<PAGE> 1
SECURITIES EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Act
--- of 1934 for the quarterly period ended March 31, 1999.
Transition Report Pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934.
Commission file No. 333-3954
------------
IMC MORTGAGE COMPANY
(Exact name of issuer as specified in its Charter)
Florida 59-3350574
----------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification number)
5901 E. FOWLER AVENUE
TAMPA, FLORIDA 33617
(Address of Principal Executive Offices)
Issuer's telephone number, including area code: (813) 984-8801
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing for the past 90 days. Yes X No
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Title of each Class: Outstanding at May 14, 1999
- --------------------------------------- ---------------------------
Common Stock, par value $.01 per share 34,221,718
<PAGE> 2
IMC MORTGAGE COMPANY AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 1999 and December 31, 1998 1
Consolidated Statements of Operations
for the three months ended
March 31, 1999 and March 31, 1998 2
Consolidated Statements of Cash Flows
for the three months ended March 31, 1999
and March 31, 1998 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 2. Changes in Securities 32
Item 3. Defaults Upon Senior Securities 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 32
</TABLE>
<PAGE> 3
IMC MORTGAGE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 19,479 $ 15,454
Accrued interest receivable 9,528 10,695
Accounts receivable 48,875 44,661
Mortgage loans held for sale, net 748,456 946,446
Interest-only and residual certificates 445,833 468,841
Property, furniture, fixtures and equipment, net 16,467 17,119
Mortgage servicing rights 47,209 52,388
Income tax receivable 8,770 12,914
Goodwill 88,801 89,621
Other assets 27,539 25,500
----------- -----------
Total assets $ 1,460,957 $ 1,683,639
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse finance facilities $ 793,701 $ 984,571
Term debt 412,357 415,331
Notes payable 17,281 17,406
Accounts payable and accrued liabilities 12,732 15,302
Accrued interest payable 5,457 3,086
----------- -----------
Total liabilities 1,241,528 1,435,696
----------- -----------
Commitments and contingencies
Redeemable preferred stock (redeemable at
maturity at $100 per share and, under certain
circumstances, upon a change in control) 38,070 37,333
----------- -----------
Stockholders' equity:
Common stock, par value $.01 per share; 50,000,000
authorized; and 34,201,380 and 34,139,790 shares
issued and outstanding 342 341
Additional paid-in capital 251,860 251,633
Accumulated deficit (70,843) (41,364)
----------- -----------
Total stockholders' equity 181,359 210,610
----------- -----------
Total $ 1,460,957 $ 1,683,639
=========== ===========
</TABLE>
See accompanying notes to Consolidated Financial Statements
1
<PAGE> 4
IMC MORTGAGE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-------------------------------
1999 1998
<S> <C> <C>
Revenues:
Gain on sales of loans $ 18,111 $ 59,980
------------ ------------
Warehouse interest income 20,629 41,235
Warehouse interest expense (14,474) (33,494)
------------ ------------
Net warehouse interest income 6,155 7,741
------------ ------------
Servicing fees 13,172 9,011
Other 7,645 7,139
------------ ------------
Total servicing fees and other 20,817 16,150
------------ ------------
Total revenues 45,083 83,871
------------ ------------
Expenses:
Compensation and benefits 29,350 28,438
Selling, general and administrative 23,425 24,940
Other interest expense 8,884 4,889
Interest expense - Greenwich Funds 7,880 --
------------ ------------
Total expenses 69,539 58,267
------------ ------------
Income (loss) before provision for income taxes (24,456) 25,604
Provision for income taxes 4,286 10,500
------------ ------------
Net income (loss) $ (28,742) $ 15,104
============ ============
Net income (loss) per common share:
Basic $ (0.86) $ 0.49
============ ============
Diluted $ (0.86) $ 0.44
============ ============
Weighted average number of shares outstanding:
Basic 34,221,718 30,750,870
Diluted 34,221,718 34,695,591
</TABLE>
See accompanying notes to Consolidated Financial Statements
2
<PAGE> 5
IMC MORTGAGE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (28,742) $ 15,104
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Interest expense - Greenwich Funds 5,500 --
Depreciation and amortization 7,220 5,131
Deferred taxes -- 4,768
Mortgage servicing rights -- (11,128)
Net loss on joint venture 63 704
Net change in operating assets and liabilities:
Decrease (increase) in mortgages loans held for sale, net 197,990 (89,570)
Increase in securities purchased under agreements
to resell and securities sold but not yet purchased -- (4,267)
Decrease in accrued interest receivable 1,167 5,818
Decrease (increase) in interest-only and residual certificates 23,008 (104,449)
Decrease (increase) in other assets (1,550) 3,997
Decrease (increase) in accounts receivable (4,214) 1,915
Decrease in income tax receivable 4,144 5,641
Increase in accrued interest payable 2,371 2,678
Increase (decrease) in accounts payable and accrued liabilities (2,570) 5,476
--------- ---------
Net cash provided by (used in) operating activities 204,387 (158,182)
--------- ---------
Investing activities:
Investment in joint venture (556) (1,393)
Purchase of property, furniture, fixtures, and equipment (336) (1,322)
Other -- (376)
--------- ---------
Net cash used in investing activities (892) (3,091)
--------- ---------
Financing activities:
Net borrowings (repayments) on warehouse facilities (190,870) 85,453
Term debt and notes payable borrowings 4,126 138,750
Term debt and notes payable repayments (12,726) (72,803)
--------- ---------
Net cash provided by (used in) financing activities (199,470) 151,400
--------- ---------
Net increase (decrease) in cash and cash equivalents 4,025 (9,873)
Cash and cash equivalents, beginning of period 15,454 26,750
--------- ---------
Cash and cash equivalents, end of period $ 19,479 $ 16,877
========= =========
Supplemental disclosure cash flow information:
Cash paid during the period for interest $ 22,817 $ 35,705
========= =========
Cash paid during the period for taxes $ 142 $ 312
========= =========
</TABLE>
See accompanying notes to Consolidated Financial Statements
3
<PAGE> 6
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION:
IMC Mortgage Company and its wholly-owned subsidiaries (the "Company"
or "IMC") purchase and originate mortgage loans made to borrowers who
may not otherwise qualify for conventional loans for the purpose of
securitization and sale. The Company typically securitizes these
mortgages into the form of a Real Estate Mortgage Investment Conduit
("REMIC") or an owner trust. The mortgages are sold on a servicing
retained (whereby the Company keeps the contractual right to service
the mortgage) or a servicing released basis.
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. All intercompany
transactions have been eliminated in the accompanying consolidated
financial statements.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the interim periods are not
necessarily indicative of financial results for the full year. These
unaudited condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998 and reports filed on Forms 8-K
dated March 3, 1999, February 26, 1999, February 23, 1999, November 27,
1998 and October 21, 1998. The year-end balance sheet data was derived
from audited financial statements, but does not include all disclosures
required by generally accepted accounting principles.
Certain reclassifications have been made to the presentations to
conform to current period presentations.
CONSUMMATION OF STOCK PURCHASE BY THE GREENWICH FUNDS
As described in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998, the Company, like several companies in
the subprime mortgage industry, is being materially and adversely
affected by significant and adverse conditions in the equity, debt and
asset-backed capital markets. IMC's ability to access equity, debt and
asset-backed capital markets has become severely restricted. These
market conditions resulted in several other companies in the subprime
mortgage industry filing for bankruptcy protection, such as Southern
Pacific Funding (October 1, 1998), Wilshire Financial Services Group,
Inc. (March 3, 1999), MCA Financial Corp. (February 11, 1999), United
Companies (March 2, 1999) and certain subsidiaries of First Plus
Financial (March 6, 1999).
4
<PAGE> 7
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
The Company's revolving credit facility with BankBoston, N.A. matured
in mid-October 1998 and BankBoston was unwilling to extend the
facility. In addition, beginning in September 1998, the Company's
residual lenders, which had advanced approximately $276 million to the
Company collateralized by its interest-only and residual certificates,
proposed to reduce their exposure by making cash margin calls. Certain
of the Company's warehouse lenders holding more than $2 billion in
mortgage loans also threatened to make margin calls on their credit
lines during September and October 1998. During this period, the
Company's traditional strategy of minimizing the risks of interest rate
fluctuations through a program of short selling United States Treasury
securities subjected the Company to margin calls of approximately $47.5
million in cash as a "flight to quality" following the devaluation of
the Russian ruble and concerns over economic conditions in the emerging
markets generally disrupted the Company's anticipated hedging strategy.
As a consequence, in October 1998, the Company, faced with the prospect
of a forced liquidation of its assets or bankruptcy and the absence of
other alternative sources of capital, entered into a $33 million
standby revolving credit facility with Greenwich Street Capital
Partners II, L.P. ("GSCP") and certain of the other Greenwich Funds.
The facility provided IMC with interim financing for a period of 90
days, which enabled the Company to continue to operate while it sought
a substantial source of capital which would either invest funds in the
Company or acquire the Company. In return for providing the facility,
the Greenwich Funds received a $3.3 million commitment fee and
non-voting Class C exchangeable preferred stock representing the
equivalent of 40% of the common equity of the Company. The Class C
exchangeable preferred stock is exchangeable after March 31, 1999 for
Class D preferred stock, which has voting rights equivalent to 40% of
the voting power of the Company. Under the loan facility, the Greenwich
Funds may exchange the loans for additional shares of Class C
exchangeable preferred stock or shares of Class D preferred stock in an
amount up to the equivalent of 50% of the common equity of the Company
(in addition to the preferred stock received for providing the
facility) (the "Exchange Option"). In addition, upon certain changes in
control of the Company, the Greenwich Funds could elect either to (i)
receive payment of the facility, plus accrued interest and a take-out
premium of up to 200% of the average principal amount of the loans
outstanding or (ii) exercise the Exchange Option. The Company and the
Greenwich Funds also entered into intercreditor agreements with the
Company's significant creditors requiring such creditors to
"standstill" for up to 90 days.
On February 19, 1999, the Company entered into a merger agreement with
the Greenwich Funds pursuant to which the Greenwich Funds would
acquire 93.5% of the Company's common stock. On March 31, 1999, the
merger agreement was terminated and recast as an acquisition agreement
with the Greenwich Funds on substantially the same economic terms. The
Company's execution of the merger agreement and the acquisition
agreement were unanimously approved by the Board of Directors of the
Company, acting on the unanimous recommendation of a special committee
of the Board consisting solely of disinterested directors. Under the
acquisition agreement, the Company agreed to issue common stock to the
Greenwich Funds representing approximately 93.5% of the outstanding
common stock of the Company following such issuance. In return for
such common stock
5
<PAGE> 8
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
issuance, the Greenwich Funds agreed to surrender their Class C
exchangeable preferred stock and amend the loan agreement (i) to
provide for an additional $35 million of working capital loans to the
Company, (ii) to forego the Exchange Option, (iii) to reduce the
takeout premium payable in certain events from 200% of the average
principal amount outstanding from October 1998 to the prepayment date,
to 10% of the average principal amount outstanding from the closing of
the acquisition to the prepayment date and (iv) to extend the maturity
of the loans thereunder until the third anniversary of the acquisition.
The Company also entered into amended intercreditor agreements with
certain of its creditors in February 1999 which provide an additional
standstill period through the consummation of the acquisition by the
Greenwich Funds and for 12 months thereafter, provided the acquisition
occurs within five months, and subject to earlier termination in
certain events as provided in the intercreditor agreements. The closing
of the acquisition by the Greenwich Funds is subject to a number of
conditions, including obtaining the approval of the shareholders of the
Company for the transaction.
The Company is in the process of preparing to call a special meeting of
its shareholders to approve the acquisition and the issuance of 93.5%
of the common stock of IMC to the Greenwich Funds. In the event the
acquisition agreement is terminated or the acquisition is not
consummated within five months, the lenders subject to the
requirements of the amended and restated 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.
2. RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 is effective for fiscal quarters of fiscal years
beginning after June 15, 1999 (January 1, 2000 for the Company). SFAS
133 requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative was designated as part of a hedge
transaction and, if it is, the type of hedge transaction. For
fair-value hedge transactions in which the Company hedges changes in
the fair value of an asset, liability or firm commitment, changes in
the fair value of the derivative instrument will generally be offset in
the income statement by changes in the hedged item's fair value. The
ineffective portion of hedges will be recognized in current-period
earnings.
SFAS 133 precludes designation of a nonderivative financial instrument
as a hedge of an asset or liability. The Company, prior to September
30, 1998, hedged its interest rate risk on loan purchases by selling
short United States Treasury Securities which match the duration of the
6
<PAGE> 9
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
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
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 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.
7
<PAGE> 10
IMC Mortgage Company and Subsidiaries
Notes to Consolidated Financial Statements
for the three months ended March 31, 1999 and 1998
(Unaudited)
3. EARNINGS PER SHARE:
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128 "Earnings per Share" ("SFAS 128"), which became effective for
the Company for reporting periods ending after December 15, 1997. Under
the provisions of SFAS 128, basic earnings per share is determined by
dividing net income (loss), adjusted for preferred stock dividends, by
the weighted average number of shares outstanding. Diluted earnings
per share, as defined by SFAS No. 128, is computed assuming all
dilutive potential common shares were issued. All prior period
earnings per share data has been restated in accordance with the
provisions of SFAS 128.
Amounts used in the determination of basic and diluted earnings per
share are shown in the table below:
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
-------------------------------
1999 1998
---- ----
(in thousands, except share data)
<S> <C> <C>
Net income (loss) ................................ $ (28,742) $ 15,104
Less accretion of preferred stocks ............... (737) --
------------ -----------
Income (loss) available to common stockholders-
basic ......................................... $ (29,479) $ 15,104
============ ===========
Weighted average common shares outstanding ....... 34,221,718 30,750,870
Adjustments for dilutive securities:
Stock warrants ................................ -- 2,160,000
Stock options ................................. -- 940,920
Contingent shares ............................. -- 843,801
------------ -----------
Diluted common shares ............................ 34,221,718 34,695,591
============ ===========
</TABLE>
For the three months ended March 31, 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.
4. 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"), and 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 Significant Lenders to
"standstill" and keep outstanding balances under their facilities in
place, subject
8
<PAGE> 11
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
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 that 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 credit 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.
In mid-January 1999, the intercreditor agreements expired; however, on
February 19, 1999, concurrent with the execution of the Acquisition
Agreement (see the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998 and Note 17 of Notes to Consolidated
Financial Statements "Significant Events and Events Subsequent to
December 31, 1998" included therein), the Company entered into amended
and restated intercreditor agreements with the Significant Lenders.
Under the amended and restated intercreditor agreements, the
Significant Lenders agreed to keep their respective facilities in place
until the closing of the acquisition and for twelve months thereafter
provided that the closing of the acquisition occurs within five months,
subject to earlier termination in certain events. If the acquisition is
not consummated within a five-month period, after that period, the
Significant Lenders would not be subject to the requirements of the
amended and restated intercreditor agreements.
The Acquisition Agreement is subject to a number of conditions,
including approval by the Company's shareholders. There can be no
assurance that the acquisition will be consummated. If the acquisition
by the Greenwich Funds is not consummated within five months from the
signing of amended and restated intercreditor agreements, the
standstill period thereunder would expire and the Significant Lenders
could exercise remedies. In such an event, it is likely that the
Company would be unable to continue its business.
None of the three Significant Lenders has formally reduced the amount
available under its facilities, but each has informally indicated its
desire that the Company keep the average amount outstanding on the
warehouse facilities well below the amount available. There can be no
assurance that the Significant Lenders will continue to fund the
Company under their uncommitted facilities. The intercreditor
agreements also require the Company to make various amortization
payments on the underlying debt before, upon and after the closing of
the acquisition. Failure to make the required payments would permit the
Significant Lenders to terminate the standstill period under the
intercreditor agreements and to exercise remedies. In such an event, it
is likely the Company would be unable to continue its business.
At March 31, 1999, the Company had a $1.25 billion uncommitted credit
facility with Paine Webber. Outstanding warehouse borrowings bear
interest at rates ranging from LIBOR (5.06% at March 31, 1999) plus
0.65% to LIBOR plus 0.90%. Approximately $80 million was outstanding
under this facility at March 31, 1999. The
9
<PAGE> 12
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
Company has informally requested that Paine Webber permit funding of an
additional $200 million under its warehouse facilities, but has not yet
been notified if the request has been approved.
At March 31, 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. At March 31,
1999, approximately $232 million was outstanding under this facility.
DMG has indicated to the Company that additional funding will be on an
"as-requested" basis.
At March 31, 1999, the Company had a $1.0 billion uncommitted warehouse
facility with Bear Stearns. This facility bears interest at LIBOR plus
0.75%. At March 31, 1999, approximately $385 million was outstanding
under this facility. Bear Stearns has requested that the Company
maintain outstanding amounts under this warehouse facility at no more
than $500 million.
Additionally, at March 31, 1999, the Company had other outstanding
warehouse lines of credit of approximately $97 million. Interest rates
ranged from LIBOR plus 0.65% to LIBOR plus 1.50% as of March 31, 1999,
and all borrowings mature within one year.
Outstanding borrowings under the Company's warehouse financing
facilities are collateralized by mortgage loans held for sale,
and servicing rights on approximately $250 million of mortgage loans.
Upon the sale of these loans 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 March 31, 1999, outstanding interest-only and residual financing
borrowings were $148.5 million under the Company's credit facility with
Paine Webber. Outstanding borrowings bear interest at LIBOR plus 2.0%
and are collateralized by the Company's interest in certain
interest-only and residual certificates.
10
<PAGE> 13
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
Bear, Stearns & Co. Inc. and its affiliates, Bear Stearns Mortgage
Capital Corporation and Bear, Stearns International Limited, provide
the Company with a $100 million credit facility which is
collateralized by the Company's interest in certain interest-only and
residual certificates. At March 31, 1999, $90.9 million was outstanding
under this credit facility, which bears interest at 1.75% per annum in
excess of LIBOR.
At March 31, 1999, outstanding interest-only and residual financing
borrowings under the Company's credit facility with DMG were $42.7
million. Outstanding borrowings bear interest at LIBOR plus 2.0% and
are collateralized by the Company's interest in certain interest-only
and residual certificates.
The interest-only and residual financing facilities described above are
subject to the intercreditor agreements and amended and restated
intercreditor agreements described under "Warehouse Finance Facilities"
above.
At March 31, 1999, the Company had borrowed $2.1 million under an
agreement which matured in August 1998, bears interest at 2.0% per
annum in excess of LIBOR and is collateralized by the Company's
interest in certain interest-only and residual certificates. The
Company 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. There can
be no assurance the informal agreement will provide for any further
extension of the maturity.
At March 31, 1999, the Company also has outstanding a $5.9 million
credit facility with an affiliate of the Company which bears interest
at 10% per annum. The credit facility provides for repayment of
principal and interest over 36 months, and based on certain
circumstances, a partial prepayment of principal may be required on
July 31, 1999.
BankBoston provided the Company with a revolving credit facility which
matured in October 1998, bore interest at LIBOR plus 2.75% and provided
for borrowings up to $50.0 million to be used to finance interest-only
and residual certificates or for acquisitions or bridge financing. On
February 19, 1999, $42.5 million was outstanding under this credit
facility. BankBoston, with participation from another financial
institution, also provided the Company with a $45.0 million working
capital facility, which bore interest at LIBOR plus 2.75% and matured
in October 1998. On February 19, 1999, $45.0 million was outstanding
under this facility. The Company was unable to repay either of these
BankBoston facilities when they matured.
In October 1998, the Company entered into a forbearance and
intercreditor agreement with BankBoston with respect to its combined
$95.0 million facilities. That agreement provided that the bank would
take no collection action, subject to certain conditions, for up to 90
days (which expired in mid-January 1999) in order for the Company to
explore its financial alternatives.
11
<PAGE> 14
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
In mid-January, 1999 the forbearance and intercreditor agreement with
BankBoston expired. On February 19, 1999 the Greenwich Funds purchased,
at a discount, from BankBoston its interest in the credit facilities,
and entered into an amended intercreditor agreement with the Company
relating to the combined $95.0 million facilities. Under the amended
intercreditor agreement, the Greenwich Funds have agreed to keep its
facilities in place for a period of 12 months thereafter, if the
acquisition described in the Acquisition Agreement, discussed below, is
consummated within five months, subject to earlier termination in
certain events as provided in the intercreditor agreements. If the
acquisition by the Greenwich Funds is not consummated within a five
month period, after that, the Greenwich Funds would no longer be
required to standstill.
On October 15, 1998, the Company entered into an agreement for a $33.0
million standby revolving credit facility with certain of the Greenwich
Funds (the "Greenwich Loan Agreement"). The facility was available to
provide working capital for a period of up to 90 days. The terms of the
facility 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
the Company entered into a definitive agreement for a transaction which
could result in a change of control. In mid-January 1999, the $33.0
million standby revolving credit facility matured. On February 16,
1999, the Greenwich Funds made additional loans available totaling $5.0
million under the facility. At March 31, 1999, $34.8 was outstanding
under the Greenwich Loan Agreement.
On February 19, 1999, the Company entered into a merger agreement with
the Greenwich Funds that was terminated and recast as an acquisition
agreement on March 31, 1999. Under the Acquisition Agreement, the
Greenwich Funds will receive newly issued common stock of the Company
equal to 93.5% of the common stock outstanding after such issuance,
leaving the existing common shareholders of the Company with 6.5% of
the common stock outstanding. No payment will be made to the Company's
common shareholders in this transaction. Upon the consummation of the
acquisition, the Greenwich Funds will surrender for cancellation their
Class C exchangeable preferred stock and enter into an amendment and
restatement of its existing loan agreement with the Company, pursuant
to which the Greenwich Funds will, among other things, make available
to the Company an additional $35 million in working capital loans,
extend the maturity of the loans to three years from such consummation
and forego their right to exchange their loans for additional
preferred stock.
The terms of the Greenwich Loan Agreement resulted in significant
expense and stockholder dilution. Interest expense-Greenwich Funds of
$7.9 million was recognized for the three months ended March 31, 1999
with respect to the Greenwich Loan Agreement which includes accrued
interest at 10% and 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. (See the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998
and Note 4 of Notes to Consolidated Financial Statements "Preferred
Stock" included therein). Interest expense-Greenwich Funds also
includes interest
12
<PAGE> 15
IMC Mortgage Company and Subsidiaries
Notes to Consolidated Financial Statements
for the three months ended March 31, 1999 and 1998
(Unaudited)
expense of $1.0 million related to the $95.0 million credit facilities
that the Greenwich Funds purchased from BankBoston on February 19,
1999.
The Acquisition Agreement is subject to a number of conditions,
including approval by the Company's shareholders. There can be no
assurance that the Acquisition Agreement will be consummated. If the
acquisition is not consummated within five months from the signing of
the amended and restated intercreditor agreements, the standstill
thereunder would expire and Significant Lenders and the Greenwich Funds
could exercise remedies.
The warehouse notes and term debt have requirements that the Company
maintain certain debt to equity ratios and certain agreements restrict
the Company's ability to pay dividends on common stock. Capital
expenditures are limited by certain agreements.
NOTES PAYABLE
At March 31, 1999, $4.4 million was outstanding under a mortgage note
payable, which bears interest at 8.16% per annum and expires December
2007. The note is collateralized by the Company's headquarters
building.
At March 31, 1999, $12.9 million was outstanding under notes payable to
shareholders related to an acquisition completed in 1997. These notes
bear interest at prime (7.75% at March 31, 1999) plus 2.0% and mature
on July 1, 1999.
5. INTEREST-ONLY AND RESIDUAL CERTIFICATES
Activity in interest-only and residual certificates consisted of the
following:
<TABLE>
<CAPTION>
For the three months ended
March 31,
--------------------------
1999 1998
(in thousands)
<S> <C> <C>
Balance, January 1 ..................... $ 468,841 $ 223,306
Additions .............................. -- 105,125
Cash receipts .......................... (23,008) (676)
--------- ---------
Balance, March 31 ...................... $ 445,833 $ 327,755
========= =========
</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 the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1998 and 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" of Notes to Consolidated Financial Statements included therein),
the Company revised its loss curve
13
<PAGE> 16
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
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 traditionally had offerred loans
to borrowers that are less creditworthy, which IMC believes may
increase the frequency of defaults. 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.
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.
6. COMMITMENTS AND CONTINGENCIES
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 these contracts were paid for the fiscal year 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. The Acquisition
Agreement, described in Note 1, is contingent upon future employment
agreements with certain members of management acceptable to the
Greenwich Funds. There can be no assurance employment agreements
acceptable to certain members of management and Greenwich Funds can be
achieved.
LEGAL PROCEEDINGS
The Company is party to various legal proceedings arising in the
ordinary course of its business. Management believes that none of these
matters, individually or in the aggregate, will have a material adverse
effect on the consolidated financial condition or results of operations
of the Company.
On December 23, 1998, certain former shareholders of Corewest sued the
Company in Superior Court of the State of California for the County of
Los Angeles claiming the Company agreed to pay them $23.8 million in
cancellation of the contingent "earn out" payment, if any, payable by
the Company in connection with the Company's purchase of all of the
outstanding shares of Corewest. The case is in the early stages of
pleading; however, the Company's management, based on consultation
with legal counsel, believes there is no merit in the plaintiffs'
claim.
14
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the consolidated
financial statements and notes included in Item 1 of this Quarterly Report, and
the financial statements and the notes thereto and Management's Discussion and
Analysis of Financial Condition and Results of Operations included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998
and reports filed on Forms 8-K dated March 3, 1999, February 26, 1999, February
23, 1999, November 27, 1998 and October 21, 1998. The following management's
discussion and analysis of the Company's financial condition and results of
operations contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, which involve risks and
uncertainties. You can identify forward looking statements by the use of such
words as "expect", "estimate", "intend", "project", "budget", "forecast",
"anticipate", "plan", "in the process of" and similar expressions. Forward
looking statements include all statements regarding IMC's expected financial
position, results of operations, cash flows, financing plans, business
strategies, budgets, capital and other expenditures, competitive positions,
plans and objectives of management and markets for stock. All forward looking
statements involve risks and uncertainties. In particular, any statements
contained herein regarding the consummation and benefits of the proposed
transaction with Greenwich Street Capital Partners II, L.P. and certain related
funds (the "Greenwich Funds"), as well as expectations with respect to future
sales, operating efficiencies and product and product expansion, are subject to
known and unknown risks, uncertainties and contingencies, many of which are
beyond the control of IMC, which may cause actual results, performance or
achievements to differ materially from anticipated results, performance or
achievements. Factors that might affect such forward looking statements include,
among other things, overall economic and business conditions, the demand for
IMC's services, competitive factors in the industry in which IMC competes,
changes in government regulation, continuing tightening of credit availability
to the subprime mortgage industry, early termination of the amended and restated
intercreditor agreements or the standstill periods relating to certain of IMC's
creditors increased yield requirements by asset-backed investors, lack of
continued availability of IMC's credit facilities, reduction in real estate
values, reduced demand for non-conforming loans, changes in underwriting
criteria applicable to such loans, prepayment speeds, delinquency and default
rates of mortgage loans owned or serviced by IMC, rapid fluctuation in interest
rates, risks related to not hedging against loss of value of IMC's mortgage loan
inventory, changes which influence the loan securitization and the net interest
margin securities (excess cashflow trust) markets generally, lower than expected
performance of companies acquired by IMC, market forces affecting the price of
IMC's common stock and other uncertainties associated with IMC's current
financial difficulties and the proposed transaction with the Greenwich Funds,
and other risks identified in IMC Mortgage Company's Securities and Exchange
Commission filings.
GENERAL
IMC is a specialized consumer finance company engaged in purchasing,
originating, servicing and selling home equity loans secured primarily by first
liens on one- to four-family residential properties. The Company focuses on
lending to individuals whose borrowing needs are generally not being served by
traditional financial institutions due to such individuals' impaired credit
profiles and other factors. Loan proceeds typically are used by such individuals
to consolidate debt, to refinance debt, to finance home improvements, to pay
educational expenses and for a variety of other uses. By focusing on individuals
with impaired credit profiles and providing prompt responses to their borrowing
requests,
15
<PAGE> 18
the Company has been able to charge higher interest rates for its loan products
than typically are charged by conventional mortgage lenders.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998.
Net loss for the three months ended March 31, 1999 was $28.7 million
representing a decrease of $43.8 million or 290.3% from net income of $15.1
million for the three months ended March 31, 1998. The decrease in net income
resulted principally from a decrease in gain on sale of loans of $41.9 million
or 69.8% to $18.1 million for the three months ended March 31, 1999 from $60.0
million for the three months ended March 31, 1998 and $7.9 million of interest
expense associated with the transaction with the Greenwich Funds. Also
contributing to the decrease in net income was a $1.6 million or 20.5% decrease
in net warehouse interest income to $6.2 million for the three months ended
March 31, 1999 from $7.7 million for the three months ended March 31, 1998. The
decrease in net income was partially offset by a $4.2 million or 46.2% increase
in servicing fees to $13.2 million for the three months ended March 31, 1999
from $9.0 million for the three months ended March 31, 1998, and a $0.5 million
or 7.1% increase in other revenues to $7.6 million for the three months ended
March 31, 1999 from $7.1 million for the three months ended March 31, 1998.
The decrease in income was also attributed to a $0.9 million or 3.2% increase in
compensation and benefits to $29.4 million for the three months ended March 31,
1999 from $28.4 million for the three months ended March 31, 1998. The decrease
in income is also attributable to a $4.0 million or 81.7% increase in other
interest expense to $8.9 million for the three months ended March 31, 1999 from
$4.9 million for the three months ended March 31, 1998. The decrease in income
was partially offset by a $1.5 million or 6.1% decrease in selling, general and
administrative expenses to $23.4 million for the three months ended March 31,
1999 from $24.9 million for the three months ended March 31, 1998.
Net loss before taxes was increased by a provision for income taxes of $4.3
million for the three months ended March 31, 1999 compared to a provision for
income taxes of $10.5 million for the three months ended March 31, 1998. No
income tax benefit has been applied to the net loss for the three months ended
March 31, 1999, as the Company determined it cannot be assured that the income
tax benefit could be realized in the future.
16
<PAGE> 19
REVENUES
The following table sets forth information regarding components of the Company's
revenues for the three months ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-----------------------------
1999 (in thousands) 1998
-------- --------
<S> <C> <C>
Gain on sales of loans $ 18,111 $ 59,980
-------- --------
Warehouse interest income 20,629 41,235
Warehouse interest expense (14,474) (33,494)
-------- --------
Net warehouse interest income 6,155 7,741
-------- --------
Servicing fees 13,172 9,011
Other 7,645 7,139
-------- --------
Total revenues $ 45,083 $ 83,871
======== ========
</TABLE>
Gain on Sales of Loans. For the three months ended March 31, 1999, gain on sales
of loans decreased to $18.1 million from $60.0 million for the three months
ended March 31, 1998, a decrease of 69.8%, due primarily to a decrease in loans
sold through securitizations. The total volume of loans produced decreased by
79.2% to approximately $353 million for the three months ended March 31, 1999
as compared with a total volume of approximately $1.7 billion for the three
months ended March 31, 1998. Originations by the Company's correspondent
network decreased 99.2% to approximately $9 million for the three months ended
March 31, 1999 from approximately $1.2 billion for the three months ended March
31, 1998, while production from the Company's broker network and direct lending
operations decreased by 36.0% to approximately $344 million for the three
months ended March 31, 1999 from approximately $537 million for the three
months ended March 31, 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 three
months ended March 31, 1999, the Company did not sell any loans through the
securitization market in order to better manage its cash flow. Mortgage loans
delivered to securitization trusts decreased by $1.4 billion, a decrease of
100% to $0 for the three months ended March 31, 1999 from $1.4 billion for the
three months ended March 31, 1998. Mortgage loans sold in the whole loan market
increased by approximately $413 million, an increase of approximately 413%, to
approximately $513 million for the three months ended March 31, 1999 from
approximately $100 million for the three months ended March 31, 1998.
Net Warehouse Interest Income. Net warehouse interest income decreased to $6.2
million for the three months ended March 31, 1999 from $7.7 million for the
three months ended March 31, 1998, a decrease of 20.5%. The decrease in the
three month period ended March 31, 1999 reflected decreased mortgage loan
production and mortgage loans held for sale.
Net warehouse interest income for the three months ended March 31, 1998 was
partially offset by a decrease in the securitization of adjustable rate mortgage
loans. In a fixed rate mortgage loan securitization transaction, the Company
receives the pass-through rate of interest on the loans conveyed to the
securitization trust for the period between the cut-off date (generally the
first day of the month a securitization transaction occurs) and the closing date
of the securitization transaction (typically
17
<PAGE> 20
during the third or fourth week of the month). The cut-off date represents the
date after which interest on the mortgage loans accrues to the securitization
trust rather than the Company. The pass-through rate, which is less than the
weighted average interest rate on the mortgage loans, represents the interest
rate to be received by investors who purchase pass-through certificates in the
securitization trust on the closing date. The Company continues to incur
interest expense on its warehouse financings related to loans conveyed to the
trust until the closing date, at which time the warehouse line is repaid. In an
adjustable rate mortgage loan securitization, the Company receives no interest
on mortgage loans conveyed to the securitization trust for the period between
the cut-off date and the closing date of the securitization. For the three
months ended March 31, 1999 and 1998, the Company incurred warehouse interest
expense of $0 and approximately $2.9 million, respectively, related to the
period between the cut-off date and the closing date of adjustable rate mortgage
rate mortgage loan securitizations for which no corresponding interest income
was recognized.
Servicing Fees. Servicing fees increased to $13.2 million for the three months
ended March 31, 1999 from $9.0 million for the three months ended March 31,
1998, an increase of 46.2%. Servicing fees for the three months ended March 31,
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 $2.1 billion or 42.4% to $7.5 billion for
the three months ended March 31, 1999 from $5.4 billion for the three months
ended March 31, 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, increased to $7.6 million or 7.1% for the three
months ended March 31, 1999 from $7.1 million in three months ended March 31,
1998.
EXPENSES
The following table sets forth information regarding components of the Company's
expenses for the three months ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
--------------------------
1999 (in thousands) 1998
------- -------
<S> <C> <C>
Compensation and benefits $29,350 $28,438
Selling, general and administrative 23,425 24,940
Other interest expense 8,884 4,889
Interest expense - Greenwich Funds 7,880 0
------- -------
Total expenses $69,539 $58,267
======= =======
</TABLE>
Compensation and benefits increased by $0.9 million or 3.2% to $29.4 million for
the three months ended March 31, 1999 from $28.4 million for the three months
ended March 31, 1998, principally due to an increase in the number of employees
related to additions of personnel to service the Company's loan servicing
portfolio, offset by a reduction of personnel to originate mortgage loans and a
$2.7 million decrease in executive and management incentive compensation to $0
for the three months ended March 31, 1999 from $2.7 million for the three months
ended March 31, 1998. The amount of executive bonuses is directly related to
increases in the Company's earnings per share. Although executive bonuses of
$2.7 million were accrued in the three months ended March 31, 1998, no executive
bonuses were actually paid during 1998 and none are anticipated for 1999.
18
<PAGE> 21
Selling, general and administrative expenses decreased by $1.5 million or 6.1%
to $23.4 million for the three months ended March 31, 1999 from $24.9 million
for the three months ended March 31, 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 $4.0 million or 81.7% to $8.9 million for
the three months ended March 31, 1999 from $4.9 million for the three months
ended March 31, 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 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. Interest expense - Greenwich Funds also includes accrued interest on
the $95.0 million credit facilities the Greenwich Funds purchased from
BankBoston on February 18, 1999. See Note 4 of Notes to Consolidated Financial
Statements for the three months ended March 31, 1999 and 1998 "Warehouse
Finance Facilities, Term Debt and Notes Payable".
Income Taxes. The provision for income taxes for the three months ended March
31, 1999 was approximately $4.3 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, amortization
expenses related to goodwill and a full valuation allowance established against
the deferred tax asset.
FINANCIAL CONDITION
March 31, 1999 Compared to December 31, 1998
Mortgage loans held for sale, net, at March 31, 1999 were $748.5 million, a
decrease of $198.0 million or 20.9% from mortgage loans held for sale of $946.4
million at December 31, 1998. Included in mortgages held for sale, net, at March
31, 1999 and December 31, 1998 were $83.8 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 March 31, 1999 and December 31, 1998 were
$21.5 million and $24.0 million, respectively.
Accounts receivable increased $4.2 million or 9.4% from $44.7 million at
December 31, 1998 to $48.9 million at March 31, 1999, 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 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.
19
<PAGE> 22
Interest-only and residual certificates at March 31, 1999 were $445.8 million,
representing a decrease of $23.0 million or 4.9% from interest-only and residual
certificates of $468.8 million at December 31, 1998. Mortgage servicing rights
decreased $5.2 million or 9.9% from $52.4 million at December 31, 1998 to $47.2
million March 31, 1999. The decrease in mortgage servicing rights consists of
amortization of $5.2 million. The decrease in interest-only and residual
certificates and mortgage servicing rights resulted primarily from the receipt
of cash on the interest-only and residual certificates in the three months ended
March 31, 1999.
Goodwill decreased $0.8 million from $89.6 million at December 31, 1998 to $88.8
million at March 31, 1999 due to amortization of goodwill. 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 March 31, 1999 based on the projected cash flows of
the acquired companies. However, potential impairment in future periods may
result from several factors, including the proposed transaction with the
Greenwich Funds, the discontinuation of operations or sale of certain acquired
companies, or other factors including turmoil in the financial markets in which
the acquired companies and the Company operate.
Borrowings under warehouse financing facilities at March 31, 1999 were $793.7
million, a decrease of $190.9 million or 19.4% from borrowings under warehouse
financing facilities of $984.6 million at December 31, 1998. This decrease was a
result of decreased mortgage loans held for sale, caused by IMC's significant
lenders imposing restrictions on loans to IMC. See "-Liquidity and Capital
Resources" included herein and the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 and Note 3 of Notes to the Consolidated
Financial Statements "Warehouse Finance Facilities, Term Debt and Notes Payable"
included therein.
Term debt and notes payable at March 31, 1999 was $429.6 million, representing a
decrease of $3.1 million or 0.7% from term debt and notes payable of $432.7
million at December 31, 1998. This decrease was primarily a result of repayment
of certain amounts under term debt from cash flows received from interest-only
and residual certificates as provided in the intercreditor agreements.
The Company's net deferred tax asset of $42.2 million at March 31, 1999 was
offset by a full valuation allowance and, after the offset, 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 $0.7 million to $38.1 million at March 31, 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 Travelers. The Class A
redeemable preferred stock was convertible into non-registered common stock at
$10.44 per share. As described in Note 4 "Preferred Stock" of Notes to the
December 31, 1998 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.
20
<PAGE> 23
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 "Preferred Stock" of Notes to the December 31, 1998 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 March 31, 1999 was $181.4 million, a decrease of
$29.3 million over stockholders' equity of $210.6 million at December 31, 1998.
Stockholders equity decreased for the three months ended March 31, 1999
primarily as a result of a net loss of $28.7 million.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 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 the three months ended March 31, 1999
included the funding of loan purchases and originations, payment of principal
and interest costs on borrowings, operating expenses, income taxes and capital
expenditures.
The Company has an ongoing need for substantial amounts of capital. Adequate
credit facilities and other sources of funding are essential to the continuation
of the Company's ability to purchase and originate loans. The Company typically
has operated, and expects to continue to operate, on a negative operating cash
flow basis. During the three months ended March 31, 1999, the Company received
cash flows from operating activities of $204.4 million, an increase of $362.6
million, or 229.2%, from cash flows used in operating activities of $158.2
million during the three months ended March 31, 1998. During the three months
ended March 31, 1999, cash flows used by the Company in financing activities
were $199.5 million, a decrease of $350.9 million or 231.8% from cash flows
received from financing activities of $151.4 million during the three months
ended March 31, 1998. The cash flows received from operating activities relate
primarily to the sale of mortgage loans held for sale and cash flows used in
financing activities related primarily to the repayment of warehouse finance
facilities borrowings.
Significant cash outflows are incurred upon the closing of a securitization
transaction; however, the Company does not receive a significant portion of the
cash representing the gain until later periods when the related loans are repaid
or otherwise collected. The Company borrows funds on a short-term basis to
support the accumulation of loans prior to sale. These short-term borrowings are
made under warehouse lines of credit with various lenders.
During the year ended December 31, 1998, debt, equity and asset-backed markets
were extremely volatile, effectively denying the Company access to publicly
traded debt and equity markets to fund cash needs. Additionally, the spread over
treasury securities demanded by investors to acquire newly issued asset-backed
securities widened, resulting in less profitable gain on sales of loans sold
through securitization. The Company has responded by reducing the premium the
Company pays to correspondents and brokers to acquire loans, but the reduction
of premiums in the future may not offset the wider spreads demanded by
investors. Investors may not continue to invest in asset-backed securities at
all.
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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 $282 of the Company's
interest-only and residual financing at March 31, 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) in order for the
Company to explore its financial alternatives. The intercreditor agreements also
provided, subject to certain conditions, that the lenders would not issue any
margin calls requesting additional collateral be delivered to the lenders. See
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1998 and Note 3 of Notes to the Consolidated Financial Statements "Warehouse
Finance Facilities, Term Debt and Notes Payable" included therein.
In mid-January 1999, the original intercreditor agreements expired; however, on
February 19, 1999, concurrent with the execution of the Acquisition Agreement
described in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 and Note 17 of Notes to Consolidated Financial Statements
"Significant Events and Events Subsequent to December 31, 1998" included
therein, the Company entered into amended and restated intercreditor agreements
with the Significant Lenders. Under the amended and restated intercreditor
agreements, the Significant Lenders agreed to keep their respective facilities
in place through the closing under the Acquisition Agreement if the closing
occurs within five months, and for twelve months thereafter, subject to earlier
termination in certain events. If the acquisition is not consummated within a
five month period, after that period, those lenders would not be required to
refrain from exercising remedies. The intercreditor agreements require the
Company to make various amortization payments on the underlying debt before,
upon and after the closing of the acquisition. Failure to make the required
payments would permit the Significant Lenders to terminate the standstill period
under the intercreditor agreements and to exercise remedies. There can be no
assurance the Company will be able to make all the required payments. The
Company anticipates using the proceeds of the additional loans to be made under
the Greenwich Funds facility upon closing of the acquisition to fund certain of
these payments.
None of the three Significant Lenders has formally reduced the amount available
under its facilities, but each has informally indicated its desire that the
Company keep the average amount outstanding on the warehouse facilities well
below the amount available. There can be no assurance that the Significant
Lenders will continue to fund the Company under their uncommitted facilities.
See the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1998 and Note 3 "Warehouse Finance Facilities, Term Debt and Notes Payable"
and Note 17 "Significant Events and Events Subsequent to December 31, 1998" of
Notes to Consolidated Financial Statements included therein.
At March 31, 1999, the Company had a $1.25 billion uncommitted warehouse and
residual financing facility with Paine Webber. This Warehouse facility bears
interest rates at rates ranging from LIBOR plus 0.65% to LIBOR plus 0.90%.
Approximately $80 million was outstanding under this warehouse facility as of
March 31, 1999. The Company had informally requested that Paine Webber permit
funding of an additional $200 million under its warehouse facilities, but has
not yet been notified if the request has been approved.
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At March 31, 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 $385 million was outstanding under this facility at March 31,
1999. Bear Stearns has requested that the Company maintain outstanding amounts
under this warehouse facility at no more that $500 million.
At March 31, 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 $232 million was outstanding under this
warehouse and residual financing facility at March 31, 1999. DMG has indicated
to the Company that additional fundings will be on an "as requested" basis. To
induce DMG to enter the intercreditor agreement in October 1998, the Company
consented to convert DMG's committed warehouse and residual facility to an
uncommitted facility. See the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998 and Note 3 "Warehouse Finance Facilities,
Term Debt and Notes Payable" of Notes to Consolidated Financial Statements
included therein.
Additionally, at March 31, 1999, the Company had other warehouse lines of credit
outstanding which totaled approximately $97 million. Interest rates ranged from
LIBOR plus 0.65% to LIBOR plus 1.50% and all borrowings mature within one year.
Outstanding borrowings under the Company's warehouse financing facilities are
collateralized by mortgage loans held for sale and servicing rights on
approximately $250 million of mortgage loans. Upon the sale of these loans, the
borrowings under these lines are repaid.
The Company is attempting to enter into arrangements to obtain warehouse
facilities from lenders that are not currently providing warehouse financing to
IMC, but has not yet been successful.
As a result of the DMG warehouse facility becoming uncommitted and the adverse
market conditions currently being experienced by the Company and other mortgage
companies in the industry, the Company's ability to continue to operate is
almost entirely dependent upon the Significant Lenders discretion to provide
warehouse funding to the Company. The Significant Lenders may not approve the
Company's warehouse funding requests.
At March 31, 1999, the Company had borrowed $148.5 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 March 31, 1999,
$90.9 million was outstanding under this credit facility, which bears interest
at 1.75% per annum in excess of LIBOR.
At March 31, 1999, outstanding interest-only and residual financing borrowings
under the Company's credit facility with DMG were $42.7 million. Outstanding
borrowings bear interest at LIBOR plus 2% and are collateralized by the
Company's interest in certain interest-only and residual certificates.
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At March 31, 1999, the Company had borrowed $2.2 million under a residual
financing credit facility which matured in August 1998, bears interest at 2.0%
per annum in excess of LIBOR and is collateralized by the Company's interest in
certain interest-only and residual certificates. The Company has informally
agreed to allow approximately 1/3 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.
At December 31, 1998 the Company also has outstanding $5.9 million under a
credit facility with an affiliate of a shareholder of the Company which bears
interest at 10% per annum. That credit facility provides for repayment of
principal and interest over 36 months and, based on certain circumstances, a
partial prepayment of principal may be required on July 31, 1999.
BankBoston provided the Company with a revolving credit facility which matured
in October 1998, bore interest at LIBOR plus 2.75% and provided for borrowings
up to $50 million to be used to finance interest-only and residual certificates,
or for acquisitions or bridge financing. BankBoston with participation from
another financial institution also provided the Company with a $45 million
working capital facility, which bore interest at LIBOR plus 2.75% and matured in
October 1998. The Company was unable to repay these credit facilities when they
matured and in October 1998, the Company entered into a forbearance and
intercreditor agreement with BankBoston with respect to these credit facilities.
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 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 the amended intercreditor agreement, the Greenwich Funds agreed to keep
these facilities in place for a period of twelve months after the acquisition of
IMC common stock described in the Acquisition Agreement is consummated if the
consummation occurs within a five month period, subject to earlier termination
in certain events provided in the amended intercreditor agreement.
The Company's current warehouse lines generally are subject to one-year terms.
The Company's current creditors may not renew their facilities as they expire
and the Company may not be able to obtain additional credit lines.
On July 14, 1998, Travelers Casualty and Surety Company and certain of the
Greenwich Funds (together, the "Purchasers") purchased $50 million of the
Company's Class A preferred stock. The Class A preferred stock was convertible
into common stock at $10.44 per share. The Class A preferred stock bears no
dividend and is redeemable by the Company over a three-year period commencing in
July 2008. As part of the preferred stock purchase agreement, the Company agreed
to use its best efforts to cause two persons designated by the Purchasers to be
elected to the Company's board of directors. The Purchasers were also granted an
option to purchase, within the next three years, an additional $30 million of
Series B redeemable preferred stock at par. The Class B preferred stock was
convertible into common stock at $22.50 per share. In October 1998, the terms of
the $50 million Class A preferred stock and the terms of the Class B preferred
stock were amended to eliminate the right to convert into common stock. See Note
4 "Preferred Stock" of Notes to the December 31, 1998 Consolidated Financial
Statements.
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On October 15, 1998 the Company reached an agreement for a $33 million standby
revolving credit facility with certain of the Greenwich Funds. The facility was
available to provide working capital for a period of up to 90 days, or until
mid-January 1999. The terms of the standby revolving credit facility resulted in
substantial dilution of existing common stockholders' equity equal to a minimum
of 40%, up to a maximum of 90%, on a diluted basis, depending on (among other
things) when, or whether, a change of control transaction occurs. In mid-January
1999, the $33 million standby revolving credit facility matured. On February 16,
1999, the Greenwich Funds provided an additional $5 million of loans under the
facility. On February 19, 1999, the Company and the Greenwich Funds entered into
an amended and restated intercreditor agreement, whereby the Greenwich Funds
agreed to keep the facility in place for a period through the closing under the
Acquisition Agreement if the closing occurs within a five month period and for
twelve months thereafter, subject to earlier termination in certain events as
provided in the amended and restated intercreditor agreement. At March 31, 1999,
$34.8 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 Greenwich Funds will
receive newly issued common stock of the Company equal to 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. No
payment will be made to the Company's common shareholders in this transaction.
Upon the closing, certain of the Greenwich Funds will surrender all of the
outstanding Class C exchangeable preferred stock for cancellation and enter into
an amendment and restatement of their existing loan agreement with IMC, pursuant
to which the Greenwich Funds will make available to IMC an additional $35
million in working capital loans.
The acquisition by the Greenwich Funds is subject to a number of conditions,
including approval by the Company's shareholders. There can be no assurance that
the acquisition will be consummated. If the Acquisition Agreement is terminated
or the acquisition is not consummated within five months from the signing of the
amended and restated intercreditor agreements, the standstills would expire or
could be terminated and the Significant Lenders could exercise remedies. In such
an event, the Company most likely would be unable to continue its business.
The Company has substantial capital requirements and it anticipates that it will
need to arrange for additional external cash resources through either the sale
or securitization of interest-only and residual certificates, increased credit
facilities or the sale or placement of debt, preferred stock or equity
securities. Also, there can be no assurance that existing warehouse and
interest-only and residual certificate lenders will continue to fund the Company
under their uncommitted facilities, that existing credit facilities can be
increased, extended or refinanced, that the Company will be able to arrange for
the sale or securitization of interest-only and residual certificates in the
future on terms the Company would consider favorable, if at all, that the
Company will be able to sell debt, preferred stock or equity securities at any
given time or on terms the Company would consider favorable, or at all, or that
funds generated from operations will be sufficient to repay the Company's
existing debt obligations or meet its operating and capital requirements. To the
extent that the Company is not successful in increasing, maintaining or
replacing existing credit facilities, in selling or securitizing interest-only
and residual certificates or in selling debt, preferred stock or other equity
securities, the Company would not be able to hold a large volume of loans
pending securitization or whole loan sale and therefore would have to curtail
its loan production activities to attempt to sustain operations. The Company may
not be successful in sustaining operations.
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RISK MANAGEMENT
The Company purchases and originates mortgage loans and then sells them through
securitizations and whole loan sales. At the time of securitization of the
loans, the Company recognizes gain on sale based on a number of factors
including the difference, or "spread", between the interest rate on the loans
and 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 value of the
loans would be effectively hedged. The Company executed the sale of the United
States Treasury securities with large, reputable securities firms and used the
proceeds received to acquire United States Treasury securities under repurchase
agreements. These securities were designated as hedges in the Company's records
and were closed out when the loans were sold.
Historically, when the value of the hedges decreased, generally largely
offsetting an increase in the value of the loans, the Company, upon settlement
with its counterparty, would pay the hedge loss in cash and realize the
generally corresponding increase in the value of the loans as part of its
interest-only and residual certificates. Conversely, if the value of the hedges
increased, generally largely offsetting a decrease in the value of the loans,
the Company, upon settlement with its counterparty, would receive the hedge gain
in cash and realize the generally corresponding decrease in the value of the
loans through a reduction in the value of the related interest-only and residual
certificates.
The Company believes that its hedging activities using United States Treasury
securities were substantially similar in purpose, scope and execution to
customary hedging activities using United States Treasury securities engaged in
by several of its competitors.
In September 1998, the Company believes that, primarily due to significant
volatility in debt, equity and asset-backed markets, investors demanded wider
spreads over United States Treasury securities to acquire newly issued
asset-backed securities. The effect of the increased demand for the United
States Treasury Securities resulted in a devaluation of the Company's hedge
position that 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. 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.
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 increases. An increase in the
discount rates used to present value
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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 March
31, 1999 of approximately 2%, 6% and 10%, 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 March 31, 1999 of approximately 2%, 7% and 13%,
respectively.
INFLATION
Inflation historically has had no material effect on the Company's results of
operations. Inflation affects the Company most in the area of loan originations
and can have an effect on interest rates. Interest rates normally increase
during periods of high inflation and decrease during periods of low inflation.
Profitability may be directly affected by the level and fluctuation in interest
rates which affect the Company's ability to earn a spread between interest
received on its loans and the costs of its borrowings. The profitability of the
Company is likely to be adversely affected during any period of unexpected or
rapid changes in interest rates. A substantial and sustained increase in
interest rates could adversely affect the ability of the Company to purchase and
originate loans and affect the mix of first and second mortgage loan products.
Generally, first mortgage production increases relative to second mortgage
production in response to low interest rates and second mortgage production
increases relative to first mortgage production during periods of high interest
rates. A significant decline in interest rates could decrease the size of the
Company's loan servicing portfolio by increasing the level of loan prepayments.
Additionally, to the extent servicing rights and interest-only and residual
certificates have been capitalized on the books of the Company, higher than
anticipated rates of loan prepayments or losses could require the Company to
write down the value of such servicing rights and interest-only and residual
certificates which could have a material adverse effect on the Company's results
of operations and financial condition. Conversely, lower than anticipated rates
of loan prepayments or lower losses could allow the Company to increase the
value of interest-only and residual certificates which could have a favorable
effect on the Company's results of operations and financial condition.
Fluctuating interest rates also may affect the net interest income earned by the
Company from the difference between the yield to the Company on loans held
pending sales and the interest paid by the Company for funds borrowed under the
Company's warehouse facilities. In addition, inverse or flattened interest yield
curves could have an adverse impact on the profitability of the Company because
the loans pooled and sold by the Company have long-term rates, while the senior
interests in the related securitization trusts are priced on the basis of
intermediate term rates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for
fiscal quarters of fiscal years beginning after June 15, 1999 (January 1, 2000
for the Company). SFAS 133 requires that all derivative instruments be recorded
on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative was designated as part of a hedge
transaction and, if it is, the type of hedge transaction. For fair-value hedge
transactions in which the Company hedges changes in the fair value of an asset,
liability or firm commitment, changes in the fair value of the derivative
instrument will generally be offset in the income statement by changes in the
hedged item's fair value. The ineffective portion of hedges will be recognized
in current-period earnings.
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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
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 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 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 failure or miscalculations which could cause personal injury,
property damage,
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disruption of operations and/or delays in payments from borrowers, any or all of
which could materially adversely effect the Company's business, financial
condition or results of operations.
During 1998 the Company implemented an internal Y2K compliance task force. The
goal of the task force is to minimize the disruptions to the Company's business,
which could result from the Y2K problem, and to minimize other liabilities,
which the Company might incur in connection with the Y2K problem. The task force
consists of existing employees of the Company and an outside consultant hired
specifically to address the Company's internal Y2K issues.
The Company has conducted a company-wide assessment of its computer systems and
operations infrastructure, and is currently testing its systems to determine
their Y2K compliance. The Company presently believes those business-critical
computer systems which are not presently Y2K-compliant will have been replaced,
upgraded or modified prior to 2000.
During 1998, the Company initiated communications with third parties whose
computer systems' functionality could impact the Company. These communications
will facilitate coordination of Y2K solutions and will permit the Company to
determine the extent to which the Company may be vulnerable to failures of the
third parties to address their own Y2K issues. However, as to the systems of the
third parties that are linked to the Company, there can be no guarantee that
such systems that are not now Y2K compliant will be timely converted to Y2K
compliance.
The costs of the Company's Y2K compliance efforts are being funded with cash
flows from operations. In total, these costs are not expected to be
substantially different from the normal, recurring costs that are incurred for
systems development, implementation and maintenance. As a result, these costs
are not expected to have a material adverse effect on the Company's financial
position, results of operations or cashflows. The Company anticipates that Y2K
expenses through December 31, 1999 will be less than $1.0 million.
The Company has currently identified two material potential risks related to its
Y2K issues. The first risk is that the Company's primary lenders, depository
institutions and collateral custodians do not become Y2K compliant before year
end 1999, which could materially impact the Company's ability to access funds
and collateral necessary to operate its businesses. The Company is currently
accessing 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 the 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.
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The foregoing assessment of the impact of the Y2K problem on the Company is
based on management's best estimates at the present time 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
the actual results could differ from those estimated if these assumptions prove
inaccurate. The disclosure in this Section, "Year 2000", contains
forward-looking statements, which involve risks and uncertainties. Reference is
made to the first paragraph of Item 2. "Management's Discussion and Analysis of
Financial Condition and Results of Operations on page 15 of this Report on Form
10-Q.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings -
IMC is a party to various legal proceedings arising out of the ordinary
course of its business. Management believes that none of these actions,
individually or in the aggregate, will have a material adverse effect on the
results of operations or financial condition of IMC.
On December 23, 1998, the former shareholders of Corewest sued IMC in
Superior Court of the State of California for the County of Los Angeles claiming
IMC agreed to pay them $23.8 million in cancellation of the contingent "earn
out" payment, if any, payable by IMC in connection with IMC's purchase of all
the outstanding shares of Corewest. The case is in the early stages of pleading;
however, IMC's management believes, based on consultation with legal counsel,
there is no merit in the plaintiffs' claims.
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K -
A. Exhibits
27 - Financial Data Schedule (for SEC use only)
99 - Report of Independent Certified Public Accountants
B. Reports on Form 8-K
On March 3, 1999, the Company filed a Current Report on Form 8-K to
report that the Company had entered into an Agreement and Plan of Merger with
Greenwich Funds.
On February 26, 1999 the Company filed a Current Report on Form 8-K
with respect to the Current Report on Form 8-K filed February 23, 1999.
On February 23, 1999, the Company filed a Current Report on Form 8-K to
report that the Company had appointed Grant Thornton L.L.P. as the independent
accounting firm to audit the financial statements of the Company for the year
ended December 31, 1998 and dismissed Pricewaterhouse Coopers L.L.P.
31
<PAGE> 34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: May 17, 1999 IMC MORTGAGE COMPANY
By: /s/ Thomas G. Middleton
Thomas G. Middleton, President, Chief Operating Officer, Assistant
Secretary and Director
By: /s/ Stuart D. Marvin
Stuart D. Marvin, Chief Financial Officer
32
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMAMRY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF IMC MORTGAGE FOR THE THREE MONTHS ENDED AND IS QUALIFIED
IN ITS ENTRIETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 19,479
<SECURITIES> 0
<RECEIVABLES> 58,403
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 16,467
<DEPRECIATION> 7,098
<TOTAL-ASSETS> 1,460,957
<CURRENT-LIABILITIES> 0
<BONDS> 0
38,070
0
<COMMON> 342
<OTHER-SE> 181,017
<TOTAL-LIABILITY-AND-EQUITY> 1,460,957
<SALES> 18,111
<TOTAL-REVENUES> 45,083
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 52,775
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,238
<INCOME-PRETAX> (24,456)
<INCOME-TAX> 4,286
<INCOME-CONTINUING> (28,742)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (28,742)
<EPS-PRIMARY> (0.86)
<EPS-DILUTED> (0.86)
</TABLE>
<PAGE> 1
EXHIBIT 99
Report of Independent Certified Public Accountants
To the Stockholders of
IMC Mortgage Company and Subsidiaries
We have reviewed the accompanying consolidated balance sheet of IMC Mortgage
Company and Subsidiaries as of March 31, 1999, and the related statements of
operations, stockholders' equity, and cash flows for the three months then
ended. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institution of Certified Public Accountants. A review of interim financial
information principally of applying analytical procedures to financial data and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with
generally accepted auditing standards, the objective of which is the expression
of an opinion regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended and in our report dated March 31, 1999, we
expressed an unqualified opinion with an explanatory paragraph for a going
concern on these consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheets
as of December 31, 1998 is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
/s/ Grant Thornton L.L.P.
Tampa, Florida
May 14, 1999
33
