<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
Exchange Act of 1934 for the quarterly period ended September 30,
2000.
[ ] 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)
10014 NORTH DALE MABRY HIGHWAY, SUITE 101
TAMPA, FLORIDA 33618
----------------------------------------
(Address of Principal Executive Offices)
Issuer's telephone number, including area code: (813) 968-9851
--------------
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 November 10, 2000
-------------------------------------- --------------------------------
Common Stock, par value $.01 per share 34,157,380
<PAGE> 2
IMC MORTGAGE COMPANY AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 2000 and December 31, 1999 1
Consolidated Statements of Operations
for the three months and the nine months ended
September 30, 2000 and September 30, 1999 2
Consolidated Statements of Cash Flows
for the nine months ended September 30, 2000
and September 30, 1999 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 2. Changes in Securities 31
Item 3. Defaults Upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 5. Other Information 31
Item 6. Exhibits and Reports on Form 8-K 32
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
<PAGE> 4
IMC MORTGAGE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents (See Note 1) $ 15,556 $ 54,318
Accrued interest receivable 513 5,798
Accounts receivable 3,510 30,884
Mortgage loans held for sale, net 2,255 377,494
Interest-only and residual certificates 71,808 161,372
Other assets 5,200 11,560
--------- ---------
Total assets $ 98,842 $ 641,426
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities:
Warehouse finance facilities $ 4,210 $ 419,743
Term debt 249,789 272,373
Notes payable 13,504 12,974
Accounts payable and accrued liabilities 10,904 11,308
Accrued interest payable 17,118 12,204
--------- ---------
Total liabilities 295,525 728,602
--------- ---------
Commitments and contingencies (Note 6)
Redeemable preferred stock (redeemable at
maturity at $100 per share and, under certain
circumstances, upon a change in control) 42,491 40,280
--------- ---------
Stockholders' deficit:
Common stock, par value $.01 per share; 50,000,000
authorized; 34,157,380 shares issued and outstanding 342 342
Additional paid-in capital 251,937 251,937
Accumulated deficit (491,453) (379,735)
-------- ---------
Total stockholders' deficit (239,174) (127,456)
--------- ---------
Total liabilities and stockholders' deficit $ 98,842 $ 641,426
========= =========
</TABLE>
See accompanying notes to Consolidated Financial Statements
1
<PAGE> 5
IMC MORTGAGE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Gain on sales of loans $ -- $ 5,738 $ 3,941 $ 37,377
------------ ------------ ------------ ------------
Warehouse interest income 524 13,361 4,651 48,526
Warehouse interest expense (105) (9,280) (4,320) (32,491)
------------ ------------ ------------ ------------
Net warehouse interest income 419 4,081 331 16,035
------------ ------------ ------------ ------------
Servicing fees -- 11,448 -- 36,578
Other 625 5,590 2,131 20,410
------------ ------------ ------------ ------------
Total servicing fees and other 625 17,038 2,131 56,988
------------ ------------ ------------ ------------
Total revenues 1,044 26,857 6,403 110,400
------------ ------------ ------------ ------------
Expenses:
Compensation and benefits 223 18,061 1,451 71,158
Selling, general and administrative 2,036 28,228 14,778 77,705
Other interest expense 3,596 7,713 10,667 23,502
Interest expense-Greenwich Funds (Note 4) 4,820 9,105 14,019 24,484
Market valuation adjustment (Note 5) 10,687 11,521 74,295 74,397
Goodwill impairment charge -- 7,981 -- 85,427
Other charges -- 7,996 -- 13,175
------------ ------------ ------------ ------------
Total expenses 21,362 90,605 115,210 369,848
------------ ------------ ------------ ------------
Loss before provision for
income taxes (20,318) (63,748) (108,807) (259,448)
Provision for income taxes -- 772 700 5,419
------------ ------------ ------------ ------------
Net loss $ (20,318) $ (64,520) $ (109,507) $ (264,867)
============ ============ ============ ============
Net loss per common share:
Basic $ (0.62) $ (1.91) $ (3.27) $ (7.81)
============ ============ ============ ============
Diluted $ (0.62) $ (1.91) $ (3.27) $ (7.81)
============ ============ ============ ============
Weighted average number of shares outstanding:
Basic 34,157,380 34,201,380 34,157,380 34,208,085
Diluted 34,157,380 34,201,380 34,157,380 34,208,085
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
2
<PAGE> 6
IMC MORTGAGE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
-----------------------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(109,507) $(264,867)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Goodwill impairment charge -- 85,427
Interest expense - Greenwich Funds -- 5,500
Depreciation and amortization -- 19,931
Other 530 117
Net loss on sale of joint venture -- 2,592
Net loss on disposal of Rhode Island branch -- 2,587
Net loss on disposal of subsidiaries -- 8,309
Net change in operating assets and liabilities:
Decrease in mortgages loans held for sale, net 375,239 431,873
Decrease in accrued interest receivable 5,285 3,437
Decrease in interest-only and residual certificates 89,564 154,708
Decrease in other assets 6,360 1,064
Decrease (increase) in accounts receivable 27,374 (18,472)
Decrease in income tax receivable -- 5,113
Increase in accrued interest payable 4,914 6,675
Decrease in accounts payable and accrued liabilities (404) 504
--------- ---------
Net cash provided by operating activities 399,355 444,498
--------- ---------
Investing activities:
Investment in joint venture -- (638)
Purchase of property, furniture, fixtures and equipment -- (1,835)
Other -- 166
--------- ---------
Net cash used in investing activities -- (2,307)
--------- ---------
Financing activities:
Net decrease in warehouse finance facilities (415,533) (416,123)
Term debt borrowings -- 214,340
Term debt repayments (22,584) (236,654)
--------- ---------
Net cash used in financing activities (438,117) (438,437)
--------- ---------
Net decrease in cash and cash equivalents (38,762) 3,754
Cash and cash equivalents, beginning of period 54,318 15,454
--------- ---------
Cash and cash equivalents, end of period $ 15,556 $ 19,208
========= =========
Supplemental disclosure cash flow information:
Cash paid during the period for interest $ 24,092 $ 68,302
========= =========
Cash paid during the period for taxes $ 66 $ 404
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
3
<PAGE> 7
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION:
Prior to November 15, 1999, IMC Mortgage Company and its wholly-owned
subsidiaries (the "Company" or "IMC") purchased and originated
mortgage loans made to borrowers who may not have otherwise qualified
for conventional loans for the purpose of securitization and whole
loan sale. Prior to 1999, the Company typically securitized these
mortgages into the form of a Real Estate Mortgage Investment Conduit
("REMIC") or owner trust. During 1999 and the nine months ended
September 30, 2000, the Company sold loans on a whole loan sale basis.
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All
inter-company 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, 1999. The year-end balance sheet
data was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting
principles.
Substantially all the Company's cash and cash equivalents are
restricted pursuant to the second amended and restated intercreditor
agreements described in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999 and Note 3 of Notes to
Consolidated Financial Statements included therein.
Certain reclassifications have been made to the presentations to
conform to current period presentations.
SALE OF CERTAIN ASSETS TO CITIFINANCIAL MORTGAGE COMPANY
As described in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999, on November 15, 1999 the Company
sold its mortgage servicing rights related to mortgage loans which had
been securitized, its mortgage loan origination business and real
property consisting of its Tampa, Florida headquarters building and
its leased facilities at its Ft. Washington, Pennsylvania, Cherry
Hill, New Jersey and Cincinnati, Ohio office locations to
CitiFinancial Mortgage Company ("CitiFinancial Mortgage"), an
indirectly wholly-owned subsidiary of Citigroup Inc.
4
<PAGE> 8
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
After the sale of assets to CitiFinancial Mortgage, the Company had
and continues to have essentially no ongoing operating business, but
will continue to own assets consisting primarily of cash, accounts
receivable, mortgage loans held for sale, interest-only and residual
certificates and other assets that are pledged as collateral for the
warehouse finance facilities and term debt. The assets are being
either held or sold by the Company to attempt to realize the maximum
value for these assets and to repay its obligations, including the
warehouse finance facilities and term debt.
There can be no assurance that the Company will be able to maximize
the value of its remaining assets and have adequate proceeds and
resources to satisfy its creditors and provide any value to the
Company's shareholders or that the Company will not seek bankruptcy
protection in the future.
2. RECENT ACCOUNTING PRONOUNCEMENTS:
In September 2000, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 140
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 140"), which replaces SFAS No.
125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." It revises the standards for
accounting for securitizations and other transfers of financial assets
and collateral and requires certain disclosures. SFAS 140 is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. It is effective for
recognition and reclassification of collateral and for disclosures
relating to securitization transactions and collateral for fiscal
years ending after December 15, 2000. The Company does not anticipate
that the application of the provisions of SFAS 140 will have a
material impact on the Company's statement of operations or balance
sheet.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which was amended by
SFAS No. 137 "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No.
133." SFAS 133, as amended, is effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000 (January 1, 2001 for
the Company). SFAS 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the fair
value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative was
designated as part of a hedge transaction and, if it is, the type of
hedge transaction. For fair-value hedge transactions designed to hedge
changes in the fair value of an asset, liability or firm commitment,
changes in the fair value of the derivative instrument will generally
be offset in the income statement by changes in the hedged item's fair
value. The ineffective portion of hedges will be recognized in
current-period earnings. The Company has no present plans to engage in
hedging activities and does not anticipate that the adoption of SFAS
133 will have a material impact on the Company's statement of
operations or balance sheet.
5
<PAGE> 9
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
3. EARNINGS PER SHARE:
In February 1997, the FASB issued SFAS No. 128 "Earnings per Share"
("SFAS 128"), which became effective for the Company for reporting
periods ending after December 15, 1997. Under the provisions of SFAS
128, basic earnings per share is determined 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 128, is computed assuming all dilutive potential
common shares were issued.
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 For the Nine months Ended
September 30, September 30,
-------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ---------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net loss $ (20,318) $ (64,520) $ (109,507) $ (264,867)
Less accretion of preferred stock (737) (737) (2,211) (2,211)
----------- ----------- ---------- -----------
Net loss available to common stockholders $ (21,055) $ (65,257) $ (111,718) $ (267,078)
=========== =========== ========== ===========
Weighted average shares outstanding 34,157,380 34,201,380 34,157,380 34,208,085
=========== =========== ========== ===========
</TABLE>
For the three and nine months ended September 30, 2000 and 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 and Term Debt
As described in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999, on November 15, 1999 the Company
consummated the sale of its mortgage loan servicing business,
substantially all of its mortgage loan origination business and
certain other assets to CitiFinancial Mortgage. Simultaneously, the
Company entered into second amended and restated intercreditor
agreements with Paine Webber Real Estate Securities, Inc. ("Paine
Webber"), Bear Stearns Home Equity Trust ("Bear Stearns") and Aspen
Funding Corp. and German American Capital Corporation, subsidiaries of
Deutsche Bank of North American Holding Corp ("DMG") (collectively,
the "Significant Lenders"), and Greenwich Street Capital Partners II,
L.P. and certain of its affiliates (the "Greenwich Funds").
Under these agreements, the lenders agreed to keep their respective
facilities in place so long as the obligations owed to those lenders
are repaid in accordance with the terms of these
6
<PAGE> 10
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
agreements and certain events of default as described in these
agreements do not occur. Each of the Significant Lenders and the
Greenwich Funds has indicated that they will not make any additional
advances under their facilities.
In addition, the second amended and restated intercreditor agreements
described above provide a mechanism for the Company's principal
secured creditors who are parties to the intercreditor agreements to
release to the Company for its working capital needs a portion of the
monthly receipts from the interest-only and residual certificates, if
any, serving as collateral for those lenders' loans. As more fully
described in Note 5 "Interest-Only and Residual Certificates," because
the cash flow from various interest-only and residual certificates has
materially decreased in the three months ended September 30, 2000,
there can be no assurance that this mechanism will provide sufficient
cash flow to cover the Company's working capital needs.
At September 30, 2000, the Company had no available credit facilities
from the Significant Lenders, the Greenwich Funds or any other source.
At September 30, 2000, the amount of warehouse finance facilities
which remained outstanding from previously available warehouse finance
facilities was as follows:
<TABLE>
<CAPTION>
Warehouse Finance Facilities September 30, 2000
----------------------------------- ------------------
(in thousands)
<S> <C>
Bear Stearns $ 2,478
DMG 490
Paine Webber 1,242
---------
$ 4,210
=========
</TABLE>
Outstanding borrowings under the Company's warehouse financing
facilities bear interest at rates ranging from LIBOR (6.62% at
September 30, 2000) plus 0.75% to LIBOR plus 2.00%, and are
collateralized by, among other assets, mortgage loans held for sale.
Upon the sale of these mortgage loans, the proceeds are used to pay
down the borrowings under these warehouse finance facilities. The
Company is currently paying interest related to these warehouse
borrowings.
7
<PAGE> 11
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
At September 30, 2000, the amount of term debt which remained
outstanding from previously available term debt credit facilities was
as follows:
<TABLE>
<CAPTION>
Term Debt September 30, 2000
----------- ------------------
(in thousands)
<S> <C>
Paine Webber-residual credit facility $ 106,197
Greenwich Funds-credit facility acquired
from BankBoston N.A. 77,480
Greenwich Funds-standby revolving
credit facility 38,000
DMG-residual credit facility 25,778
Other 2,334
----------
$ 249,789
==========
</TABLE>
Outstanding borrowings under the Company's residual credit facilities
with Paine Webber and DMG bear interest at LIBOR plus 3.00%, and are
collateralized by, among other assets, the Company's interest in
certain interest-only and residual certificates. Upon receipt of cash
from the interest-only and residual certificates, if any, the proceeds
are used for the Company's working capital needs, in accordance with
the second amended and restated intercreditor agreements and to pay
down the residual credit facilities. The Company is currently paying
interest related to these residual credit facilities.
Credit facilities previously provided by BankBoston N.A.
("BankBoston") matured and the Company was unable to repay its
outstanding borrowings under these facilities. The Greenwich Funds
acquired, at a discount, from BankBoston its interest in the credit
facilities. These credit facilities bear interest at 9.75%, and are
collateralized by interest-only and residual certificates and certain
other assets of the Company. The Company is currently paying interest
under these credit facilities.
The Company entered into an agreement for a $38.0 million standby
revolving credit facility with certain of the Greenwich Funds (the
"Greenwich Loan Agreement"). The facility was originally available to
provide working capital for a period of up to 90 days and was not
repaid when matured. The standby credit facility accrues interest at
22% per annum, and is collateralized by interest-only and residual
certificates and certain other assets of the Company. No interest has
been paid to date related to the Greenwich Loan Agreement; accrued
interest under the Greenwich Loan Agreement was $16.0 million at
September 30, 2000.
At September 30, 2000, credit facility with a financial institution
which bears interest at 9% per annum. On October 26, 2000, the Company
entered into a forbearance agreement with the financial institution
whereby the Company made loan repayments to the financial institution
and permitted the financial institution to liquidate certain cash
collateral aggregating $1.6 million and the financial institution
agreed to forbear from exercising its rights and remedies under the
credit facility until the earlier of December 31, 2001 or the
occurrence of
8
<PAGE> 12
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
and event of default under the forbearance agreement. The remaining
obligation of $731 thousand obligations is payable in full on December
31, 2001 without interest.
Interest expense - Greenwich Funds included in the accompanying
Consolidated Statement of Operations of $4.8 million and $9.1 million
for the three months ended September 30, 2000 and 1999, respectively,
and $14.0 million and $24.5 million for the nine months ended
September 30, 2000 and 1999, respectively, consists of interest
charges related to the Greenwich Loan Agreement and the credit
facilities that the Greenwich Funds purchased from BankBoston.
Interest expense - Greenwich Funds for the nine months ended September
30, 1999 also includes amortization of commitment fees 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 Greenwich Loan Agreement. (See the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 and Note 4 "Redeemable Preferred Stock" of Notes to
Consolidated Financial Statements included therein.)
NOTES PAYABLE
At September 30, 2000, $13.5 million was outstanding under notes
payable to two individuals related to an acquisition of a company
completed by IMC in 1997. These notes matured on July 10, 1999. Since
maturity and until paid in full, these notes bear interest at prime
(9.5% at September 30, 2000) plus 5% per annum. On November 11, 1999,
the Company and certain other parties entered into an intercreditor
agreement with the individuals holding such notes. Under that
agreement, the holders of those notes agreed to forebear any
collection actions so long as the Company repays the obligations owed
to these lenders according to an agreed-upon plan and no event of
default occurs. Interest under these notes payable is being paid
monthly to the extent monthly receipts from the Company's
interest-only and residual cash flows, if any, are available under the
terms of the individuals' intercreditor agreements and the second
amended and restated intercreditor agreements. As more fully described
in Note 5 "Interest-Only and Residual Certificates," the cash flow
from various interest-only and residual certificates has materially
decreased in the three months ended September 30, 2000. During the
three and nine months ended September 30, 2000, $115 thousand and $294
thousand of interest has been paid. All accrued and unpaid interest at
September 30, 2000, totaling $834 thousand, has been paid in kind by
delivery of additional notes payable.
9
<PAGE> 13
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
5. INTEREST-ONLY AND RESIDUAL CERTIFICATES
Activity in interest-only and residual certificates consisted of the
following:
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine months Ended
September 30, September 30,
-------------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Beginning balance $ 84,870 $352,544 $161,372 $468,841
Increases -- -- 6,664 --
Cash receipts (2,375) (26,890) (21,933) (80,311)
Market valuation adjustment (10,687) (11,521) (74,295) (74,397)
-------- -------- -------- --------
Balance, September 30 $ 71,808 $314,133 $ 71,808 $314,133
======== ======== ======== ========
</TABLE>
As a result of adverse market conditions and continuing trends in the
portfolio of underlying mortgages, the Company adjusted its loss curve
assumptions during the third quarter of 2000. The loss curve
assumption used by the Company at September 30, 2000 to approximate
the timing of losses over the life of the securitized loans gradually
increases from zero in the first six months to 491 basis points after
55 months. The decrease in the estimated value of the interest-only
and residual certificates is reflected as a market valuation
adjustment in the accompanying Statement of Operations for the three
and nine months ended September 30, 2000. The loss curve assumption
used by the Company at September 30, 1999 to approximate the timing of
losses over the life of the securitized loans gradually increased from
zero in the first nine months to 275 basis points after 30 months.
Cash receipts from interest-only and residual certificates have been
significantly reduced due to delinquency and loss rates associated
with the loans in the securitization trusts. Generally, the pooling
and servicing agreements for the securitizations require that their
related over-collateralization accounts be increased when the
delinquency and the loss rates exceed various specified limits. These
increases are funded primarily through the cash flow that would
otherwise be distributed to the Company in respect to its interest-
only and residual certificates. There can be no assurance that the
Company will receive sufficient cash receipts from the interest-only
and residual certificates to repay the obligations owed to the
Significant Lenders and the Greenwich Funds, whose loans are
collateralized by the monthly cash receipts from the interest-only and
residual certificates. Additionally, there can be no assurance that
the Company will not seek bankruptcy protection in the future.
In addition, the significant reductions in cash received with respect
to the Company's interest-only and residual certificates pose a
material risk that the Company will not have sufficient cash to
continue its operations. In fact, unless the various creditors which
are subject to the inter-creditor agreements with the Company agree to
material (or, perhaps, total) deferrals in interest payments currently
being required of the Company, the Company estimates that it will run
out of the cash needed to maintain its operations as early as the
first quarter of 2001. Even if those creditors agree to the requested
deferrals, there can still be no assurance that the Company will have
sufficient cash to sustain its operations beyond the second quarter of
2001. The Company may well be forced to seek protection under the
United States bankruptcy laws
10
<PAGE> 14
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
if the cash flow from the Company's interest-only and residual
certificates do not materially improve in early 2001.
On January 27, 2000, the Company sold mortgage loans with a principal
balance of approximately $265 million to EMC Mortgage Corporation
("EMC"), an affiliate of Bear Stearns. The loans were sold on a
service released basis and were securitized by EMC. The Company
received consideration in the form of cash and an interest-only and
residual certificate, having an estimated fair value of $6.7 million,
representing a subordinated interest in the proceeds of the
securitization by EMC.
6. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
The Company is party to various legal proceedings arising out of the
conduct of its business. The Company has accrued certain amounts to
defend various legal proceedings and such amounts are included in
accounts payable and accrued liabilities in the accompanying
Consolidated Balance Sheet at September 30, 2000 and December 31,
1999. Management believes that amounts accrued for defense in
connection with these matters are adequate and ultimate resolution of
these matters will not have a material adverse effect on the
consolidated financial condition or results of operations of the
Company. However, due to the Company's estimated cash flow (see Note 5
above), any adverse determination in those legal proceedings could
have a material and adverse effect on the Company's cash flow and its
ability to continue its operations.
The Company is a defendant in a lawsuit pending in the United States
District Court, District of Maryland, brought by the two principals
and sole shareholders of Central Money Mortgage, Inc. ("CMM"), the
assets of which were acquired by the Company in August, 1997, pursuant
to the terms of an Asset Purchase Agreement ("Agreement") for $11.0
million in stock of the Company. The plaintiffs were to be employed by
Central Money Mortgage (IMC), Inc., a subsidiary formed to continue
the business of CMM, for a term of five years. A Registration Rights
Agreement, executed at the time of the closing, required the Company
to prepare and file a Short Form Registration Statement within twenty
days after the closing to enable the plaintiffs to sell approximately
half of the shares received pursuant to the Agreement. Promptly after
the closing, the Company prepared a draft Registration Statement
intending to fulfill that obligation, but was subsequently advised by
its outside counsel not to file the registration statement.
The parties agreed that if the value of the shares which were to have
been registered was less on August 19, 1998 (the date the stock could
be sold under Rule 144 without being registered), than it was at the
closing date one year earlier, the Company would issue to the
plaintiffs sufficient additional shares so that the total value of
shares which were to have been registered, when added to the value of
the additional shares (all valued twelve months after closing), would
equal the value of the shares which were to have been registered at
closing. Therefore,
11
<PAGE> 15
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
on August 20, 1998, the Company issued 96,790 additional shares to the
plaintiffs.
The Company's stock, which was selling at $12.87 per share on August
20, 1998, fell dramatically thereafter. If the plaintiffs had sold
their shares in August 1998 when they received the additional shares,
they would have sustained no loss as a result of the Company's
inability to register the shares as originally agreed. However, they
failed to do so and are seeking damages in this action.
The plaintiffs' multi-count complaint alleges federal securities
fraud, Maryland securities fraud and common law fraud and contends
that at the time of the execution of the Agreement and the
Registration Rights Agreement the Company never intended to register
the shares and only promised to do so in order to induce the
plaintiffs to surrender their company. They claim both punitive and
compensatory damages. In a separate count the plaintiffs allege that
the failure to register the shares constituted a breach of contract.
The plaintiffs' employment was terminated in July, 1999 (the Company
contends, with cause), and in an additional count the plaintiffs are
seeking to recover the balance of the payments which would be due
under their employment contracts which amounts to approximately $1.2
million.
The discovery in this case has now been concluded and the Company
believes that based on the facts that have been developed to date and
consultation with legal counsel there is little or no evidence to
support the plaintiffs' allegations of fraud and that it is probable
those counts of the complaint can be successfully defended. Regarding
the issue as to whether the Company's failure to register the shares
was a breach of the Registration Rights Agreement, it is the Company's
position that the subsequent agreement providing for the issuance of
additional shares to the plaintiffs, which was consummated on August
20, 1998, constitutes an accord and satisfaction and any damages
sustained by the plaintiffs were as a result of their decision to
retain their stock. The Plaintiffs and the Company have filed cross
motions for summary judgment; however, it appears the issue of breach
of contract, as well as whether the plaintiffs were terminated with
cause as contended by the Company or without cause as alleged by the
plaintiffs, will ultimately be decided at trial. Management intends to
defend such action vigorously.
On November 12, 1999, the Company's shareholders approved the sale of
certain assets to CitiFinancial Mortgage. While the majority of all
votes entitled to be cast voted in favor of the transaction, there
were a limited number of shareholders who exercised their dissenter's
rights. Because it will be unclear for several years whether there are
any assets available for distribution to holders of IMC common stock,
the Company has taken the position that the fair value of the IMC
common stock is negligible and that no material payment should be
made. The Company had made an offer to purchase the IMC common stock
of the dissenting shareholders based on the trading price of the
Company's common stock at the time of the approval by the Company's
shareholders of the sale of assets to CitiFinancial Mortgage, which in
certain instances was rejected. The Company has filed an action in a
court of competent jurisdiction in Florida requesting that the fair
value of IMC common stock be determined. The Court shall also
determine whether each dissenting shareholder, as to whom the Company
requests the court to make such determination, is entitled to receive
payment for their shares.
12
<PAGE> 16
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
The case is in the preliminary discovery stages and management of the
Company believes that its prior offer represents the fair and
reasonable value of the Company's shares.
13
<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,
1999. 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" and similar expressions.
Forward looking statements include all statements regarding IMC's expected
financial position, results of operations, cash flows, financing plans,
business strategies, capital and other expenditures, plans and objectives of
management and markets for stock. All forward looking statements involve risks
and uncertainties. Factors that might affect such forward looking statements
include, among other things, overall economic and business conditions, early
termination of the second amended and restated intercreditor agreements or the
standstill periods relating to certain of IMC's creditors, increase in
prepayment speeds, delinquency, loss and default rates of mortgage loans owned
by IMC or constituting a portion of a securitized pool of loans in which the
Company holds a residual or interest-only certificate, rapid fluctuation in
interest rates, reductions in cash flow from interest-only and residual
certificates, inadequate cash to maintain the Company's operations, risks
related to not hedging against loss of value of IMC's mortgage loan inventory,
IMC's success in achieving value in selling its remaining assets and in
realizing the value of its interest-only and residual certificates, effects of
litigation, representation and warranty claims on previous sales of loans,
market forces affecting the price of IMC's common stock and other uncertainties
associated with IMC's financial difficulties and other transactions described
herein, and other risks identified in IMC Mortgage Company's Securities and
Exchange Commission filings.
SALE OF ASSETS TO CITIFINANCIAL MORTGAGE COMPANY
As described in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999, on November 15, 1999 the Company sold its mortgage
servicing rights related to mortgage loans which had been securitized, its
mortgage loan origination business and real property consisting of its Tampa,
Florida headquarters building and its leased facilities at its Ft. Washington,
Pennsylvania, Cherry Hill, New Jersey and Cincinnati, Ohio office locations to
CitiFinancial Mortgage Company ("CitiFinancial Mortgage"), an indirectly
wholly-owned subsidiary of Citigroup Inc. for $96 million in cash and an
additional $4 million over the next two years if certain conditions are met.
After the sale of assets to CitiFinancial Mortgage, the Company had and
continues to have essentially no ongoing operating business, but continues to
own assets consisting primarily of cash, accounts receivable, mortgage loans
held for sale, interest-only and residual certificates and other assets that
are pledged as collateral for the warehouse finance facilities and term debt.
The assets are being either held or sold by the Company to attempt to realize
the maximum value for these assets and repay its obligations, including the
warehouse finance facilities and term debt.
14
<PAGE> 18
There can be no assurance that the Company will be able to maximize the value
of its remaining assets and have adequate proceeds and resources to satisfy its
creditors and provide any value to the Company's shareholders or that the
Company will not seek bankruptcy protection in the future. See Note 5 of Notes
to Consolidated Financial Statements included herein for a more detailed
statement of the possible negative effect of reduced cash flow on the Company
and its operations.
GENERAL
The Company was 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 focused on
lending to individuals whose borrowings needs were generally not being served
by traditional financial institutions due to such individuals' impaired credit
profiles and other factors. Loan proceeds typically were used by such
individuals to consolidate debt, to refinance debt, to finance home
improvements, to pay educational expenses and for a variety of other uses. By
focusing on individuals with impaired credit profiles and providing prompt
responses to their borrowing requests, the Company was able to charge higher
interest rates for its loan products than typically were charged by
conventional mortgage lenders.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999.
Net loss for the three months ended September 30, 2000 was $20.3 million,
representing a decrease of $44.2 million, or 68.5%, from net loss of $64.5
million for the three months ended September 30, 1999. The decrease in net loss
resulted principally from a $17.8 million, or 98.8%, decrease in compensation
and benefits to $0.2 million for the three months ended September 30, 2000 from
$18.1 million for the three months ended September 30, 1999 and a $26.2
million, or 92.8%, decrease in selling, general and administrative expenses to
$2.0 million for the three months ended September 30, 2000 from $28.2 million
for the three months ended September 30, 1999. The decrease in net loss was
also due to a decrease in goodwill impairment charge of $8.0 million and a $834
thousand decrease in market valuation adjustment related to the value of the
Company's interest only and residual certificates, as well as a $8.0 million
decrease in other charges, which related to losses and expenses incurred during
the three months ended September 30, 1999 related to the disposal of the
Company's eight operating subsidiaries. The decrease in net loss was partially
attributable to a $4.1 million, or 53.4%, decrease in other interest expense to
$3.6 million for the three months ended September 30, 2000 from $7.7 million
for the three months ended September 30, 1999 and a $4.3 million decrease in
interest expense - Greenwich Funds associated with the credit facility provided
by Greenwich Street Capital Partners II, L.P. and certain related affiliates
(the "Greenwich Funds").
The decrease in net loss was partially offset by a decrease in gain on sale of
loans of $5.7 million, or 100.0%, to $0 for the three months ended September
30, 2000 from $5.7 million for the three months ended September 30, 1999 and a
$11.4 million, or 100.0%, decrease in servicing fees to $0 for the three months
ended September 30, 2000 from $11.4 million for the three months ended
September 30, 1999. The decrease in net loss was also partially offset by a
$5.0 million, or 88.8%, decrease in other revenues to $625 thousand for the
three months ended September 30, 2000 from $5.6 million for the three months
ended September 30, 1999 and a decrease in net warehouse interest income of
$3.7 million, or 89.7%, to net warehouse interest income of $419 thousand for
the three
15
<PAGE> 19
months ended September 30, 2000 from net warehouse interest income of $4.1
million for the three months ended September 30, 1999.
The provision for income taxes was zero for the three months ended September
30, 2000 compared to a provision for income taxes of $772 thousand for the
three months ended September 30, 1999. No income tax benefit has been applied
to the net loss for the three months ended September 30, 2000, as the Company
determined it cannot be assured that the income tax benefit could be realized
in the future.
REVENUES
The following table sets forth information regarding components of the
Company's revenues for the three months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
For the Three Months
Ended September 30,
-----------------------------------
2000 (in thousands) 1999
--------- ---------
<S> <C> <C>
Gain on sales of loans $ 0 $ 5,738
--------- ---------
Warehouse interest income 524 13,361
Warehouse interest expense (105) (9,280)
--------- ---------
Net warehouse interest income 419 4,081
--------- ---------
Servicing fees -- 11,448
Other 625 5,590
--------- ---------
Total revenues $ 1,044 $ 26,857
========= =========
</TABLE>
Gain on Sales of Loans. For the three months ended September 30, 2000, gain on
sales of loans decreased to $0 from $5.7 million for the three months ended
September 30, 1999, a 100% decrease. During the three months ended September
30, 2000 and September 30, 1999, no mortgage loans were securitized. Mortgage
loans sold in the whole loan market decreased by approximately $342.0 million,
a decrease of approximately 99%, to approximately $5.0 million for the three
months ended September 30, 2000 from approximately $347.0 million for the three
months ended September 30, 1999. The total volume of loans produced decreased
by 100.0% to $0 for the three months ended September 30, 2000 as compared with
a total volume of approximately $263.0 million for the three months ended
September 30, 1999. On November 15, 1999, the Company sold substantially all of
its mortgage loan origination business to CitiFinancial Mortgage.
Net Warehouse Interest Income. Net warehouse interest income decreased from
$4.1 million for the three months ended September 30, 1999 to $419 thousand for
the three months ended September 30, 2000. The decrease in net warehouse
interest income was primarily due to a decrease in the average balance of
mortgage loans held for sale, higher interest rates charged by the Company's
warehouse lenders and a greater percentage of the remaining loans held for sale
which are non-performing.
Servicing Fees. Servicing fees decreased to $0 for the three months ended
September 30, 2000 from $11.4 million for the three months ended September 30,
1999, due to the sale of the Company's servicing portfolio to CitiFinancial
Mortgage on November 15, 1999.
Other. Other revenues, consisting principally of prepayment penalties from
borrowers who prepay the
16
<PAGE> 20
outstanding balance of their mortgage, decreased to $ 0.6 million for the three
months ended September 30, 2000 from $5.6 million for three months ended
September 30, 1999, a decrease of 88.8%, due primarily to the sale of the
Company's servicing portfolio to CitiFinancial Mortgage on November 15, 1999.
Subsequent to November 15, 1999, the Company collects prepayment penalties only
on mortgage loans held for sale.
EXPENSES
The following table sets forth information regarding components of the
Company's expenses for the three months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
For the Three Months
Ended September 30,
----------------------------------
2000 (in thousands) 1999
--------- ---------
<S> <C> <C>
Compensation and benefits $ 223 $ 18,061
Selling, general and administrative 2,036 28,228
Other interest expense 3,596 7,713
Interest expense - Greenwich Funds 4,820 9,105
Market valuation adjustment 10,687 11,521
Goodwill impairment charge -- 7,981
Other charges -- 7,996
--------- ---------
Total expenses $ 21,362 $ 90,605
========= =========
</TABLE>
Compensation and benefits decreased by $17.8 million, or 98.8%, to $223
thousand for the three months ended September 30, 2000 from $18.1 million for
the three months ended September 30, 1999, due to the disposal of the Company's
eight operating subsidiaries during the third and fourth quarters of 1999 and
the sale of the Company's mortgage servicing rights and loan origination
business to CitiFinancial Mortgage on November 15, 1999, which resulted in the
elimination of substantially all remaining IMC employees on November 15, 1999.
(See the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 and Note 6 "Disposal of Assets" of Notes to Consolidated
Financial Statements included therein.)
After the sale of assets to CitiFinancial Mortgage on November 15, 1999, the
Company had and continues to have essentially no ongoing operating business.
Selling, general and administrative expenses for the three months ended
September 30, 2000 primarily consist of valuation adjustments related to certain
of the Company's assets. Selling, general and administrative expenses decreased
by $26.2 million, or 92.8%, to $2.0 million for the three months ended September
30, 2000 from $28.2 million for the three months ended September 30, 1999
principally due to a decrease in operating costs and amortization expense
related to mortgage servicing rights and goodwill as a result of the disposal of
the Company's eight operating subsidiaries during the third and fourth quarters
of 1999 and the sale of the Company's mortgage loan servicing business and
substantially all the Company's mortgage loan origination business to
CitiFinancial Mortgage on November 15, 1999.
Other interest expense decreased by $4.1 million, or 53.4%, to $3.6 million for
the three months ended September 30, 2000 from $7.7 million for the three
months ended September 30, 1999 principally as a result of decreased interest
expense due to decreased interest-only and residual borrowings.
Interest expense - Greenwich Funds decreased by $4.3 million, or 47.1%, to $4.8
million for the three months ended September 30, 2000 from $9.1 million for the
three months ended September 30, 1999. Interest expense - Greenwich Funds
represents interest charges associated with the Greenwich Loan
17
<PAGE> 21
and the credit facilities the Greenwich Funds purchased from BankBoston.
Market valuation adjustment, which represents a decrease in the estimated fair
value of the Company's interest-only and residual certificates, decreased to
$10.7 million for the three months ended September 30, 2000 from $11.5 million
for the three months ended September 30, 1999. During the third quarter of
2000, as a result of adverse market conditions and continuing trends in the
portfolio of underlying mortgages, the Company adjusted its loss curve
assumptions. The loss curve assumption used by the Company at September 30,
2000 to approximate the timing of losses over the life of the securitized loans
gradually increases from zero in the first six months to 491 basis points after
55 months. See Note 5 "Interest-Only" and Residual Certificates" of Notes to
Consolidated Financial Statements included herein. The loss curve assumption
used by the Company at September 30, 1999 to approximate the timing of losses
over the life of the securitized loans gradually increased from zero in the
first six months to 275 basis points after 30 months. The Company believes the
adverse market conditions affecting the non-conforming mortgage industry may
limit the borrowers' ability to refinance existing delinquent loans serviced by
the Company with other non-conforming mortgage lenders that market their
products to borrowers that are less credit worthy. As a result, the frequency
of default may increase.
Goodwill impairment charge represents the writedown of goodwill during the
three months ended September 30, 1999 resulting from the Company's evaluation
of the goodwill associated with the Company's eight operating subsidiaries at
September 30, 1999. (See the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999 and Note 6 "Goodwill Impairment and Loss on
Disposal of Subsidiaries" included therein.)
Other charges represent losses and expenses incurred or accrued during the
three months ended September 30, 1999 related to, among other things, disposal
of assets, lease termination costs and costs of disposal of the Company's eight
operating subsidiaries. (See the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999 and Note 6 "Goodwill Impairment and Loss on
Disposal of Subsidiaries" included therein.)
Income Taxes. The provision for income taxes for the three months ended
September 30, 2000 was zero which differed from the federal tax rate of 35%
primarily due to a full valuation allowance established against the deferred tax
asset.
Nine months Ended September 30, 2000 Compared to Nine months Ended September
30, 1999.
Net loss for the nine months ended September 30, 2000 was $109.5 million,
representing a decrease of $155.4 million, or 58.7%, from net loss of $264.9
million for the nine months ended September 30, 1999. The decrease in net loss
resulted principally from a decrease in goodwill impairment charge of $85.4
million, a $69.7 million, or 98.0%, decrease in compensation and benefits to
$1.4 million for the nine months ended September 30, 2000 from $71.2 million
for the nine months ended September 30, 1999 and a $62.9 million, or 81.0%,
decrease in selling, general and administrative expenses to $15.7 million for
the nine months ended September 30, 2000 from $77.7 million for the nine months
ended September 30, 1999. The decrease in net loss was also due to a $13.2
million decrease in other charges related to losses from the disposal of the
Company's eight operating subsidiaries and investments in international
operations and closing the Rhode Island branch office location in 1999. The
decrease in net loss was partially attributable to a $12.8 million, or 54.6%,
18
<PAGE> 22
decrease in other interest expense to $10.7 million for the nine months ended
September 30, 2000 from $23.5 million for the nine months ended September 30,
1999 and a $10.5 million decrease in interest expense - Greenwich Funds
associated with the credit facility provided by The Greenwich Street Funds.
The decrease in net loss was partially offset by a decrease in gain on sale of
loans of $33.4 million, or 89.5%, to $3.9 million for the nine months ended
September 30, 2000 from $37.4 million for the nine months ended September 30,
1999 and a $36.6 million, or 100.0%, decrease in servicing fees to $0 for the
nine months ended September 30, 2000 from $36.6 million for the nine months
ended September 30, 1999. The decrease in net loss was also partially offset by
a $18.3 million, or 89.6%, decrease in other revenues to $2.1 million for the
nine months ended September 30, 2000 from $20.4 million for the nine months
ended September 30, 1999 and a decrease in net warehouse interest income of
$15.7 million, or 97.9%, to net warehouse interest income of $331 thousand for
the nine months ended September 30, 2000 from net warehouse interest income of
$16.0 million for the nine months ended September 30, 1999.
Net loss before taxes was increased by a provision for income taxes of $700
thousand for the nine months ended September 30, 2000 compared to a provision
for income taxes of $5.4 million for the nine months ended September 30, 1999.
No income tax benefit has been applied to the net loss for the nine months
ended September 30, 2000, as the Company determined it cannot be assured that
the income tax benefit could be realized in the future.
REVENUES
The following table sets forth information regarding components of the
Company's revenues for the nine months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
For the Nine months
Ended September 30,
-----------------------------------
2000 (in thousands) 1999
--------- ---------
<S> <C> <C>
Gain on sales of loans $ 3,941 $ 37,377
--------- ---------
Warehouse interest income 4,651 48,526
Warehouse interest expense (4,320) (32,491)
--------- ---------
Net warehouse interest income (expense) 331 16,035
--------- ---------
Servicing fees -- 36,578
Other 2,131 20,410
--------- ---------
Total revenues $ 6,403 $ 110,400
========= =========
</TABLE>
Gain on Sales of Loans. For the nine months ended September 30, 2000, gain on
sales of loans decreased to $3.9 million from $37.4 million for the nine months
ended September 30, 1999, a decrease of 89.5%. During the nine months ended
September 30, 2000 and September 30, 1999, no mortgage loans were securitized.
Mortgage loans sold in the whole loan market decreased by approximately $382.0
million, a decrease of approximately 49%, to approximately $405.0 million for
the nine months ended September 30, 2000 from approximately $787.0 million for
the nine months ended September 30, 1999. The total volume of loans produced
decreased by 100.0% to $0 for the nine months ended September 30, 2000 compared
with a total volume of approximately $957.0 million for the nine months ended
September 30, 1999. On November 15, 1999, the Company sold substantially all of
its mortgage
19
<PAGE> 23
loan origination business to CitiFinancial Mortgage.
Net Warehouse Interest Income. Net warehouse interest income decreased from net
warehouse interest income of $16.0 million for the nine months ended September
30, 1999 to net warehouse interest income of $331 thousand for the nine months
ended September 30, 2000, a decrease of 97.9%. The decrease in net warehouse
interest income was primarily due to a decrease in the average balance of
mortgage loans held for sale, higher interest rates charged by the Company's
warehouse lenders and a greater percentage of the remaining loans held for sale
which are non-performing.
Servicing Fees. Servicing fees decreased to $0 for the nine months ended
September 30, 2000 from $36.6 million for the nine months ended September 30,
1999, due to the sale of the Company's servicing portfolio to CitiFinancial
Mortgage on November 15, 1999.
Other. Other revenues, consisting principally of prepayment penalties from
borrowers who prepay the outstanding balance of their mortgage, decreased to
$2.1 million for the nine months ended September 30, 2000 from $20.4 million
for the nine months ended September 30, 1999, a decrease of 89.6%, due
primarily to the sale of the Company's servicing portfolio to CitiFinancial
Mortgage on November 15, 1999. Subsequent to November 15, 1999, the Company
collects prepayment penalties only on mortgage loans held for sale.
EXPENSES
The following table sets forth information regarding components of the
Company's expenses for the nine months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
For the Nine months
Ended September 30,
-----------------------------------
2000 (in thousands) 1999
--------- ---------
<S> <C> <C>
Compensation and benefits $ 1,451 $ 71,158
Selling, general and administrative 14,778 77,705
Other interest expense 10,667 23,502
Interest expense - Greenwich Funds 14,019 24,484
Market valuation adjustment 74,295 74,397
Goodwill impairment charge -- 85,427
Other charges -- 13,175
--------- ---------
Total expenses $ 115,210 $ 369,848
========= =========
</TABLE>
Compensation and benefits decreased by $69.7 million, or 98.0%, to $1.4 million
for the nine months ended September 30, 2000 from $71.2 million for the nine
months ended September 30, 1999, due to the disposal of the Company's eight
operating subsidiaries during the third and fourth quarters of 1999 and the
sale of the Company's mortgage servicing rights and loan origination business
to CitiFinancial Mortgage on November 15, 1999, which resulted in the
elimination of substantially all remaining IMC employees on November 15, 1999.
(See the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 and Note 6 "Disposal of Assets" of Notes to Consolidated
Financial Statements included therein.)
20
<PAGE> 24
After the sale of assets to CitiFinancial Mortgage on November 15, 1999, the
Company had and continues to have essentially no ongoing operating business.
Selling, general and administrative expenses for the nine months ended September
30, 2000 primarily consist of valuation adjustments related to certain of the
Company's assets and an increase in the amount accrued to defend various legal
proceedings against the Company (see Note 6 "Commitments and Contingencies" of
Notes to Consolidated Financial Statements included herein.) Selling, general
and administrative expenses decreased by $62.9 million, or 81.0%, to $14.8
million for the nine months ended September 30, 2000 from $77.7 million for the
nine months ended September 30, 1999 principally due to a decrease in operating
costs and amortization expense related to mortgage servicing rights and goodwill
as a result of the disposal of the Company's eight operating subsidiaries during
the third and fourth quarters of 1999 and the sale of the Company's mortgage
loan servicing business and substantially all the Company's mortgage loan
origination business to CitiFinancial Mortgage on November 15, 1999.
Other interest expense decreased by $12.8 million, or 54.6%, to $10.7 million
for the nine months ended September 30, 2000 from $23.5 million for the nine
months ended September 30, 1999 principally as a result of decreased interest
expense due to decreased interest-only and residual borrowings.
Interest expense - Greenwich Funds decreased by $10.5 million or 42.7% to $14.0
million for the nine months ended September 30, 2000 from $24.5 million for the
nine months ended September 30, 1999. Interest expense - Greenwich Funds
represents interest charges associated with the Greenwich Loan and the credit
facilities the Greenwich Funds purchased from BankBoston. For the nine months
ended September 30, 1999, interest expense - Greenwich Funds also includes
amortization of commitment fees and the value attributable to the Class C
preferred stock issued in connection with the Greenwich Loan Agreement and
preferred stock issuable to the Greenwich Funds under the terms of the
Greenwich Loan Agreement. See the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999 and Note 3 "Warehouse Finance Facilities,
Term Debt and Notes Payable" and Note 4 "Redeemable Preferred Stock" of Notes
to Consolidated Financial Statements included therein.
Market valuation adjustment, which represents a decrease in the estimated fair
value of the Company's interest-only and residual certificates, decreased to
$74.3 million for the nine months ended September 30, 2000 from $74.4 million
for the nine months ended September 30, 1999. During the third quarter of 2000,
as a result of adverse market conditions and continuing trends in the portfolio
of underlying mortgages, the Company adjusted its loss curve assumptions. The
loss curve assumption used by the Company at September 30, 2000 to approximate
the timing of losses over the life of the securitized loans gradually increases
from zero in the first six months to 491 basis points after 55 months. See Note
5 "Interest-Only and Residual Certificates" of Notes to Consolidated Financial
Statements included herein. The loss curve assumption used by the Company at
September 30, 1999 to approximate the timing of losses over the life of the
securitized loans gradually increased from zero in the first six months of the
loan to 275 basis points after 30 months. The Company believes the adverse
market conditions affecting the non-conforming mortgage industry may limit the
borrowers' ability to refinance existing delinquent loans serviced by the
Company with other non-conforming mortgage lenders that market their products
to borrowers that are less credit worthy. As a result, the frequency of default
may increase.
Goodwill impairment charge of $85.4 million for the nine months ended September
30, 1999 represents the writedown of goodwill resulting from the Company's
evaluation of the goodwill associated with the Company's eight operating
subsidiaries at September 30, 1999. (See the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1999 and Note 6 "Goodwill
Impairment and Loss on Disposal of Subsidiaries" included therein.)
21
<PAGE> 25
Other charges represent losses and expenses incurred or accrued during the nine
months ended September 30, 1999 related to, among other things, disposal of
assets, lease termination costs and costs of disposal of the Company's eight
operating subsidiaries, disposal of investments in international operations and
closing the Company's Rhode Island branch location. (See the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999 and Note 6
"Goodwill Impairment and Loss on Disposal of Subsidiaries" included therein.)
Income Taxes. The provision for income taxes for the nine months ended September
30, 2000 was $700 thousand which differed from the federal tax rate of 35%
primarily due to state income taxes and a full valuation allowance established
against the deferred tax asset.
FINANCIAL CONDITION
September 30, 2000 Compared to December 31, 1999
Mortgage loans held for sale, net, at September 30, 2000 were $2.3 million, a
decrease of $375.2 million, or 99.4%, from $377.5 million at December 31, 1999.
This decrease resulted primarily from the sale of mortgage loans as the Company
attempts to sell its remaining mortgage loans held for sale and pay down its
warehouse finance facilities. Borrowings under warehouse financing facilities
at September 30, 2000 decreased $415.5 million, or 99.0%, to $4.2 million from
$419.7 million at December 31, 1999 due primarily to the repayment of warehouse
finance facilities as the mortgage loans are sold. Included in mortgages held
for sale, net, at September 30, 2000 and December 31, 1999 was a valuation
allowance of $3.6 million and $37.5 million, respectively, representing the
amount by which cost exceeds market value on mortgage loans held for sale.
Accounts receivable decreased $27.4 million, or 88.6%, from $30.9 million at
December 31, 1999 to $3.5 million at September 30, 2000, primarily due to
receipt of principal and interest collections related to mortgage loans held
for sale remitted to the Company by the servicer of the loans.
Interest-only and residual certificates at September 30, 2000 were $71.8
million, representing a decrease of $89.6 million, or 55.5%, from $161.4
million at December 31, 1999. The decrease in interest-only and residual
certificates resulted from the receipt of cash from the interest-only and
residual certificates and a $74.3 million market valuation adjustment
representing the decrease in the fair market value of the interest-only and
residual certificates. The decrease in interest-only and residual certificates
was partially offset by the receipt of a residual certificate, with an
estimated fair value, on January 27, 2000, of $6.7 million, representing a
subordinated interest in the proceeds from a sale of whole loans which were
securitized (see Note 5 "Interest-Only and Residual Certificates" of Notes to
Consolidated Financial Statements included herein).
Term debt at September 30, 2000 was $249.8 million, representing a decrease of
$22.6 million, or 8.3%, from $272.4 million at December 31, 1999. This decrease
was primarily a result of repayment of certain amounts of term debt from cash
flows received from interest-only and residual certificates as provided in the
Company's intercreditor agreements.
Accounts payable and accrued liabilities decreased $0.9 million, or 7.8%, from
$11.3 million at
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<PAGE> 26
December 31, 1999 to $10.9 million at September 30, 2000, primarily due to a
reduction in the amount accrued to defend various legal proceedings against the
Company (see Note 6 "Commitments and Contingencies" of Notes to Consolidated
Financial Statements included herein).
Stockholders' deficit as of September 30, 2000 was $239.2 million, an increase
of $111.7 million over stockholders' deficit of $127.5 million at December 31,
1999. Stockholders' deficit increased for the nine months ended September 30,
2000 primarily as a result of a net loss of $109.5 million.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 2000, the Company used its cash flow
from the sale of loans through whole loan sales, net interest income and
interest-only and residual certificates to meet its working capital needs. The
Company's cash requirements during the nine months ended September 30, 2000
included payment of principal and interest costs on borrowings, and operating
expenses.
Substantially all the Company's cash and cash equivalents are restricted
pursuant to the second amended and restated intercreditor agreements described
in the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1999 and Note 3 of Notes to Consolidated Financial Statements included
therein. In addition, under the second amended and restated intercreditor
agreements, the Company's principal secured creditors who are parties to the
intercreditor agreements release to the Company for its working capital needs a
portion of the monthly receipts from the interest-only and residual
certificates serving as collateral for those lenders' loans. As more fully
described in Note 5 "Interest-Only and Residual Certificates" of Notes to
Consolidated Financial Statements included herein, because the cash flow from
various interest only and residual certificates has materially decreased in the
three months ended September 30, 2000, there can be no assurance that these
agreements will provide sufficient cash flow to cover the Company's working
capital needs.
The Company typically has operated, and expects to continue to operate, on a
negative operating cash flow basis. During the nine months ended September 30,
2000, the Company received cash flows from operating activities of $399
million, a decrease of $45.1 million from cash flows provided by operating
activities of $444.5 million during the nine months ended September 30, 1999.
During the nine months ended September 30, 2000, cash flows used by the Company
in financing activities were $438.1 million, a decrease of $320 thousand from
cash flows used in financing activities of $438.4 million during the nine
months ended September 30, 1999. The cash flows received from operating
activities relate primarily to the sale of mortgage loans held for sale. The
cash flows used in financing activities related primarily to the repayment of
principal on finance facilities borrowings.
Cash receipts from interest-only and residual certificates have been
significantly reduced due to delinquency and loss rates associated with the
loans in the securitization trusts. Generally, the pooling and servicing
agreements for the securitizations require that their related
over-collateralization accounts be increased when the delinquency and the loss
rates exceed various specified limits. These increases are funded primarily
through the cash flow that would otherwise be distributed to the Company in
respect to its interest only and residual certificates. There can be no
assurance that the Company will receive sufficient cash receipts from the
interest-only and residual certificates to repay the obligations owed to the
Significant Lenders and the Greenwich
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<PAGE> 27
Funds, whose loans are collateralized by the monthly cash receipts from the
interest-only and residual certificates. Additionally, there can be no
assurance that the Company will not seek bankruptcy protection in the future.
In addition, the significant reductions in cash received with respect to the
Company's interest-only and residual certificates pose a material risk that the
Company will not have sufficient cash to continue its operations. In fact,
unless the various creditors which are subject to the inter-creditor agreements
with the Company agree to material (or, perhaps, total) deferrals in interest
payments currently being required of the Company, the Company estimates that it
will run out of the cash needed to maintain its operations as early as the
first quarter of 2001. Even if those creditors agree to the requested
deferrals, there can still be no assurance that the Company will have
sufficient cash to sustain its operations beyond the second quarter of 2001.
The Company may well be forced to seek protection under the United States
bankruptcy laws if the cash flow from the Company's Interests-Only and Residual
Certificates do not materially improve in early 2001.
Warehouse Finance Facilities and Term Debt
As described in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999, on November 15, 1999 the Company consummated the sale
of its mortgage loan servicing business, substantially all of its mortgage loan
origination business and certain other assets to CitiFinancial Mortgage.
Simultaneously, the Company entered into second amended and restated
intercreditor agreements with Paine Webber Real Estate Securities, Inc. ("Paine
Webber"), Bear Stearns Home Equity Trust ("Bear Stearns"), Aspen Funding Corp.
and German American Capital Corporation, subsidiaries of Deutsche Bank of North
American Holding Corp ("DMG") (collectively, the "Significant Lenders"), and
the Greenwich Funds.
Under these agreements, the lenders agreed to keep their respective facilities
in place so long as the obligations owed to those lenders are repaid in
accordance with the terms of these agreements and certain events of default as
described in these agreements do not occur. Each of the Significant Lenders and
the Greenwich Funds has indicated that they will not make any additional
advances under their facilities.
In addition, the second amended and restated intercreditor agreements described
above provide a mechanism for the Company's principal secured creditors who are
parties to the intercreditor agreements to release to the Company for its
working capital needs a portion of the monthly receipts from the interest-only
and residual certificates serving as collateral for those lenders' loans.
At September 30, 2000, the Company had no available credit facilities from the
Significant Lenders, the Greenwich Funds or any other source. At September 30,
2000, the warehouse finance facilities which remained outstanding from
previously available warehouse finance facilities were as follows:
<TABLE>
<CAPTION>
Warehouse Finance Facilities September 30, 2000
----------------------------------- ------------------
(in thousands)
<S> <C>
Bear Stearns $ 2,478
DMG 490
Paine Webber 1,242
-------------
$ 4,210
=============
</TABLE>
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<PAGE> 28
Outstanding borrowings under the Company's warehouse financing facilities bear
interest at rates ranging from LIBOR (6.62% at September 30, 2000) plus 0.75%
to LIBOR plus 2.00%, and are collateralized by, among other assets, mortgage
loans held for sale. Upon the sale of these mortgage loans, the proceeds are
used to pay down the borrowings under these warehouse finance facilities. The
Company is currently paying interest related to these warehouse borrowings.
At September 30, 2000, the term debt which remained outstanding from previously
available term debt credit facilities was as follows:
<TABLE>
<CAPTION>
Term Debt September 30, 2000
----------- ------------------
(in thousands)
<S> <C>
Paine Webber-residual credit facility $ 106,197
Greenwich Funds-credit facility acquired
from BankBoston N.A. 77,480
Greenwich Funds-standby revolving
credit facility 38,000
DMG-residual credit facility 25,778
Other 2,334
-------------
$ 249,789
=============
</TABLE>
Outstanding borrowings under the Company's term debt credit facilities with
Paine Webber and DMG bear interest at LIBOR plus 3.00%, and are collateralized
by, among other assets, the Company's interest in certain interest-only and
residual certificates. Upon receipt of cash from the interest-only and residual
certificates, if any, the proceeds are used for the Company's working capital
needs, in accordance with the second amended and restated intercreditor
agreements, and to pay down these credit facilities. The Company is currently
paying interest on borrowings outstanding under these credit facilities.
Credit facilities previously provided by BankBoston N.A. ("BankBoston") matured
and the Company was unable to repay its outstanding borrowings under these
facilities. The Greenwich Funds acquired, at a discount, from BankBoston its
interest in the credit facilities. These credit facilities bear interest at
9.75%, and are collateralized by interest-only and residual certificates and
certain other assets of the Company. The Company is currently paying interest
related to these credit facilities.
The Company entered into an agreement for a $38.0 million standby revolving
credit facility with certain of the Greenwich Funds (the "Greenwich Loan
Agreement"). The facility was originally available to provide working capital
for a period of up to 90 days and was not repaid when it matured. Borrowings
under the standby credit facility accrue interest at 22% per annum and are
collateralized by interest-only and residual certificates and certain other
assets of the Company. No interest has been paid to date under the Greenwich
Loan Agreement; accrued interest under the Greenwich Loan Agreement was $16.0
million at September 30, 2000.
At September 30, 2000, $2.3 million was outstanding under a credit facility
with a financial institution, which bears interest at 9% per annum. On October
26, 2000, the Company entered into
25
<PAGE> 29
a forbearance agreement with the financial institution whereby the Company
made loan repayments to the financial institution and permitted the financial
institution to liquidate certain cash collateral aggregating $1.6 million and
the financial institution agreed to forbear from exercising its rights and
remedies under the credit facility until the earlier of December 31, 2001 or the
occurrence of and event of default under the forbearance agreement. The
remaining obligation of $731 thousand is payable in full on December 31, 2001,
without interest.
NOTES PAYABLE
At September 30, 2000, $13.5 million was outstanding under notes payable to two
individuals related to an acquisition of a company completed by IMC in 1997.
These notes matured on July 10, 1999. Since maturity and until paid in full,
these notes bear interest at prime (9.5% at September 30, 2000) plus 5% per
annum. On November 11, 1999, the Company and certain other parties entered into
an intercreditor agreement with the individuals holding such notes. Under that
agreement, the holders of those notes agreed to forebear any collection actions
so long as the Company repays the obligations owed to these lenders according
to an agreed-upon plan and no event of default occurs. Interest under these
notes payable is being paid monthly to the extent cash receipts from the
Company's interest-only and residual certificates are available under the terms
of the individuals' intercreditor agreement and the second amended and restated
intercreditor agreements. During the three and nine months ended September 30,
2000, $115 thousand and $294 thousand interest has been paid, respectively. As
more fully described in Note 5 "Interest-Only and Residual Certificates" of
Notes to Consolidated Financial Statements included herein, the cash flow from
various interest-only and residual certificates has materially decreased in the
three months ended September 30, 2000. All accrued and unpaid interest at
September 30, 2000, totaling $834 thousand, has been paid in kind by delivery
of additional notes payable.
RISK MANAGEMENT
Since October 1, 1998 the Company has used a discount rate of 16% to present
value the difference (spread) between (i) interest earned on the portion of the
loans sold and (ii) interest paid to investors with related costs over the
expected life of the loans, including expected losses, foreclosure expenses and
a normal servicing fee. Based on market volatility in the asset-backed markets
and the widening of the spreads demanded by asset-backed investors since
September 1998 to acquire newly issued asset-backed securities, there can be no
assurance that discount rates utilized by the Company in the future to present
value the spread described above will not change, particularly if the spreads
demanded by asset-backed investors to acquire newly issued asset-backed
securities continues to increase. An increase in the discount rates used to
present value the spread described above of 1%, 3% or 5% would result in a
corresponding decrease in the value of the interest-only and residual
certificates at September 30, 2000 of approximately 5%, 13% and 20%
respectively. A decrease in the discount rates used to present value the spread
described above of 1%, 3% or 5% would result in an increase in the value of the
interest-only and residual certificates at September 30, 2000 of approximately
5%, 16% and 29%, respectively.
INFLATION
Inflation historically has had no material effect on the Company's results of
operations. Inflation can have an effect on interest rates, which normally
increase during periods of high inflation and
26
<PAGE> 30
decrease during periods of low inflation.
Profitability may be directly affected by the level and fluctuation in interest
rates, which may impact interest expense related to the Company's residual
finance facility borrowings and may also affect the Company's ability to earn a
spread between interest received on its loans and the costs of its warehouse
borrowings. During the nine months ended September 30, 2000, LIBOR increased
from 5.8% to 6.6%, which resulted in increased interest costs related to the
Company's residual finance facilities and a decrease in the spread between
interest received on the Company's loans and the costs of its warehouse
borrowings. The results of operations of the Company will likely continue to be
adversely affected during any period of unexpected or rapid changes in interest
rates.
Additionally, to the extent 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
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 require 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. In addition, inverse or flattened interest
yield curves could have an adverse impact on the profitability of the Company
because the loans pooled and sold by the Company have long-term rates, while
the senior interests in the related securitization trusts are priced on the
basis of intermediate term rates. The Company does not engage in hedging
activities, which could result in substantial losses in the value of the
Company's mortgage loans held for sale without an offsetting gain.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 140 "Accounting for
Transfers and Servicing Assets and Extinguishments of Liabilities" ("SFAS 140"),
which replaced SFAS No. 125 "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." It revises the standards for
accounting, for securitization and other transfers of financial assets and
collateral and requires certain disclosures. SFAS 140 is effective to
securitization transactions and collateral for fiscal years ending after
December 15, 2000. The Company does not anticipate that the application of the
provisions of SFAS 140 will have a material effect on the Company's statement
of operations or balance sheet.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which was amended by SFAS No.
137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133". SFAS 133, as amended, is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000 (January 1, 2001 for the Company). SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in
the fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative was designated as
part of a hedge transaction and, if it is, the type of hedge transaction. For
fair-value hedge transactions designed to hedge 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
27
<PAGE> 31
be recognized in current-period earnings. The Company has no present plans to
engage in hedging activities and does not anticipate that the adoption of SFAS
133 will have a material impact on the Company's statement of operations or
balance sheet.
YEAR 2000
The year 2000 (Y2K) problem was the result of computer programs being written
using two digits rather than four to define the applicable year. Thus year 1999
was represented by the number "99" in many software applications.
The Company to date has experienced no material Y2K compliance issues and does
not anticipate any material Y2K compliance issues in the future.
The foregoing assessment of the impact of the Y2K problem on the Company is
based on management's best estimates at the present time and, although not
expected to, could change substantially. The assessment is based upon several
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.
RECENT DEVELOPMENTS
In August 2000, the Company entered into Severance Agreements with all
remaining employees other than the Company's President, in order to provide an
incentive for them to remain with the Company and not seek alternative
employment. Those agreements provided that each employee would receive an
amount equal to 90 days salary and provisions would be made to provide a
continuation of normal insurance and other benefits for that 90 day period if a
"Severance Termination" occurred as to such employee. A Severance Termination
is any termination of employment by IMC for any reason other than Cause (as
defined in the Severance Agreements) or a voluntary decision by the employee to
resign from employment with IMC. A copy of the form of Severance Agreement is
filed as exhibits to the Quarterly Report on Form 10-Q and is incorporated
herein in its entirety.
In addition, in September 2000, the Company entered into escrow agreements with
Dennis J. Pitocco and Robert F. Melone, respectively the Company's President
and in-house General Counsel, pursuant to which the Company's obligations with
respect to payment of severance amounts under the Severance Agreements and
under Mr. Pitocco's employment agreement were pre-paid, subject to the
Company's rights to recover those funds if the employee voluntarily resigns or
if no event giving rise to the right to receive severance payments has occurred
by September 2003. Copies of the Escrow Agreements are filed as exhibits to the
Quarterly Report of Form 10-Q and incorporated herein in their entirety.
28
<PAGE> 32
PART II. OTHER INFORMATION
29
<PAGE> 33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings -
The Company is party to various legal proceedings arising out of the conduct of
its business. The Company has accrued certain amounts to defend various legal
proceedings and such amounts are included in accrued liabilities in the
accompanying Consolidated Balance Sheet at September 30, 2000. Management
believes that amounts accrued in connection with these matters are adequate and
ultimate resolution of these matters will not have a material adverse effect on
the consolidated financial condition or results of operations of the Company.
The Company is a defendant in a lawsuit pending in the United States District
Court, District of Maryland, brought by the two principals and sole
shareholders of Central Money Mortgage, Inc. ("CMM"), the assets of which were
acquired by the Company in August, 1997, pursuant to the terms of an Asset
Purchase Agreement ("Agreement") for $11.0 million in stock of the Company. The
plaintiffs were to be employed by Central Money Mortgage (IMC), Inc., a
subsidiary formed to continue the business of CMM for a tern of five years. A
Registration Rights Agreement, executed at the time of the closing, required
the Company to prepare and file a Short Form Registration Statement within
twenty days after the closing to enable the plaintiffs to sell approximately
half of the shares received pursuant to the Agreement. Promptly after the
closing, the Company prepared a draft Registration Statement intending to
fulfill that obligation, but was subsequently advised by its outside counsel
not to file the registration statement.
The parties agreed that if the value of the shares which were to have been
registered was less on August 19, 1998 (the date the stock could be sold under
Rule 144 without being registered), than it was at the closing date one year
earlier, the Company would issue to the plaintiffs sufficient additional shares
so that the total value of shares which were to have been registered, when added
to the value of the additional shares (all valued twelve months after closing),
would equal the value of the shares which were to have been registered at
closing. Therefore, on August 20, 1998, the Company issued 96,790 additional
shares to the plaintiffs.
The Company's stock, which was selling at $12.87 per share on August 20, 1998,
fell dramatically thereafter. If the plaintiffs had sold their shares in August
1998 when they received the additional shares, they would have sustained no
loss as a result of the Company's inability to register the shares as
originally agreed. However, they failed to do so and are seeking damages in
this action.
The plaintiffs' multi-count complaint alleges federal securities fraud,
Maryland securities fraud and common law fraud and contends that at the time of
the execution of the Agreement and the Registration Rights Agreement the
Company never intended to register the shares and only promised to do so in
order to induce the plaintiffs to surrender their company. They claim both
punitive and compensatory damages. In a separate count the plaintiffs allege
that the failure to register the shares constituted a breach of contract. The
plaintiffs' employment was terminated in July, 1999 (the Company contends, with
cause), and in an additional count the plaintiffs are seeking to recover the
balance of the payments which would be due under their employment contracts
which amounts to approximately $1.2 million.
The discovery in this case has now been concluded and the Company believes that
based on the facts that have been developed to date and consultation with legal
counsel there is little or no evidence
30
<PAGE> 34
to support the plaintiffs' allegations of fraud and that it is probable those
counts of the complaint can be successfully defended. Regarding the issue as to
whether the Company's failure to register the shares was a breach of the
Registration Rights Agreement, it is the Company's position that the subsequent
agreement providing for the issuance of additional shares to the plaintiffs,
which was consummated on August 20, 1998, constitutes an accord and
satisfaction and any damages sustained by the plaintiffs were as a result of
their decision to retain their stock. The Plaintiffs and the Company have filed
cross motions for summary judgment; however, it appears the issue of breach of
contract, as well as whether the plaintiffs were terminated with cause as
contended by the Company or without cause as alleged by the plaintiffs, will
ultimately be decided at trial. Management intends to defend such action
vigorously.
On November 12, 1999, the Company's shareholders approved the sale of certain
assets to CitiFinancial Mortgage. While the majority of all votes entitled to
be cast voted in favor of the transaction, there were a limited number of
shareholders who exercised their dissenter's rights. Because it will be unclear
for several years whether there are any assets available for distribution to
holders of IMC common stock, the Company has taken the position that the fair
value of the IMC common stock is negligible and that no material payment should
be made. The Company had made an offer to purchase the IMC common stock of the
dissenting shareholders based on the trading price of the Company's common
stock at the time of the approval by the Company's shareholders of the sale of
assets to CitiFinancial Mortgage, which in certain instances was rejected. The
Company has filed an action in a court of competent jurisdiction in Florida
requesting that the fair value of IMC common stock be determined. The Court
shall also determine whether each dissenting shareholder, as to whom the
Company requests the court to make such determination, is entitled to receive
payment for their shares. The case is in the preliminary discovery stages and
management of the Company believes that its prior offer represents the fair and
reasonable value of the Company's shares.
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities -
At September 2000, the Company was not in compliance with certain financial
covenants related to its credit facilities with Paine Webber Real Estate
Securities, Inc., Bear Stearns Home Equity Trust, and Aspen Funding Corp. and
German American Capital Corporation, subsidiaries of Deutsche Bank North
America Holding Corp. (collectively, the "Significant Lenders"). As described
in Note 4 "Warehouse Finance Facilities, Term Debt and Notes Payable" to the
Consolidated Financial Statements included herein, the Company entered into
second amended and restated intercreditor agreements with the Significant
Lenders which provide for the Significant Lenders to "stand-still" and keep
outstanding balances under their facilities in place, subject to certain
conditions, as the Company repays the obligations owed to these lenders
according to an agreed upon plan.
Item 4. Submission of Matters to a Vote of Security Holders - None.
Item 5. Other Information - None
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<PAGE> 35
Item 6. Exhibits and Reports on Form 8-K -
A. Exhibits
10.89 - Form of Severance Agreement
10.90 - Escrow Agreement dated October 10, 2000, by and between IMC
Mortgage Company, as Depositor, and Dennis J. Pitocco and
Robert F. Melone, as Escrow Agents
27 - Financial Data Schedule (for SEC use only)
99 - Report of Independent Certified Public Accountants
B. Reports on Form 8-K - None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date: November 10, 2000 IMC MORTGAGE COMPANY
By: /s/ Dennis J. Pitocco
Dennis J. Pitocco, Chairman, President,
Chief Executive Officer and
Chief Financial Officer.
32
