<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 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 - 28,500,000 shares as of October 31, 1998
1
<PAGE>
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 September 30, 1998 and December 31, 1997 3
Consolidated Statements of Earnings for the three and nine months ended September 30, 1998 4
Consolidated Statement of Cash Flows for the nine months ended September 30, 1998 5
Consolidated Statement of Changes in Stockholders' Equity and Comprehensive Income for the nine
months ended September 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 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 20
</TABLE>
The Company's quarterly report on Form 10-Q for the quarter ended September 30,
1998 is being amended hereby to clarify certain disclosures made as of September
30, 1998.
2
<PAGE>
IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and interest bearing deposits $ 16,680 $ 11,902
Repurchase agreements 0 148,711
Mortgage loans, net of allowance for loan losses ($5,027 and $1,727, respectively) 579,920 272,009
Real property, net of accumulated depreciation of $962 in 1998 108,271 0
Securities available-for-sale, at estimated fair value 60,074 59,321
Accrued interest receivable 5,974 2,085
Other assets 5,652 1,109
----------------------------
TOTAL ASSETS $776,571 $495,137
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Dividends payable $ 9,603 $ 4,485
Borrowings under secured warehouse facility 275,000 0
Borrowings under repurchase facility 12,400 0
Borrowings under secured bank loan 3,573 0
Mortgage loans secured by real property 48,729 0
Accrued expenses, payables and other liabilities, including amounts due
to affiliates of $1,969 and $7,330, respectively 7,352 10,950
----------------------------
Total Liabilities 356,657 15,435
----------------------------
Stockholders' Equity:
Common stock, par value $0.0001 per share.
Authorized 500,000,000 shares, 34,500,000 shares issued 3 3
Additional paid-in capital 481,856 481,856
Accumulated other comprehensive income 616 169
Dividends in excess of earnings (10,665) (2,326)
----------------------------
Total 471,810 479,702
Less cost of 5,400,000 shares held in treasury in 1998 (51,896) 0
----------------------------
Total Stockholders' Equity 419,914 479,702
----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $776,571 $495,137
============================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1998
---- ----
<S> <C> <C>
INTEREST INCOME
Mortgage loans $ 12,223 $ 28,354
Repurchase agreements and interest bearing deposits 98 2,284
Securities available-for-sale 1,566 4,631
------------------------------
TOTAL INTEREST INCOME 13,887 35,269
Real Property Rental Income 3,274 4,266
------------------------------
TOTAL INCOME 17,161 39,535
------------------------------
OPERATING EXPENSES
Management fees 1,818 4,383
Interest expense 4,441 5,475
Provision for loan losses 3,200 3,300
Write-down of securities available-for-sale 3,233 3,233
Depreciation of real property 720 962
Real property operating expenses 800 1,014
Due diligence expenses 343 866
Other 428 1,098
------------------------------
TOTAL EXPENSES 14,983 20,331
------------------------------
NET EARNINGS 2,178 19,204
Dividends 9,603 27,543
------------------------------
DIVIDENDS IN EXCESS OF EARNINGS $ (7,425) $ (8,339)
==============================
EARNINGS PER SHARE
Basic $0.07 $0.57
Diluted 0.07 0.57
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 32,703,188 33,901,063
Effect of dilutive stock options 0 23,389
------------------------------
Diluted 32,703,188 33,924,452
==============================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
1998
----
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 19,204
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization 1,034
Amortization of premium on mortgage loans 1,177
Amortization of discount on investment securities available-for-sale (4,631)
Provision for loan losses 3,300
Write-down of securities available-for-sale 3,233
Net change in:
Accrued interest receivable (3,889)
Other assets (4,359)
Other liabilities (3,618)
---------
Total Cash Provided by Operating Activities 11,451
---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available-for-sale (6,096)
Payments received on securities available-for-sale 6,906
Purchases of mortgage loans (377,308)
Principal reductions on mortgage loans 64,920
Purchase of real property, net of mortgage loans assumed (73,486)
---------
Total Cash Used for Investing Activities (385,064)
---------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (22,425)
Cash borrowings under repurchase facility 12,400
Cash borrowings under secured warehouse facility 275,000
Cash borrowings under secured bank loan 3,348
Cash borrowings under mortgage loans secured by real property 13,253
Common stock repurchased and held in treasury (51,896)
---------
Total Cash Provided by Financing Activities 229,680
---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (143,933)
Cash and cash equivalents at beginning of period 160,613
---------
Cash and cash equivalents at end of period $ 16,680
=========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITIES
Mortgage loans assumed upon real property purchases $ 34,580
=========
Cash paid for interest $ 4,476
=========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Additional Other Dividends in Cost of
Common Paid-In Comprehensive Excess of Shares Held In Comprehensive
Stock Capital Income Earnings Treasury Income
----- ------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period $3 $481,856 $169 $ (2,326)
Change in unrealized gain on
securities available-for-sale 165 165
Foreign exchange gain 282 282
Net earnings 19,204 19,204
Dividends declared ($0.85 per
share) (27,543)
Cost of treasury stock acquired (51,896)
--------------------------------------------------------------------------------------------
Balance at end of period $3 $481,856 $616 $(10,665) $(51,896) $19,651
============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
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 that
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 primarily invests
in mortgage loans, real property and interests in commercial mortgage-backed
securities ("CMBS"). The majority 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 its affiliates. The Company operates 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 (10.8%) 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.
Pursuant to the Management Agreement, 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 and assumptions.
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 subsidiaries at September 30,
1998 and their results of operations and cash flows for the three and/or nine
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 September 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
<PAGE>
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 continually are 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 that 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 20-30 years
Leasehold improvements 10 years
</TABLE>
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. Unrealized losses on securities that reflect a decline in
value which is other than temporary, if any, are charged to earnings. 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.
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 subsidiaries in the
accompanying consolidated financial statements.
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.
8
<PAGE>
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
and foreign exchange gain (loss) has been included in comprehensive income.
Comprehensive income for the nine months ended September 30, 1998 aggregated
$19,651 and was comprised of net income of $19,204, increase in unrealized gain
on securities available-for-sale of $165, and foreign exchange gain of $282.
Comprehensive income for the three months ended September 30, 1998 aggregated
$2,146 and was comprised of net income of $2,178, decrease in unrealized gain on
securities available-for-sale of $314, and foreign exchange gain of $282.
Translation of Foreign Currencies
Financial statement accounts expressed in foreign currencies are translated into
U.S. dollars in accordance with Statement of Financial Accounting Standards No.
52 "Foreign Currency Translation" (FASB 52). Under FASB 52, functional currency
assets and liabilities are translated into U.S. dollars generally using current
rates of exchange and the related translation adjustments are recorded as a
separate component of comprehensive income. Functional currencies are generally
the currencies of the local operating environment. Income statement accounts
expressed in functional currencies are translated using average exchange rates.
Effect of New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"). This standard requires that all derivative
instruments be recorded in the balance sheet at fair value; the accounting for
the gain or loss due to the changes in fair value of the derivative instrument
depends on whether the derivative instrument qualifies as a hedge. If the
derivative instrument does not qualify as a hedge, the gains or losses are
reported in earnings when they occur. However, if the derivative instrument
qualifies as a hedge, the accounting varies based on the type of risk being
hedged. SFAS 133 will apply to the Company starting January 1, 2000. Management
is currently evaluating the financial statement impact, if any, of adopting SFAS
133.
3. 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
properties.
As of September 30, 1998 and December 31, 1997, the Company's mortgage loan
portfolio consisted of the following:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998 AS OF DECEMBER 31, 1997
------------------------ -----------------------
Number Amount Number Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Multifamily loans 992 $280,779 681 $171,312
Commercial loans 395 273,246 191 90,050
Construction loan participation 1 18,000 0 0
------------------------------------------------------
Total principal 1,388 572,025 872 261,362
===== ===
Unamortized premium 15,026 12,374
Unearned loan fees (2,104) 0
Allowance for loan losses (5,027) (1,727)
-------- --------
Net carrying amount $579,920 $272,009
======== ========
Principal balance of SPB loans 1,014 $369,604 568 $196,801
Principal balance of FMAC loans 64 57,505 2 6,182
-------------------------------------------------------
Total principal balance of loans
acquired from affiliates of Manager 1,078 $427,109 570 $202,983
-------------------------------------------------------
</TABLE>
9
<PAGE>
4. INVESTMENT SECURITIES AVAILABLE-FOR-SALE
At September 30, 1998, the Company's investment securities available-for-sale
consisted of certain CMBS interests including subordinated securities and
interest only securities collateralized by commercial mortgages, certain
subordinated asset-backed notes issued by Franchise Mortgage Acceptance Company
("FMAC"), an affiliate of Imperial Credit, and shares of a private equity REIT.
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 SEPTEMBER 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 $34,646 $ 434 $ $35,080
Investment grade rated senior interest only interests 3,766 3,766
Non-investment grade rated subordinated interest only interests 4,382 4,382
Non-rated subordinated interest only interests 1,599 1,599
Other non-rated subordinated interests 4,156 100 4,056
-----------------------------------------------
Total CMBS interests 48,549 434 100 48,883
Non-investment grade rated subordinated notes 6,191 6,191
Private equity REIT 5,000 5,000
-----------------------------------------------
Total $59,740 $ 434 $ 100 $60,074
===============================================
<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. Some of the Company's CMBS interests are
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.
During the third quarter, the Company determined, based primarily on accelerated
prepayments, that certain declines in the estimated fair value of its interest
only CMBS securities were other than temporary. Accordingly, the Company took a
charge to earnings of $3,233 to write down the securities to estimated fair
value and such charge is reflected in amortized cost. The remaining gross
unrealized loss of $100 at September 30, 1998 is considered a temporary decline
in estimated fair value and has been reflected as a component of comprehensive
income.
The unamortized discount on investment securities available-for-sale was $29,442
and $28,211 at September 30, 1998 and December 31, 1997, respectively. There
were no sales of investment securities available-for-sale during the nine-month
period ended September 30, 1998.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Dollar amounts herein are expressed in thousands, other than share data.
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 September 30, 1998, the Company's assets included
$579,920 of mortgage loans, $108,271 of real property and $60,074 of securities
available-for-sale. Secured borrowings at September 30, 1998 aggregated
$339,702. As of September 30, 1998, the Company had repurchased 5,400,000 shares
which are held in treasury at a cost of $51,896.
On September 18, 1998, the Board of Directors of the Company declared a dividend
of one preferred share purchase right (a "Right") for each outstanding share of
common stock, par value $0.0001 per share, of the Company. The Rights dividend
was payable on September 21, 1998 to stockholders of record at the close of
business on that date. The description and terms of the Rights are set forth in
an agreement between the Company and U.S. Stock Transfer Corporation, a copy of
which was included as an exhibit to the Company's Current Report on Form 8-K,
filed with the SEC on September 22, 1998. The Rights dividend was in response to
an unsolicited merger proposal from Wilshire Real Estate Investment Trust Inc.
and to enable the Company to induce potentially hostile suitors to negotiate
terms with the Company's Board of Directors before initiating takeover attempts.
For the three months ended September 30, 1998, total income of $17,161 resulted
in net earnings of $2,178, $0.07 per share of common stock (basic and diluted).
During the nine months ended September 30, 1998, total income of $39,535
resulted in net earnings of $19,204, $0.57 per share of common stock (basic and
diluted).
RESULTS OF OPERATIONS
DIVIDENDS DECLARED AND DIVIDENDS IN EXCESS OF EARNINGS. The Company declared
dividends on March 24, 1998, June 25, 1998 and September 21, 1998 of $8,280
($0.24 per share), $9,660 ($0.28 per share) and $9,603 ($0.33 per share) to
stockholders of record on March 31, 1998, July 9, 1998 and September 30, 1998,
respectively. These dividends were paid on April 14, 1998, July 23, 1998 and
October 14, 1998. The dividend declared on March 24, 1998 covered the Company's
remaining portion of undistributed taxable income for 1997 and the three-month
period of operations ended March 31, 1998. The other dividends covered the
Company's operations for the quarters ended June 30 and September 30, 1998 and
the latter dividend was accrued at September 30, 1998. As a result of these
dividends, the Company incurred dividends in excess of earnings of $7,425 for
the three months ended September 30, 1998 and $8,339 for the nine months ended
September 30, 1998.
11
<PAGE>
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 NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
------------------ ------------------
Interest Average Annualized Interest Average Annualized
Income Balance Yield Income Balance Yield
------ ------- ----- ------ ------- -----
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans $12,223 $555,107 8.81% $27,536 $424,217 8.65%
Repurchase agreements and interest
bearing deposits 98 8,271 4.74% 2,284 55,516 5.49%
Securities available-for-sale 1,566 58,394 10.73% 4,631 57,573 10.72%
------- -------- ------- --------
Total 13,887 $621,772 8.93% 34,451 $537,306 8.55%
======== ========
Additional interest from FMAC call 0 818
------- -------
Total $13,887 $35,269
======= =======
</TABLE>
The additional interest from the FMAC call is non-recurring income (see third
sentence of last paragraph on this page).
The Company's net interest income is determined by subtracting interest expense
(other than on mortgage loans related to real property owned by the Company)
from the interest income reflected above. Interest expense (not related to
Company owned real property) aggregated $3,620 and $4,463 for the three and nine
month periods ended September 30, 1998, respectively. Thus, the Company's net
interest income amounted to $10,267 for the three months ended September 30,
1998 and $30,806 for the nine months ended September 30, 1998.
OPERATING EXPENSES. Management fees of $1,818 and $4,383 for the three and nine
months ended September 30, 1998 are comprised solely of the 1% (per annum) base
management fee payable to the Manager for the respective periods (as provided
pursuant to the Management Agreement). The Manager earned no incentive
management fee for such periods. The Company incurred due diligence and asset
acquisition expenses of $343 and $866 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
nine months ended September 30, 1998 aggregated $261,965 and $104,334, with
interest expense of $4,441 and $5,475, and a resulting average interest rate of
6.78% and 7.00%, respectively.
During the third quarter, operating expenses included certain non-cash charges
of $6,433 ($0.20 per share). These charges were comprised of (a) a $3,233
impairment write-down of the Company's CMBS interest-only securities to
estimated fair value based primarily on accelerated prepayments as well as
current market conditions and (b) a $3,200 increase in the allowance for loan
losses on mortgage loans primarily to address increased delinquencies on a
multifamily and commercial loan portfolio previously acquired from an
unaffiliated third party.
12
<PAGE>
BALANCE SHEET CHANGES
GENERAL. During the nine months ended September 30, 1998, total assets
increased by $281,434. This increase was comprised of $311,800 of mortgage loans
and accrued interest, $753 of securities available-for-sale, $108,271 of real
property, $4,543 of other assets and $4,778 of cash and interest bearing
deposits offset by a decrease in repurchase agreements of $148,711. Total
liabilities increased by $341,222 during the nine months ended September 30,
1998 as a result of new borrowings under (a) the secured warehouse facility of
$275,000, (b) the repurchase facility of $12,400, (c) the secured bank loan of
$3,573 and (d) mortgage loans assumed or obtained upon real property
acquisitions of $48,729, increases in declared but unpaid dividends of $5,118,
unpaid management fees of $883, interest payable of $958 and deferred revenues
and deposits of $2,232, offset by reductions in amounts due affiliate for
mortgage loans acquired of $6,385 and various other payables of $1,286.
The Company's mortgage loan investment additions during the first nine months of
1998 consisted of loans acquired from affiliates and others acquired from or
originated to unrelated third parties. Mortgage loans acquired from affiliates
were made up of 480 mortgage loans for $193,725 from SPB and 95 mortgage loans
for $94,678 from FMAC. In June, FMAC exercised a call right and repurchased
$20,700 of the FMAC loans. Mortgage loans acquired from or made to unrelated
third parties consisted of six mortgage loans for $13,600 under a $20 million
first mortgage loan facility in connection with certain acquisitions made by On
Stage Entertainment, Inc., participations in two tranches of a construction loan
facility for the redevelopment of a major hotel and casino in Las Vegas for
$18,000, a mortgage loan secured by a hotel/apartment complex in Miami, Florida
for $27,500, a mortgage loan secured by the unsold units of a condominium
conversion project in Honolulu, Hawaii for $29,006 and 22 other mortgage loans
for $2,894. The Miami, Florida and Honolulu, Hawaii mortgage loans as well as 18
FMAC loans aggregating $21,577 were funded in the third quarter.
The Company acquired $108,066 of real property during the first nine months of
1998 which consisted of (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 (iii) seventeen properties in
Arizona, Texas and New Mexico subject to "triple-net" leases with the Ugly
Duckling Corporation, (iv) The Terraces, a 178,000 square foot shopping center
in Palos Verdes, California and (v) a 106,000 square foot office complex in a
suburb of Paris, France. Three of the "triple-net" lease properties and the
office complex in Paris, France were acquired during the third quarter.
The acquisition of securities available-for-sale consisted of $6,096 of asset-
backed notes issued by an affiliate, FMAC, as part of a securitization.
The Board of Directors of the Company authorized the Company to repurchase in
the aggregate up to 12,000,000 shares of its common stock pursuant to three
separate authorizations during the third quarter. As of September 30, 1998, the
Company had repurchased 5,400,000 shares at a total cost of $51,896. The Company
has repurchased 6,000,000 shares to date at a total cost of $56,338.
The Company borrowed $275,000 under its secured warehouse line of credit,
$12,400 under its repurchase facility and $3,573 under its secured bank loan in
conjunction with its acquisitions and stock repurchases during the first nine
months of 1998. In addition, one of the investments in real property was
financed with a $13,253 first mortgage loan and two of the investments in real
property were acquired with the assumption of $34,580 of existing first mortgage
loans. All of the borrowings other than $167,000 under the warehouse line and
the mortgage loans assumed took place in the third quarter.
At September 30, 1998, the Company had outstanding borrowings of $339,702 and
stockholders' equity of $419,914 resulting in a 0.81 to 1.0 debt to equity
ratio.
13
<PAGE>
CASH AND INTEREST BEARING DEPOSITS. At September 30, 1998, the Company's total
cash and interest bearing deposits aggregated $16,680, an increase of $4,778
from December 31, 1997.
REPURCHASE AGREEMENTS. The Company's repurchase agreements of $148,711 at the
end of last year were allowed to mature and the proceeds used during the first
quarter for investment acquisitions.
The Company earned interest income of $2,284 during the nine months ended
September 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 $753 during the nine months
ended September 30, 1998 is due to purchases of $6,096, discount amortization of
$4,631 and unrealized gains (included in comprehensive income) of $165, offset
by impairment losses of $3,233 and interest payments of $6,906. The Company
acquired all of its CMBS interests from Imperial Credit or its affiliates and
the subordinated notes were obtained from an FMAC asset-backed securitization.
The following table sets forth delinquency, loss and prepayment data for the
mortgage loans underlying the Company's CMBS investments as of and for the
periods ended September 30, 1998:
<TABLE>
<S> <C>
CMBS investments $ 48,883
Mortgage Loans:
Original principal balance 480,023
Principal balance at 9/30/98 374,570
Delinquent principal balance at 9/30/98 11,125
Delinquent balance percent at 9/30/98 3%
Prepayments year to date 59,378
Prepayments for quarter 25,287
Losses year to date 766
</TABLE>
MORTGAGE LOANS.
At September 30, 1998, 29 loans in the aggregate principal amount of $5,023 were
more than three months delinquent as compared to one loan in the amount of $116
at December 31, 1997. At September 30, 1998, these over 90-day delinquent loans
have been placed on non-accrual status and approximately $235 and $410,
respectively, of previously accrued interest income was reversed for the three
and nine months ended September 30, 1998. Additions to the allowance for loan
losses aggregated $3,200 and $3,300, respectively, for the three and nine months
ended September 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 September 30, 1998 included $427,109 acquired from
SPB and FMAC and $144,916 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 nine months ended September 30, 1998
is attributable to additional investments of $377,308 offset by principal
repayments, including the FMAC call, of $64,920, amortization of premium of
$1,177 and the provision for loan losses of $3,300. The investments made during
the nine months ended September 30, 1998 include 575 mortgage loans acquired
from SPB and FMAC for $288,410 and 30 mortgage loans and a construction loan
participation acquired from unrelated third parties for $91,002 less unearned
loan fees of $2,104.
BORROWINGS UNDER SECURED WAREHOUSE FACILITY. As of September 30, 1998,
borrowings under the Company's warehouse line of credit were $275,000. The line
of credit is secured by $317,679 of mortgage loans acquired from SPB and $48,883
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 and in conjunction with the
share repurchase program.
MORTGAGE LOANS SECURED BY REAL PROPERTY. As of September 30, 1998, mortgage
loans secured by real property were $48,729. These loans are secured by the
Company's shopping centers in Oceanside and Palos Verdes, CA and the office
complex in a suburb of Paris, France with a cost of $68,539, bear interest at
effective rates ranging from 4.5% to 7.8% and have final maturity dates ranging
from 2012 to 2027.
STOCKHOLDERS' EQUITY. Stockholders' equity decreased by $59,788 during the nine
months ended September 30, 1998 to $419,914. The decrease was attributable to
repurchase of the Company's common stock at a cost of $51,896 and dividends in
excess of earnings of $8,339 offset by the increase in unrealized gains on
securities available-for-sale of $165 and foreign exchange gain of $282 (both
included in accumulated other comprehensive income).
14
<PAGE>
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 $11,451 during the nine
months ended September 30, 1998. During the nine-month period, cash resources
from operating activities were provided primarily by net earnings.
The Company's investing activities used cash totaling $385,064 during the nine-
month period. During this period, cash flows from investing activities were used
primarily to purchase mortgage loans, real property and securities available-
for-sale.
The Company's financing activities provided $229,680 in cash during the nine-
month period after payment of dividends related to 1997 and the first and second
quarters of 1998 and after repurchase of the Company's stock.
The Company's warehouse line of credit with Morgan Guaranty Trust Company of New
York (a subsidiary of J.P. Morgan & Co. Incorporated ("JP Morgan")) 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 draws made as of September
30, 1998, the Company had $25,000 of available credit under the line as of
September 30, 1998. During October the Company borrowed an additional $4,000
under this line leaving $21,000 available. The warehouse line expires on March
29, 1999, and the Company has been notified that the line will not be extended
based on market related factors rather than any concerns specific to the
Company. Therefore, the outstanding borrowings under this line will have to be
repaid on or before March 29, 1999.
The Company presently is working in conjunction with JP Morgan on a
securitization transaction covering the SPB mortgage loans in the Company's
mortgage loan portfolio. Such a transaction would take the form of a financing
with collateralized mortgage obligation bonds being issued and the proceeds
being used to pay down outstanding borrowings under the warehouse line. The
Company is also seeking other warehouse lending arrangements to finance future
investing activities. There can be no assurance that the aforementioned
securitization will be successfully completed or that the Company will be able
to secure replacement financing at favorable rates to meet the Company's
liquidity needs. The Company believes that it will have adequate sources of
liquidity to maintain its current business. However, the ability of the Company
to continue its growth is subject to completing its securitization and obtaining
a replacement warehouse line of credit.
The Company's $25,000 reverse repurchase loan facility with Merrill Lynch
Mortgage Capital Inc. has been collateralized by the pledge of the Company's
interest in a construction loan. As of September 30, 1998, $12,400 was
outstanding and $2,000 was available under this facility. During October the
availability under this line was reduced due to a reduction in the advance rate
and current market conditions and the current outstanding balance is $8,100 with
no additional availability.
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%. During the three months ended September 30, 1998, the
Company paid monthly interest on the notional balance at an annual rate of
5.99%, which ranged from approximately $355 to $410 per month, and collected
monthly interest at annual rates ranging from 5.59% to 5.67%, or about $339 to
$392 per month. The net cost of the swap ranged from $16 to $20 per month and is
included in interest expense in the Company's operating results. Such net cost
was $50 and $68 for the three and nine months ended September 30, 1998,
respectively. As of September 30, 1998, the approximate net present value cost
of this swap was $2,614 and the notional balance was $73,768. There can be no
assurance that this swap will adequately protect the Company's exposure to
interest rate risk.
At September 30, 1998, the Company has an outstanding commitment to fund a
mortgage loan for approximately $30,000. The Company plans to fund this
commitment with cash on hand, available borrowings and anticipated future cash
flow.
In light of current market conditions and certain dislocations in the capital
markets (i.e., sudden, substantial declines in demand for securities in the CMBS
markets), the Company currently is focusing its resources on enhancing overall
liquidity, maintaining leverage at prudent levels, i.e., a debt to equity ratio
of less than 2.0 to 1.0, and on successfully closing the aforementioned
securitization. As a result, there can be no assurance that the Company will
have adequate funds available to repurchase additional shares of its common
stock and to take advantage of investment opportunities that become available.
15
<PAGE>
FUNDS FROM OPERATIONS ("FFO")
In general, FFO adjusts net earnings by adding back non-cash charges such as
depreciation, certain amortization expenses and most non-recurring gains and
losses. The Company generally considers FFO an appropriate supplementary
measure of operating performance of a REIT because that measure does not
recognize as an operating expense (i) compensation expense related to stock
options issued to the Manager and (ii) depreciation of real property, which
management believes is not meaningful in the evaluation of income-producing real
property, which historically has not depreciated in value. While operating
charges for depreciation and amortization, stock option compensation expense and
non-recurring gains and losses are valid and significant components for
determining operating results in accordance with generally accepted accounting
principles ("GAAP") and while the Company's financial condition, results of
operations and cash flows determined under GAAP are the primary measurement
tools for understanding and assessing the Company's financial performance, the
consideration of FFO as a supplement to these primary tools provides investors
with an additional means to assess the ability of a REIT to meet dividend
requirements, fund commitments, fund capital expenditure needs and meet debt
service requirements. However, the Company's computation of FFO may not be
comparable to other similarly titled measures of other companies and FFO should
not be construed as an alternative to operating results or cash flows determined
pursuant to GAAP. The Company's increase or decrease in FFO should be considered
in conjunction with trends in the Company's primary measurement tools as well as
dividends, debt incurred, new investments or acquisitions, capital expenditures
and other factors.
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 nine months ended September 30, 1998, the Company's FFO was
$2,898 ($0.09 per share) and $20,166 ($0.59 per share), respectively. FFO was
computed as follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
------------ -----------
<S> <C> <C>
Net earnings $2,178 $19,204
Add: Depreciation of real property 720 962
------ -------
FFO $2,898 $20,166
====== =======
</TABLE>
MARKET CONDITIONS
The current flat yield curve and low level of long-term interest rates has
hindered the Company's ability to continue to obtain whole mortgage loans at
unleveraged yields (i.e., yields from mortgage loans before taking into account
borrowing costs on borrowings used to finance the acquisition of such mortgage
loans) and in volumes consistent with management's expectations that existed at
the time of the Company's initial public offering. The Company did not acquire
any mortgage loans from SPB during the third quarter and may not be able to
acquire mortgage loans from SPB in the future at volume and yield levels
consistent with previous acquisitions.
Current conditions in the capital and equity markets for mortgage REITs has made
permanent financing transactions extremely difficult and more expensive than
earlier in the year. Consequently, there can be no assurance that the Company
will be able to effectively fund future growth.
16
<PAGE>
YEAR 2000
The Company is aware of the issues associated with the Year 2000 ("Y2K") problem
concerning existing computer systems. Y2K affects every computer and subsystem
the Company operates, both in-house and from independent servicers and vendors.
The issue is whether the Company's computer systems will properly recognize the
"00" and the prefix "20" dates when the year changes to 2000. Since many
existing computer programs use only two digits to identify a year field with the
assumption that the first two digits are always "19", most computer systems that
do not properly recognize the new prefix century date of "20" and "00" year
date could generate erroneous data or cause a computer system to fail. Systems
that calculate, compare or sort using the incorrect date may cause erroneous
results, ranging from system malfunction to incorrect or incomplete processing.
The Company believes that the Y2K compliance of the Company's information
technology needs, such as computer hardware, software and subsystems is
primarily dependent upon Y2K compliance efforts and results of third party
vendors and service providers.
STATE OF READINESS
Since the Company's systems are new and are based on networked personal
computers, management does not believe that Y2K compliance will present any
material problems for the Company's internal computer systems. The Company is,
however, currently evaluating the risks of Y2K issues on companies which are now
servicing the Company's mortgage loan portfolio, companies that provide property
management services for the Company's real property and companies involved in
trust, administration and servicing activities in connection with the Company's
CMBS interests. We are in the process of contacting all of our major service
providers and third party vendors regarding the state of their Y2K readiness.
The Company has had preliminary oral discussions with certain third parties and
affiliates and has not received any written responses. While the discussions
have indicated that such third parties and affiliates are planning to achieve
Y2K compliance, such compliance has not yet been achieved. We are also in the
process of identifying and evaluating individual borrowers or tenants whose Y2K
compliance failure could materially impact the Company.
COSTS TO ADDRESS Y2K
The Company has not incurred any costs to date regarding Y2K compliance.
Management does not believe that the Company will likely incur material Y2K
compliance costs because the Manager and the Company's service providers are
believed to be responsible for such costs. No assurance can be given that all
service providers will adequately achieve Y2K compliance or that replacements
for deficient service providers can be obtained in a timely manner and without
any additional expense to the Company.
RISK OF Y2K
The Company is a REIT which invests primarily in mortgage loans, real property
and CMBS securities. The risk to the Company of Y2K is that any significant
investment(s) could be negatively impacted by the failure of borrowers, tenants
or service providers to achieve Y2K compliance in a manner that impedes their
ability to meet contractual obligations and normal business needs related to
real property and financial instruments underlying the Company's investments.
Since the Company has a diverse portfolio of investments, the failure of any
single borrower or tenant to achieve Y2K compliance generally is unlikely to
have a material adverse effect on the Company's financial position and results
of operations. However, a substantial loan(s) to a single borrower or a
substantial property(ies) leased to a single tenant could result in a Y2K
problem with adverse consequences to the Company. Also, the failure of any of
the Company's mortgage loan servicers, property managers or CMBS service
providers to achieve Y2K compliance could necessitate that the Company find a
suitable replacement. While the Company believes that suitable replacements
could be obtained, there is no assurance that this could be done in a timely and
cost effective manner.
Various systems at the real property level do not relate to information
technology but could impact the underlying real property operations. These
systems include telecommunications, security, HVAC, fire and safety systems,
lighting and electrical systems, elevator systems and systems for power supply.
The Company does not expect to be in a position to adequately evaluate these
kinds of risks other than through inquiries of its service providers and third
party vendors.
The worst case Y2K scenario would be one in which various real property systems
adversely impact real property operators throughout the United States in a
manner that prevents such operators from meeting their debt service and other
cash requirements. This in turn would limit the Company's collections of
payments on mortgage loans and mortgage backed securities, as well as receipts
from real property owned which, in turn, would hinder the Company's ability to
meet its own debt service, dividend and other cash requirements. While the
Company is not in a position to assess the likelihood of this scenario, if such
a scenario were to take place, the Company would expect it to impact similarly
many other real property owners, investors and mortgage holders.
17
<PAGE>
CONTINGENCY PLANS
The Company currently does not have a contingency plan in place. Once the
Company completes evaluation of responses from its major service providers and
third party vendors, it will consider development of contingency plans.
There can be no assurance that the impact of any failure of the Company or its
borrowers, tenants, service providers or any third party vendors to be Y2K
compliant will not have a material adverse effect on the Company's business,
financial condition or results of operations.
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, THE AVAILABILITY OF AND COSTS ASSOCIATED WITH SOURCES OF FINANCING
AND LIQUIDITY, 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,
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 REPORTS ON FORM 10-Q FILED WITH THE SEC ON NOVEMBER
26, 1997, MAY 15, 1998 AND AUGUST 14, 1998, 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 ANTICIPATED OR
UNANTICIPATED EVENTS OR CIRCUMSTANCES AFTER THE DATE OF SUCH STATEMENTS.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As of September 30, 1998, the Company had $275,000 in outstanding borrowings
under the warehouse line. The Company has been notified that the warehouse line
will not be extended beyond the line's March 29, 1999 maturity date. The Company
is presently working on a securitization transaction, the proceeds of which
would be used to repay the warehouse line, and is also seeking other warehouse
lending arrangements. There can be no assurance that the aforementioned
securitization will be successfully completed or that the Company will be able
to secure replacement financing at favorable rates to meet the Company's
liquidity needs. The Company is subject to exposure from fluctuations in
interest rates under the warehouse line. In addition, adverse changes in
interest rates could negatively impact (a) the value of the Company's portfolio
of mortgage loans and investments in CMBS securities, (b) the levels of interest
income to be derived from these assets and (c) the cost of borrowing under
permanent (i.e., borrowings obtained through a securitization) or interim
(i.e., borrowings obtained under warehouse lines or other short-term
facilities) financing that may be obtained in the future. Adverse changes in
interest rates in this context refers to (a) decreases in indices that are a
basis for calculating interest on the Company's mortgage loans without
corresponding decreases in indices that are a basis for calculating interest on
the Company's borrowings as well as (b) increases in indices that are a basis
for calculating interest on the Company's borrowings without corresponding
increases in indices that are a basis for calculating interest on the Company's
mortgage loans.
As noted above, the Company is subject to interest rate risk. The Company's
mortgage loans that have been pledged as security under the Company's warehouse
line include adjustable rate and fixed rate loans. The adjustable rate loans
generally are subject to semi-annual interest rate adjustment based on changes
in the underlying indices. While most of the adjustable rate loans are based on
the six-month LIBOR index, others are based on the one-year constant maturity
treasury and prime rates. The Company's warehouse borrowings are based on the
one-month LIBOR index and are subject to monthly interest rate adjustment. Thus,
most of the Company's pledged assets and all of the Company's warehouse
borrowings are subject to interest rate adjustment based on LIBOR indices. The
primary lack of interest rate correlation between the Company's pledged assets
and related borrowings is due to the amount of fixed rate mortgage loans pledged
as security under the warehouse line. In order to manage this exposure, the
Company has entered into an interest rate swap agreement described below.
18
<PAGE>
The Company's interest rate swap provides for the collection of interest based
on one-month LIBOR and the payment of interest based on a fixed interest rate of
approximately 5.99%. The interest payments are computed on a notional balance
of $73,768 at September 30, 1998, which declines thereafter over a period of
less than ten years. There can be no assurance that the swap will adequately
protect the Company's exposure to interest rate risk on borrowings.
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 securities 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. Yield to maturity
on the Company's CMBS interests in this context refers to the ultimate rate of
return on the original investment based on the timing and amount of payments
collected by the Company over the actual life of the applicable CMBS interest.
The Company's CMBS interests primarily are either discount bonds or interest
only certificates. Changes in interest rates generally impact the mortgage loans
that serve as collateral for the CMBS interests. Increases in interest rates
generally result in lower levels of borrower prepayments, which in turn
generally would increase the yield to maturity on interest only certificates
while decreasing the yield to maturity on discount bonds. Increases in interest
rates also may result in higher levels of borrower delinquencies, which could
lead to increased loan losses and which, depending on the severity of such
losses, could reduce the yield to maturity on interest only certificates and on
discount bonds. Decreases in interest rates generally result in higher levels of
borrower prepayments, which in turn generally would reduce the yield to maturity
on interest only certificates while increasing the yield to maturity on discount
bonds. Decreases in interest rates also may result in lower levels of borrower
delinquencies, which could lead to reduced loan losses and which, depending on
the magnitude of the loss reduction, could enhance the yield to maturity on both
types of CMBS interests. While the Company has invested in various classes of
CMBS interests, including interest only securities, 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.
Interest rates over the last few months have generally been relatively stable.
While significant swings in interest rates are not expected over the near term,
it is impossible to predict with certainty what interest rate levels will be in
the future.
The Company's financial instruments as of September 30, 1998 are comprised of
mortgage loans, securities available-for-sale, all outstanding borrowings and an
interest rate swap arrangement. The Company believes that the carrying amount of
its mortgage loans, securities available-for-sale and outstanding borrowings are
a reasonable approximation of the estimated fair value of such financial
instruments as of September 30, 1998. Management believes that the estimated net
present value cost of the swap arrangement was $2,614 as of September 30, 1998.
The estimates presented herein are not necessarily indicative of the amounts the
Company could realize in a current market exchange. Furthermore, the estimates
were made as of September 30, 1998 and, therefore, current estimates of fair
value may differ significantly from the estimates noted above.
19
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 18, 1998, the Company's Board of Directors declared a dividend
pursuant to the Company's preferred share purchase rights plan, as further
described in the fourth paragraph of Item 2, Part I of this Form 10-Q.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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 was filed with the Commission on July 10, 1998 with the Company's
press release covering investments made during the quarter ended June 30, 1998.
A Form 8-K was filed with the Commission on August 3, 1998 with the Company's
press release covering earnings for the period ended June 30, 1998.
A Form 8-K was filed with the Commission on August 31, 1998 with the Company's
press release covering the Company's repurchase of its common stock.
A Form 8-K was filed with the Commission on September 21, 1998 with the
Company's press releases covering an unsolicited proposal from Wilshire Real
Estate Investment Trust Inc. to negotiate a merger between Wilshire and the
Company and the Company's rejection of that proposal and other matters.
A Form 8-K was filed with the Commission on September 22, 1998 covering the
Company's preferred share purchase rights plan.
20
<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: January 13, 1999
/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)
21
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- ---------------------
<C> <S>
4.1* Amendment to the Bylaws of Imperial Credit Commercial
Mortgage Investment Corp.
4.2* Agreement, dated as of September 21, 1998, between Imperial
Credit Commercial Mortgage Investment Corp. and U.S. Stock
Transfer Corporation, as Rights Agent, including the form of
Articles Supplementary as Exhibit A, the form of Right
Certificate as Exhibit B and the Summary of Rights to
Purchase Preferred Shares as Exhibit C.
27 Financial Data Schedule
</TABLE>
- --------------------------------------------------------------------------------
* Incorporated by reference to the Company's Current Report on Form 8-K, filed
with the Securities and Exchange Commission on September 22, 1998.
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 16,680 16,680
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 108,271 108,271
<DEPRECIATION> 962 962
<TOTAL-ASSETS> 776,571 776,571
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
0 0
<COMMON> 3 3
<OTHER-SE> 419,911 419,911
<TOTAL-LIABILITY-AND-EQUITY> 776,571 776,571
<SALES> 0 0
<TOTAL-REVENUES> 17,161 39,535
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 7,342 11,556
<LOSS-PROVISION> 3,200 3,300
<INTEREST-EXPENSE> 4,441 5,475
<INCOME-PRETAX> 2,178 19,204
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,178 19,204
<EPS-PRIMARY> .07 .57
<EPS-DILUTED> .07 .57
</TABLE>
