governors of the Federal Reserve System regarding this transaction. Citigroup
intends to file such application or notice as soon as practicable. There can be
no assurance that the Board of Governors of the Federal Reserve System will not
object to this transaction or take any action in connection with this
transaction.
Dissenter's Rights
The Florida Business Corporation Act (the "FBCA") provides dissenter's
rights in the event of certain corporate actions, including a sale of
substantially all the assets of a corporation. The sale of assets to
CitiFinancial may be deemed to constitute a sale of substantially all the assets
of IMC.
Holders of IMC capital stock will have dissenter's rights by reason of the
Asset Purchase Agreement and the consummation of the sale of assets. Because
this is a summary, it does not contain all the information that may be important
to you if you want to exercise dissenter's rights. You should carefully read the
full text of Sections 607.1301, 607.1302 and 607.1320 of the FBCA, a copy of
which is attached as Annex C to this Proxy Statement and incorporated herein by
reference.
If you dissent from the sale of assets and exercise dissenter's rights
under Sections 607.1301, 607.1302 and 607.1320, and if the Asset Sale Proposal
is approved and becomes effective, you will have the right to receive in cash
the "fair value" of your IMC stock, which may be determined by a Florida court.
The following is a summary of the principal procedures which must be complied
with in order to perfect dissenter's rights under Florida law:
(i) a shareholder must deliver to IMC before the vote is taken written
notice of the shareholder's intent to demand payment for his or her shares if
the sale of assets is effectuated. The shareholder should not vote his or her
shares in favor of the Asset Sale Proposal. A vote, in person or by proxy,
against the Asset Sale Proposal does not constitute notice of intent to demand
payment.
(ii) within ten (10) days after the special meeting of shareholders, IMC
must give written notice to each shareholder who filed a notice of intent to
demand payment (other than holders who voted for the Asset Sale Proposal) of the
approval of the Asset Sale Proposal.
(iii) within twenty (20) days after IMC's notice to the shareholders of
the approval of the Asset Sale Proposal, any shareholder who elects to dissent
shall file with IMC a notice of election to dissent, stating the shareholder's
name and address, the number, classes, and series of shares as to which he or
she dissents, and a
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demand for payment of the fair value of his or her shares. Any shareholder who
fails to file this election to dissent within the required time period shall be
bound by the Asset Sale Proposal and consequently will remain a shareholder. Any
shareholder filing an election to dissent shall deposit his or her certificates
for certificated shares with IMC simultaneously with the filing of the election
to dissent.
(iv) upon filing of a notice of election to dissent, the shareholder will
thereafter be entitled only to payment of the fair value of his or her shares in
accordance with the statutes, and shall not be entitled to vote or to exercise
any other rights of a shareholder. A notice of election may be withdrawn in
writing by the shareholder at any time before an offer is made by IMC to pay for
the shares. After any offer has been made, IMC must consent to the withdrawal.
(v) within 10 days after the expiration of the period in which
shareholders may file their notices of election to dissent, or within 10 days
after the sale of assets is consummated, whichever is later (but not more than
90 days after the shareholders meeting) IMC shall make a written offer to each
dissenting shareholder who has made a demand to pay an amount IMC estimates to
be the fair value of the shares.
(vi) if within 30 days after the making of such offer any shareholder
accepts the offer, payment shall be made within 90 days after the making of the
offer or the consummation of the sale of assets, whichever is later.
(vii) if IMC fails to make an offer within the specified time period or an
offer is made but any dissenting shareholder fails to accept the offer within 30
days, then IMC may, and upon written demand of a dissenting shareholders within
60 days after the sale of assets shall, file an action in any court of competent
jurisdiction in the county of Florida where IMC's registered office is located
requesting that the fair value of such shares be determined. If IMC fails to
institute the proceeding, any dissenting shareholder may do so in IMC's name.
You should review this discussion and Sections 607.1301, 607.1302, and
607.1320 of the FBCA carefully if you wish to exercise dissenter's rights or
wish to preserve the right to do so, since failure to comply with the required
procedures will result in the loss of such rights. If you are considering
dissenting, you should consult your legal advisor. If your shares of IMC common
stock or preferred stock are held of record in the name of another person and
you desire to exercise dissenter's rights, you must act promptly to cause the
shareholder of record to follow the steps summarized above. Since, as disclosed
in this proxy statement, it is highly unlikely that there will be any payment to
holders of common stock for several years following the consummation of the
proposed sale of assets to CitiFinancial, if at all, IMC intends to take the
position in any proceeding asserting dissenter's rights that the fair value of
IMC common stock is negligible and, accordingly, that no payment should be made
to holders seeking to assert dissenter's rights.
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MATERIAL PROVISIONS OF THE ASSET PURCHASE AGREEMENT
This section of the Proxy Statement describes the material provisions of
the Asset Purchase Agreement. For the full text of the Asset Purchase Agreement
see Annex A to this Proxy Statement, which is incorporated herein by reference.
In addition, important information about the Asset Purchase Agreement and the
proposed sale of assets to CitiFinancial is provided in the section entitled
"Proposal 1: The Proposed Sale of Assets."
Consummation of the Transaction
Promptly after the satisfaction or waiver of the conditions to the closing
of the proposed transaction set forth in the Asset Purchase Agreement, IMC will
sell the following assets to CitiFinancial for $100 million: (1) all of IMC's
rights to the servicing of residential mortgage loans; (2) IMC's Tampa, Florida
headquarters and IMC's rights to its leased facilities in Ft. Washington,
Pennsylvania, Cherry Hill, New Jersey and Cincinnati, Ohio; (3) the furniture
and personal property located in the Tampa, Ft. Washington, Cherry Hill and
Cincinnati facilities; (4) all of IMC's contracts relating to its business of
origination, selling and servicing of residential loans (other than the business
conducted by Mortgage America, CoreWest Banc, American Mortgage Reduction Inc.,
Equity Mortgage, National Lending Center Inc., Central Money Mortgage Co., Inc.,
Residential Mortgage Corporation and Alternative Capital Group, Inc.); (5) the
books and records relating to IMC's residential loan business; (6) the
intellectual property rights used in IMC's residential loan business; and (7)
the funds and accounts held or controlled by IMC in the operation of its
residential loan business. CitiFinancial will assume all of the liabilities
relating to these assets that accrue or arise on or after the closing date. In
return for these assets, CitiFinancial will pay IMC $96 million at closing, and
CitiFinancial will pay IMC $2 million one year after closing and $2 million two
years after closing, subject to the continued accuracy of the representations
and warranties and the performance of the mortgage loan servicing portfolio. IMC
intends to use the proceeds from the sale of assets to repay certain
indebtedness secured by certain assets of IMC.
If the sale of these assets is completed, it will result in the sale of
IMC's mortgage loan servicing business, substantially all its correspondent
origination loan business and its broker originated loan business conducted in
Tampa, Florida, Ft. Washington, Pennsylvania, Cherry Hill, New Jersey and
Cincinnati, Ohio. The remaining loan origination business, which primarily
consists of broker and direct originations, is performed by eight operating
subsidiaries, Mortgage America, CoreWest Banc, American Mortgage Reduction Inc.,
Equity Mortgage, National Lending Center Inc., Central Money Mortgage Co., Inc.,
Residential Mortgage Corporation and Alternative Capital Group, Inc. IMC is
currently in the process of disposing or discontinuing the operations of these
subsidiaries, and through August 1, 1999 has closed two of these subsidiaries.
These alternatives are intended to reduce the use of working capital by these
subsidiaries. However, none of these alternatives is expected to increase the
value of IMC's equity securities.
After the proposed sale of assets to CitiFinancial and the disposition of
the operations of these subsidiaries, IMC will essentially have no ongoing
operating business, but will continue to own assets consisting primarily of
cash, accounts receivable, mortgage loans held for sale, interest-only and
residual certificates and other assets that are pledged as collateral for
warehouse finance facilities and term debt. The assets remaining after the
proposed sale of assets to CitiFinancial will be either held or sold by IMC to
attempt to realize the maximum value for these assets and repay its obligations,
including the warehouse finance facilities and term debt. If IMC receives
sufficient proceeds from these remaining assets to repay its obligations, any
remaining proceeds will be used first to redeem IMC's outstanding preferred
stock and then to make payments to IMC's common shareholders.
IMC does not expect any payment to be made to its common shareholders upon
consummation of the sale of assets to CitiFinancial, and IMC believes that any
payment in the future is unlikely, but will ultimately depend upon the proceeds
received from the assets remaining after consummation of the CitiFinancial
transaction. If any proceeds remain for IMC's common shareholders, these
proceeds would be available only after the repayment of IMC's obligations and
the redemption of IMC's preferred stock, which are not expected to be made for
several years.
Although the proposed sale of assets to CitiFinancial will not result in
any proceeds to IMC's common shareholders upon consummation and is unlikely to
result in proceeds to IMC's common shareholders in the future, IMC believes that
if the proposed sale of assets to CitiFinancial is not approved and IMC does not
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receive the $100 million in proceeds, IMC will not be able to satisfy its
creditors and will be forced to seek protection immediately by filing for
bankruptcy. A bankruptcy would not result in any assets remaining for common
shareholders. Accordingly, IMC believes the approval and consummation of the
sale of assets to CitiFinancial offers the best chance for any ultimate payment
to its common shareholders. However, there can be no assurance that even if you
approve the proposed sale of assets to CitiFinancial IMC will be able to
maximize the value of its remaining assets and have adequate proceeds and
resources to satisfy its creditors or that IMC will not seek bankruptcy
protection in the future.
Representations and Warranties
IMC and CitiFinancial have made various customary mutual representations
and warranties in the Asset Purchase Agreement about themselves and, in the case
of IMC, its subsidiaries relating to, among other things, organization, power
and authority to enter into the Asset Purchase Agreement and the transactions
contemplated thereby, the binding effect of the Asset Purchase Agreement,
consents required in connection with entry into the Asset Purchase Agreement,
absence of any breach of organizational documents or laws or orders as a result
of the contemplated transactions, absence of legal proceedings or orders, and
finder's fees owed in connection with the Asset Purchase Agreement. IMC has also
made representations and warranties to CitiFinancial with respect to reports
filed with the Securities and Exchange Commission, financial statements, the
assets to be acquired, labor relations, mortgage loans, transactions with
affiliates, intellectual property, environmental liability, brokers, taxes,
funds and accounts and loan servicing agreements.
Conduct of Business of IMC
IMC has agreed that, except as consented to or approved by CitiFinancial,
required by the Asset Purchase Agreement or related to the other assets and
businesses of IMC, until the closing date, IMC will conduct its mortgage loan
origination and servicing business only in the ordinary course of business and
substantially in accordance with its present policies and procedures. IMC will
use reasonable commercial efforts to preserve intact its present organization
relating to its mortgage loan origination and servicing business, to keep
available the services of its present management and employees and to preserve
its relationships with suppliers and customers and other third parties so that
the mortgage loan origination and servicing business of IMC will not be impaired
in any material respect. In particular, IMC has agreed that neither it nor any
of its subsidiaries, without the prior written consent of CitiFinancial, will
(subject, in certain cases, to specified exceptions):
(i) permit or allow any of the assets that will be purchased by
CitiFinancial to be subjected to any lien;
(ii) sell, transfer, license, lease or otherwise dispose of or agree to
dispose of, or acquire or agree to acquire any material assets that are of the
type to be purchased by CitiFinancial, or sell, transfer, license, lease or
otherwise dispose of or agree to dispose of any rights to the servicing of
residential mortgage loans;
(iii) grant any general increase or implement any general decrease in the
compensation of officers or employees or grant any increase in the compensation
payable or to become payable to any officer or employee;
(iv) make any single capital expenditure or commitment in excess of
$25,000 for additions to property, plant, equipment or intangible capital assets
that would be included in the assets to be purchased by CitiFinancial or make
aggregate capital expenditures and commitments for these assets in excess of
$100,000;
(v) enter into any agreement (other than for residential mortgage loans)
for, or modify or amend any existing agreements with, a non-cancelable term in
excess of one year or involving aggregate payments in excess of $50,000; or
(vi) hire any person who would become an employee of IMC's residential
mortgage loan business.
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No Solicitation
Subject to the exceptions noted below, IMC has agreed that it will not,
and will cause its officers, directors, employees and agents not to, initiate
contact with, solicit any inquiries from, request or invite submission of any
proposal or offer from, or provide any confidential information to, or
participate in any negotiations with, any third party in connection with any
possible proposal by such third party regarding a sale of all or any substantial
portion of the assets of IMC's mortgage loan origination and servicing business.
Any written proposal from a third party for a merger, consolidation or other
business combination involving IMC or the purchase of all or substantially all
of the assets of IMC, including its mortgage loan origination and servicing
business, is referred to in this Proxy Statement as a "Takeover Proposal."
However, until the IMC shareholders approve the proposed sale of assets to
CitiFinancial and if IMC keeps CitiFinancial fully informed of the existence,
status and material details of a Takeover Proposal, IMC may:
(i) solicit, initiate or encourage a Takeover Proposal to acquire all or
substantially all of the assets of IMC for a purchase price, which the IMC Board
of Directors reasonably believes, based on advice from IMC's independent
financial advisor, is superior to the consideration provided for in the Asset
Purchase Agreement;
(ii) furnish information to a third party which is making that Takeover
Proposal; and
(iii) negotiate that Takeover Proposal.
Notwithstanding the foregoing, IMC and the IMC Board of Directors may not:
o withdraw or modify, or propose to withdraw or modify the IMC Board
of Directors's approval of the Asset Purchase Agreement; or
o approve or recommend, or propose to approve or recommend, any
Takeover Proposal except (a) in connection with a Superior Proposal
and only after IMC terminates the Asset Purchase Agreement or (b) in
connection with a Takeover Proposal involving of all or a portion of
IMC common stock by an acquiror which agrees to vote in favor of the
Asset Purchase Agreement. A "Superior Proposal" is a bona fide
written Takeover Proposal (x) to acquire for consideration of cash
and/or securities and/or the contribution or combination by merger
or otherwise all or substantially all of the assets of IMC, (y) on
terms which the IMC Board of Directors decides in its good faith
reasonable judgment to be more favorable to the IMC shareholders
than the proposed sale of assets to CitiFinancial (based on the
advice of IMC's independent financial advisor that the value of the
consideration for that proposal is superior to the value of the
consideration for the proposed sale of assets to CitiFinancial) for
which financing is available or which is reasonably capable of being
obtained by the third party, and (z) which the IMC Board of
Directors determines, in its good faith reasonable judgment, is
reasonably likely to be consummated without undue delay. If the IMC
Board of Directors approves a Superior Proposal and terminates the
Asset Purchase Agreement, IMC must pay CitiFinancial $10 million.
Non-Competition Agreement
IMC has agreed that until the fifth anniversary of the closing date
neither it nor any other entity of which it owns 51% or more of the voting stock
or other equity interests will engage in the business of originating, selling or
servicing residential mortgage loans in the United States, other than the
business of Mortgage America, CoreWest Banc, American Mortgage Reduction, Equity
Mortgage, National Lending Center, Central Money Mortgage, Residential Mortgage
and Alternative Capital. IMC has also agreed that it will not solicit any
customer of the mortgage loan origination or servicing business. CitiFinancial
has agreed that it will not solicit any mortgagor of any mortgage loan held by
IMC for the purpose of refinancing his, her or its mortgage loans.
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Other Covenants
Employees. CitiFinancial will offer to employ substantially all of the
employees of IMC's mortgage loan origination and servicing business.
CitiFinancial will offer those employees benefits under CitiFinancial's plans
but will not assume any of IMC's employee benefits plans.
Regulatory Filings. IMC and CitiFinancial will make all filings with the
appropriate governmental authorities required by applicable law with respect to
the transactions contemplated by the Asset Purchase Agreement. IMC and
CitiFinancial shall use commercially reasonable efforts to comply as
expeditiously as possible with all requests of any governmental authorities for
additional information and documents.
Injunctions. If any court issues any restraining order, injunction or
decree which prohibits the consummation of any of the transactions contemplated
by the Asset Purchase Agreement, IMC and CitiFinancial will use reasonable
efforts to have that restraining order, injunction or decree eliminated as
promptly as possible and to pursue the underlying litigation diligently and in
good faith.
Access to Information. IMC will provide CitiFinancial and its accountants,
counsel and other authorized representatives access during normal business hours
and under reasonable circumstances to any properties, contracts, books records
and other information of or relating to IMC's residential mortgage loan business
and to the officers, employees and agents of that business. IMC will cause its
offers to provide CitiFinancial and its authorized representatives with any
financial, environmental health and safety, technical and operating data or any
other information relating to IMC's residential mortgage loan business that
CitiFinancial may request and which is either normally available to IMC in the
ordinary course of business or which may be obtained or produced by IMC with
minimal cost and effort.
Further Action. IMC and CitiFinancial have also agreed to use reasonable
commercial efforts to take, or cause to be taken, all actions and do all other
things necessary, proper or advisable to ensure that the closing conditions
described below are satisfied and to consummate and make effective the
transactions contemplated by the Asset Purchase Agreement.
Until 180 days after the closing date, IMC and CitiFinancial will use
reasonable commercial efforts to obtain at the earliest practicable date,
whether before or after the closing date, all consents required to be obtained
for the performance of the transactions contemplated by the Asset Purchase
Agreement. IMC will use reasonable commercial efforts to obtain, whether before
or after the closing date, any amendments, novations, releases, waivers,
consents or approvals with respect to the outstanding contracts of IMC that are
necessary either to cure any material defaults under those contracts existing
prior to the closing date or for the consummation of the transactions
contemplated by the Asset Purchase Agreement. IMC and CitiFinancial will execute
and deliver those instruments, certificates and other documents and take action
as reasonably requested by the other party in order to carry out the Asset
Purchase Agreement. However, neither IMC nor CitiFinancial shall agree to any
amendment of any instrument that imposes any obligation or liability on the
other party without that party's prior written consent and neither IMC nor
CitiFinancial shall be obligated to execute any guarantees or undertakings or
otherwise incur or assume any expense or liability (other than for filing fees
and similar costs required in connection with the purchase and sale of assets)
in obtaining any release, novation, approval, consent, authorization or waiver.
IMC and CitiFinancial shall provide information and cooperate fully with
each other in making the applications, filings and other submissions which may
be required or reasonably necessary to obtain all approvals, consents,
authorizations and waivers that are required from any governmental authority or
other third party in connection with the transactions contemplated by the Asset
Purchase Agreement and shall promptly use reasonable commercial efforts to make
these applications, filings or other submissions.
Insurance. IMC shall use reasonable commercial efforts to maintain all
insurance policies relating to IMC's residential mortgage loan business in full
force and effect and shall pay all premiums, deductibles and retro-adjustment
billings, if any, with respect to the business, ensuring coverage of the
business up to the closing date.
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Confidentiality. IMC and CitiFinancial will hold, and will use reasonable
efforts to cause its employees and agents to hold, in strict confidence all
information concerning the other party furnished by that party. Any release to
the public of information with respect to the matters contemplated by the Asset
Purchase Agreement shall be made only in the form and manner approved by IMC and
CitiFinancial.
Conditions to the Transaction
Conditions to Obligation of Each Party. Each of the obligations of IMC and
CitiFinancial to complete the proposed transaction are subject to the
satisfaction or waiver at or prior to consummation of the proposed transaction
of the following conditions:
(i) the Asset Purchase Agreement and the transactions contemplated by that
agreement shall have been approved by (a) a majority of the votes entitled to be
cast by the holders of common stock and by the holders of the outstanding IMC
Class A preferred stock and the outstanding IMC Class C exchangeable preferred
stock, (b) the affirmative vote of a majority of the outstanding common stock of
IMC other than shares held by the management of IMC or the Greenwich Funds,
their affiliates and associates; and (c) the affirmative vote of more than 66
2/3% of the outstanding IMC Class A preferred stock and the outstanding IMC
Class C exchangeable preferred stock, voting separately; and
(ii) IMC and CitiFinancial have entered into a transition services
agreement.
Additional Conditions to Obligations of CitiFinancial. The obligations of
CitiFinancial to complete the proposed transaction are also subject to the
following conditions:
(i) the representations and warranties of IMC in the Asset Purchase
Agreement which are qualified with respect to materiality shall be true and
correct in all respects and the representations and warranties of IMC in the
Asset Purchase Agreement that are not so qualified shall be true and correct in
all material respects on and as of the date of consummation of the proposed
transaction, with the same force and effect as if made on and as of the date of
the consummation of the proposed transaction, and IMC has performed in all
material respects its covenants under the Asset Purchase Agreement on or prior
to consummation of the proposed transaction, and CitiFinancial shall have
received a certificate signed by the President of IMC to such effects and that
IMC believes that after consummation of the proposed transaction it will not
have unreasonably small capital for the limited business in which IMC reasonably
expects to be engaged, and CitiFinancial shall have received a certificate
signed by the Chief Financial Officer of IMC that immediately before and after
consummation of the proposed transaction the book value of IMC's assets will
exceed its liabilities (after estimating the value of the cash flows on interest
only and residual certificates on an undiscounted cash flow basis) and IMC will
be able to pay its debts and other liabilities (including, but not limited to,
the reasonably anticipated amount of subordinated, unmatured, unliquidated and
contingent liabilities) as they mature, subject to certain exceptions;
(ii) no proceedings have been instituted before a court of competent
jurisdiction in the United States or any other governmental agency, which has
had the effect or which could reasonably be expect to lead to a judgment, which
has the effect or shall have the effect of enjoining the consummation of the
proposed transaction;
(iii) all approvals (other than mortgage lending approvals) required from
any governmental agency in order to consummate the proposed transaction and to
conduct the mortgage loan origination and servicing business after the closing
shall have been obtained and all applicable waiting periods under any applicable
laws shall have expired or been terminated;
(iv) each of the approvals necessary from any person not a governmental
agency for the transfer of assets to or assumption of liabilities by
CitiFinancial shall have been obtained, and the Asset Purchase Agreement shall
have been approved and the transactions contemplated by the Asset Purchase shall
have been consented to by more than 90% of IMC's creditors, based on the amount
due, as of the closing;
(v) IMC shall have authorized, executed and delivered to CitiFinancial a
bill of sale and any deeds and other instruments of conveyance required;
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(vi) CitiFinancial shall have received title surveys and title insurance
commitments for the real property owned by IMC that is being sold to
CitiFinancial;
(vii) certain employees and officers shall have accepted employment with
CitiFinancial on terms and conditions reasonably satisfactory to CitiFinancial;
(viii) transfer instructions for the transfer to CitiFinancial of IMC's
rights to the servicing of residential mortgage loans and the related mortgage
loans shall have been completed in all material respects;
(ix) CitiFinancial shall have received the opinion of a business valuation
expert to the effect that IMC has received reasonably equivalent value in
exchange for the transfer of assets;
(x) there shall have been no material adverse change in IMC's mortgage
loan origination and servicing business or the assets to be purchased;
(xi) IMC shall have obtained or filed all documents or instruments, or
taken all actions, necessary to release any material liens on the assets to be
purchased; and
(xii) IMC shall have taken the actions necessary so that the provisions of
Section 607.0901 (control-share statute) and 607.0902 (affiliated transactions)
of the Florida Business Corporation Act do not apply to the transactions
contemplated by the Asset Purchase Agreement.
Additional Conditions to Obligation of IMC. The obligation of IMC to
complete the proposed transaction is also subject to the following conditions:
(i) the representations and warranties of CitiFinancial in the Asset
Purchase Agreement shall be true and correct in all material respects on and as
of consummation of the proposed transaction, with the same force and effect as
if made on and as of the date of the consummation of the proposed transaction,
CitiFinancial has performed in all material respects its obligations under the
Asset Purchase Agreement on or prior to consummation of the proposed
transaction, and IMC shall have received a certificate to such effects signed by
the President or a Vice President of CitiFinancial;
(ii) no judgment shall have been rendered in any litigation which has the
effect of enjoining the consummation of the transactions contemplated by the
Asset Purchase Agreement;
(iii) all approvals required from any governmental agency in order to
consummate the transactions contemplated by the Asset Purchase Agreement shall
have been obtained and all applicable waiting periods under any applicable laws
shall have expired or been terminated without the imposition of materially
burdensome restrictions or conditions of IMC;
(iv) CitiFinancial shall have authorized, executed and delivered an
assumption agreement dated as of the closing date and shall have acknowledged
the bill of sale; and
(v) CitiFinancial shall have paid the portion of the purchase price due at
closing.
Indemnification
The representations and warranties of each party shall survive until the
anniversary of the closing date that falls in the thirtieth (30th) month after
closing. IMC will indemnify CitiFinancial, its affiliates and its directors,
officers, agents and representatives for any losses arising out of any (i)
breach of IMC's representations and warranties, covenants or undertakings; (ii)
liabilities or assets retained by IMC; (iii) claim by any employee arising out
of matters that occurred prior to the closing date or any claim by an employee
under IMC's employee benefits plans; (iv) obligations relating to servicing
rights retained by IMC in mortgage loans sold prior to closing or performance by
IMC of duties in connection with those servicing rights; and (v) claim of any
person relating to IMC's failure to comply with "bulk sales" laws in any state.
CitiFinancial will indemnify IMC, its affiliates and its directors, officers,
agents and representatives for any losses arising out of any (i) breach of
CitiFinancial's representations and warranties, covenants or undertakings; (ii)
liabilities assumed by
- 40 -
<PAGE>
CitiFinancial; (iii) matters relating to the assets purchased by CitiFinancial
that occur after the closing date; and (iv) claim by any employee arising out of
matters that occurred after the closing date and relate to CitiFinancial's
employee benefits plans.
Termination
Conditions to Termination. The Asset Purchase Agreement may be terminated
at any time prior to the consummation of the proposed transaction,
notwithstanding the approval of the IMC shareholders:
(i) by mutual written consent of IMC and CitiFinancial; or
(ii) by either IMC or CitiFinancial, if a court or governmental agency
shall have issued a judgment or taken any other action restraining, enjoining or
otherwise prohibiting the transactions contemplated by the Asset Purchase
Agreement and such judgment or other action shall have become final and
nonappealable;
(iii) by either IMC or CitiFinancial, if the proposed transaction has not
been consummated by October 15, 1999; provided that the failure to consummate
the transaction is not the result of a material breach of the Asset Purchase
Agreement by the terminating party; or
(iv) by either IMC or CitiFinancial, if the approval of the IMC
shareholders as required by the Asset Purchase Agreement shall not have been
obtained; or
(v) by CitiFinancial, if there is any material adverse change in IMC's
mortgage loan origination and servicing business or in the assets to be
purchased by CitiFinancial related to that business or in the condition,
financial or otherwise, of IMC; or
(vi) by CitiFinancial, if IMC advises it that IMC has become aware of
events or issues that would lead to the reasonable belief that the valuation
opinion to be delivered to CitiFinancial may not be obtained; or
(vii) by either IMC or CitiFinancial, if either before or after the IMC
special meeting the IMC Board of Directors withdraws, modifies or changes its
approval or recommendation of the Asset Purchase Agreement in a manner adverse
to CitiFinancial in order to approve and permit IMC to execute an agreement
relating to a Superior Proposal; provided that prior to such withdrawal,
modification, change or termination, IMC shall and shall cause its legal and
financial advisors to, negotiate in good faith with CitiFinancial to adjust the
terms and conditions of the Asset Purchase agreement in order to proceed with
the proposed transaction with CitiFinancial as adjusted. If IMC terminates the
Asset Purchase Agreement for this reason, IMC shall immediately pay
CitiFinancial $10 million.
Effect of Termination. If the Asset Purchase Agreement is terminated in
accordance with its terms: all obligations of the parties thereunder shall
terminate and there shall be no liability on the part of any party thereto,
except with respect to confidentiality, publicity, fees and expenses and the
payment of $10 million as described in the previous paragraph; however
termination will not relieve the liability of any party for its action in bad
faith or willful violation of the Asset Purchase Agreement.
Fees and Expenses. Each party will pay all of the fees and expenses
incurred by it in connection with the Asset Purchase Agreement.
Amendment; Parties in Interest
IMC and CitiFinancial may amend the Asset Purchase Agreement by a written
instrument signed on behalf of IMC and CitiFinancial by their authorized
representatives.
The Asset Purchase Agreement is binding upon and inures solely to the
benefit of the parties thereto and their respective successors and permitted
assigns. Neither the Asset Purchase Agreement nor any of the rights, interests
or obligations thereunder may be assigned by any of the parties thereto except
with the prior written consent of the other party or by operation of law;
provided that CitiFinancial may assign its rights and obligations to Citigroup
or any of Citigroup's subsidiaries. Nothing in the Asset Purchase Agreement
confers
- 41 -
<PAGE>
upon any other person any right, benefit or remedy, other than the parties
thereto and their successors and permitted assigns.
- 42 -
<PAGE>
MARKET PRICES AND DIVIDENDS
Until April 14, 1999, IMC common stock was listed and traded on the
Nasdaq National Market under the symbol "IMCC." Since April 14, 1999, IMC common
stock has been quoted and traded on the OTC Electronic Bulletin Board under the
symbol "IMCC." The following table sets forth the high and low sales prices per
share of IMC common stock as reported on the Nasdaq National Market and the OTC
Electronic Bulletin Board, for the quarterly periods presented below.
High Low
---- ---
1996:
Second quarter (from June 25, 1996)(1) $ 11.50 $ 9.38
Third quarter 17.44 10.75
Fourth quarter 20.50 13.63
1997:
First quarter $ 25.00 $14.38
Second quarter 18.00 11.13
Third quarter 18.44 15.38
Fourth quarter 19.30 11.50
1998:
First quarter $ 13.88 $ 7.48
Second quarter 18.25 9.75
Third quarter 14.56 1.63
Fourth quarter 3.00 0.19
1999:
First quarter $ 0.56 $ 0.16
Second quarter $0.50 $0.06
Third quarter (through August 31) $0.13 $0.05
- ------------
(1) IMC common stock commenced trading on the Nasdaq National Market on June 25,
1996.
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 did not trade above $1.00 per
share for a period of at least 10 consecutive trading days before April 13,
1999. Since IMC's common stock did not trade above $1.00 for the requisite
period, and IMC was also unable to satisfy the continued listing requirements of
the Nasdaq SmallCap Market, IMC's common stock was delisted from the Nasdaq
Stock Market. Trading in IMC's common stock is now conducted in the
over-the-counter market on the NASD's "OTC Electronic Bulletin Board."
On July 13, 1999, the last trading day prior to announcement of the
proposed sale of assets to CitiFinancial, the closing price per share of IMC
common stock as reported on the OTC Electronic Bulletin Board was $0.13. On
September __, 1999, the most recent date for which prices were available prior
to printing this Proxy Statement, the closing price per share of IMC common
stock as reported on the OTC Electronic Bulletin Board was $_________.
Shareholders are urged to obtain current market quotations.
IMC has never paid any dividends on its common stock. It is not
expected that dividends will be paid after the consummation of the proposed sale
of assets for the reasonably foreseeable future.
- 43 -
<PAGE>
BUSINESS OF IMC
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 June 30, 1999, IMC had
in excess of 400 approved correspondents, 1,400 approved mortgage loan brokers
and 70 Company-owned retail branches. IMC has experienced growth in loan
production from total purchases and originations of approximately $5.9 billion,
$6.2 billion, $3.6 billion and $694 million for the years ended December 31,
1997 and 1998 and the six months ended June 30, 1998 and 1999, respectively. 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 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 six months ended June 30,
1999 decreased by $2.9 billion as compared to the six months ended June 30,
1998, also due to the volatility in the equity, debt and asset-backed capital
markets that has materially and adversely affected the business of the Company.
See "Loan Purchases and Originations". IMC's network of correspondents accounted
for approximately 73.7%, 62.1%, 68.0% and 7.0% of loan production in 1997, 1998
and the first six months of 1998 and 1999, respectively. Through its network of
mortgage brokers, IMC generated approximately 13.3%, 22.6%, 19.0% and 59.1% of
its loan production in 1997, 1998 and the first six months of 1998 and 1999,
respectively. IMC's direct consumer lending effort contributed approximately
13.0%, 15.3%, 13.0% and 33.9% of loan production in 1997, 1998 and the first six
months of 1998 and 1999, respectively.
The Company's total revenues decreased from $181.2 million for the six
months ended June 30, 1998 to $83.5 million for the six months ended June 30,
1999, while net income decreased from $31.4 million for the six months ended
June 30, 1998 to a net loss of $200.3 million for the six months ended June 30,
1999. Gain on sale of loans, net, represented $131.1 million, or 72.4% of total
revenues, for the six months ended June 30, 1998 and $31.6 million, or 37.9% of
total revenues, for the six months ended June 30, 1999. Servicing income, net
warehouse interest income and other revenues in the aggregate increased from
$50.0 million, or 27.6% of total revenues, for the six months ended June 30,
1998 to $51.9 million, or 62.1% of total revenues, for the six months ended June
30, 1999.
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 December 31,
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 December 31, 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 December 31, 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
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<PAGE>
which IMC sells the right to service the loan with the loan sold). Through June
30, 1999, 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 and
June 30, 1998 and 1999, IMC had a servicing portfolio, including mortgage loans
held for sale, of $7.0 billion, $8.9 billion, $9.4 billion and $7.3 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.
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.
- 45 -
<PAGE>
Loan Purchases and Originations
As of June 30, 1999, IMC purchased and originated loans through in
excess of 400 approved correspondents, 1,400 approved brokers and 70 retail
branch offices.
The following table shows channels of loan purchases and originations
for the periods shown:
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, Ended June 30,
------------------------------------------------ ------------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Correspondent:
Principal balance (in millions) ................. $233 $544 $1,582 $4,342 $3,839 $2,470 $48
Average principal balance per loan (in thousands) 66 62 66 73 67 68 55
Weighted average loan-to-value ratio (1)(2) ..... 69.2% 70.6% 72.8% 75.6% 76.9% 76.8% 75.3%
Weighted average interest rate .................. 11.2% 12.1% 11.5% 11.0% 10.7% 10.8% 10.3%
Broker:
Principal balance (in millions) ................. $49 $67 $121 $782 $1,393 $691 $411
Average principal balance per loan (in thousands) 56 47 54 71 72 75 86
Weighted average loan-to-value ratio (1)(2) ..... 71.8% 72.6% 73.4% 76.9% 78.9% 77.6% 79.7%
Weighted average interest rate .................. 12.0% 12.0% 11.5% 10.7% 10.3% 10.3% 9.4%
Direct consumer loan originations:
Principal balance (in millions) ................. $1 $11 $67 $769 $945 $472 $235
Average principal balance per loan (in thousands) 88 49 58 68 71 81 85
Weighted average loan-to-value ratio (1)(2) ..... 80.0% 72.6% 72.5% 71.9% 74.5% 72.6% 77.0%
Weighted average interest rate .................. 11.3% 11.7% 10.7% 10.7% 9.6% 9.8% 8.8%
Total loan purchases and originations:
Principal balance (in millions) ................. $283 $622 $1,770 $5,893 $6,177 $3,633 $694
Average principal balance per loan (in thousands) 64 60 65 71 69 71 80
Weighted average loan-to-value ratio (1)(2)(3) .. 69.7% 70.9% 72.9% 75.3% 77.0% 76.4% 78.5%
Weighted average interest rate .................. 11.4% 12.1% 11.5% 10.9% 10.4% 10.6% 9.3%
</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%, $3.4 billion, or 55%, $2.0 billion, or 55.2%, and $409.5
million, or 59.0%, of total purchases and originations, for the years
ended December 31, 1995, 1996, 1997 and 1998 and the six months ended June
30, 1998 and 1999, 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.
- 46 -
<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, March 31,
1997 1997 1997 1997 1998
<S> <C> <C> <C> <C> <C>
Correspondent:
Principal balance (in millions) .... $631 $1,096 $1,440 $1,175 $1,161
Average principal balance
per loan (in thousands) ......... 69 73 77 70 67
Weighted average loan-to-
value ratio(1)(2) ............... 74.2% 74.9% 72.3% 76.1% 76.6%
Weighted average interest rate ..... 11.3% 11.0% 10.8% 11.0% 10.9%
Broker:
Principal balance (in millions) .... $53 $105 $270 $354 $315
Average principal balance
per loan (in thousands) ......... 69 72 67 74 75
Weighted average loan-to-
value(1)(2) ..................... 73.9% 75.0% 77.4% 77.5% 77.2%
Weighted average interest rate ..... 10.6% 10.6% 11.0% 10.6% 10.3%
Direct consumer loan originations:
Principal balance (in millions) .... $135 $191 $198 $245 $221
Average principal balance per
loan (in thousands) ............. 66 67 64 73 81
Weighted average loan-to-value
ratio(1)(2) ..................... 69.8% 71.0% 72.3% 73.5% 72.7%
Weighted average interest rate ..... 10.8% 10.9% 10.8% 10.3% 9.8%
Total loan purchases and originations:
Principal balance (in millions) .... $819 $1,392 $1,908 $1,774 $1,697
Average principal balance
per loan (in thousands) ......... 69 72 74 71 69
Weighted average loan-to-
value ratio(1)(2)(3) ............ 73.5% 74.4% 76.0% 76.0% 76.2%
Weighted average interest
rate ............................ 11.2% 10.9% 10.8% 10.8% 10.6%
<CAPTION>
Three Months Ended
=========================================================
June 30, September 30 December 31, March 31, June 30,
1998 1998 1998 1999 1999
<S> <C> <C> <C> <C> <C>
Correspondent:
Principal balance (in millions) .... $1,309 $1,248 $121 $9 $39
Average principal balance
per loan (in thousands) ......... 68 67 65 35 60
Weighted average loan-to-
value ratio(1)(2) ............... 76.9% 77.0% 76.7% 74.8% 75.4%
Weighted average interest rate ..... 10.7% 10.6% 10.5% 10.6% 10.3%
Broker:
Principal balance (in millions) .... $376 $403 $299 $202 $209
Average principal balance
per loan (in thousands) ......... 78 72 75 85 87
Weighted average loan-to-
value(1)(2) ..................... 78.0% 80.0% 79.6% 79.0% 80.3%
Weighted average interest rate ..... 10.3% 10.4% 10.2% 9.4% 9.4%
Direct consumer loan originations:
Principal balance (in millions) .... $251 $262 $211 $141 $94
Average principal balance per
loan (in thousands) ............. 77 72 75 86 83
Weighted average loan-to-value
ratio(1)(2) ..................... 72.6% 76.7% 76.8% 76.8% 77.4%
Weighted average interest rate ..... 9.8% 9.6% 9.2% 8.9% 8.6%
Total loan purchases and originations:
Principal balance (in millions) .... $1,936 $1,913 $631 $352 $342
Average principal balance
per loan (in thousands) ......... 71 69 72 82 77
Weighted average loan-to-
value ratio(1)(2)(3) ............ 76.6% 77.6% 78.1% 78.0% 79.0%
Weighted average interest
rate ............................ 10.5% 10.5% 9.9% 9.3% 9.3%
</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%, $3.4 billion, or 55%, $2.0 billion, or 55.2%, and
$409.5 million, or 59.0%, of total purchases and originations for the
years ended December 31,1995, 1996, 1997 and 1998 and the six months
ended June 30, 1998 and 1999, 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.
The following table shows lien position, weighted average interest
rates and loan-to-value ratios for the periods shown.
- 47 -
<PAGE>
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, Ended June 30,
--------------------------------------------------- -----------------------
1994 1995 1996 1997 1998 1998 1999
------ ------ ------ ------ ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
First mortgages:
Percentage of total purchases and
originations.............................. 82.4% 77.0% 90.3% 92.1% 92.8% 92.3% 95.0%
Weighted average interest rate............. 11.3 12.1 11.4 10.8 10.3 10.4 9.2
Weighted average loan-to-value ratio(1).... 69.8 70.7 72.6 75.2 76.7 76.2 77.7
Second mortgages:
Percentage of total purchases and
originations.............................. 17.6% 23.0% 9.7% 7.9% 7.2% 7.7% 5.0%
Weighted average interest rate............. 11.7 12.4 12.2 12.4 11.9 10.0 11.7
Weighted average loan-to-value ratio(1).... 68.8 71.7 75.6 78.5 81.6 80.7 83.7
</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 nine-month
period ended June 30, 1999 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 and the six months ended June 30, 1998 and 1999, IMC
purchased loans through its mortgage correspondent network totaling
approximately $233 million, $544 million, $1.6 billion, $4.3 billion, $3.8
billion, $2.5 billion and $48 million, respectively. Total loans originated
through correspondents represented 82.5%, 87.5%, 89.4%, 73.7%, 62.1%, 68.0% and
7.0% of IMC's total purchases and originations for the years ended December 31,
1994, 1995, 1996, 1997 and 1998 and the six months ended June 30, 1998 and 1999,
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%,
$252 million, or 4.1%, $206 million, or 5.7%, and $0 million, or 0%, of IMC's
total loan purchases and originations for the years ended December 31, 1994,
1995, 1996, 1997 and 1998 and the six months ended June 30, 1998 and 1999,
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 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
- 48 -
<PAGE>
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 and as of June
30, 1998 and 1999, premium rebates due to IMC were $4.1 million, $8.2 million,
$7.5 million and $7.8 million, respectively.
Brokers. For the years ended December 31, 1994, 1995, 1996, 1997 and 1998
and the six months ended June 30, 1998 and 1999, IMC originated approximately
$49 million, $67 million, $121 million, $782 million, $1.4 billion, $691 million
and $411 million, respectively, of loans through broker transactions. Total
loans purchased and originated through broker transactions represented 17.3%,
10.7%, 6.8%, 13.3%, 22.6%, 19.0% and 59.2% of the total loans IMC purchased and
originated for the years ended December 31, 1994, 1995, 1996, 1997 and 1998 and
the six months ended June 30, 1998 and 1999, 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 and the six months ended June 30, 1998 and 1999, IMC originated
approximately $1 million, $11 million, $67 million, $769 million, $945 million,
$472 million and $235 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%, 15.3%, 13.0% and 33.9% of the total loans purchased or
originated for the years ended December 31, 1994, 1995, 1996, 1997 and 1998 and
the six months ended June 30, 1998 and 1999, respectively. As of June 30, 1999,
IMC had in excess of 70 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%, 8.8%, 9.8% and
2.4% of IMC's total loan purchase and origination volume for the years ended
December 31, 1994, 1995, 1996, 1997 and 1998 and the six months ended June, 1998
and 1999, respectively.
- 49 -
<PAGE>
The following table shows geographic distribution of loan purchases and
originations for the periods shown.
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, Ended June 30,
----------------------------------------------------------------------- ----------------------- -
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
States:
New York.......... 11.7% 12.4% 14.0% 12.6% 8.8% 9.8% 2.4%
Michigan.......... 7.3 8.8 7.8 7.1 8.2 8.3 6.9
Florida........... 4.2 6.2 6.7 7.3 7.6 7.0 10.6
California........ 0.0 0.3 3.0 7.4 6.3 5.3 8.7
Illinois.......... 2.0 3.0 4.3 5.9 6.0 5.1 13.0
Ohio.............. 4.9 4.7 4.3 4.9 6.0 5.9 3.6
Pennsylvania...... 5.3 4.3 3.8 5.1 5.3 5.4 4.5
New Jersey........ 6.6 9.9 7.6 4.5 3.9 4.2 1.1
Maryland.......... 18.6 12.8 7.3 5.2 3.1 3.2 2.1
All other states.. 39.4 37.6 41.2 40.0 44.8 45.8 47.1
</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 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
- 50 -
<PAGE>
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:
- 51 -
<PAGE>
<TABLE>
<CAPTION>
Loan Classification Criteria
----------------------------
"A" Risk "B" Risk "C" Risk "D" Risk
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
General repayment.......... Has repaid installment Has generally repaid May have experienced May have experienced
or revolving debt installment or significant past credit significant past credit
revolving credit problems problems
Existing mortgage
loans...................... Current at application Current at application May not be current at Must be paid full from
time and a maximum time and a maximum application time and a loan proceeds and no
of two-30-day late of three 30-day late maximum of one 60- more than 149 days
payments in the last 12 payments in the last day late payment in the delinquent at closing
months 12 months last 12 months and an explanation is
required
Non-mortgage credit........ Minor derogatory Some prior defaults Significant prior Significant prior defaults
items allowed with a allowed but major delinquencies may have may have occurred, but
letter of explanation; credit or installment occurred, but if major most demonstrate an
no open collection debt paid as agreed credit or installment debt ability to maintain
accounts or charge- may offset some in recent periods have regularity in payment of
offs, judgments or delinquency; open been paid as agreed, may credit
liens charge-offs, judgements offset some significant
or liens are permitted prior delinquency
on a case-by-case basis obligations in the past
Bankruptcy filings......... Discharged more than Discharged more than Discharged more than Discharged prior to
two years prior to two years prior to one year prior to closing
closing and credit closing and credit closing and credit
reestablished reestablished reestablished
Debt service-to-income
ratio...................... Generally 50% or less Generally 50% or less Generally 50% or less Generally 50% or less
Maximum loan-to-value ratio:
Owner-occupied............. Up to 100% for a one- Generally 80% (or Generally 75% (or 80% for Generally 65% (or 70% for
to two-family 85%*) for a one- to first liens*) for a one- first liens*) for a one-
residence; 75% for a two-family residence; to two-family residence; to two-family residence;
condominium and for a 70% for condominium 60% for a three- to 60% for a three- to
three-to four-family and for a three- to four-family residence or four-family residence or
residence four-family residence condominium 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
* On an exception basis.
</TABLE>
-------------------------------
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 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.
- 52 -
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted Weighted
Borrower % of Average % of Average % of Average % of Average % of Average
Classification Total Total Coupon Total Total Coupon Total Total Coupon Total Total Coupon Total Total Coupon
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <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% $3,156 53.6% 10.4% $3,405 55.1% 9.9%
B Risk ....... 74 26.3 11.6 177 28.5 12.0 443 25.0 11.5 1,377 23.4 10.9 1,487 24.1% 10.6%
C Risk ....... 38 13.5 13.0 126 20.2 13.0 338 19.1 12.3 1,092 18.5 11.7 1,079 17.5% 11.3%
D Risk ....... 15 5.2 14.4 43 6.9 14.4 106 6.0 13.6 268 4.5 13.1 206 3.3% 12.6%
----- ----- ----- ------ ------ ------ ----- ----- ----- -----
Total $283 100.0% 11.4% $622 100.0% 12.1% $1,770 100.0% 11.5% $5,893 100.0% 10.9% $6,177 100.0% 10.4%
===== ===== ===== ====== ====== ====== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------------------------------------------------------
1998 1999
------------------------------------- ----------------------------------------
Weighted Weighted
Borrower % of Average % of Average
Classification Total Total Coupon Total Total Coupon
- -------------- ----- ----- ------ ----- ----- ------
<S> <C> <C> <C> <C> <C> <C>
A Risk............ $1,963 54.0% 10.1% $501 72.2% 8.8%
B Risk............ 879 24.2 10.7 121 17.4 10.1
C Risk............ 660 18.2 11.4 61 8.8 11.0
D Risk............ 131 3.6 12.8 11 1.6 12.1
-------- ------ ------ --------
Total............. $3,633 100.0% 11.2% $694 100.0% 9.3%
====== ===== === =====
</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%, $3.4 billion, or 55%, $2.0 billion, or 55.2%, and $409.5 million, or 59.0%,
of total purchases and originations for the years ended December 31, 1995, 1996,
1997 and 1998 and the six months ended June 30, 1998 and 1999, 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 and the six months ended June 30, 1998 and 1999, IMC sold
approximately $262 million, $459 million, $1.1 billion, $5.0 billion, $6.7
billion, $3.4 billion and $950 million of loan production, respectively.
- 53 -
<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>
Six Months Ended June 30,
--------------------------------
1998 1999
---- ----
% of % of
Total Total Total Total
----- ----- ----- -----
Securitizations......................... $3,059 89.1% $ - - %
Whole loan sales........................ 375 10.9% 950 100.0
-------- -------- -------- --------
Total loan sales...................... $3,434 100.0% $950 100.0%
======== ======== ======== ========
Securitizations. Through June 30, 1999, 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.
- 54 -
<PAGE>
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. Whole loan
sales as a percent of total sales increased from 10.9% for the six months ended
June 30, 1998 to 100% of total sales for the six months ended June 30, 1999.
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
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, $4.5 billion, $3.1 billion and $0, or 87.3%, 90.5%, 97.1%, 68.0%, 89.1%
and 0% of the loans it sold in 1995, 1996, 1997 and 1998 and the first six
months of 1998 and 1999, respectively.
As of June 30, 1999, IMC was servicing loans representing an aggregate of
approximately $7.3 billion. Revenues generated from loan servicing amounted to
7.8%, 8.5%, 7.2%, 14.1%, 10.9% and 30.1% of IMC's total revenues for the years
ended December 31, 1995, 1996, 1997 and 1998 and the six months ended June 30,
1998 and 1999, 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.
- 55 -
<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.
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, At June 30,
----------------------------------------------------------- -------------------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Servicing portfolio (in thousands) $92,003 $535,798 $2,148,068 $6,956,905 $8,887,163 $9,398,704 $7,274,226
Delinquency percentages(1):
30-59 days ............... 0.72% 2.54% 3.01% 2.35% 4.15% 1.91% 3.68%
60-89 days ............... 0.15 0.59 1.01 1.21 1.25 0.85 0.93
90+ days ................. 0.00 0.30 1.28 1.84 1.15 1.57 1.40
---- ---- ---- ---- ---- ---- ----
Total delinquency 0.87% 3.43% 5.30% 5.40% 6.55% 4.33% 6.01%
---- ---- ---- ---- ---- ---- ----
Default percentages(2):
Foreclosure .............. 0.00% 0.75% 0.94% 1.42% 4.84% 2.21% 5.58%
Bankruptcy ............... 0.12 0.25 0.53 0.73 2.30 0.89 1.68
---- ---- ---- ---- ---- ---- ----
Total default ... 0.12% 1.00% 1.47% 2.15% 7.14% 3.10% 7.26%
---- ---- ---- ---- ---- ---- ----
Total delinquency and default ..... 0.99% 4.43% 6.77% 7.55% 13.69% 7.43% 13.27%
==== ==== ==== ==== ===== ==== =====
</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.
- 56 -
<PAGE>
The following table provides certain delinquency and default experience
as a percentage of outstanding principal balance for the ten quarters ended June
30, 1999, if applicable, for each of the Company's securitization trusts
completed through June 30, 1999, 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 and over............................. 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>
- 57 -
<PAGE>
<TABLE>
<CAPTION>
1994-1 1995-1 1995-2 1995-3
As of June 30, 1998: --------------- --------------- --------------- ---------------
Delinquency:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 and over............................. 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 and over............................. 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%
====== ==== ====== ==== ====== ===== ====== ====
<CAPTION>
As of December 31, 1998:
Delinquency:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 and over............................. 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%
====== ==== ====== ===== ====== ===== ====== ====
As of March 31, 1999:
Delinquency:
30-59 days................................... $639 2.86% $716 2.61% $759 2.35% $2,061 4.29%
60-89 days................................... 82 0.37 204 0.74 457 1.41 391 0.81
90 days and over............................. 569 2.54 701 2.55 438 1.35 678 1.41
------ ---- ------ ---- ---- ---- ------ ----
Total....................................$1,290 5.77% $1,621 5.9% $1,654 5.11% $3,130 6.52%
====== ===== ====== ==== ====== ===== ====== =====
Total defaults...............................$2,227 9.96% $2,603 9.48% $4,643 14.36% $4,662 9.71%
====== ===== ====== ===== ====== ====== ====== =====
<CAPTION>
As of June 30, 1999:
Delinquency:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
30-59 days...................................$ 665 3.20% $878 3.52% $855 2.91% $2,193 5.05%
60-89 days................................... 82 0.39 179 0.72 180 0.61 429 0.99
90 days and over............................. 769 3.70 397 1.59 634 2.16 340 0.78
------- ---- ------- ---- -------- ---- ------- ----
Total....................................$1,516 7.29% $1,454 5.83% $1,669 5.68% $2,962 6.82%
====== ==== ====== ==== ====== ==== ====== ====
Total defaults...............................$2,010 9.67% $2,591 10.38% $3,959 13.48% $4,253 9.79%
====== ==== ====== ===== ====== ===== ====== ====
<CAPTION>
1996-1 1996-2 1996-3 1996-4
As of March 31, 1997: --------------- --------------- --------------- ---------------
Delinquency:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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%
====== ==== ======= ==== ======= ==== ====== ====
<CAPTION>
As of June 30, 1997:
Delinquency:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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% $ 9,7355.00% $12,714 4.94%
====== ==== ====== ==== =========== ======= ====
Total defaults...............................$6,549 5.72% $8,104 5.71% $10,997 5.65% $10,117 3.93%
====== ==== ====== ==== ======= ==== ======= ====
<CAPTION>
As of September 30, 1997:
Delinquency:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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%
====== ==== ====== ==== ======= ==== ======= ====
</TABLE>
- 58 -
<PAGE>
<TABLE>
<CAPTION>
1996-1 1996-2 1996-3 1996-4
As of December 31, 1997: --------------- --------------- --------------- ---------------
Delinquency:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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%
====== ==== ====== ==== ====== ==== ======= ====
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 and over............................. 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 and over............................. 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 and over............................. 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 and over............................. 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%
====== ===== ====== ===== ====== ==== ======= =====
As of March 31, 1999:
Delinquency:
30-59 days...................................$2,518 4.15% $3,135 4.14% $1,832 1.76% $7,283 5.44%
60-89 days................................... 619 1.02 854 1.13 690 0.66 2,207 1.65
90 days and over............................. 1,244 2.05 1,708 2.25 1,771 1.7 3,061 2.29
------- ---- ------- ---- ----- ------ ------- ----
Total....................................$4,381 7.21% $5,697 7.52% $4,2934.12.% $12,551 9.37%
====== ==== ====== ==== =========== ======= ====
Total defaults...............................$7,892 13.0% $8,994 11.87% $9,500 9.12% $14,881 11.11%
====== ==== ====== ===== ====== ==== ======= =====
As of June 30, 1999:
Delinquency:
30-59 days...................................$2,500 4.43% $2,987 4.35% $2,930 3.13% $6,028 4.95%
60-89 days................................... 514 0.91 389 0.57 526 0.56 1,908 1.57
90 days and over............................. 768 1.36 1,440 2.10 1,317 1.41 2,280 1.87
------- ---- ------ ---- ------ ---- -------- ----
Total....................................$3,782 6.70% $4,816 7.02% $4,773 5.10% $10,216 8.39%
====== ===== ====== ==== ====== ==== ======= ====
Total defaults...............................$6,760 11.99% $7,726 11.26% $8,733 9.32% $12,934 10.61%
====== ===== ====== ===== ====== ==== ======= =====
</TABLE>
- 59 -
<PAGE>
<TABLE>
<CAPTION>
1997-1 1997-2 1997-3 1997-4
As of March 31, 1997: --------------- --------------- --------------- ---------------
Delinquency:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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%
====== ==== ======= ==== ====== ==== ==== ====
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....................................$14,469 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%
======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
- 60 -
<PAGE>
<TABLE>
<CAPTION>
1997-1 1997-2 1997-3 1997-4
As of September 30, 1998: --------------- --------------- --------------- ---------------
Delinquency:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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%
======= ===== ======= ===== ======= ===== ======= ====
As of March 31, 1999:
Delinquency:
30-59 days...................................$5,102 3.61% $8,185 4.22% $17,814 3.85% $13,335 4.28%
60-89 days................................... 1,833 1.3 1,969 1.01 6,134 1.33 2,838 0.91
90 days and over............................. 2,598 1.84 3,354 1.73 11,965 2.59 2,372 0.76
------ ---- ----- ---- ------ ---- -------- ----
Total....................................$9,533 6.74% $13,508 6.96% $35,913 7.77% $18,545 5.96%
====== ==== ======= ==== ======= ==== ======= ====
Total defaults..............................$16,047 11.34% $23,046 11.88% $50,541 10.93% $27,023 8.68%
======= ===== ======= ===== ======= ===== ======= ====
As of June 30, 1999:
Delinquency:
30-59 days...................................$ 7,121 5.52% $7,113 4.08% $17,922 4.24% $11,713 4.58%
60-89 days................................... 1,131 0.88 1,475 0.85 4,945 1.17 2,313 0.91
90 days and over............................. 2,680 2.08 3,789 2.17 8,028 1.90 2,591 1.01
------- ---- ------- ---- ------- ---- ------- ----
Total....................................$10,932 8.48% $12,377 7.10% $30,895 7.31% $16,617 6.50%
======= ===== ======= ==== ======= ===== ======= ====
Total defaults...............................$14,761 11.43% $18,785 10.77% $50,695 12.00% $18,333 7.18%
======= ===== ======= ===== ======= ===== ======= ====
<CAPTION>
1997-5 1997-6 1997-7 1997-8
As of September 30, 1997: --------------- --------------- --------------- ---------------
Delinquency:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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%
======== ==== ======= ==== ======= = ======= =
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%
======= ==== ======= ==== ======= ==== ====== ====
</TABLE>
- 61 -
<PAGE>
<TABLE>
<CAPTION>
1997-5 1997-6 1997-7 1997-8
As of September 30, 1998: --------------- --------------- --------------- ---------------
Delinquency:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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%
======= ==== ======= ==== ======= ==== ======= ====
As of March 31, 1999:
Delinquency:
30-59 days...................................$23,592 3.72% $13,849 3.26% $14,654 2.68% $5,232 2.52%
60-89 days................................... 7,175 1.13 4,550 1.07 3,577 0.65 1,485 0.72%
90 days and over............................. 10,967 1.73 6,547 1.54 8,328 1.52 1,406 0.68
------ ---- ------- ---- -------- ---- ------- ----
Total....................................$41,734 6.58% $24,946 5.87% $26,559 4.85% $8,123 3.92%
======= ==== ======= ==== ======= ==== ====== ====
Total defaults...............................$56,378 8.88% $39,104 9.20% $39,711 7.26% $14,788 7.14%
======= ==== ======= ==== ======== ==== ======= ====
As of June 30, 1999:
Delinquency:
30-59 days...................................$25,195 4.32% $13,675 3.68% $17,764 3.55% $4,492 2.43%
60-89 days................................... 4,829 0.83 2,927 0.79 4,175 0.84 1,444 0.78
90 days and over............................. 11,811 2.03 4,086 1.10 6,784 1.36 1,248 0.67
------- ---- -------- ---- ------- ---- ------- ----
Total....................................$41,835 7.18% $20,688 5.57% $28,723 5.75% $ 7,184 3.88%
======= ==== ======= ==== ======= ==== ======= ====
Total defaults...............................$54,071 9.28% $35,790 9.64% $37,977 7.60% $11,904 6.43%
======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
<TABLE>
<CAPTION>
1998-1 1998-2 1998-3 1998-4
As of March 31, 1998: --------------- --------------- --------------- ---------------
Delinquency:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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% $24,866 4.97%
======= ==== ======= ====
Total defaults...............................$ 1 44 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%
======= ==== ======= ==== ======= ==== ======= ====
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%
======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
- 62 -
<PAGE>
<TABLE>
<CAPTION>
As of March 31, 1999: 1998-1 1998-2 1998-3 1998-4
Delinquency: --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
30-59 days...................................$24,005 3.11% $16,235 3.40% $25,929 3.07% $14,032 2.86%
60-89 days................................... 4,586 0.59 6,044 1.26 2,105 0.25 4,902 1
90 days and over............................. 8,215 1.06 5,026 1.05 8,391 0.99 4,853 0.99
-------- ---- ------- ---- -------- ---- ------- ----
Total....................................$36,806 4.76% $27,305 5.71% $36,425 4.31% $23,787 4.85%
======= ==== ======= ==== ======= ==== ======= ====
Total defaults...............................$38,527 4.98% $31,455 6.58% $31,260 3.70% $23,651 4.82%
======= ==== ======= ==== ======= ==== ======= ====
As of June 30, 1999:
Delinquency:
30-59 days...................................$22,609 3.20% $15,276 3.65% $30,090 3.92% $15,726 3.66%
60-89 days................................... 3,780 0.53 6,128 1.46 6,383 0.83 5,605 1.30
90 days and over............................. 8,624 1.22 5,780 1.38 7,729 1.01 3,809 0.89
-------- ---- ------- ---- -------- ---- ------- ----
Total....................................$35,013 4.95% $27,184 6.49% $44,202 5.76% $25,140 5.85%
======= ==== ======= ==== ======= ==== ======= ====
Total defaults...............................$40,875 5.78% $31,304 7.47% $33,871 4.41% $25,026 5.82%
======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
<TABLE>
<CAPTION>
1998-5 1998-6
As of September 30, 1998: -------------------------------------
Delinquency:
<S> <C> <C> <C> <C>
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% $35,741 5.32%
======= ==== ======= ====
Total defaults...............................$ 7,973 1.68% $11,637 1.73%
======= ==== ======= ====
As of March 31, 1999:
Delinquency:
30-59 days...................................$12,796 2.83% $18,530 2.87%
60-89 days................................... 3,634 0.81 4,649 0.72
90 days and over............................. 3,608 0.8 6,239 0.97
------- ------ ----- ----
Total....................................$20,038 4.44% $29,418 4.56%
======= ==== ======= ====
Total defaults...............................$11,178 2.48% $17,148 2.66%
======= ==== ======= ====
As of June 30, 1999:
Delinquency:
30-59 days...................................$14,387 3.50% $22,367 3.71%
60-89 days................................... 4,402 1.07 7,447 1.24
90 days and over............................. 2,645 0.64 5,626 0.93
------- ---- ------- ----
Total....................................$21,434 5.21% $35,470 5.88%
======= ==== ======= ====
Total defaults...............................$14,443 3.51% $22,389 3.72%
======= ==== ======= ====
</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
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<PAGE>
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 and the six months ended June 30, 1998 and 1999.
<TABLE>
<CAPTION>
Year Ended Six months ended
December 31, June 30,
------------------------------------------------------------- --------------------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Average amount outstanding (1)........ $52,709 $294,252 1,207,172 $4,315,238 $9,073,680 $8,340,205 $7,968,591
Losses (2) .................... -- 279 1,580 6,274 22,272 9,854 38,743
Annualized losses as a percentage of
average amount outstanding.......... 0.00% 0.09% 0.13% 0.15% 0.25% 0.24% 0.97%
</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.
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 June 30, 1999, IMC marketed its direct
consumer lending services through more than 70 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 underserved; (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
- 64 -
<PAGE>
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 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 initially 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 Asset Purchase Agreement entered into on July 13, 1999 did not include
the operations of those acquired businesses. Therefore, in July 1999, the IMC
Board of Directors approved a formal plan to dispose of them. The Company
currently is in the process of closing the operations of several of those
acquired businesses to reduce the use of working capital by those businesses. In
some cases, the Company is negotiating to sell those businesses back to their
former owners for a release of liabilities relating to the outstanding earnouts
and employment agreements and an assumption of certain other obligations of the
Company relating to the businesses.
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. In June 1999, IMC
sold its 45% interest in the joint venture to Foxgard for approximately $1.5
million.
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. In
August 1999, IMC sold its operation in Canada for $4.2 million. See
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<PAGE>
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations - 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 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 to 10.4%
for the year ended December 31, 1998 and to 9.3% for the six months ended June
30, 1999. 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 and to
78.5% for the six months ended June 30, 1999.
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.
- 66 -
<PAGE>
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.
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 June 30, 1999, IMC had a total
of 1,876 employees, 480 of whom were in its Tampa, Florida headquarters. The
reduction of employees from December 31, 1998 to June 30, 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.
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.
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, seven 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. In August 1999, five of the former
shareholders of CoreWest, representing approximately 80% of the interests of all
former shareholders, settled their employment agreement claims and agreed to
dismiss their claims under the lawsuit and sign mutual general and irrevocable
releases for $1.4 million. The case is in the early
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stages of pleading; however, based upon management's understanding of the
relevant facts and consultation with legal counsel, IMC's management believes
there is no merit in the plaintiffs' claims.
On June 17, 1999, the former shareholders of Central Money Mortgage, Inc.
sued IMC and its counsel, Mitchell Legler, in the United States District Court
of the State of Maryland claiming a failure to perform certain oral and written
representations made in connection with IMC's purchase of the assets of Central
Money Mortgage. The case is in the preliminary stages of discovery; however,
based upon management's understanding of the relevant facts and consultation
with legal counsel, IMC's management believes there is no merit in the
plaintiffs' claims.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with "Selected
Financial Data of IMC" and the historical financial statements and related notes
contained in the annual, quarterly and other reports filed by IMC with the
Securities and Exchange Commission. The following management's discussion and
analysis of IMC's financial condition and results of operations contains forward
looking statements which involve risks and uncertainties. IMC's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of, among other things, the factors described or referred
to under "Forward Looking Information" on page 10. In addition, it should be
noted that past financial and operational performance of IMC is not necessarily
indicative of future financial and operational performance.
General
IMC is a specialized consumer finance company engaged in purchasing,
originating, servicing and selling home equity loans secured primarily by first
liens on one- to four-family residential properties. IMC focuses on lending to
individuals whose borrowing needs are generally not being served by traditional
financial institutions due to such individuals' impaired credit profiles and
other factors. Loan proceeds typically are used by such individuals to
consolidate debt, to finance home improvements, to pay educational expenses and
for a variety of other uses. By focusing on individuals with impaired credit
profiles and providing prompt responses to their borrowing requests, IMC has
been able to charge higher interest rates for its loan products than typically
are charged by conventional mortgage lenders.
In 1996, IMC acquired Mortgage Central Corp., a non-conforming lender
which did business under the name "Equitystars". In 1997, IMC 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. These acquisitions were accounted for using the
purchase method of accounting and the results of operations have been included
with IMC's results of operations since the effective acquisition dates.
For important information concerning significant events during the year
ended December 31, 1998 and the six months ended June 30, 1999, see "Proposal 1:
The Proposed Sale of Assets -- Background of the Transaction."
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.
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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 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. At June 30, 1999, as a result of trends in the Company's serviced loan
portfolio and adverse market conditions, the Company revised the loss curve
assumption to increase from zero in the first six months of the loan to 275
basis points after 30 months, representing estimated aggregate losses over the
life of the pool (i.e., historical plus future losses) of 4.3% of original pool
balances. The revised loss curve assumption resulted in a decrease in the
estimated fair value of the Company's interest-only and residual certificates of
approximately $62.9 million, which was recorded as a market valuation adjustment
for the six months ended June 30, 1999.
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
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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 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 minimis amount (the "Conti Option"). Consequently,
subsequent to March 26, 1996, no liability has been
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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.
Results of Operations
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998.
Net loss for the six months ended June 30, 1999 was $200.3 million
representing a decrease of $231.8 million from net income of $31.4 million for
the six months ended June 30, 1998. The decrease in net income resulted
principally from a goodwill impairment charge of $77.4 million, which resulted
from the Company's evaluation of goodwill recoverability at June 30, 1999, and a
$62.9 million mark-to-market adjustment in the value of the Company's
interest-only and residual certificates, which resulted from an increase in loss
assumptions. The Company determined that the useful lives assigned to goodwill
associated with the Company's eight operating subsidiaries should be reduced
based on the decision of the IMC Board of Directors to dispose of eight
operating subsidiaries, and the resulting evaluation of goodwill resulted in an
impairment charge of $77.4 million. Additionally, the Company revised the loss
assumption used to approximate the timing of losses over the life of the
securitized loans as a result of trends in the Company's serviced loan portfolio
and adverse market conditions. Also contributing to the decrease in net income
were a decrease in gain on sale of loans of $99.5 million or 75.9% to $31.6
million for the six months ended June 30, 1999 from $131.1 million for the six
months ended June 30, 1998 and $15.4 million of interest expense, commitment
fees and other charges associated with credit facilities provided by the
Greenwich Funds. The decrease in net income was also attributable to a $1.8
million or 13.3% decrease in net warehouse interest income to $12.0 million for
the six months ended June 30, 1999 from $13.8 million for the six months ended
June 30, 1998 and other charges of $5.2 million during the six months ended June
30, 1999 related to losses from the disposal of investments in international
operations and closing the Rhode Island branch office location. The decrease in
net income was partially offset by a $5.5 million or 27.7% increase in servicing
fees to $25.1 million for the six months ended June 30, 1999 from $19.7 million
for the six months ended June 30, 1998.
The decrease in income was also partially offset by a $8.8 million or
14.2% decrease in compensation and benefits to $53.1 million for the six months
ended June 30, 1999 from $61.9 million for the six months ended June 30, 1998
and a $6.3 million or 11.3% decrease in selling, general and administrative
expenses to $49.5 million for the six months ended June 30, 1999 from $55.8
million for the six months ended June 30, 1998. The decrease in income was
partially attributable to a $5.6 million or 55.2% increase in other interest
expense to $15.8 million for the six months ended June 30, 1999 from $10.2
million for the six months ended June 30, 1998 and a $1.8 million or 10.6%
decrease in other revenues to $14.8 million for the six months ended June 30,
1999 from $16.6 million for the six months ended June 30, 1998.
Net loss before taxes was increased by a provision for income taxes of
$4.6 million for the six months ended June 30, 1999 compared to a provision for
income taxes of $21.9 million for the six months ended June 30, 1998. No income
tax benefit has been applied to the net loss for the six months ended June 30,
1999, as the Company determined it cannot be assured that the income tax benefit
could be realized in the future.
Revenues
The following table sets forth information regarding components of the
Company's revenues for the six months ended June 30, 1999 and 1998:
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For the Six Months
Ended June 30,
---------------
1999 1998
-------- ------
(in thousands)
Gain on sales of loans $ 31,639 $ 131,139
--------- ---------
Warehouse interest income 35,165 80,220
Warehouse interest expense (23,211) (66,438)
--------- ---------
Net warehouse interest income 11,954 13,782
--------- ---------
Servicing fees 25,130 19,677
Other 14,820 16,575
--------- ---------
Total revenues $ 83,543 $ 181,173
========= =========
Gain on sales of loans. For the six months ended June 30, 1999, gain on
sales of loans decreased to $31.6 million from $131.1 million for the six months
ended June 30, 1998, a decrease of 75.9%, due primarily to a decrease in loans
sold through securitizations. The total volume of loans produced decreased by
80.9% to approximately $695 million for the six months ended June 30, 1999 from
a total volume of approximately $3.6 billion for the six months ended June
30,1998. Originations by the Company's correspondent network decreased 98.1% to
approximately $50 million for the six months ended June 30, 1999 from
approximately $2.5 billion for the six months ended June 30, 1998, while
production from the Company's broker network and direct lending operations
decreased by 44.5% to approximately $645 million for the six months ended June
30, 1999 from approximately $1.2 billion for the six months ended June 30, 1998.
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, or (ii) whole loan sales,
which involve selling blocks of loans to single purchasers. During the six
months ended June 30, 1999, based on the Company's lack of liquidity and adverse
market conditions, the Company was unable to sell any loans through the
securitization market. Mortgage loans delivered to securitization trusts
decreased by $3.1 billion, a decrease of 100% to $0 for the six months ended
June 30, 1999 from $3.1 billion for the six months ended June 30, 1998. Mortgage
loans sold in the whole loan market increased by approximately $575 million, to
approximately $950 million for the six months ended June 30, 1999 from
approximately $375 million for the six months ended June 30, 1998.
Net Warehouse Interest Income. Net warehouse interest income decreased
to $12.0 million for the six months ended June 30, 1999 from $13.8 million for
the six months ended June 30, 1998, a decrease of 13.3%. The decrease in the
six-month period ended June 30, 1999 reflected decreased mortgage loan
production and mortgage loans held for sale and increased interest rates related
to the Company's warehouse finance facilities.
Servicing Fees. Servicing fees increased to $25.1 million for the six
months ended June 30, 1999 from $19.7 million for the six months ended June 30,
1998, an increase of 27.7%. Servicing fees for the six months ended June 30,
1999 were positively affected by an increase in mortgage loans serviced for
others over the prior period. The Company increased its average portfolio of
mortgage loans serviced for others by approximately $1.4 billion or 23.2% to
approximately $7.3 billion for the six months ended June 30, 1999 from
approximately $5.9 billion for the six months ended June 30, 1998.
Other. Other revenues, consisting principally of the recognition of the
increase or accretion of the discounted value of interest-only and residual
certificates over time and prepayment penalties from borrowers who prepay the
outstanding balance of their mortgage, decreased by 10.6% to $14.8 million for
the six months ended June 30, 1999 from $16.6 million in six months ended June
30, 1998.
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Expenses
The following table sets forth information regarding components of the
Company's expenses for the six months ended June 30, 1999 and 1998:
For the Six Months
Ended June 30,
------------------
1999 1998
---- ----
(in thousands)
Compensation and benefits $ 53,097 $ 61,859
Selling, general and administrative 49,477 55,809
Other interest expense 15,789 10,173
Interest expense - Greenwich Funds 15,379 --
Market valuation adjustment 62,876 --
Goodwill impairment charge 77,446 --
Other charges 5,179 --
-------- --------
Total expenses $279,243 $127,841
======== ========
Compensation and benefits decreased by $8.8 million or 14.2% to $53.1
million for the six months ended June 30, 1999 from $61.9 million for the six
months ended June 30, 1998, principally due to a reduction of personnel to
originate mortgage loans and a $3.2 million decrease in executive and management
incentive compensation to $0 for the six months ended June 30, 1999 from $3.2
million for the six months ended June 30, 1998. The amount of executive bonuses
is directly related to increases in the Company's earnings per share. Although
executive bonuses of $3.2 million were accrued in the six months ended June 30,
1998, no executive bonuses were actually paid during 1998 and none are
anticipated for 1999.
Selling, general and administrative expenses decreased by $6.3 million
or 11.3% to $49.5 million for the six months ended June 30, 1999 from $55.8
million for the six months ended June 30, 1998 principally due to a decrease in
underwriting and originating costs as a result of a decrease in the volume of
mortgage loan production.
Other interest expense increased by $5.6 million or 55.2% to $15.8
million for the six months ended June 30, 1999 from $10.2 million for the six
months ended June 30, 1998 principally as a result of increased interest expense
due to increased interest-only and residual borrowings.
Interest expense - Greenwich Funds includes costs associated with a $38
million standby revolving credit facility entered into by Greenwich Funds and
the Company on October 15, 1998. Interest expense - Greenwich Funds includes
interest charges as well as amortization of a $3.3 million commitment fee,
amortization of the value attributable to the Class C exchangeable preferred
stock issued, and amortization of 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. Interest expense -
Greenwich Funds also includes interest charges and commitment fees related to
Note Purchase and Amendment Agreements and on the $95.0 million credit
facilities the Greenwich Funds purchased from BankBoston on February 18, 1999.
See Note 3 of Notes to Consolidated Financial Statements.
Market valuation adjustment, which represents the realized loss on the
Company's interest-only and residual certificates for the six months ended June
30, 1999, increased to $62.9 million for the six months ended June 30, 1999 from
$0 for the six months ended June 30, 1998. During the second quarter of 1999, as
a result of trends in the Company's serviced loan portfolio and adverse market
conditions in the non-conforming mortgage industry, the Company revised the loss
assumption used to approximate the timing of losses over the life of the
securitized loans so that expected losses from defaults gradually increase from
zero in the first six months of the loan to 275 basis points after 30 months,
representing estimated aggregate losses over the life of the pool (i.e.,
historical plus future
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losses) of 4.3% of original pool balances. During the fourth quarter of 1998,
based on emerging trends in the Company's portfolio and adverse market
conditions, the Company revised its loss curve assumptions so that expected
losses from defaults gradually increased 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 mortgage loans
serviced by the Company with other non-conforming mortgage lenders that market
their products to borrowers that are less credit-worthy. As a result the
frequency of default may increase.
Goodwill impairment charge represents the write-down of goodwill
resulting from the Company's evaluation of the goodwill associated with the
Company's eight operating subsidiaries at June 30, 1999. The decision of the IMC
Board of Directors to dispose of eight operating subsidiaries led the Company to
determine that the useful lives assigned to goodwill should be reduced to less
than one year, and the resulting evaluation of the goodwill associated with the
eight operating subsidiaries resulted in a goodwill impairment charge of $77.4
million for the six months ended June 30, 1999.
Other charges represent the loss on disposal of investments in
international operations and closing the Rhode Island branch location. On June
30, 1999, the Company entered into an agreement to sell to one of its joint
venture partners its 45% interest in a joint venture (Preferred Mortgages
Limited) in the United Kingdom formed to originate and purchase mortgages made
to borrowers who may not otherwise qualify for conventional loans for the
purpose of securitization and sale. Under the terms of the sale agreement, the
Company received $1.5 million in exchange for its interest in the joint venture,
including all shares, notes receivable, advances and interest due from the joint
venture. The sale resulted in a loss of approximately $2.6 million, which is
included in other charges for the six months ended June 30, 1999.
On June 30, 1999, the Company terminated operations at its branch
office in Rhode Island, which consisted of the assets of Mortgage Central Corp.
("MCC"), a mortgage banking company acquired by the Company on January 1, 1996.
The carrying amount of the goodwill that arose from the acquisition of MCC was
eliminated and the assets to be disposed of were adjusted to their estimated
fair value at June 30, 1999. The resulting loss on disposal of the assets of MCC
of $2.6 million is included in other charges for the six months ended June 30,
1999.
Income Taxes. The provision for income taxes for the six months ended
June 30, 1999 was approximately $4.6 million which differed from the federal tax
rate of 35% primarily due to state income taxes, the non-deductibility for tax
purposes of a portion of interest expense - Greenwich Funds and the goodwill
impairment charge and a full valuation allowance established against the
deferred tax asset.
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 a $33 million standby
revolving credit facility with the Greenwich Funds and $22.4 million of losses
on short sales of United States Treasury securities. 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
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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.
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.
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<PAGE>
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
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
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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 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 loss on short sales
of United States Treasury securities. 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.
Expenses
The following table sets forth information regarding components of the
Company's expenses for the year ended December 31, 1997 and 1998:
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<PAGE>
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
Loss on short sales of United States Treasury securities -- 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.
Loss on short sales of United States Treasury securities 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 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 loss on short sales of United States Treasury securities. 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.
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<PAGE>
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).
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 $5.1 million for the year ended December
31, 1996.
The increase in income was partially offset by a $66.0 million or
412.6% increase in compensation and benefits to $82.1 million for the year ended
December 31, 1997 from $16.0 million for the year ended December 31, 1996, of
which $48.9 million consisted of compensation and benefits relating to the
acquisitions of Mortgage America, CoreWest, Equity Mortgage, American Reduction,
National Lending Center, Central Money Mortgage, Residential Mortgage
Corporation and Alternative Capital Group (collectively, the "Acquisitions") and
the remainder
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<PAGE>
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.
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
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<PAGE>
of its loan servicing capability; and (iv) the Acquisitions, which accounted for
approximately $1.2 billion in residential mortgage loans originated during the
year ended December 31, 1997.
The gain on sale as a percentage of loans sold and securitized
decreased to 3.7% for the year ended December 31, 1997 from 4.4% for the year
ended December 31, 1996. The decrease in the gain on sale percentage was
primarily due to the increase in securitization of adjustable rate mortgage
loans, higher premiums paid on loan production and higher prepayment speed
assumptions used to calculate the gain on sale of securitized loans. In 1996,
less than 2% of the $935 million mortgage loans securitized by the Company were
adjustable rate mortgages. In 1997, approximately $1.7 billion or 34% of the
$4.9 billion mortgage loans securitized by the Company were adjustable rate
mortgages. The prepayment curve utilized by the Company to recognize the gain on
sale of securitized fixed rate loans reaches a maximum CPR of 28% as compared to
the prepayment curve utilized to recognize the gain on sale of adjustable rate
loans, which reaches a maximum CPR of 35%. The higher prepayment assumption for
adjustable rate loans, which is based on historical adjustable rate loan
prepayment patterns, results in the recognition of a lower gain on sale for
adjustable rate loans than for fixed rate loans. The average premium paid for
loan production was 5.0% for the year ended December 31, 1996 compared to 5.3%
for the year ended December 31, 1997. The maximum CPR assumed for fixed mortgage
loans securitized increased from 26% for the year ended December 31, 1996 to 28%
(35% for adjustable rate mortgage loans) for the year ended December 31, 1997.
The decrease in the gain on sale percentage was partially offset by an increase
in retail loan production. Upfront points and origination fees related to retail
loan production are recognized as gain on sale at the time the loan is sold.
Total retail production increased from approximately $67 million for the year
ended December 31, 1996 to approximately $769 million for the year ended
December 31, 1997.
Net Warehouse Interest Income
Net warehouse interest income increased to $24.7 million for the year
ended December 31, 1997 from $12.9 million for the year ended December 31, 1996,
an increase of 91.1%. The increase in the year ended December 31, 1997 reflected
higher interest income resulting primarily from increased mortgage loan
production and mortgage loans held for sale in inventory for longer periods of
time, partially offset by interest expense associated with warehouse facilities.
The 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
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servicing portfolio by $4.9 billion or 233.3% to $7.0 billion as of December 31,
1997 from $2.1 billion as of December 31, 1996.
Other
Other revenues, consisting principally of the recognition of the
increase or accretion of the discounted value of interest on interest-only and
residual certificates, over time, 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 proportionate 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
June 30, 1999 Compared to December 31, 1998
Mortgage loans held for sale, net, at June 30, 1999 were $610.2
million, a decrease of $336.3 million or 35.5% from mortgage loans held for sale
of $946.4 million at December 31, 1998. Included in mortgages held for sale,
net, at June 30, 1999 and December 31, 1998 were $76.4 million and $84.6
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. The valuation allowances at June 30, 1999 and June 30,
1998 were $21.0 million and $24.0 million, respectively.
Accounts receivable increased $9.6 million or 21.6% to $54.3 million at
December 31, 1999 from $44.7 million at June 30, 1998, primarily due to an
increase in servicing advances outstanding. As the servicer for the
securitization trusts, the Company is required to advance certain principal,
interest and escrow amounts to the securitization trust for the 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 the securitization pools continue to mature.
Interest-only and residual certificates at June 30, 1999 were $352.5
million, representing a decrease of $116.3 million or 24.8% from interest-only
and residual certificates of $468.8 million at December 31, 1998. Mortgage
servicing rights decreased $9.9 million or 18.9% to $42.5 million at June 30,
1999 from $52.4 million at December 31, 1998. The decrease in mortgage servicing
rights consists of amortization of $9.9 million. The decrease in interest-only
and residual certificates resulted from the receipt of cash on the interest-only
and residual certificates in the six months ended June 30, 1999 and from the
Company's revision of the loss curve assumption used to approximate the timing
of losses over the life of the securitized loans. See Note 10 of Notes to
Consolidated Financial Statements.
Goodwill decreased $81.2 million to $8.5 million at June 30, 1999 from
$89.6 million at December 31, 1998 due to a $77.4 million impairment charge
related to the Company's eight operating subsidiaries, amortization of goodwill,
and elimination of the $1.9 million carrying amount of goodwill associated with
the acquisition of MCC. On June 30, 1999 the Company terminated operations at
the MCC offices in Rhode Island and began disposing of the related assets. See
Note 6 of Notes to Consolidated Financial Statements.
The decision of the IMC Board of Directors to dispose of eight
operating subsidiaries and the continued decline in financial results of the
Company resulted in an evaluation of the goodwill associated with the these
subsidiaries for possible impairment at June 30, 1999. The Company 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. The events described above led the
Company to determine that the useful lives assigned to goodwill should be
reduced to less than one year. The resulting evaluation of the goodwill
associated with the eight operating subsidiaries resulted in a goodwill
impairment charge of $77.4 million.
Borrowings under warehouse financing facilities at June 30, 1999 were
$633.4 million, a decrease of $351.1 million or 35.7% from borrowings under
warehouse financing facilities of $984.6 million at December 31, 1998.
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This decrease was a result of decreased mortgage loans held for sale, caused by
IMC's significant lenders imposing restrictions on IMC's ability to borrow funds
to originate mortgage loans. See " -Liquidity and Capital Resources" included
herein and Note 3 of Notes to the Consolidated Financial Statements.
Term debt and notes payable at June 30, 1999 was $436.7 million,
representing an increase of $4.0 million or 0.9% from term debt and notes
payable of $432.7 million at December 31, 1998. This increase was primarily a
result of additional borrowings from the Greenwich Funds, offset by repayment of
certain amounts under term debt from cash flows received from interest-only and
residual certificates as provided in the intercreditor agreements. Additional
borrowings from the Greenwich Funds included an additional $7.3 million borrowed
under a standby revolving credit facility and $26.1 million outstanding at June
30,1999 related to a Note Purchase Agreement. See Note 3 of Notes to
Consolidated Financial Statements.
The Company's net deferred tax asset of $0 at June 30, 1999, after
valuation allowance, represented no change from a deferred tax asset, after
valuation allowance, of $0 at December 31, 1998. The deferred tax asset 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 ($19.8 million) and
Class C ($18.3 million), increased $1.5 million to $38.8 million at June 30,
1999 from $37.3 million at December 31, 1998, due to accretion of the preferred
stock discount. In July 1998, the Company sold $50 million of Class A redeemable
preferred stock to certain of the Greenwich Funds and TCSC. The Class A
redeemable preferred stock was convertible into unregistered 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, which was charged to
paid in capital in 1998 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 Class C
exchangeable 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 June 30, 1999 was $9.1 million, a decrease
of $201.5 million from stockholders' equity of $210.6 million at December 31,
1998. Stockholders' equity decreased for the six months ended June 30, 1999
primarily as a result of a net loss of $200.3 million.
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
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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 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 a transaction involving the sale of the
Company or the Company's assets, 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.
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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 TCSC. The Class
A redeemable preferred stock was convertible into unregistered 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, 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 from 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
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due to an overall dollar increase in delinquencies from 1996 to 1997 as the
Company's servicing portfolio increases and matures. As the servicer for the
securitization trusts, the Company is required to advance certain principal,
interest and escrow amounts to the securitization trusts for delinquent
mortgagors. The Company then collects the past due amounts from the mortgagors
or from the proceeds from liquidation of foreclosed properties. The Company
expects the overall dollar amount of delinquencies to increase in future periods
as the servicing portfolio increases and securitization pools continue to
mature.
Interest-only and residual certificates at December 31, 1997 were
$223.3 million, representing an increase of $137.1 million or 158.9% over
interest-only and residual certificates of $86.2 million at December 31, 1996.
This increase was a result of the Company completing eight securitizations
during the twelve months ended December 31, 1997 for an aggregate of $4.9
billion. The increase was offset by the sale on a non-recourse basis of certain
interest-only and residual certificates that had a net book value of $267
million. The sale was effected through a securitization (the "Excess Cashflow
Securitization") by which the Company received approximately $228 million of net
cash proceeds, or approximately 85% of the estimated net book value, and
retained a subordinated residual certificate for the remaining balance. The
Company used the net proceeds to retire or reduce certain term debt. 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.
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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 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 and the six months ended June 30, 1999, the Company used
its cash flow from the sale of loans through 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 and the six months ended June 30, 1999,
included the funding of loan purchases and originations, payment of principal
and interest costs on borrowings, operating expenses 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 six months ended June 30, 1999,
the Company received cash flows from operating activities of $353.6 million, an
increase of $595.8 million, or 246.0%, from cash flows used in operating
activities of $242.2 million during the six months ended June 30, 1998. During
the six months ended June 30, 1999, cash flows used by the Company in financing
activities were $352.7 million, a decrease of $582.8 million or 253.2% from cash
flows received from financing activities of $230.2 million during the six months
ended June 30, 1998. 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, equity, debt 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 the Company's 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 approximately $263 million of the
Company's interest-only and residual financing at June 30, 1999. 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) to allow
the Company to explore its financial alternatives. The intercreditor agreements
also provided, subject to certain conditions, that the lenders would not
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issue any margin calls requesting additional collateral be delivered to the
lenders. See Note 3 of Notes to Consolidated Financial Statements.
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 occurred
within five months and for twelve months thereafter, subject to earlier
termination in certain events. The intercreditor agreements require the Company
to make various amortization payments on the underlying debt. Failure to make
the required payments would permit the Significant Lenders to terminate the
standstill period under the intercreditor agreements and to exercise remedies.
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 June 30, 1999, 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 $66.1 million was outstanding under this warehouse facility as of
June 30, 1999. The Company had informally requested that Paine Webber permit
funding of an additional $200 million under its warehouse facilities, but has
been notified that Paine Webber does not intend to make any additional advances
at this time.
At June 30, 1999, the Company also had a $1.0 billion uncommitted
warehouse facility with Bear Stearns. This facility bears interest at LIBOR plus
0.75%. Approximately $333.9 million was outstanding under this facility at June
30, 1999. Bear Stearns has requested that the Company maintain outstanding
amounts under this warehouse facility at no more than $500 million.
At June 30, 1999, 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 $159.3 million was
outstanding under this warehouse financing facility at June 30, 1999. DMG has
indicated to the Company that it does not plan to make any additional advances
at this time and 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.
At June 30, 1999, the Company had a $125 million committed warehouse
facility with Residential Funding Corporation ("RFC") which bears interest at
LIBOR plus 1.25%. At June 30, 1999, approximately $67.5 million was outstanding
under this facility. The RFC credit facility requires the Company to comply with
various financial covenants, including, among other things, minimum net worth
tests and a minimum pledged servicing portfolio. At June 30, 1999, the Company's
net worth, tangible net worth, and pledged servicing portfolio were below the
minimum requirements under the covenants of the RFC credit facility. In July
1999, RFC indicated that it will not continue to fund the Company under its
committed facility after the facility matures on August 31, 1999. The Company is
discussing terms for repayment of the amount that will be outstanding under the
RFC credit facility when the facility matures.
Additionally, at June 30, 1999, approximately $6.6 million was
outstanding under another warehouse line of credit, which bears interest at
LIBOR plus 1.5% and has expired and is not expected to be renewed.
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Outstanding borrowings under the Company's warehouse financing
facilities are collateralized by mortgage loans held for sale and servicing
rights on approximately $210.0 million of mortgage loans. Upon the sale of these
loans, the proceeds are used to repay the borrowings under these lines.
The Company has attempted to enter into arrangements to obtain
warehouse facilities from lenders that are not currently providing warehouse
financing to IMC, but has not 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 almost entirely dependent upon the Significant Lenders' discretion to provide
warehouse funding to the Company. The Significant Lenders may not continue to
fund the Company's warehouse requirements.
At June 30, 1999, the Company had borrowed $138.2 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 June
30, 1999, $82.0 million was outstanding under this credit facility, which bears
interest at 1.75% per annum in excess of LIBOR.
At June 30, 1999, outstanding interest-only and residual financing
borrowings under the Company's credit facility with DMG were $41.4 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 June 30, 1999, the Company had borrowed $1.9 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 has
informally agreed to allow approximately one-third of the cash from the
interest-only and residual certificates to be used to reduce the amounts
outstanding under this facility on a monthly basis and the lender has informally
agreed to keep the facility in place. There can be no assurance the informal
agreement will provide for any further extension of the maturity of this loan
agreement.
At June 30, 1999 the Company also had outstanding $5.3 million under a
credit facility with a financial institution which bears interest at 10% per
annum. That credit facility provides for repayment of principal and interest
over 36 months through October 2001.
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. After maturity, the interest rates on these
facilities increased to prime plus 2% per annum. 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, $87.5 million was outstanding under
these credit facilities. 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 this amended intercreditor agreement,
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the Greenwich Funds agreed to keep these facilities in place for a period of
twelve months thereafter if the acquisition described in the acquisition
agreement was consummated within five months.
The Company's current warehouse lines generally are subject to one-year
terms. The Company's current creditors most likely will not renew their
facilities as they expire and the Company may not be able to obtain additional
credit lines.
The Company is required to advance monthly delinquent interest as the
servicer under the pooling and servicing agreements related to securitizations
the Company services. The Company typically makes these advances to the
securitizations on or about the 18th of each month and such advances are
typically repaid by the securitizations over a 30 day period. In this respect,
on April 19, 1999, the Company borrowed $15 million from the Greenwich Funds
pursuant to secured promissory notes to fund a portion of delinquent interest
advance to the securitizations. These notes bore interest at a rate of 20% per
annum. These notes have been repaid in full.
On May 18, 1999, the Company entered into a Note Purchase and Amendment
Agreement (the "Note Purchase Agreement") with the Greenwich Funds. Borrowings
under the Note Purchase Agreement bear interest at 20% per annum. On May 18,
1999, the Greenwich Funds loaned the Company an aggregate of $33.0 million under
the Note Purchase Agreement to fund a portion of the delinquent interest advance
to the securitizations. In consideration for these loans, the Company paid the
Greenwich Funds a $1.2 million commitment fee. The $33.0 million borrowed under
the Note Purchase Agreement on May 18, 1999 was repaid in full.
On June 18, 1999, the Greenwich Funds loaned the Company an aggregate
of $35.0 million under the Note Purchase Agreement to fund a portion of the
delinquent interest advance to the securitizations. In consideration for these
loans, the Company agreed to pay Greenwich Funds a $1.0 million commitment fee.
At June 30,1999, $26.1 million was outstanding under the Note Purchase
Agreement, which was repaid in full by July 16, 1999.
On July 16, 1999, the Company borrowed $45.0 million under the Note
Purchase Agreement to fund a portion of the delinquent interest advance to the
securitizations. In consideration for these loans, the Company agreed to pay the
Greenwich Funds a $1.25 million commitment fee. The $45.0 million borrowed under
the Note Purchase Agreement was repaid in full by August 18, 1999.
On August 18, 1999, the Company borrowed $45.0 million under the Note
Purchase Agreement to fund a portion of the delinquent interest advance to the
securitizations. In consideration for these loans the Company agreed to pay the
Greenwich Funds a $1.25 million commitment fee.
The Greenwich Funds have provided the Company with funds to enable the
Company to make the required delinquent interest advance to the securitizations
each month, but has been unwilling to commit to make these funds available for
more than 30 days at a time. If the delinquent interest advances are not made by
the servicer each month pursuant to the pooling and servicing agreements, the
Company's contractual rights to service the mortgage loans in the securitization
could be terminated. The Company is dependent upon obtaining continued funding
each month to allow the Company to make required delinquent interest advances to
the securitizations. There can be no assurance the Greenwich Funds will continue
to make funds available to permit the Company to make future delinquent interest
advances and there can be no assurance the contractual rights to service the
mortgage loans will not be terminated.
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
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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
Consolidated Financial Statements.
On October 15, 1998 the Company entered into 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 made
additional loans of $5 million available 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 occurred 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. At June 30, 1999, $38.0 million was
outstanding under this facility.
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 Company agreed to issue
common stock to the Greenwich Funds representing approximately 93.5% of the
outstanding common stock after each issuance, leaving the existing common
shareholders of the Company with 6.5% of the common stock outstanding. Upon the
closing, certain of the Greenwich Funds would 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 would make available to IMC an additional $35 million
in working capital loans. The acquisition agreement was terminated when the
Company entered into the agreement with CitiFinancial described below.
On July 14, 1999, the Company entered into an asset purchase agreement
with CitiFinancial pursuant to which IMC will sell its mortgage loan origination
and servicing business and other assets relating to that business to
CitiFinancial for $100 million. The agreement was approved by the Company's
Board of Directors on July 30, 1999 and, as a result, the acquisition agreement
with the Greenwich Funds was terminated. Consequently, the Greenwich Funds will
not be obligated to provide an additional $35 million of loans to the Company.
See Note 17 of Notes to Consolidated Financial Statements.
IMC intends to use the proceeds from the sale of assets to repay
certain indebtedness secured by assets of IMC. No payment is expected to be made
to the IMC common shareholders as a result of this transaction, nor are any
payments to the IMC common shareholders likely in the future. After consummation
of the sale, IMC will essentially have no ongoing operating business but will
continue to own other assets, including but not limited to, mortgage loans held
for sale, the interest-only and residual certificates in its securitized loans
(see "Business of IMC - Loan Sales" and "Business - Loan Servicing and
Collection") and accounts receivable. There can be no assurance that the
interest-only and residual certificates or the disposal of these other assets
will generate enough cash flow to repay IMC's remaining obligations and provide
any value to IMC shareholders.
The sale of assets is subject to a number of conditions, including
approval by the Company's shareholders. There can be no assurance that the sale
of assets will be consummated. If the Asset Purchase Agreement is terminated or
the sale of assets is not consummated by October 15, 1999, the Company most
likely would be unable to continue its business.
Subsequent to June 30, 1999, the amended and restated intercreditor
agreements were extended through September 16, 1999, subject to earlier
termination in certain events. In the event the Company is not successful in
obtaining further extensions of these agreements, the standstill periods
thereunder would expire on September 16, 1999 and the lenders would be entitled
to seek remedies under their loan agreements with the Company, including actions
to realize upon the collateral that secure their loans. In such an event, the
Company most likely would be unable to continue its business. See Note 17 of
Notes to Consolidated Financial Statements.
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The Company has substantial capital requirements and it anticipates
that it will need significant additional external cash resources through either
the sale or securitization of interest-only and residual certificates or
increased credit facilities if the proposed sale of assets to CitiFinancial is
not consummated. If the proposed sale of assets to CitiFinancial is not
consummated, 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 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, 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 or in selling or securitizing interest-only and residual
certificates, the Company would not be able to hold loans pending securitization
or whole loan sale and therefore would have to further 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 has
historically sold them through securitizations or 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 the risk to the value of the loans would be effectively hedged. The Company
executed the sale
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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
loss on short sales of United States Treasury securities. 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 June 30, 1999, 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 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
1%, 3% or 5% would result in a corresponding decrease in the value of the
interest-only and residual certificates at June 30, 1999 of approximately 2%, 6%
and 9%, respectively. A decrease in the discount rates used to present value the
spread described above of minus 1%, 3% or 5% would result in an increase in the
value of the interest-only and residual certificates at June 30, 1999 of
approximately 2%, 7% and 12%, 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.
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
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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 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," which was amended by Statement
of Financial Accounting Standards No. 137 "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133." SFAS 133, as amended, is effective for fiscal quarters of fiscal years
beginning after June 15, 2000 (January 1, 2001 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.
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 had 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
financial 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
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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, 1999, the Company adopted 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. The application of
the provisions of SFAS 134 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 included a questionnaire requesting specific information from
third parties with respect to their systems and services related to Y2K
compliance. The responses received ranged from point-by-point responses to the
Company's questionnaire, to global response statements estimating compliance
target dates, to direct compliance letters. The Company received a 100% response
rate in one or more of these forms. All of the Company's material third party
vendors that are not currently compliant have estimated compliance target dates
from the end of the second quarter of 1999 to the end of the third quarter of
1999. Based on these responses, the Company believes that the material third
party vendors will be Y2K compliant, although there can be no assurance that
this will be the case.
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
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material adverse effect on the Company's financial position, results of
operations or cash flows. To date, the Company has spent approximately $250,000
on Y2K compliance and 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 "Forward Looking Information" on page 10 of this Proxy
Statement.
Change in Certifying Accountants
On February 16, 1999, IMC appointed Grant Thornton LLP ("Grant
Thornton") as 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
advice from the Securities and Exchange Commission. The Securities and Exchange
Commission announced on January 14, 1999 that the Securities and Exchange
Commission had brought and settled charges against PWC for engaging in improper
professional conduct by violating Securities and Exchange Commission
independence rules. The Securities and Exchange Commission issued in Order
Instituting Proceedings and Opinion and Order Pursuant to Rule 102(e) of the
Securities and Exchange Commission's Rules of Practice ("SEC Order") 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 Securities and Exchange Commission 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
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"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 and 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.
Based on discussions with members of the staff of the Securities and
Exchange Commission, IMC believes that the Securities and Exchange Commission
has acknowledged that IMC had no knowledge or reason to know of PWC's lack of
compliance with the Securities and Exchange Commission's independence standards.
The conduct of PWC is not consistent with the standards regarding compliance
with Securities and Exchange Commission 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 a 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 a specific completed or proposed transactions, or the type of
audit opinion that might be 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).
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SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of September __,
1999, with respect to the beneficial ownership of shares of IMC common stock by
(i) each person known by IMC to be the beneficial owner of more than 5% of the
outstanding shares of the IMC common stock, (ii) each director and executive
officer of IMC and (iii) all of IMC's executive officers and directors, as a
group. Unless otherwise indicated in the footnotes to the table, the beneficial
owners named have, to IMC's knowledge, sole voting and dispositive powers with
respect to the shares beneficially owned, subject to community property laws
where applicable.
Name and Address Shares Percentage
- ---------------- ------ ----------
Neal Henschel (1) 2,382,581 6.53%
700 W. Hillsboro Boulevard
Building 1, Suite 204
Deerfield Beach, FL 334441
ContiTrade Services Corporation (2) 2,174,998 6.00%
277 Park Avenue
New York, NY 10172
George Nicholas (3) 1,489,645 4.19%
5901 E. Fowler Avenue
Tampa, FL 33617
Joseph P. Goryeb (4) 534,692 1.54%
Waterview Corporate Centre
20 Waterview Boulevard
Parsippany, NJ 07054-1267
Thomas G. Middleton (5) 472,471 1.37%
5901 E. Fowler Avenue
Tampa, FL 33617
Mitchell W. Legler (6)(7) 108,734 *
300A Wharfside Way
Jacksonville, FL 32207
Stuart D. Marvin (8) 45,386 *
5901 E. Fowler Avenue
Tampa, FL 33617
All directors and executive officers, as a 2,650,928 7.47%
group (3) through (8)
- ---------------
* Represents less than one percent (1%).
(1) Excludes 265,349 shares of IMC common stock owned by Mr. Henschel's adult
child.
(2) Source of ownership information: Securities and Exchange Commission Form
13-G filed as an amendment on February 11, 1998. Ownership reported
includes 2,159,998 shares of IMC common stock owned by ContriTrade
Services Corporation, an affiliate of Continental Grain Company, which
represent shared voting and disposition powers. The Form 13-G filing
includes 15,000 shares of IMC common stock owned by Paul
- 100 -
<PAGE>
J. Fribourg, President and Chairman of Continental Grain Company. Mr.
Fribourg has sole voting and disposition power over 15,000 shares of IMC
common stock and shared voting and disposition power over the 2,159,998
shares of IMC common stock issuable upon exercise of the warrants.
(3) Includes 475,732 shares of IMC common stock issuable upon the exercise of
options.
(4) Excludes 504,119 shares of IMC common stock owned by Mr. Goryeb's adult
children.
(5) Includes 282,866 shares of IMC common stock issuable upon the exercise of
options.
(6) Includes 12,932 shares of IMC common stock issuable upon the exercise of
options.
(7) Includes 62,026 shares of IMC common stock issuable upon exercise of
options, 27,776 shares of IMC common stock held by Mr. Legler jointly with
his spouse and 6,000 shares of IMC common stock held in his individual
retirement account.
(8) Includes 44,136 shares of IMC common stock issuable upon the exercise of
vested options.
----------------
- 101 -
<PAGE>
The following table sets forth as of September __, 1999 certain
information with respect to the beneficial ownership of shares of Class A
preferred stock and Class C exchangeable preferred stock of IMC by each person
known by IMC to be the beneficial owner of the outstanding shares of each such
class of preferred stock which, in the case of beneficial ownership by the
Greenwich Funds, is based on information furnished to IMC by GSCP. Unless
otherwise indicated in the footnotes to the table, the beneficial owners named
have, to the knowledge of IMC based, in the case of the Greenwich Funds, on
information disclosed to it by GSCP, sole voting and dispositive powers with
respect to the shares beneficially owned:
<TABLE>
<CAPTION>
Shares of Percentage Shares of Percentage
Name and Address Class A Preferred Outstanding Class C Preferred Outstanding
---------------- ----------------- ----------- ----------------- -----------
<S> <C> <C> <C> <C>
Greenwich Street
Capital Partners II,
L.P. 357,736 71.5472% 21,250.1963 89.4340%
Greenwich Fund,
L.P. 12,118 2.4236% 729.8322 3.0295%
GSCP Offshore
Fund, L.P. 7,458 1.4916% 443.0193 1.8645%
Greenwich Street
Employees Fund,
L.P. 20,924.8 4.1850% 1,242.9728 5.2312%
TRV Executive
Fund, L.P. 1,763.2 0.3526% 104.7374 0.4408%
Travelers Casualty
and Surety
Company 100,000 20.000% 0 0%
</TABLE>
_____________________
The consummation of the proposed sale of assets will not affect the
percentage of the outstanding shares of any class of Preferred Stock owned by
any holder thereof.
The Greenwich Funds hold shares of Class C exchangeable preferred stock of
IMC, which after March 31, 1999 are exchangeable for shares of Class D preferred
stock, having voting rights equivalent to approximately 40% of the voting power
of the Company. In addition, the Greenwich Funds have the right to exchange
their right to receive payment of the loan under the $38 million Greenwich Funds
loan agreement for additional shares of Class C exchangeable preferred stock or
Class D preferred stock representing an additional 50% of the voting power of
the Company. Accordingly, if the Greenwich Funds were to exchange their Class C
exchangeable preferred stock for Class D preferred stock and exercise their
exchange option under the loan facility, they would hold shares of Class C
and/or Class D preferred stock representing approximately 90% of the voting
power of the Company, which would permit the Greenwich Funds over time to effect
a change in control of the Company. In addition, if a change in control of IMC
shall not have occurred on or prior to April 14, 1999 and, on or after such
date, the Class D preferred stock constitutes a majority of the voting power of
the issued and outstanding capital stock of IMC, then the number of directors
constituting the Board of Directors shall be adjusted to permit the holders of
Class D preferred stock, voting separately as one class, to elect a majority of
the Board of Directors of IMC and a special meeting of shareholders shall be
called to permit such election.
- 102 -
<PAGE>
OTHER MATTERS; SHAREHOLDER PROPOSALS
It is not expected that any matters other than those described in this
Proxy Statement will be brought before the special meeting. If any other matters
are presented, however, it is the intention of the persons named in the
appropriate proxy to vote the proxy in accordance with the discretion of the
persons named in such proxy. Shareholder proposals for inclusion in IMC's proxy
statement for its annual meeting of shareholders to be held in 2000 must be
received at IMC's principal executive offices, 5901 E. Fowler Avenue, Tampa,
Florida 33617, no later than _________, 2000.
CHANGES IN IMC'S INDEPENDENT CERTIFYING ACCOUNTANTS
On February 16, 1999, IMC appointed Grant Thornton LLP as the
independent accounting firm to audit the financial statements of IMC for the
year ended December 31, 1998 and dismissed PricewaterhouseCoopers LLP. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--Change in Certifying Accountants."
INDEPENDENT CERTIFYING ACCOUNTANTS
The consolidated financial statements included in this Proxy Statement
for the year ended December 31, 1998 have been audited by Grant Thornton LLP,
independent auditors as stated in their report appearing herein. The
consolidated financial statements included in this Proxy Statement for the two
years in the period ended December 31, 1997 have been audited by
PricewaterhouseCoopers LLP, independent accountants, as stated in their report
appearing herein.
WHERE TO FIND MORE INFORMATION
If you would like to request documents from IMC, please contact Laurie
S. Williams, Secretary of IMC, at 5901 E. Fowler Avenue, Tampa, Florida 33617,
by ___ ___, 1999 to receive them before the special meeting.
You should rely only on the information contained or incorporated by
reference in this Proxy Statement to vote on the matters submitted to you. IMC
has not authorized anyone to provide you with information that is different from
what is contained in this Proxy Statement. This Proxy Statement is dated
September __, 1999. You should not assume that the information contained in the
Proxy Statement is accurate as of any date other than such date, and neither the
mailing of this Proxy Statement to shareholders nor the sale of assets to
CitiFinancial pursuant to the Asset Purchase Agreement shall create any
implication to the contrary.
- 103 -
<PAGE>
IMC LOGO
FORM OF PROXY
FOR IMC MORTGAGE COMPANY
SPECIAL MEETING OF SHAREHOLDERS
OCTOBER ___, 1999
THIS PROXY CARD MUST BE RECEIVED PRIOR TO 10:00 A.M. (LOCAL TIME) ON
OCTOBER ___, 1999.
PROXY SOLICITED BY THE BOARD OF DIRECTORS OF IMC MORTGAGE COMPANY, A
FLORIDA CORPORATION, FOR THE SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON
___________, 1999 AT 10:00 A.M.(LOCAL TIME).
The undersigned, being a holder of shares of common stock, par value
$0.001 per share (the "Common Stock"), of IMC Mortgage Company ("IMC"), hereby
appoints George Nicholas and Thomas Middleton, or if only one is present, then
that individual, and each such person with full power of substitution and
resubstitution, as his, her or its proxy at the Special Meeting to be held on
___________, 1999 (and any adjournment or postponement thereof) and to vote on
behalf of the undersigned (or abstain from voting) as indicated on the reverse
of this card or, to the extent that no such indication is given, as set forth
herein. The Special Meeting has been convened to consider a proposal to approve
the Asset Purchase Agreement, dated as of July 13, 1999, by and between
CitiFinancial Mortgage Company ("CitiFinancial") and IMC, and the transactions
contemplated thereby, which, among other matters, provides for the sale by IMC
to CitiFinancial of certain assets relating to IMC's mortgage loan origination
and servicing business. In his discretion, the proxy is authorized to vote upon
such other business as may properly come before the meeting or any adjournment
or postponement thereof. The undersigned hereby revokes any previously dated
forms of proxy with respect to the Special Meeting.
THE IMC BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE PROPOSAL. IF THIS CARD
IS RETURNED SIGNED BUT NOT MARKED WITH ANY INDICATION AS TO HOW TO VOTE, THE
UNDERSIGNED WILL BE DEEMED TO HAVE DIRECTED THE PROXY TO VOTE FOR THE PROPOSAL.
PLEASE INDICATE ON THE REVERSE OF THIS CARD HOW YOUR SHARES ARE TO BE
VOTED. PLEASE DATE, SIGN AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED
ENVELOPE.
PLEASE SIGN AND DATE ON REVERSE SIDE
- --------------------------------------------------------------------------------
*FOLD AND DETACH HERE*
- 104 -
<PAGE>
Please mark
your votes as
indicated in
this example. [X]
PROPOSALS
THE BOARD OF DIRECTORS OF IMC MORTGAGE COMPANY UNANIMOUSLY RECOMMENDS THAT YOU
VOTE FOR EACH OF THE FOLLOWING PROPOSALS OF IMC MORTGAGE COMPANY:
1. To approve the Asset Purchase FOR AGAINST ABSTAIN
Agreement, dated as of July 13, |_| |_| |_|
1999, by and between CitiFinancial
Mortgage Company ("CitiFinancial")
and IMC, and the transactions
contemplated thereby, which, among
other matters, provides for the
sale by IMC to CitiFinancial of
certain assets relating to IMC's
mortgage loan origination and
servicing business.
Signature(s)(and Title(s), if any)_________________ Date:_____________, 1999
Please sign your name above exactly as it appears hereon. When signing as
attorney, executor, administrator, trustee or other representative capacity,
please give full title as such. If a corporation, please sign in full corporate
name by a duly authorized director or other offcer, indicating title, or
execute under the corporation's common seal. In the case of joint holders, any
one may sign but the first-named in the share register may exclude the voting
rights of the other joint holder(s) by voting in person or by proxy.
- --------------------------------------------------------------------------------
*FOLD AND DETACH HERE*
- 105 -
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants......................... F-2
Report of Independent Accountants.......................................... F-3
Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and 1998
and June 30, 1999..................................................... F-4
Consolidated Statements of Operations for the years ended December 31,
1996, 1997 and 1998 and the six months ended June 30, 1998 and 1999... F-5
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1997 and 1998 and the six months ended
June 30, 1999......................................................... F-6
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998 and the six months ended June 30, 1998 and 1999... F-7
Notes to Consolidated Financial Statements............................. F-8
F-1
<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
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
F-2
<PAGE>
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
F-3
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
December 31, June 30,
------------------------------ -------
1997 1998 1999
---- ---- ----
(unaudited)
ASSETS
<S> <C> <C> <C>
Cash and cash equivalents ........................................... $ 26,750 $ 15,454 $ 14,846
Securities purchased under agreements to resell ..................... 772,586 -- --
Accrued interest receivable ......................................... 29,272 10,695 7,928
Accounts receivable ................................................. 21,349 44,661 54,302
Mortgage loans held for sale, net ................................... 1,673,144 946,446 610,181
Interest-only and residual certificates ............................. 223,306 468,841 352,544
Warehouse financing due from correspondents ......................... 25,913 2,810 656
Property, furniture, fixtures and equipment, net .................... 14,884 17,119 16,042
Mortgage servicing rights ........................................... 34,954 52,388 42,498
Income tax receivable ............................................... 18,841 12,914 8,554
Goodwill ............................................................ 91,963 89,621 8,454
Other assets ........................................................ 12,970 22,690 20,622
---------- ---------- ----------
Total ....................................................... $2,945,932 $1,683,639 $1,136,627
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse finance facilities ......................................... $ 1,732,609 $ 984,571 $ 633,448
Term debt ............................................................ 112,291 415,331 419,540
Notes payable ........................................................ 18,189 17,406 17,155
Securities sold but not yet purchased ................................ 775,324 -- --
Accounts payable and accrued liabilities ............................. 31,665 15,302 11,963
Accrued interest payable ............................................. 10,857 3,086 6,653
Deferred tax liability ............................................... 10,933 -- --
----------- ----------- -----------
Total liabilities .............................................. 2,691,868 1,435,696 1,088,759
----------- ----------- -----------
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 38,807
----------- ----------- -----------
Stockholders' equity:
Common stock, par value $.01 per share; 50,000,000
authorized; 30,710,790, 34,139,790 and 34,201,380
shares issued and outstanding ..................................... 307 341 342
Additional paid-in capital ........................................... 193,178 251,633 251,904
Retained earnings (accumulated deficit) .............................. 60,579 (41,364) (243,185)
----------- ----------- -----------
Total stockholders' equity ....................................... 254,064 210,610 9,061
----------- ----------- -----------
Total ............................................................ $ 2,945,932 $ 1,683,639 $ 1,136,627
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
For the Six
Months Ended
For the Year Ended December 31, June 30,
------------------------------ -------------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Gain on sales of loans .......................... $46,230 $180,963 $205,924 $131,139 $31,639
Additional securitization transaction
expense (Note 7) ............................... (4,158) -- -- -- --
------------ ------------ ------------ ------------ ------------
Net gain on sale of loans ..................... 42,072 180,963 205,924 131,139 31,639
------------ ------------ ------------ ------------ ------------
Warehouse interest income ....................... 37,463 123,432 147,937 80,220 35,165
Warehouse interest expense ...................... (24,535) (98,720) (118,345) (66,438) (23,211)
------------ ------------ ------------ ------------ ------------
Net warehouse interest income ................. 12,928 24,712 29,592 13,782 11,954
------------ ------------ ------------ ------------ ------------
Servicing fees .................................. 5,562 17,072 45,382 19,677 25,130
Other revenues .................................. 5,092 16,012 40,311 16,575 14,820
------------ ------------ ------------ ------------ ------------
Total servicing fees and other ................ 10,654 33,084 85,693 36,252 39,950
------------ ------------ ------------ ------------ ------------
Total revenues ................................ 65,654 238,759 321,209 181,173 83,543
------------ ------------ ------------ ------------ ------------
Expenses:
Compensation and benefits ....................... 16,007 82,051 124,234 61,859 53,097
Selling, general and administrative expenses .... 15,652 64,999 130,547 55,809 49,477
Sharing of proportionate value of equity (Note 7) 2,555 -- -- -- --
Other interest expense .......................... 2,321 14,280 28,434 10,173 15,789
Loss on short sales of United States Treasury
Securities (Note 5) ............................. -- -- 22,351 -- --
Market valuation adjustment (Note 10) ........... -- -- 84,638 -- 62,876
Goodwill impairment charge ...................... -- -- -- -- 77,446
Other charges ................................... -- -- -- -- 5,179
Interest expense - Greenwich Funds (Note 3) ..... -- -- 30,795 -- 15,379
------------ ------------ ------------ ------------ ------------
Total expenses .............................. 36,535 161,330 420,999 127,841 279,243
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes ............... 29,119 77,429 (99,790) 53,332 (195,700)
Provision for income taxes ...................... 4,206 29,500 679 21,900 4,647
------------ ------------ ------------ ------------ ------------
Net income (loss) .................................. $24,913 $47,929 $(100,469) $31,432 $(200,347)
============ ============ ============ ============ ============
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) $31,432 $(200,347)
============ ============ ============ ============ ============
Net income (loss) per common share:
Basic ......................................... $1.12 $1.76 $(3.21) $1.02 $(5.90)
Diluted ....................................... $0.92 $1.54 $(3.21) $0.90 $(5.90)
Weighted average shares outstanding:
Basic ......................................... 15,981,521 27,299,827 31,745,575 30,775,154 34,211,493
Diluted ....................................... 19,539,963 31,147,944 31,745,575 34,828,065 34,211,493
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
Retained
Additional Earnings
Common Stock 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
Accretion of Class A
preferred stock (unaudited) ................... -- -- -- (1,474) (1,474)
Net loss (unaudited) ............................ -- -- -- (200,347) (200,347)
Other (unaudited) ............................... 61,590 1 271 -- 272
---------- ---------- ---------- ---------- ----------
Stockholders' equity at
June 30, 1999 (unaudited) ..................... 34,201,380 $342 $251,904 $(243,185) $9,061
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this consolidated
financial statement.
F-6
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
For the Six
Months Ended
For the Year Ended December 31 June 30,
------------------------------ --------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(unaudited)
-----------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss) ................................................. $ 24,913 $ 47,929 $(100,469) $ 31,432 $(200,347)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Goodwill impairment charge ............................... -- -- -- -- 77,446
Interest expense - Greenwich Funds ....................... -- -- 27,500 -- 5,500
Issuance of stock warrants ............................... -- -- 1,128 -- --
Sharing of proportionate value of equity ................. 2,555 -- -- -- --
Depreciation and amortization ............................ 1,650 10,144 25,937 11,344 13,864
Mortgage servicing rights ................................ (7,862) (34,252) (35,911) (24,591) --
Net loss on joint venture ................................ 852 1,813 2,579 1,512 117
Net loss on sale of joint venture ........................ -- -- -- -- 2,592
Net loss on disposal of Rhode Island branch .............. -- -- -- -- 2,587
Non-recurring benefit associated with the conversion
of Partnership to C Corporation ........................ (3,600) -- -- -- --
Change in deferred taxes ................................. 879 13,654 (10,933) 8,267 --
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 (44,583) 336,265
Decrease (increase) in securities purchased
under agreement to resell and securities
sold but not yet purchased ............................. 429 1,167 (2,738) (235) --
Decrease (increase) in accrued interest receivable ....... (6,763) (20,615) 18,577 5,591 2,531
Decrease (increase) in warehouse financing due
from correspondents .................................... (4,992) (25,674) 23,103 10,034 2,154
Decrease (increase) in interest-only and residual
certificates ........................................... (72,174) (137,060) (245,535) (222,271) 116,297
Increase in other assets ................................. (2,200) (7,495) (7,274) (14,741) (1,281)
Decrease (increase) in accounts receivable ............... (1,596) (16,450) (23,312) (6,116) (8,089)
Decrease (increase) in income tax receivable ............. -- (15,241) 8,611 -- 4,360
Increase (decrease) in accrued interest payable .......... 3,022 6,779 (7,771) 1,649 3,567
Increase (decrease) in income tax payable ................ 2,543 (2,543) -- -- --
Increase (decrease) in accrued and other liabilities ..... 6,978 2,421 (9,853) 528 (3,969)
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating activities ...... (776,713) (878,350) 390,337 (242,180) 353,594
--------- --------- --------- --------- ---------
Investing activities:
Investment in joint venture .............................. (2,591) (1,781) (4,260) (2,280) (638)
Purchase of property, furniture, fixtures and equipment .. (1,218) (12,772) (5,665) (3,362) (899)
Acquisition of businesses, net of cash acquired and
including other cash payments associated with
the acquisitions ....................................... -- (10,008) -- -- --
Other .................................................... -- -- (672) (415) --
--------- --------- --------- --------- ---------
Net cash used in investing activities .................... (3,809) (24,561) (10,597) (6,057) (1,537)
--------- --------- --------- --------- ---------
Financing activities:
Issuance of common stock ................................. 58,203 59,923 12 6 --
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) 81,261 (351,123)
Borrowings - term debt ................................... 51,066 401,240 324,473 306,016 91,338
Borrowings - notes payable ............................... -- 5,000 -- -- --
Repayments of borrowings - term debt ..................... (14,756) (337,702) (15,932) (156,856) (92,630)
Repayments of borrowings - notes payable ................. -- -- (783) (250) (250)
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities ...... 788,677 916,372 (391,036) 230,177 (352,665)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents ....................................... 8,155 13,461 (11,296) (18,060) (608)
Cash and cash equivalents, beginning of period ........... 5,134 13,289 26,750 26,750 15,454
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of period ................. $ 13,289 $ 26,750 $ 15,454 $ 8,690 $ 14,846
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
(Unaudited for June 30, 1999 and the six months ended
June 30, 1998 and 1999)
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 "recapitalization") 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 July 14, 1999, the Company entered into an Agreement (the
"Agreement") to sell certain assets to CitiFinancial Mortgage Company
("CitiFinancial Mortgage"), an indirectly wholly-owned subsidiary of Citigroup,
Inc. The Agreement, which is subject to a number of conditions, was approved by
the Company's Board of Directors on July 30, 1999, and, as a result, an
acquisition agreement (the "Acquisition Agreement") the Company had previously
entered into with Greenwich Street Capital Partners II, L.P. and certain of its
affiliates (the "Greenwich Funds") terminated.
2. Summary of Significant Accounting Policies
Interim Financial Statements
The consolidated financial statements as of June 30, 1999 (unaudited)
and for the six months ended June 30, 1998 and 1999 (unaudited) reflect all
adjustments (consisting solely of normal recurring adjustments) which, in the
opinion of management, are necessary to present fairly the financial position
and results of operations for the period presented. The results of operations
for the six months ended June 30, 1999 are not necessarily indicative of the
results for a full year. Certain information and footnote disclosures as of June
30, 1998 and for the six months ended June 30, 1998 normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission, although the Company believes that
the disclosures are adequate to make the information not misleading.
F-8
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
(Unaudited for June 30, 1999 and the six months ended
June 30, 1998 and 1999)
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.
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. The Company did not securitize any
loans during the six months ended June 30, 1999. 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,
F-9
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
(Unaudited for June 30, 1999 and the six months ended
June 30, 1998 and 1999)
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.
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. At June 30, 1999, as a result of trends in the Company's serviced
loan portfolio and adverse market conditions, as described in Note 17
"Significant Events and Events Subsequent to December 31, 1998", the Company
revised the loss curve assumption to increase from zero in the first six months
of the loan to 275 basis points after 30 months, representing estimated
aggregate losses over the life of the pool (i.e., historical plus future losses)
of 4.3% of original pool balances. See Note 10 "Interest-Only and Residual
Certificates."
F-10
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
(Unaudited for June 30, 1999 and the six months ended
June 30, 1998 and 1999)
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, $35.9 million and $0 for the years ended December 31, 1996, 1997 and
1998 and the six months ended June 30, 1999, respectively, and amortized $1.2
million, $5.9 million, $18.5 million and $9.9 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.
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 and June 30, 1999, there were no open hedge positions. See
Note 5 "Loss on Short Sales of United States Treasury Securities."
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 and June 30, 1999 were approximately $54 million, $85
million and $76 million, respectively, of mortgage loans which were not eligible
for securitization due to delinquency and other factors (loans
F-11
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
(Unaudited for June 30, 1999 and the six months ended
June 30, 1998 and 1999)
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 and June 30, 1999
were $11.5 million, $21.0 million and $21.0 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.
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, $15.3 million and
$3.1 million for the years ended December 31, 1996, 1997 and 1998 and the six
months ended June 30, 1999, 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, $4.0
million and $1.7 million for the years ended December 31, 1996, 1997 and 1998
and the six months ended June 30, 1999, respectively. Accumulated amortization
approximated $2.8 million, $6.8 million and $8.5 million at December 31, 1997
and 1998 and June 30, 1999, respectively.
F-12
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
(Unaudited for June 30, 1999 and the six months ended
June 30, 1998 and 1999)
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.
As described in Note 17 "Significant Events and Events Subsequent to
December 31, 1998," the Company's Board of Directors approved a formal plan on
July 26, 1999 to dispose of the Company's eight operating subsidiaries, which
led the Company to determine that the useful lives assigned to goodwill should
be reduced to less than one year. The resulting evaluation of the goodwill
associated with the eight operating subsidiaries resulted in a goodwill
impairment charge of $77.4 million for the six months ended June 30, 1999.
Translation of Foreign Currency
Assets and liabilities of the Company's Canadian subsidiary, IMC
Mortgage Company, Canada Ltd. ("IMC Canada"), 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 and the six months ended
June 30, 1999, the financial position and results of operations of IMC Canada
were not material in relation to the financial position or results of operations
of the Company.
On August 12, 1999, the Company sold IMC Canada. The assets of IMC
Canada are recorded in the accompanying Consolidated Balance Sheet at June 30,
1999 in other assets at their historical book value, which approximated fair
value at June 30, 1999. The net proceeds from the disposition approximated the
current carrying value of IMC Canada.
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.
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.
F-13
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
(Unaudited for June 30, 1999 and the six months ended
June 30, 1998 and 1999)
Consolidated Statement of Cash Flows - Supplemental Disclosures
The Company paid $23.8 million, $106.2 million, $157.8 million and
$45.3 million for interest during the years ended December 31, 1996, 1997 and
1998 and the six months ended June 30, 1999, respectively. Total income taxes
paid were $796,000, $33.5 million, $4.1 million and $391,000 for the years ended
December 31, 1996, 1997 and 1998 and the six months ended June 30, 1999,
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 June 1998, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), which was amended
by SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FAS Statement No. 133." SFAS 133, as amended,
is effective for fiscal quarters of fiscal years beginning after June 15, 2000
(January 1, 2001 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.
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, 1999, the Company adopted 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 SFAS 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
F-14
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
(Unaudited for June 30, 1999 and the six months ended
June 30, 1998 and 1999)
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. The
application of the provisions of SFAS 134 did not have an impact on the
Company's financial position or results of operations.
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.
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
=======
F-15
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
(Unaudited for June 30, 1999 and the six months ended
June 30, 1998 and 1999)
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.
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 (in thousands, except share data).
F-16
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
(Unaudited for June 30, 1999 and the six months ended
June 30, 1998 and 1999)
<TABLE>
<CAPTION>
December 31, June 30,
-------------------------------------------- ---------------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net income (loss) (pro forma net income for 1996) ..... $ 17,929 $ 47,929 $ (100,469) $ 31,432 $ (200,347)
Less preferred dividends .............................. (79) -- -- -- --
Less accretion of preferred stock ..................... -- -- (1,474) -- (1,474)
--------- -------- --------- --------- -------
Income (loss) available to common stockholders-basic .. 17,850 47,929 (101,943) 31,432 (201,821)
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) $ 31,432 $ (201,821)
======= ======= ========= ========== =========
Weighted average common shares outstanding ............ 15,981,521 27,299,827 31,745,575 30,775,154 34,211,493
Adjustments for dilutive securities:
Stock warrants .................................. 2,139,344 2,327,178 -- 2,160,000 --
Stock options ................................... 1,240,553 1,281,995 -- 1,006,468 --
Contingent shares ............................... 9,827 238,944 -- 886,443 --
Convertible preferred stock ..................... 115,248 -- -- -- --
Convertible debentures .......................... 53,470 -- -- -- --
-------- --------- ------ ------- --------
Diluted common shares ................................. 19,539,963 31,147,944 31,745,575 $ 34,828,065 34,211,493
========== ========== ========== =========== ==========
</TABLE>
For the year ended December 31, 1998 and the six months ended June 30,
1999, 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.
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 occurred within five months,
subject to earlier termination in certain events.
F-17
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
(Unaudited for June 30, 1999 and the six months ended
June 30, 1998 and 1999)
As discussed in Note 17 "Significant Events and Events Subsequent to
December 31, 1998," the intercreditor agreements were subsequently extended to
September 16, 1999, subject to earlier termination in certain events. In the
event the Company is not successful in obtaining further extensions of these
agreements, the standstill periods thereunder would expire on September 16, 1999
and the Significant Lenders would be entitled to seek remedies under their loan
agreements with the Company, including actions to realize upon the collateral
that secure their loans. In such an event, it is likely 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 require the Company to make
various amortization payments on the underlying debt. Failure to make the
required payments would permit the Significant Lenders to terminate the
standstill agreement under the intercreditor agreements and to exercise
remedies. In such an event, it is likely the Company would be unable to continue
its business.
At June 30, 1999, the Company had a $1.25 billion uncommitted credit
facility with Paine Webber. Outstanding warehouse borrowings, which bear
interest at rates ranging from LIBOR (5.63% at June 30, 1999) plus 0.75% to
LIBOR plus 2.00%, were approximately $110 million and $66 million at December
31, 1998 and June 30, 1999, respectively. The Company has informally requested
that Paine Webber permit funding of an additional $200 million under its
warehouse facilities, but has been notified that Paine Webber, at this time,
does not intend to make any additional advances.
At June 30, 1999, 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. Approximately $369 million and $159
million was outstanding under this facility at December 31, 1998 and June 30,
1999, respectively. DMG has indicated to the Company that additional funding
will be on an "as-requested" basis.
At June 30, 1999, 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 and June 30, 1999, approximately $496 million and $333
million, respectively, 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.
At June 30, 1999, the Company had a $125 million committed warehouse
facility with Residential Funding Corporation ("RFC") which bears interest at
LIBOR plus 1.25%. At June 30, 1999, approximately $67.5 million was outstanding
under this facility. The RFC credit facility requires the Company to comply with
various financial covenants, including, among other things, minimum net worth
tests and a minimum pledged servicing portfolio. At June 30, 1999, the Company's
net worth, tangible net worth and pledged servicing portfolio were below the
minimum requirements under the covenants of the RFC credit facility. In July
1999, RFC indicated that it will not continue to fund the Company under its
committed facility after the facility matures on August 31, 1999. The Company is
discussing terms for repayment of the amount that will be outstanding under the
RFC credit facility.
Additionally, at June 30, 1999, approximately $7 million was
outstanding under another warehouse line of credit which bears interest at LIBOR
plus 1.50% and has expired and is not expected to be renewed.
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 $210
million
F-18
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
(Unaudited for June 30, 1999 and the six months ended
June 30, 1998 and 1999)
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 and June 30, 1999, outstanding interest-only and
residual financing borrowings were $153.3 million and $138.2 million,
respectively, 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 and June 30, 1999, $97.7 million and $82.0 million, respectively, was
outstanding under this credit facility, which bears interest at 1.75% per annum
in excess of LIBOR.
At December 31, 1998 and June 30, 1999, outstanding interest-only and
residual financing borrowings under the Company's credit facility with DMG were
$43.2 million and $41.4 million, respectively. 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.
At December 31, 1998 and June 30, 1999, the Company had borrowed $2.2
million and $1.9 million, respectively, under an agreement with Nomura
Securities (Bermuda) Ltd. 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 has informally
agreed to allow approximately 1/3 of the cash from the interest-only and
residual certificates to be used to reduce the amount outstanding under this
facility on a monthly basis and the lender has informally agreed to keep the
facility in place.
At December 31, 1998 and June 30, 1999, the Company also has
outstanding a $6.2 million and $5.3 million, respectively, 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,
through October 2001.
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
F-19
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
(Unaudited for June 30, 1999 and the six months ended
June 30, 1998 and 1999)
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. After maturity, the
interest rates on these facilities increased to prime plus 2% per annum.
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 agreed to keep its facilities in place for a period of 12
months thereafter, if the acquisition described in the Acquisition Agreement,
described in Note 17 "Significant Events and Events Subsequent to December 31,
1998," was consummated within five months, subject to earlier termination in
certain events as provided in the intercreditor agreements. As discussed in Note
17 "Significant Events and Events Subsequent to December 31, 1999," the amended
intercreditor agreement was subsequently extended through September 16, 1999,
subject to earlier termination in certain events. In the event the Company is
not successful in obtaining further extensions of this agreement, the standstill
period thereunder would expire on September 16, 1999 and the Greenwich Funds
would be entitled to seek remedies under its loan agreements with the Company,
including actions to realize upon the collateral that secure its loans. In such
an event, it is likely the Company would be unable to continue its business. At
June 30, 1999, $86.6 million was outstanding under the combined facilities.
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 and bore interest at 10%. After 90% days,
the interest rate on the facility increased to 12% per annum on amounts
outstanding after 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 May 18, 1999, the interest
rate on the facility was increased to 22% per annum on amounts outstanding after
May 18, 1999. On February 16, 1999, the Greenwich Funds made additional loans
available totaling $5.0 million under the facility. At June 30, 1999, $38.0
million was outstanding under the Greenwich Loan Agreement.
The Company is required to advance monthly delinquent interest as the
servicer under the pooling and servicing agreements related to securitizations
the Company services. The Company typically makes these advances to the
securitizations on or about the 18th of each month and such advances are
typically repaid by the securitizations over a 30 day period. In this respect,
on April 19, 1999, the Company borrowed $15 million from the Greenwich Funds
pursuant to secured promissory notes to fund a portion of the delinquent
interest advance to the securitizations. These notes bore interest at a rate of
20% per annum and were repaid in full by May 18, 1999.
On May 18, 1999, the Company entered into a Note Purchase and Amendment
Agreement (the "Note Purchase Agreement") with the Greenwich Funds. Borrowings
under the Note Purchase Agreement bear interest at 20% per annum. On May 18,
1999, the Greenwich Funds loaned the Company an aggregate of $33.0 million under
the Note Purchase Agreement to fund a portion of the delinquent interest advance
to the securitizations. In
F-20
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
(Unaudited for June 30, 1999 and the six months ended
June 30, 1998 and 1999)
consideration for these loans, the Company paid the Greenwich Funds a $1.2
million commitment fee. The $33.0 million borrowed under the Note Purchase
Agreement on May 18, 1999 was repaid in full by June 18, 1999.
On June 18, 1999, the Greenwich Funds loaned the Company an aggregate
of $35.0 million under the Note Purchase Agreement to fund a portion of the
delinquent interest advance to the securitizations. In consideration for these
loans, the Company agreed to pay the Greenwich Funds a $1.0 million commitment
fee. At June 30,1999, $26.1 million was outstanding under the Note Purchase
Agreement, which was repaid in full by July 16, 1999.
On July 16, 1999, the Company borrowed $45.0 million under the Note
Purchase Agreement to fund a portion of the delinquent interest advance to the
securitizations. In consideration for these loans, the Company agreed to pay the
Greenwich Funds a $1.25 million commitment fee. The $45.0 million borrowed under
the Note Purchase Agreement was repaid in full by August 18, 1999.
On August 18, 1999, the Company borrowed $45.0 million under the Note
Purchase Agreement to fund a portion of the delinquent interest advance to the
securitizations. In consideration for these loans, the Company agreed to pay the
Greenwich Funds a $1.25 million commitment fee.
The Greenwich Funds have provided the Company with funds to enable the
Company to make the required delinquent interest advance to the securitizations
each month, but has been unwilling to commit to make these funds available for
more than 30 days at a time. If the delinquent interest advances are not made by
the servicer each month pursuant to the pooling and servicing agreements, the
Company's contractual rights to service the mortgage loans in the securitization
could be terminated. The Company is dependent upon obtaining financing to fund
the required monthly delinquent interest advances to the securitizations. There
can be no assurance that the Greenwich Funds will continue to make funds
available to permit the Company to make future delinquent interest advances and
thus there can be no assurance the contractual rights to service the mortgage
loans will not be terminated.
Interest expense - Greenwich Funds of $30.8 million and $15.4 million
for the year ended December 31, 1998 and the six months ended June 30, 1999,
respectively, consists of interest charges with respect to the Greenwich Loan
Agreement as well as 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."
Interest expense - Greenwich Funds for the six months ended June 30, 1999 also
includes interest expense and commitment fees related to the Note Purchase
Agreements and the $95.0 million credit facilities that the Greenwich Funds
purchased from BankBoston on February 19, 1999.
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. At June 30, 1999, the Company was not in
compliance with certain financial covenants related to credit facilities with
the Significant Lenders. As described above, the Company entered into
intercreditor agreements with the Significant Lenders which provide for the
Significant Lenders to "stand-still" and keep outstanding balances under their
facilities in place, subject to certain conditions, until September 16, 1999.
Notes Payable
At December 31, 1998 and June 30, 1999, $4.5 million and $4.3 million,
respectively, 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.
F-21
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
(Unaudited for June 30, 1999 and the six months ended
June 30, 1998 and 1999)
At December 31, 1998 and June 30, 1999, $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 June 30, 1999) plus 2.0% and
matured on July 10, 1999. After maturity, the unpaid principal balance accrues
interest until paid in full at prime plus 5% per annum. The Company is currently
in negotiations regarding the amount and timing of repayment of these notes
payable.
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.
4. Preferred Stock:
Preferred stock consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
---- ----
<S> <C> <C>
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 $20,526
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 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 $38,807
======= =======
</TABLE>
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
F-22
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
(Unaudited for June 30, 1999 and the six months ended
June 30, 1998 and 1999)
stock of $22.50. At June 30, 1999, 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
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 and $1.5 million for the
year ended December 31, 1998 and the six months ended June 30, 1999,
respectively. 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 and June 30, 1999, $15.2
million and $18.3 million, respectively, of this discount has been amortized to
interest expense and is included in "Interest expense - Greenwich Funds" in the
accompanying Consolidated Statements of Operations. 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 was amortized to expense over the 90-day
commitment period of the Greenwich Loan Agreement. As of December 31, 1998 and
June 30, 1999, $12.3 million and $14.7 million, respectively, of this discount
has been amortized to interest expense and is included in "Interest Expense -
Greenwich Funds" in the accompanying Consolidated Statements of Operations.
F-23
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
(Unaudited for June 30, 1999 and the six months ended
June 30, 1998 and 1999)
5. Loss on Short Sales of United States Treasury Securities:
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, 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 loss on short sales of United States Treasury securities in the
Statement of Operations for the year ended December 31, 1998. At December 31,
1998 and June 30, 1999, 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.
On June 30, 1999, the Company terminated its operations at the MCC
offices in Rhode Island and began disposing of the related assets. Accordingly,
the carrying amount of the goodwill that arose from the acquisition of
F-24
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
(Unaudited for June 30, 1999 and the six months ended
June 30, 1998 and 1999)
MCC has been eliminated and the assets to be disposed of are recorded in the
accompanying Consolidated Balance Sheet at June 30, 1999 at their estimated net
fair value. The loss on disposal of the assets of MCC of $2.6 million is
included in other charges in accompanying Consolidated Statement of Operations
for the six months ended June 30, 1999.
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, a
non-conforming mortgage lender based in Los Angeles, California. Effective
February 1, 1997, the Company acquired all of the assets of American Mortgage
Reduction, Inc., a non-conforming mortgage lender based in Owings Mills,
Maryland. Effective July 1, 1997, the Company acquired all of the outstanding
common stock of National Lending Center, Inc., a non-conforming mortgage lender
based in Deerfield Beach, Florida, and substantially all of the assets of
Central Money Mortgage Co., Inc., a non-conforming mortgage lender based in
Baltimore, Maryland. Effective October 1, 1997, the Company acquired
substantially all of the assets of Residential Mortgage Corporation, a
non-conforming mortgage lender based in Cranston, Rhode Island. Effective
November 1, 1997, the Company acquired substantially all of the assets of
Alternative Capital Group, Inc., a non-conforming 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.
The pro forma results of operations listed below reflect purchase
accounting adjustments assuming the acquisitions occurred on January 1, 1997.
F-25
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
(Unaudited for June 30, 1999 and the six months ended
June 30, 1998 and 1999)
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.
The Company 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. As discussed in Note 17 "Significant Events and Events Subsequent to
December 31, 1998," on July 26, 1999 the Company's Board of Directors' approved
a formal plan to dispose of the eight acquired companies described above, which
led the Company to determine that the useful lives assigned to goodwill at June
30, 1999 should be reduced to less than one year. The resulting evaluation of
the goodwill associated with the eight acquired companies at June 30, 1999
resulted in a goodwill impairment charge of $77.4 million, which is included in
the accompanying Statement of Operations for the six months ended June 30, 1999.
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
F-26
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
(Unaudited for June 30, 1999 and the six months ended
June 30, 1998 and 1999)
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 minimis 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 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
ContiFinancial had exercised the warrant for the entire 3,000,000 shares.
8. Other Assets
Other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
--------------------------- --------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Prepaid expenses............................ $3,106 $10,319 $10,600
Real estate owned........................... 1,805 6,088 7,684
Investment in joint venture................. 1,707 3,388 ----
Hedge deposits.............................. 4,356 ---- ----
Notes receivable............................ 1,003 950 620
Other....................................... 993 1,945 1,718
------ ------- --------
$12,970 $22,690 $20,622
======= ======= =======
</TABLE>
In March 1996, the Company entered into an agreement to form a joint
venture (Preferred Mortgages Limited) in the United Kingdom to originate and
purchase mortgages made to borrowers who may not otherwise qualify for
conventional loans for the purpose of securitization and sale. The Company and a
second party each own 45% of the joint venture, and a third party owns the
remaining 10%. The original investment in the joint venture represents the
acquisition of 675,000 shares of the joint venture stock for $1.0 million and a
note receivable from the joint venture for $1.0 million. Additionally, during
the years ended December 31, 1996, 1997 and 1998 and the six months ended June
30, 1999, the Company loaned to the joint venture $528,000, $1.8 million, $4.3
million and $638,000, respectively. The investment in the joint venture was
accounted for under the equity method and was included in other assets at
December 31, 1997 and 1998.
F-27
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
(Unaudited for June 30, 1999 and the six months ended
June 30, 1998 and 1999)
On June 30, 1999, the Company entered into an agreement to sell its
interest in the joint venture to one of its partners. Under the terms of the
sale agreement, the Company received $1.5 million in exchange for its interest
in the joint venture, including all shares, notes receivable, advances and
interest due from the joint venture. The sale resulted in a loss of
approximately $2.6 million, which is included in other charges in the
accompanying Consolidated Statement of Operations for the six months ended June
30, 1999.
9. Servicing Portfolio
The total servicing portfolio of loans was approximately $2.1 billion,
$7.0 billion, $8.9 billion and $7.3 billion at December 31, 1996, 1997 and 1998
and June 30, 1999, respectively.
10. Interest-Only and Residual Certificates
Activity in interest-only and residual certificates consisted of the
following (in thousands):
<TABLE>
<CAPTION>
For the year ended For the six
December 31, months ended
1997 1998 June 30, 1999
---- ---- -------------
<S> <C> <C> <C>
Balance, beginning of year ................... $ 86,247 $ 223,306 $ 468,841
Additions .................................... 384,971 365,353 --
Cash receipts ................................ (247,912) (35,180) (53,421)
Market valuation adjustment .................. -- (84,638) (62,876)
--------- --------- ---------
Balance, end of year ......................... $ 223,306 $ 468,841 $ 352,544
========= ========= =========
</TABLE>
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.
At June 30, 1999, as a result of trends in the Company's serviced loan
portfolio and continued adverse market conditions, the Company revised its loss
curve assumption used to approximate the timing of losses over the life of the
securitized loans so that expected losses from defaults gradually increase from
zero in the first six months of the loan to 275 basis points after 30 months,
representing estimated aggregate losses over the life of the pool (i.e.,
F-28
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
(Unaudited for June 30, 1999 and the six months ended
June 30, 1998 and 1999)
historical plus future losses) of 4.3% of original pool balances. There can be
no assurance that the loss curve assumption presently being used by the Company,
based on the adverse market conditions, will prove to be sufficient. The revised
loss curve assumption resulted in a decrease to the estimated fair value of the
interest-only and residual certificates of approximately $62.9 million, which is
reflected as a market valuation adjustment in the accompanying Consolidated
Statement of Operations for the six months ended June 30, 1999.
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.
11. Property, Furniture, Fixtures and Equipment
Property, furniture, fixtures and equipment consists of the following
(in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------- June 30,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Building ................................ $ 5,113 $ 5,113 $ 5,314
Computer systems ........................ 4,430 6,991 7,484
Office equipment ........................ 3,603 4,395 4,673
Furniture ............................... 3,465 5,350 5,302
Leasehold improvements .................. 512 732 738
Other ................................... 335 648 542
-------- -------- --------
Total ............................. 17,458 23,229 24,053
Less accumulated depreciation ........... (2,574) (6,110) (8,011)
-------- -------- --------
Property, furniture, fixtures and
equipment, net ....................... $ 14,884 $ 17,119 $ 16,042
======== ======== ========
</TABLE>
Depreciation expense was $317,000, $1.5 million, $3.5 million and $1.9
million for the years ended December 31, 1996, 1997 and 1998 and the six months
ended June 30, 1999, respectively.
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.
F-29
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
(Unaudited for June 30, 1999 and the six months ended
June 30, 1998 and 1999)
The components of the provision for income taxes allocable to the
Company consist of the following (in thousands):
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
----------------------- --------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Current income tax expense:
Federal ................................... $ 5,713 $ 13,070 $ 9,578 $ 11,236 $ 3,959
State ..................................... 1,214 2,776 2,034 2,408 688
-------- -------- -------- -------- --------
6,927 15,846 11,612 13,644 4,647
-------- -------- -------- -------- --------
Deferred income tax expense (benefit):
Federal ................................... 725 11,262 (9,018) 6,810 --
State ..................................... 154 2,392 (1,915) 1,446 --
-------- -------- -------- -------- --------
879 13,654 (10,933) 8,256 --
-------- -------- -------- -------- --------
Non-recurring benefit associated with the conversion
of Partnership to C Corporation ................. (3,600) -- -- -- --
-------- -------- -------- -------- --------
Total provision for income taxes ................... $ 4,206 $ 29,500 $ 679 $ 21,900 $ 4,647
======== ======== ======== ======== ========
</TABLE>
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.
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 (in thousands):
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
----------------------- --------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income tax (benefit) at federal statutory rate .......... $ 10,192 $ 27,100 $(34,927) $ 18,666 $(68,489)
State income tax (benefit), net of federal benefit....... 1,310 3,484 (4,490) 2,400 (8,805)
Interest expense - Greenwich Funds ...................... -- -- 4,845 -- 1,200
Non-recurring benefit associated with the conversion
of the Partnership to a C Corporation ................ (3,600) -- -- -- --
Goodwill amortization ................................... -- 817 1,345 652 664
Goodwill impairment charge .............................. -- -- -- -- 27,384
Other, net .............................................. (312) (1,901) 281 182 71
Valuation allowance ..................................... -- -- 33,625 -- 52,622
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 $ 21,900 $ 4,647
======== ======== ======== ======== ========
</TABLE>
The effects of temporary differences that give rise to significant portions of
the deferred tax assets and deferred tax liabilities are as follows (in
thousands):
F-30
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
(Unaudited for June 30, 1999 and the six months ended
June 30, 1998 and 1999)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets:
Stock warrants .......................................................... $ 2,403 $ -- $ --
Allowance for loan losses ............................................... 5,095 10,334 9,181
Interest-only and residual certificates ................................. 3,722 69,323 117,643
Joint venture ........................................................... 1,037 2,068 2,081
Mortgage servicing rights ............................................... 866 8,159 11,959
Other ................................................................... 3,634 4,346 6,720
Deferred tax liabilities:
Interest-only and residual certificates ................................. (27,110) (59,611) (60,393)
Other ................................................................... (580) (994) (944)
--------- --------- ---------
Net deferred tax asset (liability) before
valuation allowance ................................................... (10,933) 33,625 86,247
Valuation allowance ..................................................... -- (33,625) (86,247)
--------- --------- ---------
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. 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 or June 30, 1999. See Note 5 "Loss on Short Sale of United
States Treasury Securities."
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.
F-31
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
(Unaudited for June 30, 1999 and the six months ended
June 30, 1998 and 1999)
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.
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.
F-32
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
(Unaudited for June 30, 1999 and the six months ended
June 30, 1998 and 1999)
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 and June 30, 1999, 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 historically has made available to certain correspondents
warehouse financing which bears interest at rates ranging from 1.75% to 2.50%
per annum in excess of LIBOR, of which $25.9 million, $2.8 million and $656,000
were outstanding at December 31, 1997 and 1998 and June 30, 1999, respectively.
Interest income on these warehouse financing facilities was $191,000, $1.5
million, $1.2 million and $33,000 for the years ended December 31, 1996, 1997
and 1998 and the six months ended June 30, 1999, respectively. The warehouse
commitments are for terms of less than one year.
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 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, $1.9 million and $585,000 for the years ended
December 31, 1996, 1997 and 1998 and the six months ended June 30, 1999,
respectively.
F-33
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
(Unaudited for June 30, 1999 and the six months ended
June 30, 1998 and 1999)
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 and the six months ended June 30, 1999 were approximately $24,000, $89,000
and $28,000, 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 or the six months ended June 30, 1999.
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 or
the six months ended June 30, 1999.
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.
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
F-34
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
(Unaudited for June 30, 1999 and the six months ended
June 30, 1998 and 1999)
stock at the date of each grant. Such options expire ten years after the date of
grant. As of December 31, 1998 and June 30, 1999, 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:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
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..................... ---- ---- ----
</TABLE>
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, 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, $96,000 and
$48,000 in the years ended December 31, 1996, 1997 and 1998 and the six months
ended June 30, 1999, respectively.
F-35
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
(Unaudited for June 30, 1999 and the six months ended
June 30, 1998 and 1999)
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 and $57,000 has
been recognized in the years ended December 31, 1996 and 1997, 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> <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>
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.
F-36
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
(Unaudited for June 30, 1999 and the six months ended
June 30, 1998 and 1999)
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 and the six months ended June 30,
1999 amounted to approximately $257,000, $252,000, $189,000 and $0,
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, $7.9 million and $3.4 million in the years ended December 31,
1996, 1997 and 1998 and the six months ended June 30, 1999, 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. No bonuses under the contracts were
paid for the fiscal year ended December 31, 1998 and no bonuses are anticipated
for the fiscal year 1999. Each employment agreement contains a restrictive
covenant, which prohibits the executive from competing with the Company for a
period of 18 months after termination, and certain deferred compensation upon a
"change of control" as defined in the employment agreements. As discussed in
Note 17 "Significant Events and Events Subsequent to December 31, 1998," on July
14, 1999, the Company entered into an Agreement to sell certain
F-37
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
(Unaudited for June 30, 1999 and the six months ended
June 30, 1998 and 1999)
assets to CitiFinancial Mortgage. The Agreement is contingent upon CitiFinancial
Mortgage entering into future employment arrangements with certain members of
management acceptable to CitiFinancial Mortgage. There can be no assurance
employment arrangements acceptable to certain members of management and
CitiFinancial Mortgage can be achieved.
Certain members of the Company's Board of Directors and certain members
of the Company's senior management have employment agreements with the Company,
and the Company's general counsel, a director of the Company, has a retainer
agreement with the Company, that permit each of them, following a change of
control, to voluntarily terminate their employment with, or retention by, the
Company and become entitled to deferred compensation. Subsequent to June 30,
1999, the members of senior management who have these agreements and the
Company's general counsel entered into mutual, general and irrevocable releases
with the Company, which release the Company from payment of deferred
compensation aggregating approximately $10 million and all other obligations in
the employment or retainer agreements in consideration for aggregate payments of
$400,000 plus additional aggregate payments of $420,000 to be paid over a period
of up to twelve months. The payments commenced upon execution of the release for
those members of senior management who are not also directors and will commence
upon consummation of the Agreement described in Note 17 "Significant Events and
Events Subsequent to December 31, 1998," if the Agreement is approved by the
Company's shareholders, for members of the Company's Board of Directors and
general counsel. Each member of senior management and the Company's general
counsel who has entered into a release has become an employee "at will" and may
be terminated by the Company at any time without additional benefits.
The Greenwich Funds have agreed to indemnify certain surety companies
against losses on surety bonds issued with respect to the Company. To induce the
Greenwich Funds to make this indemnity, on May 18, 1999 the Company entered into
a Reimbursement Agreement (the "Reimbursement Agreement') with the Greenwich
Funds. Under the Reimbursement Agreement, the Company will reimburse the
Greenwich Funds for any amounts it pays to indemnify the surety companies. The
Company will also pay interest on any payments made by the Greenwich Funds to
the surety companies at a rate equal to the prime rate plus 2%.
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, seven 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. In
August 1999, five of the former shareholders of Corewest, representing
approximately 80% of the interests of all former shareholders, settled their
employment agreement claims and agreed to dismiss their claims under that
lawsuit and signed mutual, general and irrevocable releases for approximately
$1.4 million. The case is in the early stages of pleading; however, the
Company's management, based on its interpretation of the relevant facts and
consultation with legal counsel, believes there is no merit in the plaintiffs'
claims.
On June 17, 1999, the former shareholders of Central Money Mortgage
Co., Inc. ("Central Money Mortgage") sued the Company and its general counsel in
U.S. District Court for the State of Maryland claiming failure to perform on
certain oral and written representations made in connection with the Company's
acquisition of the assets of Central Money Mortgage. The case is in the
preliminary stages of discovery; however, based on
F-38
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
(Unaudited for June 30, 1999 and the six months ended
June 30, 1998 and 1999)
consultation with legal counsel, the Company's management believes there is no
merit in the plaintiffs' claims and intends to defend such action vigorously.
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)
<TABLE>
<CAPTION>
(in millions, except per share data)
Fiscal Quarter
-------------------------------------------------------
1999 First Second Third Fourth
---- ----- ------ ----- ------
<S> <C> <C> <C> <C>
Revenues........................................ $ 45.1 $ 38.5
Net loss........................................ $ (28.7) $(171.6)
Basic earnings per share........................ $ (0.86) $ (5.04)
Diluted earnings per share...................... $ (0.86) $ (5.04)
1998
----
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
</TABLE>
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
F-39
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
(Unaudited for June 30, 1999 and the six months ended
June 30, 1998 and 1999)
Company, based on these unprecedented market conditions, has entered into an
Agreement to sell certain assets to CitiFinancial Mortgage in order 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 was to
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 was to be made to the Company's common shareholders in this transaction.
Upon the consummation of the acquisition, the Greenwich Funds was to 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 was to make available to the Company an additional $35 million
in working capital loans. See Note 3, "Warehouse Finance Facilities, Term Debt
and Notes Payable."
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 thereafter if
acquisition by the Greenwich Funds was consummated within five months, subject
to earlier termination in certain events as provided in the intercreditor
agreements.
On July 14, 1999, the Company entered into an Agreement to sell certain
assets to CitiFinancial Mortgage. The Agreement was approved by the Board of
Directors on July 30, 1999, and as a result, the Acquisition Agreement with the
Greenwich Funds described above terminated. Consequently, the Greenwich Funds
will not be obligated to provide an additional $35 million of loans to the
Company. The Agreement is subject to a number of conditions, including approval
by the Company's common and preferred stockholders (together with a separate
vote in favor of the transaction by the majority of the Company's common
shareholders other than the Company's management) and approval by certain other
parties. There can be no assurance that the stockholders of the Company will
approve the transaction or that the other conditions will be met.
Under the Agreement, the Company will receive $100 million from
CitiFinancial Mortgage for the sale of its mortgage servicing rights related to
mortgage loans which have been securitized, real property consisting of the
Company's Tampa, Florida headquarters building and the Company's leased
facilities at its Ft. Washington, Pennsylvania, Cherry Hill, New Jersey and
Cincinnati, Ohio office locations. Additionally, all furniture, fixtures and
equipment and other personal property located at the premises described above
will be included in the purchase.
F-40
<PAGE>
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
(Unaudited for June 30, 1999 and the six months ended
June 30, 1998 and 1999)
It is anticipated that substantially all of the employees at the locations
referred to above at the time the Agreement is consummated will be offered
employment by CitiFinancial Mortgage.
The proceeds from the sale of assets will be used to repay certain
indebtedness secured by certain assets of the Company. No payment is expected to
be made to the Company's common shareholders as a result of this transaction,
nor are any payments to common stockholders likely in the future.
If the transaction contemplated by the Agreement is completed, it will
result in the sale of the Company's servicing platform, substantially all its
correspondent origination loan business and its broker originated loan business
conducted at the locations referred to above. The remaining loan origination
business, which primarily consists of broker and direct originations, is
performed by eight operating subsidiaries. CitiFinancial Mortgage's offer to
acquire certain assets of the Company did not include the subsidiaries and
accordingly the subsidiaries are not part of the purchased assets.
The Agreement to sell certain assets to CitiFinancial Mortgage did not
include the Company's eight operating subsidiaries. Therefore, on July 26, 1999,
the Company's Board of Directors approved a formal plan to dispose of the eight
subsidiaries, and it is anticipated the disposal will be substantially complete
by September 30, 1999. The Company recorded a goodwill impairment charge of
$77.4 million for the six months ended June 30, 1999 relating to the formal plan
to dispose of the eight operating subsidiaries. Additional charges will be
incurred relating to, among other things, disposal of assets and costs of
disposal. The actual amount of goodwill impairment and additional charges will
depend on the proceeds, if any, from disposal and the costs incurred to dispose
of the subsidiaries.
The Company is in the process of preparing to call a special meeting of
its shareholders to approve the Agreement with CitiFinancial Mortgage. The Board
of Directors will request shareholders to vote in favor of the transaction to
allow the Company to attempt to continue to operate and repay its creditors in
an orderly manner. There can be no assurance the Company's shareholders will
approve the Agreement with CitiFinancial Mortgage. In such an event, it is
likely the Company would be unable to continue its business.
Subsequent to June 30, 1999, the amended and restated intercreditor
agreements were extended through September 16, 1999, subject to earlier
termination in certain events. There can be no assurance that the Company will
be successful in obtaining further extensions of these agreements. In the event
the Company is not successful in obtaining further extensions of these
agreements, the standstill periods thereunder would expire on September 16, 1999
and the Significant Lenders and the Greenwich Funds would be entitled to seek
remedies under their loan agreements with the Company, including actions to
realize upon the collateral that secure their loans. In such an event, it is
likely 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 transaction with CitiFinancial
Mortgage and the intercreditor agreements will be extended beyond September 16,
1999. In the event the Agreement with CitiFinancial Mortgage is terminated or
the intercreditor agreements are not extended beyond September 16, 1999, the
lenders subject to the requirements of the amended and restated intercreditor
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.
F-41
<PAGE>
ANNEX A
ASSET PURCHASE AGREEMENT
Dated as of
July 13, 1999
by and between
IMC Mortgage Company,
as Seller,
and
CitiFinancial Mortgage Company,
as Purchaser
<PAGE>
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT dated as of July 13, 1999, by and between IMC
Mortgage Company, a Florida corporation (the "Seller"), and CitiFinancial
Mortgage Company, a Delaware corporation (the "Purchaser").
W I T N E S S E T H:
WHEREAS, upon the terms and subject to the conditions of this
Agreement, the Seller desires to sell, convey, assign, transfer and deliver to
the Purchaser, and the Purchaser desires to purchase and acquire from the
Seller, certain assets, subject to certain of the liabilities, relating to the
Seller's business of origination, selling and servicing of residential mortgage
loans excluding such activities conducted by Seller's Acquired Affiliates or
Foreign Operations provided such certain assets are not shared between Seller
and the Acquired Affiliates or Foreign Operations (collectively, the
"Business");
NOW, THEREFORE, in consideration of the premises and the mutual
promises and covenants contained herein, the parties hereby agree as follows:
ARTICLE I
Certain Definitions
Section 1.01 Certain Definitions. As used in this Agreement, unless the
context requires otherwise, the following terms shall have the meanings
indicated, and additional capitalized terms shall have the meanings assigned
elsewhere in this Agreement (with terms being defined in the singular having a
corresponding meaning in the plural and vice versa):
"Acquired Affiliates" shall mean Mortgage America, CoreWest Banc,
American Mortgage Reduction, Equity Mortgage, National Lending Center, Central
Money Mortgage, Residential Mortgage and Alternative Capital.
"Affiliate" of any Person means any other Person, existing or future,
directly or indirectly, Controlling, Controlled by or under common Control with
the former Person. For Seller, this would include the Acquired Affiliates.
"Approvals" means franchises, licenses, permits, certificates of
occupancy and other approvals, authorizations, consents and waivers.
"Assumed Liabilities" has the meaning assigned in Section 2.03.
"Assumption Agreement" means a duly executed assumption agreement in
substantially the form to be agreed upon.
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"Bill of Sale" means a duly executed bill of sale in substantially the
form to be agreed upon.
"Business" has the meaning assigned in the preamble to this Agreement.
"Business Day" means any day on which commercial banks in New York City
and Tampa, Florida are open for business.
"Business Records" shall mean all of Seller's books and records
relating to the Purchased Assets, including, without limitation, all account
applications, statements, mortgage documents and other related files, marketing
materials, financial information, tax filings, any reports or records relating
to the securitized transactions identified in Section 2.01(a)(i) of the
Disclosure Schedule, including any trustee reports, current and previous
customer information, including servicing and collection records, information
relating to correspondents and brokers, information relating to origination
history and practice, comments and correspondence, whether in documentary form
or on microfilm, microfiche, magnetic tape, computer disk or other form.
"Closing" means the closing of the transactions contemplated by this
Agreement.
"Closing Date" means the date on which the Closing actually occurs.
"Code" means the Internal Revenue Code of 1986, as amended.
"Contract" means any note, bond, mortgage, indenture, deed of trust,
license agreement, franchise, contract, agreement, Lease, instrument or
guarantee.
"Control" means the power to direct or cause the direction of the
management and policies of another Person, whether through the ownership of
voting securities, by contract or otherwise.
"Custodial Account" means the payment clearing accounts, principal and
interest accounts, Escrow Account or any other accounts that include any funds
held or controlled by the Seller pursuant to the Servicing Agreements or
obligations thereunder with respect to any Mortgage Loan, including, but not
limited to, all principal and interest funds, buydown funds and any other funds
held by Seller on behalf of others, or due private investors or others.
"Disclosure Schedule" means the disclosure schedule attached hereto as
Schedule 1.01.
"Employees" has the meaning assigned in Section 6.01.
"Employee Benefit Plans" shall include pension and profit sharing
plans, retirement and post retirement welfare benefits, health insurance
benefits (medical, dental and vision), disability, life and accident insurance,
sickness benefits, vacation, employee loans and any bonus, incentive, deferred
compensation, stock purchase, stock option, severance, employment, or fringe
benefit plan, program or agreement.
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"Employer" has the meaning assigned in Section 6.01.
"Escrow Account" means the account or accounts that includes all funds
due third parties other than private investors held or controlled by Seller with
respect to Mortgage Loan escrows/impounds relating to the Servicing Rights,
including, but not limited to, accounts for real estate taxes and PMI, flood and
hazard insurance premiums.
"Excluded Assets" has the meaning assigned in Section 2.01(b).
"Foreign Operations" shall mean Seller's Affiliates or investments or
operations outside of the United States of America.
"GAAP" means generally accepted accounting principles, applied
consistently with the Seller's past practices (to the extent such past practices
are consistent with generally accepted accounting principles).
"Governmental Agency" means any governmental body or other regulatory
or administrative agency or commission.
"Hazardous Materials" means (a) any petroleum or petroleum products,
radioactive materials, asbestos in any form that is or could become friable,
polychlorinated biphenyls and radon gas; (b) any chemicals, materials or
substances defined as or included in the definition of "hazardous substances,"
"hazardous waste," "hazardous materials," "extremely hazardous substances,"
"toxic substances," "toxic pollutants," "contaminants," or "pollutants," or
words of similar import, under any applicable Laws; and (c) any materials which
could be or are defined by any applicable Law to be hazardous to human health.
"Indemnifiable Loss" means a Purchaser Indemnifiable Loss or a Seller
Indemnifiable Loss, as such terms are defined in Section 12.02 and Section
12.03, respectively.
"Indemnified Party" means a party having indemnification rights
pursuant to Article XII.
"Indemnifying Party" means a party having indemnification obligations
pursuant to Article XII.
"Intellectual Property Rights or IPR" means any and all of the
following used in or related to the Business: (i) trade secrets, inventions,
ideas and conceptions of inventions, whether or not patentable, whether or not
reduced to practice, and whether or not yet made the subject of a patent
application or applications, (ii) United States patents, patent applications and
statutory invention registrations, all rights therein provided by international
treaties or conventions and all improvements thereto, (iii) copyrightable works,
copyrights, whether or not registered, and registrations and applications for
registration thereof in the United States, and all rights therein provided by
international treaties or conventions, (iv) Software, (v) technical and business
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information, including know-how, manufacturing and production processes and
techniques, research and development information, technical data, financial,
marketing and business data, pricing and cost information, business and
marketing plans, business forms, and customer and supplier lists and
information, whether or not confidential, (vii) copies and tangible embodiments
of all the foregoing, in whatever form or medium, (viii) licenses and
sublicenses (whether as licensee, sublicensee, licensor or sublicensor) in
connection with any of the foregoing, and (ix) all goodwill associated with the
foregoing and all rights to sue or recover and retain damages and costs and
attorneys' fees for past, present, and future infringement or breach of any of
the foregoing; provided that Intellectual Property Rights shall not include
readily available commercial products such as off-the-shelf or publicly vended
software programs.
"Judgment" means any judgment, ruling, order or decree.
"Knowledge" means as to any party the actual knowledge, after
reasonable investigation, of any executive officer or vice president of such
party. Reasonable investigation shall include, but not be limited to, inquiry of
appropriate employees who directly report to such executive officer or vice
president.
"Law" means any order, writ, injunction, decree, judgment, ruling, law,
decision, opinion, statute, rule or regulation of any governmental, judicial,
legislative, executive, administrative or regulatory authority of the United
States, or of any state or local government or any subdivision thereof, or of
any Governmental Agency, including, without limitation, any federal, state or
local fair lending laws.
"Lease" means any lease, sublease, easement, license, right-of-way or
similar interest in real or personal property.
"Lien" means any lien, easement, encumbrance, mortgage, liability
(actual or contingent) or other conflicting ownership or security interest in
favor of any third party.
"Litigation" means any action, suit, claim, arbitration or other
proceeding, investigation or written inquiry by or before any Governmental
Agency, court or arbitrator.
"Material Adverse Effect" or "Material Adverse Change", with respect to
the Seller or with respect to the Business or Purchased Assets, means any
change, occurrence or effect, direct or indirect, that could reasonably be
expected to have a material adverse effect on the business, prospects,
operations, properties (including tangible properties), condition (financial or
otherwise) of the assets, obligations or liabilities (whether absolute, accrued
or contingent) of the Seller or of the Business or the Purchased Assets, as the
case may be, taken as a whole.
"Mortgage" means the mortgage, deed of trust or other instrument
creating a lien on Mortgaged Property securing a Mortgage Note.
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"Mortgage Loans" means the mortgage loans for which Seller owns the
related Servicing Rights, in each case as identified on the Mortgage Loan
Schedule, and all of Seller's rights and benefits with respect thereto.
"Mortgage Loan Schedule" has the meaning assigned in Section 4.08(a).
"Mortgage Note" means the original executed note or other evidence of
the Mortgage Loan indebtedness of a Mortgagor.
"Mortgaged Property" means the Mortgagor's real property securing
repayment of a related Mortgage Note.
"Mortgagor" means the obligor on a Mortgage Note, the owner of the
Mortgaged Property and the grantor or mortgagor named in the related Mortgage
and such grantor's or mortgagor's successors in title to the Mortgaged Property.
"Person" means an individual, a corporation, a limited liability
company, a partnership, an unincorporated association, a joint venture, a
government or Governmental Agency or another entity or group.
"PMI" means the default insurance provided by private mortgage
insurance companies on certain Mortgage Loans.
"Pre-Closing Servicing Obligations" includes any obligations with
respect to (i) customary representations and warranties made in connection with
Mortgage Loans sold prior to the Closing Date with Servicing Rights retained by
the Seller and (ii) performance by the Seller prior to the Closing Date of its
duties under the Servicing Rights in accordance with their terms.
"Principal Stockholders" means those directors, executive officers,
principal stockholders and others identified on Exhibit A hereto.
"Purchased Assets" has the meaning assigned in Section 2.01(a).
"Real Property" means the lands and premises, together with the
buildings and improvements thereon, owned by the Seller and more particularly
described in Section 1.01 of the Disclosure Schedule together with:
(a) all furniture, fixtures, building equipment, telephone exchange
numbers, and other articles of personal property related thereto to the extent
of the Seller's ownership or other interest therein;
(b) all easements, rights of way, reservations, privileges, appurtenances,
and other estates and rights of the Seller pertaining to such land and the
buildings;
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(c) all rights of ingress and egress to and from such land and buildings;
(d) to the extent in the possession and control of the Seller, any and all
original and supplemental site plans, blue prints, plans, specifications,
surveys, engineering, inspection or similar reports, operating manuals,
warranties, guaranties, licenses, franchises, permits, certificates, contracts,
books, records, accounts and files relating to the ownership, construction, use,
leasing, service, management, operation, maintenance and repair of such land and
buildings; and
(e) any and all rights to the present or future use of water rights,
wastewater, wastewater capacity, drainage, water or other utility facilities to
the extent same pertain to or benefit such real property, including, without
limitation, all reservations of or commitments or letters covering any such use
in the future.
"Related Documents" means all other agreements and instruments
described in this Agreement that are to be executed and delivered at or prior to
the Closing in connection with the transactions contemplated hereby.
"Retained Liabilities" has the meaning assigned in Section 2.04.
"Seller IPR" means all Intellectual Property Rights owned by or
licensed to the Seller to the extent such licensed rights are assignable.
"Servicing Agreement" has the meaning assigned to it in Section 4.08(h).
"Servicing Rights" means all right, title and interest of the Seller in
and to the servicing of the Mortgage Loans.
"Software" means computer software and subsequent versions thereof
developed or currently being developed, manufactured, sold or marketed by the
Seller or acquired by Seller from third parties, including without limitation,
source code, object code, objects, comments, screens, user interfaces, report
formats, templates, menus, buttons and icons, and all files, data materials,
manuals, design notes and other items and documentation related thereto or
associated therewith owned by or licensed to Seller.
"Taxes" (including, with correlative meaning, or derivation of the word
"Taxes") the term "Taxable") means all taxes, charges, fees, duties, levies, or
other assessments imposed by any federal, state or local taxing authority,
including without limitation federal, state and local income, profits,
franchise, gross receipts, environmental, customs duty, severances, stamp,
payroll, sales, use, employment, unemployment, disability, property,
withholding, backup withholding, excise, production, occupation, service,
service use, leasing and leasing use, ad valorem, value added, occupancy,
transfer, and other taxes, of any nature whatsoever, together with all interest,
penalties and additions imposed with respect to such amounts and any interest in
respect of such penalties and additions.
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"Tax Returns" means all returns and reports, information returns, or
payee statements (including, but not limited to elections, declarations,
filings, forms, statements, disclosures, schedules, estimates and information
returns) required to be supplied to a Tax authority relating to Taxes.
"Third Party IPR" means the rights possessed by the Seller in any other
Person's Intellectual Property Rights which relate to or are used in the
Business and which are not owned by the Seller to the extent assignable.
"Year 2000 Compliant" means, with respect to an internal system, that
at all times before, during and after January 1, 2000, such internal system
accurately processes and handles date and time data from, into and between the
twentieth and twenty-first centuries, and the years 1999 and 2000, including,
without limitation, leap year calculations, to the extent that other information
technology used in combination with such internal systems and such products and
services properly exchange date and time data with it.
ARTICLE II
Transfer of Assets and Assumption of Liabilities
Section 2.01 Assets to be Sold.
a) Upon the terms and subject to the conditions of this Agreement, at the
Closing, the Seller shall sell, convey, assign, transfer and deliver to the
Purchaser all of the following:
(i) all Servicing Rights related to the Mortgage Loans which have
been securitized in the transactions identified in Section
2.01(a)(i) of the Disclosure Schedule (the "Purchased Servicing
Rights");
(ii) the Real Property and the Leases identified in Section
2.01(a)(ii) of the Disclosure Schedule (the "Transferred
Leases");
(iii) all furniture, fixtures and other fixed assets and other
articles of personal property related thereto to the extent of
the Seller's ownership or other interests therein located on the
premises leased pursuant to the Transferred Leases, in all
material cases as identified in Section 2.01(a) (iii) of the
Disclosure Schedule;
(iv) all right, title and interest of Seller in the Contracts listed
in Section 2.01(a) (iv) of the Disclosure Schedule relating to
the Business and any other Contract entered into by the Seller
between the date hereof and Closing which the Purchaser
hereafter agrees shall become a Purchased Asset;
(v) all Business Records, including, without limitation, the
customer lists
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owned exclusively by the Seller or shared with Affiliates,
broker and correspondent lists and any related mailing lists
relating to the Business and all records relating to the sale of
loans by the Seller;
(vi) all Seller IPR and any rights in any Third Party IPR which are
identified in Section 2.01(a) (vi) of the Disclosure Schedule;
(vii) all right, title and interest of Seller in the Custodial
Accounts listed in Section 2.01(a)(vii) of the Disclosure
Schedule; and
(viii) any and all rights and claims of Seller relating to any of the
foregoing.
All the assets to be transferred pursuant to this Agreement are
referred to collectively herein as the "Purchased Assets".
(b) Notwithstanding anything to the contrary in this Agreement, the
Purchased Assets shall not include any assets not specifically set forth in this
Section 2.01 (the "Excluded Assets").
(c) The Purchased Assets shall not include any cash or cash equivalents
owned by Seller at the time of the Closing.
(d) The sale, conveyance, assignment, transfer and delivery of the
Purchased Assets shall be effected by delivery by the Seller to the Purchaser at
the Closing of (i) the Bill of Sale, (ii) good and sufficient warranty deeds in
recordable or registrable form, with respect to all Real Property owned by the
Seller and included in the Purchased Assets, and (iii) such other instruments of
conveyance and transfer as the Purchaser shall reasonably request.
Section 2.02 Nonassignable Leases and Contracts.
(a) To the extent that any Contract, except Contracts conveying
Servicing Rights to the Seller, to be included in the Purchased Assets would be
subject to termination or restriction or is not capable of being assigned,
transferred, subleased or sublicensed without the consent or waiver of the
issuer thereof or the other party thereto or any third party, or if such
assignment, transfer or sublease would constitute a breach thereof or a
violation of any Law, this Agreement shall not constitute an assignment,
transfer, sublease or sublicense thereof.
(b) The Seller agrees to use its reasonable commercial efforts prior to
the Closing to obtain the consents and waivers and to resolve any
impracticalities of assignment referred to in Section 2.02(a) and to obtain any
other consents and waivers necessary to sell, convey, assign, transfer and
deliver title to such Purchased Assets to the Purchaser at the Closing, subject
to Section 10.05(b).
(c) To the extent that the consents and waivers referred to in Section
2.02(a) are not obtained by the Seller, or until the impracticalities of
transfer referred to therein are resolved, and subject to Sections 8.04 and
10.05(b) , (i) the Seller shall use its reasonable commercial efforts (x)
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at Purchaser's request, to provide to the Purchaser the benefits of any Contract
intended to be included in the Purchased Assets, (y) at Purchaser's request and
expense, to cooperate in any arrangement, reasonable and lawful as to the Seller
and the Purchaser, designed to provide such benefits to the Purchaser and (z) at
the Purchaser's request, to enforce for the account and at the expense of the
Purchaser any rights of the Seller arising from the Contracts intended to be
included among the Purchased Assets, including the right to elect to terminate
or not renew in accordance with the terms thereof on the advice of the
Purchaser, which termination shall, upon becoming effective, relieve the Seller
of any further obligation under this Section 2.02(c) with respect to such
Contract. At Purchaser's option and subject to Section 8.04, the Seller and the
Purchaser shall cooperate with each other to take such actions as are reasonably
calculated to effectuate the intent of the preceding sentence. Notwithstanding
anything to the contrary in the foregoing, the Purchaser may determine, in its
reasonable discretion, that any material Contract for which the required
consents and waivers referred to in Section 2.02(a) are not obtained by the
Seller, or the impracticalities of transfer referred to therein are not
resolved, by the Business Day prior to the Closing Date, shall not be a
Purchased Asset, and in that event all rights and obligations with respect to
such material Contract shall be retained by the Seller and the parties shall
agree to an equitable adjustment to the Purchase Price to reflect the reduced
value of the Purchased Assets.
Section 2.03 Liabilities Assumed by the Purchaser. Upon the terms and
subject to the conditions of this Agreement, the Purchaser agrees to assume as
of the Closing Date (i) any liabilities and obligations accruing and arising
after the Closing Date under any mortgage relating to the Real Property and
under any Transferred Lease, which amounts shall be prorated as of the Closing
Date, and (ii) the liabilities and obligations of the Seller that accrue with
respect to any Purchased Asset on or after the Closing Date or that accrue based
on services performed after the Closing Date under all Contracts and Purchased
Servicing Rights included in the Purchased Assets, subject to Section 2.04
(collectively, the "Assumed Liabilities"). The assumption of the Assumed
Liabilities shall be effected by delivery by the Purchaser to the Seller at the
Closing of the Assumption Agreement, whereby the Purchaser shall assume and
agree to pay and discharge in accordance with their terms the Assumed
Liabilities.
Section 2.04 Liabilities Not Assumed by the Purchaser. All obligations
and liabilities of the Seller not constituting Assumed Liabilities, including
any obligations and liabilities that accrue or arise before, on or after the
Closing Date based on or arising out of an act or omission occurring before the
Closing Date (whether or not disclosed to the Purchaser), are hereinafter
referred to as the "Retained Liabilities". The Purchaser shall not assume or be
liable with respect to the Retained Liabilities.
ARTICLE III
Purchase Price; Payment
Section 3.01 The Purchase Price. The Purchase Price (the "Purchase
Price") for the Purchased Assets will be $100 million, which shall be payable as
set forth herein. The Purchase Price shall be payable as follows:
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(a) The Purchaser shall pay the Seller $96 million on the Closing Date;
and
(b) Subject to the next succeeding sentences, the Purchaser shall pay
the Seller $2 million on the first anniversary of the Closing Date and $2
million on the second anniversary of the Closing Date (the two payments set
forth in this clause (b) are hereinafter referred to as the "Contingent Purchase
Price"). Payment of the Contingent Purchase Price shall only be required if
Seller has complied with the material terms of this Agreement and if the number
of Mortgage Loans being serviced by Purchaser as of the Closing Date has not
been reduced by 40% per annum or more on either the first anniversary date of
the Closing Date or the second anniversary of the Closing Date. In addition, the
Contingent Purchase Price payments shall be subject to setoff by and in
satisfaction of the amount of any liquidated claim (and may be withheld pending
resolution of any pending claim, to the extent that such withheld amounts become
payable to Seller such amounts shall bear interest at 5% per annum from the date
such amounts are withheld to the date paid) which has been asserted under
Article XII on or prior to the payment due dates. Any reduction of the
Contingent Purchase Price shall be applied first to the portion of the
Contingent Purchase Price otherwise payable on the first anniversary of the
Closing Date, then to the portion of the Contingent Purchase Price otherwise
payable on the second anniversary of the Closing Date.
ARTICLE IV
Representations and Warranties of the Seller
The Seller represents and warrants to the Purchaser as follows:
Section 4.01 Organization of the Seller. The Seller is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Florida, with the requisite corporate power and authority to own,
operate and lease its properties and to carry on its business as now being or
has been conducted.
Section 4.02 Power and Authority. The Seller has the requisite
corporate power and authority to execute and deliver this Agreement and the
Related Documents to which it is or will be a party and to perform the
transactions contemplated hereby and thereby to be performed by it. Except for
the satisfaction of the conditions precedent set forth in Section 9.05 hereof,
all corporate action on the part of the Seller or the Seller's shareholders,
necessary to approve or to authorize the execution and delivery of this
Agreement and the Related Documents to which it is a party, and the performance
of the transactions contemplated hereby and thereby to be performed by it, has
been duly taken and this Agreement is, and the Related Documents shall be, valid
and binding obligations of the Seller, enforceable against Seller in accordance
with their respective terms.
Section 4.03 No Conflicts. Except as set forth in Section 4.03 of the
Disclosure Schedule, neither the execution or delivery by the Seller of this
Agreement or any Related Document to which it is or will be a party nor the
performance by Seller of the transactions contemplated hereby or thereby to be
performed by it shall:
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(i) conflict with or result in a breach of any provision of
the Articles of Incorporation (or other charter documents) or Bylaws of
the Seller ;
(ii) violate any Law applicable to the Seller or by which the
Seller or any of its properties is bound; or
(iii) constitute an event of default under, permit the
termination of, give rise to a right to accelerate any indebtedness
under, or otherwise violate, breach or conflict with, any Contract or
Approval binding on the Seller, or by which any material asset which
will be a Purchased Asset is bound, or result in the creation of any
Lien upon any asset which will be a Purchased Asset, other than such
Liens that may be imposed by or as a result of any action of the
Purchaser or any of its Affiliates; or require any consent, approval,
authorization or other order or action of, or notice to, or
declaration, filing or registration by Seller with any Governmental
Agency or other third party, except in the case of clause (iii) for
defaults, terminations, accelerations, violations, breaches or
conflicts, that would not reasonably be expected to have a Material
Adverse Effect on the Business.
Section 4.04 Litigation; Compliance with Laws.
(a) The Seller (i) is not in violation of, or has not received any
notice alleging a violation of, any applicable Law or any Approval issued or
required to be obtained thereunder or (ii) has no unsatisfied liability or
obligation in respect of any such violation, except for such violations,
liabilities or obligations that would not reasonably be expected to have a
Material Adverse Effect on the Business. The Seller and its Affiliates own or
possess in the operation of the Business all material Approvals which are
necessary for the conduct of the Business.
(b) Except as set forth in Section 4.04(b) and 4.06(d)(ii) of the Disclosure
Schedule, there is no pending or, to the knowledge of the Seller, threatened
Litigation by or before any Governmental Agency, court or arbitrator, to which
the Seller is a party or by which any asset that will be a Purchased Asset may
be bound or affected which is reasonably expected by the Seller to have a
Material Adverse Effect on the Business. Except as set forth in Section 4.04(b)
of the Disclosure Schedule, since January 1, 1996, no Governmental Agency has
initiated any proceeding or, to the Seller's knowledge, any investigation into
the business or operations of the Seller except pursuant to normal licensing
application and extension inquiries. There are no unresolved written violations,
citations or exceptions by any Governmental Agency with respect to any
examinations of the Seller or any of its Affiliates.
(c) Except as set forth in Section 4.04(c) of the Disclosure Schedule,
on the date hereof, neither the Seller nor any of its Affiliates is a party to
any consent decree and, to the knowledge of the Seller, none are threatened,
pending or contemplated.
Section 4.05 Financial Statements; SEC Reports
(a) Since January 1, 1997, the Seller has filed all required reports,
schedules, forms,
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statements and other documents (including exhibits and all other information
incorporated therein) with the Securities and Exchange Commission (the "SEC").
As of their respective dates, such documents (the "Seller SEC Documents")
complied as to form in all material respects with the applicable requirements of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended, and the rules of the SEC applicable to such Seller SEC Documents,
and no Seller SEC Document when filed contained any untrue statement of a
material fact or omitted 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.
(b) The financial statements included in the Seller SEC Documents (the
"Financial Statements") fairly present, in all material respects the
consolidated financial position and the consolidated results of operations and
cash flows of the Seller and its consolidated subsidiaries for the period
therein identified in conformity with GAAP (except for the omission of footnotes
and, with respect to interim periods, normal year end adjustments).
(c) The Seller has previously delivered to the Purchaser copies of the
Seller's internally prepared accounting reports for each month since March 31,
1999, and will deliver such reports for June 30, 1999 when available (such
reports collectively, the "Internal Reports"). The statements of income for the
months ended April 30 and May 31 and the balance sheets as of April 30, May 31
and June 30 included in the Internal Reports were or will be prepared
consistently with the Financial Statements in accordance with GAAP as
appropriate for the preparation of interim reports of that type (except for the
omission of footnotes and, with respect to interim periods, normal year end
adjustments).
(d) Since December 31, 1998, except as identified on Section 4.05(d) of
the Disclosure Schedule, there has been no action taken by the Seller of the
type described in Section 10.04(a).
(e) As to their respective dates, the Seller had no liabilities of any
nature, known or unknown, fixed or contingent of a type required to be set forth
on a balance sheet in accordance with GAAP which were not reflected in the
Financial Statements or the Internal Reports and has not incurred any since the
date of the last Internal Report, except for liabilities incurred in the
ordinary course of business.
Section 4.06 Purchased Assets; Real Property; Leases and Other
Contracts; Insurance.
(a) Except as described in Section 4.06(a) of the Disclosure Schedule,
the Seller owns, in its sole name and stead, good and indefeasible title to, a
leasehold interest in or the right to use all Purchased Assets, and at the
Closing will (subject to Section 2.02) have the right to convey and transfer to
the Purchaser, all Purchased Assets free and clear of all Liens, except for
Liens for Taxes not yet due and payable or which are being contested in good
faith by appropriate proceedings and Liens disclosed in Section 4.06(a) of the
Disclosure Schedule. All of the tangible assets which will be Purchased Assets
and the assets leased or licensed under Contracts which will be Purchased Assets
are in good operating condition and repair, reasonable wear and tear excepted.
The assets that will be Purchased Assets, taken together, include all material
properties, Contracts, rights and assets which are being used in the conduct of
the Business. The Purchased Assets comprise all the
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material properties, Contracts, rights and assets required by the Seller to
conduct the Business and to service the Mortgage Loans. The Purchased Assets are
not subject to any option to purchase or right of first refusal.
(b) Section 4.06(b) of the Disclosure Schedule contains a brief
description of all Real Property owned in fee simple or held pursuant to a Lease
by the Seller that will be included in the Purchased Assets. Except for the Real
Property and Transferred Leases, no other real property, or interest in real
property, is used in the operation of the Business. To the knowledge of Seller,
the Real Property and Transferred Leases include all material easements and
rights-of-way necessary for present access to and use, as currently utilized, of
the Real Property and the real property subject to the Transferred Leases,
including, but not limited to easements for all utilities servicing the Real
Property and the real property subject to the Transferred Leases. To the
knowledge of Seller, the Real Property and the real property subject to the
Transferred Leases conform in all material respects to all applicable zoning
laws and regulations, and no written notice of violation of any Laws or
Judgments relating to the Real Property or the real property held pursuant to
the Transferred Leases has been received by the Seller. To the knowledge of
Seller, no condemnation proceedings are pending, proposed or threatened, which
would have a Material Adverse Effect on the Real Property or the real property
held pursuant to the Transferred Leases.
In addition, the Seller represents and warrants that:
(i) No tenant, licensee or other entity has any rights to use or
occupy any part of the Real Property or the real property held
pursuant to the Transferred Leases.
(ii) No assessment (general or specific) exists or is pending as to
all or any part of the Real Property or the real property held
pursuant to the Transferred Leases.
(iii) The improvements on the Real Property and the real property held
pursuant to the Transferred Leases are currently in good repair
(ordinary wear and tear excepted) and have been maintained in
accordance with past practice.
(iv) There has been no material or labor furnished to or on the Real
Property or the real property held pursuant to the Transferred
Leases for which payment to be made by Seller has not been made,
to the knowledge of the Seller there are no mechanic's or
materialmen's liens or claims filed against the Real Property or
the real property held pursuant to the Transferred Leases, and
Seller has received no notices of any claims of non-payment or
claims of liens by any contractors, subcontractors, suppliers,
mechanics, materialmen or artisans with respect to any work
performed on or materials furnished to the Real Property or the
real property held pursuant to the Transferred Leases at the
request of Seller.
(v) Except as set forth in Section 4.06(b)(v) of the Disclosure
Schedule, there are no material agreements, guarantees,
indemnities or offers, either written or oral, affecting the
Real Property or, to the Seller's Knowledge, the real property
held pursuant to the Transferred Leases.
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(vi) The parking facilities at the Real Property contain spaces for
automobiles, which spaces, are sufficient to comply in all
material respects with all local ordinances and with all parking
commitments made by Seller under any documents.
(vii) To Seller's knowledge, there are no pending or, threatened
actions or proceedings to alter the current zoning for the Real
Property or the real property held pursuant to the Transferred
Leases.
(c) All Contracts included in the Purchased Assets are in full force
and effect and are valid and binding obligations of the Seller and, to the
Seller's knowledge, of the other parties thereto, except for such Contracts, the
failure of which to be in full force and effect or valid and binding would not
reasonably be expected to have a Material Adverse Effect on the Business. The
Seller has provided to the Purchaser true and complete copies of all such
Contracts. Except as set forth in Section 4.06(c) of the Disclosure Schedule, no
party to any such Contract is in default in any material respect under any such
Contract, nor to the knowledge of the Seller, does there presently exist any
event or condition which, with the passage of time or giving of notice or both,
could be reasonably expected to constitute such a material default. The Seller
has not received any written notice that any party to any Contract has
determined to or intends to terminate such agreement. Section 4.06(c)(i) and
Section 2.01(a)(ii) of the Disclosure Schedule accurately set forth all payment
obligations under any Transferred Leases, expiration dates of Transferred Leases
and options to renew or cancel such Transferred Leases.
(d) Section 4.06(d) on the Disclosure Schedule contains a complete and
correct list of (i) all material insurance policies under which the Seller is a
named insured and that provide coverage with respect to the Purchased Assets and
(ii) any outstanding claims under such insurance policies related to the
Purchased Assets. Seller has not received notice of cancellation of any such
policies.
Section 4.07 Labor Relations. With respect to any employees of the
Business, the Seller is not a party to any collective bargaining agreement with
a labor organization certified by the National Labor Relations Board (the
"NLRB"), and (a) there is no unfair labor practice charge or complaint against
the Seller pending before, or to the knowledge of the Seller, threatened to be
brought before, the NLRB, (b) there is no labor strike, or organized dispute,
slowdown, work stoppage or other form of collective labor activity actually
pending or, to the knowledge of the Seller , threatened against or affecting the
Seller, (c) there is no union representation claim or petition pending before
the NLRB and (d) Seller has not experienced any organized dispute, slowdown,
work stoppage or other form of collective activity in the past three years.
Section 4.08 Mortgage Loans.
(a) In connection with the execution of this Agreement, Seller has
delivered to Purchaser in a computer tape format reasonably acceptable to
Purchaser, a report that identifies the Mortgage Loans (the "Mortgage Loan
Schedule," which term includes, except where the context requires otherwise, the
updated schedule to be prepared and delivered in accordance with Section
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10.15 (Updated Mortgage Loan Schedule)). The Mortgage Loan Schedule identifies
each Mortgage Loan, and sets forth the following information with respect to
each such Mortgage Loan as of the close of business on the last day of the
preceding month (the "Cut-off Date"): (1) the Seller's mortgage loan identifying
number; (2) the mortgagor's first and last name; (3) the original term to
maturity in months; (4) the original date of the mortgage; (5) the mortgage
interest rate in effect on the Cut-off-Date and (6) the stated maturity date.
The information set forth in the Mortgage Loan Schedule is complete, true and
correct in all material respects as of the date hereof.
(b) The Mortgage Loans have been underwritten, originated, held and
serviced in compliance in all material respects with (i) all applicable
contractual requirements (including contractual requirements of private
investors), (ii) all applicable Laws, (iii) all requirements of any insurer, and
(iv) all requirements of the Servicing Agreements.
(c) The brokers and correspondents involved in the origination of any
Mortgage Loan have complied in all material respects with all internal policies
and procedures of the Seller with respect to the origination of such Mortgage
Loans and all applicable Laws, except for such non-compliance as would not
reasonably be expected to have a Material Adverse Effect on the Business.
(d) Except as disclosed in Section 4.08 of the Disclosure Schedule, the
files relating to a the Mortgage Loan contain all documentation necessary for
the Purchaser to service such Mortgage Loan following the Closing, except for
the failure of such files to contain documentation as would not reasonably be
expected to have a Material Adverse Effect on the Business.
(e) Each Mortgage Loan included in a mortgage loan pool met at the time
of its inclusion all the eligibility requirements of the investor for inclusion
in such mortgage pool., except for such Mortgage Loans as would not reasonably
be expected to have a Material Adverse Effect on the Business.
(f) Except as set forth in Section 4.08(f) of the Disclosure Schedule,
except for Mortgage Loans that are delinquent or in default, or which have been
foreclosed, the Seller has no knowledge of any circumstances or conditions with
respect to any Mortgage, any Mortgaged Property, any Mortgagor or any
Mortgagor's credit standing that can reasonably be expected to cause
institutional investors investing in loans of the same type as a Mortgage Loan
to regard such Mortgage Loan to be an unacceptable investment or adversely
affect the value of the Mortgage Loan.
(g) All of the Mortgage Loans are being serviced without recourse to
the Seller (other than for breaches of customary representations and warranties
and other than for recourse to the excess servicing rights which are retained by
the Seller).
(h) The Mortgage Loans are being serviced in compliance in all material
respects with the provisions of any applicable agreements (the "Servicing
Agreements").
(i) The Seller has not, and the Seller has no knowledge that any other
person has, taken
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any action or omitted to take any reasonably required action, which action or
omission would impair the rights of the Seller or (after the Closing) the
Purchaser in the Mortgage Loans or prevent any such person from collecting any
amounts due thereunder, except for such actions or omissions that would not
reasonably be expected to have a Material Adverse Effect on the Business.
(j) Except as set forth in Section 4.08(j) of the Disclosure Schedule,
the Seller has not received any written request that remains outstanding from
any investor, trustee or insurer to repurchase any of the Mortgage Loans.
(k) Except as set forth in Section 4.08(k) of the Disclosure Schedule,
no Person other than the Seller has serviced any of the Mortgage Loans.
Section 4.09 Vote Required. The affirmative vote of the holders of each
of (a) a majority of the outstanding common stock of the Seller and any
outstanding Class D Preferred Stock of the Seller, voting together as class,
entitled to vote thereon, (b) two-thirds of the outstanding Series A Preferred
Stock entitled to vote thereon and (c) two-thirds of the outstanding Series C
Preferred Stock entitled to vote thereon are the only votes of the holders of
any class or series of the Seller's capital stock necessary to approve the
transaction contemplated hereby.
Section 4.10 Transactions with Affiliates. Since January 1, 1997,
except as set forth in Section 4.10 of the Disclosure Schedule with respect to
the Purchased Assets, the Seller has not purchased, acquired or leased any
property or services from or sold, transferred or leased any property or
services to, or lent or advanced any money to, or borrowed any money from, or
acquired any capital stock, obligations or securities of, or made any management
consulting or similar fee agreement with any officer, director or employee of
the Seller or of any Affiliate of the Seller.
Section 4.11 Intellectual Property.
(a) The Seller is the sole owner of all right, title and interest in,
or a valid right to use, the Seller IPR, free and clear of all Liens. All
renewal fees and actions reasonably required to be taken for the maintenance or
protection of the Seller IPR have been paid and taken, except for fees and
actions that would not reasonably be expected to have a Material Adverse Effect
on the Business. The Seller or an Affiliate has the exclusive, unqualified right
to use the Seller IPR and Third Party IPR and to transfer the Seller IPR and
Third Party IPR as set forth in Section 2.01(a)(vi) of the Disclosure Schedule,
subject to Third Party IPR licensing requirements, to the Purchaser. The Seller
has not received any written charge, complaint, claim, demand or notice alleging
that the ownership or use of the Seller IPR or Third Party IPR constitutes any
interference with or infringement or misappropriation of any rights of any
Person, and the Seller has no knowledge of any reasonable basis therefor. To the
Seller's knowledge, no Person has interfered with, infringed or misappropriated
any material Seller IPR. Except as set forth in Section 2.01(a)(vi) of the
Disclosure Schedule, neither the Seller IPR nor the Third Party IPR, is subject
to any outstanding Judgment or Contract to which Seller is a party prohibiting
or restricting the use thereof by the Seller with respect to the Business or
prohibiting or restricting the licensing or transfer thereof by the Seller to
the Purchaser or any other Person, or restricting the use thereof by
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the Purchaser or any other Person.
(b) Except to the extent set forth in Section 4.11(b) of the Disclosure
Schedule, the Seller has not entered into any agreement to indemnify any Person
against any charge of infringement of any Intellectual Property Right or
misappropriation of any trade secret.
(c) All Software, computer hardware and other systems currently used in
the Business are Year 2000 Compliant. Each third party whose systems interface
with the Business' internal systems has advised the Seller that such third
party's systems will be Year 2000 Compliant, and by the Closing Date, the Seller
will have used its reasonable best efforts to verify the accuracy of such
advice.
(d) Except as set forth in Section 4.11(d) of the Disclosure Schedule,
all records and systems (including without limitation computer systems but
excluding Third Party IPR) and all data and information of the Business which
are Purchased Assets are owned by the Seller , and are recorded, stored,
maintained or operated or otherwise held by the Seller and are not wholly or
partly dependent on any facilities which are not under the exclusive ownership
or control of the Seller.
(e) None of the operations of the Business involve the unlicensed or
unauthorized use of confidential information which is not owned by Seller or its
Affiliates. To the Seller's knowledge, the processes employed, the services
provided, the business conducted and the products used or dealt in by the Seller
in the conduct of the Business do not infringe any Intellectual Property Rights
of any unaffiliated Person, except for such infringement that would not
reasonably be expected to have a Material Adverse Effect on the Business. Except
as set forth in Section 4.11(e) of the Disclosure Schedule, none of the
operations of the Business give rise to any material royalty or like payment
obligation for the use of any Third Party IPR.
(f) The Seller has taken all reasonable customary and usual precautions
to protect the secrecy, confidentiality, and value of its trade secrets. The
Seller has good title and an absolute right to use the trade secrets. To the
Seller's knowledge, none of the trade secrets are part of the public knowledge
or literature, or have been used, divulged, or appropriated either for the
benefit of any Person (other than the Seller or its Affiliates) or to the
detriment of the Seller or any of its Affiliates, except for trade secrets the
disclosure of which would not reasonably be expected to have a Material Adverse
Effect on the Business. No material trade secret is subject to any adverse claim
or, to the Seller's knowledge, has been challenged or threatened in writing.
Section 4.12 Environmental Liability. Neither the Seller nor, to the
Seller's knowledge, any third party has engaged in the generation, use,
manufacture, treatment, transportation, storage or disposal of any Hazardous
Material on any of the properties included in the Purchased Assets, and the
Seller has no knowledge that any such properties, as currently used and
occupied, do not comply in all material respects with applicable Laws and
Approvals, including those relating to land use, pollution, Hazardous Materials
and the environment. There is no Litigation and, to the knowledge of the Seller,
there are no private investigations or remediation activities or governmental
investigations pending or, to the Seller's knowledge threatened, seeking to
impose, or
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that would reasonably be expected to result in the imposition, on the Seller or
any Affiliate any obligation or liability under any Law relating to pollution,
Hazardous Materials or the environment which would reasonably be expected to
have a Material Adverse Effect on the Seller, nor does the Seller know of any
reasonable basis therefor.
Section 4.13 Brokers. The Seller has not retained any broker other than
Donaldson, Lufkin and Jenrette ("DLJ") as a broker, in connection with this
Agreement or the transactions provided for hereby, and the fees due DLJ are
solely the responsibility of Seller.
Section 4.14 Information Supplied; Accuracy of Data.
(a) All information (including information on computer tapes and disks)
provided by or on behalf of the Seller to the Purchaser or any of its Affiliates
including any cut-off date information, payment and remittance information and
service fee information and any other information provided in connection with
the negotiation of this Agreement and the consummation of the transactions
contemplated hereby was, as of the date provided, true, complete and correct in
all material respects.
(b) The records (including computer records), files and other
information in written or recorded form relating to, or used by the Seller in
connection with, the Business accurately reflect in all material respects the
information supplied to the Seller by third parties and the actions taken by the
Seller. All servicing accounts maintained by or on behalf of Seller accurately
reflect all material transactions in such accounts and all material information
supplied to the Seller by third parties.
(c) All representations and warranties given by the Seller in
connection with the securitization transactions identified on Section 2.01(a)(i)
of the Disclosure Schedule were true and correct as of the closing date of each
such related securitization.
Section 4.15 Taxes. (a) With respect to Taxes:
(i) each of the Seller and its Affiliates has filed all Tax
Returns that it was required to file. All such Tax Returns were correct
and complete in all respects. All Taxes owed by any of the Seller or
its Affiliates (whether or not shown on any Tax Return) have been paid.
None of the Seller and its Affiliates currently is the beneficiary of
any extension of time within which to file any Tax Return, except as
disclosed in Section 4.15(a)(i) of the Disclosure Schedule. No claim
has ever been made by an authority in a jurisdiction where any of the
Seller and Affiliates does not file Tax Returns that is or may be
subject to taxation by that jurisdiction;
(ii) except to the extent disclosed on Section 4.15(a)(ii) of
the Disclosure Schedule, no adjustments relating to Taxes of the
Affiliates have been proposed by the Internal Revenue Service or any
state, local or foreign taxing authority, whether informally or in
writing, and to the Seller's knowledge no basis exists for such an
adjustment;
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(iii) there are no Tax liens on any of the assets of any of
the Seller and its Affiliates that arose in connection with any failure
(or alleged failure) to pay any Tax other than for taxes that are not
yet due and payable, or for taxes that are being contested in good
faith;
(iv) to the Seller's knowledge, there are no proposed
reassessments of the Purchased Assets or any property owned by the
Affiliates, or other proposals that could increase the amount of Tax to
which the Seller and its Affiliates would be subject; and
(v) each of the Seller and its Affiliates has withheld and
paid all Taxes required to have been withheld and paid in connection
with amounts paid or owing to any employee, independent contractor,
creditor, stockholder, or other third party;
(vi) except as disclosed in Section 4.15(vi) of the Disclosure
Schedule, no penalties under Section 6721, 6722 or 6723 of the Code
have been assessed against the Seller or any of the Affiliates, or if
penalties have been assessed, all such penalties have been abated; and
(vii) none of the Seller and its Affiliates has waived any
statute of limitations in respect of Taxes or agreed to any extension
of time with respect to a Tax assessment or deficiency.
Section 4.16 Title to the Servicing and Escrow Accounts. The Seller is
the sole and lawful owner of the Servicing Rights, is responsible for the
maintenance of the Escrow Accounts, has the sole right and authority, subject to
obtaining the Approvals set forth in Section 4.16 of the Disclosure Schedule, to
transfer the Purchased Servicing Rights as contemplated hereby, and is not
contractually obligated to sell or subcontract the Purchased Servicing Rights to
any other party.
Section 4.17 Escrow Accounts. All Escrow Accounts have been and are
being maintained in all material respects in accordance with applicable Law and
in accordance with the Servicing Agreements and the terms of all documents
related to the Mortgage Loans. All balances required by any documents related to
the Mortgage Loans and paid to the Seller for the account of the Mortgagors are
on deposit in the appropriate Escrow Account. The Seller has credited or caused
to be credited to the account of each Mortgagor all interest required to be paid
to a Mortgagor on any escrowed amounts in the Escrow Account in accordance with
all applicable requirements.
Section 4.18 Custodial Accounts. All Custodial Accounts have been and
are being maintained in all material respects in accordance with applicable Law
and in accordance with the Servicing Agreements and related obligations. All
balances paid to the Seller for the account of the Mortgagors and required by
the Servicing Agreements or any other documents related to the Mortgage Loans to
be held by the Seller in Custodial Accounts are on deposit in the appropriate
Custodial Account.
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Section 4.19 Servicing Agreements. The Servicing Agreements set forth
all of the terms and conditions of the Seller's rights and obligations to any
investor or trustee that is a party thereto, and there are no other agreements,
written or oral, that modify or affect the Servicing Agreements in any material
respect. The Seller has delivered to the Purchaser true, correct and complete
copies of the Servicing Agreements.
Section 4.20 Solvency. On the date hereof, the Seller believes that
both immediately before and after, and giving effect to consummation of the
transactions contemplated by this Agreement, including, but not limited to, the
transfer of the Purchased Assets to the Purchaser, (i) the book value of the
Seller's assets will exceed its liabilities (after estimating the value of the
cash flows on interest only and residual certificates on an undiscounted cash
flow basis), and (ii) the Seller will be able to pay its debts and other
liabilities (including, but not limited to the reasonably anticipated amount of
subordinated, unmatured, unliquidated and contingent liabilities (collectively,
the "Contingent Liabilities")), as they mature; provided, however, that this
representation and warranty in clause (ii) is based upon the assumptions that
the Seller will be able to liquidate its assets in an orderly process for full
book value, and that the maturity and amount of liabilities (including but not
limited to the Contingent Liabilities) will be renegotiated to match the amounts
and timing of the orderly liquidation of such assets.
ARTICLE V
Representations and Warranties of the Purchaser\
The Purchaser represents and warrants to the Seller as follows:
Section 5.01 Organization of the Purchaser. The Purchaser is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has the requisite power and authority to own,
operate and lease its properties and to carry on its business as now being
conducted.
Section 5.02 Power and Authority. The Purchaser has the requisite power
and authority to execute and deliver this Agreement and the Related Documents to
which it is or will be a party and to perform the transactions contemplated
hereby and thereby to be performed by it. Except for the satisfaction of the
conditions precedent set forth in Section 8.11 hereof, all corporate action on
the part of the Purchaser necessary to approve or to authorize the execution and
delivery of this Agreement and the Related Documents to which it is or will be a
party and the performance of the transactions contemplated hereby and thereby to
be performed by it has been duly taken. This Agreement is a valid and binding
obligation of the Purchaser, enforceable in accordance with its terms.
Section 5.03 No Conflicts. Except as set forth in Section 5.03 of the
Disclosure Schedule, neither the execution or delivery by the Purchaser of this
Agreement or the Related Documents to which it is or will be a party nor the
performance by the Purchaser of the transactions
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contemplated hereby or thereby to be performed by it, shall:
(i) conflict with or result in a breach of any provision of
the Certificate of Incorporation or Bylaws of the Purchaser;
(ii) violate any Law applicable to the Purchaser or by which
the Purchaser or any of its properties is bound; or
(iii) require any consent, approval, authorization or other
order or action of, or notice to, or declaration, filing or
registration with, any Governmental Agency or other third party.
Section 5.04 Litigation. Except as set forth in Section 5.04 of the
Disclosure Schedule, there is no pending or, to the knowledge of the Purchaser,
threatened Litigation, by or before any Governmental Agency, court or arbitrator
to which Purchaser is a party which may affect or delay Purchaser's ability to
fulfill the terms of its obligations under this Agreement.
Section 5.05 Brokers. The Purchaser has not retained any broker or
finder, and no broker or finder has acted on behalf of the Purchaser, in
connection with this Agreement or the transactions provided for hereby.
ARTICLE VI
Employees and Employee-Related Matters
Section 6.01 Basic Employment Matters.
(a) Effective as of the Closing Date, the Purchaser or an Affiliate of
the Purchaser (the "Employer") shall offer to employ substantially all of the
employees of the Seller employed in the Business on the day before the Closing
Date and who have been working in offices of the Seller located on the Real
Property and the Transferred Leases for a majority of the Business Days for one
year prior to the date of this Agreement or, with respect to employees who have
not been employed for one year, who have been working in offices of the Seller
located on the Real Property and the Transferred Leases for a majority of the
Business Days during the time they have been employed and were not previous
employees of any Affiliate. The Purchaser agrees to deliver to the Seller at
least ten Business Days before the Closing Date a list of employees to whom it
will offer employment. Purchaser may offer such employees salaries, bonuses and
benefits, which Purchaser, in its sole discretion, deems appropriate. The
employees to whom the Employer elects to offer employment pursuant to the
preceding sentence and who accept such employment are referred to collectively
herein as the "Employees." The employment of the Employees shall not be
construed to limit the ability of Purchaser to terminate the employment of any
Employee at any time for any reason, and the employment of the Employees shall
be subject to all of the Purchaser's practices and policies, including its
policy of employment-at-will. Such Employees will be offered employment as new
Employees of the Purchaser (a) at a location of not more than fifty (50) miles
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distant from their present employment site; (b) at a level comparable to their
present position with Seller and (c) with benefits in accordance with the
Purchaser's plans now or thereafter in effect. Such Employees shall receive
credit for years of employment with Seller for (i) calculating vacation benefits
and (ii) calculating benefits under Purchaser's severance benefits. Purchaser
shall waive pre-existing condition requirements, evidence of insurability
provisions, waiting period requirements or any similar provisions applicable as
of the Closing Date under any Employee Welfare Benefit Plans maintained,
sponsored or contributed to by the Purchaser for Employees after the Closing
Date; and the Purchaser shall apply toward any deductible requirements and
out-of-pocket maximum limits under such Employee Welfare Benefit Plans any
amounts paid (or accrued) by each Employee under Seller's Employee Welfare
Benefit Plans during the current plan year; provided, however, that the
foregoing shall apply only to the extent that Seller provides the Purchaser with
such information as Purchaser reasonably requires to administer such provisions.
For the purposes of this Agreement, "Employee Welfare Benefit Plan" means any
employee welfare benefit plan within the meaning of Section 3(1) of ERISA,
regardless of whether any such plan is subject to ERISA.
(b) None of the Employee Benefit Plans of Seller or its Affiliates is
being assumed by or transferred to Purchaser and Purchaser shall have no rights
or liabilities with respect to any such Employee Benefit Plan.
ARTICLE VII
Closing
Section 7.01 The Closing. The Closing shall be held at 10:00 a.m. on
the earliest date that is five Business Days after the satisfaction or waiver of
all of the conditions to Closing set out in Articles VIII and IX hereto (other
than any condition to be satisfied or waived at the Closing) at the offices of
the Purchaser at 300, St. Paul Place, Baltimore, Maryland 21202, or at such
other time and place as may mutually be agreed upon by the parties hereto. At
the Closing, the appropriate parties shall take all other actions not previously
taken but required to be taken hereunder on or prior to the Closing Date. The
transfer of the Purchased Assets to the Purchaser and the assumption of the
Assumed Liabilities by the Purchaser shall be deemed to occur at 12:01 a.m. on
the Closing Date.
ARTICLE VIII
Conditions to Obligations of the Purchaser
to Consummate the Transaction
The obligations of the Purchaser to be performed at the Closing shall
be subject to the satisfaction or waiver, at or prior to the Closing, of the
following conditions:
Section 8.01 Representations and Warranties; Compliance with Covenants.
The representations and warranties of the Seller contained in this Agreement
shall be true and correct in
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all material respects (other than those qualified as to materiality, Material
Adverse Effect or Material Adverse Change which shall be true and correct) on
and as of the Closing Date with the same force and effect as though such
representations and warranties were made at the Closing Date. The covenants
required to be performed by the Seller at or prior to the Closing pursuant to
the terms of this Agreement shall have been duly performed in all material
respects. The Purchaser shall have received a certificate of the President of
the Seller, executed on behalf of the Seller, to the effect (i) of the preceding
two sentences and (ii) that the Seller believes that after Closing Date the
Seller will not have unreasonably small capital for the limited business in
which the Seller reasonably expects to be engaged. In addition, the Purchaser
shall have received a certificate from the Chief Financial Officer, executed on
behalf of the Seller, that the representation and warranties in Sections 4.20(i)
and (ii) are true and correct in all respects on and as of the Closing Date as
if made on and as of the Closing Date.
Section 8.02 No Proceedings. No proceedings have been instituted before
a court of competent jurisdiction in the United States or any other Governmental
Agency, which has had the effect or which could reasonably be expected to lead
to a Judgment, which has the effect, or shall have the effect, of enjoining the
consummation of the transactions contemplated by this Agreement.
Section 8.03 Approvals. All Approvals (not including mortgage lending
Approvals) required from any Governmental Agency in order to consummate the
transactions contemplated by this Agreement and to conduct the Business
following the Closing and as set forth in Section 8.03 on the Disclosure
Schedule shall have been obtained and all applicable waiting periods under any
applicable Laws shall have expired or been terminated, without the imposition of
any materially burdensome restrictions or conditions on the Purchaser.
Section 8.04 Third Party Consents. Each of the Approvals necessary from
any person not a Governmental Agency for the transfer of the Purchased Assets
to, or assumption of the Assumed Liabilities by, the Purchaser and as set forth
in Section 8.04 on the Disclosure Schedule shall have been obtained. Without
limiting the foregoing, this Agreement shall have been approved, and the
transactions contemplated herein, including, but not limited to, the transfer of
the Purchased Assets to the Purchaser, consented to, by more than 90% of the
creditors, based on amount due, of the Seller known by the Seller to exist as of
the date of Closing.
Section 8.05 Bill of Sale, etc. The Seller shall have duly authorized,
executed and delivered to the Purchaser the Bill of Sale dated as of the Closing
Date, and the deeds and other instruments of conveyance referred to in Section
2.01(d).
Section 8.06 Survey; Title Policies. The Purchaser shall have received
the surveys and commitments to issue title policies with respect to the Real
Property as specified in Section 10.12.
Section 8.07 Employment. Those persons identified in Section 8.07 of
the Disclosure Schedule shall have accepted employment with the Purchaser
effective as of the Closing Date, on terms and conditions reasonably
satisfactory to the Purchaser.
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Section 8.08 Transfer Instructions. The transfer instructions for the
transfer of the Purchased Servicing Rights and the related Mortgage Loans
identified on Schedule 8.08 to be completed prior to the Closing Date shall have
been completed in all material respects.
Section 8.09 Corporate and Other Approval. This Agreement and the
transactions contemplated hereby shall have been approved and adopted by (i) the
stockholders of the Seller by (a) the vote required by the Florida Business
Corporation Act, (b) the affirmative vote of the holders (other than the
Principal Stockholders) of a majority of the shares of the common stock of the
Seller outstanding and owned by such holders entitled to vote thereon, and (c)
the affirmative vote of the holders of two-thirds of the shares of each class
preferred stock of the Seller outstanding entitled to vote thereon, and (ii) by
a majority of the members of the Seller's board of directors and the special
committee of independent directors.
Section 8.10 Valuation Opinion. The Seller shall have received, at its
sole cost and expense, the opinion of a business valuation expert reasonably
satisfactory to the Purchaser, dated the Closing Date, addressed to the
Purchaser and reasonably satisfactory as to form and content to the Purchaser to
the effect that Seller has received reasonably equivalent value in exchange for
the transfer of the Purchased Assets and the Seller shall have delivered such
opinion to the Purchaser.
Section 8.11 Board Approval. This Agreement and the transactions
contemplated hereby shall have been approved by the Board of Directors of each
of the Purchaser and Citigroup Inc.
Section 8.12 No Material Adverse Change. There shall have been no
Material Adverse Change in the Business or the Purchased Assets.
Section 8.13 Release of Liens; UCC Filings. The Seller shall have
obtained or filed all documents or instruments or taken all actions necessary to
release any material Liens on the Purchased Assets, including the filing of
UCC's, other than Liens that constitute Assumed Liabilities.
Section 8.14 Inapplicability of Florida Control Share and Affiliated
Transactions Statutes. The Seller shall have taken the actions necessary so that
the provisions of Florida Statutes section 607.0901 and 607.0902 do not apply to
the transactions contemplated herein.
Section 8.15 Transition Services Agreement. Purchaser and Seller shall
have entered into a transition services agreement in form and substance
reasonably satisfactory to Purchaser and Seller.
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ARTICLE IX
Conditions to Obligations of the Seller
to Consummate the Transaction
The obligations of the Seller to be performed at the Closing shall be
subject to the satisfaction or waiver, at or prior to the Closing, of the
following conditions:
Section 9.01 Representations and Warranties; Compliance with Covenants.
The representations and warranties of the Purchaser contained in this Agreement
shall be true and correct in all material respects on and as of the Closing Date
with the same force and effect as though such representations and warranties
were made at the Closing Date; the covenants required to be performed by the
Purchaser at or prior to the Closing pursuant to the terms of this Agreement
shall have been duly performed in all material respects; and the Seller shall
have received a certificate of the President or a Vice President of the
Purchaser to such effect.
Section 9.02 No Injunction. No Judgment shall have been rendered in any
Litigation which has the effect of enjoining the consummation of the
transactions contemplated by this Agreement.
Section 9.03 Approvals. All Approvals required from any Governmental
Agency in order to consummate the transactions contemplated by this Agreement
shall have been obtained and all applicable waiting periods under any applicable
Laws shall have expired or been terminated, without the imposition of any
materially burdensome restrictions or conditions on the Seller.
Section 9.04 Assumption Agreement. The Purchaser shall have duly
authorized, executed and delivered to the Seller the Assumption Agreement, dated
as of the Closing Date, and shall have acknowledged the Bill of Sale.
Section 9.05 Corporate and Other Approval. This Agreement and the
transactions contemplated hereby shall have been approved and adopted by (i) the
stockholders of the Seller by (a) the vote required by the Florida Business
Corporation Act, (b) the affirmative vote of the holders other than the
Principal Stockholders of a majority of the shares of the common stock of the
Seller outstanding entitled to vote thereon, and (c) the affirmative vote of the
holders of two-thirds of the shares of each class preferred stock of the Seller
outstanding entitled to vote thereon, and (ii) by a majority of the members of
the Seller's board of directors and the special committee of independent
directors.
Section 9.06 Payment. The Purchaser shall have paid to the Seller, in
immediately available funds, the Purchase Price less the Contingent Purchase
Price.
Section 9.07 Transition Services Agreement. Purchaser and Seller shall
have entered into a transition services agreement in form and substance
reasonably satisfactory to Purchaser and Seller.
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ARTICLE X
Covenants
Section 10.01 Regulatory Filings. As soon as practicable after the
execution of this Agreement, the parties shall make all filings with the
appropriate Governmental Agencies of the information and documents required or
contemplated by any applicable Law with respect to the transactions contemplated
by this Agreement. The Seller, on the one hand, and the Purchaser, on the other
hand, shall use their commercially reasonable efforts to comply as expeditiously
as possible with all lawful requests of such Governmental Agencies for
additional information and documents.
Section 10.02 Injunctions. If any court having jurisdiction over any of
the parties hereto issues or otherwise promulgates any restraining order,
injunction, decree or similar order which prohibits the consummation of any of
the transactions contemplated hereby or by any Related Document, the parties
hereto shall use reasonable efforts to have such restraining order, injunction,
decree or similar order dissolved or otherwise eliminated as promptly as
possible and to pursue the underlying Litigation diligently and in good faith.
Notwithstanding anything to the contrary contained in this Agreement, nothing
contained in this Section 10.02 shall limit the respective rights of the parties
to terminate this Agreement pursuant to Section 13.01 or shall limit or
otherwise affect the respective conditions to the obligations of the parties set
forth in Articles VIII and IX hereof.
Section 10.03 Access to Information. Between the date of this Agreement
and the Closing Date, the Seller shall, and shall cause its Affiliates to, upon
reasonable request by the Purchaser, (i) provide the Purchaser and its
accountants, counsel and other authorized representatives access, during normal
business hours and under reasonable circumstances, to any and all premises,
properties, Contracts, commitments, books, records and other information of or
relating to the Business and to the officers, employees and agents of the
Business and (ii) cause its officers to furnish to the Purchaser and its
authorized representatives any financial, environmental, health and safety,
technical and operating data and other information pertaining to the Business,
as the Purchaser shall from time to time reasonably request and which is either
normally available to the Seller in the ordinary and usual course of business or
which may be obtained or produced by the Seller at a de minimis cost and effort
to the Seller.
Section 10.04 No Extraordinary Actions by the Seller.
(a) In each case except as (x) consented to or approved by the
Purchaser in writing (which consent shall not be unreasonably withheld, bearing
in mind the Purchaser's plans to operate the Business after the Closing), (y)
required by this Agreement or the Related Documents or (z) related to the
Excluded Assets or the Retained Liabilities, from the date hereof until the
Closing, the Seller shall not take any action that would cause its
representations and warranties herein to be untrue in any material respect
(except for the representation and warranty in Section 4.20 which shall remain
true in all respects) and shall conduct the Business only in the ordinary course
and substantially in accordance with its present policies and procedures
(including without limitation
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loan collection and chargeoff practices) and use reasonable commercial efforts
to preserve intact its present organization relating to the Business, keep
available the services of its present management and employees and preserve its
relationships with suppliers and customers and others having business dealings
with it (including, to the extent consistent with the provisions of this
Agreement, its Affiliates) so that the Business shall not be impaired in any
material respect, and the Seller and its Affiliates will not:
(i) Permit or allow any of the assets that will be Purchased
Assets to be subjected to any Lien, except for Liens for Taxes not yet
due and payable or which are being contested in good faith by
appropriate proceedings and except for Liens that are part of the
Assumed Liabilities as of the date of this Agreement and except for
Liens provided in connection with the financing of servicing advances;
(ii) Sell, transfer, license, lease or otherwise dispose of or
agree to dispose of, or acquire or agree to acquire, any material
assets that would be Purchased Assets except in the ordinary course of
business, or sell, transfer, license, lease or otherwise dispose of or
agree to dispose of any Servicing Rights except for Liens provided in
connection with the financing of servicing advances;
(iii) Except as required by Contract or applicable Law, grant
any general increase or implement any general decrease in the
compensation of officers or employees (including any such increase
pursuant to any bonus, pension, profit-sharing or other plan or
commitment) or grant any increase in the compensation payable or to
become payable to any officer or employee, except for increases in
compensation payable to employees (but not officers) in the ordinary
course of business consistent with past practice;
(iv) Make any single capital expenditure or commitment in
excess of $25,000 for additions to property, plant, equipment or
intangible capital assets that would be included in the Purchased
Assets or make aggregate capital expenditures and commitments for such
purposes in excess of $100,000;
(v) Enter into any agreement (other than Mortgage Loans or
commitments to make Mortgage Loans) for, or modify or amend any
existing agreements with, a non-cancelable term in excess of one year
or involving aggregate payments by the Seller in excess of $50,000,
except for modifications or amendments to the Seller's existing
intercreditor agreements with its significant warehouse and other
significant lenders; or
(vi) Hire any person who would become an Employee, provided
that the Seller may hire any non-exempt employee to fill a vacancy or
enter into or amend any employment agreement.
(b) The Seller agrees to cooperate with the Purchaser throughout the
period prior to the Closing to meet with employees of the Business at such times
as shall be reasonably approved by a representative of the Seller, for purposes
of retaining such employees.
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(c) Except as provided in clauses (d) through (h) below, from the date
hereof until the Closing or the earlier termination of this Agreement, the
Seller will not, and will cause its officers, directors, employees and agents
not to, initiate contact with, solicit any inquiries from, request or invite
submission of any proposal or offer from, or provide any confidential
information to, or participate in any negotiations with, any third party in
connection with any possible proposal by such third party regarding a sale of
all or any substantial portion of the assets of the Business, provided that the
provisions of this paragraph shall not apply to any assets that would be
Excluded Assets.
(d) At any time prior to, but at no time subsequent to, the receipt of
the Seller's corporate approval in accordance with Sections 8.09 and 9.05, the
Seller may, subject to compliance with Section 10.04(e), (i) solicit, initiate
or encourage a Takeover Proposal of the sort referred to in Section 10.04(h)
that involves consideration to the Seller's shareholders with a value that the
Seller's Board of Directors reasonably believes, based on advice from the
Seller's independent outside financial advisor, is superior to the consideration
to the Seller provided for pursuant to this Agreement, and (ii) furnish
information with respect to the Seller 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 Superior Proposal.
(e) Neither the Board of Directors of Seller nor any committee thereof
shall (x) withdraw or modify, or propose to withdraw or modify any approval or
recommendation by such Board of Directors or such committee of this Agreement or
(y) approve or recommend, or propose to approve or recommend, any Takeover
Proposal except (i) in connection with a Superior Proposal (as defined in
Section 10.04(h)) and then only at or after the termination of this Agreement
pursuant to and in accordance with Section 13.02 or (ii) in connection with any
Takeover Proposal involving the acquisition of all or a portion of the common
stock of the Seller by an acquirer which agrees to vote in favor of this
Agreement.
(f) In addition to the obligations of the Company set forth in
paragraphs (d) and (e) of this Section 10.04, the Seller promptly shall advise
Purchaser 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 Purchaser with a true and complete
copy of such Takeover Proposal, if in writing. The Seller shall keep Purchaser
fully informed of the status and material details (including material amendments
or proposed amendments) of any such Takeover Proposal.
(g) Nothing contained in this Section 10.04 shall prohibit the Seller
from taking and disclosing to its shareholders a position contemplated by Rule
14e-2(a) promulgated under the Exchange Act; provided, however, neither the
Seller nor its Board of Directors nor any committee thereof shall, except as
permitted by Section 10.04(e), withdraw or modify, or propose to withdraw or
modify, its position with respect to this Agreement or approve or recommend, or
propose to approve or recommend, a Takeover Proposal.
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(h) As used in this Agreement: "Superior Proposal" means a bona fide
written Takeover Proposal (x) to acquire, directly or indirectly, for
consideration consisting of cash and/or securities and/or the contribution or
combination of assets by merger or otherwise all or substantially all the assets
of the Company, (y) otherwise on terms which the Board of Directors of the
Seller decides in its good faith reasonable judgment to be more favorable to the
Seller's shareholders than the transactions provided for pursuant to this
Agreement (based on the advice with only customary qualifications, of the
Seller'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
Seller'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 Seller or the purchase
of all or substantially all of the assets of the Seller that include the
Purchased Assets.
Section 10.05 Further Assurances.
(a) Upon the terms and subject to the conditions hereof, the Seller,
and the Purchaser, agree to use reasonable commercial efforts to take or cause
to be taken all actions, and to do or cause to be done all things, necessary,
proper or advisable to ensure that the conditions set forth in Articles VIII and
IX are satisfied and to consummate and make effective the transactions
contemplated by this Agreement and the Related Documents, insofar as such
matters are within their respective control.
(b) Except as otherwise expressly provided for in this Agreement,
through the date which is 180 days after the Closing Date (i) each of the
Purchaser and the Seller shall, and shall cause each of their respective
Affiliates to, use reasonable commercial efforts to obtain at the earliest
practicable date, whether before or after the Closing Date, all consents
required to be obtained by it for the performance of the transactions
contemplated by this Agreement and the Related Documents, (ii) the Seller shall
use commercial reasonable efforts to obtain, whether before or after the Closing
Date, any amendments, novations, releases, waivers, consents or approvals with
respect to all outstanding Contracts of the Seller which are necessary either to
cure any material defaults thereunder existing immediately prior to the Closing
Date or for the consummation of the transactions contemplated by this Agreement
and the Related Documents, and (iii) each party hereto shall execute and deliver
such instruments, certificates and other documents and take such other actions
as any other party hereto may reasonably request in order to carry out this
Agreement or any of the Related Documents and the transactions contemplated
hereby and thereby; provided, however, that (A) in obtaining any such
amendments, novations, releases, waivers, consents or approvals, no party hereto
shall, or shall permit any of its Affiliates to, agree to any amendment of any
such instrument which imposes any obligation or liability on another party
without the prior written consent of such other party, and (B) except as
otherwise expressly provided by this Agreement, no party hereto shall be
obligated to execute any guarantees or undertakings or otherwise incur or assume
any expense or liability (other than for filing fees and similar costs
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required in connection with the purchase and sale of the Purchased Assets) in
obtaining any such release, novation, approval, consent, authorization or
waiver.
(c) The Purchaser, on the one hand, and the Seller, on the other hand,
shall provide such information and cooperate fully with each other party hereto
in making such applications, filings and other submissions which may be required
or reasonably necessary in order to obtain all approvals, consents,
authorizations and waivers as may be required from any Governmental Agency or
other third party in connection with the transactions contemplated by this
Agreement and the Related Documents and shall promptly use reasonable commercial
efforts to make each such application, filing or other submission, including
without limitation, any supplemental filing.
(d) If, prior to Closing, the Seller should become aware of events or
issues that would lead to the reasonable belief that the opinion set forth in
Section 8.10 may not be obtained by Seller, the Seller shall promptly advise the
Purchaser of such events or issues.
Section 10.06 Insurance and Benefits Contracts. The Seller shall use
reasonable commercial efforts to maintain all insurance policies and binders
relating to the Business in full force and effect at all times up to and
including the Closing Date and shall pay all premiums, deductibles and
retro-adjustment billings, if any, with respect thereto covering all periods,
and ensuring coverage of the Business, up to and including the Closing Date.
Section 10.07 Preparation of a Proxy Statement; Stockholder Meeting.
(a) As soon as practicable following the date of this Agreement the
Seller shall prepare and file with the SEC a Proxy Statement relating to the
vote described in Section 8.09. Prior to such filing, the Seller shall allow the
Purchaser to review the Proxy Statement. The Seller will use all reasonable
efforts to cause the Proxy Statement to be mailed to its stockholders as
promptly as practicable. None of the information included or incorporated by
reference in the Proxy Statement will at the time the Proxy Statement is first
mailed to the Seller's stockholders 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; provided that the Seller's
representation in this sentence does not extend to information, if any, supplied
by the Purchaser. The Proxy Statement will comply as to form in all material
respects with the requirements of the Exchange Act. If at any time prior to the
Closing Date any information relating to the Seller, the Purchaser or any of
their respective Affiliates, officers or directors, should be discovered by the
Seller or the Purchaser which should be set forth in an amendment or supplement
to the Proxy Statement, so that such document would not include any misstatement
of a material fact or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, the party which discovers such information shall promptly notify
the other party hereto and an appropriate amendment or supplement describing
such information shall be promptly filed with the SEC and, to the extent
required by law, disseminated to the stockholders of the Seller.
(b) The Seller shall, as soon as practicable following the clearance of
the Proxy Statement by the SEC, duly call, give notice of, convene and hold a
meeting of its stockholders (the
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"Stockholders Meeting") for the purpose of obtaining the approval of its
stockholders of this Agreement and the transactions contemplated hereby and
shall, through its Board of Directors, once approved by its board of directors
and its special committee of independent directors, recommend to its
stockholders the approval and adoption of this Agreement and the transactions
contemplated hereby.
Section 10.08 Mail Received After Closing; Power of Attorney.
(a) Following the Closing, (i) the Purchaser may receive and open all
mail addressed or directed to the Seller at the offices of the Business, (ii) to
the extent that such mail and the contents thereof relate to the Purchased
Assets, the Business or to any of the Assumed Liabilities, the Purchaser may
deal with the contents thereof in its sole discretion and (iii) the Purchaser
shall promptly forward any other such mail to the Seller.
(b) On the Closing Date, the Seller shall furnish the Purchaser with a
Power of Attorney reasonably acceptable to the Purchaser to enable the Purchaser
to endorse any check or other instrument made payable to the Seller on account
of the Purchased Assets or take any other action consistent with this
transaction.
Section 10.09 Confidentiality; Publicity. Each party shall hold, and
shall use reasonable efforts to cause its employees and agents to hold, in
strict confidence all information concerning another party furnished to it by
such other party. Any release to the public of information with respect to the
matters contemplated by this Agreement (including without limitation any
termination of this Agreement) shall be made only in the form and manner
approved by the Purchaser and the Seller, provided that if a party is required
by law, regulations or rules or requests of any stock exchange to make any
disclosure concerning such matters, such party shall discuss in good faith with
the other party the form and content of such disclosure prior to its release.
Section 10.10 Transition Services. The parties shall negotiate in good
faith and execute and deliver on or prior to the Closing Date, a transitional
services agreement in form and substance reasonably satisfactory to Purchaser
and Seller.
Section 10.11 Access to Records After the Closing.
(a) The Seller and the Purchaser recognize that subsequent to the
Closing they may have information and documents which relate to the Business,
its employees, its properties, the Purchased Assets, the Excluded Assets, the
Retained Liabilities, the Excluded Liabilities and Taxes and to which the other
party may need access subsequent to the Closing. Each party shall provide the
other party access, during normal business hours on reasonable notice, to all
such information and documents, and to such of its employees, which such other
party reasonably requests. The Purchaser and the Seller agree that prior to the
destruction or disposition of any such documents or any books or records
pertaining to or containing such information at any time within five years (or,
in any matter involving Taxes, until the later of the expiration of all
applicable statutes of limitations (including extensions thereof) or the
conclusion of all litigation (including exhaustion of all appeals relating
thereto) with respect to such Taxes) after the Closing Date, each party shall
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provide not less than 30 calendar days prior written notice to the other of any
such proposed destruction or disposal. If the recipient of such notice desires
to obtain any such documents, it may do so by notifying the other party in
writing at any time prior to the scheduled date for such destruction or
disposal. Such notice must specify the documents which the requesting party
wishes to obtain. The parties shall then promptly arrange for the delivery of
such documents. All out-of-pocket costs associated with the delivery of the
requested documents shall be paid by the requesting party.
(b) With respect to audits conducted by federal, state and local taxing
authorities, Purchaser agrees to cooperate with Seller to the extent it has any
information required by Seller to respond to information document requests
presented by such taxing authorities as promptly as practicable. Such
information document requests may include, but shall not be limited to, all tax
matters related to Seller and Affiliates for all tax years currently open under
the relevant jurisdictions' statute of limitation.
Section 10.12 Title Commitments; Surveys.
(a) The Seller shall, not less than 30 days prior to the Closing Date,
deliver to the Purchaser a commitment of a title insurance company selected by
Seller and reasonably satisfactory to the Purchaser to issue an owner's policy
of title insurance on a standard American Land Title Association form covering
title to each parcel of real property owned by the Seller described in Section
4.07(b) in an amount reasonably satisfactory to the Purchaser naming the
Purchaser as the insured. The Seller agrees to pay the cost of such title
insurance commitments.
(b) As soon as reasonably practicable after the execution of this
Agreement, the Seller shall, at its expense, furnish to the Purchaser a current
on-the-ground staked "as-built" survey of the owned premises included in the
Purchased Assets made in accordance with the "Minimum Standard Detail
Requirements for ALTA/ACSM Land Title Surveys" jointly established by ALTA and
ACSM in 1992 and meeting the accuracy requirements of an Urban Class Survey, as
defined therein, including Items 1-44, 6-11 and 13 on Table A contained therein
(the "Survey") prepared by a registered land surveyor licensed in the state
where such premise is located (the "Surveyor"), and which survey shall otherwise
be acceptable to the Purchaser, in its reasonable discretion, and the title
company for deletion of the exceptions pertaining to areas and boundaries. The
Survey (including specifically the certificate of the Surveyor forming a part
thereof) shall be in form and substance acceptable to the Purchaser, in its
reasonable discretion, and to the title insurance company and shall locate all
existing improvements, easements and rights-of-way (which shall show recording
data, if applicable), encroachments, conflicts and protrusions affecting such
premises, water, sewer, gas and electric lines, telephone and television cable
lines and the size and capacity thereof, parking spaces and the size of each,
shall set forth the outside perimeter of the premises, shall contain a metes and
bounds description of the premises and shall set forth the acres included within
the premises. The Survey shall contain a statement on the face thereof
certifying as to the Zone Designation by the Secretary of Housing and Urban
Development with reference to the appropriate Flood Insurance Rate Map Number
(which Flood Insurance Rate Map Number shall be the current Flood Insurance Rate
Map for the community in which the premises is located). In the event the Survey
shows any easement, right-of-way, encroachment, conflict or protrusion affecting
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the premises that is unacceptable to the Purchaser, in its reasonable
discretion, the Purchaser shall within 20 days after receipt of such Survey, the
title commitment and a legible copy of each exception document, notify the
Seller in writing of such fact. The Seller shall then promptly undertake to
eliminate or modify such unacceptable matters to the satisfaction of the
Purchaser, as determined in its reasonable discretion. In the event the Seller
is unable to do so prior to the Closing, the Purchaser may either decline to
acquire such premises or accept such title to the premises as the Seller can
deliver and receive a credit against the purchase price in an amount reasonably
acceptable to the Purchaser.
Section 10.13 Agreement Not to Compete; Non-Solicitation.
(a) The Seller agrees that during the period ending on the fifth
anniversary of the Closing Date, neither the Seller nor any other entity of
which the Seller owns, directly or indirectly, 51% or more of the voting stock
or other similar equity interests (collectively, the "Seller's Affiliates"),
will engage in the business of originating, selling or servicing residential
mortgage loans in the United States (the "mortgage business")provided, however,
that the business conducted by the Acquired Affiliates and Foreign Operations
may continue.
(b) The Seller agrees that (i) from the date of this Agreement to the
Closing Date, it will not solicit any customers of the Business or use or
provide any of its Affiliates any list of customers, suppliers, brokers,
correspondents or other business contacts of the Business maintained by the
Seller for any purpose except to promote the Business, and from and after the
date of this Agreement it will not allow any unaffiliated party to use such
lists or information for any purpose, (ii) from and after the Closing Date,
Seller will not solicit any person who became a customer of the Seller or any of
its Affiliates in connection with the Business or use any list of customers,
suppliers, brokers, correspondents or other business contacts maintained by the
Seller or any of its Affiliates in connection with the Business and (iii) from
the date of this Agreement until the third anniversary of the Closing Date,
Affiliates of the Seller not engaged in the Business will not, and from the
Closing Date until the third anniversary of the Closing Date, the Seller will
not, solicit for employment or employ any employee of the Business, other than
any such employee who will not be or has not been offered post-closing
employment pursuant to Section 6.01 or whose employment with the Seller or the
Purchaser has otherwise been terminated, whether voluntarily or involuntarily;
provided that this provision shall not be violated by any general solicitation
or advertising not directed at any such employee or group of employees.
(c) Purchaser shall not intentionally solicit any Mortgagors for the
purpose of refinancing such Mortgagor's Mortgage Loan. The preceding sentence is
not intended to prohibit the Purchaser from soliciting such Mortgagors through
direct mail lists, telemarketing lists or similar lists already in use by
Purchaser or acquired by Purchaser after the Closing Date or through any mass
marketing media.
Section 10.14. Qualifying Loans. The Purchaser understands that between
the date hereof and the Closing Date the Seller will be originating mortgage
loans with respect to which the Seller agrees to use reasonable commercial
efforts to comply with the underwriting standards of the Purchaser. On or prior
to the Closing Date, the Purchaser, in its sole and absolute discretion, may
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determine to purchase such loans at a purchase price to be agreed upon by the
parties. Any purchase of loans pursuant to this Section 10.14 shall be subject
to such other terms and conditions as the Purchaser and Seller mutually agree to
be contained in a purchase agreement to be negotiated by the parties.
Section 10.15 Updated Mortgage Loan Schedule. Within five Business Days
after the Closing Date, the Seller shall deliver to the Purchaser an updated
copy of the Mortgage Loan Schedule as of the Closing Date. The information set
forth in such updated Mortgage Loan Schedule shall be complete, true and correct
in all material respects as of its date.
Section 10.16 Additional Agreements. Seller and Purchaser shall prepare
and execute all forms, documents and other information reasonably requested by
the Purchaser, any investor, rating agency or trustee or any other applicable
entities in connection with the transfer of the Servicing Rights or Purchased
Assets.
Section 10.17 No Financing Obligation. The Seller acknowledges and
agrees that none of this Agreement, any Related Documents or any transactions
contemplated hereby or thereby create any obligation on the part of the
Purchaser or any of its Affiliates to provide to the Seller or any of its
Affiliates any form of financing.
Section 10.18 Updated Disclosure Schedule. In the event that any
information required to be disclosed on any section of the Disclosure Schedule
changes or becomes incorrect prior to Closing, Seller shall promptly supplement
or amend the relevant section of the Disclosure Schedule by notice to Purchaser
in accordance with Section 14.03 hereof. No such supplement or amendment to
Disclosure Schedule shall be deemed to be a cure of any breach of any
representation, warranty or covenant of the Seller contained in this Agreement
or any Related Document or a waiver of any condition set forth in Article VIII.
ARTICLE XI
Tax Matters
Section 11.01 Allocation of Responsibility.
(a) The Seller and it Affiliates shall pay or cause to be paid to the
relevant Governmental Agency all Taxes with respect to pre-Closing Date
activities, including any Taxes for which the Seller or any of its Affiliates
may be held liable as a member of the Sellers' consolidated group pursuant to
section 1.1502-6(a) of the Treasury Regulations or as a member of any combined,
consolidated or unitary group of which the Seller, any of its Affiliates is or
was a member pursuant to any similar provision of any state, local or foreign
law with respect to Taxes.
(b) All Taxes based on the ownership of property (other than any sales,
use, transfer, income or franchise Taxes) imposed with respect to the Purchased
Assets for a tax or assessment
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period that included the Closing Date shall be apportioned between the Seller
and Purchaser with the Seller bearing the portion of such taxes based on the
number of days in the tax or assessment period prior to the Closing Date and the
Purchaser bearing a portion of such Taxes based on the number of days in the tax
or assessment period on or after the Closing Date.
(c) Seller shall pay all sales, use, transfer, real property transfer,
recording, gains, stock transfer and other similar taxes and fees ("Transfer
Taxes") arising out of or in connection with the transactions effected pursuant
to this agreement, and shall indemnify, defend, and hold harmless the Purchaser
(and its Affiliates) against Transfer Taxes in excess of such amount. Seller
shall file all necessary documentation and Tax Returns with respect to such
Transfer Taxes, and Purchaser shall cooperate with Seller with respect to such
filings.
(d) After the Closing Date, Seller and Affiliates shall have the sole
responsibility for preparing and filing any Tax Returns required to be filed
relating to Taxes with respect to pre-Closing Date activities and any related
Taxes due will be paid by Seller and its Affiliates.
(e) Seller agrees to make Tax records and other reasonable information
and resources available to allow Purchaser to accurately complete its Tax
Returns that are due on or after the Closing Date, including, without
limitation, resources required to prepare federal and state information returns.
Section 11.02 Allocation of Purchase Price. Purchaser shall provide
Seller an initial allocation of the Purchase Price (as set forth in Section
3.01) for Tax purposes not later than 180 days following the Closing Date.
Seller will have 45 days from receipt of Purchaser's initial allocation of the
Purchase Price to object to any allocation set forth therein. Thereafter, the
parties shall negotiate in good faith to agree on a final form of the Purchase
Price allocation. If Seller does not object within 45 days following receipt of
Purchaser's initial allocation, such allocation shall become the final form of
the Purchase Price allocation. Purchaser and Seller shall use the allocations
contained in the final form of the Purchase Price allocation in preparing all
returns or material reports or forms required to be filed with a governmental
authority with respect to any Tax. If the Purchaser and Seller cannot agree on
the final form of the Purchase Price allocation within 30 days following an
objection by Seller to the initial allocation of the Purchase Price, neither
Buyer nor Seller shall remain under any obligation to agree on the Purchase
Price allocation or to report such allocation in a consistent manner with the
other party.
Section 11.03 Designation Agreement. Purchaser shall prepare, file and
distribute all federal and state information returns for all amounts paid in
connection with the Purchased Assets in 1999, provided that the Seller shall, on
or before December 31, 1999, furnish to Purchaser correct information respecting
all such payments. For this purpose, Purchaser is the designee of the Seller,
within the meaning of Treasury Regulation Section 1.6050H-2(d), for all amounts
paid to Seller during 1999 with respect to the Purchased Assets. Seller shall
remain liable for any information return penalties that result from errors in
the information that is provided to Purchaser by Seller.
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ARTICLE XII
Survival and Indemnification
Section 12.01 Survival. The representations and warranties in Article
IV and Article V hereof shall survive the Closing but shall terminate and be of
no further force and effect on the anniversary of the Closing Date falling in
the 30th month after Closing. Unless a specific period is set forth in this
Agreement (in which event such specified period shall control), all other
covenants and agreements contained in this Agreement shall survive the Closing
and remain in effect indefinitely.
Section 12.02 Indemnification by the Seller. On the terms and subject
to the limitations set forth herein, the Seller shall indemnify, defend and hold
harmless the Purchaser, each of its Affiliates and each of their respective
past, present and future directors, officers, agents and representatives
(together, the "Purchaser Indemnitees") from and against any and all
liabilities, obligations, claims, suits, damages, civil and criminal penalties
and fines, out-of-pocket costs and expenses, including without limitation any
reasonable and necessary attorney's and other professional fees, after deducting
any insurance proceeds received by the Purchaser Indemnitees in connection
therewith ("Purchaser Indemnifiable Losses"), relating to, resulting from or
arising out of the following:
(a) any breach of any representation, warranty, covenant or undertaking
by the Seller contained in this Agreement or any Related Document;
(b) any Retained Liabilities or any matters related to the Excluded
Assets;
(c) any claim by any Employee based on or arising out of matters
occurring before the Closing Date or any other claim of an employee under
Seller's Employee Benefit Plans;
(d) any Pre-Closing Servicing Obligations; or
(e) any claim of any Person related to the failure of the Seller to
comply with the provisions of the "bulk sales" or similar laws of any applicable
jurisdiction other than in respect of Assumed Liabilities and all bulk sales tax
provisions in all states.
The items described in clauses (a) through (e) of this Section 12.02
are collectively referred to herein as "Purchaser Claims".
Section 12.03 Indemnification by the Purchaser. On the terms set forth
herein, the Purchaser shall indemnify, defend and hold harmless the Seller, each
of its Affiliates, and each of their respective past, present and future
directors, officers, agents and representatives (together, the "Seller
Indemnitees"), from and against any and all liabilities, obligations, claims,
suits, damages, civil and criminal penalties and fines, out-of-pocket costs and
expenses, including without limitation any reasonable and necessary attorney's
and other professional fees, after deducting any insurance proceeds received by
the Seller Indemnitees in connection therewith ("Seller
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Indemnifiable Losses") relating to, resulting from or arising out of any of the
following:
(a) any breach of any representation, warranty, covenant or undertaking
of the Purchaser contained in this Agreement, the Assumption Agreement or any
Related Document;
(b) any Assumed Liabilities;
(c) any matters related to the Purchased Assets based on or arising out
of matters occurring on or after the Closing Date; and
(d) any claim by any Employee based on or arising out of matters
occurring on or after the Closing Date relating to Purchaser's Employee Benefit
Plans.
The items described in clauses (a) through (d) of this Section 12.03
are collectively referred to herein as "Seller Claims".
Section 12.04 Procedures for Making Claims Against Indemnifying Party.
(a) From time to time on or before the expiration, if any, of the
applicable indemnification obligation, in the case of Section 12.02 or Section
12.03, the Purchaser Indemnitee or the Seller Indemnitee, as the case may be (a
"claimant"), may give notice to the Seller or the Purchaser, as the case may be,
specifying in reasonable detail the nature and dollar amount of any claim under
Section 12.02 or Section 12.03 of this Agreement (each a "claim"); a claimant
may make more than one claim (including any supplements thereto) with respect to
any underlying state of facts. If the Seller or Purchaser, as the case may be,
gives notice disputing any claim (a "counter notice") within 30 days following
receipt of the notice regarding such claim, such claim shall be resolved as
provided in Section 12.04(b). If no counter notice is received by the claimant
within such 30-day period, then the dollar amount of the claim as set forth in
the original notice shall be deemed established for purposes of this Agreement
and, at the end of such 30-day period, in the case of a claim under Section
12.02 or Section 12.03, the Indemnifying Party shall make a payment to the
Indemnified Party in the dollar amount claimed in the notice. Any claim pending
at the expiration of the indemnification period under Section 12.01 shall
survive until such claim has been resolved and the Indemnifying Party has made
any required payments to the Indemnified Party.
(b) If the counter notice as described in Section 12.04(a) is timely
received with respect to a claim, the parties shall attempt in good faith to
agree on resolution of the disputed amount. The Indemnifying Party shall pay to
Indemnified Party all non-disputed amounts in accordance with the time period
specified in Section 12.04(a). Any amount mutually agreed upon or awarded to the
Indemnified Party under a final and non-appealable Judgment of a court of
competent jurisdiction shall be paid by the Indemnifying Party within five
Business Days following agreement or Judgment, as applicable. If the parties'
agreement or the Judgment determines that a deduction of monies from the
Contingent Purchase Price under Section 3.01(b) was not appropriate, the
Purchaser shall reverse such deduction or if the time for maintaining the
Contingent Purchase Price has expired under Section 3.01(b), pay those monies
directly to Seller within five Business Days after such determination.
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Section 12.05 Defense of Claims.
(a) If an Indemnified Party shall receive written notice of the
assertion of any third party claim with respect to which an Indemnifying Party
is obligated under this Agreement to provide indemnification, such Indemnified
Party shall give the Indemnifying Party prompt notice thereof; provided,
however, that the failure of any Indemnified Party to give such notice shall not
relieve any Indemnifying Party of its obligations under this Article XII, except
to the extent that such Indemnifying Party is actually prejudiced by such
failure to give notice. Such notice shall describe the claim in reasonable
detail, and, if practicable, shall indicate the estimated amount of the
Indemnifiable Loss that has been or may be sustained by such Indemnified Party.
(b) An Indemnifying Party, at such Indemnifying Party's own expense and
through counsel chosen by such Indemnifying Party (which counsel shall be
reasonably satisfactory to the Indemnified Party), may elect to defend any third
party claim; and if it so elects, it shall, within 20 Business Days after
receiving notice of such third party claim (or sooner, if the nature of such
third party claim so requires), notify the Indemnified Party of its intent to do
so, and such Indemnified Party shall cooperate in the defense of such third
party claim. Such Indemnifying Party shall pay such Indemnified Party's
reasonable out-of-pocket expenses incurred in connection with such cooperation.
After notice from an Indemnifying Party to an Indemnified Party of its election
to assume the defense of a third party claim, such Indemnifying Party shall not
be liable to such Indemnified Party under this Article XII for any legal or
other expenses subsequently incurred by such Indemnified Party in connection
with the defense thereof; provided, however, that such Indemnified Party shall
have the right to employ one counsel to represent such Indemnified Party and all
other persons entitled to indemnification in respect of such claim hereunder
(which counsel shall be reasonably acceptable to the Indemnifying Party) if, in
such Indemnified Party's reasonable judgment, either a conflict of interest
between such Indemnified Party and such Indemnifying Party exists in respect of
such claim or there may be defenses available to such Indemnified Party which
are different from or in addition to those available to such Indemnifying Party,
and in that event (i) the reasonable fees and expenses of such separate counsel
shall be paid by such Indemnifying Party and (ii) each of such Indemnifying
Party and such Indemnified Party shall have the right to direct its own defense
in respect of such claim. If any Indemnifying Party elects not to defend against
a third party claim, or fails to notify an Indemnified Party of its election
within a reasonable period of time, such Indemnified Party may defend,
compromise and settle such third party claim; provided, however, that no such
Indemnified Party may, without the prior written consent of the Indemnifying
Party (which consent shall not be unreasonably withheld), settle or compromise
any third party claim or consent to the entry of any Judgment which does not
include as an unconditional term thereof the delivery by such third party to the
Indemnifying Party of a written release from all liability in respect of such
third party claim. The Indemnifying Party may defend, compromise and settle any
third party claim on such terms as it deems appropriate, provided, however, that
no Indemnifying Party may, without the prior written consent of the Indemnified
Party (which consent shall not be unreasonably withheld), settle or compromise
any third party claim or consent to the entry of any Judgment which does not
include as an unconditional term thereof the delivery by such third party to the
Indemnified Party of a written release from all liability in respect of such
third party claim. If any Indemnifying Party elects to defend against a
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third party claim, no Indemnified Party shall settle or compromise on such claim
or consent to the entry of a judgment without the prior written consent of the
Indemnifying Party, which consent shall not be unreasonably withheld.
Section 12.06 Remedies Exclusive. The remedies provided to the parties
in this Article XII for the matters set forth in this Article XII shall be
exclusive and shall preclude assertion by them of all other rights and the
seeking of all other remedies for such matters against any other party hereto;
provided that any party hereto shall not be precluded from (i) seeking specific
performance or any other available remedy for a breach of a covenant or
agreement contained in this Agreement or in any Related Document, (ii) seeking
any other remedy explicitly provided by any other provision of this Agreement or
a Related Document or (iii) pursuing remedies under applicable law for fraud or
willful misconduct.
Section 12.07 Limitation of Seller's Obligations to Indemnify.
(a) Notwithstanding the other provisions of this Article XII, Seller
shall have liability to Purchaser with respect to breaches of representations
and warranties only if and to the extent that the sum of Purchaser's
Indemnification Losses related to such breaches exceed $1,000,000 in the
aggregate.
(b) Notwithstanding the other provisions of this Article XII, the
Seller's aggregate liability pursuant to this Article XII for breaches of
representations and warranties shall be limited to an amount equal to
$50,000,000.
ARTICLE XIII
Termination
Section 13.01 Termination. This Agreement may be terminated at any time
(including before or after the Seller receives stockholder approval) prior to
the Closing:
(a) by mutual consent of the parties hereto;
(b) upon written notice by any party hereto, if (i) a court or
Governmental Agency shall have issued a Judgment or taken any other action
restraining, enjoining or otherwise prohibiting the transactions contemplated by
this Agreement and (ii) such Judgment or other action shall have become final
and nonappealable;
(c) upon written notice at any time on or after, October 15, 1999 by
the Purchaser or the Seller, if the Closing has not occurred by such date,
provided that the failure to close is not the result of a material breach of
this Agreement by the terminating party;
(d) upon written notice by the Purchaser or Seller if the approval of
the directors or stockholders of Seller as contemplated by Sections 8.09 and
9.05 hereof shall have not been
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obtained at meetings duly convened therefor or at any adjournment or
postponement thereof;
(e) by the Purchaser if there shall be any Material Adverse Change in
the Business or the Purchased Assets or in the condition, financial or
otherwise, of the Seller;
(f) by the Purchaser if the conditions set forth in Section 8.09(c)(ii)
shall not have been met by July 31, 1999;
(g) by the Seller if the condition set forth in Section 8.11 with
respect to the Purchaser shall not have been met by July 31, 1999; or
(h) by the Purchaser if the Seller should advise the Purchaser that
Seller has become aware of events or issues that would lead to the reasonable
belief that the opinion set forth in Section 8.10 may not be obtained by Seller.
Section 13.02 Fiduciary Termination. This Agreement may be terminated
at any time prior to the Closing, before or after the adoption and approval of
this Agreement by the shareholders of the Seller referred to in Sections 8.09
and 9.05, if the Board of Directors of the Seller has withdrawn, or modified or
changed in a manner adverse to Purchaser its approval or recommendation of this
Agreement in order to approve and permit the Seller to execute a definitive
agreement relating to a Superior Proposal; provided, however, that prior to any
such withdrawal, modification, change or termination, the Seller shall, and
shall cause its respective financial and legal advisors to, negotiate in good
faith with the Purchaser to make such adjustments in the terms and conditions of
this Agreement as would enable the Seller to proceed with the transactions
contemplated herein on such adjusted terms. In the event of termination
hereunder, the Seller shall immediately pay the Purchaser $10,000,000.00.
Section 13.03 Obligations Shall Cease. In the event that this Agreement
shall be terminated pursuant to Section 13.01 or 13.02 hereof, all obligations
of the parties hereto under this Agreement shall terminate and there shall be no
liability of any party hereto to any other party except (a) for the obligations
with respect to confidentiality and publicity contained in Section 10.09 hereof
and (b) as set forth in Section 13.02 and 13.04; provided that nothing contained
in this Section shall relieve any party of liability for its bad faith or
willful violation of the provisions of this Agreement.
Section 13.04 Fees and Expenses. Except as otherwise specifically
provided herein, each party hereto shall pay all of the fees and expenses
incurred by it in connection herewith.
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ARTICLE XIV
Miscellaneous
Section 14.01 Complete Agreement. This Agreement, and the Related
Documents, and the exhibits and schedules attached hereto and thereto and the
documents referred to herein and therein shall constitute the entire agreement
between the parties hereto with respect to the subject matter hereof and thereof
and shall supersede all previous negotiations, commitments and writings with
respect to such subject matter.
Section 14.02 Waiver, Discharge, etc. This Agreement may not be
released, discharged, abandoned, waived, changed or modified in any manner,
except by an instrument in writing signed on behalf of each of the parties
hereto by their duly authorized representatives. The failure of any party hereto
to enforce at any time any of the provisions of this Agreement shall in no way
be construed to be a waiver of any such provision, nor in any way be construed
to affect the validity of this Agreement or any part thereof or the right of any
party thereafter to enforce each and every such provision. No waiver of any
breach of this Agreement shall be held to be a waiver of any other or subsequent
breach. If any provision of this Agreement shall be declared by any court of
competent jurisdiction to be illegal or unenforceable, the other provisions
shall not be affected, but shall remain in full force and effect.
Section 14.03 Notices. All notices, requests and demands to or upon the
respective parties hereto shall be in writing, including by telecopy, and,
unless otherwise expressly provided herein, shall be deemed to have been duly
given or made (a) if delivered by hand (including by courier), when delivered,
(b) in the case of mail, three Business Days after deposit in United States
first class mail, postage prepaid and (c) in the case of telecopy notice, when
receipt has been confirmed by the transmitting telecopy operator. In each case
notice shall be sent to the address of the party to be notified, as follows, or
to such other address, telecopy number or person's attention as may be hereafter
designated by the respective parties hereto in accordance with these notice
provisions:
If to the Purchaser, to:
CitiFinancial Mortgage Company
300 St. Paul Place
Baltimore, MD 21202
Telecopy: (410) 332-3319
Attention: Raymond L. Fischer, Jr.
With a copy to:
Citigroup Inc.
Corporate Legal Department
425 Park Avenue - 2nd Floor
New York, New York 10043
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Telecopy: (212) 793-4401
Attention: Stephen Dietz
CitiFinancial Mortgage Company
Office of General Counsel
300 St. Paul Place
Baltimore, Maryland 21202
Telecopy: (410) 332-3734
Attention: Martin J. Wong
If to the Seller or Parent, to:
IMC Mortgage Company
5901 East Fowler Avenue
Tampa, Florida 336197-2522
Telecopy: (813) 984-2593
Attention: George Nicholas
With a copy to:
Mitchell Legler, P.A.
300A Wharfside Way
Jacksonville, Florida 32207
Telecopy: (904) 346-3299
Attention: Mitchell Legler
With a copy to:
Kramer Levin Naftalis & Frankel, LLP
919 Third Avenue
New York, New York 10022-3903
Telecopy: (212) 715-8000
Attention: Peter S. Kolevzon
Section 14.04 Governing Law; Waiver of Jury Trial.
(a) This Agreement shall be governed by and construed in accordance
with the laws of the State of New York, without regard to conflict of law
principles.
(b) Each party waives, to the fullest extent permitted by applicable
Law, any right it may have to a trial by jury in respect of any action, suit or
proceeding arising out of or relating to this Agreement or any Related Document.
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Section 14.05 Headings. The descriptive headings of the several
Articles and Sections of this agreement are inserted for convenience only and do
not constitute a part of this Agreement.
Section 14.06 Successors. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and permitted assigns. Neither this Agreement nor
any of the rights, interests or obligations hereunder shall be assigned by any
of the parties hereto except with the prior written consent of the other parties
or by operation of law, provided that without such consent, the Purchaser may
assign its rights and obligations hereunder to Citigroup Inc. or any of
Citigroup Inc.'s direct or indirect wholly owned subsidiaries, in which event
such assignee shall be substituted for the assignor for purposes of this
Agreement to the extent appropriate, but without affecting any liability of the
assignor hereunder.
Section 14.07 Third Parties. Except as specifically set forth or
referred to herein (including, without limitation, in Article XII), nothing
herein expressed or implied is intended or shall be construed to confer upon or
give any person or entity, other than the parties hereto and their successors
and permitted assigns, any rights or remedies under or by reason of this
Agreement.
Section 14.08 Counterparts. This Agreement may be executed in two or
more counterparts, all of which shall be considered one and the same instrument
and each of which shall be deemed an original.
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IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed by its duly authorized representatives as of the day
and year first above written.
IMC MORTGAGE COMPANY,
as Seller
By:/s/
-------------------------------
Name:
Title:
CITIFINANCIAL MORTGAGE COMPANY
as Purchaser
By:/s/
-------------------------------
Name:
Title:
<PAGE>
Annex B
[Letterhead of Donaldson, Lufkin & Jenrette Securities Corporation]
July 30, 1999
Board of Directors
IMC Mortgage Company
5901 E. Fowler Avenue
Tampa, Florida 33617
Ladies and Gentlemen:
You have requested our opinion as to the fairness from a financial point
of view to IMC Mortgage Company, a Florida corporation (the "Company"), of the
consideration to be received by the Company pursuant to the terms of the Asset
Purchase Agreement dated as of July 13, 1999 (the "Purchase Agreement") between
the Company and CitiFinancial Mortgage Company (the "Purchaser"). Pursuant to
the terms of the Purchase Agreement, the Purchaser will purchase certain assets
related to the Company's loan origination and loan servicing businesses (but
excluding the Company's right to reimbursement of servicing and escrow advances
previously made by the Company as servicer of its securization trusts) for an
aggregate purchase price of $100 million. As more fully described in the
Purchase Agreement, the assets to be purchased by the Purchaser are subject to
certain liens and other obligations thereon, and are collectively referred to
herein as the "Businesses."
In arriving at our opinion, we have reviewed the Purchase Agreement. We
also have reviewed financial and other information about the Company and the
Businesses that was publicly available or furnished to us by the Company
including information provided during discussions with management of the
Company. Included in the information provided during discussions with management
was certain information concerning the current cash position and financial
position of the Company and each of the Businesses and certain cash flow and
financial projections of the Company and each of the Businesses for the period
July 1, 1999 to December 31, 2004, including the Company's projected weekly cash
position through October 1, 1999. In addition, we reviewed certain financial and
securities data of the Company and conducted such other financial studies,
analyses and investigations as we deemed appropriate for purposes of this
opinion.
In rendering our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
us from public sources, that was provided to us by the Company and its
representatives, or that
<PAGE>
Board of Directors, IMC Mortgage Company
Page 2
was otherwise reviewed by us. With respect to the financial projections supplied
to us, we have assumed that they have been reasonably prepared on the basis
reflecting the best currently available estimates and judgments of the
management of the Company as to the future operations, cash flow, financial
condition and performance of the Company and its financial assets and the
Businesses. We have not assumed any responsibility for making any independent
evaluation of any assets or liabilities of the Company or the Businesses, or for
making any independent verification of any of the information reviewed by us.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. It should be understood that, although subsequent
developments with respect to the Company, in the financial markets or otherwise,
may affect the matters covered by this opinion, we do not have any obligation to
update, revise or reaffirm this opinion. We are expressing no opinion herein as
to any transactions related to the sale of the Businesses, including any use of
the proceeds of the sale. Our opinion does not address the Board's decision to
proceed with the sale of the Businesses or the fairness from a financial point
of view to the Company's common stockholders, any other class of securityholders
or creditors or any other person. Our opinion does not constitute a
recommendation to any stockholder, securityholder or creditor as to how such
stockholder, securityholder or creditor should vote on the proposed sale of the
Businesses or any other transaction.
Donaldson, Lufkin & Jenrette Securities Corporation, as part of its
investment banking services, is regularly engaged in the valuation of businesses
and securities in connection with mergers, acquisitions, underwritings, sales
and distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes.
Based upon the foregoing and such other factors as we deem relevant, we
are of the opinion that the consideration to be received by the Company pursuant
to the Purchase Agreement is fair to the Company from a financial point of view.
Very truly yours,
/s/ Donaldson, Lufkin & Jenrette
Securities Corporation
<PAGE>
Annex C
Florida Business Corporation Act
607.1301 DISSENTER'S RIGHTS; DEFINITIONS. The following definitions
apply to ss. 607.1302 and 607.132:
(1) "Corporation" means the issuer of the shares held by a dissenting
shareholder before the corporate action or the surviving or acquiring
corporation by merger or share exchange of that issuer.
(2) "Fair value," with respect to a dissenter's shares, means the
value of the shares as of the close of business on the day prior to the
shareholders' authorization date, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
(3) "Shareholders' authorization date" means the date on which the
shareholders' vote authorizing the proposed action was taken, the date on which
the corporation received written consents without a meeting from the requisite
number of shareholders in order to authorize the action, or, in the case of a
merger pursuant to s. 607.1104, the day prior to the date on which a copy of the
plan of merger was mailed to each shareholder of record of the subsidiary
corporation.
607.1302 RIGHT OF SHAREHOLDERS TO DISSENT. (1) Any shareholder
has the right to dissent from, and obtain payment of the fair value of his
shares in the event of, any of the following corporate actions:
(a) Consummation of a plan of merger to which the corporation is a
party:
1. If the shareholder is entitled to vote on the merger, or
2. If the corporation is a subsidiary that is merged with its parent
under s.607.1104, and the shareholders would have been entitled to vote on
action taken, except for the applicability of s. 607.1104;
(b) Consummation of a sale or exchange of all, or substantially all,
of the property of the corporation, other than in the usual and regular course
of business, if the shareholder is entitled to vote on the sale or exchange
pursuant to s.607.1202, including a sale in dissolution but not including a sale
pursuant to court order or a sale for cash pursuant to a plan by which all or
substantially all of the net proceeds of the sale will be distributed to the
shareholders within 1 year after the date of sale;
(c) As provided in s.607.0902(11), the approval of a control-share
acquisition;
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(d) Consummation of a plan of share exchange to which the corporation
is a party as the corporation the shares of which will be acquired, if the
shareholder is entitled to vote on the plan;
(e) Any amendment of the articles of incorporation if the shareholder
is entitled to vote on the amendment and if such amendment would adversely
affect such shareholder by:
1. Altering or abolishing any preemptive rights attached to any of
his shares;
2. Altering or abolishing the voting rights pertaining to any of his
shares, except as such rights may be affected by the voting rights of new shares
being authorized of any existing or new class or series of shares;
3. Effecting an exchange, cancellation, or reclassification of any of
his shares, when such exchange, cancellation, or reclassification would alter or
abolish his voting rights or alter his percentage of equity in the corporation,
or affecting a reduction or cancellation of accrued dividends or other
arrearages in respect to such shares;
4. Reducing the stated redemption price of any of his redeemable
shares, altering or abolishing any provision relating to any sinking fund for
the redemption or purchase of any of his shares, or making any of his shares
subject to redemption when they are not otherwise redeemable;
5. Making noncumulative, in whole or in part, dividends of any of his
preferred shares which had theretofore been cumulative;
6. Reducing the stated dividend preference of any of his preferred
shares; or
7. Reducing any stated preferential amount payable on any of his
preferred shares upon voluntary or involuntary liquidation; or
(f) Any corporate action taken, to the extent the articles of
incorporation provide that a voting or nonvoting shareholder is entitled to
dissent and obtain payment for his shares.
(2) A shareholder dissenting from any amendment specified in
paragraph (1)(e) has the right to dissent only as to those of his shares which
are adversely affected by the amendment.
(3) A shareholder may dissent as to less than all the shares
registered in his name. In that event, his rights shall be determined as if the
shares as to which he has dissented and his other shares were registered in the
names of different shareholders.
(4) Unless the articles of incorporation otherwise provide, this
section does not apply with respect to a plan of merger or share exchange or a
proposed sale or exchange of property, to the holders of shares of any class or
series which, on the record date fixed to determined the shareholders entitled
to vote at the meeting of shareholders at which such
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action is to be acted upon or to consent to any such action without a meeting,
were either registered on a national securities exchange or designated as a
national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc., or held of record by not fewer
than 2,000 shareholders.
(5) A shareholder entitled to dissent and obtain payment for his
shares under this section may not challenge the corporate action creating his
entitlement unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation.
607.1320 PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS. (1) (a) If a
proposed corporate action creating dissenters' rights under s.607.1320 is
submitted to a vote at a shareholders' meeting, the meeting notice shall state
that shareholders are or may be entitled to assert dissenters' rights and be
accompanied by a copy of ss.607.1301, 607.1302, and 607.1320. A shareholder who
wishes to assert dissenters' rights shall:
1. Deliver to the corporation before the vote is taken written notice
of his intent to demand payment for his shares if the proposed action is
effectuated, and
2. Not vote his shares in favor of the proposed action. A proxy or
vote against the proposed action does not constitute such a notice of intent to
demand payment.
(b) If proposed corporate action creating dissenters' rights under
s.607.1302 is effectuated by written consent without a meeting, the corporation
shall deliver a copy of ss.607.1301, 607.1302, and 607.1320 to each shareholder
simultaneously with any request for his written consents or, if such a request
is not made, within 10 days after the date the corporation received written
consents without a meeting from the requisite number of shareholders necessary
to authorize the action.
(2) Within 10 days after the shareholders' authorization date, the
corporation shall give written notice of such authorization or consent or
adoption of the plan of merger, as the case may be, to each shareholder who
filed a notice of intent to demand payment for his shares pursuant to paragraph
(1)(a) or, in the case of action authorized by written consent, to each
shareholder, excepting any who voted for, or consented in writing to, the
proposed action.
(3) Within 20 days after the giving of notice to him, any
shareholder who elects to dissent shall file with the corporation a notice of
such election, stating his name and address, the number, classes, and series of
shares as to which the dissents, and a demand for payment of the fair value of
his shares. Any shareholder failing to file such election to dissent within the
period set forth shall be bound by the terms of the proposed corporate action.
Any shareholder filing an election to dissent shall deposit his certificates for
certificated shares with the corporation simultaneously with the filing of the
election to dissent. The corporation may restrict the transfer of uncertificated
shares from the date the shareholder's election to dissent is filed with the
corporation.
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(4) Upon filing a notice of election to dissent, the shareholder
shall thereafter be entitled only to payment as provided in this section and
shall not be entitled to vote or to exercise any other rights of a shareholder.
A notice of election may be withdrawn in writing by the shareholder at any time
before an offer is made by the corporation, as provided in subsection (5), to
pay for his shares. After such offer, no such notice of election may be
withdrawn unless the corporation consents thereto. However, the right of such
shareholder to be paid the fair value of his shares shall cease, and he shall be
reinstated to have all his rights as a shareholder as of the filing of his
notice of election, including any intervening preemptive rights and the right to
payment of any intervening dividend or other distribution or, if any such rights
have expired or any such dividend or distribution other than in cash has been
completed, in lieu thereof, at the election of the corporation, the fair value
thereof in cash as determined by the board as of the time of such expiration or
completion, but without prejudice otherwise to any corporate proceedings that
may have been taken in the interim, if:
(a) Such demand is withdrawn as provided in this section;
(b) The proposed corporate action is abandoned or rescinded or the
shareholders revoke the authority to effect such action;
(c) No demand or petition for the determination of fair value by a
court has been made or filed within the time provided in this section or
(d) A court of competent jurisdiction determines that such
shareholder is not entitled to the relief provided by this section.
(5) Within 10 days after the expiration of the period in which
shareholders may file their notices of election to dissent, or within 10 days
after such corporate action is effected, whichever is later (but in no case
later than 90 days from the shareholders' authorization date), the corporation
shall make a written offer to each dissenting shareholder who has made demand as
provided in this section to pay an amount the corporation estimates to be the
fair value for such shares. If the corporate action has not been consummated
before the expiration of the 90-day period after the shareholders' authorization
date, the offer may be made conditional upon the consummation of such action.
Such notice and offer shall be accompanied by:
(a) A balance sheet of the corporation, the shares of which the
dissenting shareholder holds, as of the latest available date and not more than
12 months prior to the making of such offer; and
(b) A profit and loss statement of such corporation for the 12-month
period ended on the date of such balance sheet or, if the corporation was not in
existence throughout such 12-month period, for the portion thereof during which
it was in existence.
(6) If within 30 days after the making of such offer any shareholder
accepts the same, payment for his shares shall be made within 90 days after the
making of such offer or
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the consummation of the proposed action, whichever is later. Upon payment of the
agreed value, the dissenting shareholder shall cease to have any interest in
such shares.
(7) If the corporation fails to make such offer within the period
specified therefor in subsection (5) or if it makes the offer and any dissenting
shareholder or shareholders fail to accept the same within the period of 30 days
thereafter, then the corporation, within 30 days after receipt of written demand
from any dissenting shareholder given within 60 days after the date on which
such corporate action was effected, shall, or at its election at any time within
such period of 60 days may, file an action in any court of competent
jurisdiction in the county in this state where the registered office of the
corporation is located requesting that the fair value of such shares be
determined. The court shall also determine whether each dissenting shareholder,
as to whom the corporation requests the court to make such determination, is
entitled to receive payment for his shares. If the corporation fails to
institute the proceeding as herein provided, any dissenting shareholder may do
so in the name of the corporation. All dissenting shareholders (whether or not
residents of this state), other than shareholders who have agreed with the
corporation as to the value of their shares, shall be made parties to the
proceeding as an action against their shares. The corporation shall serve a copy
of the initial pleading in such proceeding upon each dissenting shareholder who
is a resident of this state in the manner provided by law for the service of a
summons and complaint and upon each nonresident dissenting shareholder either by
registered or certified mail and publication or in such other manner as is
permitted by law. The jurisdiction of the court is plenary and such other manner
as is permitted by law. The jurisdiction of the court is plenary and exclusive.
All shareholders who are proper parties to the proceeding are entitled to
judgment against the corporation for the amount of the fair value of their
shares. The court may, if it so elects, appoint one or more persons as
appraisers to receive evidence and recommend a decision on the question of fair
value. The appraisers shall have such power and authority as is specified in the
order of their appointment or an amendment thereof. The corporation shall pay
each dissenting shareholder the amount found to be due him within 10 days after
final determination of the proceedings. Upon payment of the judgment, the
dissenting shareholder shall cease to have any interest in such shares.
(8) The judgment may, at the discretion of the court, include a fair
rate of interest, to be determined by the court.
(9) The costs and expenses of any such proceeding shall be determined
by the court and shall be assessed against the corporation, but all or any part
of such costs and expenses may be apportioned and assessed as the court deems
equitable against any or all of the dissenting shareholders who are parties to
the proceeding, to whom the corporation has made an offer to pay for the shares,
if the court finds that the action of such shareholders in failing to accept
such offer was arbitrary, vexatious, or not in good faith. Such expenses shall
include reasonable compensation for, and reasonable expenses of, the appraisers,
but shall exclude the fees and expenses of counsel for, and experts employed by,
any party. If the fair value of the shares, as determined, materially exceeds
the amount which the corporation offered to pay therefor or if no offer was
made, the court in discretion may award to any shareholder who is a party to the
proceeding such sum as the court determines
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to be reasonable compensation to any attorney or expert employed by the
shareholder in the proceeding.
(10) Shares acquired by a corporation pursuant to payment of the
agreed value thereof or pursuant to payment of the judgment entered therefor, as
provided in this section, may be held and disposed of by such corporation as
authorized but unissued shares of the corporation, except that, in the case of a
merger, they may be held and disposed of as the plan of merger otherwise
provides. The shares of the surviving corporation into which the shares of such
dissenting shareholders would have been converted had they assented to the
merger shall have the status of authorized but unissued shares of the surviving
corporation.
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