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As filed with the Securities and Exchange Commission on April 24, 1998
Registered No. 333-46667
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
IMPAC MORTGAGE HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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MARYLAND 33-0675505
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
20371 IRVINE AVENUE
SANTA ANA HEIGHTS, CALIFORNIA 92707
(714) 556-0122
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
ARE CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------
JOSEPH R. TOMKINSON
CHIEF EXECUTIVE OFFICER
IMPAC MORTGAGE HOLDINGS, INC.
20371 IRVINE AVENUE
SANTA ANA HEIGHTS, CALIFORNIA 92707
(714) 556-0122
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPY TO:
THOMAS J. POLETTI, ESQ.
KATHERINE J. BLAIR, ESQ.
FRESHMAN, MARANTZ, ORLANSKI,
COOPER & KLEIN
9100 WILSHIRE BLVD., 8TH FLOOR EAST
BEVERLY HILLS, CALIFORNIA 90212
TELEPHONE: (310) 273-1870
FACSIMILE: (310) 274-8357
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APPROPRIATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: Form
time to time after the effective date of this Registration Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus expected to be made pursuant to Rule 434,
check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVENESS DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRANT
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT
TO SAID SECTION 8(A), MAY DETERMINE.
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registrant statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED APRIL 24, 1998
PROSPECTUS
2,009,310 SHARES
IMPAC MORTGAGE HOLDINGS, INC.
COMMON STOCK
This Prospectus relates to the offer and sale from time to time by
Imperial Credit Industries, Inc., a California corporation (the "Selling
Stockholder"), of up to an aggregate of 2,009,310 shares of Common Stock (the
"Shares"), $.01 par value per share (the "Common Stock"), of Impac Mortgage
Holdings, Inc., a Maryland corporation (the "Company"). See "Plan of
Distribution" for information relating to resales of the Shares by the Selling
Stockholder.
SEE "RISK FACTORS" STARTING ON PAGE 6 FOR A DISCUSSION OF MATERIAL
RISKS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK.
The Shares may be sold from time to time pursuant to this Prospectus by
the Selling Stockholder. The Shares may be sold by the Selling Stockholder to or
through underwriters, in block trades, purchases and resales by a broker-dealer,
exchange and/or secondary distributions, ordinary brokerage transactions and in
transactions in which brokers solicit purchases, in privately negotiated
transactions, through the writing of options on Shares (whether such options are
listed on an options exchange or otherwise), or in a combination of such methods
of sale, at market prices prevailing at the time of sale, at prices relating to
such prevailing market prices or at negotiated prices. Broker-dealers may
receive compensation in the form of discounts, concessions or commissions from
the Selling Stockholder and/or the purchasers of Shares for whom such
broker-dealers may act as agent or to whom they sell as principal or both (which
compensation as to a particular broker-dealer might be in excess of customary
commission). The Selling Stockholder may also sell Common Stock pursuant to Rule
144 promulgated under the Securities Act of 1933, as amended (the "Securities
Act"), or pledge the Shares as collateral for margin accounts, and such Shares
could be resold pursuant to the terms of such accounts. See "Plan of
Distribution." The Company will receive no part of the proceeds of sales of
Common Stock by the Selling Stockholder. All expenses of registration incurred
in connection with this offering are being borne by the Company, but all selling
and other expenses incurred by the Selling Stockholder will be borne by the
Selling Stockholder.
The Common Stock is quoted on the American Stock Exchange under the
symbol "IMH." The last reported sale price of the Common Stock on April 23,
1998, was $16.9375.
The Selling Stockholder and any agents or broker-dealers that
participate with the Selling Stockholder in the distribution of the Shares may
be deemed to be "underwriters" within the meaning of the Securities Act, and any
commissions received by them and any profit on the resale of the Shares may be
deemed to be underwriting commissions or discounts under the Securities Act.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is________________, 1998.
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NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER, AGENT OR DEALER. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES BEING OFFERED PURSUANT TO THIS
PROSPECTUS SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AT ANY TIME SUBSEQUENT TO THE DATE
HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION
OF AN OFFER TO PURCHASE SECURITIES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING THE OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company may be inspected and
copied, at prescribed rates, at the public reference facilities of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, Room 1024, as well
as at the regional offices of the Commission at Seven World Trade Center, 13th
Floor, New York, New York 10048, and the Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60601. Copies of such material may
also be obtained at prescribed rates by writing to the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission maintains a website that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of the site is http://www.sec.gov. The Common
Stock is listed on the American Stock Exchange. Reports, proxy statements and
other information described above may also be inspected and copied at the
offices of the American Stock Exchange at 86 Trinity Place, New York, New York
10006.
The Company has filed with the Commission a Registration Statement on
Form S-3 (therein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Shares of Common Stock offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. For further information with
respect to the Company and the Securities offered hereby, reference is made to
the Registration Statement and the exhibits and schedules thereto. Statements
contained herein concerning the provisions of any documents are necessarily
summaries of those documents, and each statement is qualified in its entirety by
reference to the copy of the applicable document filed with the Commission. The
Registration Statement and any amendments thereto, including exhibits filed as a
part thereof, are available for inspection and copying as set forth above.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents which have been filed with the Commission are
incorporated herein by reference:
(1) The Company's Annual Report on Form 10-K for the year ended
December 31, 1997;
(2) The description of the Common Stock contained in the Company's
Registration Statement on Form 8-A, including all amendments and reports filed
for the purpose of updating such description; and
(3) The Company's Current Reports on Form 8-K, dated December 19, 1997,
as amended, and January 28, 1998, as amended.
All documents filed by the Company pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to
the termination of this offering shall be deemed to be incorporated by reference
in this Prospectus and to be a part hereof from the date of filing of such
documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus. Subject to the
foregoing, all information appearing in this Prospectus is qualified in its
entirety by the information appearing in the documents incorporated herein by
reference.
The Company will furnish without charge to each person to whom this Prospectus
is delivered, on the written or oral request of any such person, a copy of any
and all of the documents described above under "Incorporation of Certain
Documents by Reference," other than exhibits to such documents, unless such
exhibits are specifically incorporated by reference therein. Such requests
should be directed to: Impac Mortgage Holdings, Inc., 20371 Irvine Avenue, Santa
Ana Heights, California 92707, Attention: Investor Relations, Telephone: (714)
556-0122.
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THE COMPANY
Unless the context otherwise requires, references herein to the
"Company" refer to Impac Mortgage Holdings, Inc. ("IMH"), Impac Funding
Corporation (together with its wholly owned subsidiary, Impac Secured Assets
Corp., "IFC"), IMH Assets Corp. ("IMH Assets"), IMH/ICH Dove St., LLC, and Impac
Warehouse Lending Group, Inc. ("IWLG"), collectively.
GENERAL
Impac Mortgage Holdings, Inc. is a specialty finance company, which,
together with its subsidiaries and related companies, operates three businesses:
(1) the Long-Term Investment Operations, (2) the Conduit Operations, and (3) the
Warehouse Lending Operations. The Long-Term Investment Operations invests
primarily in non-conforming residential mortgage loans and securities backed by
such loans. The Conduit Operations purchases and sells or securitizes primarily
non-conforming mortgage loans, and the Warehouse Lending Operations provides
warehouse and repurchase financing to originators of mortgage loans. These
latter two businesses include certain ongoing operations contributed to the
Company in 1995 by Imperial Credit Industries, Inc. (the "Selling Stockholder"
or "ICII"), a leading specialty finance company (the "Contribution
Transaction"). IMH is organized as a real estate investment trust ("REIT") for
federal income tax purposes, which generally allows it to pass through qualified
income to stockholders without federal income tax at the corporate level.
Long-Term Investment Operations. The Long-Term Investment Operations,
conducted by IMH, invests primarily in non-conforming residential mortgage loans
and mortgage-backed securities secured by or representing interests in such
loans and, to a lesser extent, in second mortgage loans. Non-conforming
residential mortgage loans are residential mortgages that do not qualify for
purchase by government-sponsored agencies such as the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
Such loans generally provide higher yields than conforming loans. The principal
differences between conforming loans and non-conforming loans include the
applicable loan-to-value ratios, the credit and income histories of the
mortgagors, the documentation required for approval of the mortgagors, the type
of properties securing the mortgage loans, the loan sizes, and the mortgagors'
occupancy status with respect to the mortgaged properties. Second mortgage loans
are higher yielding mortgage loans secured by a second lien on the property and
made to borrowers owning single-family homes for the purpose of debt
consolidation, home improvements, education and a variety of other purposes.
Conduit Operations. The Conduit Operations, conducted by IFC, purchases
primarily non-conforming mortgage loans and, to a lesser extent, second mortgage
loans from its network of third party correspondents and subsequently
securitizes or sells such loans to permanent investors, including the Long-Term
Investment Operations. IFC's ability to design non-conforming mortgage loans
which suit the needs of its correspondent loan originators and their borrowers
while providing sufficient credit quality to investors, as well as its efficient
loan purchasing process, flexible purchase commitment options and competitive
pricing, enable it to compete effectively with other non- conforming mortgage
loans conduits. In addition to earnings generated from ongoing securitizations
and sales to third party investors, IFC supports the Long-Term Investment
Operations of the Company by supplying IMH with non- conforming mortgage loans
and securities backed by such loans. Prior to the Contribution Transaction, IFC
was a division or subsidiary of ICII since 1990. IMH owns 99% of the economic
interest in IFC, while Joseph R. Tomkinson, the Company's Chief Executive
Officer, William S. Ashmore, the Company's President, and Richard J. Johnson,
the Company's Chief Financial Officer, are the holders of all the outstanding
voting stock of, and 1% of the economic interest in, IFC.
Warehouse Lending Operations. The Warehouse Lending Operations,
conducted by IWLG, provides warehouse and repurchase financing to IFC and to
approved mortgage banks, most of which are correspondents of IFC, to finance
mortgage loans during the time from the closing of the loans to their sale or
other settlement with pre-approved investors.
IMH's principal sources of income are (1) income from the Long-Term
Investment Operations, (2) income from the Warehouse Lending Operations, and (3)
income from IMH's equity investment in the Conduit Operations. In addition, the
Company expects to receive dividend income from its investment in the common
stock of Impac Commercial Holdings, Inc. (formerly IMH Commercial Holdings,
Inc.) ("ICH"), a REIT in which IMH currently holds shares of Common Stock and
shares of non-voting Class A Common Stock which are convertible into an
equivalent
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number of shares of ICH's Common Stock. The net income of the Conduit
Operations is fully subject to federal and state income taxes. The principal
source of income from IMH's Long-Term Investment Operations is net interest
income, which is the net spread between interest earned on mortgage loans and
securities held for investment and the interest costs associated with the
borrowings used to finance such loans and securities, including CMO debt. "CMO"
means an adjustable or fixed-rate debt obligation (bond) that is collateralized
by mortgage loans or mortgage certificates and issued by private institutions or
issued or guaranteed by FNMA, FHLMC or the Government National Mortgage
Association. The principal sources of income from the Warehouse Lending
Operations are net interest income, which is the net spread between interest
earned on warehouse loans and the interest costs associated with the borrowings
used to finance such loans, and the fee income received from the borrowers in
connection with such loans. The principal sources of income from the Conduit
Operations are gains recognized on the sale of mortgage loans and securities,
net interest income earned on loans purchased by IFC pending their
securitization or resale, servicing fees, commitment fees and processing fees.
The Company is located at 20371 Irvine Avenue, Santa Ana Heights,
California 92707 and its telephone number is (714) 556-0122.
DIVIDEND POLICY AND DISTRIBUTIONS
To maintain its qualification as a REIT, IMH intends to make annual
distributions to stockholders of at least 95% of its taxable income (which does
not necessarily equal net income as calculated in accordance with generally
accepted accounting principles) determined without regard to the deduction for
dividends paid and excluding any net capital gains. Any taxable income remaining
after the distribution of regular quarterly dividends or other dividends will be
distributed annually, on or prior to the date of the first regular quarterly
dividend payment date of the following taxable year. The dividend policy is
subject to revision at the discretion of the Board of Directors. All
distributions in excess of those required for IMH to maintain REIT status will
be made by IMH at the discretion of the Board of Directors and will depend on
the taxable earnings of IMH, the financial condition of IMH and such other
factors as the Board of Director deems relevant. The Board of Directors has not
established a minimum distribution level.
TAX STATUS OF IMH
IMH has elected to be taxed as a REIT under Sections 856 through 860 of
the Internal Revenue Code of 1986, as amended (the "Code"), commencing with its
taxable year ended December 31, 1995, and believes its organization and manner
of operation have enabled and will continue to enable it to meet the
requirements for qualification as a REIT. To maintain REIT status, any entity
must meet a number of organizational and operational requirements, including a
requirement that it currently distribute at least 95% of its taxable income
(determined without regard to the dividends paid deduction and excluding net
capital gains) to its stockholders. As a REIT, IMH generally will not be subject
to federal income tax on net income it distributes currently to its
stockholders. If IMH fails to qualify as a REIT in any taxable year, it
generally will be subject to federal income tax at regular corporate rates. See
"Federal Income Tax Considerations" and "Risk Factors-Consequences of Failure to
Maintain REIT Status May Include IMH Being Subject to Tax as a Regular
Corporation." Even if IMH qualifies for taxation as a REIT, IMH may be subject
to certain federal, state and local taxes on its income. In addition, IFC is
subject to federal and state income tax at regular corporate rates on its net
income.
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RISK FACTORS
Before investing in the Shares, prospective investors should give
special consideration to the information set forth below, in addition to the
information set forth elsewhere in this Prospectus. The following risk factors
are interrelated and, consequently, investors should treat such risk factors as
a whole.
This Prospectus contains forward-looking statements that inherently
involve risks and uncertainties within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. The Company's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth in the
following risk factors and elsewhere in this Prospectus.
NET INTEREST INCOME MAY BE ADVERSELY AFFECTED BY INTEREST RATE FLUCTUATIONS;
PREPAYMENTS OF MORTGAGE LOANS MAY ADVERSELY AFFECT NET INCOME
The Company's income may be affected by changes in market interest
rates. In conducting its Conduit Operations, the Company is subject to the risk
of rising mortgage interest rates between the time the Company commits to
purchase mortgage loans at a fixed price and the time the Company sells or
securitizes those mortgage loans. An increase in interest rates will generally
result in a decrease in market value of loans that the Company has committed to
purchase at a fixed price, but has not yet sold or securitized.
Higher rates of interest may discourage potential mortgagors from
refinancing mortgage loans, borrowing to purchase a home or seeking a second
mortgage loan, thus decreasing the volume of mortgage loans available to be
purchased by the Conduit Operations. In addition, an increase in short-term
interest rates may decrease or eliminate or, under certain circumstances, cause
to be negative, the Company's net interest spread during the accumulation of
mortgage loans held for sale or the net interest spread on mortgage loans held
for investment when such loans are financed through reverse repurchase
agreements. Should short-term interest rates exceed long-term interest rates (an
"inverted yield curve" scenario), the negative effect on the Company's net
interest spread would likely be coupled with a reduction in any income on any
servicing portfolio held by the Company to the extent prepayments on the
underlying mortgage loans increased as long-term interest rates declined.
In conducting its Long-Term Investment Operations, a significant
portion of the Company's mortgage assets held for long-term investment bear
adjustable interest ("ARMs") or pass-through rates based on short-term interest
rates, and substantially all of the Company's borrowings bear interest at fixed
rates and have maturities of less than 60 days. Consequently, changes in
short-term interest rates may significantly influence the Company's net interest
income. Mortgage loans owned by the Company that are ARMs or mortgage-backed
securities backed by ARMs are subject to periodic interest rate adjustments
based on objective indices such as the CMT Index, which is the one year constant
maturity Treasury index, or LIBOR, the London interbank offered rate. Interest
rates on the Company's borrowings are also based on short-term indices. To the
extent any of the Company's mortgage assets are financed with borrowings bearing
interest based on an index different from that used for the related mortgage
assets, so-called "basis" interest rate risk will arise. In such event, if the
index used for the subject mortgage assets is a "lagging" index (such as the
11th District Cost of Funds) that reflects market interest rate changes on a
delayed basis, and the rate borne by the related borrowings reflects market rate
changes more rapidly, the Company's net interest income will be adversely
affected in periods of increasing market interest rates. Additionally, the
Company's mortgage assets are subject to periodic interest rate adjustments that
may be less frequent than the increases or decreases in rates borne by the
borrowings or financings utilized by the Company. Accordingly, in a period of
increasing interest rates, the Company could experience a decrease in net
interest income or a net interest loss because the interest rates on borrowings
could adjust faster than the interest rates on the Company's ARMs or
mortgage-backed securities backed by ARMs. Moreover, ARMs are typically subject
to periodic and lifetime interest rate caps, which limit the amount an ARMs
interest rate can change during any given period. The Company's borrowings are
not subject to similar restrictions. Hence, in a period of rapidly increasing
interest rates, the Company could also experience a decrease in net interest
income or a net interest loss in the absence of effective hedging because the
interest rates on borrowings could increase without limitation by caps while the
interest rates on the Company's ARMs and mortgage-backed securities backed by
ARMs would be so limited. Further, some ARMs may be subject to periodic payment
caps that result in some portion of the interest accruing on the ARMs being
deferred and added to the principal outstanding. This could result in less cash
received by the Company on its ARMs than is required to pay interest on the
related borrowings, which will not have such payment caps. The Company expects
that the net effect of these factors, all other factors being equal, will be to
lower the Company's net interest income or
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cause a net interest loss during periods of rapidly rising interest rates, which
could negatively impact the market price of the Shares. No assurance can be
given as to the amount or timing of changes in income. To the extent that the
Company utilizes short-term debt financing for fixed rate mortgages or
mortgage-backed securities backed by fixed rate mortgages, the Company may also
be subject to interest rate risks. To the extent that some of the warehouse
loans made by the Company bear interest based upon an intermediate-term index
while the Company's borrowings to fund such loans bear interest based upon a
short-term index, the Company will be subject to the risk of narrowing interest
rate spreads.
Higher rates of interest may have a negative effect, in particular, on
the yield of any Company portfolio of "principal-only" securities and other
types of mortgage-backed securities purchased at a discount. If the Company were
required to dispose of any "principal-only" securities held in its portfolio in
a rising rate environment, a loss could be incurred. Lower long-term rates of
interest may negatively affect the yield on any Company portfolio of
"interest-only" securities, servicing fees receivable, and other mortgage loan
and mortgage-backed securities purchased at a premium. It is also possible that
in certain low interest rate environments the Company would not fully recoup any
initial investment in such securities or investments.
Mortgage prepayment rates vary from time to time and may cause changes
in the amount of the Company's net interest income. Prepayments on ARMs and
mortgage-backed securities backed by ARMs generally increase when mortgage
interest rates fall below the then current interest rates on such ARMs.
Conversely, prepayments of such mortgage loans generally decrease when mortgage
interest rates exceed the then-current interest rate on such mortgage loans.
Prepayment experience also may be affected by the geographic location of the
property securing the mortgage loans, the credit grade of the mortgage loan, the
assumability of the mortgage loans, the ability of the borrower to convert to a
fixed-rate loan, conditions in the housing and financial markets and general
economic conditions. In addition, prepayments on ARMs are affected by conditions
in the fixed-rate mortgage market. If the interest rates on ARMs increase at a
rate greater than the interest rates on fixed-rate mortgage loans, prepayments
on ARMs will tend to increase. In periods of fluctuating interest rates,
interest rates on ARMs may exceed interest rates on fixed-rate mortgage loans,
which may tend to cause prepayments on ARMs to increase at a greater rate than
anticipated. Prepayment rates also vary by credit grade. Second mortgage loans
generally have smaller average principal balances than first mortgage loans and
are not viewed by borrowers as permanent financing. Accordingly, second mortgage
loans may experience a higher rate of prepayment than first mortgage loans. In
addition, any future limitations on the right of borrowers to deduct interest
payments on mortgage loans for Federal income tax purposes may result in a
higher rate of prepayment on mortgage loans.
Prepayments of mortgage loans could affect the Company in several
adverse ways. A substantial portion of the ARMs acquired by the Company (either
directly as mortgage loans or through mortgage-backed securities backed by ARMs)
have been newly originated within six months of purchase and generally bear
initial interest rates which are lower than their "fully-indexed" rates (the
applicable index plus the margin). In the event that such an ARM is prepaid
prior to or soon after the time of adjustment to a fully-indexed rate, the
Company will have experienced an adverse effect on its net interest income
during the time it held such ARM compared with holding a fully-indexed ARM and
will have lost the opportunity to receive interest at the fully-indexed rate
over the expected life of the ARM.
The prepayment of any mortgage loan that had been purchased at a
premium by the Company would result in the immediate write-off of any remaining
capitalized premium amount and a consequent decrease in the Company's interest
income. The Conduit Operations' strategy at the present time is to purchase
mortgage loans on a "servicing released" basis (i.e., the Company will acquire
both the mortgage loans and the rights to service them). This strategy requires
payment of a higher purchase price by the Company for the mortgage loans, and to
the extent a premium is paid, the Company is more exposed to the adverse effects
of early prepayments of the mortgage loans, as described above.
COMPANY OPERATIONS MAY BE ADVERSELY AFFECTED IF THE COMPANY FAILS TO EFFECTIVELY
HEDGE AGAINST INTEREST RATE CHANGES OR IF LOSSES ARE INCURRED IN CONNECTION WITH
HEDGING ACTIVITIES
To mitigate risks associated with its Conduit Operations, the Company,
through IFC, enters into transactions designed to hedge interest rate risks,
which may include mandatory and optional forward selling of mortgage loans or
mortgage-backed securities, interest rate caps, floors and swaps and buying and
selling of futures and options on futures. To mitigate risks associated with its
Long-Term Investment Operations, the Company's policy is to attempt to match
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the interest rate sensitivities of its adjustable rate mortgage assets held for
investment with the associated liabilities. The Company may purchase interest
rate caps, interest rate swaps or similar instruments to attempt to mitigate the
cost of its variable rate liabilities increasing at a faster rate than the
earnings on its subject assets during a period of rising interest rates. The
nature and quantity of the hedging transactions for the Conduit Operations and
the Long-Term Investment Operations is determined by the management of the
Company based on various factors, including market conditions and the expected
volume of mortgage loan purchases, and there have been no limitations placed on
management's use of certain instruments in such hedging transactions. No
assurance can be given that such hedging transactions will offset the risks of
changes in interest rates, and it is possible that there will be periods during
which the Company could incur losses after accounting for its hedging
activities.
ACQUIRING AND INVESTING IN MORTGAGE LOANS MAY ENTAIL SUBSTANTIAL RISKS
The Company makes long-term investments in mortgage loans and mortgage-
backed securities. The Company does not obtain credit enhancements such as
mortgage pool or special hazard insurance for its mortgage loans and investments
other than private mortgage insurance and only when specified by its
underwriting criteria. Accordingly, during the time it holds mortgage loans for
investment, the Company is subject to risks of borrower defaults and
bankruptcies and special hazard losses that are not covered by standard hazard
insurance (such as those occurring from earthquakes or floods). In the event of
a default on any mortgage loan held by the Company, the Company bears the risk
of loss of principal to the extent of any deficiency between the value of the
related mortgaged property, plus any payments from an insurer or guarantor, and
the amount owing on the mortgage loan. Defaulted mortgage loans will also cease
to be eligible collateral for borrowings, and will have to be financed by the
Company out of other funds until ultimately liquidated.
Credit risks associated with non-conforming mortgage loans, especially
"B" and "C" grade loans, may be greater than those associated with conforming
mortgage loans that comply with FNMA and FHLMC guidelines. Non-conforming
mortgage loans generally consist of jumbo mortgage loans (loans with a principal
balance in excess of $227,400) or loans that are originated in accordance with
underwriting or product guidelines that differ from those applied by FNMA or
FHLMC. The principal differences between conforming loans and the non-conforming
loans purchased by the Company include the applicable loan-to-value ratios, the
credit and income histories of the mortgagors, the documentation required for
approval of the mortgagors, the types of properties securing the mortgage loans,
loan sizes and the mortgagors' occupancy status with respect to the mortgaged
property. As a result of these and other factors, the interest rates charged on
non-conforming loans are often higher than those charged for conforming loans.
The combination of different underwriting criteria and higher rates of interest
may lead to higher delinquency rates and/or credit losses for non-conforming as
compared to conforming loans and could have an adverse effect on the Company's
operations to the extent that the Company invests in such loans or securities
evidencing interests in such loans.
In addition, with respect to second mortgage loans, the Company's
security interest in the property securing such loans is subordinated to the
interest of the first mortgage holder. If the value of the property securing the
second mortgage loan is not sufficient to repay the borrower's obligation to the
first mortgage holder upon foreclosure or if there is no additional value in
such property after satisfying the borrower's obligation to the first mortgage
loan holder, the borrower's obligation to the Company will likely not be
satisfied.
The yield derived from certain classes of mortgage-backed securities
created in connection with securitizations by IFC and subsequently retained by
the Company, including, but not limited to, "interest-only," "principal-only"
and subordinated securities, is particularly sensitive to interest rate,
prepayment and credit risks. The Company's investment portfolio includes each of
these classes of securities. See "--Net Interest Income May be Adversely
Affected by Interest Rate Fluctuations; Prepayment's of Mortgage Loans May
Adversely Affect Net Income." Because subordinated securities, in general, bear
all credit losses prior to the related senior securities, the amount of credit
risk associated with any investment in such subordinated securities is
significantly greater than that associated with a comparable investment in the
related senior securities and, on a percentage basis, the risk is greater than
holding the underlying mortgage loans directly. See "--Value of Interest-Only,
Principal-Only, Residual Interest and Subordinated Securities Subject to
Fluctuation."
The Company also bears risk of loss on any mortgage-backed securities
it purchases in the secondary mortgage market. To the extent third parties have
been contracted to insure against these types of losses, the Company would be
dependent in part upon the creditworthiness and claims paying ability of the
insurer and the timeliness of reimbursement
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in the event of a default on the underlying obligations. Further, the insurance
coverage for various types of losses is limited, and losses in excess of the
limitation would be borne by the Company.
As a warehouse lender, the Company is a secured creditor of mortgage
bankers and is subject to the risks associated with such businesses, including
the risks of fraud, borrower default and bankruptcy, any of which could result
in credit losses for the Company. Any claim of the Company as a secured lender
in a bankruptcy proceeding may be subject to adjustment and delay.
In connection with its Conduit Operations, IFC has engaged in
securitizations and bulk whole loan sales. In connection with the issuance of
mortgage-backed securities by IFC, such securities have been non-recourse to
IFC, except in the case of a breach of the standard representations and
warranties made by IFC when mortgage loans are securitized. While IFC has
recourse to the sellers of mortgage loans for any such breaches, there can be no
assurance of the sellers' abilities to honor their respective obligations. IFC
has engaged in bulk whole loan sales pursuant to agreements that provide for
recourse by the purchaser against IFC (and, in certain cases, IMH as guarantor)
in the event of a breach of representation or warranty made by IFC, any fraud or
misrepresentation during the mortgage loan origination process or upon early
default on such mortgage loans. IFC has generally limited the remedies of such
purchasers to the remedies IFC receives from the persons from whom IFC purchased
such mortgage loans. However, in some cases, the remedies available to a
purchaser of mortgage loans from IFC are broader than those available to IFC
against its seller, and should a purchaser exercise its rights against IFC, IFC
may not always be able to enforce whatever remedies IFC may have against its
sellers. IFC may from time to time make provisions for loan losses related to
estimated losses from the breach of a standard representation and warranty.
DEPENDENCE ON SECURITIZATIONS MAY CREATE LIQUIDITY RISKS
The Company securitizes a substantial portion of the mortgage loans it
purchases. IFC relies significantly upon securitizations to generate cash
proceeds for repayment of its warehouse line and to create credit availability.
Further, gains on sales from IFC's securitizations represent a significant
portion of IFC's earnings. Several factors affect the Company's ability to
complete securitizations of its mortgage loans, including conditions in the
securities markets generally, conditions in the asset-backed securities market
specifically, the credit quality of the mortgage loans purchased by the Conduit
Operations and the Company's ability to obtain credit enhancement. If IFC were
unable to securitize profitably a sufficient number of its mortgage loans in a
particular financial reporting period, then IFC's revenues for such period would
decline, which could result in lower income or a loss for such period. In
addition, unanticipated delays in closing a securitization could also increase
IFC's interest rate risk by increasing the warehousing period for its mortgage
loans.
IFC endeavors to effect quarterly public securitizations of its loan
pools. However, market and other considerations, including the volume of IFC's
mortgage acquisitions and the conformity of such loan pools to the requirements
of insurance companies and rating agencies, may affect the timing of such
transactions. Any delay in the sale of a loan pool beyond the end of a fiscal
quarter would postpone the recognition of gain related to such loans and would
likely result in lower income or a loss for such quarter being reported by IFC.
In order to gain access to the securitization market, the Company has
relied, and in the future may rely, on credit enhancements provided by insurance
companies to guarantee senior interests in the related trusts to enable them to
obtain "AAA/Aaa" ratings for such interests. Any unwillingness of insurance
companies to guarantee the senior interests in the Company's loan pools could
have a material adverse effect on the Company's results of operations and
financial condition.
The Company also relies on securitizations in the form of CMO
borrowings to finance a substantial portion of the loans held by the Long-Term
Investment Operations. Any reduction in the Company's ability to complete
additional securitizations would require the Company to utilize other sources of
financing which may be on less favorable terms.
VALUE OF INTEREST-ONLY, PRINCIPAL-ONLY, RESIDUAL INTEREST AND SUBORDINATED
SECURITIES SUBJECT TO FLUCTUATION
The Company's assets include "interest-only," "principal-only,"
residual interest and subordinated securities, valued by the Company in
accordance with SFAS No. 115, "Accounting for Certain Debt and Equity
Securities," if
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purchased by the Company in the secondary market or in
accordance with SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities," if created in connection
with the securitization of mortgages held for sale by IFC. IMH records its
retained interest in IFC securitizations (including "interest-only,"
"principal-only" and subordinated securities) as investments classified as
trading securities and records its purchased residual interests and subordinated
securities as available for sale securities. Realization of these
"interest-only," "principal-only," residual interest and subordinated securities
in cash is subject to the timing and ultimate realization of cash flows
associated therewith, which is in turn effected by the prepayment and loss
characteristics of the underlying loans. Because subordinated securities, in
general, bear all credit losses prior to the related senior securities, the
amount of credit risk associated with any investment in such subordinated
securities is significantly greater than that associated with a comparable
investment in the related senior securities and, on a percentage basis, the risk
associated with holding subordinated securities is greater than holding the
underlying mortgage loans directly due to the concentration of losses in such
subordinated securities and because subordinated securities receive payments of
principal and interest after such payments on related senior securities and the
underlying mortgages. The Company estimates future cash flows from these
Ainterest-only," "principal-only," residual interest and subordinated securities
and values such securities utilizing assumptions that it believes to be
consistent with those that would be utilized by an unaffiliated third party
purchaser. If actual experience differs from the assumptions used in the
determination of the asset value, future cash flows and earnings could be
negatively impacted, and the Company could be required to reduce the value of
its Ainterest-only," "principal-only," residual interest and subordinated
securities in accordance with SFAS No. 115 and SFAS 125. The value of such
securities can fluctuate widely and may be extremely sensitive to changes in
discount rates, projected mortgage loan prepayments and loss assumptions. The
Company believes that its aggregate delinquency and loan loss experience will
increase as its mortgage portfolio matures. To the Company's knowledge, the
market for the sale of the Ainterest- only," "principal-only," residual interest
and subordinated securities is limited. No assurance can be given that
"interest-only," "principal-only," residual interest and subordinated securities
could be sold at their reported value, if at all.
The risks of investing in mortgage-backed securities include risks that
the existing credit support will prove to be inadequate, either because of
unanticipated levels of losses or, if such credit support is provided by a third
party, because of difficulties experienced by such credit support provider.
Delays or difficulties encountered in servicing mortgage-backed securities may
cause greater losses and, therefore, greater resort to credit support than was
originally anticipated, and may cause a rating agency to downgrade a security.
The Company also bears risk of loss on any mortgage-backed securities
it purchases in the secondary market. To the extent third parties have
contracted to insure against these types of losses, the Company would be
dependent in part upon the creditworthiness and claims paying ability of the
insurer and the timeliness of reimbursement in the event of a default on the
underlying obligations. Further, the insurance coverage for various types of
losses is limited, and losses in excess of the limitation would be borne by the
Company.
MORTGAGE SERVICING RIGHTS SUBJECT TO VOLATILITY
When IFC purchases loans that include the associated servicing rights
or originates loans, the allocated cost of the servicing rights will be
reflected on its financial statements as Mortgage Servicing Rights ("MSRs").
MSRs are amortized in proportion to, and over the period of, expected net
servicing income.
SFAS No. 125 requires that a portion of the cost of acquiring a
mortgage loan be allocated to the mortgage loan servicing rights based on its
fair value relative to the fair value of the components of the loan. To
determine the fair value of the servicing rights created, IFC uses a valuation
model that calculates the present value of future net servicing revenues to
determine the fair value of the servicing rights. In using this valuation
method, IFC incorporates assumptions that it believes market participants would
use in estimating future net servicing income which include estimates of the
cost of servicing, an inflation rate, ancillary income per loan, a prepayment
rate, a default rate and a discount rate commensurate with the risks involved.
MSRs are subject to some degree of volatility in the event of
unanticipated prepayments or defaults. Prepayments in excess of those
anticipated at the time MSRs are recorded could result in a decline in the fair
value of the MSRs below their carrying value requiring a provision to increase
the MSRs' valuation allowance. The rate of prepayment of loans is affected by a
variety of economic and other factors, including prevailing interest rates and
the availability of alternative financing. The effect of those factors on loan
prepayment rates may vary depending on the
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particular type of loan. Estimates of prepayment rates are made based on
management's expectations of future prepayment rates, which are based, in part,
on the historical rate of prepayment of IFC's loans, and other considerations.
There can be no assurance of the accuracy of the Company's prepayment estimates.
If actual prepayments with respect to loans serviced occur more quickly than
were projected at the time such loans were sold, the carrying value of the MSRs
may have to be reduced through a provision recorded to increase the MSRs'
valuation allowance in the period the fair value declined below the MSRs'
carrying value. If actual prepayments with respect to loans occur more slowly
than estimated, the carrying value of MSRs would not increase except for the
impact of a reduction in the valuation allowance.
BORROWINGS AND SUBSTANTIAL LEVERAGE HAVE THE POTENTIAL FOR NET INTEREST AND
OPERATING LOSSES; LIQUIDITY
The Company has employed a financing strategy to increase the size of
its investment portfolio by borrowing a substantial portion (up to approximately
98%, depending on the nature of the underlying asset) of the market value of
substantially all of its investments in mortgage loans and mortgage-backed
securities. The Company initially intended to maintain a ratio of equity capital
(book value of stockholders' equity) to total assets of approximately 15%. This
target ratio was developed on the assumption that the Company would utilize the
sale of pass-through mortgage-backed securities as its primary securitization
technique, as compared to financing the loans in the Company's long-term
investment portfolio through CMOs. Subsequently, the Company has elected to
utilize CMO borrowings to a substantial degree because CMOs are more consistent
with IMH's maintenance of its REIT tax status. CMOs receive financing treatment
as opposed to sale treatment. Financing treatment allows the Company to
recognize spread income over time as qualifying interest income under the REIT
gross income tests, as compared to gains at IFC from the issuance of
pass-through securities, which receives sale treatment and is fully taxable. The
value of the assets collateralizing CMO borrowings are reflected on the
Company's balance sheet, while the value of the assets backing pass-through
securities are not reflected on the balance sheet. Consequently, CMO borrowings
tend to increase the assets of the Company and to reduce the Company's ratio of
equity capital to total assets, as compared to the sale of pass-through
securities. It is currently expected that the continued use of CMOs will likely
result in a ratio of equity capital to total assets generally between 8% to 13%,
although such ratio may vary substantially depending upon, among other things,
the timing of IFC's securitizations and the Company's offerings of equity
capital.
The use of CMOs as financing vehicles tends to increase the Company's
leverage as mortgage loans held for CMO collateral are retained for investment
rather than sold in a secondary market transaction. Retaining mortgage loans as
CMO collateral exposes the Company to greater potential credit losses than from
the use of securitization techniques that are treated as sales. The creation of
a CMO involves an equity investment by the Company to fund collateral in excess
of the amount of the securities issued. Should the Company experience credit
losses greater than expected, the value of the Company's equity investment in
its CMOs would decrease and the Company's financial condition and results of
operations would be materially adversely affected.
A majority of other Company borrowings are collateralized, primarily in
the form of reverse repurchase agreements, which are based on the market value
of the Company's assets pledged to secure the specific borrowings. The cost of
borrowings under a reverse repurchase agreement corresponds to the referenced
interest rate (e.g., the CMT Index or LIBOR) plus or minus a margin. The margin
over or under the referenced interest rate varies depending upon the lender, the
nature and liquidity of the underlying collateral, the movement of interest
rates, the availability of financing in the market and other factors. If the
returns on the assets and mortgage-backed securities financed with borrowed
funds fail to cover the cost of the borrowings, the Company will experience net
interest losses and may experience net losses.
The ability of the Company to achieve its investment objectives depends
not only on its ability to borrow money in sufficient amounts and on favorable
terms but also on the Company's ability to renew or replace on a continuous
basis its maturing short-term borrowings. The Company's business strategy relies
on short-term borrowings to fund long-term mortgage loans and investment
securities available for sale. In the event the Company is not able to renew or
replace maturing borrowings, the Company could be required to sell, under
adverse market conditions, all or a portion of its mortgage loans and investment
securities available for sale, and could incur losses as a result. In addition,
in such event the Company may be required to terminate hedge positions, which
could result in further losses to the Company. Such events could have a
materially adverse effect on the Company.
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Certain of the Company's mortgage loans may be cross-collateralized to
secure multiple borrowing obligations of the Company to a single lender. A
decline in the market value of such assets could limit the Company's ability to
borrow or result in lenders initiating margin calls (i.e., requiring a pledge of
cash or additional mortgage loans to reestablish the ratio of the amount of the
borrowing to the value of the collateral). The Company could be required to sell
mortgage loans under adverse market conditions in order to maintain liquidity.
If these sales were made at prices lower than the carrying value of its mortgage
loans, the Company would experience losses. A default by the Company under its
collateralized borrowings could also result in a liquidation of the collateral,
including any cross-collateralized assets, and a resulting loss of the
difference between the value of the collateral and the amount borrowed.
Additionally, in the event of a bankruptcy of the Company, certain reverse
repurchase agreements may qualify for special treatment under the Bankruptcy
Code, the effect of which is, among other things, to allow the creditors under
such agreements to avoid the automatic stay provisions of the Bankruptcy Code
and to liquidate the collateral under such agreements without delay. Conversely,
in the event of a bankruptcy of a party with whom the Company had a reverse
repurchase agreement, the Company might experience difficulty repurchasing the
collateral under such agreement if it were to be repudiated and the Company's
claim against the bankrupt lender for damages resulting therefrom were to be
treated simply as one of an unsecured creditor. Should this occur, the Company's
claims would be subject to significant delay and, if and when received, may be
substantially less than the damages actually suffered by the Company. Although
the Company has entered into reverse repurchase agreements with several
different parties and has developed procedures to reduce its exposure to such
risks, no assurance can be given that the Company will be able to avoid such
third party risks.
The REIT provisions of the Code require IMH to distribute to its
stockholders substantially all of its taxable income. As a result, such
provisions restrict the Company's ability to retain earnings and replenish the
capital committed to its business activities.
The Company's liquidity is also affected by its ability to access the
debt and equity capital markets. To the extent that the Company is unable to
regularly access such markets, the Company could be forced to sell assets at
unfavorable prices or discontinue various business activities in order to meet
its liquidity needs. As a result, any such inability to access the capital
markets could have a negative impact on the Company's earnings.
Substantially all of the assets of the Conduit Operations have been
pledged to secure the repayment of mortgage-backed securities issued in the
securitization process, reverse repurchase agreements or other borrowings. In
addition, substantially all of the mortgage loans that the Company has acquired
and will in the future acquire have been or will be pledged to secure borrowings
pending their securitization or sale or as a part of their long- term financing.
The cash flows received by the Company from its investments that have not yet
been distributed, pledged or used to acquire mortgage loans or other investments
may be the only unpledged assets available to unsecured creditors and
stockholders in the event of liquidation of the Company.
REDUCTION IN DEMAND FOR RESIDENTIAL MORTGAGE LOANS AND THE COMPANY'S
NON-CONFORMING LOAN PRODUCTS MAY ADVERSELY AFFECT THE COMPANY'S OPERATIONS
The availability of mortgage loans meeting the Company's criteria is
dependent upon, among other things, the size and level of activity in the
residential real estate lending market and, in particular, the demand for
non-conforming mortgage loans. The size and level of activity in the residential
real estate lending market depend on various factors, including the level of
interest rates, regional and national economic conditions and inflation and
deflation in residential property values, as well as the general regulatory and
tax environment as it relates to mortgage lending. To the extent the Company is
unable to obtain sufficient mortgage loans meeting its criteria, the Company's
business will be adversely affected.
FNMA and FHLMC are not currently permitted to purchase mortgage loans
with original principal balances above $227,400. If this dollar limitation is
increased without a commensurate increase in home prices, the Company's ability
to maintain or increase its current acquisition levels could be adversely
affected as the size of the non-conforming mortgage loan market may be reduced,
and FNMA and FHLMC may be in a position to purchase a greater percentage of the
mortgage loans in the secondary market than they currently acquire.
In general, lower interest rates prompt greater demand for mortgage
loans, because more individuals can afford to purchase residential properties,
and refinancing and second mortgage loan transactions increase. However, if low
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interest rates are accompanied by a weak economy and high unemployment, demand
for housing and residential mortgage loans may decline. Conversely, higher
interest rates and lower levels of housing finance and refinance activity may
decrease mortgage loan purchase volume levels, resulting in decreased economies
of scale and higher costs per unit, reduced fee income, smaller gains on the
sale of non-conforming mortgage loans and lower net income.
Although the Company seeks geographic diversification of the properties
underlying the Company's mortgage loans and mortgage-backed securities, it does
not set specific limitations on the aggregate percentage of its portfolio
composed of such properties located in any one area (whether by state, zip code
or other geographic measure). Concentration in any one area will increase
exposure of the Company's portfolio to the economic and natural hazard risks
associated with such area. In addition, management estimates that a majority of
the loans included in securitizations in which IMH holds subordinated interests
are secured by properties in California. Certain parts of California have
experienced an economic downturn in past years, particularly in areas of high
defense industry concentration, and have suffered the effects of certain natural
hazards such as earthquakes, fires and floods, as well as riots.
DELINQUENCY RATIOS AND COMPANY PERFORMANCE MAY BE AFFECTED BY CONTRACTED
SUB-SERVICING
IFC currently contracts for the sub-servicing of all loans it purchases
and holds for sale or investment with third-party sub-servicers. This
arrangement allows the Conduit Operations to increase the volume of loans it
originates and purchases without incurring the expenses associated with
servicing operations. As with any external service provider, IFC is subject to
risks associated with inadequate or untimely services. Many of IFC's borrowers
require notices and reminders to keep their loans current and to prevent
delinquencies and foreclosures. A substantial increase in the IFC's delinquency
rate or foreclosure rate could adversely affect its ability to access profitably
the capital markets for its financing needs, including future securitizations.
IFC regularly reviews the delinquencies of its servicing portfolio. Although the
Conduit Operations periodically reviews the costs associated with establishing
operations to service the loans it purchases, it has no plans to establish and
perform servicing operations at this time.
Each of IFC's sub-servicing agreements with its third-party
sub-servicers provides that if IFC terminates the agreement without cause (as
defined in the agreement), IFC will be required to pay the third-party
sub-servicer a fee. Further, one such agreement provides that IFC shall pay the
third-party sub-servicer a transfer fee per loan for any mortgage loan which IFC
transfers to another sub-servicer without terminating the agreement. Depending
upon the size of IFC's loan portfolio sub-serviced at any point in time, the
termination penalty that IFC would be obligated to pay upon termination without
cause, may be substantial.
IFC also subcontracts with sub-servicers to service the loans in each
of the Company's public securitizations. With respect to such loans, the related
pooling and servicing agreements permit IFC to be terminated as servicer under
specific conditions described in such agreements, which generally include the
failure to make payments, including advances, within specific time periods. Such
termination would generally be at the option of the trustee and/or the financial
guaranty insurer for such securitization, if applicable, but not at the option
of the Company. If, as a result of a sub-servicer's failure to perform
adequately, IFC were terminated as servicer of a securitization, the value of
any servicing rights held by IFC would be adversely impacted. In addition, poor
performance by a sub-servicer with respect to any such securitization may result
in greater than expected delinquencies and losses on the related loans, which
would adversely impact the value of any "interest-only," "principal-only" and
subordinated securities held by the Company in connection with such
securitization, which are more sensitive to credit risk. See "--Value of
Interest-Only, Principal-Only, Residual Interest and Subordinated Securities
Subject to Fluctuation."
RISKS REGARDING PURCHASE OF MORTGAGE LOANS FROM PREFERRED
New Product Offerings May Entail Substantial Risks
Pursuant to a mortgage loan purchase agreement (the "Preferred Purchase
Agreement") entered into in July 1997, as amended and restated in August 1997,
with Preferred Credit Corporation ("Preferred"), the Company agreed to purchase
up to $500.0 million in mortgage loans. During the year ended December 31, 1997,
the Company had purchased an aggregate of $576.1 million in principal balance of
mortgage loans from Preferred. The Company has limited experience with the type
of mortgage loans originated by Preferred, and there can be no assurance that
the return on the Company's investment in these new products will be consistent
with the Company's historical financial results.
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Representations and Warranties
Resale of mortgage loans purchased from Preferred may subject the
Company to risk. As of December 31, 1997, $218.9 million in principal balance of
mortgage loans purchased from Preferred have been sold by the Company. IFC
currently intends to securitize the remaining mortgage loans purchased from
Preferred. In connection with the issuance of mortgage backed securities by IFC,
such securities have been, and are expected, to be non-recourse to IFC, except
in the case of a breach of the standard representations and warranties made by
IFC when the mortgage loans are securitized. While IFC may have recourse to
Preferred for any such breaches, there can be no assurance of Preferred's
ability to honor its obligations. IFC has generally limited the remedies of such
purchasers to the remedies IFC receives from Preferred. However, in some cases,
the remedies available to a purchaser of mortgage loans from IFC may be broader
than those available to IFC against Preferred and should a purchaser exercise
its remedies against IFC, IFC may not always be able to enforce whatever
remedies IFC may have against Preferred. Furthermore, even if IFC were able to
enforce remedies available against Preferred, the effect of such enforcement may
be limited by the current financial position and operations of Preferred. There
can be no assurance that sanctions imposed on Preferred by the Department of
Real Estate or the effect of the settlement with the Department of Corporations
will not have a material adverse effect on the financial condition and results
of operations of Preferred, the effect of which could adversely affect the
ability of Preferred to honor its repurchase or indemnity obligations under the
Preferred Purchase Agreement.
Limited Information Regarding Loss and Prepayment History; Lack of Seasoning
Preferred has had a limited operating history and as a result,
Preferred's historical loss and prepayment experience may be of limited
relevance in quantifying delinquency, loss, prepayment or other characteristics
of these loans. Furthermore, Preferred's mortgage loans represent a relatively
new loan product within the consumer finance industry and accordingly the
Company cannot rely on the historical experience of other companies issuing a
comparable product. Any material change in delinquencies, prepayments and losses
from management's assumptions and estimates may adversely affect the Company's
financial condition and results of operations including the value of any
residual interest retained in any securitization of such loans. The actual
performance of such mortgage loans will not be known until sometime in the
future.
Credit Risk Associated with Preferred's Loan Products
Although mortgage loans originated by Preferred and purchased by the
Company under the Preferred Purchase Agreement are secured by real estate,
because of the relatively high loan-to-value ("LTV") of said loans, in most
cases the value of the underlying collateral will be less than the principal
amount of the mortgage loans, and effectively unsecured. Accordingly, in making
underwriting decisions, Preferred relies principally on the creditworthiness of
the borrower, rather than the underlying collateral for repayment. Because of
the relatively high combined LTV ratios of such mortgage loans and because the
mortgage loans are second mortgages giving the Company a position as a
subordinate lien holder with respect to the collateral underlying such mortgage
loans, the Company is likely to incur a total loss in the event that a customer
defaults on its mortgage loan obligations to the Company or to the senior lien
holder.
Credit Risks Associated With Mortgage Loans Not Securitized
Mortgage loans purchased from Preferred may not be readily
securitizeable, or may be securitizeable only after individual mortgage loan
portfolio characteristics become apparent over time. To the extent that such
mortgage loans are not securitized, the Company must fund such assets with
borrowings or internally generated funds and bear the credit risk associated
with such assets. The Company's inability ultimately to sell or securitize
substantially all of the mortgage loans it purchases from Preferred could have a
material adverse effect on the Company's business and results of operations.
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RISKS REGARDING PURCHASE OF MORTGAGE LOANS FROM GREENWICH
Representations and Warranties
In August 1997, IFC purchased $80.2 million of non-conforming
residential mortgage loans from Greenwich Capital Financial Products, Inc.
("Greenwich") pursuant to a mortgage loan purchase agreement (the "WSI Purchase
Agreement"). Greenwich previously purchased such loans from Walsh Securities,
Inc. ("WSI") a firm affiliated with James Walsh, a Director of the Company.
Resale of mortgage loans purchased from Greenwich may subject the Company to
risk. As of December 31, 1997, an aggregate of $68.8 million in principal
balance of the mortgage loans have been sold, of which $7.3 million were
repurchased by WSI. The Company recorded a loss of $112,000 on the resale of the
mortgage loans to WSI. IFC intends to continue to sell, through bulk whole loans
sales conducted by IFC, substantially all of the mortgage loans purchased from
Greenwich. In connection with such bulk whole loan sales IFC has entered into,
and expects to continue to enter into, agreements that provide for recourse by
the purchaser against IFC (and, in certain cases, IMH as guarantor) in the event
of a breach of representation or warranty made by IFC, any fraud or
misrepresentation during the mortgage loan origination process or upon early
default on such mortgage loans. IFC has generally limited the remedies of such
purchasers to the remedies IFC receives from WSI and Greenwich. However, in some
cases, the remedies available to a purchaser of mortgage loans from IFC may be
broader than those available to IFC against WSI or Greenwich, and should a
purchaser exercise its remedies against IFC, IFC may not always be able to
enforce whatever remedies IFC may have against WSI or Greenwich.
Furthermore, even if IFC were able to enforce remedies available
against WSI or Greenwich, the effect of such enforcement may be limited by the
current financial position and operations of WSI or Greenwich. Pursuant to the
WSI Purchase Agreement, WSI and Greenwich made representations and warranties
regarding the mortgage loans. In the event of a breach of their respective
representations and warranties, WSI and Greenwich would be responsible for the
repurchase of an affected mortgage loan or for indemnifying IFC for losses
suffered in connection with such loan. According to published reports, WSI
financed loans for independent mortgage loan brokers that engaged in fraudulent
misconduct in connection with the origination of such mortgage loans. There can
be no assurance that the effect of such fraudulent activity will not result in a
material adverse effect on the financial condition and results of operations of
WSI which would adversely affect its ability to repurchase any mortgage loan or
honor any indemnification obligations under the WSI Purchase Agreement.
LIMITED HISTORY OF OPERATIONS OF LIMITED RELEVANCE IN PREDICTING FUTURE
PERFORMANCE
The Company commenced operations on November 20, 1995. Prior to the
date of the Contribution Transaction, IFC was a division or subsidiary of ICII,
and IWLG was a division of Southern Pacific Bank (formerly Southern Pacific
Thrift and Loan Association) ("SPB"), a subsidiary of ICII. Although the Company
has experienced substantial growth in mortgage loan originations and total
revenues, there can be no assurance that the Company will be profitable in the
future or that these rates of growth will be sustainable or indicative of future
results. Prior to the Company's initial public offering in November 1995 (the
"Initial Public Offering"), each of IFC and IWLG benefited from the financial,
administrative and other resources of ICII and SPB, respectively.
In light of this growth, the historical financial performance of the
Company may be of limited relevance in predicting future performance. Since the
Company commenced operations in November 1995, its growth in purchasing loans
has been significant. Also, the loans purchased by the Company and included in
the Company's securitizations have been outstanding for a relatively short
period of time. Consequently, the delinquency and loss experience of the
Company's loans to date may not be indicative of future results. It is unlikely
that the Company will be able to maintain delinquency and loan loss ratios at
their present levels as the portfolio becomes more seasoned.
COMPETITION FOR MORTGAGE LOANS MAY ADVERSELY AFFECT THE COMPANY'S OPERATIONS
In purchasing non-conforming mortgage loans and issuing securities
backed by such loans, the Company competes with established mortgage conduit
programs, investment banking firms, savings and loan associations, banks, thrift
and loan associations, finance companies, mortgage bankers, insurance companies,
other lenders and other entities purchasing mortgage assets. Continued
consolidation in the mortgage banking industry may also reduce the number of
current sellers to the Conduit Operations, thus reducing the Company's potential
customer base, resulting in the Company purchasing a larger percentage of
mortgage loans from a smaller number of sellers. Such changes could
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negatively impact the Conduit Operations. Mortgage-backed securities issued
through the Conduit Operations face competition from other investment
opportunities available to prospective investors. See "--Reduction in Demand for
Residential Mortgage Loans and the Company's Non-Conforming Loan Products May
Adversely Affect the Company's Operations."
The Company's operations may be affected by the activities of ICII and
its affiliates. As an end-investor in non-conforming mortgage loans, SPB may
compete with the Company. Also, Southern Pacific Funding Corporation ("SPFC") is
an affiliate of ICII whose business is primarily to act as a wholesale
originator and a bulk purchaser of non-conforming mortgage loans. ICII or any of
its affiliates may compete with the Company's Long-Term Investment Operations,
the Conduit Operations and the Warehouse Lending Operations. While the Company
believes such activities will not have a material adverse effect on the
Company's operations, there can be no assurance of this. See "--Relationship
with ICII and its Affiliates; Conflicts of Interest."
NO ASSURANCE OF CONTINUED EXPANSION
The Company's total revenues and net income have grown significantly
since the Company's inception, primarily due to increased mortgage purchasing,
sales and investing activities. The Company intends to continue to pursue a
growth strategy for the foreseeable future, and its future operating results
will depend largely upon its ability to expand its Long-Term Investment
Operations, its Conduit Operations and its Warehouse Lending Operations. Each of
these plans requires additional personnel and assets and there can be no
assurance that the Company will be able to successfully expand and operate its
expanded operations profitably. There can be no assurance that the Company will
anticipate and respond effectively to all of the changing demands that its
expanding operations will have on the Company's management, information and
operating systems, and the failure to adapt its systems could have a material
adverse effect on the Company's results of operations and financial condition.
There can be no assurance that the Company will successfully achieve its
continued expansion or, if achieved, that the expansion will result in
profitable operations.
CONFLICTS OF INTEREST WITH AFFILIATED ENTITIES
Benefit to Insiders; Interlocking Relationships; Other Considerations
The Company is subject to conflicts of interest arising from its
relationships with ICH, RAI Advisors, LLC ("RAI") and their officers, directors
and affiliates. First, IMH owns a substantial number of shares of ICH's common
stock. Second, RAI renders management services to ICH and will be paid certain
incentive compensation for each quarter, resulting in a direct benefit to its
owners, who are officers or directors of ICH and IMH. Third, IFC has entered
into a submanagement agreement with RAI pursuant to which ICH will pay IFC
(through RAI) for all costs and services under such contract, plus a 15% service
charge. Fourth, many of the officers and directors of the Company are officers,
directors and owners of ICH, RAI and Impac Commercial Capital Corporation
(formerly Imperial Commercial Capital Corporation) ("ICCC").
RAI oversees the day-to-day operations of ICH, pursuant to a management
agreement (the "RAI Management Agreement") entered into in August 1997. RAI is
owned one-third by Joseph R. Tomkinson, IMH's Vice Chairman of the Board and
Chief Executive Officer and ICH's Chairman of the Board and Chief Executive
Officer; one-third by William S. Ashmore, IMH's and ICH's President and Chief
Operating Officer; and one-third by Richard J. Johnson, IMH's and ICH's Senior
Vice President, Chief Financial Officer, Treasurer and Secretary. Pursuant to
the RAI Management Agreement, ICH pays incentive compensation to RAI on a
quarterly basis, resulting in a direct benefit to its owners.
The Company is subject to conflicts of interest arising from its
relationship with RAI, and with RAI's affiliates. RAI has interests that may
conflict with those of the Company in fulfilling certain of its duties.
Specifically, all of the persons who are officers of RAI are also officers or
directors of IMH and ICH. In order to utilize the IMH infrastructure, RAI has
entered into a submanagement agreement with IMH and IFC to provide substantially
all of the administrative services required by ICH. IMH owns all of the
outstanding shares of non-voting preferred stock of IFC, representing 99% of the
economic interest in IFC, and Messrs. Tomkinson, Johnson and Ashmore own all of
the outstanding shares of common stock of IFC, representing 1% of the economic
interest. Each of Messrs. Tomkinson, Ashmore and Johnson and Mrs.
Glass-Schannault has modified his or her employment agreement with IFC to allow
him or her to become an
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officer of RAI (and of ICH and ICCC). However, such officers are expected
to devote the majority of their time and effort towards the management and
operations of IMH and IFC. RAI has agreed to cause each of its officers to
devote as much of his or her time to the operations of ICH as is necessary. ICH
will reimburse RAI, who will reimburse IFC, on a dollar for dollar basis, for
the actual cost of providing the services of its officers to ICH based upon the
compensation payable to them by IFC, plus a 15% service charge. ICH will
reimburse RAI for expenses incurred by RAI, plus a service charge of 15% on all
expenses owed by RAI to IFC for costs and services under the submanagement
agreement with IFC and RAI will pay all such third parties on a dollar for
dollar basis for the aforementioned amounts received by it from the ICH; no such
15% service charge will be paid to third party service providers other than IFC.
For the first three years of the RAI Management Agreement, there will be a
minimum amount of $500,000 (including the 15% service charge) payable by ICH in
connection with services provided and expenses incurred by RAI and payable by
RAI to IFC. After the third year, ICH will only be responsible for reimbursing
expenses and services provided, plus the 15% service charge for amounts due to
IFC. RAI's officers are expected to devote the majority of their time and effort
towards the management and operations of IMH and IFC. Should the operations of
ICH and ICCC and those of the Company require immediate attention or action by
RAI or any of its officers, there can be no assurance that the officers of RAI
will be able to properly allocate sufficient time to the operations of the
Company. The failure or inability of the Company's officers and directors to
provide the services required of them under their respective employment
agreements or any other agreements or arrangements with the Company could have a
material adverse effect on the Company's business and results of operations.
Many of the affiliates of IMH, RAI and IFC have interlocking executive
positions and share common ownership. Joseph R. Tomkinson, IMH's Vice Chairman
of the Board and Chief Executive Officer and IFC's Chief Executive Officer and a
Director, is the Chief Executive Officer and Chairman of the Board of ICH, a
one-third owner of RAI, an owner of one-third of the common stock of IFC, and an
owner of 25% of the common stock of ICCC. William S. Ashmore, IMH's President,
Chief Operating Officer and a Director and IFC's President and a Director, is
the President and Chief Operating Officer of ICH, a one-third owner of RAI, an
owner of one-third of the common stock of IFC, and an owner of 25% of the common
stock of ICCC. Richard J. Johnson, IMH's and IFC's Senior Vice President, Chief
Financial Officer, Treasurer and Secretary, and a Director of IFC, is a Senior
Vice President, Chief Financial Officer, Treasurer and Secretary of ICH, a
one-third owner of RAI, an owner of one-third of the common stock of IFC, and a
25% owner of the common stock of ICCC. Mary C. Glass-Schannault, IMH's and IFC's
Senior Vice President, is a Senior Vice President of ICH. Each of James Walsh,
Frank P. Filipps and Stephan R. Peers, Directors of IMH, are Directors of ICH.
In addition, as owners of all of the outstanding shares of voting stock of IFC,
Messrs. Tomkinson, Ashmore, and Johnson, have the right to elect all directors
of IFC and the ability to control the outcome of all matters for which the
consent of the holders of the common stock of IFC is required. Ownership of 100%
of the common stock of IFC entitles the owners thereof to an aggregate of 1% of
the economic interest in IFC.
Effect of Right of First Refusal Agreement
It is anticipated that RAI will act as the Manager for other REITs,
some of which may have been or will be affiliated with the Company, ICH, or
their respective conduit operations (an "Affiliated REIT"). In such an event,
any Affiliated REIT utilizing RAI as its Manager may be in competition with the
Company. RAI, ICH, ICCC, IMH and IFC have entered into a ten-year right of first
refusal agreement (the "Right of First Refusal Agreement"). It is expected that
any Affiliated REIT utilizing RAI as its Manager will become a party to the
Right of First Refusal Agreement, but such event is outside the control of the
Company and there can be no assurance that any or all Affiliated REITs will
actually become parties to the Right of First Refusal Agreement. Pursuant to
this Agreement, RAI has agreed that any mortgage
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loan or mortgage-backed security investment opportunity (an "Investment
Opportunity") which is offered to it on behalf of either the Company, ICH or any
Affiliated REIT will first be offered to that entity (the "Principal Party")
whose initial primary business as described in its initial public offering
documentation (the "Initial Primary Business") most clearly aligns with such
Investment Opportunity. In addition, both IMH and IFC on the one hand and ICH
and ICCC on the other have agreed that any Investment Opportunity offered to
either of them which falls outside the scope of its Initial Primary Business
shall be offered to the Principal Party. Should the Principal Party decline to
take advantage of an Investment Opportunity offered to RAI, RAI will make an
independent evaluation of which REIT's business is more greatly enhanced by such
Investment Opportunity. Should all of said REITs decline such Investment
Opportunity, RAI may offer the investment opportunity to any third party. Should
the Principal Party decline to take advantage of an Investment Opportunity
offered to a REIT which is a party to the Right of First Refusal Agreement, said
REIT shall then be free to pursue the Investment Opportunity. In such an event
there can be no assurance that the Company will be able to take advantage of any
such Investment Opportunity or that any competitive activity of ICH, or any
Affiliated REIT will not adversely affect the Company's operations. In addition,
the Company may become further prejudiced by the Right of First Refusal
Agreement to the extent that the Company desires to pursue or pursues a business
outside its Initial Primary Business.
Effect of Termination Agreement
In December 1997, IMH and IFC entered into a termination agreement with
Imperial Credit Advisors, Inc. ("ICAI") and ICII and Joseph R. Tomkinson,
William S. Ashmore and Richard J. Johnson (the "Termination Agreement"),
pursuant to which ICAI discontinued providing management services to the Company
under a management agreement entered into in November 1995, and as amended and
restated in January 1997 (the "Management Agreement"), in return for a $44.0
million termination payment consisting of $35.0 million or 2,009,310 shares of
Common Stock of IMH and other assets comprising the balance. The $44.0 million
termination payment was treated as a non-recurring, non-cash expense and
resulted in a charge of $44.4 million to the earnings for the three months ended
December 31, 1997. The Company is currently negotiating with the principals of
RAI to provide the management services. See "--Benefit to Insiders; Interlocking
Relationships; Other Considerations" for a description of affiliations between
the Company and RAI. In either case, the arrangement pursuant to which
management services will be provided to the Company will be on terms no less
favorable to the Company on a pro rata basis than the terms of the agreement
with ICAI. The inability of the Company to contract with the principals of RAI
would have a material adverse effect on the Company's operations. Furthermore,
if RAI or its principals are contracted with to provide management services to
the Company, there may be conflicts of interest as described in "--Conflicts of
Interest with Affiliated Entities."
RISKS OF INVESTMENT IN ICH
As of March 31, 1998, IMH owned 719,789 shares of ICH Common Stock
and 674,211 shares of ICH non-voting Class A Common Stock which are convertible
into an equivalent number of shares of ICH Common Stock. IMH's investment in ICH
is recorded on the Company's financial statements in "Investment in Impac
Commercial Holdings, Inc." Of the net income or loss of ICH, 17.4% is recognized
on a pre-tax basis in the Company's financial statements. Any such recognized
net loss may adversely affect the Company's ability to conduct future activities
under borrowing facilities. As an originator of mortgage loans, each of ICH
and/or ICCC is or may be subject to many of the same risks applicable to IMH and
IFC. In addition, as an originator of commercial mortgages, each of ICH and/or
ICCC is or may be specifically subject to additional risks relating to the
following:
Limited History of Operations of Limited Relevance in Predicting Future
Performance
Since each of ICH and ICCC recently commenced operations in 1997, their
historical performance may be of limited relevance in predicting future
performance. In addition, the commercial mortgages purchased to date by ICH have
been outstanding for a relatively short period of time. Consequently, the
delinquency and loss experience of ICH's commercial mortgages to date may not be
indicative of future results. It is unlikely that ICH will be able to maintain
delinquency and loan loss ratios at their present levels as the portfolio grows
and becomes more seasoned. ICH intends to pursue a growth strategy for the
foreseeable future, and its future operating results will depend largely upon
its ability to expand its operations. These plans require additional personnel
and assets and there can be no assurance that ICH will be able to successfully
expand and operate its expanded operations profitably.
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Competition in the Commercial Mortgage Industry May Adversely Affect ICH's
Operations
Other multifamily residences, self-storage facilities, retail shopping
facilities, office buildings and combination warehouse/industrial facilities
located in the areas of the mortgaged properties securing ICH's commercial
mortgages will compete with the mortgaged properties of such types to attract
residents, retail correspondents, tenants and customers. Increased competition
could adversely affect income from, and the market value, of the mortgaged
properties. In addition, the business conducted at each mortgaged property may
face competition from other industries and industry segments.
Originating and Investing in Commercial Mortgages May Entail Substantial Risks
ICH makes long-term investments in commercial mortgages. Accordingly,
during the time it holds commercial mortgages for investment, ICH is subject to
risks of borrower defaults, bankruptcies and losses that are not covered by
insurance (such as those occurring from earthquakes or floods). Commercial
mortgage lending is generally viewed as exposing the lender to a greater risk of
loss than residential mortgage lending in part, because it typically involves
larger loans to single borrowers or groups of related borrowers than residential
mortgage loans. Further, the repayment of commercial mortgages secured by
income-producing properties is typically dependent upon the tenants ability to
meet its obligations under the lease relating to such property, which in turn
depends upon profitable operation of the related property. Furthermore, the
value of commercial mortgages may be adversely affected due to characteristics
of underlying commercial properties and facilities.
Balloon Payment at Maturity and Extension Maturity Increases Lender Risks
It is expected that a substantial percentage of ICH's commercial
mortgages will have a balloon payment due for each such commercial mortgage at
its respective maturity date. Commercial mortgages with balloon payments involve
a greater risk to a lender than self-amortizing loans, because the ability of a
borrower to pay such amount will normally depend on its ability to fully
refinance the commercial mortgage or sell the related property at a price
sufficient to permit the borrower to make the balloon payments. The ability of a
borrower to effect a refinancing or sale will be affected by a number of
factors, including, without limitation, the value of the related property, the
level of available mortgage interest rates at the time of refinancing, the
related borrower's equity in the property, the financial condition and operating
history of the borrower and the related property, the strength of the commercial
and multifamily real estate markets, tax laws, and prevailing general economic
conditions.
Environmental Risks May Adversely Affect Value of Underlying Commercial
Mortgages
Contamination of real property may give rise to a lien on that property
to assure payment of the cost of clean-up or, in certain circumstances, may
result in liability to the lender for that cost. Such contamination may also
reduce the value of the property. Environmental clean-up costs may be
substantial. It is possible that such costs could become a liability of ICH
reducing the return to holders of its Common Stock if such remedial costs were
incurred.
RELATIONSHIP WITH ICII AND ITS AFFILIATES; CONFLICTS OF INTEREST
The Company is subject to conflicts of interest arising from its
relationship with ICAI, and ICAI's affiliates. In December 1997, IMH and IFC
entered into a services agreement (the "Services Agreement") with ICAI pursuant
to which ICAI agreed to provide certain human resource, data and phone
communications services for IMH and IFC. ICAI, through its affiliation with
ICII, has interests that may conflict with those of the Company in fulfilling
certain of its duties. In addition, certain of the officers and Directors of
ICII or its affiliates are also officers and Directors of the Company, including
H. Wayne Snavely and Joseph R. Tomkinson, Chairman of the Board and Chief
Executive Officer of IMH, respectively. The Company relies upon ICAI to provide
the services under the Services Agreement. All other operations of the Company
are conducted through IFC and IWLG. No assurance can be given that the Company's
relationships with ICAI and its affiliates will continue indefinitely. The
failure or inability of ICAI to provide the services required of it under the
Services Agreement or any other agreements or arrangements with the Company may
have a material adverse effect on the Company's business.
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It is the intention of the Company and ICII that any agreements and
transactions, taken as a whole, between the Company, on the one hand, and ICII
or its affiliates, on the other hand, are fair to both parties. To minimize or
avoid potential conflicts of interests, all three Unaffiliated Directors must
independently and by majority vote approve all such agreements and transactions.
However, there can be no assurance that each of such agreements or transactions
will be on terms at least as favorable to the Company as could have been
obtained from unaffiliated third parties.
CONSEQUENCES OF FAILURE TO MAINTAIN REIT STATUS MAY INCLUDE IMH BEING SUBJECT
TO TAX AS A REGULAR CORPORATION
Commencing with its taxable year ended December 31, 1995, IMH has
operated and intends to continue to operate so as to qualify as a REIT under the
Code. Although IMH believes that it has operated and will continue to operate in
such a manner, no assurance can be given that IMH was organized or has operated,
or will be able to continue to operate, in a manner which will allow it to
qualify as a REIT. Qualification as a REIT involves the satisfaction of numerous
requirements (some on an annual and others on a quarterly basis) established
under highly technical and complex Code provisions for which there are only
limited judicial and administrative interpretations, and involves the
determination of various factual matters and circumstances not entirely within
IMH's control. For example, in order to qualify as a REIT, at least 95% of IMH's
gross income (including the gross income of IWLG and IMH Assets) in any year
must be derived from qualifying sources, and IMH must pay distributions to
stockholders aggregating annually at least 95% of its (including IWLG's and IMH
Assets) taxable income (determined without regard to the dividends paid
deduction and by excluding net capital gains). No assurance can be given that
IMH's actual operating results will meet the various requirements for
qualification as a REIT. Moreover, no assurance can be given that legislation,
new regulations, administrative interpretations or court decisions will not
significantly change the tax laws with respect to qualification as a REIT or the
federal income tax consequences of such qualification. See "Federal Income Tax
Considerations--Taxation of IMH."
Among the requirements for REIT qualification is that the value of any
one issuer's securities held by a REIT may not exceed the value of 5% of the
REIT's total assets on certain testing dates. See "Federal Income Tax
Considerations--Taxation of IMH--Requirements for Qualification." IMH believes
that the aggregate value of the securities of IFC held by IMH have been and will
continue to be less than 5% of the value of IMH's total assets.
IMH owns 100% of the nonvoting preferred stock of IFC, which represents
approximately 99% of the economic value of all classes of stock of IFC. IMH does
not and will not own any of the voting securities of IFC, and therefore IMH will
not be considered to own more than 10% of the voting securities of IFC (which
would be prohibited by the REIT asset tests currently set forth in the Code).
President Clinton's 1999 federal budget proposal contains a provision which
would amend the REIT asset tests so as to prohibit REITs from owning stock of a
corporation possessing more than 10% of the vote or value of all classes of
stock of the corporation. This proposal would be effective with respect to stock
acquired on or after the date of the first Congressional committee action with
respect to the proposal (the "Action Date"). In addition, to the extent that a
REIT's stock ownership is grandfathered by virtue of this effective date, such
grandfathered status would terminate if the subsidiary corporation engages in a
trade or business that it is not engaged in on the Action Date or acquires
substantial new assets on or after such date. Accordingly, if this provision of
the budget proposal were enacted in its present form, IMH's stock ownership in
IFC would be grandfathered, but such grandfathered status would terminate if IFC
engages in a trade or business that it is not engaged in on the Action Date or
acquires substantial new assets (including additional mortgage loans) on or
after such date, even if such activities are undertaken or assets are acquired
prior to the adoption of the proposal. In such case, IMH's continued ownership
of more than 10% of the economic value of IFC beyond IMH's next quarterly asset
testing date following the Action Date (which could occur prior to the adoption
of the proposal) could cause IMH to fail to qualify as a REIT. See "Federal
Income Tax ConsiderationsCFailure to Qualify." It is presently uncertain whether
any proposal regarding REIT subsidiaries, such as IFC, will be enacted, or if
enacted, what the terms of such proposal (including its effective date) will be.
At this time, it is expected that IFC will continue to acquire additional
mortgage loans notwithstanding the proposed legislation regarding REIT
subsidiaries. Furthermore, if the proposal passes, then in order to maintain its
REIT status, IMH may be required to dispose of its ownership of IFC either
through a sale of IFC or a distribution of the shares of IFC to IMH's
stockholders in connection with a spin-out. It is anticipated that upon any
distribution of the shares in connection with a spin-out, that a right of first
refusal would be entered into between IMH and IFC so that IFC will be obligated
to first offer mortgage assets to IMH. A sale of IFC, whether if required
pursuant to the proposal or otherwise, would leave IMH without a concentrated
origination source which would require IMH to purchase mortgage assets from
other sources. As such, approval of the proposal may have a material adverse
effect on the Company's business and result of operations. Lastly, any
distribution of shares to IMH's stockholders would have a number of tax
consequences including, without limitation, the possibility of IMH's
stockholders recognizing a material amount of dividend income.
If IMH were to fail to qualify as a REIT in any taxable year, IMH would
be subject to federal income tax (including any applicable alternative minimum
tax) on its (including IWLG's and IMH Assets') taxable income at regular
corporate rates and would not be allowed a deduction in computing its taxable
income for amounts distributed to its stockholders. Moreover, unless entitled to
relief under certain statutory provisions, IMH also would be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification is lost. This treatment would
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reduce the net income of IMH available for investment or distribution to
stockholders because of the additional tax liability to IMH for the years
involved. In addition, distributions to stockholders would no longer be required
to be made. See "Federal Income Tax Considerations--Taxation of
IMH--Requirements for Qualification."
Even if IMH maintains its REIT status, it may be subject to certain
federal, state and local taxes on its income. For example, if IMH has net income
from a prohibited transaction, such income will be subject to a 100% tax. See
"Federal Income Tax Considerations--Taxation of IMH." In addition, the net
income, if any, from the Conduit Operations conducted through IFC is subject to
federal income tax at regular corporate tax rates. See "Federal Income Tax
Considerations--Other Tax Consequences."
COMPANY'S OPERATIONS MAY BE ADVERSELY AFFECTED IF THE COMPANY IS SUBJECT TO
THE INVESTMENT COMPANY ACT
The Company at all times intends to conduct its business so as not to
become regulated as an investment company under the Investment Company Act.
Accordingly, the Company does not expect to be subject to the restrictive
provisions of the Investment Company Act. The Investment Company Act exempts
entities that are "primarily engaged in the business of purchasing or otherwise
acquiring mortgages and other liens on and interests in real estate"
("Qualifying Interests"). Under the current interpretation of the staff of the
Commission, in order to qualify for this exemption, the Company must, among
other things, maintain at least 55% of its assets directly in mortgage loans,
qualifying pass-through certificates and certain other Qualifying Interests in
real estate. In addition, unless certain mortgage securities represent all the
certificates issued with respect to an underlying pool of mortgages, such
mortgage securities may be treated as securities separate from the underlying
mortgage loans and, thus, may not qualify as Qualifying Interests for purposes
of the 55% requirement. The Company's ownership of certain mortgage loans
therefore may be limited by the provisions of the Investment Company Act. In
addition, in meeting the 55% requirement under the Investment Company Act, the
Company intends to consider privately issued certificates issued with respect to
an underlying pool as to which the Company holds all issued certificates as
Qualifying Interests. If the Commission, or its staff, adopts a contrary
interpretation with respect to such securities or otherwise believes the Company
does not satisfy the above exception, the Company could be required to
restructure its activities to the extent its holdings of such privately issued
certificates did not comply with the interpretation. Such a restructuring could
require the sale of a substantial amount of privately issued certificates held
by the Company at a time it would not otherwise do so. Further, in order to
insure that the Company at all times continues to qualify for the above
exemption from the Investment Company Act, the Company may be required at times
to adopt less efficient methods of financing certain of its mortgage loans and
investments in mortgage-backed securities than would otherwise be the case and
may be precluded from acquiring certain types of such mortgage assets whose
yield is somewhat higher than the yield on assets that could be purchased in a
manner consistent with the exemption. The net effect of these factors will be to
lower at times the Company's net interest income, although the Company does not
expect the effect to be material. If the Company fails to qualify for exemption
from registration as an investment company, its ability to use leverage would be
substantially reduced, and it would be unable to conduct its business as
described herein. Any such failure to qualify for such exemption could have a
material adverse effect on the Company.
FUTURE REVISIONS IN POLICIES AND STRATEGIES AT THE DISCRETION OF THE BOARD
OF DIRECTORS MAY BE AFFECTED WITHOUT STOCKHOLDER CONSENT
The Board of Directors, including a majority of the Unaffiliated
Directors, has established the investment policies and operating policies and
strategies. With respect to other matters, the Company may, in the future, but
currently has no present plans to, invest in the securities of other REITs for
the purpose of exercising control, offer securities in exchange for property or
offer to repurchase or otherwise reacquire its shares or other securities. The
Company may also, but does not currently intend to underwrite the securities of
other issuers. However, any of the policies, strategies and activities
referenced above or described in this Prospectus may be modified or waived by
the Board of Directors, subject in certain cases to approval by a majority of
the Unaffiliated Directors, without stockholder consent.
EFFECT OF FUTURE OFFERINGS MAY ADVERSELY AFFECT MARKET PRICE OF COMMON STOCK
The Company in the future may increase its capital resources by making
additional private or public offerings of its Common Stock, securities
convertible into its Common Stock, preferred stock or debt securities. The
actual or
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perceived effect of such offerings, the timing of which cannot be
predicted, may be the dilution of the book value or earnings per share of the
Company's Common Stock or other securities then outstanding, which may result in
the reduction of the market price of such Common Stock or other securities.
RESTRICTIONS ON OWNERSHIP OF COMMON STOCK MAY INHIBIT MARKET ACTIVITY;
POSSIBLE ANTI-TAKEOVER EFFECT MAY DETER TAKE-OVER OF THE COMPANY
In order for IMH to maintain its qualification as a REIT, not more than
50% in value of the outstanding shares of IMH's stock, including Common Stock,
may be owned, actually or constructively, by or for five or fewer individuals
(as defined in the Code to include certain entities) at any time during the last
half of a taxable year (other than the first year for which the election to be
treated as a REIT has been made). Furthermore, after the first taxable year for
which the REIT election was made, IMH's shares of stock, including Common Stock,
must be held by a minimum of 100 persons for at least 335 days of a 12-month
taxable year (or a proportionate part of a shorter taxable year). In order to
protect IMH against the risk of losing REIT status due to a concentration of
ownership among its stockholders, the Charter limits actual or constructive
ownership of (i) the outstanding shares of Common Stock by any person to 9.5%
(the "Ownership Limit") (in value or in number of shares, whichever is more
restrictive) of the then outstanding shares of Common Stock or (ii) the
outstanding shares of stock of IMH by any person to 9.5% in value (the
"Aggregate Ownership Limit"). See "Description of Capital Stock--Capital
Stock--Repurchase of Shares and Restrictions on Transfer." Although the Board of
Directors presently has no intention of doing so (except as described below),
the Board of Directors, in its sole discretion, could waive the Ownership Limit
or the Aggregate Ownership Limit with respect to a particular person if it were
satisfied, based upon the advice of tax counsel or otherwise, that ownership by
such person in excess of the Ownership Limit would not jeopardize IMH's status
as a REIT. The Board of Directors may from time to time increase or, subject to
certain limitations, decrease the Ownership Limit or the Aggregate Ownership
Limit.
Actual or constructive ownership of shares of stock in excess of the
Ownership Limit or the Aggregate Ownership Limit, or, with the consent of the
Board of Directors, such other limit, which would cause IMH not to qualify as a
REIT, will cause the violative transfer of ownership to be void with respect to
the intended transferee or owner as to that number of shares in excess of such
limit, and such shares will be automatically transferred to a trustee for the
benefit of a trust for the benefit of a charitable beneficiary. The trustee of
such trust shall sell such shares and distribute the net proceeds generally as
follows: the intended transferee shall receive the lesser of (i) the price paid
by the intended transferee for such excess shares and (ii) the sales proceeds
received by the trustee for such excess shares. Any proceeds in excess of the
amount distributable to the intended transferee will be distributed to the
charitable beneficiary. In addition, shares of stock held in trust shall be
deemed to have been offered for sale to IMH, or its designee, at a price per
share equal to the lesser of (i) the price per share in the transaction that
resulted in such transfer to the trust and (ii) the Market Price (as defined
below) on the date IMH, or its designee, accepts such offer. IMH shall have the
right to accept such offer until the trustee has sold the shares held in the
trust. Upon such a sale to IMH, the interest of the charitable beneficiary in
the shares sold shall terminate and the trustee shall distribute the net
proceeds of the sale to the intended transferee. Also, such intended transferee
shall have no right to vote such shares or be entitled to dividends or other
distributions with respect to such shares. See "Description of Capital
Stock--Capital Stock--Repurchase of Shares and Restrictions on Transfer" for
additional information regarding the Ownership Limit.
These provisions may inhibit market activity in shares of Common Stock
and may delay, defer or prevent a change of control or other transaction
involving the opportunity for IMH's stockholders to receive a premium for their
shares that might otherwise exist if any person were to attempt to assemble a
block of shares of Common Stock in excess of the number of shares permitted
under the Charter. Such provisions also may make IMH an unsuitable investment
vehicle for any person seeking to obtain ownership of more than 9.5% of the
outstanding shares of Common Stock.
In addition, certain provisions of the Maryland General Corporation Law
("MGCL") and of IMH's Charter and Bylaws may also have the effect of delaying,
deferring or preventing a change in control of the Company or other transaction
that may involve a premium price for holders of Common Stock or otherwise be in
their best interest. See "Certain Provisions of Maryland Law and of the
Company's Charter and Bylaws."
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USE OF PROCEEDS
The Selling Stockholder will receive all of the net proceeds from the
sale of the Shares offered hereby. The Company will not receive any proceeds
from the sale of such Shares.
SELLING STOCKHOLDER
The Shares offered by this Prospectus may be offered from time to time
by the Selling Stockholder named below. The following table sets forth the name
of and the number of shares of Common Stock beneficially owned by the Selling
Stockholder as of April 24, 1998 and the maximum number of Shares to be offered
by the Selling Stockholder. Since the Selling Stockholder may sell all, some or
none of its Shares, no estimate can be made of the actual aggregate number of
Shares that will be offered hereby. See "Plan of Distribution." If all of the
Shares offered hereby are sold, the Selling Stockholder will not own any of the
outstanding shares of Common Stock of the Company.
<TABLE>
<CAPTION>
Shares Beneficially Maximum Number
Name Owned Before Offering of Shares to be Offered
- ---- --------------------- -----------------------
<S> <C> <C>
Imperial Credit Industries, Inc. (1) .... 2,009,310 2,009,310
</TABLE>
(1) May be reached at 23550 Hawthorne Blvd., Building #1, Suite 110, Torrance,
California 90505.
The Selling Stockholder received the Shares from ICAI, a subsidiary of
the Selling Stockholder, which obtained the Shares pursuant to the Termination
Agreement. Pursuant to the Termination Agreement, the parties agreed to
terminate the Management Agreement between the Company and ICAI, and IMH agreed
to pay ICAI a $44.0 million termination payment which included the issuance of
shares of IMH Common Stock. IMH and ICAI also entered into a Registration Rights
Agreement (the "Registration Rights Agreement") whereby IMH agreed to register
the Shares and IMH and IFC entered into the Services Agreement with ICAI. H.
Wayne Snavely, a director of IMH, is Chairman of the Board of each of ICII and
ICAI. Joseph R. Tomkinson, Chairman of the Board of IMH, is a Director of ICII.
PLAN OF DISTRIBUTION
This Prospectus relates to the offer and sale from time to time by the
Selling Stockholder of up to 2,009,310 shares of Common Stock (the "Shares").
Such sales may be made in underwritten offerings or in open market or block
transactions or otherwise on the AMEX, or such other national securities
exchange or automated interdealer quotation system on which shares of Common
Stock are then listed, in the over-the-counter market, in private transactions
or otherwise at market prices prevailing at the time of sale, at prices related
to prevailing market prices at the time of the sale or at negotiated prices. The
methods by which the Shares may be sold include: (a) block transactions (which
may involve crosses) in which the broker-dealer so engaged will attempt to sell
the securities as agent but may position and resell a portion of the block as
principal to facilitate the transaction; (b) purchases by a broker-dealer as
principal and resale by such broker-dealer for its own account pursuant to this
Prospectus; (c) special offerings, exchange distributions and/or secondary
distributions in accordance with the rules of the AMEX; (d) ordinary brokerage
transactions and transactions in which the broker solicits purchasers; (e) sales
"at the market" to or through a market maker or into an existing trading market,
or on an exchange or otherwise, for such shares; (f) sales not involving market
makers or established trading markets, including direct sales or distributions
to institutions or individual purchasers; or (g) a combination of such methods
of sale. The Selling Stockholder may offer to sell and may sell the Shares in
options transactions (whether such option are listed on an options exchange or
otherwise) or deliver such Shares to cover short sales "against the box." Some
or all of the Shares may be sold through brokers acting on behalf of the Selling
Stockholder or to dealers for resale by such dealers. In connection with such
sales, such brokers and dealers may receive compensation in the form of
discounts or commissions from the Selling Stockholder and may receive
commissions from the purchasers of such shares for whom they act as broker or
agent (which discounts and commissions may exceed those customary in the types
of transactions involved). If necessary, a supplemental or amended Prospectus
will describe the method of sale in greater detail. In effecting sales,
broker-dealers engaged by the Selling Stockholder and/or purchasers of the
Common Stock may arrange for other broker-dealers to participate. In addition,
any of the Shares covered by this Prospectus which qualifies for sale pursuant
to Rule 144 rather
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than pursuant to this Prospectus or the Shares may be pledged as collateral for
margin accounts, and such shares could be resold pursuant to the terms of such
account.
If the Shares are sold in an underwritten offering, the Shares will be
acquired by the underwriters for their own accounts and may be resold from time
to time in one or more transactions, including negotiated transactions, at a
fixed public offering price or prices at the time of the sale or at negotiated
prices. The Shares may be offered to the public either through underwriting
syndicates represented by one or more managing underwriters or directly by one
or more firms acting as underwriters. The underwriter or underwriters with
respect to a particular underwritten offering of Shares will be named in a
supplemental or amended Prospectus relating to such offering, and if an
underwriting syndicate is used, the managing underwriter or underwriters will be
set forth on the cover of such supplemental or amended Prospectus. Any initial
public offering price and any discounts or commissions allowed or reallowed or
paid to dealers may be changed from time to time. Underwriters may sell shares
to or through broker-dealers, and such broker-dealers may receive compensation
in the form of discounts, commissions or commissions from the underwriters and
may receive commissions from the purchasers of such shares for whom they act as
broker or agent or to whom they sell as principal or both (which discounts and
commissions may exceed those customary in the types of transactions involved).
Pursuant to the Registration Rights Agreement, the Company has agreed
to pay all expenses in connection with the registration of the Shares being
offered hereby. The Selling Stockholder is responsible for paying any other
selling expenses, including underwriting discounts and brokers' commissions, and
expenses of Selling Stockholder's counsel.
The Selling Stockholder and any underwriter, broker, dealer or agent
who acts in connection with the sale of the Shares hereunder may be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act, and
any compensation received by them and any profit on any resale of the Shares as
principals may be deemed to be underwriting discounts and commissions under the
Securities Act.
In order to comply with the securities laws of certain jurisdictions,
the securities offered hereby will be offered or sold in such jurisdictions only
through registered or licensed brokers or dealers. In addition, in certain
jurisdictions the securities offered hereby may not be offered or sold unless
they have been registered or qualified for sale in such jurisdictions or an
exemption from registration or qualification is available and is complied with.
Pursuant to the Registration Rights Agreement, IMH has agreed to
indemnify the Selling Stockholder, its officers and directors and any person who
controls such Selling Stockholder, against certain liabilities and expenses
arising out of or based upon the information set forth or incorporated by
reference in this Prospectus, and the Registration Statement of which this
Prospectus is a part, including liabilities under the Securities Act.
In the event of a "distribution" of the shares, the Selling
Stockholder, any selling broker-dealer or agent and any "affiliated purchasers"
may be subject to Rule 102 under the Exchange Act, which would prohibit, with
certain exceptions, any such person from bidding for or purchasing any security
which is the subject of such distribution until its participation in that
distribution is completed.
DESCRIPTION OF CAPITAL STOCK
The following is a brief description of the material terms of the
Securities. This description does not purport to be complete and is subject and
qualified in its entirety by reference to Maryland law and to the Company's
Charter and Bylaws, copies of which are on file with the Commission, and are
incorporated by reference herein. See "Incorporation of Certain Documents by
Reference" and "Available Information."
GENERAL
The authorized stock of IMH consists of 50,000,000 shares of Common
Stock, $0.01 par value per share, and 10,000,000 shares of Preferred Stock,
$0.01 par value per share. It is expected that meetings of the stockholders of
IMH will be held annually. Special meetings of the stockholders may be called by
the President, Chief Executive Officer, a majority of the entire Board of
Directors or a majority of the Unaffiliated Directors and must be called upon
the written request of holders of shares entitled to cast at least 25% of all
the votes entitled to be cast at the meeting. The Charter reserves to IMH the
right to amend any provision thereof in the manner prescribed by Maryland law
upon the
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<PAGE>
affirmative vote of stockholders entitled to cast at least a majority of
all the votes entitled to be cast on the matter, except that the provision
requiring the affirmative vote of the holders of two-third of votes entitled to
be cast in the election of directors to remove a director may only be amended
upon the affirmative vote of the holders of two-thirds of the votes entitled to
be cast in the election of directors. The Common Stock is listed on the American
Stock Exchange.
COMMON STOCK
Each share of Common Stock is entitled to participate equally in
dividends when and as authorized by the Board of Directors and in the
distribution of assets of IMH upon liquidation. Each share of Common Stock is
entitled to one vote, subject to the provisions of the Charter regarding
restrictions on transfer of stock, and will be fully paid and nonassessable by
IMH upon issuance. Shares of Common Stock have no preference, conversion,
exchange, redemption, appraisal, preemptive or cumulative voting rights. The
authorized stock of IMH may be increased and altered from time to time in the
manner prescribed by Maryland law upon the affirmative vote of stockholders
entitled to cast at least a majority of all the votes entitled to be cast on the
matter. The Charter authorizes the Board of Directors to reclassify any unissued
shares of its Common Stock in one or more classes or series of stock.
PREFERRED STOCK
The Charter authorizes the Board of Directors to issue shares of
Preferred Stock and to classify or reclassify any unissued shares of Preferred
Stock into one or more classes or series of stock. The Preferred Stock may be
issued from time to time with such designations, preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications or terms or conditions of redemption as shall be
determined by the Board of Directors for each class or series of stock subject
to the provisions of the Charter regarding restrictions on transfer of stock.
Preferred Stock is available for possible future financing of, or acquisitions
by, IMH and for general corporate purposes without further stockholder
authorization, unless such authorization is required by applicable law or the
rules of either the American Stock Exchange or the principal national securities
exchange on which such stock is listed or admitted to trading. Thus, the Board
could authorize the issuance of shares of Preferred Stock with terms and
conditions which could have the effect of delaying, deferring or preventing a
change in control of IMH by means of a merger, tender offer, proxy contest or
otherwise. The Preferred Stock, if issued, may have a preference on dividend
payments which could reduce the assets available to IMH to make distributions to
the common stockholders. As of the date hereof, no shares of Preferred Stock
have been issued.
REPURCHASE OF SHARES AND RESTRICTIONS ON TRANSFER
For IMH to qualify as a REIT under the Code, no more than 50% in value
of its outstanding shares of stock may be owned, actually or constructively, by
or for five or fewer individuals (as defined in the Code to include certain
entities) at any time during the last half of a taxable year (other than the
first year for which an election to be treated as a REIT has been made). In
addition, a REIT's stock must be beneficially owned by 100 or more persons
during at least 335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year (other than the first year for
which an election to be treated as a REIT has been made).
Because IMH expects to continue to qualify as a REIT, the Charter
contains restrictions on the transfer of Common Stock which are intended to
assist IMH in complying with these requirements. The Charter prohibits any
person, subject to certain specified exceptions discussed below, from owning,
actually or constructively, (i) shares of Common Stock in excess of 9.5% (in
value or in number, whichever is more restrictive) of the outstanding shares of
Common Stock or (ii) shares of stock of IMH in excess of 9.5% in value the
aggregate value of the outstanding shares of stock of the Company (the
"Aggregate Ownership Limit"). The constructive ownership rules are complex, and
may cause shares of stock owned actually or constructively by a group of related
individuals and/or entities to be constructively owned by one individual or
entity. As a result, the acquisition of less than 9.5% of the outstanding shares
of Common Stock (or the acquisition of an interest in an entity that owns,
actually or constructively, shares of Common Stock) by an individual or entity,
could nevertheless cause that individual or entity, or another individual or
entity, to own constructively shares of stock in excess of the Ownership Limit
or the Aggregate Ownership Limit, or such other limit as provided in the Charter
or as otherwise permitted by the Board of Directors. The Board of Directors may,
but in no event will be required to, exempt a person from the Ownership Limit or
the Aggregate Ownership Limit if it determines that such person's ownership of
shares of stock in excess of such limits will not jeopardize IMH's status as a
REIT. As a condition of such waiver, the Board of Directors may require a ruling
from the Internal Revenue Service
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<PAGE>
or opinions of counsel satisfactory to it and/or undertakings or
representations from the applicant with respect to IMH's status as a REIT.
IMH's Charter further prohibits (a) any person from actually or
constructively owing shares of Common Stock that would result in IMH being
"closely held" under Section 856(h) of the Code or otherwise cause IMH to fail
to qualify as a REIT, and (b) any person from transferring shares of Common
Stock if such transfer would result in shares of Common Stock being owned by
fewer than 100 persons. Any person who acquires or attempts or intends to
acquire actual or constructive ownership of shares of stock of IMH that will or
may violate any of the foregoing restrictions on transferability and ownership
is required to give written notice immediately to IMH and provide IMH with such
other information as it may request in order to determine the effect of such
transfer on its status as a REIT. The foregoing restrictions on transferability
and ownership will not apply if the Board of Directors determines that it is no
longer in the best interest of IMH to attempt to qualify, or to continue to
qualify, as a REIT. The Board of Directors may from time to time increase the
Ownership Limit and the Aggregate Ownership Limit.
Pursuant to the Charter, if any purported transfer of Common Stock or
any other event would otherwise result in any person owning shares of stock in
excess of the Ownership Limit or the Aggregate Ownership Limit or in IMH being
"closely held" as described above or otherwise failing to qualify as a REIT,
then that number of shares of stock the actual or constructive ownership of
which otherwise would cause such person to violate such restrictions (rounded to
the nearest whose share) will be automatically transferred to a trustee (the
"Trustee") as trustee of a trust (the "Trust") for the exclusive benefit of one
or more charitable beneficiaries (the "Charitable Beneficiary"), and the
intended transferee will not acquire any rights in such shares. Shares held by
the Trustee will constitute issued and outstanding shares of stock. The intended
transferee will not benefit economically from ownership of any shares held in
the Trust, will have no rights to dividends and will not possess any rights to
vote or other rights attributable to the shares held in the Trust. The Trustee
will have all voting rights and rights to dividends or other distributions with
respect to shares held in the Trust, which rights will be exercised for the
exclusive benefit of the Charitable Beneficiary. Any dividend or other
distribution paid prior to the discovery by IMH that shares of stock have been
transferred to the Trustee will be paid with respect to such shares to the
Trustee upon demand and any dividend or other distribution authorized but unpaid
will be paid when due to the Trustee. Any dividends or distributions so paid
over to the Trustee will be held in trust for the Charitable Beneficiary.
Subject to Maryland law, effective as of the date that such shares have been
transferred to the Trustee, the Trustee will have the authority (at the
Trustee's sole discretion) (i) to rescind as void any vote cast by an intended
transferee prior to the discovery by IMH that such shares have been transferred
to the Trustee and (ii) to recast such vote in accordance with the desires of
the Trustee acting for the benefit of the Charitable Beneficiary.
Within 20 days of receiving notice from IMH that shares of stock have
been transferred to the Trust, the Trustee will sell the shares held in the
Trust to a person designated by the Trustee whose ownership of the shares will
not violate the ownership restrictions set forth in the Charter. Upon such sale,
the interest of the Charitable Beneficiary in the shares sold will terminate and
the Trustee will distribute the net proceeds of the sale to the intended
transferee and to the Charitable Beneficiary as follows: the intended transferee
will receive the lesser of (1) the price paid by the intended transferee for the
shares or, if the intended did not give value for the shares in connection with
the event causing the shares to be held in the Trust (e.g., in the case of a
gift, devise or other such transaction), the Market Price (as defined below) of
the shares on the day of the event causing the shares to be held in the Trust
and (2) the price per share received by the Trustee from the sale or other
disposition of the shares held in the Trust. Any net sales proceeds in excess of
the amount payable to the intended transferee will be immediately paid to the
Charitable Beneficiary.
In addition, shares of stock held in Trust will be deemed to have been
offered for sale to IMH, or its designee, at a price per share equal to the
lesser of (i) the price per share in the transaction that resulted in such
transfer to the Trust (or, in the case of a devise or gift, the Market Price (as
defined below) at the time of such devise or gift) and (ii) the Market Price on
the date IMH, or its designee, accepts such offer. IMH will have the right to
accept such offer until the Trustee has sold the shares held in the Trust. Upon
such a sale to IMH, the interest of the Charitable Beneficiary in the shares
sold will terminate and the Trustee will distribute the net proceeds of the sale
to the intended transferee.
The Charter defines the term "Market Price" on any date, with respect
to any class or series of outstanding shares of IMH's stock, as the Closing
Price (as defined below) for such shares on such date. The "Closing Price" on
any date shall mean the last sale price for such shares, regular way, or, in
case no such sale takes place on such day, the average of the closing bid and
asked prices, regular way, for such shares, in either case as reported in the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the NYSE or, if such
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<PAGE>
shares are not listed or admitted to trading on the NYSE, as reported on
the principal consolidated transaction reporting system with respect to
securities listed on the principal national securities exchange on which such
shares are listed or admitted to trading or, if such shares are not listed or
admitted to trading on any national securities exchange, the last quoted price,
or, if not so quoted, the average of the high bid and low asked prices in the
over-the- customer market, as reported by the National Association of Securities
Dealers, Inc. Automated Quotation System or, if such system is no longer in use,
the principal other automated quotation system that may then be in use or, if
such shares are not quoted by any such organization, the average of the closing
bid and asked prices as furnished by a professional market maker making a market
in such shares selected by the Board of Directors or, in the event that no
trading price is available for such shares, the fair market value of the shares,
as determined in good faith by the Board of Directors.
If any purported transfer of shares of stock of IMH shall cause IMH to
be beneficially owned be fewer than 100 persons, such transfer will be null and
void in its entirety and the intended transferee will acquire no rights to such
shares.
All certificates representing shares of Common Stock bear a legend
referring to the restrictions described above.
Every owner of more than 5% (or such lower percentage as required by
the Code or the regulations promulgated thereunder) of all classes or series of
the Company's stock, including shares of Common Stock, within 30 days after the
end of each taxable year, is required to give written notice to the Company
stating the name and address of such owner, the number of shares of each class
and series of stock of the Company beneficially owned and a description of the
manner in which such shares are held. Each such owner shall provide to the
Company such additional information as the Company may request in order to
determine the effect, if any, of such beneficial ownership on IMH's status as a
REIT and to ensure compliance with the Ownership Limit.
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
The Company has established a Dividend Reinvestment and Stock Purchase
Plan pursuant to which holders of record and beneficial owners of shares of
Common Stock of IMH may elect to have all or a portion of their dividends
reinvested automatically in additional shares of Common Stock of the Company,
and to make optional cash purchases of Common Stock of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is
Boston EquiServe, L.P., North Quincy, Massachusetts.
CERTAIN PROVISIONS OF MARYLAND LAW AND
OF THE COMPANY'S CHARTER AND BYLAWS
The following summary of certain provisions of the MGCL and of the
Charter and the Bylaws of IMH does not purport to be complete and is subject to
and qualified in its entirety by reference to Maryland law and to the Charter
and the Bylaws of IMH, copies of which are filed with the Commission. See
"Available Information." For a description of additional restrictions on
transfer of the Common Stock, see "Description of Securities--Capital Stock--
Repurchase of Shares and Restrictions on Transfer."
REMOVAL OF DIRECTORS
The Charter provides that a director may be removed from office at any
time but only by the affirmative vote of the holders of at least two-thirds of
the votes entitled to be cast in the election of directors.
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer or
issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns 10% or more of the voting power
of the corporation's shares or an
27
<PAGE>
affiliate of the corporation who, at any time within the two-year period
prior to the date in question, was the beneficial owner of 10% or more of the
voting power of the then outstanding voting stock of the corporation (an
"Interested Stockholder") or an affiliate of such an Interested Stockholder are
prohibited for five years after the most recent date on which the Interested
Stockholder becomes an Interested Stockholder. Thereafter, any such business
combination must be recommended by the board of directors of such corporation
and approved by the affirmative vote of at least (a) 80% of the votes entitled
to be cast by holders of outstanding shares of voting stock of the corporation
and (b) two-thirds of the votes entitled to be cast by holders of voting stock
of the corporation other than shares held by the Interested Stockholder with
whom (or with whose affiliate) the business combination is to be effected,
unless, among other conditions, the corporation's common stockholders receive a
minimum price (as defined in the MGCL) for their shares and the consideration is
received in cash or in the same form as previously paid by the Interested
Stockholder for its shares. These provisions of Maryland law do not apply,
however, to business combinations that are approved or exempted by the board of
directors of the corporation prior to the time that the Interested Stockholder
becomes an Interested Stockholder. Pursuant to the statute, IMH has exempted any
business combinations involving ICII and, consequently, the five-year
prohibition and the super-majority vote requirements of the statute will not in
any event apply to business combinations between ICII and IMH. As a result, ICII
may be able to enter into business combinations with IMH which may not be in the
best interest of the stockholders, without compliance by IMH with the
super-majority vote requirements and the other provisions of the statute.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation
acquired in a "control share acquisition" have no voting rights except to the
extent approved by a vote of two-thirds of the votes entitled to be cast on the
matter, excluding shares of stock owned by the acquiror, by officers or by
directors who are employees of the corporation. "Control shares" are voting
shares of stock which, if aggregated with all other such shares of stock
previously acquired by the acquiror or in respect of which the acquiror is able
to exercise or direct the exercise of voting power (except solely by virtue of a
revocable proxy), would entitle the acquiror to exercise voting power in
electing directors within one of the following ranges of voting power: (1)
one-fifth or more but less than one-third, (2) one-third or more but less than a
majority, or (3) a majority or more of all voting power. Control shares do not
include shares the acquiring person is then entitled to vote as a result of
having previously obtained stockholder approval. A "control share acquisition"
means the acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition,
upon satisfaction of certain conditions (including an undertaking to pay
expenses), may compel the board of directors of the corporation to call a
special meeting of stockholders to be held within 50 days of demand to consider
the voting rights of the shares. If no request for a meeting is made, the
corporation may itself present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring
person does not deliver an acquiring person statement as required by the
statute, then, subject to certain conditions and limitations, the corporation
may redeem any or all of the control shares (except those for which voting
rights have previously been approved) for fair value determined, without regard
to the absence of voting rights for the control shares, as of the date of the
last control share acquisition by the acquiror or of any meeting of stockholders
at which the voting rights of such shares are considered and not approved. If
voting rights for control shares are approved at a stockholders meeting and the
acquiror becomes entitled to vote a majority of the shares entitled to vote, all
other stockholders may exercise appraisal rights. The fair value of the shares
as determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share acquisition.
The control share acquisition statute does not apply (a) to shares
acquired in a merger, consolidation or share exchange if the corporation is a
party to the transaction or (b) to acquisitions approved or exempted by the
charter or bylaws of the corporation and adopted at any time before the
acquisition of shares.
The Bylaws of IMH contain a provision exempting from the control share
acquisition statute any and all acquisitions by any person of IMH's shares of
stock. There can be no assurance that such provision will not be amended or
eliminated at any time in the future.
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AMENDMENT TO THE CHARTER
IMH reserves the right from time to time to make any amendment to its
Charter, now or hereafter authorized by law, including any amendment which
alters the contract rights as expressly set forth in the Charter, of any shares
of outstanding stock. The Charter may be amended only by the affirmative vote of
holders of shares entitled to cast not less than a majority of all the votes
entitled to be cast on the matter; provided, however, that provisions on removal
of directors may be amended only by the affirmative vote of holders of shares
entitled to cast not less than two- thirds of all the votes entitled to be cast
in the election of directors.
DISSOLUTION OF THE COMPANY
The dissolution of IMH must be approved by the affirmative vote of
holders of shares entitled to cast not less than a majority of all the votes
entitled to be cast on the matter.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws provide that (a) with respect to an annual meeting of
stockholders, nominations of persons for election to the Board of Directors and
the proposal of business to be considered by stockholders may be made only (1)
pursuant to IMH's notice of the meeting, (2) by the Board of Directors or (3) by
a stockholder who is entitled to vote at the meeting and has complied with the
advance notice procedures set forth in the Bylaws and (b) with respect to
special meetings of stockholders, only the business specified in IMH's notice of
meeting may be brought before the meeting of stockholders and nominations of
persons for election to the Board of Directors may be made only (1) pursuant to
IMH's notice of the meeting, (2) by the Board of Directors or (3) provided that
the Board of Directors has determined that directors shall be elected at such
meeting, by a stockholder who is entitled to vote at the meeting and has
complied with the advance notice provisions set forth in the Bylaws.
POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE
CHARTER AND BYLAWS
The business combination provisions and, if the applicable provision in
the Bylaws is rescinded, the control share acquisition provisions of the MGCL,
the provisions of the Charter on ownership and transfer of stock and on removal
of directors and the advance notice provisions of the Bylaws could delay, defer
or prevent a change in control of IMH or other transaction that might involve a
premium price for holders of Common Stock or otherwise be in their best
interest.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain federal income tax considerations
regarding the Company and holders of Common Stock is based on current law, is
for general information only and is not tax advice. The information set forth
below, to the extent that it constitutes matters of law, summaries of legal
matters or legal conclusions, is the opinion of Latham & Watkins, tax counsel to
the Company. The tax treatment of a holder of Common Stock will vary depending
on his or her particular situation, and this summary does not purport to deal
with all aspects of taxation that may be relevant to prospective purchasers of
Common Stock in light of such purchasers' particular investment or tax
circumstances, or to certain types of purchasers subject to special treatment
under the federal income tax laws, including, without limitation, insurance
companies, certain financial institutions, broker- dealers, stockholders holding
Common Stock as part of a conversion transaction, as part of a hedge or hedging
transaction, or as a position in a straddle for tax purposes, tax-exempt
organizations (except to the extent discussed under the heading "--Taxation of
Tax-Exempt Stockholders"), or foreign corporations, foreign partnerships and
persons who are not citizens or residents of the United States. In addition, the
summary below does not consider the effect of any foreign, state, local or other
tax laws that may be applicable to prospective purchasers of Common Stock.
The information in this section is based on the Code, current,
temporary and proposed Treasury Regulations promulgated under the Code, the
legislative history of the Code, current administrative interpretations and
practices of the Internal Revenue Service (the "Service") (including its
practices and policies as expressed in certain private letter rulings which are
not binding on the Service except with respect to the particular taxpayers who
requested and received such rulings), and court decisions, all as of the date
hereof. No assurance can be given that future legislation, Treasury Regulations,
administrative interpretations and practices and/or court decisions will not
adversely affect existing
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interpretations. Any such change could apply retroactively to transactions
preceding the date of the change. IMH has not requested, and does not plan to
request, any ruling from the Service concerning the tax treatment of IMH. Thus,
no assurance can be provided that the statements set forth herein (which are, in
any event, not binding on the Service or courts) will not be challenged by the
Service or will be sustained by a court if so challenged.
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
REGARDING THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
SALE OF COMMON STOCK, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX
CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
TAXATION OF IMH
General. IMH elected to be taxed as a REIT under Sections 856 through
860 of the Code, commencing with its taxable year ended December 31, 1995. IMH
believes that, commencing with such taxable year, it has been organized and has
operated in such a manner as to qualify for taxation as a REIT under the Code,
and IMH intends to continue to operate in such a manner. However, no assurance
can be given that IMH has operated or will continue to operate in such a manner
so as to qualify or remain qualified as a REIT.
The sections of the Code and Treasury Regulations governing REITs are
highly technical and complex. The following summary sets forth the material
aspects of the sections that govern the federal income tax treatment of a REIT
and its stockholders. This summary is qualified in its entirety by the
applicable Code provisions, rules and regulations promulgated thereunder, and
administrative and judicial interpretations thereof.
If IMH qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on its net income that is currently
distributed to stockholders. This treatment substantially eliminates the "double
taxation" (at the corporate and stockholder levels) that generally results from
investment in a regular corporation. However, IMH will be subject to federal
income tax as follows: First, IMH will be taxed at regular corporate rates on
any undistributed "REIT taxable income," including undistributed net capital
gains. Second, under certain circumstances, IMH may be subject to the
Aalternative minimum tax" on its items of tax preference. Third, if IMH has (i)
net income from the sale or other disposition of Aforeclosure property" (defined
generally as property acquired through foreclosure or otherwise as a result of a
default on a loan secured by the property or a lease of such property) which is
held primarily for sale to customers in the ordinary course of business, or (ii)
other nonqualifying net income from foreclosure property, it will be subject to
tax at the highest corporate rate on such income. Fourth, if IMH has net income
from prohibited transactions (which are, in general, certain sales or other
dispositions of property held primarily for sale to customers in the ordinary
course of business other than foreclosure property), such income will be subject
to a 100% tax. Fifth, if IMH should fail to satisfy the 75% gross income test or
the 95% gross income test (as discussed below), but has nonetheless maintained
its qualification as a REIT because certain other requirements have been met, it
will be subject to a 100% tax on an amount equal to (a) the gross income
attributable to the greater of the amount by which IMH fails the 75% or 95% test
multiplied by (b) a fraction intended to reflect IMH's profitability. Sixth, if
IMH should fail to distribute during each calendar year at least the sum of (i)
85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain
net income for such year, and (iii) any undistributed taxable income from prior
periods, IMH would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. Seventh, if IMH has excess
inclusion income (attributable to its interest, if any, in a residual interest
in a REMIC or if all or a portion of IMH, IMH Assets, or IWLG is treated as a
taxable mortgage pool) and a disqualified organization (generally, tax-exempt
entities not subject to tax on unrelated business income, including governmental
organizations) holds shares of stock in IMH, IMH will be taxed at the highest
corporate tax rate on the amount of excess inclusion income for the taxable year
allocable to the shares held by such disqualified organization. Eighth, with
respect to any asset (a "Built-In Gain Asset") acquired by IMH from a
corporation which is or has been a C corporation (i.e., generally a corporation
subject to full corporate-level tax) in a transaction in which the basis of the
Built-In Gain Asset in the hands of IMH is determined by reference to the basis
of the asset in the hands of the C corporation, if IMH recognizes gain on the
disposition of such asset during the ten-year period (the "Recognition Period")
beginning on the date on which such asset was acquired by IMH, then, to the
extent of the Built-In Gain (i.e., the excess of (a) the fair market value of
such asset over (b) IMH's adjusted basis in such asset, determined as of the
beginning of the Recognition Period), such gain will be subject to tax at the
highest regular corporate rate pursuant to Treasury Regulations that have not
yet been promulgated. The results described above with respect to the
recognition of Built-In Gain assume that IMH will make
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an election pursuant to IRS Notice 88-19 and that the availability or
nature of such election is not modified as proposed in President Clinton's 1999
federal budget proposal. Ninth, IMH may be subject to tax on any "excess
inclusion income" (as defined in the Code) to the extent that shares of its
capital stock are held by certain disqualified organizations.
Requirements for Qualification. The Code defines a REIT as a
corporation, trust or association (i) which is managed by one or more trustees
or directors; (ii) the beneficial ownership of which is evidenced by
transferable shares, or by transferable certificates of beneficial interest;
(iii) which would be taxable as a domestic corporation but for Sections 856
through 859 of the Code; (iv) which is neither a financial institution nor an
insurance company subject to certain provisions of the Code; (v) the beneficial
ownership of which is held by 100 or more persons; (vi) during the last half of
each taxable year not more than 50% in value of the outstanding stock of which
is owned, actually or constructively, by or for five or fewer individuals (as
defined in the Code to include certain entities); and (vii) which meets certain
other tests, described below, regarding the nature of its income and assets and
the amount of its distributions. The Code provides that conditions (i) to (iv),
inclusive, must be met during the entire taxable year and that condition (v)
must be met during at least 335 days of a taxable year of twelve months, or
during a proportionate part of a taxable year of less than twelve months. For
purposes of conditions (v) and (vi), pension funds and certain other tax-exempt
entities are treated as individuals, subject to a "look-through" exception in
the case of condition (vi). In addition, a corporation may not elect to become a
REIT unless its taxable year is the calendar year. IMH has a calendar taxable
year.
The Company believes that it has previously issued sufficient shares of
Common Stock with sufficient diversity of ownership to allow IMH to satisfy
conditions (v) and (vi). In addition, the Charter provides for restrictions
regarding the transfer and ownership of shares, which restrictions are intended
to assist IMH in continuing to satisfy the share ownership requirements
described in (v) and (vi) above. Such ownership and transfer restrictions are
described in "Description of Capital Stock--Repurchase of Shares and
Restrictions on Transfer." These restrictions, however, may not, in all cases,
ensure that IMH will be able to satisfy the share ownership requirements
described above. If IMH fails to satisfy such share ownership requirements,
IMH's status as a REIT will terminate; provided, however, that if IMH complies
with the rules contained in the applicable Treasury Regulations requiring IMH to
attempt to ascertain the actual ownership of its shares, and IMH does not know,
and would not have known through the exercise of reasonable diligence, whether
it failed to meet the requirement set forth in condition (vi) above, IMH will be
treated as having met such requirement. See "--Failure to Qualify."
Ownership of IWLG and IMH Assets. IMH has owned 100% of the stock of
IWLG and IMH Assets at all times that IWLG and IMH Assets have been in
existence. As a result, IWLG and IMH Assets will be treated as "qualified REIT
subsidiaries" ("QRSs"). Code Section 856(I) provides that a corporation which is
a "qualified REIT subsidiary" will not be treated as a separate corporation, and
all assets, liabilities, and items of income, deduction, and credit of a
"qualified REIT subsidiary" will be treated as assets, liabilities and such
items (as the case may be) of the REIT for all purposes of the Code including
the REIT qualification tests. Thus, in applying the requirements described
herein, the QRSs will be ignored, and all assets, liabilities and items of
income, deduction and credit of such subsidiaries will be treated as assets,
liabilities and such items (as the case may be) of IMH. For this reason,
references under "Federal Income Tax Considerations" to the income and assets of
IMH shall include the income and assets of the QRSs. Because the QRSs will be
treated as "qualified REIT subsidiaries" they will not be subject to federal
income tax. In addition, IMH's ownership of the voting stock of the QRSs will
not violate the restrictions against ownership of securities of any one issuer
which constitute more than 10% of such issuer's voting securities or more than
5% of the value of IMH's total assets, described below under "-- Asset
Tests."
Income Tests. In order to maintain its qualification as a REIT, IMH
annually must satisfy two gross income requirements. First, at least 75% of
IMH's gross income (excluding gross income from prohibited transactions) for
each taxable year must be derived directly or indirectly from: (i) rents from
real property; (ii) interest on obligations secured by mortgages on real
property or on interests in real property; (iii) gain from the sale or other
disposition of real property (including interests in real property and interests
in mortgages on real property) not held primarily for sale to customers in the
ordinary course of business; (iv) dividends or other distributions on, and gain
(other than gain from prohibited transactions) from the sale or other
disposition of, transferable shares in other real estate investment trusts; (v)
abatements and refunds of taxes on real property; (vi) income and gain derived
from foreclosure property; (vii) amounts (other than amounts the determination
of which depend in whole or in part on the income or profits of any person)
received or accrued as consideration for entering into agreements (a) to make
loans secured by mortgages on real
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property or on interests in real property or (b) to purchase or lease real
property (including interests in real property and interests in mortgages on
real property); (viii) gain from the sale or other disposition of a real estate
asset which is not a prohibited transaction; and (ix) qualified temporary
investment income. Second, at least 95% of IMH's gross income (excluding gross
income from prohibited transactions) for each taxable year must be derived from
the sources described above with respect to the 75% gross income test,
dividends, interest, and gain from the sale or disposition of stock or
securities (or from any combination of the foregoing). In addition, for taxable
years beginning prior to August 5, 1997, short-term gain from the sale or other
disposition of stock or securities, gain from prohibited transactions, and gain
on the sale or other disposition of real property held for less than four years
(apart from involuntary conversions and sales or other dispositions of
foreclosure property) must represent less than 30% of IMH's gross income
(including gross income from prohibited transactions). The 30% gross income test
has been repealed and will not apply beginning with IMH's 1998 taxable year.
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales.
Generally, if a loan is secured by both personal property and real
property, interest must be allocated between the personal property and the real
property, with only the interest allocable to the real property qualifying as
mortgage interest under the 75% gross income test. Treasury Regulations provide
that if a loan is secured by both personal and real property and the fair market
value of the real property as of the commitment date (generally, the date on
which the REIT's obligation to make the loan becomes binding) equals or exceeds
the amount of the loan, the entire interest amount will qualify under the 75%
gross income test. If the amount of the loan exceeds the fair market value of
the real property as of the commitment date, the interest income allocated to
the real property is an amount equal to the interest income multiplied by a
fraction, the numerator of which is the fair market value of the real property
as of the commitment date, and the denominator of which is the amount of the
loan. The interest income allocated to the personal property is an amount equal
to the excess of the total interest income over the interest income allocated to
the real property.
Interest earned on mortgage loans, and mortgage-backed securities
secured by or representing an interest in such loans, will qualify as "interest"
for purposes of both the 95% and 75% gross income tests to the extent such
assets are treated as obligations secured by mortgages on real property or on
interests in real property. However, income attributable to securities or other
obligations that are not treated as obligations secured by mortgages on real
property or on interests in real property (and which are not otherwise
"Qualified REIT Assets", as defined below), dividends on stock (including any
dividends IMH receives from IFC, but not including dividends IMH receives from
other qualifying REITs or from the QRSs), and gains from the sale or disposition
of such stock or such securities or other obligations will not qualify under the
75% gross income test. Such income will qualify under the 95% gross income test,
however, if such income constitutes interest, dividends or gain from the sale or
disposition of stock or securities. Income from loan guarantee fees, mortgage
servicing contracts or other contracts will not qualify under either the 95% or
75% gross income test if such income constitutes fees for services rendered by
IMH or is not treated as interest (on obligations secured by mortgages on real
property or on interests in real property for purposes of the 75% gross income
test). Similarly, income from hedging, including the sale of hedges, will not
qualify under the 75% or 95% gross income tests unless such hedges constitute
certain qualified hedges, in which case such income will qualify under the 95%
gross income test. For purposes of the discussion herein, the term "Qualified
REIT Assets" shall mean (i) real property (including interests in real property
and interests in mortgages on real property), (ii) shares (or transferable
certificates of beneficial interest) in other REITs which meet the requirements
of Sections 856-859 of the Code, (iii) stock or debt instruments (not otherwise
described in (i), (ii) or (iv)) held for not more than one year that were
purchased with the proceeds of (a) an offering of stock in IMH (other than
amounts received pursuant to a dividend reinvestment plan) or (b) a public
offering of debt obligations of IMH which have maturities of at least five
years, and (iv) a regular or residual interest in a REMIC, but only if 95% or
more of the assets of such REMIC are assets described in (i) through (iii).
Furthermore, IFC receives servicing and processing fees and income from
gain on the sale of certain mortgage loans and mortgage securities. Such fees do
not accrue to IMH, but IMH receives dividends on its nonvoting preferred stock
in IFC. Such dividends will qualify under the 95% gross income test, but will
not qualify under the 75% gross income test.
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In order to comply with the 95% and 75% gross income tests, IMH has
limited and will continue to limit substantially all of the assets that it
acquires to mortgage loans or other securities or obligations that are treated
as obligations secured by mortgages on real property or on interests in real
property or to other Qualified REIT Assets. As a result, IMH may limit the type
of assets, including hedging contracts, that it otherwise might acquire and,
therefore, the type of income it otherwise might receive, including income from
hedging, other than income from certain qualified hedges.
In order to comply with the REIT gross income tests, IMH has monitored
and will continue to monitor its income, including income from dividends,
warehouse lending, hedging transactions, futures contracts, servicing and sales
of mortgage assets, gains on the sale of securities, and other income not
derived from Qualified REIT Assets. IMH believes that the aggregate amount of
any nonqualifying income in any taxable year has not exceeded and will not
exceed the limit on nonqualifying income under the gross income tests.
If IMH fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions will be generally available if IMH's failure to meet such tests was
due to reasonable cause and not due to willful neglect, IMH attaches a schedule
of the sources of its income to its federal income tax return, and any incorrect
information on the schedule was not due to fraud with intent to evade tax. It is
not possible, however, to state whether in all circumstances IMH would be
entitled to the benefit of these relief provisions. For example, if IMH fails to
satisfy the gross income tests because nonqualifying income that IMH
intentionally incurs exceeds the limits on such income, the Service could
conclude that IMH's failure to satisfy the tests was not due to reasonable
cause. If these relief provisions are inapplicable to a particular set of
circumstances involving IMH, IMH will not qualify as a REIT. As discussed above
in "Federal Income Tax Considerations--Taxation of IMH-- General," even if these
relief provisions apply and IMH retains its status as a REIT, a 100% tax would
be imposed on an amount equal to (a) the gross income attributable to the
greater of the amount by which IMH failed the 75% or 95% test multiplied by (b)
a fraction intended to reflect IMH's profitability. There can be no assurance
that IMH will always be able to maintain compliance with the gross income tests
for REIT qualification despite its periodic monitoring procedures. No similar
mitigation provision provides relief if IMH fails the 30% gross income test. In
such case, IMH would cease to qualify as a REIT. See "--Failure to Qualify."
Any gain realized by IMH on the sale of any property (including
mortgage loans and mortgage-backed securities) held as inventory or other
property held primarily for sale to customers in the ordinary course of business
will be treated as income from a prohibited transaction that is subject to a
100% penalty tax. Such prohibited transaction income may also have an adverse
effect upon IMH's ability to satisfy the income tests for qualification as a
REIT. Under existing law, whether property is held as inventory or primarily for
sale to customers in the ordinary course of a trade or business is a question of
fact that depends on all the facts and circumstances with respect to the
particular transaction. IFC securitizes mortgage loans and sells the resulting
mortgage securities. If IMH were to sell such mortgage securities on a regular
basis, there is a substantial risk that such sales would constitute prohibited
transactions and that all of the profits therefrom would be subject to a 100%
tax. Therefore, such sales have been made and will be made only by IFC. IFC is
not subject to the 100% penalty tax on income from prohibited transactions,
which is only applicable to a REIT.
Asset Tests. IMH, at the close of each quarter of its taxable year,
must also satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of IMH's total assets must be represented by Qualified
REIT Assets, cash, cash items and government securities. Second, not more than
25% of IMH's total assets may be represented by securities other than those in
the 75% asset class. Third, of the investments included in the 25% asset class,
the value of any one issuer's securities owned by IMH may not exceed 5% of the
value of IMH's total assets and IMH may not own more than 10% of any one
issuer's outstanding voting securities. IMH believes that substantially all of
its assets, other than the nonvoting preferred stock of IFC, and the amount of
any loans made to ICCC and certain loans made to IFC, are Qualified REIT Assets.
As described above, IMH will be treated as owning all assets,
liabilities and items of income, deduction, and credit of the QRSs. IWLG
provides short- term lines of credit ("warehouse loans") to IFC and approved
mortgage banks, most of which are correspondents of IFC, to finance mortgage
loans during the time from the closing of the loans to their sale or other
settlement with pre-approved investors, including IMH. IWLG's warehouse loans
are secured by assignments of first priority perfected security interests in and
liens on, among other items of collateral, mortgages loans and related mortgage
notes owned by the customer that in turn are secured by mortgages on real
property. The Service
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has issued a Revenue Ruling in which it ruled that loans similar to IWLG's
warehouse loans to IFC were obligations secured by mortgages on real property
and interests in mortgages on real property, and therefore that such loans were
Qualified REIT Assets. Based on such Revenue Ruling, IMH believes that IWLG's
warehouse loans are Qualified REIT Assets. However, in the event that the IWLG's
warehouse loans are not treated as Qualified REIT Assets, IMH would likely fail
the 5% asset test and fail to qualify as a REIT. See "-- Failure to Qualify."
As described above, IMH owns 100% of the nonvoting preferred stock of
IFC, which represents approximately 99% of the economic value of all classes of
stock of IFC. IMH does not and will not own any of the voting securities of IFC,
and therefore IMH will not be considered to own more than 10% of the voting
securities of IFC (which would be prohibited by the REIT asset tests currently
set forth in the Code). President Clinton's 1999 federal budget proposal
contains a provision which would amend the REIT asset tests so as to prohibit
REITs from owning stock of a corporation possessing more than 10% of the vote or
value of all classes of stock of the corporation. This proposal would be
effective with respect to stock acquired on or after the date of the first
Congressional committee action with respect to the proposal (the "Action Date").
In addition, to the extent that a REIT's stock ownership is grandfathered by
virtue of this effective date, such grandfathered status would terminate if the
subsidiary corporation engages in a trade or business that it is not engaged in
on the Action Date or acquires substantial new assets on or after such date.
Accordingly, if this provision of the budget proposal were enacted in its
present form, IMH's stock ownership in IFC would be grandfathered, but such
grandfathered status would terminate if IFC engages in a trade or business that
it is not engaged in on the Action Date or acquires substantial new assets
(including additional mortgage loans) on or after such date, even if such
activities are undertaken or assets are acquired prior to the adoption of the
proposal. In such case, IMH's continued ownership of more than 10% of the
economic value of IFC beyond IMH's next quarterly asset testing date following
the Action Date (which could occur prior to the adoption of the proposal) could
cause IMH to fail to qualify as a REIT. See "--Failure to Qualify." It is
presently uncertain whether any proposal regarding REIT subsidiaries, such as
IFC, will be enacted, or if enacted, what the terms of such proposal (including
its effective date) will be. At this time, it is expected that IFC will continue
to acquire additional mortgage loans notwithstanding the proposed legislation
regarding REIT subsidiaries.
IMH believes that the aggregate value of its securities of IFC has not
at any time exceeded 5% of the total value of IMH's assets, and will not exceed
such amount in the future. There can be no assurance that the Service will not
contend that the value of the securities of IFC held by IMH exceeds the 5% value
limitation. The 5% asset test requires that IMH revalue its assets at the end of
each calendar quarter in which IMH acquires additional securities in IFC for the
purpose of applying such test. Although IMH plans to take steps to ensure that
it satisfies the 5% asset test for any quarter with respect to which retesting
is to occur, there can be no assurance that such steps will always be
successful, or will not require a reduction in IMH's overall interest in IFC.
IMH has taken and will continue to take measures to prevent the value
of securities issued by any one entity that do not constitute Qualified REIT
Assets from exceeding 5% of the value of IMH's total assets as of the end of
each calendar quarter. In particular, as of the end of each calendar quarter,
IMH has limited and diversified and will continue to limit and diversify its
ownership of securities of IFC and other securities that do not constitute
Qualified REIT Assets as necessary to satisfy the REIT asset tests described
above.
When purchasing mortgage-related securities, IMH and its counsel may
rely on opinions of counsel for the issuer or sponsor of such securities given
in connection with the offering of such securities, or statements made in
related offering documents, for purposes of determining whether and to what
extent those securities constitute Qualified REIT Assets for purposes of the
REIT asset tests and produce income which qualifies under the REIT gross income
tests discussed above. The inaccuracy of any such opinions or statements may
have an adverse impact on IMH's qualification as a REIT.
A regular or residual interest in a REMIC will be treated as a
Qualified REIT Asset for purposes of the REIT asset tests and income derived
with respect to such interests will be treated as interest on obligations
secured by mortgages on real property, assuming that at least 95% of the assets
of the REMIC are Qualified REIT Assets. If less than 95% of the assets of the
REMIC are Qualified REIT Assets, only a proportionate share of the assets of and
income derived from the REMIC will be treated as qualifying under the REIT asset
and income tests. Based on information provided to IMH by each REMIC in which
IMH holds an interest, IMH believes that its REMIC interests fully qualify for
purposes of the REIT gross income and asset tests. IMH has not acquired and does
not expect to acquire or retain residual interests issued by REMICs.
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If IMH invests in a partnership, it will be deemed to own its
proportionate share of the assets of the partnership and will be deemed to be
entitled to the income of the partnership attributable to such share. In
addition, the character of the assets and gross income of the partnership shall
retain the same character in the hands of IMH for purposes of the REIT gross
income and asset tests.
After initially meeting the asset tests at the close of any quarter,
IMH will not lose its status as a REIT for failure to satisfy the asset tests at
the end of a later quarter solely by reason of changes in asset values. If the
failure to satisfy the asset tests results from an acquisition of securities or
other property during a quarter, the failure can be cured by the disposition of
sufficient nonqualifying assets within 30 days after the close of that quarter.
IMH intends to maintain adequate records of the value of its assets to ensure
compliance with the asset tests and to take such other actions within 30 days
after the close of any quarter as may be required to cure any noncompliance. If
IMH fails to cure noncompliance with the asset tests within such time period,
IMH would cease to qualify as a REIT.
Annual Distribution Requirements. IMH, in order to maintain its
qualification as a REIT, is required to distribute dividends (other than capital
gain dividends) to its stockholders in an amount at least equal to (i) the sum
of (a) 95% of IMH's "REIT taxable income" (generally, income of IMH computed
without regard to the dividends paid deduction and by excluding its net capital
gain) and (b) 95% of the excess of the net income, if any, from foreclosure
property over the tax imposed on such income, minus (ii) the excess of the sum
of certain items of non-cash income (i.e., income attributable to leveled
stepped rents, original issue discount or purchase money debt, or a like-kind
exchange, that is later determined to be taxable) over 5% of "REIT taxable
income." In addition, if IMH disposes of any Built-In Gain Asset during its
Recognition Period, IMH will be required, pursuant to Treasury Regulations which
have not yet been promulgated, to distribute at least 95% of the Built-in Gain
(after tax), if any, recognized on the disposition of such asset. Such
distributions must be paid in the taxable year to which they relate, or in the
following taxable year if declared before IMH timely files its tax return for
such year and if paid on or before the first regular dividend payment date after
such declaration and if IMH so elects and specifies the dollar amount on its tax
return. Such distributions are taxable to holders of Common Stock (other than
certain tax-exempt entities, as discussed below) in the year in which paid, even
if such distributions relate to the prior year for purposes of IMH's 95%
distribution requirement. The amount distributed must not be preferential (e.g.,
each holder of shares of Common Stock must receive the same distribution per
share). To the extent that IMH does not distribute all of its net capital gain
or distributes at least 95%, but less than 100%, of its "REIT taxable income,"
as adjusted, it will be subject to tax on the undistributed portion at regular
ordinary and capital gain corporate tax rates. Furthermore, if IMH should fail
to distribute during each calendar year (or, in the case of distributions with
declaration and record dates falling in the last three months of the calendar
year, by the end of January immediately following such year) at least the sum of
(i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital
gain income for such year, and (iii) any undistributed taxable income from prior
periods, IMH would be subject to a 4% excise tax on the excess of such required
distributions over the amounts actually distributed. Any REIT taxable income and
net capital gain on which this excise tax is imposed for any year is treated as
an amount distributed that year for purposes of calculating such tax. IMH
believes that it has and intends to continue to make timely distributions
sufficient to satisfy these annual distribution requirements.
IMH anticipates that it will generally have sufficient cash or liquid
assets to enable it to satisfy the distribution requirements described above. It
is possible, however, that IMH, from time to time, may not have sufficient cash
or other liquid assets to meet these distribution requirements due to timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of such income and deduction of such
expenses in arriving at taxable income of IMH. For instance, IMH may realize
income without a corresponding cash payment, as in the case of original issue
discount or accrued interest on defaulted mortgage loans. In the event that such
timing differences occur, in order to meet the distribution requirements, IMH
may find it necessary to sell assets, arrange for short-term, or possibly
long-term, borrowings, or pay dividends in the form of taxable stock dividends.
The Service has ruled that if a REIT's dividend reinvestment plan
allows stockholders of the REIT to elect to have cash distributions reinvested
in shares of the REIT at a purchase price equal to at least 95% of fair market
value on the distribution date, then such cash distributions reinvested pursuant
to such a plan qualify under the 95% distribution test. IMH expects that the
terms of its DRP will comply with this ruling.
Under certain circumstances, IMH may be able to rectify a failure to
meet the distribution requirement for a year by paying "deficiency dividends" to
stockholders in a later year, which may be included in IMH's deduction for
dividends paid for the earlier year. Thus, IMH may be able to avoid being taxed
on amounts distributed as deficiency
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dividends; however, IMH will be required to pay interest based upon the
amount of any deduction taken for deficiency dividends.
FAILURE TO QUALIFY
If IMH fails to qualify for taxation as a REIT in any taxable year, and
the relief provisions do not apply, IMH will be subject to tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates. Distributions to stockholders in any year in which IMH fails to qualify
will not be deductible by IMH nor will they be required to be made. As a result,
IMH's failure to qualify as a REIT would substantially reduce the cash available
for distribution by IMH to its stockholders. In addition, if IMH fails to
qualify as a REIT, all distributions to stockholders will be taxable as ordinary
income, to the extent of IMH's current and accumulated earnings and profits,
and, subject to certain limitations of the Code, corporate distributees may be
eligible for the dividends received deduction. Unless entitled to relief under
specific statutory provisions, IMH will also be disqualified from taxation as a
REIT for the four taxable years following the year during which qualification
was lost. It is not possible to state whether in all circumstances IMH would be
entitled to such statutory relief. Failure to qualify for even one year could
result in the IMH's incurring substantial indebtedness (to the extent borrowings
are feasible) or liquidating substantial investments in order to pay the
resulting taxes. In addition, President Clinton's 1999 federal budget proposal
contains a provision which, if enacted in its present form, would result in the
immediate taxation of all gain inherent in a C corporation's assets upon an
election by the corporation to become a REIT in taxable years beginning after
January 1, 1999, and thus could effectively preclude IMH from re-electing to be
taxed as a REIT following a loss of its REIT status.
TAXATION OF TAXABLE U.S. STOCKHOLDERS
As used herein, the term "U.S. Stockholder" means a holder of shares of
Common Stock who (for United States federal income tax purposes) (i) is a
citizen or resident of the United States, (ii) is a corporation, partnership, or
other entity created or organized in or under the laws of the United States or
of any political subdivision thereof, (iii) is an estate the income of which is
subject to United States federal income taxation regardless of its source, or
(iv) is a trust, the administration of which is subject to the primary
supervision of a United States court and which has one or more United States
persons who have the authority to control all substantial decisions of the
trust. Notwithstanding the preceding sentence, to the extent provided in
regulations, certain trusts in existence on August 20, 1996, and treated as
United States persons prior to such date that elect to continue to be treated as
United States persons, shall also be considered U.S. Stockholders.
As long as IMH qualifies as a REIT, distributions made by IMH out of
its current or accumulated earnings and profits (and not designated as capital
gain dividends) will constitute dividends taxable to its taxable U.S.
Stockholders as ordinary income. Such distributions will not be eligible for the
dividends received deduction in the case of U.S. Stockholders that are
corporations. Distributions made by IMH that are properly designated by IMH as
capital gain dividends will be taxable to taxable U.S. Stockholders as gain (to
the extent that they do not exceed IMH's actual net capital gain for the taxable
year) from the sale or disposition of a capital asset (provided that the shares
have been held as a capital asset). Depending upon the period of time that IMH
held the assets to which such gains were attributable, and upon certain
designations, if any, which may be made by IMH, such gains will be taxable to
non-corporate U.S. Stockholders at a rate of either 20%, 25% or 28%. U.S.
Stockholders that are corporations may, however, be required to treat up to 20%
of certain capital gain dividends as ordinary income. To the extent that IMH
makes distributions (not designated as capital gain dividends) in excess of its
current and accumulated earnings and profits, such distributions will be treated
first as a tax-free return of capital to each U.S. Stockholder, reducing the
adjusted basis which such U.S. Stockholder has in his shares of Common Stock for
tax purposes by the amount of such distribution (but not below zero), with
distributions in excess of a U.S. Stockholder's adjusted basis in his shares
taxable as capital gains (provided that the shares have been held as a capital
asset). With respect to non-corporate U.S. Stockholders, amounts described as
being treated as capital gains in the preceding sentence will be taxable as
long-term capital gains if the shares to which such gains are attributable have
been held for more than eighteen months, mid-term capital gains if the shares
have been held for more than one year but not more than eighteen months, or
short-term capital gains if the shares have been held for one year or less.
Dividends declared by IMH in October, November, or December of any year and
payable to a stockholder of record on a specified date in any such month shall
be treated as both paid by IMH and received by the stockholder on December 31 of
such year, provided that the dividend is actually paid by IMH on or before
January 31 of the following calendar year. Stockholders may not include in their
own income tax returns any net operating losses or capital losses of IMH.
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IMH may elect to retain, rather than distribute as a capital gain
dividend, its net long-term capital gains. In such event, IMH would pay tax on
such retained net long- term capital gains. In addition, to the extent
designated by IMH, a U.S. Stockholder generally would (i) include its
proportionate share of such undistributed long-term capital gains in computing
its long-term capital gains in its return for its taxable year in which the last
day of IMH's taxable year falls (subject to certain limitations as to the amount
so includable), (ii) be deemed to have paid the capital gains tax imposed on IMH
on the designated amounts included in such U.S. Stockholder's long-term capital
gains, (iii) receive a credit or refund for such amount of tax deemed paid by
it, (iv) increase the adjusted basis of its shares of Common Stock by the
difference between the amount of such includable gains and the tax deemed to
have been paid by it, and (v) in the case of a U.S. Stockholder that is a
corporation, appropriately adjust its earnings and profits for the retained
capital gains in accordance with Treasury Regulations to be prescribed by the
Service.
Distributions made by IMH and gain arising from the sale or exchange by
a U.S. Stockholder of shares of Common Stock will not be treated as passive
activity income, and, as a result, U.S. Stockholders generally will not be able
to apply any "passive losses" against such income or gain. Distributions made by
IMH (to the extent they do not constitute a return of capital) generally will be
treated as investment income for purposes of computing the investment interest
limitation. Gain arising from the sale or other disposition of Common Stock (or
distributions treated as such), however, will not be treated as investment
income unless the U.S. Stockholder elects to reduce the amount of such U.S.
Stockholder's total net capital gain eligible for the maximum capital gains rate
by the amount of such gain with respect to such Common Stock.
Upon any sale or other disposition of Common Stock, a U.S. Stockholder
will recognize gain or loss for federal income tax purposes in an amount equal
to the difference between (i) the amount of cash and the fair market value of
any other property received on such sale or other disposition and (ii) the
holder's adjusted basis in such shares of Common Stock for tax purposes. Such
gain or loss will be capital gain or loss if the shares have been held by the
U.S. Stockholder as a capital asset, and, with respect to non-corporate U.S.
Stockholders, will be mid-term or long-term gain or loss if such shares have
been held for more than one year or eighteen months, respectively. In general,
any loss recognized by a U.S. Stockholder upon the sale or other disposition of
shares of Common Stock that have been held for six months or less (after
applying certain holding period rules) will be treated as a long- term capital
loss, to the extent of distributions received by such U.S. Stockholder from IMH
which were required to be treated as long-term capital gains.
IMH has not acquired and does not expect to acquire or retain residual
interests issued by REMICs. Such residual interests, if acquired by a REIT,
could generate excess inclusion income taxable to the REIT's stockholders in
proportion to the dividends received from the REIT. Excess inclusion income
cannot be offset by net operating losses of a stockholder. If the stockholder of
a REIT holding a residual interest in a REMIC is a tax-exempt entity, the excess
inclusion income is fully taxable to such stockholder as unrelated business
taxable income. If allocated to a Non-U.S. Stockholder (as defined below), the
excess inclusion income is subject to federal income tax withholding without
reduction pursuant to any otherwise applicable tax treaty. Potential investors,
and in particular, tax-exempt entities, are urged to consult with their tax
advisors concerning this issue. A REIT, rather than its stockholders, will be
taxed (at the highest corporate tax rate) on the amount of excess inclusion
income for the taxable year allocable to shares of capital stock of IMH held by
disqualified organizations (generally, tax-exempt entities not subject to tax on
unrelated business income, including governmental organizations).
IMH (either directly or through its QRSs) has financed and intends to
continue to finance the acquisition of mortgage assets by entering into reverse
repurchase agreements (which are essentially loans secured by IMH's mortgage
assets), CMOs or other secured lending transactions. If the Service were to
successfully take the position that such transactions result in IMH having
issued debt instruments (i.e., the reverse repurchase agreements, CMOs or other
secured loans) with differing maturity dates secured by a pool of mortgage
loans, IMH or either of the QRSs could be treated, in whole or in part, as a
taxable mortgage pool. In this case, a portion of IMH's income could be
characterized as excess inclusion income which would subject stockholders (or
IMH, to the extent Common Stock is held by disqualified organizations) to the
tax treatment described above with respect to residual interests in REMICs. IMH
intends to take the position that its existing arrangements do not create a
taxable mortgage pool or excess inclusion income. In the absence of any
definitive authority on this issue, there can be no assurance regarding whether
IMH's reverse repurchase agreements, CMOs or other secured loans will not cause
IMH to realize excess inclusion income.
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BACKUP WITHHOLDING
IMH will report to its U.S. Stockholders and the Service the amount of
dividends paid during each calendar year, and the amount of tax withheld, if
any. Under the backup withholding rules, a stockholder may be subject to backup
withholding at the rate of 31% with respect to dividends paid unless such holder
(a) is a corporation or comes within certain other exempt categories and, when
required, demonstrates this fact, or (b) provides a taxpayer identification
number, certifies as to no loss of exemption from backup withholding, and
otherwise complies with applicable requirements of the backup withholding rules.
A U.S. Stockholder that does not provide IMH with his correct taxpayer
identification number may also be subject to penalties imposed by the Service.
Any amount paid as backup withholding will be creditable against the
stockholder's income tax liability. In addition, IMH may be required to withhold
a portion of capital gain distributions to any stockholders who fail to certify
their non-foreign status to IMH. See "--Taxation of Non-U.S. Stockholders."
TAXATION OF TAX-EXEMPT STOCKHOLDERS
Generally, a tax-exempt investor that is exempt from tax on its
investment income, such as an individual retirement account (IRA) or a 401(k)
plan, that holds Common Stock as an investment will not be subject to tax on
dividends paid by IMH. However, if such tax-exempt investor is treated as having
purchased its Common Stock with borrowed funds, some or all of its dividends
from the Common Stock will be subject to tax. In addition, under some
circumstances certain pension plans (including 401(k) plans but not including
IRAs and government pension plans) that own more than 10% (by value) of IMH's
outstanding stock, including Common Stock, could be subject to tax on a portion
of their Common Stock dividends even if their Common Stock is held for
investment and is not treated as acquired with borrowed funds. The ownership
limit set forth in the Company's Charter with respect to the Company's capital
stock, however, should prevent this result. Tax-exempt investors may also be
subject to tax on distributions from IMH to the extent IMH has excess inclusion
income. See "--Taxation of Taxable U.S.
Stockholders."
TAXATION OF NON-U.S. STOCKHOLDERS
The preceding discussion does not address the rules governing United
States federal income taxation of the ownership and disposition of Common Stock
by persons that are not U.S. Stockholders ("Non-U.S. Stockholders"). In general,
Non-U.S. Stockholders may be subject to special tax withholding requirements on
distributions from IMH and with respect to their sale or other disposition of
Common Stock, except to the extent reduced or eliminated by an income tax treaty
between the United States and the Non-U.S. Stockholder's country. A Non-U.S.
Stockholder who is a stockholder of record and is eligible for reduction or
elimination of withholding must file an appropriate form with IMH in order to
claim such treatment. Non-U.S. Stockholders should consult their own tax
advisors concerning the federal income tax consequences to them of a purchase of
shares of IMH's Common Stock including the federal income tax treatment of
dispositions of interests in, and the receipt of distributions from, IMH.
OTHER TAX CONSEQUENCES
IFC does not qualify as a REIT and will pay federal, state and local
income taxes on its taxable income at normal corporate rates. As a result, IFC
is able to distribute only its net after-tax earnings to its shareholders,
including IMH, as dividend distributions, thereby reducing the cash available
for distribution by IMH to its stockholders.
IMH and its stockholders may be subject to state or local taxation in
various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of IMH and its
stockholders may not conform to the federal income tax consequences discussed
above. Consequently, prospective stockholders should consult their own tax
advisors regarding the effect of state and local tax laws on an investment in
IMH.
ERISA INVESTORS
A fiduciary of a pension, profit-sharing, stock bonus plan or
individual retirement account, including a plan for self-employed individuals
and their employees or any other employee benefit plan (collectively, a "Plan")
subject to the prohibited transaction provisions of the Code or the fiduciary
responsibility provisions of the Employee Retirement Income Security Act of 1974
("ERISA"), should consider (1) whether the ownership of the Common Stock
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is in accordance with the documents and instruments governing the Plan, (2)
whether the ownership of the Common Stock is consistent with the fiduciary's
responsibilities and satisfies the requirements of Part 4 of Subtitle A of Title
I of ERISA (if applicable) and, in particular, the diversification, prudence and
liquidity requirements of Section 404 of ERISA, (3) the prohibitions under ERISA
on improper delegation of control over, or responsibility for "plan assets" and
ERISA's imposition of co-fiduciary liability on a fiduciary who participates in,
or permits (by action or inaction) the occurrence of, or fails to remedy a known
breach of duty by another fiduciary with respect to plan assets, and (4) the
need to value the assets of the Plan annually.
LEGAL MATTERS
The validity of the Shares offered hereby will be passed on for the
Company by Freshman, Marantz, Orlanski, Cooper & Klein, a law corporation,
Beverly Hills, California, certain tax matters will be passed on for the Company
by Latham & Watkins, Los Angeles, California, and certain legal matters with
respect to Maryland law will be passed on for the Company by Ballard Spahr
Andrews & Ingersoll LLP, Baltimore, Maryland.
EXPERTS
The financial statements of Impac Mortgage Holdings, Inc. and Impac
Funding Corporation incorporated in this Prospectus by reference to the
Company's Annual Report on Form 10-K for the year ended December 31, 1997 have
been so incorporated by references herein in reliance upon the reports of KPMG
Peat Marwick LLP, independent auditors, and upon the authority of said firm as
experts in auditing and accounting.
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================================================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY ANY OF THE COMMON STOCK OFFERED HEREBY IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
================================================================================
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
Available Information................................................ 2
Incorporation of Certain Documents By Reference...................... 3
The Company.......................................................... 4
Risk Factors......................................................... 6
Use of Proceeds...................................................... 23
Selling Stockholder.................................................. 23
Plan of Distribution................................................. 23
Description of Capital Stock......................................... 24
Certain Provisions of Maryland Law and of the Company's Charter
and Bylaws........................................................ 27
Federal Income Tax Considerations.................................... 29
Legal Matters........................................................ 39
Experts.............................................................. 39
</TABLE>
================================================================================
================================================================================
2,009,310 SHARES
IMPAC MORTGAGE HOLDINGS, INC.
COMMON STOCK
----------------------------------------
PROSPECTUS
----------------------------------------
_________________, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses, other than underwriting discounts and
commissions, in connection with the registration of Common Stock are:
Registration Fee........................... $10,007
Legal Fees and Expenses.................... 30,000
Accounting Fees and Expenses............... 5,000
American Stock Exchange Listing Fee........ 17,500
Printing Expenses.......................... 10,000
Miscellaneous.............................. 7,423
-------
TOTAL............................... $80,000
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The charter of the
Company contains such a provision which eliminates such liability to the maximum
extent permitted by Maryland law.
The charter of the Company authorizes it, to the maximum extent
permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former director or officer or (b) any individual who, while a
director of the Company and at the request of the Company, serves or has served
another corporation, partnership, joint venture, trust, employee benefit plan or
any other enterprise as a director, officer, partner or trustee of such
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise from and against any claim or liability to which such person may
become subject or which such person may incur by reason of his or her stature as
a present or former director or office of the Company. The Bylaws of the Company
obligate it, to the maximum extent permitted by Maryland law, to indemnify and
to pay or reimburse reasonable expenses in advance of final disposition of a
proceeding to (a) any present or former director or officer who is made a party
to the proceeding by reason of his service in that capacity or (b) any
individual who, while a director of the Company and at the request of the
Company, serves or has served another corporation, partnership, joint venture,
trust, employee benefit plan or any other enterprise as a director, officer,
partner or trustee of such corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise and who is made a party to the
proceeding by reason of his service in that capacity. The charter and Bylaws
also permit the Company to indemnify and advance expenses to any person who
served a predecessor of the Company in any of the capacities described above and
to any employee or agent of the Company or a predecessor of the Company.
The MGCL requires a corporation (unless its charter provides otherwise,
which the Company's charter does not) to indemnify a director or officer who has
been successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity. The MGCL
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act of omission of the director
or officer was material to the matter giving rise to the proceeding and (i) was
committed in bad faith or (ii) was the result of active and deliberate
dishonesty, (b) the director or officer actually received an improper personal
benefit in money, property or services or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful. However, under the MGCL, a Maryland corporation may
not indemnify for an adverse judgment in a suit by or in the right of the
corporation or for a judgment of liability on the basis that personal benefit
was improperly received, unless in either case a court orders indemnification
and then only
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for expenses. In addition, the MGCL permits a corporation to advance reasonable
expenses to a director or officer upon the corporation's receipt of (a) a
written affirmation by the director or officer of his good faith belief that he
has met the standard of conduct necessary for indemnification by the corporation
and (b) a written statement by him or on his behalf to repay the amount paid or
reimbursed by the corporation if it shall ultimately be determined that the
standard of conduct was not met.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
<S> <C>
4.1 Form of Common Stock Certificate (incorporated herein by reference to
Amendment No. 3 of the Registrant's Registration Statement on Form S-11
(No. 33-96670), dated November 8, 1995)
4.2 Articles of Incorporation (incorporated herein by reference to the
Registrant's Registration Statement on Form S-11 (No. 33-96670), dated
November 8, 1995)
4.2(a) Amendment to Articles of Incorporation of the Registrant (incorporated
herein by reference to the Registrant's Current Report on Form 8-K,
dated January 28, 1998, as amended)
4.3 Bylaws of the Registrant (incorporated herein by reference to the
Registrant's Registration Statement on Form S-11 (No. 33-96670), dated
November 8, 1995)
4.3(a) Amendment to Bylaws of the Registrant (incorporated herein by reference
to the Registrant's Current Report on Form 8-K, dated January 28, 1998,
as amended)
4.4 Registration Rights Agreement, dated December 29, 1997, between the
Registrant and Imperial Credit Advisors, Inc. (incorporated herein by
reference to the Registrant's Current Report on Form 8-K, dated
December 19, 1997, as amended)
*5.1 Opinion of Freshman, Marantz, Orlanski, Cooper & Klein
*5.2 Opinion of Ballard Sphar Andrews & Ingersoll LLP
*8.1 Opinion of Latham & Watkins
23.1 Consent of KPMG Peat Marwick LLP regarding the Registrant
23.2 Consent of KPMG Peat Marwick LLP regarding Impac Funding Corporation
*23.3 Consent of Freshman, Marantz, Orlanski, Cooper & Klein (contained in Exhibit 5.1)
*23.4 Consent of Ballard Spahr Andrews & Ingersoll LLP (contained in Exhibit 5.2)
*23.5 Consent of Latham & Watkins (contained in Exhibit 8.1)
*24.1 Power of Attorney (included on signature page)
</TABLE>
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* Previously filed.
II-2
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ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in value of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
provided, however, that the undertakings set forth in paragraphs (i)
and (ii) above shall not apply if the information required to be
included in a post-effective amendment by those paragraphs is contained
in periodic reports filed by the registrant pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in this registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from the registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to Section 13(a) of 15(d) of
the Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the response to Item 15, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefor, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(d) The undersigned registrant hereby undertakes that:
II-3
<PAGE>
(1) For the purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has caused this Amendment No. 1
to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Santa Ana Heights, and the State of
California, on April 24, 1998.
IMPAC MORTGAGE HOLDINGS. INC.
By: /s/ Richard J. Johnson
------------------------------
Richard J. Johnson
Executive Vice President,
Chief Financial Officer
and Secretary
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
* Chairman of the Board and Chief April 24, 1998
- --------------------------------- Executive Officer (Principal Executive
Joseph R. Tomkinson Officer`
/s/ Richard J. Johnson Chief Financial Officer (Principal April 24, 1998
- --------------------------------- Financial and Accounting Officer)
Richard J. Johnson
* Director April 24, 1998
- ---------------------------------
H. Wayne Snavely
* Director April 24, 1998
- ---------------------------------
James Walsh
* Director April 24, 1998
- ---------------------------------
Frank Filipps
* Director April 24, 1998
- ---------------------------------
Stephan R. Peers
* Director April 24, 1998
- ---------------------------------
William S. Ashmore
*By: /s/ Richard J. Johnson
-------------------------------
Richard J. Johnson
Attorney-in-fact
</TABLE>
II-5
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Impac Mortgage Holdings, Inc.
We consent to the use of our report, dated February 9, 1998, incorporated herein
by reference and to the reference to our firm under the heading "Experts" in the
Prospectus.
/s/ KPMG Peat Marwick LLP
Orange County, California
April 23, 1998
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Impac Funding Corporation
We consent to the use of our report, dated February 9, 1998, incorporated herein
by reference and to the reference to our firm under the heading "Experts" in the
Prospectus.
/s/ KPMG Peat Marwick LLP
Orange County, California
April 23, 1998
