Securities and 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 June 30, 1998
OR
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from _______________ to ______________
Commission File Number: 0-13091
Impac Commercial Holdings, Inc.
(Exact name of registrant as specified in its charter)
Maryland 33-0745075
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20371 Irvine Avenue
Santa Ana Heights, California 92707
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (714) 556-0122
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class Which registered
---------------------------------------- -----------------------------------
Common Stock $0.01 par value American Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
On August 11, 1998, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $115.8 million, based on the
closing sales price of the Common Stock on the American Stock Exchange. For
purposes of the calculation only, in addition to affiliated companies, all
directors and executive officers of the registrant have been deemed affiliates.
The number of shares of Common Stock and Class A Common Stock outstanding as of
August 11, 1998 was 9,562,084 and 456,916, respectively.
Documents incorporated by reference: None
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC.
1998 FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - IMPAC COMMERCIAL Page #
HOLDINGS, INC.
Consolidated Balance Sheets, June 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations, For the Three Months Ended June 30, 1998 and 1997
and For the Six Months Ended June 30, 1998 and For the Period from January 15, 1997
(commencement of operations) through June 30, 1997 4
Consolidated Statements of Cash Flows, For the Six Months Ended June 30, 1998 and
For the Period from January 15, 1997 (commencement of operations) through June 30, 1997 5
Notes to Consolidated Financial Statements 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 11
RESULTS OF OPERATIONS
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 16
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 17
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 17
Item 3. DEFAULTS UPON SENIOR SECURITIES 17
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
Item 5. OTHER INFORMATION 17
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
</TABLE>
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
<CAPTION>
June 30, December 31,
1998 1997
----------------- ------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 12,957 $ 15,908
Investment securities available-for-sale 17,895 19,353
Residual interest in securitizations, held-for-trading 10,322 9,936
Loan receivables:
Commercial Mortgages held-for-investment 367,341 62,790
Finance receivables 71,669 95,711
CMO collateral 11,019 4,255
Allowance for loan losses (682) (564)
----------------- -------------------
Net loan receivables 449,347 162,192
Due from affiliates 13,186 1,592
Premises and equipment, net 8,051 3,857
Investment in Impac Commercial Capital Corporation 3,306 4,182
Accrued interest receivable 770 1,361
Other assets 6,247 458
----------------- -------------------
$ 522,081 $ 218,839
================= ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Warehouse line agreements $ 361,434 $ 90,374
CMO borrowings 10,726 4,176
Reverse repurchase agreements 6,929 9,841
Due to affiliates 5,231 8,067
Other liabilities 8,332 3,139
----------------- -------------------
Total liabilities 392,652 115,597
Stockholders' Equity:
Preferred Stock; $.01 par value; 10,000,000 shares authorized; no shares
issued and outstanding at June 30, 1998 and December 31, 1997 -- --
Common Stock; $.01 par value; 46,000,000 shares authorized; 9,562,084 and 7,344,789
shares issued and outstanding at June 30, 1998 and December 31, 1997 96 73
Class A Common Stock; $.01 par value; 4,000,000 shares authorized; 456,916 and
674,211 shares issued and outstanding at June 30, 1998 and December 31, 1997 5 7
Additional paid-in-capital 133,128 104,761
Accumulated other comprehensive loss (394) (160)
Cumulative dividends declared (11,066) (4,250)
Retained earnings 7,660 2,811
----------------- -------------------
Total stockholders' equity 129,429 103,242
----------------- -------------------
$ 522,081 $ 218,839
================= ===================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except earnings per share data)
<CAPTION>
For the period
from January
January 15, 1997
(commencement)
For the Three For the Three For the Six of operations)
Months Ended Months Ended Months Ended Through
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
---------------- ---------------- --------------- -------------------
<S> <C> <C> <C> <C>
Revenues:
Interest income $ 8,704 $ 986 $ 14,478 $ 1,353
Equity in net loss of Impac Commercial
Capital Corporation (423) - (876) -
Rental and other income 318 - 426 -
---------------- ---------------- --------------- ------------------
8,599 986 14,028 1,353
---------------- ---------------- --------------- ------------------
Expenses:
Interest expense on warehouse line and
reverse repurchase agreements 4,716 297 7,035 371
Interest expense on other borrowings 349 6 746 91
Interest expense on borrowings from
Impac Warehouse Lending Group - 220 - 340
Provision for loan losses 69 20 118 33
General and administrative and other expense 430 5 620 9
Management advisory fees 217 - 379 -
Professional services 145 119 281 179
Stock compensation expense - - - 2,697
---------------- ---------------- --------------- ------------------
5,926 667 9,179 3,720
---------------- ---------------- --------------- ------------------
Net earnings (loss) $ 2,673 $ 319 $ 4,849 $ (2,367)
================ ================ =============== ==================
Weighted average shares outstanding - basic 8,111 (1) 8,066 (1)
================ ===============
Weighted average shares outstanding - diluted 8,122 (1) 8,089 (1)
================ ===============
Net earnings per share--basic and diluted $ 0.33 (1) $ 0.60 (1)
================ ===============
(1) Earnings per share and weighted average shares for periods prior to ICH's initial public offering on August 8,
1997 are not shown.
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<CAPTION>
For the period from
January 15, 1997
For the Six (commencement of
Months ended operations) through
June 30, 1998 June 30, 1997
------------------------- -----------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 4,849 $ (2,367)
Adjustments to reconcile net earnings (loss) to net cash
(used in) provided by operating activities:
Equity in net loss of Impac Commercial Capital Corporation 876 --
Stock compensation expense -- 2,697
Provision for loan losses 118 33
Depreciation 201 --
Net change in accrued interest on receivables 591 (249)
Net change in other assets and liabilities (5,095) (1,058)
Net change in due from affiliates and due to affiliates (14,430) --
------------------------- -----------------------
Net cash (used in) provided by operating activities (12,890) (944)
------------------------- -----------------------
Cash flows from investing activities:
Net change in Commercial Mortgages held-for-investment (304,551) (17,380)
Net change in finance receivables 24,042 (31,169)
Net change in CMO collateral (6,764) --
Principal reductions on investment securities available-for-sale 1,224 --
Purchase of residual interest in securitizations -- (10,098)
Principal reductions on residual interest in securitizations (386) 99
Purchase of premises and equipment (457) --
------------------------- -----------------------
Net cash used in investing activities (286,892) (58,548)
------------------------- -----------------------
Cash flows from financing activities:
Net change in warehouse line and reverse repurchase agreements 268,148 37,863
Net change in other affiliated borrowings -- 16,309
Net change in CMO borrowings 6,550 --
Issuance of Common Stock 28,388 6
Issuance of promissory notes -- 15,000
Dividends paid (6,255) --
------------------------- -----------------------
Net cash provided by financing activities 296,831 69,178
------------------------- -----------------------
Net change in cash and cash equivalents (2,951) 9,686
Cash and cash equivalents at beginning of period 15,908 --
------------------------- -----------------------
Cash and cash equivalents at end of period $ 12,957 $ 9,686
========================= =======================
Supplementary information:
Interest paid $ 6,976 $ --
Non-cash transactions:
Increase in accumulated other comprehensive loss $ 234 $ --
Conversion of promissory notes to ICH Preferred stock $ -- $ 15,000
Dividends declared and unpaid $ 3,609 $ --
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
Unless the context otherwise requires, references herein to the "Company"'
refer to Impac Commercial Holdings, Inc. (ICH) and its subsidiaries IMH/ICH
Dove Street, LLC (Dove) and Impac Commercial Capital Corporation (ICCC),
collectively. References to ICH refer to Impac Commercial Holdings, Inc. as
a separate entity from Dove or ICCC. ICH was incorporated in Maryland in
February 1997 under the name Imperial Credit Commercial Holdings, Inc. and
in June 1997 ICH changed its name to IMH Commercial Holdings, Inc. By a
vote of stockholders on January 28, 1998, a name change to Impac Commercial
Holdings, Inc. was approved.
1. Basis of Financial Statement Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP) for interim
financial information and with the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by GAAP for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been
included. Operating results for the six-month period ended June 30, 1998
are not necessarily indicative of the results that may be expected for the
year ending December 31, 1998. The accompanying consolidated financial
statements should be read in conjunction with the consolidated financial
statements and related notes included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
The operations of ICH have been presented in the consolidated financial
statements for the three months ended June 30, 1998 and 1997 and for the
six months ended June 30, 1998 and for the period from January 15, 1997
(commencement of operations) through June 30, 1997 (Commencement Period)
and include the financial results of ICH as a stand-alone entity, the
financial results of ICH's equity interest in net loss in ICCC as a
stand-alone entity, subsequent to ICH's initial public offering (IPO) on
August 8, 1997, and the financial results of Dove.
The Company is entitled to 95% of the earnings or losses of ICCC through
its ownership of all of the non-voting preferred stock of ICCC. As such,
the Company records its investment in ICCC using the equity method. Under
this method, original investments are recorded at cost and adjusted by the
Company's share of earnings or losses. The results of operations of ICCC
are included in the results of operations for ICH as "Equity in net loss of
ICCC." Gain or loss on the sale of loans or securities by ICCC to ICH are
deferred and amortized or accreted over the estimated life of the loans or
securities using the interest method.
2. Organization
ICH is a recently formed specialty commercial property finance company
which has elected to be taxed at the corporate level as a real estate
investment trust (REIT) for federal income tax purposes, which generally
allows the Company to pass through income to stockholders without payment
of federal income tax at the corporate level provided that the company
distributes 95% of its taxable income to stockholders. Impac Mortgage
Holdings, Inc. (IMH) capitalized ICH with $15.0 million in cash in March
1997. As of June 30, 1998, IMH owned 937,084, or 9.8%, of ICH voting Common
Stock and 456,916 shares, or 100%, of ICH non-voting Class A Common Stock.
3. Summary of Significant Accounting Policies
Method of Accounting
The consolidated financial statements are prepared on the accrual basis of
accounting in accordance with GAAP. The preparation of financial statements
in conformity with GAAP requires management to make significant estimates
and assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
<PAGE>
New Accounting Statements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income", which is effective for fiscal years beginning after December 15,
1997 and requires restatement of earlier financial statements for
comparative purposes. SFAS No. 130 establishes standards for reporting and
the display of comprehensive income and its components in the financial
statements. SFAS No. 130 requires that items meeting the criteria of a
component of comprehensive income (such as gains or losses on certain
investments in debt and equity securities classified as
available-for-sale), be shown in the financial statements as adjustments to
reported net earnings to arrive at a disclosure of comprehensive income.
SFAS No. 130 provides informative disclosure but does not and will not
impact previously reported or future net earnings and earnings per share.
The following table represents comprehensive income (in thousands):
<TABLE>
<CAPTION>
For the
period from
January 15, 1997
For the Six (commencement
For the Three Months Months Ended of operations)
Ended June 30, June 30, through June 30,
1998 1997 1998 1997
---------------- -------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Net earnings $ 2,673 $ 319 $ 4,849 $ (2,367)
Accumulated other comprehensive loss 196 - (234) -
--------------- ============== ================ ==================
Comprehensive income $ 2,869 $ 319 $ 4,615 $ (2,367)
=============== ============== ================ ==================
</TABLE>
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Standards (SFAS) No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS 131 establishes
standards for the way that public enterprises report information about
operating segments in annual financial statements and requires that
selected information about those operating segments be reported in interim
financial statements. This statement supersedes SFAS 14 "Financial
Reporting for Segments of a Business Enterprise." SFAS No. 131 requires
that all public enterprises report financial and descriptive information
about its reportable operating segments. Operating segments are defined as
components evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. This
statement is effective for fiscal years beginning after December 15, 1997.
In the initial year of application, comparative information for earlier
years should be restated.
In June 1998, the (FASB) issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred
to as derivatives) and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as
(a) a hedge of the exposure to changes in the fair value of a recognized
asset or liability or an unrecognized firm commitment, (b) a hedge of the
exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security,
or a foreign-currency-denominated forecasted transaction.
4. Net Earnings per Share
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings
per Share". SFAS 128 replaces the previously reported primary and fully
diluted earnings per share with basic and diluted earnings per share.
Unlike primary earning per share, basic earnings per share excludes any
dilutive effects of stock options. Diluted earnings per share are very
similar to the previously reported fully diluted earnings per share. Basic
net earnings per share are computed on the basis of the weighted average
number of shares outstanding for the period. Dilutive net earnings per
share are computed on the basis of the weighted average number of shares
and common equivalent shares outstanding for the period.
<PAGE>
The following tables represent the computation of basic and diluted
earnings per share for the three and six months ended June 30, 1998 (in
thousands, except per share data):
<TABLE>
<CAPTION>
For the Three
Months Ended
June 30, 1998
-------------------------
<S> <C>
Numerator:
Numerator for basic earnings per share--
Net earnings $ 2,673
-------------------------
Denominator:
Denominator for basic earnings per share--
Weighted average number of common shares
outstanding during the period 8,111
Net effect of dilutive stock options 11
-------------------------
Denominator for diluted earnings per share 8,122
=========================
Net earnings per share--basic $ 0.33
=========================
Net earnings per share--diluted $ 0.33
=========================
For the Six
Months Ended
June 30, 1998
-------------------------
Numerator:
Numerator for basic earnings per share--
Net earnings $ 4,849
-------------------------
Denominator:
Denominator for basic earnings per share--
Weighted average number of common shares
outstanding during the period 8,066
Net effect of dilutive stock options 23
-------------------------
Denominator for diluted earnings per share 8,089
=========================
Net earnings per share--basic $ 0.60
========================
Net earnings per share--diluted $ 0.60
=========================
</TABLE>
5. Investment in Impac Commercial Capital Corporation
The Company is entitled to 95% of the earnings or losses of ICCC through
its ownership of all of the non-voting preferred stock of ICCC. As such,
the Company records its investment in ICCC using the equity method. Under
this method, original investments are recorded at cost and adjusted by the
Company's share of earnings or losses. Gain or loss on the sale of loans or
securities by ICCC to ICH are deferred and amortized or accreted over the
estimated life of the loans or securities using the interest method.
<PAGE>
The following is financial information for ICCC for the periods presented
(in thousands):
<TABLE>
<CAPTION>
BALANCE SHEETS
June 30, December 31,
1998 1997
----------------- --------------------
<S> <C> <C>
ASSETS
Cash $ 8,018 $ 2,273
Commercial Mortgages held-for-sale 79,696 106,654
Premises and equipment, net 654 381
Due from affiliates 6 1,538
Other assets 3,840 1,789
----------------- --------------------
$ 92,214 $ 112,635
================= ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Warehouse line agreements $ 78,040 $ 104,219
Due to affiliates 8,178 758
Other liabilities 2,516 3,255
----------------- --------------------
Total liabilities 88,734 108,232
----------------- --------------------
Shareholders' Equity:
Preferred stock; no par value; 50,000 shares authorized; 9,500 shares issued
and outstanding at June 30, 1998 and December 31, 1997 2,875 2,875
Common stock; no par value; 50,000 shares authorized; 500 shares issued
and outstanding at June 30, 1998 and December 31, 1997 1 1
Contributed capital 150 150
Retained earnings 454 1,377
----------------- --------------------
Total shareholders' equity 3,480 4,403
----------------- --------------------
$ 92,214 $ 112,635
================= ====================
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
For the period from
January 15, 1997
For the Three For the Three For the Six (commencement of
Months Ended Months Ended Months Ended operations) through
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
----------------- ------------------ --------------- -------------------
<S> <C> <C> <C> <C>
Revenues:
Interest income $ 3,357 $ 225 $ 6,203 $ 231
Loan servicing income 11 18 29 20
Other income 252 19 318 19
------------------ ------------------ ---------------- -------------------
3,620 262 6,550 270
------------------ ------------------ ---------------- -------------------
Expenses:
Interest expense on warehouse line
and reverse repurchase agreements 3,453 204 6,171 204
Interest on borrowings from affiliates 168 6 369 11
General, administrative and other expense 627 203 1,232 329
Professiona1 services 142 116 375 179
Provision for repurchases - 21 - 21
------------------ ------------------ ---------------- -------------------
4,390 550 8,147 744
------------------ ------------------ ---------------- -------------------
Loss before income tax benefit (770) (288) (1,597) (474)
Income tax benefit (325) (198) (674) (198)
---------------- ------------------ ---------------- -------------------
Net loss $ (445) $ (90) $ (923) $ (276)
================== ================== ================ ===================
</TABLE>
<PAGE>
6. Stockholders' Equity
The Company completed a secondary common stock offering, which closed in
June 1998. The Company raised additional capital of $29.1 million, net of
underwriting discounts and before other expenses, as stockholders purchased
2,000,000 shares of common stock at a price of $15.3125 per share.
On June 8, 1998, the Company declared a second quarter dividend of $3.6
million, or $0.45 per share. This dividend was paid on July 15, 1998 to
stockholders of record on June 19, 1998. On April 1, 1998, the Company
declared a first quarter dividend of $3.2 million, or $0.40 per share. This
dividend was paid on April 24, 1998 to stockholders of record on April 9,
1998.
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain information contained in the following Management's Discussion and
Analysis of Financial Condition and Results of Operations constitute
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21e of the Exchange Act of
1934, as amended, which can be identified by the use of forward-looking
terminology such as "may," "will," "expect," "anticipate," "estimate" or
"continue" or the negatives thereof or other variations thereon or
comparable terminology.
GENERAL
ICH was incorporated in the state of Maryland on February 3, 1997. ICH was
formed to seek opportunities in the commercial mortgage market. Commercial
mortgage assets include mortgage loans on condominium-conversions and
mortgage loans on commercial properties, such as industrial and warehouse
space, office buildings, retail space and shopping malls, hotels and
motels, nursing homes, hospitals, multifamily, congregate care facilities
and senior living centers (collectively, "Commercial Mortgages"). The
Company operates the Long-Term Investment Operations which invests
primarily in mortgage loans and mortgage-backed securities ("MBSs"). To
date, the Long-Term Investment Operations has invested primarily in
Commercial Mortgages and mortgage-backed securities on commercial
properties ("CMBSs"). The Company also engages in the Conduit Operations,
ICCC, which originates, purchases and sells or securitizes Commercial
Mortgages. ICCC operates three divisions: the ConduitExpress Division, the
CommercialExpress Division and the CondoSelect Division.
BUSINESS OPERATIONS
Long-Term Investment Operations:
During the six months ended June 30, 1998, the Long-Term Investment
Operations, conducted by ICH, acquired $325.6 million of Commercial
Mortgages as compared to $17.5 million of Commercial Mortgages acquired
during the Commencement Period. Commercial Mortgages purchased from ICCC
during the first six months of 1998 consisted of $308.6 million of
fixed-rate mortgages ("FRMs") and $19.8 million of adjustable-rate
mortgages ("ARMs") secured by first liens on commercial property.
Commercial Mortgages purchased from ICCC during the first six months of
1998 consisted of $206.1 million of ConduitExpress loans, $109.6 million of
CommercialExpress loans and $12.7 million of CondoSelect loans. As of June
30, 1998, the Long-Term Investment Operations portfolio of mortgage loans
consisted of $367.3 million of Commercial Mortgages held-for-investment and
$11.0 million of mortgage loans held as collateral for Collateralized
Mortgage Obligations ("CMOs") of which 17.6% were FRMs and 82.4% were ARMs.
The weighted average coupon of the Long-Term Investment Operations
portfolio of Commercial Mortgages was 8.14% at June 30, 1998. The
delinquency rate of Commercial Mortgages in the long-term investment
portfolio was zero at June 30, 1998. In addition, the Long-Term Investment
Operations had outstanding finance receivables of $71.7 million, investment
securities available-for sale of $17.9 million and residual interest in
securitizations of $10.3 million at June 30, 1998.
Conduit Operations:
The Conduit Operations, conducted by ICCC, supports the Long-Term
Investment Operations of the Company by supplying ICH with Commercial
Mortgages for its long-term investment portfolio. In acting as the mortgage
conduit for the Company, ICCC originated $181.9 million of ConduitExpress
loans during the first six months of 1998 as compared to $24.1 million
during the Commencement Period. The CommercialExpress Division originated
$106.3 million during the first six months of 1998 as compared to $1.9
million during the Commencement Period. The CondoSelect Division originated
$12.7 million during the first six months of 1998 and none during the
Commencement Period. ICCC's servicing portfolio increased 766% to $452.8
million as of June 30, 1998 as compared to $52.3 million as of June 30,
1997. The loan delinquency rate of Commercial Mortgages in ICCC's servicing
portfolio was zero at June 30, 1998.
<PAGE>
RESULTS OF OPERATIONS; IMPAC COMMERCIAL HOLDINGS, INC.
THREE MONTHS ENDED JUNE 30, 1998 AS COMPARED TO THREE MONTHS ENDED
JUNE 30, 1997
Net Earnings
Net earnings for the three months ended June 30, 1998 increased to $2.7
million as compared $319,000 for the three months ended June 30, 1997. The
increase in net earnings was primarily attributed to an increase in net
interest income earned on Commercial Mortgages, investment and residual
securities, and finance receivables partially offset by an increase in
general and administrative expenses and management advisory fees. The
significant increase in the Company's net earnings for the three months
ended June 30, 1998 as compared to the three months ended June 30, 1997 is
due to the Company's growth over the past 12 months.
Revenues
Revenues for the three months ended June 30, 1998 increased to $8.6 million
as compared to $986,000 for the three months ended June 30, 1997. The
increase is primarily due to an increase in interest income earned on
Commercial Mortgages held-for-investment, investment securities
available-for-sale, residual interests in securitizations, CMO collateral,
and finance receivables (collectively, "Commercial Mortgage Assets")
partially offset by equity in net loss of ICCC of $423,000.
Interest income for the three months ended June 30, 1998 increased to $8.7
million as compared to $986,000 for the three months ended June 30, 1997.
Such an increase is attributed to an increase in average Commercial
Mortgage Assets to $347.4 million for the three months ended June 30, 1998
as compared to $36.3 million for the three months ended June 30, 1997.
The Company recorded equity in net loss of ICCC for the three months ended
June 30, 1998 of $423,000. The Company has a 95% economic interest in ICCC
through its ownership of 100% of the preferred stock of ICCC, which was
acquired in August 1997. As the preferred stock of ICCC was contributed to
the Company in August 1997, the Company did not record any investment in or
equity in net earnings or loss for the three months ended June 30, 1997.
Expenses
Expenses for the three months ended June 30, 1998 increased 785% to $5.9
million as compared to $667,000 for the three months ended June 30, 1997.
The increase is primarily due an increase in interest expense on
borrowings, general and administrative and other expenses and management
advisory fees. Interest expense for the three months ended June 30, 1998
increased to $5.1 million as compared to $523,000 for the three months
ended June 30, 1997 as average borrowings, which include warehouse line
agreements, reverse repurchase agreements and CMO borrowings, increased to
$285.0 million for the three months ended June 30, 1998 as compared to
$24.7 million for the three months ended June 30, 1997. General and
administrative and other expenses increased to $430,000 for the three
months ended June 30, 1998 as compared to $5,000 for the three months ended
June 30, 1997 due to a significant increase in operations in the past 12
months. Management advisory fees increased to $217,000 for the three months
ended June 30, 1998 as compared to zero for the three months ended June 30,
1997. The Company incurs management advisory fee expense pursuant to the
Management Agreement with RAI Advisors, LLC ("RAI"). The Company did not
record a management advisory fee for the three months ended June 30, 1997
as the Company's operations were in a formative stage, and thus, the
threshold when RAI would earn a fee (return on equity greater than the
average Ten Year U.S. Treasury rate plus 2%) was not reached
<PAGE>
RESULTS OF OPERATIONS; IMPAC COMMERCIAL HOLDINGS, INC.
SIX MONTHS ENDED JUNE 30, 1998 AS COMPARED TO THE PERIOD FROM JANUARY 15,
1997 (COMMENCEMENT OF OPERATIONS) THROUGH JUNE 30, 1997
Net Earnings
Net earnings for the six months ended June 30, 1998 increased to $4.8
million as compared to a net loss of $2.4 million for the Commencement
Period. The net loss for the Commencement Period was primarily the result
of the issuance by ICH of stock that resulted in a one-time stock
compensation expense of $2.7 million. Excluding the stock compensation
expense, ICH would have earned $330,000 for the Commencement Period. The
increase in net earnings was primarily attributed to an increase in net
interest income earned on Commercial Mortgages, investment securities,
residual interest in securitizations and finance receivables partially
offset by an increase in equity in net loss of ICCC, general and
administrative expenses and management advisory fees. The significant
increase in the Company's net earnings for the six months ended June 30,
1998 as compared to the Commencement Period is the result the Company's
growth over the past 12 months as the Company had only been in operation
for approximately five months as of June 30, 1997.
Revenues
Revenues for the six months ended June 30, 1998 increased 900% to $14.0
million as compared to $1.4 million for the Commencement Period. The
increase is primarily due to higher net interest income due to an increase
in Commercial Mortgage Assets partially offset by equity in net loss of
ICCC of $876,000.
Interest income for the six months ended June 30, 1998 increased to $14.5
million as compared to $1.4 million for the Commencement Period. Such an
increase is attributed to an increase in average Commercial Mortgage Assets
to $280.7 million for the six months ended June 30, 1998 as compared to
$24.3 million for the Commencement Period.
The Company recorded equity in net loss of ICCC for the six months ended
June 30, 1998 of $876,000. The Company has a 95% economic interest in ICCC
through its ownership of 100% of the preferred stock of ICCC which was
acquired in August 1997. As the preferred stock of ICCC was contributed to
the Company in August 1997, the Company did not record any investment in or
equity in net earnings or loss for the Commencement Period.
Expenses
Expenses for the six months ended June 30, 1998 increased 149% to $9.2
million as compared to $3.7 million for the Commencement Period. The
increase is primarily due an increase in interest expense on borrowings,
general and administrative and other expenses and management advisory fees
offset by a decrease in stock compensation expense. Interest expense for
the six months ended June 30, 1998 increased to $7.8 million as compared to
$802,000 for the Commencement Period as average borrowings, which include
warehouse line agreements, reverse repurchase agreements and CMO
borrowings, increased to $214.9 million for the six months ended June 30,
1998 as compared to $17.2 million for the Commencement Period. General and
administrative and other expenses increased to $620,000 for the six months
ended June 30, 1998 as compared to $9,000 for the Commencement Period due
to a significant increase in operations in the past 12 months. Management
advisory fees increased to $379,000 for the six months ended June 30, 1998
as compared to zero for the Commencement Period. The Company incurs
management advisory fee expense pursuant to the Management Agreement with
RAI. The Company did not record a management advisory fee for the
Commencement Period as the Company's operations were in a formative stage,
and thus, the return on equity was less than the threshold when RAI would
earn a fee (return on equity greater than the average Ten Year U.S.
Treasury rate plus 2%) was not reached. Stock compensation expense
decreased as the Company incurred a one-time charge of $2.7 million in the
Commencement Period as a result of the issuance of founder's stock.
<PAGE>
Liquidity and Capital Resources
The Company's principal liquidity requirements result from funding needs
arising from the acquisition of mortgage loans and mortgage-backed
securities by the Long-Term Investment Operations, at the ICH level, and
the origination or purchase of Commercial Mortgages held-for-sale by the
Conduit Operations, at the ICCC level. The Company's ability to meet its
long-term liquidity requirements is subject to the renewal of its credit
and repurchase facilities and/or obtaining other sources of financing,
including additional debt or equity from time to time. Any decision by the
Company's lenders and/or investors to make additional funds available to
the Company in the future will depend upon a number of factors, such as the
Company's compliance with the terms of its existing credit arrangements,
the Company's financial performance, industry and market trends in the
Company's various businesses, the general availability of and rates
applicable to financing and investments, such lenders' and/or investors'
own resources and policies concerning loans and investments, and the
relative attractiveness of alternative investment or lending opportunities.
Prior to the IPO, the Long-Term Investment Operations was funded by $15.0
million in investments and $900,000 in borrowings from IMH and a warehouse
line agreement from a third party lender. ICCC was funded by affiliated
borrowings and by $500,000 from the issuance of preferred stock. Subsequent
to the IPO, the Long-Term Investment Operations and the Conduit Operations
have been funded through borrowings from warehouse line agreements and
reverse repurchase agreements, borrowings from affiliated companies, sales
of Commercial Mortgages and proceeds from the issuance of capital stock.
ICH, as a stand-alone entity, entered into committed warehouse line
agreements with two investment banks, one of which expires in May 1999 and
one of which expires in February 1999 (unless terminated earlier), which
provide up to an aggregate of $600.0 million (of which $200.0 is
uncommitted) to finance ICH's operations as needed. Terms of the warehouse
line agreements require that the Commercial Mortgages be held by an
independent third party custodian, which gives the Company the ability to
borrow against the collateral as a percentage of the fair market value of
the Commercial Mortgages. The borrowing rates are expressed in basis points
over the one-month LIBOR or Eurodollar Rate. The margins on the warehouse
line agreements are based on the type of mortgage collateral used and the
loan amounts generally range from 75% to 92% of the fair market value of
the collateral. As of June 30, 1998, an aggregate of $361.4 million was
outstanding under the warehouse line agreements.
ICH has entered into reverse repurchase agreements whereby ICH pledges
specific CMBSs as collateral to secure short-term loans. The interest rates
on the loans are based on the one-month LIBOR plus a margin depending on
the type of collateral. As of June 30, 1998, amounts outstanding on the
reverse repurchase agreements were $6.9 million.
In August 1997, ICH entered into a revolving credit arrangement with IMH
whereby ICH agreed to advance to IMH up to maximum amount of $15.0 million.
The agreement expired on August 8, 1998. Advances under the revolving
credit arrangement were at an interest rate and maturity determined at the
time of each advance with interest and principal paid monthly. As of June
30, 1998 and December 31, 1997, there were no amounts outstanding under the
credit arrangement. Interest income recorded by ICH for the six months
ended June 30, 1998 and the Commencement Period related to such advances to
IMH was approximately $203,000 and none, respectively.
In August 1997, ICH entered into a revolving credit arrangement with IMH
whereby IMH agreed to advance to ICH up to maximum amount of $15.0 million.
The agreement expired on August 8, 1998. Advances under the revolving
credit arrangement were at an interest rate and maturity determined at the
time of each advance with interest and principal paid monthly. As of June
30, 1998 and December 31, 1997, ICH's outstanding borrowings under the
credit arrangement were none and $9.1 million, respectively. Interest
expense recorded by ICH related to such borrowings from IMH for the six
months ended June 30, 1998 and the Commencement Period was approximately
$43,000 and none respectively.
ICCC has entered into warehouse line agreements with ICH which provide up
to an aggregate of $900.0 million to finance ICCC's operations as needed.
Terms of the warehouse line agreements require that the Commercial
Mortgages be held by an independent third party custodian, which gives the
Company the ability to borrow against the collateral as a percentage of the
fair market value of the Commercial Mortgages. The borrowing rates on the
warehouse line agreements are at the prime rate which was 8.50% at June 30,
1998. The margins on the warehouse line agreements are up to 90% of the
fair market value of the collateral. Management believes that the warehouse
line agreements will be sufficient to handle the Company's liquidity needs.
As of June 30, 1998 and December 31,1997, amounts outstanding on ICCC's
warehouse line agreements with ICH were $71.7 million and $95.7 million,
respectively.
<PAGE>
ICCC has entered into an uncommitted warehouse line agreement with IMH to
provide financing as needed. The margins on the warehouse line agreement
are at 8% of the fair market value of the collateral. The interest rates on
the borrowings are indexed to the prime rate. As of June 30, 1998 and
December 31,1997, outstanding amounts on the warehouse line agreement were
$6.4 million and $8.5 million, respectively.
ICH has entered into a line of credit with Imperial Bank to borrow up to
$10.0 million dollars for general working capital purposes at the prime
rate plus .25%. As of June 30, 1998 there were no borrowings outstanding on
the line.
In June 1998, the Company raised net proceeds of $29.1 million (after
underwriting discounts and before offering expenses) from a public offering
of 2,000,000 shares of common stock at a price of $15.3125 per share.
Underwriting discount and commissions were $1.5 million and other total
expenses were approximately $600,000.
During the six months ended June 30, 1998 and the period from January 15,
1997 (commencement of operations) through December 31, 1997, ICCC sold zero
and $73.4 million, respectively, to third party investors and sold $325.6
million and $58.4 million, respectively, in principal of Commercial
Mortgages to ICH.
For the six months ended June 30, 1998 and the Commencement Period, net
cash used in operating activities was $(12.9) million and $944,000,
respectively. Net cash used in operating activities for the six months
ended June 30, 1998 was primarily the result of a net increase in due from
affiliates and due to affiliates balances of $14.4 million. Net cash
provided by operating activities for the Commencement Period was primarily
affected by $2.7 million in stock compensation expense related to the
issuance of 300,000 shares of ICH Common Stock.
For the six months ended June 30, 1998 and the Commencement Period, net
cash used in investing activities was $286.9 million and $58.5 million,
respectively. Net cash used in investing activities for the six months
ended June 30, 1998 was primarily the result of a net increase in
Commercial Mortgages held-for-investment of $304.6 million. Net cash used
in investing activities for the Commencement Period was primarily the
result of a net increase in finance receivables of $31.2 million.
For the six months ended June 30, 1998 and the Commencement Period, net
cash provided by financing activities was $296.8 million and $69.2 million,
respectively. Net cash provided by financing activities for the six months
ended June 30, 1998 and the Commencement Period was primarily the result of
an increase in net borrowings on warehouse line and reverse repurchase
agreements of $268.1 million and $37.9 million, respectively. Net cash
provided by financing activities for the Commencement Period was also
affected by the issuance of promissory notes of $15.0 million.
Inflation
The Financial Statements and Notes thereto presented herein have been
prepared in accordance with GAAP, which require the measurement of
financial position and operating results in terms of historical dollars
without considering the changes in the relative purchasing power of money
over time due to inflation. The impact of inflation is reflected in the
increased costs of the Company's operations. Unlike industrial companies,
nearly all of the assets and liabilities of the Company's operations are
monetary in nature. As a result, interest rates have a greater impact on
the Company's operations' performance than do the effects of general levels
of inflation. Inflation affects the Company's operations primarily through
its effect on interest rates, since interest rates normally increase during
periods of high inflation and decrease during periods of low inflation.
During periods of increasing interest rates, demand for mortgage loans and
a borrower's ability to qualify for mortgage financing in a purchase
transaction may be adversely affected.
The Company's operations may also be affected in a declining interest rate
environment which, generally, results in increased prepayments through loan
payoffs. Accelerated prepayments have the effect of decreasing the fair
market value of certain related investment securities which contain an
interest component and increasing the fair market value of subordinate
securities with only a principal component.
<PAGE>
Year 2000 Compliance
The Company is currently in the process of evaluating its information
technology infrastructure for the Year 2000 ("Y2000") compliance. The
Company has identified both Information Technology ("IT") systems and
non-IT systems and contacted vendors in regards to this issue. In regards
to IT systems, the Company plans to upgrade software applications where
possible or replace existing systems if required. Regarding non-IT systems,
workstations and fileservers are currently being tested and software that
is non-compliant with Y2000 is being replaced. Acquisitions of workstations
and fileservers are compliant with Y2000. Management has approved a
proposal to bring its telecommunications system into Y2000 compliance
during 1998. All new workstations are being internally tagged as being
compliant with Y2000. The Company expects to be Y2000 compliant by the end
of the first quarter of 1999. The Company does not believe that the cost to
modify its information technology infrastructure to be material to its
financial condition or results of operations, nor does the Company
anticipate any material disruption of its operations as a result of any
failure by the Company to be compliant. However, there can be no assurance
that there will not be a delay in, or increased costs associated with, the
need to address the Year 2000 issue. The Company also relies, directly and
indirectly, on other business such as third party service providers,
creditors and financial organizations and governmental entities. Even if
the Company's computer systems are not materially adversely affected by the
Year 2000 issue, the Company's business and operations could be materially
adversely affected by disruptions in the operations of the enterprises with
which the Company interacts.
Transactions with Related Parties
RAI Advisors, LLC ("RAI"), an affiliated company of IMH, has contracted
with Stephan Peers, a Director of IMH and ICH, to perform various
consulting services as an independent contractor for the benefit of IMH,
ICH, or any of their subsidiaries or affiliates (the "Impac Companies").
All costs associated with the consulting arrangement with Mr. Peers will be
charged by RAI proportionately to the appropriate Impac Company based upon
time spent.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5: OTHER INFORMATION
Stockholder Proposals
Stockholders are hereby notified that if they wish a proposal to be
included in the Company's Proxy Statement and form of proxy relating to the
1999 annual meeting of stockholders, they must deliver a written copy of
their proposal no later than February 15, 1999. Proposals must comply with
the proxy rules relating to stockholder proposals, in particular Rule 14a-8
under the Securities Exchange Act of 1934 (the "Exchange Act"), in order to
be included in the Company's proxy materials. Stockholders who wish to
submit a proposal for consideration at the Company's 1999 annual meeting of
stockholders, but who do not wish to submit the proposal for inclusion in
the Company's proxy statement pursuant to Rule 14a-8 under the Exchange
Act, must, in accordance with the Company's bylaws, deliver a copy of their
proposal no later than the close of business on May 24, 1999 nor earlier
than April 24, 1999. In either case, proposals should be delivered to 20371
Irvine Avenue, Santa Ana Heights, California 92707, Attention: Secretary.
To avoid controversy and establish timely receipt by the Company, it is
suggested that stockholders send their proposals by certified mail return
receipt requested.
Redesignation of Class A Preferred Stock
On May 8, 1998, the Company amended its Charter reclassifying 4,000,000
shares of Convertible Class A Preferred Stock to Preferred Stock, thereby,
increasing the authorized amount of Preferred Stock to 10,000,000 shares.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
3.1(c) Articles of Amendment of Registrant (incorporated by
reference herein to exhibit 3.1(c) of Amendment No. 1 to the
Registrant's Registration Statement on Form S-11 (File No.
333-52231) filed June 1, 1998.)
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
IMPAC COMMERCIAL HOLDINGS, INC.
By: /s/ Richard J. Johnson
Richard J. Johnson
Executive Vice President
and Chief Financial Officer
Date: August 12, 1998
<PAGE>
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