<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[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 000-23089
IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
(Exact name of registrant as specified in its charter)
MARYLAND
(State or other jurisdiction of incorporation or organization)
95-4648345
(I.R.S. Employer Identification No.)
11601 WILSHIRE BLVD., SUITE 2080
LOS ANGELES, CA 90025
(Address of principal executive offices) (Zip Code)
(310) 231-1280
(Registrant's telephone number, including area code)
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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, $0.0001 par value - 34,500,000 shares as of July 31, 1998
1
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IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Interim Financial Statements
Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997 3
Consolidated Statements of Earnings for the three and six months ended June 30, 1998 4
Consolidated Statement of Cash Flows for the six months ended June 30, 1998 5
Consolidated Statement of Changes in Stockholders' Equity and Comprehensive Income for the six months
ended June 30, 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosure About Market Risk 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
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>
2
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IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and interest bearing deposits $ 5,169 $ 11,902
Repurchase agreements 0 148,711
Securities available-for-sale, at estimated fair value 64,916 59,321
Mortgage loans, net of allowance for loan losses ($1,827 and $1,727, respectively) 533,881 272,009
Accrued interest receivable 5,749 2,085
Real property, net of accumulated depreciation of $242 84,453 0
Other assets 1,517 1,109
---------------------------
Total Assets $695,685 $495,137
===========================
LIABILITIES
Dividends payable $ 9,660 $ 4,485
Accrued expenses, payables and other liabilities, including amounts due
to affiliates of $1,408 and $7,330, respectively 5,178 10,950
Borrowings under secured warehouse facility 167,000 0
Mortgage loans secured by real property 34,580 0
---------------------------
Total Liabilities 216,418 15,435
---------------------------
STOCKHOLDERS' EQUITY:
Common stock, par value $0.0001 per share.
Authorized 500,000,000 shares, 34,500,000 shares issued and outstanding 3 3
Additional paid-in capital 481,856 481,856
Accumulated other comprehensive income - unrealized gain on
securities available-for-sale 648 169
Dividends in excess of earnings (3,240) (2,326)
---------------------------
Total Stockholders' Equity 479,267 479,702
---------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $695,685 $495,137
===========================
</TABLE>
See accompanying notes to consolidated financial statements.
3
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IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1998
------------- -------------
<S> <C> <C>
INTEREST INCOME
Mortgage loans $ 10,158 $ 16,131
Repurchase agreements and interest bearing deposits 67 2,186
Securities available-for-sale 1,611 3,065
------------------------------
Total Interest Income 11,836 21,382
REAL PROPERTY RENTAL INCOME 993 993
------------------------------
Total Income 12,829 22,375
------------------------------
OPERATING EXPENSES
Management fees 1,365 2,565
Interest expense 1,034 1,034
Depreciation of real property 242 242
Real property operating expenses 214 214
Due diligence expenses 375 524
Provision for loan losses 100 100
Other 321 670
------------------------------
Total Expenses 3,651 5,349
------------------------------
NET EARNINGS 9,178 17,026
Dividends 9,660 17,940
------------------------------
Dividends in excess of earnings $ ( 482) $ ( 914)
==============================
EARNINGS PER SHARE
Basic $ 0.27 $ 0.49
Diluted 0.27 0.49
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 34,500,000 34,500,000
Effect of dilutive stock options 0 35,084
------------------------------
Diluted 34,500,000 34,535,084
==============================
</TABLE>
See accompanying notes to consolidated financial statements.
4
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IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1998
-------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 17,026
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization 280
Amortization of premium on mortgage loans 554
Amortization of discount on investment securities available-for-sale (3,065)
Provision for loan losses 100
Net change in:
Accrued interest receivable (3,664)
Other assets (446)
Other liabilities (5,771)
---------
Total Cash Provided by Operating Activities 5,014
---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available-for-sale (6,096)
Payments received on securities available-for-sale 4,044
Purchases of mortgage loans (300,651)
Principal reductions on mortgage loans 38,125
Purchase of real property, net of mortgage loans assumed (50,115)
---------
Total Cash Used for Investing Activities (314,693)
---------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (12,765)
Cash borrowings under secured warehouse facility 167,000
---------
Total Cash Provided by Financing Activities 154,235
---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (155,444)
Cash and cash equivalents at beginning of period 160,613
---------
Cash and cash equivalents at end of period $ 5,169
=========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITIES
Mortgage loans assumed upon real property purchases $ 34,580
=========
Cash paid for interest $ 733
=========
</TABLE>
See accompanying notes to consolidated financial statements.
5
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IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Accumulated
Additional Other Dividends in Total
Common Paid-In Comprehensive Excess of Stockholders' Comprehensive
Stock Capital Income Earnings Equity Income
----- ------- ------ -------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period $3 $481,856 $169 $ (2,326) $479,702
Change in unrealized gain on
securities available-for-sale 479 479 479
Net earnings 17,026 17,026 17,026
Dividends declared ($0.52 per
share) (17,940) (17,940)
--------------------------------------------------------------------------------------------
Balance at end of period $3 $481,856 $648 $ (3,240) $479,267 $17,505
============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
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IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. ORGANIZATION
Imperial Credit Commercial Mortgage Investment Corp. (the "Company") was
incorporated in Maryland on July 31, 1997 and was initially capitalized on such
date through the sale of 100 shares of its Common Stock, par value $0.0001 per
share (the "Common Stock"), for $2. On October 22, 1997, the Company commenced
its operations upon consummation of an initial public offering of 34,500,000
shares of its Common Stock, with gross proceeds of $513,857 and net proceeds to
the Company of $479,309 after discounts and costs. The Company acquires
mortgage loans, real property and interests in commercial mortgage-backed
securities ("CMBS"). Most of the Company's mortgage loans and all of the
Company's interests in CMBS were acquired from Imperial Credit Industries, Inc.
("Imperial Credit") and affiliates. The Company intends to operate so as to
qualify as a real estate investment trust ("REIT") under the requirements of the
Internal Revenue Code of 1986, as amended (the "Code").
The Company has entered into a management agreement (the "Management Agreement")
with Imperial Credit Commercial Asset Management Corp. (the "Manager"), a
wholly-owned subsidiary of Imperial Credit, under which the Manager advises the
Company on various aspects of its business and manages its day-to-day
operations, subject to the supervision of the Board of Directors of the Company.
Imperial Credit currently owns 3,070,000 shares (8.9%) of the Company's
outstanding common stock and the Manager has options to purchase an additional
1,691,250 shares at $15 per share, exercisable over a three year period. The
Manager is entitled to receive a base management fee of 1% per annum of the
first $1 billion of average invested assets, 0.75% of the next $250 million of
average invested assets, and 0.5% of average invested assets above $1.25
billion, payable quarterly. In addition, the Manager is entitled to a quarterly
incentive fee generally based on 25% of Funds From Operations, as adjusted, in
excess of certain defined levels of return, as fully set forth in the Management
Agreement. Only base management fees have been earned to date.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of the Company and its subsidiaries are
prepared in accordance with generally accepted accounting principles. All
material intercompany transactions have been eliminated in consolidation.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities as of the
date of the balance sheet and revenues and expenses for the period. Actual
results could differ from those estimates.
In management's opinion, the accompanying unaudited consolidated financial
statements of the Company and its subsidiaries contain all adjustments
(consisting of normal recurring adjustments) necessary to present fairly the
consolidated financial position of the Company and subsidiary at June 30, 1998
and their results of operations and cash flows for the three and/or six months
then ended. These unaudited financial statements have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission ("SEC") for interim financial statements and accordingly are not as
comprehensive as annual financial statements prepared in accordance with
generally accepted accounting principles. Various information and note
disclosure normally included in such annual financial statements have been
condensed or omitted. While management believes that the disclosures presented
herein are adequate to make the information not misleading, users are advised to
read the accompanying unaudited interim financial statements in conjunction with
the audited consolidated financial statements and notes included in the
Company's 1997 annual report on Form 10-K filed with the SEC on March 31, 1998.
Operating results for the period ended June 30, 1998 are not necessarily
indicative of the results that may be expected for any other interim periods or
the entire year ending December 31, 1998.
7
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Investment Securities
The Company classifies investment securities as held-to-maturity, available-for-
sale, and/or trading securities at the time of purchase based upon management's
intent and the Company's ability to hold the securities. Held-to-maturity
investment securities are reported at amortized cost, available-for-sale
securities are reported at fair value with unrealized gains and losses, net of
related income taxes, reported as a component of comprehensive income, and
trading securities are reported at fair value with unrealized gains and losses
reported in income. Discounts obtained or premiums paid on investment
securities are amortized to interest income over the estimated life of the
investment securities using the interest method.
Mortgage Loans Held For Investment
The Company purchases certain mortgage loans to be held as long-term
investments. Mortgage loans held for investment are recorded at cost at the
date of purchase. Premiums and discounts related to these loans are amortized
over their estimated lives using the interest method. Loans are continually
evaluated for collectibility and, if appropriate, loans may be placed on non-
accrual status. Loans are placed on non-accrual status generally after they
become 90 days past due, in which case previously accrued interest is reversed
from income. Future collections of interest are included in interest income or
applied to the loan balance based on an assessment of the likelihood that the
principal will be collected.
The Company maintains an allowance for loan losses on mortgage loans held for
investment at an amount which it believes is sufficient to provide adequate
protection against future losses in the mortgage loan portfolio. The allowance
for loan losses is determined primarily on the basis of management's judgment of
net loss potential, including specific allowances for known impaired loans and
other factors such as changes in the nature and volume of the portfolio, value
of the collateral and current economic conditions that may affect the borrowers'
ability to pay.
Real Property
Real property is recorded at cost. Included in such costs are acquisition costs
and certain direct capitalized costs, such as, legal fees, appraisal fees,
surveys, title insurance and other costs incurred during the diligence and
closing periods. Expenditures for ordinary maintenance and repairs are expensed
to operations as incurred. Significant renovations and improvements which
improve or extend the useful life of the assets are capitalized. Except for
amounts attributed to land, real property assets are depreciated over their
estimated useful lives using the straight-line method. The estimated useful
lives by asset category are:
<TABLE>
<S> <C>
Buildings 30 years
Building leasebacks 20 years
Leaseback improvements 10 years
</TABLE>
Income Taxes
The Company has elected to be taxed as a REIT under Sections 856 through 860 of
the Code. A REIT generally will not be subject to federal income taxation on
that portion of its income that qualifies as REIT taxable income to the extent
that it distributes at least 95% of its taxable income to its stockholders and
complies with certain other requirements. Accordingly, no provision has been
made for federal income taxes for the Company and its subsidiary in the
accompanying consolidated financial statements.
8
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Earnings Per Share
Basic earnings per share is computed on the basis of the weighted average number
of shares outstanding for the period. Diluted earnings per share is computed on
the basis of the weighted average number of shares and common equivalent shares
outstanding for the period. For purposes of diluted earnings per share, the
computation of the weighted average number of shares outstanding includes the
impact of the assumed exercise of the outstanding dilutive options to purchase
common stock and assumes that the proceeds from such issuance are used to
repurchase common shares at the average market price of the Company's common
stock for the period.
Reporting Comprehensive Income
The Company adopted Financial Accounting Standards Board Statement 130 ("FAS
130"), "Comprehensive Income: Financial Statement Presentation," during the
first quarter of 1998. Pursuant to FAS 130, standards have been established for
reporting and displaying comprehensive income and its components in a full set
of general-purpose financial statements. The Company has elected to adopt FAS
130 by including separate columns for comprehensive income and accumulated other
comprehensive income in the consolidated statement of changes in stockholders'
equity. The change in unrealized gain (loss) on securities available-for-sale
has been included in comprehensive income. Comprehensive income for the six
months ended June 30, 1998 aggregated $17,505 and was comprised of net income of
$17,026 and the increase in unrealized gain on securities available-for-sale of
$479. Comprehensive income for the three months ended June 30, 1998 aggregated
$9,352 and was comprised of net income of $9,178 and the increase in unrealized
gain on securities available-for-sale of $174.
3. INVESTMENT SECURITIES AVAILABLE-FOR-SALE
At June 30, 1998, the Company's investment securities available-for-sale
consisted of shares of a private equity REIT, subordinated securities
collateralized by commercial mortgages and interest only securities and certain
subordinated asset-backed notes issued by Franchise Mortgage Acceptance Company
("FMAC"), an affiliate of Imperial Credit. In general, subordinated classes and
interest only securities of a particular series of securities bear all losses
prior to the related senior classes. Such securities or investments may subject
the Company to credit, interest rate and/or prepayment risks.
The amortized cost and estimated fair value of investment securities available-
for-sale are summarized as follows:
<TABLE>
<CAPTION>
Balance at June 30, 1998
------------------------ Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Security Description Cost Gain Loss Value
- -------------------- ---- ---- ---- -----
<S> <C> <C> <C> <C>
CMBS interests:
Non-investment grade rated subordinated interests $34,709 $2,267 $ $36,976
Investment grade rated senior interest only interests 5,845 537 5,308
Non-investment grade rated subordinated interest only interests 6,268 859 5,409
Non-rated subordinated interest only interests 1,991 290 1,701
Other non-rated subordinated interests 4,336 67 4,403
---------------------------------------------
Total CMBS interests 53,149 2,334 1,686 53,797
Non-investment grade rated subordinated notes 6,119 6,119
Private equity REIT 5,000 5,000
---------------------------------------------
Total $64,268 $2,334 $1,686 $64,916
=============================================
</TABLE>
9
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<TABLE>
<CAPTION>
Balance at December 31, 1997
---------------------------- Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Security Description Cost Gain Loss Value
- -------------------- ---- ---- ---- -----
<S> <C> <C> <C> <C>
CMBS interests:
Non-investment grade rated subordinated interests $34,405 $1,411 $ 14 $35,802
Investment grade rated senior interest only interests 6,642 486 6,156
Non-investment grade rated subordinated interest only interests 6,645 532 6,113
Non-rated subordinated interest only interests 1,987 236 1,751
Other non-rated subordinated interests 4,473 26 4,499
---------------------------------------------
Total CMBS interests 54,152 1,437 1,268 54,321
Private equity REIT 5,000 5,000
---------------------------------------------
Total $59,152 $1,437 $1,268 $59,321
=============================================
</TABLE>
The Company's CMBS interests are secured by adjustable and fixed rate commercial
and multifamily mortgage loans. The yield to maturity on each security depends
on, among other things, the rate and timing of principal payments (including
prepayments, repurchases, defaults and liquidations), the pass-through rate and
interest rate fluctuations. The Company's interest in some of these securities
is subordinated so that, in the event of a loss, payments to senior certificate
holders will be made before the Company receives its payments. All of the
Company's CMBS interests were acquired from Imperial Credit and its wholly-owned
subsidiary, Southern Pacific Bank ("SPB"), the originator or purchaser of the
underlying mortgage loans.
The unamortized discount on investment securities available-for-sale was $29,168
and $28,211 at June 30, 1998 and December 31, 1997, respectively. There were no
sales of investment securities available-for-sale during the six-month period
ended June 30, 1998.
4. MORTGAGE LOANS
Mortgage loans held for investment include various types of adjustable-rate and
fixed-rate loans secured by mortgages on commercial and multifamily real estate
properties.
As of June 30, 1998 and December 31, 1997, the Company's mortgage loan portfolio
consisted of the following:
<TABLE>
<CAPTION>
As of June 30, 1998 As of December 31, 1997
---------------------- -----------------------
Number Amount Number Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Multifamily loans 1,018 $289,891 681 $171,312
Commercial loans 399 212,845 191 90,050
Construction loan participation 1 18,000 0 0
---------------------------------------------------------
Total principal 1,418 520,736 872 261,362
===== ===
Unamortized premium 15,642 12,374
Unearned loan fees (670) 0
Allowance for loan losses (1,827) (1,727)
-------- --------
Net carrying amount $533,881 $272,009
======== ========
Principal balance of SPB loans 1,029 $378,891 568 $196,801
Principal balance of FMAC loans 67 51,735 2 6,182
---------------------------------------------------------
Total principal balance of loans
acquired from affiliates of Manager 1,096 $430,626 570 $202,983
=========================================================
</TABLE>
10
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5. REAL PROPERTY
In May 1998, the Company acquired (i) the Atrium Tower, a 149,000 square foot
office complex in Las Vegas, Nevada, (ii) the Mission Marketplace, a 343,000
square foot shopping center in Oceanside, California and (iii) fourteen
properties in Arizona, Texas and New Mexico subject to "triple-net" leases with
the Ugly Duckling Corporation. In June 1998, the Company acquired The Terraces,
a 178,000 square foot shopping center in Palos Verdes, California. These
acquisitions resulted in the Company owning $84,453 of real property, net of
accumulated depreciation, as of June 30, 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Dollar amounts herein are expressed in thousands, other than per share amounts.
The Company was incorporated in Maryland on July 31, 1997 for the purpose of
investing primarily in mortgage loans, real property and CMBS interests. The
Company expects to generate income for distribution to its stockholders
primarily from the net earnings derived from its investments in real estate
related assets. The Company intends to operate in a manner that permits it to
maintain its status as a REIT for federal income tax purposes.
On October 22, 1997, the Company completed its initial public offering of
34,500,000 common shares, with gross proceeds of $513,857 and net proceeds to
the Company of $479,309. As of June 30, 1998, the Company's assets included
$533,881 of mortgage loans, $84,453 of real property and $64,916 of securities
available-for-sale. Secured borrowings at June 30, 1998 aggregated $201,580 and
the Company continues the process of leveraging its investments.
For the three months ended June 30, 1998, total income of $12,829 resulted in
net earnings of $9,178, $0.27 per share of common stock (basic and diluted).
During the six months ended June 30, 1998, total income of $22,375 resulted in
net earnings of $17,026, $0.49 per share of common stock (basic and diluted).
FUNDS FROM OPERATIONS ("FFO")
Most industry analysts, including the Company, consider FFO an appropriate
supplementary measure of operating performance of a REIT. In general, FFO
adjusts net earnings for non-cash charges such as real property depreciation,
certain amortization expenses and most non-recurring gains and losses. However,
FFO does not represent cash provided by operating activities in accordance with
GAAP and should not be considered an alternative to net earnings as an
indication of the results of the Company's performance or to cash flow as a
measure of liquidity.
In 1995, the National Association of Real Estate Investment Trusts ("NAREIT")
established new guidelines clarifying its definition of FFO and requested that
REITs adopt this new definition beginning in 1996. The Company computes FFO in
accordance with the definition recommended by NAREIT.
For the three and six months ended June 30, 1998, the Company's FFO was $9,420
($0.27 per share) and $17,268 ($0.50 per share), respectively. FFO was computed
as follows:
<TABLE>
<CAPTION>
Three Months Six Months
------------ ----------
<S> <C> <C>
Net earnings $9,178 $17,026
Add: Depreciation of real property 242 242
------ -------
FFO $9,420 $17,268
====== =======
</TABLE>
RESULTS OF OPERATIONS
DIVIDENDS DECLARED AND DIVIDENDS IN EXCESS OF EARNINGS. The Company declared a
dividend on March 24, 1998 of $8,280, $0.24 per share of common stock, to
stockholders of record on March 31, 1998 which was paid on April 14, 1998. This
dividend covered the Company's remaining portion of undistributed taxable income
for 1997 and the three-
11
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month period of operations ended March 31, 1998. The Company declared a dividend
on June 25, 1998 of $9,660, $0.28 per share, to stockholders of record on July
9, 1998 which was paid on July 23, 1998. This dividend covered the Company's
three-month period of operations ended June 30, 1998 and was accrued at June 30,
1998. As a result of these dividends the Company incurred dividends in excess of
earnings of $482 for the three months ended June 30, 1998 and $914 for the six
months ended June 30, 1998.
INTEREST INCOME. The following table sets forth information regarding the total
amount of income from interest-earning assets and the resultant average yields.
Information is based on daily average balances during the reported periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1998 SIX MONTHS ENDED JUNE 30, 1998
--------------------------------- ---------------------------------
Interest Average Annualized Interest Average Annualized
Income Balance Yield Income Balance Yield
------ ------- ----- ------ ------- -----
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans $ 9,340 $444,161 8.41% $15,313 $358,771 8.54%
Repurchase agreements and interest
bearing deposits 67 5,726 4.68% 2,186 79,138 5.52%
Securities available-for-sale 1,611 59,631 10.81% 3,065 57,162 10.72%
------- -------- ------- --------
Total 11,018 $509,518 8.65% 20,564 $495,071 8.31%
======== ========
Additional interest from FMAC call 818 818
------- -------
Total $11,836 $21,382
======= =======
</TABLE>
The additional interest from the FMAC call is non-recurring income.
OPERATING EXPENSES. Management fees of $1,365 and $2,565 for the three and six
months ended June 30, 1998 are comprised solely of the 1% (per annum) base
management fee payable to the Manager for the periods (as provided pursuant to
the management agreement between the Manager and the Company). The Manager
earned no incentive management fee for such periods. The Company incurred due
diligence and asset acquisition expenses of $375 and $524 during the respective
periods. Other expenses are comprised of interest, insurance premiums,
directors' fees, occupancy costs, investor relations expenses, professional fees
and other miscellaneous expenses. The average outstanding borrowings for the
three and six months ended June 30, 1998 aggregated $29,853 and $59,706,
respectively, with interest expense of $1,034 for both periods, resulting in an
average interest rate of 6.92%.
BALANCE SHEET CHANGES
GENERAL. During the six months ended June 30, 1998, total assets increased by
$200,548. This increase was comprised of $265,536 of mortgage loans and accrued
interest, $5,595 of securities available-for-sale, $84,453 of real property, and
$408 of other assets offset by a decrease in cash and interest bearing deposits
of $6,733 and in repurchase agreements of $148,711. Total liabilities increased
by $200,983 during the six months ended June 30, 1998 as a result of new
borrowings under the secured warehouse facility of $167,000, mortgage loans
assumed upon real property acquisitions of $34,580, an increase in declared but
unpaid dividends of $5,175, an increase in unpaid management fees of $428, and
an increase in interest payable of $313, offset by a reduction of $6,385 in
amounts due affiliate for mortgage loans acquired and reductions in various
other payables of $128.
In March 1998, the Company acquired 260 mortgage loans for $99,363 from SPB, 24
mortgage loans for $17,735 from FMAC and asset-backed notes for $6,096 issued by
FMAC as part of a securitization. Also in March 1998, the Company acquired from
unrelated third parties participations in two tranches of a construction loan
facility for the redevelopment of a major hotel and casino in Las Vegas for
$18,000, four mortgage loans for $12,500 in connection with certain acquisitions
made by On Stage Entertainment, Inc. and 22 other mortgage loans for $2,894.
During the quarter ended June 30, 1998, the Company acquired 220 mortgage loans
for $94,362 from SPB and 53 mortgage loans for $55,366 from FMAC. Also in June
1998, FMAC exercised a call right and repurchased $20,700 of these loans. In
June, the Company funded $1,100 under a previously announced $20 million first
mortgage loan facility provided to On Stage Entertainment, Inc.
12
<PAGE>
In May 1998, the Company acquired (i) the Atrium Tower, a 149,000 square foot
office complex in Las Vegas, Nevada, (ii) the Mission Marketplace, a 343,000
square foot shopping center in Oceanside, California and (iii) fourteen
properties in Arizona, Texas and New Mexico subject to "triple-net" leases with
the Ugly Duckling Corporation. In June 1998, the Company acquired The Terraces,
a 178,000 square foot shopping center in Palos Verdes, California. These
acquisitions resulted in the Company owning $84,453 of real property, net of
accumulated depreciation, as of June 30, 1998.
The Company borrowed $167,000 under its secured warehouse line of credit in
conjunction with its acquisitions during the second quarter of 1998, and the
real property assets were acquired by the Company subject to $34,580 of existing
first mortgage loans.
CASH AND INTEREST BEARING DEPOSITS. At June 30, 1998, the Company's total cash
and interest bearing deposits of $5,169 were comprised entirely of cash and
interest bearing deposits, a decrease of $6,733 from December 31, 1997.
REPURCHASE AGREEMENTS. The Company's repurchase agreements of $148,711 at the
end of last year were liquidated during the first quarter for investment
acquisitions.
The Company earned interest income of $2,186 during the six months ended June
30, 1998 from its investments in interest bearing deposits and repurchase
agreements. Of such income, $2,077 was derived from investments in repurchase
agreements which is not expected to recur.
SECURITIES AVAILABLE-FOR-SALE
The increase in securities available-for-sale of $5,595 during the six months
ended June 30, 1998 is due to purchases of $6,096, discount amortization of
$3,065 and unrealized gains (included in comprehensive income) of $479, offset
by $4,044 of interest payments. The Company acquired all of its CMBS interests
from Imperial Credit or its affiliates and the subordinated notes were obtained
through an FMAC asset-backed securitization.
MORTGAGE LOANS.
At June 30, 1998, 13 loans in the aggregate amount of $2,905 were more than
three months delinquent as compared to one loan in the amount of $116 at
December 31, 1997. At June 30, 1998, these over 90-day delinquent loans were
placed on non-accrual status and approximately $175 of previously accrued
interest income was reversed. Additions to the allowance for loan losses
aggregated $100 for the six months ended June 30, 1998.
The Company's mortgage loans were primarily acquired from entities affiliated
with the Manager, a wholly-owned subsidiary of Imperial Credit. The principal
balance of mortgage loans at June 30, 1998 included $430,626 acquired from SPB
and FMAC and $90,110 acquired from unrelated third parties or originated by the
Company. At December 31, 1997, $202,983 principal balance of mortgage loans had
been acquired from SPB and FMAC and $58,379 principal balance had been acquired
from unrelated third parties.
The increase in mortgage loans during the six months ended June 30, 1998 is
attributable to additional investments of $300,651 offset by principal
repayments, including the FMAC call, of $38,125, amortization of premium of $554
and the provision for loan losses of $100. The investments made during the six
months ended June 30, 1998 include 557 mortgage loans acquired from SPB and FMAC
for $266,827 and 28 mortgage loans and a construction loan participation
acquired from unrelated third parties for $34,494 less unearned loan fees of
$670.
BORROWINGS UNDER SECURED WAREHOUSE FACILITY. As of June 30, 1998, borrowings
under the Company's $500,000 warehouse line of credit were $167,000. The line
of credit is secured by approximately $200,000 of mortgage loans acquired from
SPB and $53,797 of CMBS interests, generally bears interest at 90 basis points
over one-month LIBOR and matures on March 29, 1999. Such borrowings were
utilized by the Company to acquire real property and mortgage loans.
MORTGAGE LOANS SECURED BY REAL PROPERTY. As of June 30, 1998, mortgage loans
assumed upon real property acquisitions were $34,580. These loans are secured
by the Company's shopping centers in Oceanside and Palos Verdes, CA with a
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<PAGE>
cost of $49,699, bear interest at effective rates ranging from 7.4% to 7.8% and
have final maturity dates in 2012 and 2027.
STOCKHOLDERS' EQUITY. Stockholders' equity decreased by $435 during the six
months ended June 30, 1998 to $479,267. The decrease was attributable to
dividends in excess of earnings of $914 offset by the increase in unrealized
gains on securities available-for-sale of $479 (included in accumulated other
comprehensive income).
CAPITAL RESOURCES AND LIQUIDITY
Liquidity is a measurement of the Company's ability to meet potential cash
requirements, including ongoing commitments to fund acquisitions and
investments, repay borrowings and for other general business purposes. The
primary sources of funds for liquidity consist of secured borrowings and
principal payments and repayments at maturity on loans and securities.
The Company's operating activities provided cash of $5,014 during the six months
ended June 30, 1998. During the six-month period, cash resources from operating
activities were provided primarily by net earnings.
The Company's investment activities used cash totaling $314,693 during the six-
month period. During this period, cash flows from investment activities were
used primarily to purchase mortgage loans, real property and securities
available-for-sale.
The Company's financing activities provided $154,235 in cash during the six-
month period after payment of dividends related to 1997 and the first quarter of
1998.
The Company's $500,000 warehouse line of credit with Morgan Guaranty Trust
Company of New York provides a source of funds to the Company provided that
adequate collateral is posted with the custodian and accepted by the custodian
and the lender. Based on mortgage loans acquired from SPB and pledged as
collateral and draw downs made as of June 30, 1998, the Company had $41,711 of
available credit under the line as of June 30, 1998. As the Company posts
additional mortgage loans as collateral under the line, the amount of available
credit should increase. The Company currently does not have sufficient assets
to post as collateral in order to access the full $500,000. In addition, the
warehouse line expires on March 29, 1999, subject to renewal at the discretion
of the lender. There can be no assurance that the Company will post sufficient
acceptable collateral, that the line will be extended or that adequate funds
will be available to the Company under this line for sufficient time periods to
meet the Company's liquidity needs.
The Company's $25,000 reverse repurchase loan facility with Merrill Lynch
Mortgage Capital Inc. has been collateralized by the pledge of an $18,000
construction loan participation. As of June 30, 1998, no amounts were
outstanding and $14,400 was available under this facility.
The Company entered into a forward interest rate swap effective May 15, 1998
covering an amortizing notional balance of $77,467 over a ten-year period.
Under the swap, the Company receives monthly payments of interest based on one-
month LIBOR and remits monthly payments based on a fixed interest rate of
approximately 5.99%. As of June 30, 1998, the approximate net present value
cost of this swap was $450 and the notional balance was $76,527. There can be
no assurance that this swap will adequately protect the Company's exposure to
interest rate risk.
The Company currently is engaged in due diligence review and analysis with
respect to a variety of investment opportunities and is continuing to leverage
its investments. In addition, on July 29, 1998 the Company's Board of Directors
authorized the Company to purchase up to 3,000,000 shares of its common stock at
prices and at such times as may be deemed appropriate. As a result, the
Company's liquidity and capital resources could be materially adversely
affected. Furthermore, as noted above, there can be no assurance that the
Company will have adequate funds available to take advantage of all investment
opportunities that become available. At June 30, 1998, the Company has
outstanding commitments to fund mortgage loans for approximately $30,000.
14
<PAGE>
YEAR 2000
The year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. The Company recognizes
the need to ensure its operations will not be adversely impacted by year 2000
software failures. Since the Company's systems are new and are based on
networked personal computers, management does not believe that year 2000
compliance will present any significant problems for the Company's internal
computer systems. The Company is, however, currently evaluating the risks of
year 2000 issues on companies which are now servicing the Company's mortgage
loan portfolio and companies involved in trust, administration and servicing
activities in connection with the Company's CMBS interests. The Company also
will consider year 2000 issues in connection with evaluating companies which may
be engaged in the future to provide servicing, trust, administration or other
services in connection with the Company's investments. The Company could be
impacted adversely by the failure of any of its service providers to solve
applicable year 2000 issues.
MARKET CONDITIONS
Over the past several months, the competitive conditions in some of the markets
in which the Company operates have increased due to the significant amount of
new capital available in the marketplace. This competition is particularly
evident in the subordinated CMBS market. New CMBS issuances have reduced
subordination levels with yield spreads declining. Although the Company
believes that investments in certain subordinated CMBS still may provide
attractive risk adjusted returns, the Company intends to invest cautiously in
this market segment. The Company intends to take advantage of the reduced CMBS
subordination levels when it securitizes its pools of commercial and multifamily
mortgage loans, thereby reducing its borrowing costs.
The current low level of long-term interest rates has hindered the Company's
ability to continue to obtain whole mortgage loans at unleveraged yields and in
volumes consistent with market conditions that existed at the time of the
company's initial public offering. The Company may not be able to continue to
acquire mortgage loans from SPB at volume and yield levels consistent with
previous acquisitions. The Company may acquire other assets, such as mezzanine
loans and other real estate related assets, in order to satisfy its investment
guidelines.
FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED HEREIN ARE "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, SECTION 27A OF
THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES ACT OF
1934, AS AMENDED. THESE FORWARD-LOOKING STATEMENTS MAY BE IDENTIFIED BY
REFERENCE TO A FUTURE PERIOD(S) OR BY THE USE OF FORWARD-LOOKING TERMINOLOGY,
SUCH AS "MAY," "WILL," "INTEND," "SHOULD," "EXPECT," "ANTICIPATE," "ESTIMATE" OR
"CONTINUE" OR THE NEGATIVES THEREOF OR OTHER COMPARABLE TERMINOLOGY. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH
FORWARD-LOOKING STATEMENTS DUE TO A VARIETY OF FACTORS, INCLUDING, BUT NOT
LIMITED TO, CHANGES IN NATIONAL, REGIONAL OR LOCAL ECONOMIC ENVIRONMENTS,
COMPETITIVE PRODUCTS AND PRICING, GOVERNMENT FISCAL AND MONETARY POLICIES,
CHANGES IN PREVAILING INTEREST RATES, THE COURSE OF NEGOTIATIONS, THE
FULFILLMENT OF CONTRACTUAL CONDITIONS, FACTORS INHERENT TO THE VALUATION AND
PRICING OF INTERESTS IN COMMERCIAL MORTGAGE-BACKED SECURITIES, CREDIT RISK
MANAGEMENT, ASSET/LIABILITY MANAGEMENT, THE FINANCIAL AND SECURITIES MARKETS,
THE AVAILABILITY OF AND COSTS ASSOCIATED WITH SOURCES OF LIQUIDITY, AND OTHER
FACTORS GENERALLY UNDERSTOOD TO AFFECT THE REAL ESTATE ACQUISITION, MORTGAGE AND
LEASING MARKETS AND SECURITY INVESTMENTS, THE OTHER RISKS DETAILED IN THE
COMPANY'S REGISTRATION STATEMENT ON FORM S-11, AS AMENDED, FILED WITH THE SEC,
THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FILED WITH THE SEC ON NOVEMBER 26,
1997, THE COMPANY'S ANNUAL REPORT ON FORM 10-K FILED WITH THE SEC ON MARCH 31,
1998 AND OTHER FILINGS MADE BY THE COMPANY WITH THE SEC. THE COMPANY DOES NOT
UNDERTAKE, AND SPECIFICALLY DISCLAIMS ANY OBLIGATION, TO PUBLICLY RELEASE THE
RESULTS OF ANY REVISIONS WHICH MAY BE MADE TO ANY FORWARD-LOOKING STATEMENTS TO
REFLECT THE OCCURRENCE OF
15
<PAGE>
ANTICIPATED OR UNANTICIPATED EVENTS OR CIRCUMSTANCES AFTER THE DATE OF SUCH
STATEMENTS.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As of June 30, 1998, the Company had $167,000 in outstanding borrowings under
the warehouse line. The Company is subject to exposure for fluctuations in
interest rates under the warehouse line. In addition, adverse changes in
interest rates could negatively impact the value of the Company's portfolio of
mortgage loans and investments in CMBS securities as well as the levels of
interest income to be derived from these assets.
On April 30, 1998, the Company completed a forward interest rate swap
transaction in anticipation of future borrowings whereby the Company will
receive monthly payments of interest based on one-month LIBOR and will remit
monthly payments based on a fixed interest rate of approximately 5.99%. The
interest payments are computed on the notional balance of $77,467 which declines
over a ten year period. There can be no assurance that the swap will adequately
protect the Company's exposure to interest rate risk on borrowings outstanding
at June 30, 1998.
The Company's CMBS interests are secured by adjustable and fixed interest rate
commercial and multifamily mortgage loans. The yield to maturity on each
security depends on, among other things, the price at which such security is
purchased, the rate and timing of principal payments (including prepayments,
repurchases, defaults and liquidations), the pass-through rate and interest rate
fluctuations. The Company's interest in some of these securities is
subordinated so that, in the event of a loss, payments to senior certificate
holders will be made before the Company receives its payments. Changes in
interest rates could impact prepayment rates as well as default rates, which in
turn would impact the value and yield to maturity of the Company's CMBS
interests. While the Company has invested in various classes of CMBS interests,
including interest only interests, in order to diversify its exposure to such
uncertainties, there can be no assurance that the Company's strategy will be
successful.
The Company's mortgage loan portfolio includes fixed and variable interest rate
commercial and multifamily mortgage loans. Fluctuations in interest rates may
affect prepayment rates and default rates, notwithstanding any existing
prepayment penalty or yield maintenance provisions, and such rate changes would
in turn impact the value and yield to maturity of the Company's portfolio of
mortgage loans. While the Company has attempted to mitigate such exposures by
diversifying its loan portfolio, there can be no assurance that this strategy
will enable the Company to avoid adverse consequences in the future. In
addition, the current low level of long-term interest rates has resulted in
lower unleveraged yields on recently acquired mortgage loan portfolios.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
16
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 4, 1998 the Company held its Annual Meeting of Stockholders at which the
members of the Board of Directors were elected to serve for the ensuing year and
the appointment of KPMG Peat Marwick LLP as the independent accountants of the
Company for 1998 was ratified. The members of the Board of Directors so elected
were H. Wayne Snavely, Chairman, Kevin E. Villani, Vice Chairman, Mark S.
Karlan, President and Chief Executive Officer, Patric H. Hendershott, Joseph A.
Jaconi, Jr., Louis H. Masotti and Kenneth A. Munkacy. Over 99% of the votes
cast at the meeting were voted in favor of each of the directors and KPMG Peat
Marwick LLP. Over 72% of the outstanding shares were voted at the meeting and
constituted a quorum.
ITEM 5. OTHER INFORMATION
Stockholders' proposals intended to be presented at the Company's next annual
meeting of stockholders to be held in 1999 must be received at the Company's
principal executive offices no later than December 17, 1998, whether or not they
are to be considered for inclusion in the proxy statement and form of proxy
relating to that meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 27 - Financial Data Schedule
(b) REPORTS ON FORM 8-K
A Form 8-K dated April 3, 1998 was filed with the Commission with the Company's
press release covering investments made and a warehouse line of credit entered
into during the quarter ended March 31, 1998.
A Form 8-K dated May 11, 1998 was filed with the Commission with the Company's
press release covering earnings for the period ended March 31, 1998.
A Form 8-K dated June 8, 1998 was filed with the Commission with the Company's
press release covering new investments and commitment made since April 1, 1998.
A Form 8-K dated June 29, 1998 was filed with the Commission with the Company's
press release covering the dividend declared during the second quarter of 1998.
17
<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.
IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
Date: August 14, 1998
/s/ Mark S. Karlan
- ------------------
MARK S. KARLAN, President and Chief Executive Officer
(Principal Executive Officer)
/s/ Michael Meltzer
- -------------------
MICHAEL MELTZER, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
18
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------------------
<C> <S>
27 Financial Data Schedule
</TABLE>
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 5,169 5,169
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 84,695 84,695
<DEPRECIATION> 242 242
<TOTAL-ASSETS> 695,685 695,685
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
0 0
<COMMON> 3 3
<OTHER-SE> 479,264 479,264
<TOTAL-LIABILITY-AND-EQUITY> 695,685 695,685
<SALES> 0 0
<TOTAL-REVENUES> 12,829 22,375
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 2,617 4,315
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,034 1,034
<INCOME-PRETAX> 9,178 17,026
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 9,178 17,026
<EPS-PRIMARY> .27 .49
<EPS-DILUTED> .27 .49
</TABLE>
