<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 March 31, 1999
OR
[_]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------- ---------------
Commission file number 0-23089
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 April 30, 1999
<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 March 31, 1999 and December 31, 1998 3
Consolidated Statements of Earnings for the three months ended March 31, 1999 and March 31, 1998 4
Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and March 31, 1998 5
Consolidated Statement of Changes in Stockholders' Equity and Comprehensive Income for the three
months ended March 31, 1999 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
</TABLE>
2
<PAGE>
Imperial Credit Commercial Mortgage Investment Corp.
Consolidated Balance Sheets
March 31, 1999 and December 31, 1998
(Dollars in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Assets
Cash and interest bearing deposits $ 9,944 $ 23,398
Repurchase agreements 18,071 -
Mortgage loans collateralizing debt obligations, net of allowance for loan losses of 293,101 -
$3,773
Mortgage loans, net of allowance for loan losses of $7,354 and $8,027, respectively 220,843 556,648
Real property, net of accumulated depreciation of $2,512 and $1,755, respectively 105,691 107,663
Securities available-for-sale, at estimated fair value 55,910 57,671
Accrued interest receivable 4,447 6,410
Other assets 4,101 5,384
---------------------------------------
Total Assets $712,108 $757,174
=======================================
Liabilities and Stockholders' Equity
Liabilities:
Dividends payable $ 8,550 $ 9,405
Borrowings under collateralized mortgage obligations 245,381 -
Borrowings under secured warehouse facility - 279,000
Borrowings under secured bank loan - 3,557
Mortgage loans secured by real property 47,373 48,575
Accrued expenses, payables and other liabilities, including amounts due
to affiliates of $92 and $142, respectively 7,328 7,828
---------------------------------------
Total Liabilities 308,632 348,365
---------------------------------------
Stockholders' Equity:
Common stock, par value $0.0001 per share. Authorized 500,000,000 shares,
28,500,000 shares issued and outstanding 3 3
Additional paid-in capital 425,615 425,615
Accumulated other comprehensive income (loss) (1,357) 221
Accrued dividends in excess of earnings (20,785) (17,030)
---------------------------------------
Total Stockholders' Equity 403,476 408,809
---------------------------------------
Total Liabilities and Stockholders' Equity $712,108 $757,174
=======================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
Imperial Credit Commercial Mortgage Investment Corp.
Consolidated Statements of Earnings
For the three months ended March 31, 1999 and March 31, 1998
(Dollars in thousands, except share and earnings per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1999 1998
---- ----
<S> <C> <C>
Income
Mortgage loans $ 12,112 $ 5,973
Securities available-for-sale 1,557 1,454
Repurchase agreements and interest bearing deposits 362 2,119
---------------------------------------
Total Interest Income 14,031 9,546
Real property rental income 3,543 -
---------------------------------------
Total Income 17,574 9,546
---------------------------------------
Operating Expenses
Management fees 1,867 1,200
Interest expense 5,100 -
Provision for loan losses 3,100 -
Depreciation of real property 791 -
Real property operating expenses 767 -
Due diligence expenses and professional fees 752 150
Other 402 348
---------------------------------------
Total Expenses 12,779 1,698
---------------------------------------
Net Earnings 4,795 7,848
Dividends ($0.30 and $.24 per share, respectively) 8,550 8,280
---------------------------------------
Accrued dividends in excess of earnings $ (3,755) $ ( 432)
=======================================
Earnings per share
Basic $ 0.17 $ 0.23
Diluted 0.17 0.23
Weighted average common shares outstanding
Basic 28,500,000 34,500,000
Effect of dilutive stock options 32,544 70,167
---------------------------------------
Diluted 28,532,544 34,570,167
=======================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
Imperial Credit Commercial Mortgage Investment Corp.
Consolidated Statements of Cash Flows
For the three months ended March 31, 1999 and March 31, 1998
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1999 1998
---- ----
<S> <C> <C>
Cash Flows from Operating Activities
Net earnings $ 4,795 $ 7,848
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization 791 18
Amortization of premium on mortgage loans 205 282
Amortization of discount on securities available-for-sale (1,557) (1,454)
Provision for loan losses 3,100 -
Net change in:
Accrued interest receivable 1,963 (2,220)
Other assets 1,230 (25)
Other liabilities (477) 10,847
---------------------------------------
Total Cash Provided by Operating Activities 10,050 15,296
---------------------------------------
Cash Flows from Investing Activities
Purchases of securities available-for-sale - (6,096)
Payments received on securities available-for-sale 2,089 2,251
Purchases of mortgage loans (2,594) (149,757)
Principal reductions on mortgage loans 41,994 6,517
Additions to real property improvements (230) -
---------------------------------------
Total Cash Provided by (Used for) Investing Activities 41,259 (147,085)
---------------------------------------
Cash Flows from Financing Activities
Dividends paid (9,405) (4,485)
Cash borrowings under collateralized mortgage obligations 249,198 -
Repayment of collateralized mortgage obligations (3,817) -
Repayment of secured warehouse facility (279,000) -
Repayment of secured bank loan (3,557) -
Principal repayments on mortgage loans secured by real property (111) -
---------------------------------------
Total Cash Used by Financing Activities (46,692) (4,485)
---------------------------------------
Net increase (decrease) in cash and cash equivalents 4,617 (136,274)
Cash and cash equivalents at beginning of period 23,398 160,613
---------------------------------------
Cash and cash equivalents at end of period $ 28,015 $ 24,339
=======================================
Supplemental Disclosure of Cash Flow Activities
Cash paid for interest $ 4,585 $ -
=======================================
</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 three months ended March 31, 1999
(Dollars in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Total
Number of Accumulated Accrued Stockholders'
Common Additional Other Dividends Equity and
Shares Common Paid-In Comprehensive in Excess Comprehensive
Outstanding Stock Capital Income of Earnings Income
----------- ----- ------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period 28,500,000 $3 $425,615 $ 221 $(17,030) $408,809
--------
Net earnings 4,795 4,795
Change in unrealized loss on
securities available-for-sale (1,230) (1,230)
Foreign exchange loss (348) (348)
--------
Comprehensive income 3,217
--------
Dividends declared ($0.30 per share) (8,550) (8,550)
--------------------------------------------------------------------------------------
Balance at end of period 28,500,000 $3 $425,615 $(1,357) $(20,785) $403,476
======================================================================================
</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 share and 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 invests primarily
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, first 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 March 31,
1999 and their results of operations and cash flows for the three month periods
ended March 31, 1999 and March 31, 1998. 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 1998 annual report on Form 10-K filed with the SEC, as
amended. Operating results for the period ended March 31, 1999 are not
necessarily indicative of the results that may be expected for any other interim
periods or the entire year ending December 31, 1999.
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
7
<PAGE>
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 of buildings and improvements range from 10 to 30 years. Leasehold
improvements are amortized over the life of the lease ranging from 3 to 10
years.
The Company reviews its real property investments for impairment whenever known
events or changed circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held is measured by a
comparison of the carrying amount of the asset to its future net undiscounted
cash flows expected to be generated. If such an asset is considered to be
impaired, the impairment to be recognized is measured at the amount by which the
carrying value of the asset exceeds its fair value.
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>
Comprehensive Income
The change in unrealized gain (loss) on securities available-for-sale and
foreign exchange gain (loss) has been included in comprehensive income and
disclosed in the Consolidated Statement of Changes in Stockholders' Equity and
Comprehensive Income for the three months ended March 31, 1999. Comprehensive
income for the three months ended March 31, 1998 aggregated $8,153 and was
comprised of net income of $7,848 and the increase in unrealized gain on
securities available-for-sale of $305.
Translation of Foreign Currencies
The functional currencies of the Company's foreign subsidiaries are their
respective local currencies. Financial statement accounts of these subsidiaries
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 exchange rates in effect at the end of the period and
the related translation adjustments are recorded as a separate component of
comprehensive income. Income statement accounts expressed in functional
currencies are translated using average rates of exchange prevailing during the
period.
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. Securities Available-For-Sale
At March 31, 1999, the Company's 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 securities available-for-sale are
summarized as follows:
<TABLE>
<CAPTION>
Balance at March 31, 1999 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 $34,906 $ - $1,030 $33,876
Investment grade rated senior interest only interests 3,083 47 - 3,130
Non-investment grade rated subordinated interest only interests 2,614 - 49 2,565
Non-rated subordinated interest only interests 1,364 - 3 1,361
Other non-rated subordinated interests 4,060 214 - 4,274
---------------------------------------------
Total CMBS interests 46,027 261 1,082 45,206
Non-investment grade rated subordinated notes 6,154 - 450 5,704
Private equity REIT 5,000 - - 5,000
---------------------------------------------
Total $57,181 $261 $1,532 $55,910
=============================================
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Balance at December 31, 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 $34,763 $ 90 $ - $34,853
Investment grade rated senior interest only interests 3,361 - 64 3,297
Non-investment grade rated subordinated interest only interests 2,959 - - 2,959
Non-rated subordinated interest only interests 1,386 - - 1,386
Other non-rated subordinated interests 4,050 133 - 4,183
---------------------------------------------
Total CMBS interests 46,519 223 64 46,678
Non-investment grade rated subordinated notes 6,192 - 199 5,993
Private equity REIT 5,000 - - 5,000
---------------------------------------------
Total $57,711 $223 $263 $57,671
=============================================
</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.
The unamortized discount on investment securities available-for-sale was $29,298
and $29,317 at March 31, 1999 and December 31, 1998, respectively. There were no
sales of securities available-for-sale during the three-month period ended March
31, 1999.
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
properties.
As of March 31, 1999 and December 31, 1998, the Company's mortgage loan
portfolio consisted of the following:
<TABLE>
<CAPTION>
As of March 31, 1999 As of December 31, 1998
-------------------- -----------------------
Number Amount Number Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Multifamily loans 932 $260,123 968 $270,170
Commercial loans 334 235,742 374 264,732
Construction loan participation 1 18,000 1 18,000
----------------------------------------------------------
Total principal 1,267 513,865 1,343 552,902
===== =====
Unamortized premium 13,731 14,344
Unearned loan fees (2,525) (2,571)
Allowance for loan losses (11,127) (8,027)
-------- --------
Net carrying amount $513,944 $556,648
======== ========
</TABLE>
The Company has acquired mortgage loan pools from affiliated entities, including
SPB and FMAC. As of March 31, 1999 and December 31, 1998, the Company's mortgage
loan portfolio acquired from affiliates consisted of the following:
<TABLE>
<CAPTION>
As of March 31, 1999 As of December 31, 1998
-------------------- -----------------------
Number Amount Number Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Principal balance of SPB loans 957 $344,074 985 $353,477
Principal balance of FMAC loans 20 27,845 55 54,501
--------------------------------------------------------
Total principal balance of loans
Acquired from affiliates of Manager 977 $371,919 1,040 $407,978
========================================================
</TABLE>
10
<PAGE>
Mortgage loans held for investment includes loans held as security for
collateralized mortgage obligations. The total principal balance of mortgage
loans held as security for collateralized mortgage obligations was $287,426 and
consisted of 786 mortgage loans. All mortgage loans held as security for
collateralized mortgage obligations were acquired from SPB.
5. Collateralized Mortgage Obligations
On March 10, 1999, the Company closed a securitization transaction in which the
Company's wholly-owned business trust, ICCMAC Multifamily and Commercial Trust
1999-1, sold approximately $250 million of collateralized mortgage obligation
("CMO") bonds. The bonds are primarily floating interest rate bonds and carry a
cost of funds which approximates the cost on the Company's then existing
warehouse line of credit. The bonds are collateralized by approximately $290
million of first mortgage loans which the Company had previously acquired from
SPB. At the closing of this transaction, the Company repaid in full and
terminated its warehouse line of credit with Morgan Guaranty Trust Company of
New York. At March 31, 1999, the outstanding CMO bonds are summarized as
follows:
<TABLE>
<CAPTION>
Unamortized
Principal Discount Net Interest Rate
--------- -------- -------- -------------
<S> <C> <C> <C> <C>
Class A $ 96,633 $ - $ 96,633 Libor + 0.28%
Class A-2 94,831 - 94,831 Libor + 0.42%
Class S 11,750 1,428 10,322 N/A
Class A-3 17,447 - 17,447 Libor + 0.60%
Class B 11,631 - 11,631 Libor + 0.88%
Class C 14,539 22 14,517 Libor + 1.55%
-------- ------ --------
Total $246,831 $1,450 $245,381
======== ====== ========
</TABLE>
The Class S bonds do not accrue interest but have been discounted to yield
approximately 7.11%. The Class S bonds are entitled to receive monthly payments
as set forth in the prospectus of the ICCMAC Multifamily and Commercial Trust
1999-1.
6. Segment Information
The Company operates in four principal business segments; small balance mortgage
loan pools acquired ("mortgage loan pools"), individual large balance mortgage
loans originated or acquired ("large mortgage loans"), real property and
securities available-for-sale ("securities"). These segments are managed
separately because each requires different levels of resources and involves
assets having different risk profiles. Segment performance is measured based on
net earnings.
The following table sets forth the revenues and related net income and assets by
business segment for the quarters ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
Revenues Net Income Assets
-------- ---------- ------
March March March March March March
1999 1998 1999 1998 1999 1998
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loan Pools $ 9,643 $5,909 $3,149 $5,238 $432,272 $389,163
Large Mortgage Loans 2,469 64 247 57 86,119 30,109
Securities 1,557 1,454 1,403 1,307 55,910 64,925
Real Property 3,543 - 873 - 105,691 -
Other 362 2,119 (877) 1,246 32,116 25,455
------- ------ ------ ------ -------- --------
Total $17,574 $9,546 $4,795 $7,848 $712,108 $509,652
======= ====== ====== ====== ======== ========
</TABLE>
7. Subsequent Events
On May 13, 1999, Imperial Credit filed an amended Schedule 13D with the
Securities and Exchange Commission and issued a press release announcing
Imperial Credit's proposal to the Company's Board of Directors that Imperial
Credit
11
<PAGE>
acquire all of the common stock of the Company not already owned by Imperial
Credit at $11 per share in cash. Imperial Credit currently holds approximately
10.8% of the Company's outstanding common stock.
At March 31, 1999, the Company had an outstanding commitment to fund a mortgage
loan for approximately $24,000. This loan commitment was subsequently terminated
and the Company received a UK(Pounds)2,000 termination fee. The fee was paid
half in cash and half with a note bearing interest at 5.25%. The termination of
the commitment will contribute approximately $4,000 of income during the second
quarter of 1999.
On April 26, 1999, the Company received $19,072 from the put back of 50 loans to
SPB. The loans were put back as a result of various breaches by SPB of the
representations and warranties made at the time the loans were originally
acquired by the Company. Such breaches prevented the Company from including the
loans in its recent securitization transaction. The Company still holds 100
loans with a principal balance of $30,752 with similar breaches that the Company
plans to put back to SPB. The Company believes that SPB is obligated to
repurchase the loans based on the principal balance outstanding plus unamortized
purchase price premium and accrued interest at the date of repurchase. SPB has
not yet reimbursed the Company for the unamortized purchase price premium and
all the accrued interest for the first 50 loans. The unamortized purchase price
premium for the 150 loans exceeds $2,000.
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 continue to generate income for distribution to its
stockholders primarily from the net earnings derived from its investments in
real estate related assets. The Company continues 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 March 31, 1999, the Company had repurchased
6,000,000 shares of its common stock at a cost of $56,338, had invested assets
of $675,545 and had outstanding borrowings of $292,754.
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 March 31, 1999, total income of $17,574 resulted in
net earnings of $4,795, $0.17 per share of common stock (basic and diluted).
During the three months ended March 31, 1998, total income of $9,546 resulted in
net earnings of $7,848, $0.23 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 23, 1999 and March 24, 1998 of $8,550 ($0.30 per share) and
$8,280 ($0.24 per share), respectively, to stockholders of record on March 31,
1999 and 1998, respectively. The dividends declared on March 23, 1999 and March
24, 1998 covered the Company's remaining portion of undistributed taxable income
for 1998 and 1997, respectively, and the three-month periods of operations ended
March 31, 1999 and 1998, respectively. As a result of these dividends, the
Company incurred dividends in excess of earnings of $3,755 and $432 for the
three months ended March 31, 1999 and 1998, respectively.
Net 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.
12
<PAGE>
<TABLE>
<CAPTION>
Three months ended Three months ended
March 31, 1999 March 31, 1998
-------------- --------------
Interest Average Annualized Interest Average Annualized
Income Balance Yield Income Balance Yield
-------- --------- ---------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans $12,112 $544,655 8.90% $5,973 $273,382 8.74%
Securities available-for-sale 1,557 57,051 10.92% 1,454 54,693 10.63%
Repurchase agreements and interest
bearing deposits 362 31,131 4.65% 2,119 152,551 5.56%
------- -------- ------ --------
Total 14,031 $632,837 8.87% 9,546 $480,626 7.94%
======== ========
Less interest expense * 4,261 -
------- ------
Net Interest Income $ 9,770 $9,546
======= ======
</TABLE>
* Excludes interest expense attributable to real property.
The increase in interest income, interest expense and net interest income from
the first quarter of 1998 to the first quarter of 1999 is due primarily to the
Company's growth subsequent to its initial public offering. The increase in the
yield on mortgage loan pools is due in part to the increase in interest rates on
recently originated variable interest rate loans migrating out of initial teaser
interest rates and the relative mix of higher interest rate loan portfolios
outstanding during the first quarter of 1999 as compared to the same period last
year. The increase in yield on securities during the first quarter of 1999 as
compared to the first quarter of 1998 is due to mark-to-market write-downs
subsequent to March 31, 1998.
Real Estate. The table presented below sets forth the Company's real property
operating results and yields (expressed as a percentage per annum) for the first
quarter of 1999. The Company held no real property in the same period last year.
The yields are based on the average amount of real property assets for rental
income after operating expenses and average debt outstanding for interest
expense.
<TABLE>
<CAPTION>
Three months ended
March 31, 1999
Amount Yield
------ -----
<S> <C> <C>
Real Property Income
Rental income $3,543
Less operating expenses 767
------
Rental income after operating expenses 2,776 10.14%
Less interest expense 839 7.08%
------
Real property FFO 1,937
Less depreciation 791
------
Real property income $1,146
======
</TABLE>
Operating Expenses. Management fees of $1,867 and $1,200 for the three months
ended March 31, 1999 and March 31, 1998, respectively, 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 $752 and $150 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 months
ended March 31, 1999 aggregated $356,746, with interest expense of $5,100, and a
resulting average interest rate of 5.72%. There were no outstanding borrowings
or related interest expense for the three months ended March 31, 1998.
During the quarter ended March 31, 1999, operating expenses included a non-cash
charge of $3,100 ($0.11 per share) to increase the allowance for loan losses on
mortgage loans primarily to address the increased principal amounts of loans
maintained on non-accrual status. There was no such charge for the quarter ended
March 31, 1998.
Segment Reporting
The Company operates in four principal business segments; small balance mortgage
loan pools acquired ("mortgage loan pools"), individual large balance mortgage
loans originated or acquired ("large mortgage loans"), real property and
securities available-for-sale ("securities"). These segments are managed
separately because each requires different levels of resources and involves
assets having different risk profiles. Segment performance is measured based on
net earnings.
13
<PAGE>
The following table sets forth the revenues and related net income and assets by
business segment for the quarters ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
Revenues Net Income Assets
-------- ---------- ------
March March March March March March
1999 1998 1999 1998 1999 1998
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loan Pools $ 9,643 $5,909 $3,149 $5,238 $432,272 $389,163
Large Mortgage Loans 2,469 64 247 57 86,119 30,109
Securities 1,557 1,454 1,403 1,307 55,910 64,925
Real Property 3,543 - 873 - 105,691 -
Other 362 2,119 (877) 1,246 32,116 25,455
------- ------ ------ ------ -------- --------
Total $17,574 $9,546 $4,795 $7,848 $712,108 $509,652
======= ====== ====== ====== ======== ========
</TABLE>
Revenues by segment is comprised of interest income for all segments other than
real property, which is comprised of lease rental revenues. There are no
intersegment revenues or expenses.
The mortgage loan pools segment is represented by several pools of small balance
multifamily and commercial loans that the Company acquired from SPB, FMAC and
unrelated third parties. Most of these loans are from pools which average
approximately $150 to $350 per loan. The loans are concentrated in California
and the western and eastern coasts of the United States. These loans are
generally serviced by others, including SPB and FMAC, and are monitored by the
Manager on an overall basis.
The large mortgage loans segment is primarily comprised of loans originated and
serviced by the Manager. These loans are concentrated in five states and each
represents a unique investment and risk profile. These loans require much more
active involvement and direct monitoring by the Manager than do the loans
included in the mortgage loan pools segment.
The real property segment is comprised of two shopping centers and two office
buildings managed by outside professional property managers in California, Las
Vegas and France, as well as a group of seventeen properties located in three
states that are leased to the Ugly Duckling Corporation for use in connection
with that company's used car sales and finance business. These real property
investments are monitored by asset management personnel employed by the Manager.
The securities segment is comprised of the Company's CMBS securities obtained
from SPB and Imperial Credit as well as subordinated notes acquired from FMAC
and a common stock investment in a private equity REIT. The CMBS and
subordinated note investments are administered by servicers and trustees that
were put in place at the time of the applicable securitization transaction.
Personnel employed by the Manager and its affiliates actively monitor these
securities on a quarterly basis and update the Company's analytic models for
valuing the securities. The private equity REIT investment is monitored by
periodic financial reviews and communications with employees of the REIT's
advisor.
Revenues related to mortgage loan pools increased from 1998 to 1999 by $3,734 as
a result of the Company's acquisition of additional loans. The decrease in net
income related to mortgage loan pools from 1998 to 1999 of $2,089 is due to a
loan loss provision of $1,095, interest expense of $4,252 and increased
management fees of $476 offset by increased interest income of $3,734. There
were no loan loss provisions or interest expense during 1998.
Revenues and net income related to large mortgage loans increased from 1998 to
1999 by $2,405 and $190, respectively, as a result of the Company's investment
in additional loans. Large balance loans increased from 1998 to 1999 by $56,010.
Revenues and net income related to real property increased from 1998 to 1999 by
$3,543 and $873, respectively. The Company did not have any such investments at
March 31, 1998.
Revenues and net income related to other assets decreased from 1998 to 1999 by
$1,757 and $2,123, respectively. The decrease is primarily due to high cash and
interest bearing deposit balances during the quarter ended March 31, 1998 prior
to the investment of the Company's cash in mortgage loans and real estate. The
average balance of cash and interest bearing deposits for the quarters ended
March 31, 1999 and March 31, 1998 was $31,181 and $152,553, respectively.
14
<PAGE>
Balance Sheet Changes
General. During the three months ended March 31, 1999, total assets decreased
by $45,066. The decrease for the three months ended March 31, 1999 was comprised
of $44,667 of mortgage loans and accrued interest, $1,761 of securities
available-for-sale, $1,972 of real property, $1,283 of other assets and $13,454
of cash and interest bearing deposits offset by an increase in repurchase
agreements of $18,071.
Total liabilities decreased by $39,733 during the three months ended March 31,
1999. The decrease for the three months ended March 31, 1999 was comprised of
(i) payoff of the secured warehouse facility of $279,000 (ii) payoff of the
secured bank loan of $3,557, (iii) paydown of and unrealized exchange gains
related to mortgage loans secured by real property of $1,202 and (iv) decreases
in declared but unpaid dividends of $855, interest payable of $836, and various
other payables of $117 offset by (v) new borrowings under collateralized
mortgage obligations of $245,381 and (vi) an increase in funds held in escrow of
$453.
The Company's mortgage loan investment additions during the three months ended
March 31, 1999 consisted of a loan originated to an unrelated party of $2,955.
The loan is secured by property located in the United Kingdom.
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 1998. As of March 31, 1999, the Company had
repurchased 6,000,000 shares at a total cost of $56,338.
On March 10, 1999, the Company closed a securitization transaction in which the
Company's wholly-owned business trust, ICCMAC Multifamily and Commercial Trust
1999-1, sold approximately $250 million of CMO bonds. The bonds are primarily
floating interest rate bonds and are collateralized by approximately $290
million of first mortgage loans which the Company had previously acquired from
SPB. At the closing of this transaction, the Company repaid in full and
terminated its warehouse line of credit with Morgan Guaranty Trust Company of
New York. On April 27, 1999, the Company entered into a new $300 million
warehouse line of credit agreement with an affiliate of Prudential Securities
Incorporated. The Company believes that it has adequate sources of liquidity to
maintain its current business.
At March 31, 1999, the Company had outstanding borrowings of $292,754 and
stockholders' equity of $403,476 resulting in a 0.73 to 1.0 debt to equity ratio
and a 42.0% debt to total capitalization percent.
Cash and interest bearing deposits. At March 31,1999, the Company's total cash
and interest bearing deposits aggregated $9,944, a decrease of $13,454 from
December 31, 1998.
Repurchase agreements. The Company held repurchase agreements of $18,071 at
March 31, 1999. There were no such balances at December 31, 1998. The Company
earned interest income of $362 during the three months ended March 31, 1999 from
its investments in interest bearing deposits and repurchase agreements. Of such
income, $71 was derived from investments in repurchase agreements.
Securities available-for-sale. The decrease in securities available-for-sale of
$1,761 during the three months ended March 31, 1999 is due to unrealized losses
(included in comprehensive income) of $1,230 and interest payments of $2,088
offset by discount amortization of $1,557. 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.
15
<PAGE>
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 March 31, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
CMBS investments $ 45,206 $ 46,678
Mortgage Loans:
Original principal balance 480,023 480,023
Principal balance 328,961 349,447
Delinquent principal balance 10,228 10,722
Delinquent balance percent 3% 3%
Prepayments year to date 19,345 81,511
Prepayments for quarter 19,345 22,132
Losses year to date 292 845
</TABLE>
Mortgage loans. At March 31, 1999, 48 loans in the aggregate principal amount
of $21,575 were maintained on non-accrual status and considered impaired as
compared to 38 loans in the amount of $5,745 at December 31, 1998. The increase
in mortgage loans maintained on non-accrual status is primarily due to a loan
facility comprised of six loans to one borrower which recently became over 60
days past due and is in default. The loans on non-accrual status at March 31,
1999 consisted of 42 loans with a principal balance of $7,425 over 90 days past
due and 6 loans with a principal balance of $14,150 over 60 days past due.
Approximately $325 of previously accrued interest income was reversed for the
three months ended March 31, 1999. Additions to the allowance for loan losses
aggregated $3,100 for the three months ended March 31, 1999. The ratio of the
allowance for loan losses to non-accrual loans was 0.52 to 1 at March 31, 1999
as compared to 1.38 to 1 at December 31, 1998. The allowance for loan losses
represented 2.16% and 1.45% of the total principal balance of the Company's
mortgage loans at March 31, 1999 and December 31, 1998, respectively.
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 March 31, 1999 included $371,919 acquired from SPB
and FMAC and $141,946 acquired from unrelated third parties or originated by the
Company. At December 31, 1998, $407,978 principal balance of mortgage loans had
been acquired from SPB and FMAC and $144,924 principal balance had been acquired
from unrelated third parties.
The decrease in mortgage loans during the three months ended March 31, 1999 is
attributable to principal repayments of $41,994, amortization of premium and
deferred loan fees of $205, increase in deferred loan fees of $360, and the
provision for loan losses of $3,100 offset by additional investments of $2,955.
The only investment made during the three months ended March 31, 1999 consisted
of a loan originated to an unrelated party of $2,955. The loan is secured by
property located in the United Kingdom.
Borrowings under collateralized mortgage obligations On March 10, 1999, the
Company closed a securitization transaction in which the Company's wholly-owned
business trust, ICCMAC Multifamily and Commercial Trust 1999-1, sold
approximately $250 million of CMO bonds. The bonds are primarily floating
interest rate bonds and carry a cost of funds which approximates the cost on the
Company's then existing warehouse line of credit. The bonds are collateralized
by approximately $290 million of first mortgage loans which the Company had
previously acquired from SPB. At the closing of this transaction, the Company
repaid in full and terminated its warehouse line of credit with Morgan Guaranty
Trust Company of New York. At March 31, 1999, the balance due, net of discounts,
under the CMO bonds was $245,381.
Borrowings under secured warehouse facility. As of March 31, 1999, the
Company's warehouse line of credit was repaid and terminated. During the three
months ended March 31, 1999, the outstanding balance at December 31, 1998 of
$279,000 was repaid from the proceeds of the Company's securitization
transaction and available cash on hand.
Mortgage loans secured by real property. As of March 31, 1999, mortgage loans
secured by real property were $47,373. These loans are secured by the Company's
shopping centers in Oceanside, CA and Palos Verdes, CA and the office building
in a suburb of Paris, France with an aggregate cost of $67,157, bear interest at
effective rates ranging from 4.5% to 7.85% and have final maturity dates ranging
from 2012 to 2027.
Stockholders' equity. Stockholders' equity decreased by $5,333 during the three
months ended March 31, 1999 to $403,476. The decrease was attributable to
dividends in excess of earnings of $3,755 and a decrease in unrealized gains on
16
<PAGE>
securities available-for-sale of $1,230 and foreign exchange loss of $348 (both
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
Company's primary sources of funds for liquidity consist of secured borrowings
and principal payments and repayments at maturity on loans and securities.
Management believes these sources of liquidity are sufficient to enable the
Company to meet its obligations and loan commitments during 1999.
The Company's operating activities provided cash of $10,050 during the three
months ended March 31, 1999. During the three-month period, cash resources from
operating activities were provided primarily by net earnings.
The Company's investing activities provided cash totaling $41,259 during the
three-month period. During this period, cash flows from investing activities
were primarily provided by principal reductions on mortgage loans.
The Company's financing activities used $46,692 in cash during the three-month
period after payment of dividends related to 1998 and repayment of the Company's
warehouse line of credit with Morgan Guaranty Trust Company of New York.
On March 10, 1999, the Company closed a securitization transaction in which the
Company's wholly-owned business trust, ICCMAC Multifamily and Commercial Trust
1999-1, sold approximately $250 million of CMO bonds. At the closing of this
transaction, the Company repaid in full and terminated its warehouse line of
credit with Morgan Guaranty Trust Company of New York. On April 27, 1999, the
Company entered into a new $300 million warehouse line of credit agreement with
an affiliate of Prudential Securities Incorporated. While this new warehouse
line of credit agreement may provide funds for the Company to acquire certain
real estate-related assets, the ability of the Company to continue its' growth
is subject to the sourcing of new investments that meet the Company's investment
guidelines and that can be effectively financed.
The Company has a reverse repurchase line of credit for $25,000 with Merrill
Lynch Mortgage Capital Inc.; however, no assets have been pledged at March 31,
1999 and therefore no borrowing capacity currently exists under this facility.
In order for the Company to borrow funds under this line, the Company would have
to pledge assets acceptable to the lender.
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 5.9948%.
During the three months ended March 31, 1999, the Company paid monthly interest
on the notional balance at the fixed rate of 5.9948%, which ranged from
approximately $307 to $369 per month, and collected monthly interest at annual
rates ranging from 4.9356% to 5.5355%, or about $257 to $339 per month. The net
cost of the swap ranged from $23 to $57 per month and is included in interest
expense in the Company's operating results. Such net cost was $131 for the three
months ended March 31, 1999. As of March 31, 1999, the approximate net present
value cost of this swap was $681 and the notional balance was $69,353. There can
be no assurance that this swap can adequately limit the Company's exposure to
interest rate risk.
At March 31, 1999, the Company had an outstanding commitment to fund a mortgage
loan for approximately $24,000 which commitment has subsequently been
terminated.
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 its employees and (ii) depreciation of real property, which
management believes is not meaningful in the evaluation of income-producing real
property, which historically has not declined 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
17
<PAGE>
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 months ended March 31, 1999 and 1998, the Company's FFO was $5,586
($0.20 per share) and $7,848 ($0.23 per share), respectively. The following
table provides the calculation of the Company's FFO.
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
--------- ---------
<S> <C> <C>
Net Earnings $4,795 $7,848
Add: Depreciation of real property 791 -
--------- ---------
FFO $5,586 $7,848
========= =========
</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 has not acquired
any mortgage loans from SPB since June 30, 1998 and may not be able to acquire
mortgage loans from SPB or other parties in the future at volume and yield
levels consistent with previous acquisitions.
Current conditions in the capital markets and equity markets for mortgage REITs
has made permanent financing transactions more difficult and more expensive than
during the first part of 1998. Consequently, there can be no assurance that the
Company will be able to effectively fund future growth.
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 Y2K issue is whether the Company's computer systems will properly recognize
the "00" and the prefix "20" dates when the year changes to 2000. Many
existing computer programs use only two digits to identify a calendar year field
with the assumption that the first two digits are always "19". Such computer
systems will not properly recognize the new prefix century date of "20" and year
date "00" and 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 the Y2K compliance efforts and results of third
party vendors and service providers.
18
<PAGE>
State of Readiness
Since the Company's computer 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 for 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. The Company is in the process of contacting all of
its 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.
The Company is also in the process of identifying and evaluating individual
borrowers or tenants whose Y2K compliance failure could materially impact the
Company. The Company plans to complete this process during the third quarter of
1999.
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
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 or loans to a single borrower or a
substantial property or properties 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.
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. The
Company plans to have contingency plans in place during the third quarter of
1999.
19
<PAGE>
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, OTHER FACTORS
GENERALLY UNDERSTOOD TO AFFECT THE REAL ESTATE ACQUISITION, MORTGAGE AND LEASING
MARKETS AND SECURITY INVESTMENTS, AND THE OTHER RISKS DETAILED IN THE COMPANY'S
REGISTRATION STATEMENT ON FORM S-11, AS AMENDED, FILED WITH THE SEC, PERIODIC
REPORTS ON FORMS 10-Q, 8-K AND 10-K AND ANY AMENDMENTS WITH RESPECT THERETO
FILED WITH THE SEC 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 Disclosures About Market Risk
On March 10, 1999, the Company closed a securitization transaction in which the
Company's wholly-owned business trust, ICCMAC Multifamily and Commercial Trust
1999-1, sold approximately $250 million of CMO bonds. At the closing of this
transaction, the Company repaid in full and terminated its warehouse line of
credit with Morgan Guaranty Trust Company of New York. On April 27, 1999, the
Company entered into a new $300 million warehouse line of credit agreement with
an affiliate of Prudential Securities Incorporated.
Almost all of the CMO bonds issued by the Company as well as borrowings under
the former warehouse line of credit and potential borrowings under the new
warehouse line of credit have, had or would have variable rates of interest
tied to the LIBOR index (generally one-month LIBOR). CMO bonds are a permanent
source of funds with set maturities over several years while warehouse lines of
credit are temporary sources of funds with maturities set at less than one year.
The Company is subject to exposure from fluctuations in interest rates under the
collateralized mortgage obligations. 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 for the collateralized
mortgage obligations 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
20
<PAGE>
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
adjustable rate CMO 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 and adjustable rate CMO bond
borrowings are or would be 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 for the CMO bonds. In order to manage this
exposure, the Company has entered into an interest rate swap agreement described
below.
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
$69,353 at March 31, 1999, which declines thereafter over a period of less than
ten years. There can be no assurance that the swap can adequately limit 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 during the first quarter of 1999 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 March 31, 1999 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 March 31, 1999. Management believes that the estimated net
present value cost of the swap arrangement was $681 as of March 31, 1999. 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 March 31, 1999 and, therefore, current estimates of fair value
may differ significantly from the estimates noted above.
21
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
On May 13, 1999, Imperial Credit filed an amended Schedule 13D with the
Securities and Exchange Commission and issued a press release announcing
Imperial Credit's proposal to the Company's Board of Directors that Imperial
Credit acquire all of the common stock of the Company not already owned by
Imperial Credit at $11 per share in cash. Imperial Credit currently holds
approximately 10.8% of the Company's outstanding common stock.
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 February 11, 1999 with the Company's
press release covering earnings for the period ended December 31, 1998.
A Form 8-K was filed with the Commission on March 11, 1999 with the Company's
press release announcing the closing of a CMO bond securitization and repayment
in full of the existing warehouse line of credit.
A Form 8-K was filed with the Commission on March 23, 1999 with the Company's
press release covering the dividend declared for the quarter ended March 31,
1999.
22
<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: May 17, 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)
23
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
-------------- -------------------------------
27 Financial Data Schedule
-------------------------------------------------------------------------
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 9,944 24,339
<SECURITIES> 73,981 64,925
<RECEIVABLES> 518,391 419,272
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 4,101 1,116
<PP&E> 105,691 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 712,108 509,652
<CURRENT-LIABILITIES> 15,878 30,077
<BONDS> 245,381 0
0 0
0 0
<COMMON> 403,476 479,575
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 712,108 509,652
<SALES> 0 0
<TOTAL-REVENUES> 17,574 9,546
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 12,779 1,698
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 4,795 7,848
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 4,795 7,848
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,795 7,848
<EPS-PRIMARY> .17 .23
<EPS-DILUTED> .17 .23
</TABLE>
