<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 September 30, 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 October 31, 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 September 30, 1999 and December 31, 1998 3
Consolidated Statements of Earnings for the three and nine months ended September 30, 1999 and 4
September 30, 1998
Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 and September 30, 5
1998
Consolidated Statement of Changes in Stockholders' Equity and Comprehensive Income for the nine 6
months ended September 30, 1999
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
</TABLE>
2
<PAGE>
Imperial Credit Commercial Mortgage Investment Corp.
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998
(Dollars in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
----------------- -----------------
Assets
<S> <C> <C>
Cash and interest bearing deposits $ 62,125 $ 23,398
Repurchase agreements 67,479 -
Mortgage loans collateralizing debt obligations, net of allowance for loan losses of
$4,792 273,678 -
Mortgage loans, net of allowance for loan losses of $5,158 and $8,027, respectively 118,671 556,648
Real property, net of accumulated depreciation of $4,154 and $1,755, respectively 104,450 107,663
Securities available-for-sale, at estimated fair value 54,539 57,671
Accrued interest receivable 2,718 6,410
Other assets 4,080 5,384
--------------------------------
Total Assets $687,740 $757,174
=================================
Liabilities and Stockholders' Equity
Liabilities:
Dividends payable $ 6,270 $ 9,405
Borrowings under collateralized mortgage obligations 225,420 -
Borrowings under secured warehouse facility - 279,000
Borrowings under secured bank loan - 3,557
Mortgage loans secured by real property 47,073 48,575
Accrued expenses, payables and other liabilities, including amounts due to
affiliates of $1,758 and $2,082, respectively 6,507 7,828
--------------------------------
Total Liabilities 285,270 348,365
--------------------------------
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) (2,243) 221
Accrued dividends in excess of earnings (20,905) (17,030)
--------------------------------
Total Stockholders' Equity 402,470 408,809
--------------------------------
Total Liabilities and Stockholders' Equity $687,740 $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 and nine months ended September 30, 1999 and September 30, 1998
(Dollars in thousands, except share and earnings per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine months Ended
September 30, September 30,
--------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income
Mortgage loans $ 8,527 $ 12,223 $ 35,576 $ 28,354
Securities available-for-sale 1,621 1,566 4,672 4,631
Repurchase agreements and interest bearing deposits 1,525 98 2,418 2,284
--------------------------------------------------------
Total Interest Income 11,673 13,887 42,666 35,269
Real property rental income 3,485 3,274 10,479 4,266
--------------------------------------------------------
Total Income 15,158 17,161 53,145 39,535
--------------------------------------------------------
Operating Expenses
Management fees 1,781 1,818 5,485 4,383
Interest expense 4,585 4,441 14,338 5,475
Provision for loan losses - 3,200 4,633 3,300
Write-down of securities available-for-sale - 3,233 - 3,233
Depreciation of real property 790 720 2,372 962
Real property operating expenses 783 800 2,384 1,014
Due diligence expenses and professional fees 1,563 343 3,520 866
Other 245 428 918 1,098
--------------------------------------------------------
Total Expenses 9,747 14,983 33,650 20,331
--------------------------------------------------------
Net Earnings 5,411 2,178 19,495 19,204
Dividends ($0.22, $0.33, $0.82, and $0.85 per share,
respectively) 6,270 9,603 23,370 27,543
--------------------------------------------------------
Accrued dividends in excess of earnings $ (859) $ (7,425) $ (3,875) $ (8,339)
========================================================
Earnings per share
Basic $ 0.19 $ 0.07 $ 0.68 $ 0.57
Diluted 0.19 0.07 0.68 0.57
Weighted average common shares outstanding
Basic 28,500,000 32,703,188 28,500,000 33,901,063
Effect of dilutive stock options 150,220 - 89,699 23,389
--------------------------------------------------------
Diluted 28,650,220 32,703,188 28,589,699 33,924,452
========================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
Imperial Credit Commercial Mortgage Investment Corp.
Consolidated Statements of Cash Flows
For the nine months ended September 30, 1999 and September 30, 1998
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months Ended
September 30,
------------------------------
1999 1998
--------- ----------
<S> <C> <C>
Cash Flows from Operating Activities
Net earnings $ 19,495 $ 19,204
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization 2,463 1,034
Amortization of premium (net of unearned fees) on mortgage loans 1,346 1,177
Amortization of discount on securities available-for-sale (4,673) (4,631)
Provision for loan losses, net of charge-offs related to sales 1,923 3,300
Write-down of securities available-for-sale - 3,233
Net change in:
Accrued interest receivable 3,692 (3,889)
Other assets 1,168 (4,359)
Other liabilities (1,299) (3,618)
--------- ---------
Total Cash Provided by Operating Activities 24,115 11,451
--------- ---------
Cash Flows from Investing Activities
Purchases of securities available-for-sale - (6,096)
Payments received on securities available-for-sale 5,725 6,906
Purchases and originations of mortgage loans, net of fees (3,095) (377,308)
Principal reductions on and sales of mortgage loans 164,125 64,920
Purchase of real property and improvements, net of mortgage loans assumed (699) (73,486)
--------- ---------
Total Cash Provided by (Used for) Investing Activities 166,056 (385,064)
--------- ---------
Cash Flows from Financing Activities
Dividends paid (26,505) (22,425)
Cash borrowings under collateralized mortgage obligations 249,085 -
Repayment of collateralized mortgage obligations (23,665) -
Cash borrowings under repurchase facility - 12,400
Borrowings under (repayment of) secured warehouse facility (279,000) 275,000
Cash borrowings under (repayment of) secured bank loan (3,557) 3,348
Cash borrowings under (principal repayments on) mortgage loans secured by real property (323) 13,253
Common stock repurchased - (51,896)
--------- ---------
Total Cash Provided by (Used for) Financing Activities (83,965) 229,680
--------- ---------
Net increase (decrease) in cash and cash equivalents 106,206 (143,933)
Cash and cash equivalents at beginning of period 23,398 160,613
--------- ---------
Cash and cash equivalents at end of period $ 129,604 $ 16,680
========= =========
Supplemental Disclosure of Cash Flow Activities
Mortgage loans assumed upon real property purchases $ - $ 34,580
========= =========
Cash paid for interest $ 14,157 $ 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, 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 (Loss) 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 19,495 19,495
Change in unrealized loss on
securities available-for-sale (2,083) (2,083)
Foreign exchange loss (381) (381)
--------
Comprehensive income 17,031
--------
Dividends declared ($0.82 per share) (23,370) (23,370)
----------------------------------------------------------------------------------------
Balance at end of period 28,500,000 $3 $425,615 $(2,243) $(20,905) $402,470
========================================================================================
</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 and Definitive Merger Agreement
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 and consummated 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").
In 1997, the Company 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 advised the Company on various aspects of its business and managed its
day-to-day operations, subject to the supervision of the Board of Directors of
the Company. The Management Agreement expired on October 22, 1999 (see Note 8).
Imperial Credit currently owns 2,570,000 shares (9.0%) of the Company's
outstanding common stock (2,690,053 shares or 9.4% including certain affiliates
of Imperial Credit). Pursuant to the Management Agreement, the Manager was
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 was 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. Except for the quarter ended June 30, 1999, when an incentive fee of
$41 was earned, only base management fees have been earned.
On July 22, 1999, the Company and Imperial Credit entered into a definitive
merger agreement (the "Merger Agreement") under which Imperial Credit
effectively will acquire all of the outstanding shares of the Company (other
than shares already owned by Imperial Credit and its subsidiaries) for a cash
purchase price of $11.50 per share, subject to increase under certain
circumstances. That purchase price reflects a 16.5% premium to the Company's
closing price of $9.875 on May 12, 1999, the day before Imperial Credit publicly
announced its initial proposal to acquire the Company. Completion of the merger
is conditioned on, among other things, the approval of the holders of at least a
majority of the outstanding shares of the Company's common stock held by holders
other than Imperial Credit and certain of its affiliates.
The Merger Agreement provides for the prompt appraisal of the amount of the
termination fee payable by the Company under the Management Agreement with the
Manager. Imperial Credit agreed to increase the merger consideration payable to
holders of Company shares (other than Imperial Credit and its subsidiaries) by
the amount, if any, by which $35 million exceeds the appraised value. The
appraised value is $33 million and accordingly the merger consideration has been
increased by $2 million to approximately $11.57 per share. If the merger
transaction between the Company and Imperial Credit is completed, Imperial
Credit will not receive any payment from the Company as a result of the
termination of the Management Agreement. If the Merger Agreement is terminated,
the Manager has agreed to accept the lesser of $35 million and the appraised
value of the termination fee (valued at $33 million) as payment in full of the
termination fee. See Note 8 for further information regarding completion of the
appraisal process, increase in the merger consideration and expiration of the
Management Agreement.
The Merger Agreement contemplated that the Company would, during the 60 days
following the appointment of the appraisal firms that are engaged to appraise
the Management Agreement, solicit and explore alternative transactions which
would provide its stockholders with a more favorable alternative to the Imperial
Credit merger. During this 60-day market check period, and thereafter, the
Company may terminate the Merger Agreement in favor of a superior proposal. In
the event of such a termination, the Company will be obligated to reimburse
Imperial Credit for certain of its expenses incurred in connection with the
proposed merger, not to exceed $2 million. See Note 8 for further information
regarding expiration of the 60-day market check period.
7
<PAGE>
Unless the Merger Agreement is terminated for a superior proposal, the
transaction is expected to be completed during the first quarter of 2000.
Prudential Securities Incorporated is serving as financial advisor to a special
committee of the Company's Board of Directors, comprised of the Company's four
independent directors, initially formed to evaluate Imperial Credit's
unsolicited offer.
2. Basis of Presentation
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,
1999 and their results of operations and cash flows for the three and/or nine
month periods ended September 30, 1999 and September 30, 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
September 30, 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.
3. 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 nine months ended September 30, 1999. Comprehensive
income for the nine months ended September 30, 1998 aggregated $19,651 and was
comprised of net income of $19,204, unrealized gain on securities available-for-
sale of $165 and foreign exchange gain of $282. Comprehensive income for the
three months ended September 30, 1999 and 1998 aggregated $5,638 and $2,146 and
was comprised of net income of $5,411 and $2,178, unrealized gain (loss) on
securities available-for-sale of $105 and $(314) and foreign exchange gain of
$122 and $282, respectively.
4. Securities Available-For-Sale
At September 30, 1999, the Company's securities available-for-sale consisted of
certain CMBS interests including subordinated classes and interest only classes
collateralized by commercial mortgages, certain subordinated asset-backed notes
issued by Franchise Mortgage Acceptance Company ("FMAC", an affiliate of
Imperial Credit until November 1, 1999) and shares of a private equity REIT. In
general, subordinated classes and interest only classes of a particular series
of securities bear all losses prior to the related senior classes. Such
securities and other investments may subject the Company to credit, interest
rate and/or prepayment risks.
8
<PAGE>
The amortized cost and estimated fair value of securities available-for-sale are
summarized as follows:
<TABLE>
<CAPTION>
Balance at September 30, 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 $35,343 $ - $2,005 $33,338
Investment grade rated senior interest only interests 2,708 130 - 2,838
Non-investment grade rated subordinated interest only interests 2,034 77 - 2,111
Non-rated subordinated interest only interests 1,307 - 102 1,205
Other non-rated subordinated interests 4,093 418 - 4,511
-----------------------------------------------
Total CMBS interests 45,485 625 2,107 44,003
Non-investment grade rated subordinated notes 6,175 - 639 5,536
Private equity REIT 5,000 - - 5,000
-----------------------------------------------
Total $56,660 $625 $2,746 $54,539
===============================================
</TABLE>
<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 $28,695
and $29,317 at September 30, 1999 and December 31, 1998, respectively. There
were no sales of securities available-for-sale during the nine-month period
ended September 30, 1999.
5. 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.
9
<PAGE>
As of September 30, 1999 and December 31, 1998, the Company's mortgage loan
portfolio consisted of the following:
<TABLE>
<CAPTION>
As of September 30, 1999 As of December 31, 1998
------------------------ ------------------------
Number Amount Number Amount
------ -------- ------ --------
<S> <C> <C> <C> <C>
Multifamily loans 705 $198,193 968 $270,170
Commercial loans 245 177,559 374 264,732
Construction loan participation 1 18,000 1 18,000
-----------------------------------------------------------
Total principal 951 393,752 1,343 552,902
====== ======
Unamortized premium 10,333 14,344
Unearned loan fees (1,786) (2,571)
Allowance for loan losses (9,950) (8,027)
-------- --------
Net carrying amount $392,349 $556,648
======== ========
</TABLE>
The Company has acquired mortgage loan pools from affiliated entities, including
SPB and FMAC. During the three months ended September 30, 1999, SPB and FMAC
reacquired $5,396 and $3,900, respectively, principal balance of mortgage loans
that the Company previously acquired from SPB and FMAC without any gain or loss
to the Company. As of September 30, 1999 and December 31, 1998, the Company's
mortgage loan portfolio acquired from affiliates consisted of the following:
<TABLE>
<CAPTION>
As of September 30, 1999 As of December 31, 1998
------------------------ ------------------------
Number Amount Number Amount
------ -------- ------- --------
<S> <C> <C> <C> <C>
Principal balance of SPB loans 747 $269,425 985 $353,477
Principal balance of FMAC loans 0 - 55 54,501
----------------------------------------------------------
Total principal balance of loans
acquired from affiliates of Manager 747 $269,425 1,040 $407,978
==========================================================
</TABLE>
Mortgage loans held for investment includes loans held as security for the
Company's collateralized mortgage obligations. The total principal balance of
mortgage loans held as security for collateralized mortgage obligations was
$269,345 and consisted of 746 mortgage loans. All mortgage loans held as
security for collateralized mortgage obligations were acquired from SPB.
6. 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 (the "ICCMAC Trust"), sold approximately $250,000 face amount 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 with Morgan
Guaranty Trust Company of New York ("Morgan"). The bonds were originally
collateralized by approximately $282,000 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. At September 30, 1999, the outstanding CMO bonds are summarized as
follows:
<TABLE>
<CAPTION> Unamortized
Principal Discount Net Interest Rate
--------- ----------- --------- ---------------
<S> <C> <C> <C> <C>
Class A $ 78,549 $ - $ 78,549 Libor + 0.28%
Class A-2 94,831 - 94,831 Libor + 0.42%
Class S 9,540 1,097 8,443 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 20 14,519 Libor + 1.55%
-------- ------ --------
Total $226,537 $1,117 $225,420
======== ====== ========
</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 Trust.
10
<PAGE>
7. 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 "other" category reflects cash and interest bearing deposits,
repurchase agreements and the income derived therefrom as well as other assets
and liabilities and all due diligence expenses, professional fees and other
expenses.
The following table sets forth the revenues and related net earnings and assets
by business segment for the three and nine months ended September 30, 1999 and
1998, respectively:
<TABLE>
<CAPTION>
Revenues Net Earnings Assets
------------------- ------------------ ---------------------
Three Months Ended 1999 1998 1999 1998 1999 1998
September 30, -------- -------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loan Pools $ 6,619 $10,811 $1,993 $ 2,851 $311,721 $499,985
Large Mortgage Loans 1,908 1,412 1,688 1,145 83,346 85,909
Real Property 3,485 3,274 868 702 104,450 108,271
Securities 1,621 1,566 1,467 (1,827) 54,539 60,074
Other 1,525 98 (605) (693) 133,684 22,332
------- ------- ------ ------- -------- --------
Total $15,158 $17,161 $5,411 $ 2,178 $687,740 $776,571
======= ======= ====== ======= ======== ========
Revenues Net Earnings Assets
------------------- -------------------- ---------------------
Nine months Ended 1999 1998 1999 1998 1999 1998
September 30, -------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loan Pools $25,390 $26,198 $ 8,782 $15,700 $311,721 $499,985
Large Mortgage Loans 10,186 2,156 6,610 1,690 83,346 85,909
Real Property 10,479 4,266 2,466 973 104,450 108,271
Securities 4,672 4,631 4,208 931 54,539 60,074
Other 2,418 2,284 (2,571) (90) 133,684 22,332
------- ------- ------- ------- -------- --------
Total $53,145 $39,535 $19,495 $19,204 $687,740 $776,571
======= ======= ======= ======= ======== ========
</TABLE>
8. Subsequent Events
At 12:01 a.m. on October 13, 1999, the 60-day market check period during which
the Company was permitted to conduct an unrestricted solicitation of potentially
superior proposals pursuant to the Merger Agreement expired. A special committee
of the Company's Board of Directors, comprised of the Company's four independent
directors, with advice from its financial advisor, determined that none of the
proposals received during the 60-day market check period was superior to the
proposed merger transaction with Imperial Credit. The Merger Agreement provides
that the Company retains the right to consider superior proposals, if any,
received on an unsolicited basis.
On October 22, 1999, the merger consideration pursuant to the Merger Agreement
was increased from $11.50 cash per share to approximately $11.57 cash per share.
The merger consideration increase resulted from an appraisal process performed
in connection with the valuation of the termination fee payable by the Company
to the Manager upon termination or expiration of the Management Agreement. The
Merger Agreement provides that if the appraisal process were to value the
termination fee at less than $35 million, then the difference between $35
million and the appraised value of the termination fee would be paid to the
Company's stockholders upon closing of the proposed merger as an increase in the
merger consideration. The appraisal process was completed on October 22, 1999
and valued the termination fee at $33 million. Under the Merger Agreement, the
$2 million difference will result in an increase in the merger consideration of
approximately $0.07 per share.
At the close of business on October 22, 1999, the Management Agreement expired
and the Company internalized its management. The Company, with the consent of
the Manager, hired all of the Manager's employees to run the Company's
operations on an internalized basis. This internalization of management should
have no effect on the Company's operations other than to decrease the cost of
managing the Company as compared to the asset management fee that the Company
11
<PAGE>
previously paid to the Manager under the Management Agreement. If the Merger
Agreement is terminated, the Company will be obligated to pay Imperial Credit
$33 million for non-renewal of the Management Agreement.
The Merger Agreement provides that Imperial Credit or the Company may terminate
the Merger Agreement and abandon the merger and the transactions contemplated by
the Merger Agreement if the merger has not been consummated prior to January 31,
2000 (the "Sunset Date"). Effective as of October 29, 1999, the Merger Agreement
has been amended to extend the Sunset Date to February 29, 2000.
The Company, its directors and Imperial Credit have been named as defendants in
a putative class action lawsuit filed on July 22, 1999 by Riviera-Enid, a
Florida limited partnership, in the Superior Court of the State of California
for Los Angeles County, California, docket number BC213902. The complaint
alleges that the proposed merger constitutes a breach of fiduciary duty by the
defendants because the merger price is alleged to be less than the liquidation
value of the Company's assets. The complaint also alleges that the defendants
have acted to the detriment of the Company's stockholders other than Imperial
Credit in that: (i) the defendants allegedly failed to solicit arm's-length bids
to sell the Company; (ii) the proposed price allegedly represents a low premium
over the market price and is below the book value of the Company's common stock;
(iii) Imperial Credit allegedly had an advantage over other potential bidders as
a result of the Management Agreement termination fee and (iv) the proposed
merger allegedly does not "give fair valuation" to Company-owned property. The
complaint also alleges that Imperial Credit will receive $4 million more than it
otherwise would have received, but for the proposed merger, in connection with a
termination fee that the Company received on an unidentified mortgage loan
secured by property in the United Kingdom. Finally, the complaint alleges that
some of the directors have conflicts of interest because of their affiliation
with Imperial Credit and that the proposed merger will benefit Imperial Credit
at the expense of the Company's other stockholders. The complaint seeks
certification of a class of all stockholders of the Company whose stock will be
acquired in connection with the proposed merger and seeks injunctive relief that
would, if granted, prevent the completion of the proposed merger. The complaint
also seeks damages in an unspecified amount and other relief.
On November 1, 1999, the Company was served with an amended complaint in the
putative class action. No motion for leave to file the amended complaint has
been filed to the Company's knowledge. The amended complaint purports to allege
a claim for breach of fiduciary duty against each of the defendants named in the
original complaint. The amended complaint alleges that defendants have (i)
engaged in a scheme to freeze out the Company's public stockholders; (ii)
created a poison pill, other defensive measures and a tainted negotiation
process that have made it impossible to maximize shareholder value; (iii)
improperly agreed to reimburse Imperial Credit for up $2 million of expenses
under certain circumstances if the proposed merger is not completed, which
reimbursement obligation made competing bids impossible; (iv) improperly ended
the 60-day market check period prior to determination of the Management
Agreement termination fee, thus requiring prospective bidders to bid in
ignorance; (v) failed to give consideration to competing bids, or a fair
opportunity for competing bidders to make proposals; (vi) improperly limited the
pool of potential acquisition candidates and rejected liquidation or disposition
of individual assets; (vii) improperly allowed defendants H. Wayne Snavely,
Kevin E. Villani and Mark S. Karlan to participate in negotiations with
acquisition candidates; (viii) improperly limited the ability of the Board of
Directors to consider new offers after the close of the 60-day market check
period; (ix) improperly permitted Imperial Credit to threaten a hostile takeover
of the Company; and (x) negotiated an inappropriate fee arrangement with
Prudential Securities Incorporated.
The amended complaint further alleges that, by certain actions and inactions,
Imperial Credit prevented the Company from maximizing stockholder value, and
alleges conflicts of interest on the part of each of the defendants. The amended
complaint also alleges that the price agreed to in the merger agreement is
grossly unfair. The amended complaint purports to be brought as a class action
on behalf of a class of persons affected by the proposed merger. The amended
complaint seeks certification of a class, injunctive relief which, if granted,
would prevent the completion of the proposed merger, damages in an unspecified
amount and other relief.
On November 3, 1999, the Company's counsel received a letter from counsel for
the plaintiffs asserting their intent to seek a temporary restraining order,
expedited discovery, and a date for a preliminary injunction hearing. No motion
for a preliminary injunction has been filed. By letter of November 10, 1999,
counsel for the plaintiffs stated that the plaintiffs have decided not to move
forward with a motion for a temporary restraining order or preliminary
injunction at that time. The Company believes that the material allegations of
the complaint and the amended complaint are without merit.
12
<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 operates in a manner designed 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, 1999, the Company had repurchased
6,000,000 shares of its common stock at a cost of $56,338, had real estate
related invested assets of $551,338 and had outstanding borrowings of $272,493.
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 (the "Rights 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. The Rights Agreement was amended
on July 22, 1999 to permit consummation of the merger contemplated by the Merger
Agreement between the Company and Imperial Credit and a copy of the amendment
was included as an exhibit to the Company's Amendment No. 1 on Form 8-A/A filed
with the SEC on July 29, 1999.
Results of Operations
Total income of $15,158 for the quarter ended September 30, 1999 resulted in net
earnings of $5,411 or $0.19 basic and diluted net earnings per share as compared
to total income of $17,161 and net earnings of $2,178 or $0.07 basic and diluted
net earnings per share for the same period of last year. Total income of $53,145
for the nine months ended September 30, 1999 resulted in net earnings of $19,495
or $0.68 basic and diluted net earnings per share as compared to total income of
$39,535 and net earnings of $19,204 or $0.57 basic and diluted net earnings per
share for the same period of last year.
Dividends Declared and Dividends In Excess Of Earnings. The Company declared
dividends on September 29, 1999 and September 21, 1998 of $6,270 ($0.22 per
share) and $9,603 ($0.33 per share), respectively, to stockholders of record on
October 8, 1999 and September 30, 1998, respectively. The dividends declared on
September 29, 1999 and September 21, 1998 covered the three-month periods of
operations ended September 30, 1999 and 1998, respectively. The September 29,
1999 dividend was accrued as of September 30, 1999. As a result of these
dividends, the Company incurred dividends in excess of earnings of $859 and
$7,425 for the three months ended September 30, 1999 and 1998, respectively. The
Company declared dividends on June 22, 1999 and June 25, 1998 of $8,550 ($0.30
per share) and $9,660 ($0.28 per share), respectively, to stockholders of record
on June 30, 1999 and July 9, 1998, respectively. These dividends declared in
June of each year covered the second quarter's results of operations for each
year, respectively. 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. These
dividends declared in March of each year covered the prior year's remaining
undistributed taxable income and the first quarter's results of operations for
each year, respectively. As a result of these dividends, the Company incurred
dividends in excess of earnings of $3,875 and $8,339 for the nine months ended
September 30, 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 for the three and nine months ended September 30, 1999 and 1998.
Information is based on daily average balances during the reported periods.
13
<PAGE>
<TABLE>
<CAPTION>
Three months ended Three months ended
September 30, 1999 September 30, 1998
---------------------------------- ----------------------------------
Interest Average Annualized Interest Average Annualized
Income Balance Yield Income Balance Yield
-------- --------- ----------- -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans $ 8,527 $414,794 8.22% $12,223 $555,107 8.81%
Securities available-for-sale 1,621 56,210 11.54% 1,566 58,394 10.73%
Repurchase agreements and interest
bearing deposits 1,525 121,730 5.01% 98 8,271 4.74%
------- -------- ------- --------
Total 11,673 $592,734 7.88% 13,887 $621,772 8.93%
======== ========
Mortgage loans - non-recurring income - -
------- -------
Total Interest Income 11,673 13,887
Less interest expense* 3,812 $228,702 6.67% 3,620 $213,484 6.78%
------- ======== ------- ========
Net Interest Income $ 7,861 $10,267
======= =======
<CAPTION>
Nine months ended Nine months ended
September 30, 1999 September 30, 1998
---------------------------------- ----------------------------------
Interest Average Annualized Interest Average Annualized
Income Balance Yield Income Balance Yield
-------- --------- ----------- -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans $30,846 $485,586 8.47% $27,536 $424,217 8.65%
Securities available-for-sale 4,672 56,603 11.01% 4,631 57,573 10.72%
Repurchase agreements and interest
bearing deposits 2,418 67,184 4.80% 2,284 55,516 5.49%
------- -------- ------- --------
Total 37,936 $609,373 8.30% 34,451 $537,306 8.55%
======== ========
Mortgage loans - non-recurring income 4,730 818
------- -------
Total Interest Income 42,666 35,269
Less interest expense* 11,898 $259,604 6.11% 4 463 $ 84,292 7.06%
------- ======== ------- ========
Net Interest Income $30,768 $30,806
======= =======
</TABLE>
* Excludes interest expense attributable to real property.
Non-recurring income for 1999 consists of certain fees from FMAC of $0 and $647
for the three and nine month periods, respectively, and a $4,083 termination fee
received by the Company in May in connection with the termination of a
commitment to fund a loan in London, England. Non-recurring income for 1998
consists of a premium received from FMAC in connection with FMAC's call of
certain loans.
The decrease in interest income from mortgage loans for the three months ended
September 30, 1999 from the comparable period for the prior year is due
primarily to the put back of mortgage loans to SPB and to FMAC and a related
decrease in the average investment balance of approximately $140,000. The
increase in interest income from repurchase agreements and interest bearing
deposits is due to increased investments in repurchase agreements.
The increase in interest income from mortgage loans for the nine months ended
September 30, 1999 from the comparable period for the prior year is due
primarily to the termination fee related to the aforementioned commitment to
fund a loan in London, England and the Company's growth subsequent to its
initial public offering, offset by the decrease in mortgage loans as a result of
put backs and repayments. The increase in interest income from repurchase
agreements and interest bearing deposits is due to increased investments in
repurchase agreements, offset by lower interest rates.
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 three
and nine months ended September 30, 1999 and 1998, respectively. 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.
14
<PAGE>
<TABLE>
<CAPTION>
Three Months ended Three Months ended
September 30, 1999 September 30, 1998
------------------------------ ------------------------------
Amount Yield Amount Yield
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Real Property Income
Rental income $3,485 $3,274
Less operating expenses 783 800
------ ------
Rental income after operating expenses 2,702 10.03% 2,474 9.63%
Less real property interest expense 773 6.60% 821 6.79%
------ ------
Real property FFO 1,929 1,653
Less depreciation 790 720
------ ------
Real property income $1,139 $ 933
====== ======
<CAPTION>
Nine months ended Nine months ended
September 30, 1999 September 30, 1998
------------------------------ ------------------------------
Amount Yield Amount Yield
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Real Property Income
Rental income $10,479 $4,266
Less operating expenses 2,384 1,014
------- ------
Rental income after operating expenses 8,095 9.94% 3,252 9.81%
Less real property interest expense 2,440 6.92% 1,012 6.95%
------- ------
Real property FFO 5,655 2,240
Less depreciation 2,372 962
------- ------
Real property income $ 3,283 $1,278
======= ======
</TABLE>
Operating Expenses. Management fees were $1,781 and $5,485 for the three and
nine months ended September 30, 1999 and $1,818 and $4,383 for the three and
nine months ended September 30, 1998, respectively. Management fees for all
periods were comprised of the 1% per annum base management fee payable to the
Manager for the respective periods (as provided in the Management Agreement).
Management fees for the nine months ended September 30, 1999 also included $41
of incentive management fees. On October 23, 1999, the Company became
internally managed immediately following the expiration of the Management
Agreement. As a result of that internalization, the Company will no longer
incur management fees but will incur personnel expenses in an amount
significantly less than the prior management fees. The Company incurred due
diligence expenses and professional fees of $1,563 and $3,520 for the three and
nine months ended September 30, 1999, respectively, compared to $343 and $866
during the respective periods of 1998. The increase in due diligence expenses
and professional fees was due to accounting, legal, and investment banking
expenses relating to the Company's exploration of various strategic
alternatives. Other expenses were comprised of insurance premiums, directors'
fees, occupancy costs, investor relations expenses and other miscellaneous
expenses. The average outstanding borrowings for the three and nine months ended
September 30, 1999 aggregated $275,554 and $306,635, respectively, with interest
expense of $4,585 and $14,338, respectively, and a resulting average interest
rate of 6.66% and 6.23%, respectively. 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 nine months ended September 30, 1999, operating expenses included a
non-cash charge of $4,633 ($0.16 per share) to increase the allowance for loan
losses on mortgage loans primarily to address the increased principal amount of
loans maintained on non-accrual status. There were no such non-cash charges for
the three months ended September 30, 1999. Non-cash charges during the three
and nine months ended September 30, 1998 aggregated $6,433 ($0.20 per share) and
$6,533 ($0.19 per share), respectively. Such 1998 non-cash charges included
$3,300 ($3,200 for the three months ended September 30, 1998) to increase the
allowance for loan losses on mortgage loans primarily to address increased
delinquencies and a $3,233 impairment write-down of the Company's CMBS interest-
only securities to estimated fair value based primarily on accelerated
prepayments and market conditions.
Segment Reporting
15
<PAGE>
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 "other" category reflects cash and interest bearing deposits,
repurchase agreements and the income derived therefrom as well as other assets
and liabilities and all due diligence expenses, professional fees and other
expenses.
The following table sets forth the revenues and related net earnings and assets
by business segment for the three and nine months ended September 30, 1999 and
1998:
<TABLE>
<CAPTION>
Revenues Net Earnings Assets
------------------- ------------------- ---------------------
Three Months Ended 1999 1998 1999 1998 1999 1998
September 30, -------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loan Pools $ 6,619 $10,811 $1,993 $ 2,851 $311,721 $499,985
Large Mortgage Loans 1,908 1,412 1,688 1,145 83,346 85,909
Real Property 3,485 3,274 868 702 104,450 108,271
Securities 1,621 1,566 1,467 (1,827) 54,539 60,074
Other 1,525 98 ( 605) (693) 133,684 22,332
------- ------- ------ ------- -------- --------
Total $15,158 $17,161 $5,411 $ 2,178 $687,740 $776,571
======= ======= ====== ======= ======== ========
<CAPTION>
Revenues Net Earnings Assets
------------------- -------------------- ---------------------
Nine Months Ended 1999 1998 1999 1998 1999 1998
September 30, -------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loan Pools $25,390 $26,198 $ 8,782 $15,700 $311,721 $499,985
Large Mortgage Loans 10,186 2,156 6,610 1,690 83,346 85,909
Real Property 10,479 4,266 2,466 973 104,450 108,271
Securities 4,672 4,631 4,208 931 54,539 60,074
Other 2,418 2,284 (2,571) (90) 133,684 22,332
------- ------- ------- ------- -------- --------
Total $53,145 $39,535 $19,495 $19,204 $687,740 $776,571
======= ======= ======= ======= ======== ========
</TABLE>
Revenues by segment are 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 continental United States. These loans
are generally serviced by others, previously including SPB and FMAC, and are
monitored by the Company (and previously by the Manager) on an oversight basis.
The large mortgage loans segment is primarily comprised of loans originated by
and serviced by the Company (and previously 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 Company (and previously 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 net 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
Company (and previously 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 Company (and previously 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.
16
<PAGE>
Revenues and net earnings related to mortgage loan pools for the three months
ended September 30 decreased from 1998 to 1999 by $4,192 and $858, respectively.
The decrease in revenues was primarily due to a reduction in mortgage loans
during the period. The decrease in net earnings is due to decreased interest
income of $4,192 and increased interest expense of $322 offset by decreased loan
loss provision of $3,200 and management fees of $456.
Revenues and net earnings related to mortgage loan pools for the nine months
ended September 30, 1999 decreased from 1998 by $808 and $6,918, respectively.
The decrease in revenues was due to the Company's reduction in mortgage loans
during 1999. The average balance of mortgage loans decreased from 1998 to 1999
by approximately $188,000. The decrease in net earnings is due to increased
interest expense of $7,668 and management fees of $24, and decreased interest
income of $808 offset by a decrease in loan loss provision of $1,582.
Revenues and net earnings related to large mortgage loans for the three months
ended September 30 increased from 1998 to 1999 by $496 and $543, respectively.
Revenues and net earnings related to large mortgage loans for the nine months
ended September 30 increased from 1998 to 1999 by $8,030 and $4,920,
respectively. The increases were due primarily to the recognition of $4,000 in
fees from the termination of a loan commitment during the three months ended
June 30, 1999 and the Company's investment in additional loans. Average large
mortgage loan balances increased from 1998 to 1999 by $58,878.
Revenues and net earnings related to real property for the three months ended
September 30 increased from 1998 to 1999 by $211 and $166, respectively.
Revenues and net earnings related to real property for the nine months ended
September 30 increased from 1998 to 1999 by $6,213 and $1,493, respectively.
The increases were due to the Company making its initial investments in real
property during the three months ended June 30, 1998.
Revenues related to other assets for the three months ended September 30
increased from 1998 to 1999 by $1,427 as a result of higher average cash
balances during the three months ended September 30, 1999. The increase in net
earnings of $88 from the comparable prior period is due primarily to increased
interest income from cash balances, offset by increased diligence expenses and
professional fees of $1,220.
Revenues related to other assets for the nine months ended September 30
increased from 1998 to 1999 by $134. Net earnings related to other assets for
the nine months ended September 30 decreased from 1998 to 1999 by $2,481. The
increase in revenues is primarily due to higher cash and interest bearing
deposit balances during the nine months ended September 30, 1999. The average
balance of cash and interest bearing deposits for the nine months ended
September 30, 1999 and September 30, 1998 was $69,334 and $55,398, respectively.
The decrease in net earnings is primarily due to an increase in diligence
expenses and professional fees of $2,654, offset by increased revenues of $134.
Balance Sheet Changes
General. During the nine months ended September 30, 1999, total assets
decreased by $69,434. The decrease for the nine months ended September 30, 1999
was comprised of $167,991 of mortgage loans and accrued interest, $3,132 of
securities available-for-sale, $3,213 of real property, and $1,304 of other
assets offset by an increase in cash and interest bearing deposits of $38,727
and repurchase agreements of $67,479. The decline in mortgage loans was due
primarily to sales and principal reductions.
Total liabilities decreased by $63,095 during the nine months ended September
30, 1999. The decrease for the nine months ended September 30, 1999 was
comprised of (i) payoff of a secured warehouse facility of $279,000 (ii) payoff
of a secured bank loan of $3,557, (iii) paydown of borrowings under
collateralized mortgage obligations of $23,665, (iv) paydown of, and unrealized
exchange gains related to, mortgage loans secured by real property of $1,502 and
(v) decreases in declared but unpaid dividends of $3,135, interest payable of
$990, and various other payables of $331, offset by (vi) new borrowings under
collateralized mortgage obligations of $249,085.
The Company's mortgage loan investment additions during the nine months ended
September 30, 1999 consisted of a partial funding of a large mortgage loan to an
unrelated party of $2,955. The loan was secured by property located in London,
England. During the three months ended June 30, 1999, this loan was repaid and
the Company received an approximately $4,000 termination fee (approximately
$1,500 of which is in the form of an interest-bearing note) which was recognized
as income.
17
<PAGE>
The Board of Directors of the Company authorized the repurchase of up to
12,000,000 shares of the Company's common stock pursuant to three separate
authorizations during 1998. As of September 30, 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
ICCMAC Trust sold approximately $250,000 face amount of CMO bonds. The bonds are
primarily floating interest rate bonds and were collateralized by approximately
$282,000 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 then existing warehouse line of credit with Morgan. On April 27,
1999, the Company entered into a new $300 million warehouse line of credit
agreement with an affiliate of Prudential Securities Incorporated. On June 30,
1999, this new warehouse line of credit agreement was terminated by the Company.
The Company believes that it has adequate sources of liquidity to maintain its
current business.
At September 30, 1999, the Company had outstanding borrowings of $272,493 and
stockholders' equity of $402,470 resulting in a 0.68 to 1.0 debt to equity ratio
and a 40.4% debt to total capitalization ratio.
Cash and interest bearing deposits. At September 30, 1999, the Company's total
cash and interest bearing deposits aggregated $62,125, an increase of $38,727
from December 31, 1998.
Repurchase agreements. The Company held repurchase agreements of $67,479 at
September 30, 1999. There were no such balances at December 31, 1998. The
Company earned interest income of $1,525 and $2,418, respectively, during the
three and nine months ended September 30, 1999 from its investments in interest
bearing deposits and repurchase agreements. Of such income, $889 and $1,379,
respectively, was derived from investments in repurchase agreements.
Securities available-for-sale. The decrease in securities available-for-sale of
$3,132 during the nine months ended September 30, 1999 is due primarily to
unrealized losses (included in comprehensive income) of $2,083 and the excess of
cash collections over interest earned. The Company acquired all of its CMBS
interests from Imperial Credit or its affiliates and obtained the subordinated
notes 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, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
CMBS investments $ 44,003 $ 46,678
Mortgage Loans:
Original principal balance 480,023 480,023
Principal balance 273,253 349,447
Delinquent principal balance 4,973 10,722
Delinquent balance percent 2% 3%
Prepayments year to date 72,412 81,511
Prepayments for quarter 27,400 22,132
Losses year to date 503 845
</TABLE>
Mortgage loans. At September 30, 1999, 12 loans in the aggregate principal
amount of $14,696 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 became over 90 days
past due and is in default. Approximately $262 and $587 of previously accrued
interest income was reversed for the three and nine months ended September 30,
1999. Additions to the allowance for loan losses aggregated $0 and $4,633 for
the three and nine months ended September 30, 1999, respectively. The ratio of
the allowance for loan losses to non-accrual loans was 0.68 to 1 at September
30, 1999 as compared to 1.38 to 1 at December 31, 1998. The allowance for loan
losses represented 2.53% and 1.45% of the total principal balance of the
Company's mortgage loans at September 30, 1999 and December 31, 1998,
respectively.
The Company's mortgage loans were primarily acquired from entities affiliated
with Imperial Credit. The principal balance of mortgage loans at September 30,
1999 included $269,425 acquired from SPB and $124,327 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.
18
<PAGE>
The decrease in mortgage loans during the nine months ended September 30, 1999
is attributable to sales and principal repayments of $164,125, amortization of
premium and deferred loan fees of $1,346, increase in deferred loan fees of
$360, and provision for loan losses of $4,633, offset by new mortgage loans of
$3,455 and charge offs of $2,710.
Borrowings under collateralized mortgage obligations On March 10, 1999, the
Company closed a securitization transaction in which the ICCMAC Trust sold
approximately $250,000 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 with Morgan. The bonds
originally were collateralized by approximately $282,000 of first mortgage loans
which the Company previously had acquired from SPB. At the closing of this
transaction, the Company repaid in full and terminated its warehouse line of
credit with Morgan. At September 30, 1999, the balance due, net of discounts,
under the CMO bonds was $225,420 and the principal balance of the underlying
collateral was $269,345.
Mortgage loans secured by real property. As of September 30, 1999, mortgage
loans secured by real property were $47,073. These loans are secured by the
Company's shopping centers in Oceanside, CA and Rancho Palos Verdes, CA and an
office building in a suburb of Paris, France with an aggregate cost of $67,109,
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 $6,339 during the nine
months ended September 30, 1999 to $402,470. The decrease was attributable to
unrealized losses on securities available-for-sale of $2,083 and foreign
exchange losses of $381 (both included in accumulated other comprehensive
income) and dividends in excess of earnings of $3,875.
Capital Resources and Liquidity
Liquidity is a measurement of the Company's ability to meet potential cash
requirements, including cash required to pay dividends, repay borrowings and
meet other general business needs. The Company's primary sources of liquidity
consist of cash on hand 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 during 1999.
The Company's operating activities provided cash of $24,115 during the nine
months ended September 30, 1999. During the nine month period, cash resources
from operating activities were provided primarily by net earnings.
The Company's investing activities provided cash totaling $166,056 during the
nine months ended September 30, 1999. During this period, cash flows from
investing activities were primarily provided by sales of and principal
reductions on mortgage loans.
The Company's financing activities used $83,965 in cash during the nine months
ended September 30, 1999 after payment of dividends related to 1998 and
repayment of the Company's warehouse line of credit with Morgan.
On March 10, 1999, the Company closed a securitization transaction in which the
ICCMAC Trust sold approximately $250,000 face amount of CMO bonds. At the
closing of this transaction, the Company repaid in full and terminated its
warehouse line of credit with Morgan.
The Company had a reverse repurchase line of credit for $25,000 with Merrill
Lynch Mortgage Capital Inc. that matured on March 31, 1999. The Company had no
outstanding balance thereunder at maturity and the line of credit has not been
renewed.
The Company has no available borrowing facilities and has no outstanding
commitments to fund acquisitions or investments other than a $1.9 million
unfunded portion of a loan arrangement to an existing borrower.
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 5.99%.
During the three months ended September 30, 1999, the Company paid monthly
interest on the notional balance at the fixed rate of 5.99%, which ranged from
approximately $289 to $313 per month, and collected monthly interest at annual
rates ranging from 4.99% to 5.27%, or about $252 to $275 per month. The net cost
of the swap ranged from $31 to $47 per month and is included in interest
19
<PAGE>
expense in the Company's operating results. Such net expense was $106 and $412
for the three and nine months ended September 30, 1999, respectively. As of
September 30, 1999, the approximate net present value of this swap was $785 and
the notional balance was $58,557. There can be no assurance that this swap can
adequately limit the Company's exposure to interest rate risk.
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, that 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 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, 1999, the Company's FFO was
$6,201 ($0.22 per share) and $21,867 ($0.77 per share), respectively. FFO was
$2,898 ($0.09 per share) and $20,166 ($0.59 per share) for the comparable
periods of the prior year. The following table provides the calculation of the
Company's FFO.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine months Ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net earnings $5,411 $2,178 $19,495 $19,204
Add: Depreciation of real property 790 720 2,372 962
------ ------ ------- -------
FFO $6,201 $2,898 $21,867 $20,166
====== ====== ======= =======
</TABLE>
Market Conditions
Current conditions in the capital markets and equity markets for mortgage REITs
have 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.
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.
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 service providers 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
20
<PAGE>
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.
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, continuing to evaluate the risks of Y2K issues for companies which are
now servicing the Company's mortgage loan portfolios, 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 has received correspondence from all
of its major service providers regarding the state of their Y2K readiness and
believes that its present mortgage loan servicers and property managers are Y2K
compliant. The Company is also in the process of evaluating borrowers whose Y2K
compliance failure could materially impact the Company. The Company plans to
complete this process before year end.
Costs to Address Y2K
The Company has not incurred any material 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 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. Based on responses that the Company has received from such
inquiries the Company believes that the key systems at its owned real properties
are Y2K compliant.
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.
21
<PAGE>
Contingency Plans
The Company currently does not have a written contingency plan in place. The
Company plans to have written contingency plans in place prior to year end.
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 AVAILABLILITY 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, THE COMPANY'S PRELIMINARY PROXY STATEMENT FILED WITH THE SEC
WITH RESPECT TO THE COMPANY'S PROPOSED MERGER WITH A SUBSIDIARY OF IMPERIAL
CREDIT INDUSTRIES, INC., 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
ICCMAC Trust sold approximately $250,000 face amount of CMO bonds. At the
closing of this transaction, the Company repaid in full and terminated its
warehouse line of credit with Morgan.
Almost all of the CMO bonds issued by the Company as well as borrowings under
the former warehouse line of credit with Morgan have or had 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 generally set at
less than one year.
The Company is subject to exposure from fluctuations in interest rates on the
CMO bonds. 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 and (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.
22
<PAGE>
As noted above, the Company is subject to interest rate risk. The Company's
mortgage loans that have been pledged as security for the CMO bonds 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 adjustable rate CMO bond 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
adjustable rate CMO bond 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 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
$58,556 at September 30, 1999, which declines thereafter over a period of less
than nine 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.
Interest rates during the first quarter of 1999 were relatively stable and
generally have increased during the second and third quarters of 1999. 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, 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 September 30, 1999. Management believes that the estimated net
present value of the swap arrangement was $785 as of September 30, 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 September 30, 1999 and, therefore, current estimates of fair
value may differ significantly from the estimates noted above.
23
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company, its directors and Imperial Credit have been named as defendants in
a putative class action lawsuit filed on July 22, 1999 by Riviera-Enid, a
Florida limited partnership, in the Superior Court of the State of California
for Los Angeles County, California, docket number BC213902. The complaint
alleges that the proposed merger constitutes a breach of fiduciary duty by the
defendants because the merger price is alleged to be less than the liquidation
value of the Company's assets. The complaint also alleges that the defendants
have acted to the detriment of the Company's stockholders other than Imperial
Credit in that: (i) the defendants allegedly failed to solicit arm's-length bids
to sell the Company; (ii) the proposed price allegedly represents a low premium
over the market price and is below the book value of the Company's common stock;
(iii) Imperial Credit allegedly had an advantage over other potential bidders as
a result of the Management Agreement termination fee and (iv) the proposed
merger allegedly does not "give fair valuation" to Company-owned property. The
complaint also alleges that Imperial Credit will receive $4 million more than it
otherwise would have received, but for the proposed merger, in connection with a
termination fee that the Company received on an unidentified mortgage loan
secured by property in the United Kingdom. Finally, the complaint alleges that
some of the directors have conflicts of interest because of their affiliation
with Imperial Credit and that the proposed merger will benefit Imperial Credit
at the expense of the Company's other stockholders. The complaint seeks
certification of a class of all stockholders of the Company whose stock will be
acquired in connection with the proposed merger and seeks injunctive relief that
would, if granted, prevent the completion of the proposed merger. The complaint
also seeks damages in an unspecified amount and other relief.
On November 1, 1999, the Company was served with an amended complaint in the
putative class action. No motion for leave to file the amended complaint has
been filed to the Company's knowledge. The amended complaint purports to allege
a claim for breach of fiduciary duty against each of the defendants named in the
original complaint. The amended complaint alleges that defendants have (i)
engaged in a scheme to freeze out the Company's public stockholders; (ii)
created a poison pill, other defensive measures and a tainted negotiation
process that have made it impossible to maximize shareholder value; (iii)
improperly agreed to reimburse Imperial Credit up to $2 million of expenses
under certain circumstances if the proposed merger is not completed, which
reimbursement obligation made competing bids impossible; (iv) improperly ended
the 60-day market check period prior to determination of the Management
Agreement termination fee, thus requiring prospective bidders to bid in
ignorance; (v) failed to give consideration to competing bids, or a fair
opportunity for competing bidders to make proposals; (vi) improperly limited the
pool of potential acquisition candidates and rejected liquidation or disposition
of individual assets; (vii) improperly allowed defendants H. Wayne Snavely,
Kevin E. Villani and Mark S. Karlan to participate in negotiations with
acquisition candidates; (viii) improperly limited the ability of the Board of
Directors to consider new offers after the close of the 60-day market check
period; (ix) improperly permitted Imperial Credit to threaten a hostile takeover
of the Company; and (x) negotiated an inappropriate fee arrangement with
Prudential Securities Incorporated.
The amended complaint further alleges that, by certain actions and inactions,
Imperial Credit prevented the Company from maximizing stockholder value, and
alleges conflicts of interest on the part of each of the defendants. The amended
complaint also alleges that the price agreed to in the merger agreement is
grossly unfair. The amended complaint purports to be brought as a class action
on behalf of a class of persons affected by the proposed merger. The amended
complaint seeks certification of a class, injunctive relief which, if granted,
would prevent the completion of the proposed merger, damages in an unspecified
amount and other relief.
On November 3, 1999, the Company's counsel received a letter from counsel for
the plaintiffs asserting their intent to seek a temporary restraining order,
expedited discovery, and a date for a preliminary injunction hearing. No motion
for a preliminary injunction has been filed. By letter of November 10, 1999,
counsel for the plaintiffs stated that the plaintiffs have decided not to move
forward with a motion for a temporary restraining order or preliminary
injunction at that time. The Company believes that the material allegations of
the complaint and the amended complaint are without merit.
Item 2. Changes in Securities and Use of Proceeds
None
24
<PAGE>
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.1 - Amendment to the Merger Agreement, dated as of October 29, 1999,
by and among Imperial Credit, ICCMIC Acquisition Corp., a wholly-
owned subsidiary of Imperial Credit, and the Company.
Exhibit 27 - Financial Data Schedule.
_____________________________
(b) Reports on Form 8-K
A Form 8-K was filed with the Commission on July 7, 1999 announcing that the
Company terminated its new $300 million warehouse line and resold certain
mortgage loans to affiliates.
A Form 8-K was filed with the Commission on July 23, 1999 announcing that the
Company and Imperial Credit entered into a definitive merger agreement.
A Form 8-K was filed with the Commission on August 17, 1999 with the Company's
press release covering earnings for the period ended June 30, 1999.
A Form 8-K was filed with the Commission on September 29, 1999 with the
Company's press release covering the dividend declared for the quarter ended
September 30, 1999.
A Form 8-K was filed with the Commission on October 20, 1999 with the Company's
press release covering the expiration of the 60-day market check period pursuant
to the previously announced merger agreement with Imperial Credit Industries,
Inc.
A Form 8-K was filed with the Commission on October 26, 1999 with the Company's
press release announcing the increase in merger consideration pursuant to the
previously announced merger agreement with Imperial Credit Industries, Inc.
25
<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: November 15, 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)
26
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
- -------------- -------------------------------
10.1 Amendment to the Merger Agreement, dated as of October 29,
1999, by and among Imperial Credit, ICCMIC Acquisition Corp.,
a wholly-owned subsidiary of Imperial Credit, and the Company.
27 Financial Data Schedule
- --------------------------------------------------------------------------------
27
<PAGE>
AMENDMENT NO. 1 EXHIBIT 10.1
TO MERGER AGREEMENT
AMENDMENT NO. 1 TO MERGER AGREEMENT (this "Amendment"), dated as of
---------
October 29, 1999, by and among Imperial Credit Commercial Mortgage Investment
Corp., a Maryland corporation (the "Company"), Imperial Credit Industries, Inc.,
-------
a California corporation ("ICII"), and ICCMIC Acquisition Corp., a Maryland
----
corporation and wholly-owned subsidiary of ICII ("Merger Sub").
----------
WHEREAS, the Company, ICII and Merger Sub have previously entered into
that certain Merger Agreement, dated as of July 22, 1999 (as amended hereby, the
"Merger Agreement"), providing for, among other things, the merger of Merger Sub
----------------
with and into the Company, with the Company continuing as the surviving
corporation; and
WHEREAS, the Company, ICII and Merger Sub desire to amend the Merger
Agreement as set forth herein.
NOW, THEREFORE, in consideration of the premises and agreements herein
contained, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, intending to be legally bound
hereby, the Company, ICII and Merger Sub hereby agree as follows:
Section 1. References. Unless otherwise specifically defined herein,
----------
each term used herein which is defined in the Merger Agreement has the meaning
assigned to such term in the Merger Agreement. Each reference to "hereof",
"hereunder", "herein" and "hereby" and each other similar reference and each
reference to "this Agreement" and each other similar reference in the Merger
Agreement shall from and after the effective date of this Amendment refer to the
Merger Agreement as amended hereby, except in any instance where any such
reference relates to the original date as of which the Merger Agreement was
executed and delivered, in which instance such reference shall relate to the
Merger Agreement, without amendment hereby.
Section 2. Amendments. The Merger Agreement is hereby amended as
----------
follows:
(a) The date reference in clause (ii) of Section 6.1(b) is hereby
changed from "January 31, 2000" to "February 29, 2000".
Section 3. Counterparts; Effectiveness; Governing Law. This
------------------------------------------
Amendment may be executed in any number of counterparts, each of which shall be
deemed to be an original, but all of which shall constitute one and the same
agreement. This Amendment shall become effective as of the date first above
written. This Amendment shall be governed and construed in accordance with the
laws of the State of Maryland without regard to the principles of conflicts of
law thereof.
IN WITNESS WHEREOF, each of the parties has caused this Amendment to
be duly executed on its behalf as of the date first above written.
<PAGE>
IMPERIAL CREDIT COMMERCIAL
MORTGAGE INVESTMENT CORP.
By: /s/ Mark S. Karlan
------------------
Name: Mark S. Karlan
Title: President & CEO
IMPERIAL CREDIT INDUSTRIES, INC.
By: /s/ H. Wayne Snavely
--------------------
Name: H. Wayne Snavely
Title: President & CEO
ICCMIC ACQUISITION CORP.
By: /s/ H. Wayne Snavely
--------------------
Name: H. Wayne Snavely
Title: President & CEO
-2-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 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> JUL-01-1999 JUL-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 62,125 16,680
<SECURITIES> 122,018 60,074
<RECEIVABLES> 395,067 585,894
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 4,080 5,652
<PP&E> 104,450 108,271
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 687,740 776,571
<CURRENT-LIABILITIES> 12,777 16,955
<BONDS> 225,420 0
402,470 419,914
0 0
<COMMON> 0 0
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 687,740 776,571
<SALES> 0 0
<TOTAL-REVENUES> 15,158 17,161
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 9,747 14,983
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 5,411 2,178
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 5,411 2,178
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 5,411 2,178
<EPS-BASIC> .19 .07
<EPS-DILUTED> .19 .07
</TABLE>
